Aphria Inc. (NYSE: APHA) reported net revenue rose 63% to C$21.7 million for the fiscal 2019 second quarter ending November 30, 2018 versus C$8.5 million for the same time period a year earlier. The company said that the higher revenue in the quarter was driven by a 92% increase in kilogram equivalents of cannabis sold and an additional C$1.6 million of non-cannabis international sales.
The company delivered a net income of $54.8 million or $0.22 per share versus $6.5 million or $0.05 per share for the same period last year. Aphria said that the increase in net income was due to gains on its long-term investment portfolio, primarily divestitures of positions in Hiku Brands and Liberty Health Sciences.
The quarter though wasn’t without problems. The company reported that medical cannabis sales declined marginally from 1,466.2 kilogram equivalents sold in the first fiscal quarter to 1,443.6 kilogram equivalents sold in the second quarter. Cannabis oil sales, as a percentage of volume, decreased to 19% of overall sales from 39% in the prior quarter, reflecting the higher percentage of dry bud sold in the adult-use market.
In addition to that, the average selling price, inclusive of the excise tax, declined to C$6.54 per gram in the quarter, compared to C$7.12 in the prior quarter. Sales to the adult-use market, which had a lower average selling price of C$6.32, inclusive of excise tax, compared to C$7.51 in the medical-use market.
“This is the first quarter to partially include adult-use sales, helping to drive 63% quarter-over-quarter net revenue growth, as did continued strength in sales to the medical-use market,” said Chief Executive Officer Vic Neufeld. “As expected, gross margins declined, reflecting lower effective selling prices in the adult-use market, as well as temporarily lower yields and higher production costs in the quarter as we moved aggressively to build out production facilities and implement new automation processes.”
The cash cost to produce a gram of dried cannabis rose from C$1.30 last year to C$1.76 in this past quarter. The “all-in” cost of goods sold also rose from last year’s C$1.83 to C$2.60.
Expenses in the quarter rose to $27.5 million, from $24.1 million in the prior quarter and $7.3 million in the prior year, which the company attributed to higher headcount and employee-related costs, following the acquisitions of Nuuvera Inc. and LATAM Holdings, and as a result of investing $2.6 million in brand development prior to the implementation of The Cannabis Act. It said that as a percent of net revenue, SG&A declined to 127% from 181% in the prior quarter, reflecting improved operating leverage on the Company’s growing revenue base.
The company did not address the issues it has had over the past few months with Hindenburg Research, the short seller who criticized company management. It did say that Aphria’s CEO Vic Neufeld, and Co-founder Cole Cacciavillani were both nearing the end of their five-years with the company and would transition out of their executive roles over the coming months but remain on the Board.
“Succession is the plan. Cole and I have informed the Board, and they have agreed, that we will begin the transition process immediately, and at the appropriate time, we will both step down from executive positions at Aphria,” said Neufeld.
“A top priority for Aphria is expanding production and automation to secure our long-term cost and scale advantages,” said Neufeld. “The Part IV and V expansions of Aphria One are now complete and awaiting Health Canada approval, while an application for a cultivation license at Aphria Diamond has been submitted and is awaiting pre-cultivation inspection. Based on this, we now expect to generate first sales from these new facilities later in the calendar year, pending Health Canada approvals, with our annualized harvest reaching 255,000 kilograms, compared to 35,000 kilograms currently, by the end of calendar 2019.”
He went on to add, “In the second quarter we also positioned the Company for long-term growth in key global markets with strategic alliances, targeted investments, and disciplined acquisitions. We’re excited to have just closed the previously announced acquisition of CC Pharma, based in Germany, which distributes pharmaceuticals and medical cannabis to over 13,000 pharmacies. This transaction positions Aphria to be a leading player in the European medical cannabis market. We’re equally optimistic about our recently announced alliances and acquisitions of highly strategic licenses and operations in Latin America and the Caribbean’s most attractive emerging cannabis markets, including Colombia, Argentina, Paraguay, and Jamaica.”