It's been a tough year for Aphria (NASDAQOTH:APHQF). As of the end of July, the marijuana stock was down 40% year to date.
Any hopes that Aphria's quarterly update would provide a positive catalyst for the stock were crushed on Wednesday when Aphria announced its fiscal 2018 Q4 results. Its share price dropped nearly 5% in early trading after the company's update.
Why were the results so disappointing? Nearly all of Aphria's good news was accompanied by bad news. Here are five things you need to know about the marijuana grower's Q4 performance.
1. Revenue growth, but largely due to the Broken Coast acquisition
The good news for Aphria in its fiscal Q4 was that revenue increased 17% from the previous quarter and 110% year over year to a little over 12 million in Canadian dollars. Some of that growth stemmed from increased medical cannabis sales. However, much of it was due to the acquisition of Broken Coast. In Aphria's fiscal Q3 results, only one month of Broken Coast revenue was included.
There was also a change in revenue mix. Cannabis oil sales as a percentage of total sales fell from 33.1% in the previous quarter to 29.2% in Q4. This decline was also due to Broken Coast's sales being more heavily skewed to dried cannabis, which is less profitable than cannabis oils.
Aphria CFO Carl Merton stated in the company's Q4 conference call that revenue from international sales was "very minor." But Aphria is positioning to supply more product to global medical cannabis markets and to the coming Canadian recreational adult-use market. The company discontinued wholesale sales to other licensed producers in Canada to increase its inventory for these other significant market opportunities.
2. Positive EBITDA, but declines likely on the way
Aphria achieved something in its fiscal Q4 that no other Canadian marijuana grower has so far: 11 consecutive quarters of positive adjusted EBITDA. The company reported fourth-quarter adjusted EBITDA of CA$2.2 million. However, there are a couple of things to note with this figure.
First, this adjusted EBITDA amount only applies to medical cannabis sold in Canada. Aphria International posted an adjusted EBITDA loss of CA$2.8 million. On an overall basis, Aphria's net loss for the quarter totaled just under CA$5 million.
Second, the adjusted EBITDA from Canadian medical cannabis operations fell from the previous quarter and the prior-year period. Aphria warned that adjusted EBITDA could continue to decline -- and potentially become negative -- as it invests in gearing up for the domestic recreational market and increased international opportunities.
3. Lower cash cost per gram but higher all-in cost
Aphria's cash cost per gram for producing dried cannabis, which reflects the cost of sales minus amortization and packaging expenses plus any inventory adjustments, dropped to CA$0.95 from CA$0.96 in the previous quarter. Achieving its second consecutive quarter of cash cost per gram below CA$1 makes Aphria one of the lowest-cost producers in Canada. The company did caution, though, that its cash cost per gram could temporarily increase next quarter as it ramps up capacity to supply the recreational cannabis market in Canada.
It was a different story for another metric -- "all-in" cost of sales per gram. This metric includes the expenses that are subtracted out of the cash cost per gram. Aphria reported "all-in" cost of sales per gram in Q4 of CA$1.60, up CA$0.04 from the previous quarter. The company attributed this increase to additional staffing costs related to capacity expansion efforts.
4. Plenty of cash on hand, but it's decreasing rapidly
Thanks to several bought-financing deals over the last couple of years, Aphria's cash position looks pretty good. The company reported cash, cash equivalents, and marketable securities of CA$104.8 million.
However, that total was well below the total of CA$173.7 million that Aphria had at the end of its fiscal third quarter. Also, Aphria will continue to need cash to fund investments. Hiring new staff, expanding capacity, and moving into new international markets isn't cheap.
5. Capacity expansion on track, but a supply glut could be on the way
At the end of its fiscal year 2018, Aphria's annual production capacity in Canada stood at 35,000 kilograms. The company said that its expansion efforts are on schedule and on budget. By next year, Aphria expects to have an annual production capacity of 255,000 kilograms.
But a supply glut will eventually hit Canada. Even Aphria CEO Vic Neufeld acknowledged this in June. What happens then? It will depend heavily on how quickly demand for medical marijuana increases in international markets.
Neufeld stated in Aphria's Q4 conference call that he feels "very, very confident" about the company's opportunity in the German market. He also expressed optimism about the potential for Aphria to "move the needle" in the U.K.'s medical cannabis market. In addition, Aphria is actively pursuing other international opportunities in South America and elsewhere.
The good news is that Aphria is in a pretty good position to compete internationally thanks in large part to its acquisition of Nuuvera. But even if Aphria succeeds in its international expansion efforts, the global markets might not grow quickly enough to absorb the massive ramp-up in capacity among Canadian marijuana growers. As was the case in Aphria's Q4 results, good news in the future just might come with some bad news, too.