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Aphria Reported Impressive Q3 Results, Beat Expectations

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On Tuesday, Aphria (NYSE:APHA) reported its third-quarter results, which ended on February 29. The company reported an impressive third-quarter performance and beat analysts’ expectations.

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Aphria beat analysts’ revenue expectations

For the third quarter, Aphria reported net revenues of 144.4 million Canadian dollars, which beat analysts’ expectations of 130.6 million Canadian dollars. Year-over-year, the company’s revenue grew by 96.3%. Sequentially, the company reported an increase of 19.8%. The growth in the company’s net cannabis sales and an increase in distribution sales drove the sequential revenue growth. Compared to the second quarter, Aphria’s net cannabis sales increased by 64.8% to 55.57 million Canadian dollars. The increase in cannabis sales to provincial control boards drove the company’s cannabis sales. Meanwhile, the distribution sales grew by 2.2% to 88.31 million Canadian dollars.

In the third quarter, Aphria sold 8,171 kilograms of cannabis for adult-use, 1,352 kilograms of cannabis for medical-use, and 4,491 kilograms in the wholesale market. During the quarter, the average selling price of medical cannabis fell to 6.41 Canadian dollars per gram (before excise tax) from 8.16 Canadian dollars in the previous quarter. The company’s management blamed the implementation of a compassionate pricing policy for the lower price. Meanwhile, Aphria’s average selling price for adult-use cannabis increased from 5.22 Canadian dollars per gram to 5.47 Canadian dollars due to the favorable mix.

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Aphria’s adjusted EBITDA rises

Aphria reported an adjusted EBITDA of 5.7 million Canadian dollars during the quarter. The amount beat analysts’ expectations of 4.18 million Canadian dollars. Meanwhile, the company’s third-quarter adjusted EBITDA is a significant improvement from the previous quarter. Compared to the second quarter, the company’s adjusted EBITDA from cannabis operations and distribution increased by 78.1% and 24.2%, respectively. Meanwhile, the adjusted EBITDA for businesses under development improved from negative 3.55 million Canadian dollars to negative 2.86 million Canadian dollars.

Aphria’s management added that customers’ demand exceeded its supply capabilities during the quarter. There was a delay in getting approval for the Aphria Diamond facility. To meet the demand, the company had to purchase 20.2 million Canadian dollars from licensed producers. The company claimed that the purchases reduced its gross margin and adjusted EBITDA. During the quarter, the company’s gross profits on cannabis sales fell from 56.6% in the second quarter to 42.7%. Meanwhile, Aphria’s gross profits from distribution improved marginally from 12.7% to 12.9%.

During the quarter, Aphria’s SG&A expenses increased from 49.2 million Canadian dollars to 50.9 million Canadian dollars. The increase in transaction costs and headcounts drove the company’s SG&A expenses. However, some of the increases were offset by a decline in share-based compensation.

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Other highlights from the quarter

Aphria raised 100 million Canadian dollars this quarter to strengthen its balance sheet. By the end of the third quarter, the company’s cash and cash equivalents were 515.1 million Canadian dollars. During the quarter, the company received European Union Good Manufacturing Practices certification for its subsidiary, Avanti Rx Analytics, and a GMP Annex for its Aphria One facility from the Malta Medicines Authority. These certifications will allow the company to supply medical cannabis across Europe and expand its international business.

Stock performance

So far in 2020, Aphria has lost 24.9% of its stock value. Weakness in the cannabis space and the broader equity market appears to have dragged the stock down. However, I think that the company’s third-quarter performance could offset some of the declines. During the same period, OrganiGram (NASDAQ:OGI), Cronos Group (NASDAQ:CRON), and HEXO (TSE:HEXO) have declined by 30.4%, 16.0%, and 66.7%, respectively.

My take on Aphria

Aphria’s strong third-quarter performance justifies my bullish view on the stock. I had advocated a “buy” on the stock in my earnings preview. During the second quarter, the company received a license for its Aphria Diamond facility. Notably, the facility has 1.3 million square feet of greenhouse production. The company expects to start sales from the facility in the fourth quarter. The production from Aphria Diamond’s facility could reduce the company’s purchases from licensed producers. So, I think that the company’s margins will improve more.

Aphria’s balance sheet looks strong. With cash and cash equivalents of 515.1 million Canadian dollars, the company can undertake its future expansion plans. So, I’m still bullish on the stock.

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