The 3 Most Important Takeaways From Aphria's Quarterly Results

Canada's recreational adult-use marijuana market opened for business last October, and this week, Aphria (NYSE: APHA) reported its first results that include a full quarter of adult-use sales. Unfortunately, mounting losses and lower-than-anticipated revenue caused shares to tumble. Are Aphria's best days behind it? Here are the three most important things you should know about this marijuana stock following its earnings report.

No. 1: Revenue rises, with an asterisk

One of a handful of marijuana companies with licenses to market marijuana in every one of Canada's provinces, Aphria's revenue totaled $73.6 million Canadian dollars in its most recently reported quarter ending Feb. 28, which brought its sales through the first nine months of this fiscal year to CA$108.5 million.

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Although revenue increased 617% from the same quarter last year, its surging sales had little to do with Canada's adult-use market. Recreational sales were only CA$7.2 million in the quarter, down from CA$11 million in the previous quarter, a period that included just one full month of adult-use sales. Aphria's medical cannabis sales increased 33% year over year to CA$10.6 million, but that was down 2% from the prior quarter, so medical marijuana didn't offer much of a tailwind, either.

So what caused sales to skyrocket? International acquisitions. Acquiring CC Pharma, a drug distributor in Germany, and ABP, an Argentinian pharmaceuticals distributor, added $56 million in distribution revenue to Aphria's results in the quarter.

No. 2: Falling margins and an impairment cause a big loss

The shift in revenue mix from high-margin cannabis to low-margin drug distribution took a big toll on Aphria's profitability. Margins also took a hit from ratcheting back marijuana production last quarter so there'd be enough mother plants for its Aphria One greenhouse expansion, which won approval from Health Canada in March. Lower average marijuana prices in the adult-use market, significantly higher packaging costs, and rising operating expenses were also headwinds.

The new distribution businesses only offer gross margin in the 10% to 15% range, so while they increased gross profit to CA$13.4 million from CA$10.1 million in the previous quarter, Aphria's gross margin plunged to 18.2% from 46.9%. 

The company's general and administrative expenses increased to CA$22.4 million from CA$2.8 million, and selling, marketing, and promotion costs were CA$6.95 million, up from CA$3 million one year ago.

Aphria was hit particularly hard by packaging costs last quarter, which increased to CA$1.98 per gram from CA$0.97 per gram. On the company's earnings conference call, management indicated its packaging troubles were due to expensive sourcing to make sure it had enough packaging on hand when adult-use sales began and labor costs.

Profitability was also dinged heavily last quarter by a CA$50 million impairment charge on its Latin American assets. Aphria came under pressure in 2018 from short-sellers who alleged the prices it paid for its Latin American assets were inflated, and insiders had undisclosed conflicts of interest. An internal review earlier this year found prices paid were at the high end of an acceptable range, but its seems the company may still have overpaid given last quarter's charge.