Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.
Hint: It was all good news in Q3 for the beaten-down stock.
Alert: Top Cash Back Card Now Offers 0% Intro APR Until Nearly 2027
Enjoy 0% intro APR on purchases and balance transfers for 15 months—plus up to 5% cash back in popular categories.
To say that 2018 has been full of changes for Aphria (NASDAQOTH: APHQF) is quite an understatement. The Canadian marijuana grower completed two of the top five biggest marijuana acquisitions ever, buying Broken Coast Cannabis and Nuuvera. One of those transactions attracted a lot of controversy, with Aphria's management team coming under fire for not initially disclosing its personal stakes in Nuuvera. And the company scaled back its U.S. operations over concerns about meeting listing requirements on the Toronto Stock Exchange.
With all of this going on, you might wonder whether Aphria was still able to focus on its core medical marijuana business. The company put any such concerns to rest on Monday morning when it announced results from its third quarter, which ended Feb. 28, 2018. Here are three things you'll want to know from Aphria's Q3 update.
Image source: Getty Images.
Aphria posted record-high revenue of 10.3 million Canadian dollars ($8.2 million) in the third quarter. This amount nearly doubled the company's revenue reported in the prior-year period. It also reflected a 20% jump from the second quarter.
There were two reasons behind Aphria's strong revenue growth. First, both wholesale shipments and sales of medical cannabis to patients increased significantly. Second, Aphria was able to include Broken Coast's sales for February following the closing of the acquisition.
In addition, Aphria reported its 10th consecutive quarter of positive adjusted EBITDA. The marijuana grower posted Q3 adjusted EBITDA of CA$2.9 million, up 238% year over year. Aphria's third-quarter net income of CA$12.9 million also set a record. The company's bottom line was boosted by higher revenue and a gain on divesting some of its shares in Liberty Health Sciences, which focuses on the U.S. marijuana market.
Thanks to bought-deal financing transactions completed in the third quarter, Aphria is now sitting on a nice cash stockpile. The company reported cash, cash equivalents, and marketable securities totaling CA$173.7 million as of Feb. 28.
What might Aphria do with all that money? CEO Vic Neufeld stated that Aphria's strong cash position provides the "flexibility to pursue attractive investment opportunities both domestically and around the world."
While Neufeld didn't mention the possibility of using some of its cash to pay down debt, that isn't surprising. Aphria's long-term debt totals less than CA$29.5 million. With interest rates still relatively low, it's not costing the company too much to service its debt. That allows Aphria to keep its powder dry in case an attractive acquisition opportunity arises.
Not all of the details included in Aphria's Q3 results directly relate to the company's financial performance. However, a few of those details should make a big difference on Aphria's future financial performance.
Aphria appears to be in good shape with its efforts to increase production capacity. The company reported that its 700,000-square-foot expansion at the Aphria One facility and its 1.3-million-square-foot retrofitting of its Aphria Diamond facility remain on schedule. The first sales of cannabis from both facilities are expected in January 2019.
In addition, Broken Coast's phase 3 expansion is complete and awaiting a cultivation license from Health Canada. The phase 4 expansion of the facility has been revised to include additional growing space. This change is likely to delay the first sale from the expansion to fall 2019.
With these expansion efforts well underway, Neufeld said that Aphria "will have ample capacity to meet the expected demand in Canada and across our international markets."
The most important impending development for Aphria is the expected legalization of recreational marijuana use in Canada. If everything stays on track, the Canadian Senate will vote to pass legislation legalizing recreational use in June. It will take a few months for the provinces to finish getting ready for retail cannabis sales, but Aphria could have a big new market open up by September.
Assuming there are no surprises with the legalization efforts, investors will want to closely watch how much demand there is for recreational marijuana. Aphria and other marijuana growers have been aggressively increasing their production capacity in anticipation of high levels of domestic demand. If demand isn't as great as expected, it would be bad news for the Canadian cannabis industry.
At the same time, though, investors should pay attention to growth in international medical marijuana markets, particularly Germany. It's possible that demand in these international markets could absorb any excess capacity that remains after supplying marijuana to the Canadian market.
One other recent development could be enormously important to Aphria over the longer term. Last week, Sen. Cory Gardner (R-Colo.) announced a deal with President Trump that would ensure that the U.S. federal government doesn't interfere with states that have legalized marijuana. Gardner also said that Trump agreed to support legislation that would change U.S. federal laws in a way that resolves the issue permanently.
Aphria has divested some of its U.S. assets. However, a change in federal laws would open the door for the company to reenter the U.S. market in an even greater way than before. Nothing is guaranteed in the political process, of course, but this could be the biggest wild card of all for Aphria's growth prospects.