Aphria Inc (TSX:APHA)(NYSE:APHA) released its third-quarter results on Monday, which showed significant growth for the quarter. For the period ending February 28, which included a full three months of the recreational market, net revenues reached just under $74 million. That’s an increase of 617% from the prior year when sales were just $10 million.
What’s surprising, however, is that despite the significant increase in net revenue, Aphria’s gross profit was up by less than $9 million. And without fair value adjustments giving it a bit of a boost, that amount would be even smaller. The Company blames the softer gross margins on the distribution business operating at lower margin and “a temporary increase in packaging and distribution costs as the Company awaits the industrial scale and automation in Part IV and Part V to become operational.”
Operating Expenses Up Mainly Due to Impairment Charges
With a less than $9 million increase in gross profit, there was no chance Aphria was going to have a stronger bottom line even with a more impressive result in its top line. Operating expenses soared to more than $106 million for the quarter, nowhere near the $17 million that The Company incurred a year ago. A big reason for the significant jump in costs came as a result of impairment charges of $58 million, which were mainly a result of the company’s LATAM assets which were re-evaluated.
The basis for this impairment arises from the Company’s reassessment of the discount rate and the financial forecasts for these entities as a result of new financial information received from the financial advisors to the Special Committee who reviewed the LATAM transaction
Without impairment charges, operating expenses would have totalled less than $49 million. It still would have put The Company into a big loss for the quarter although it would have noticeably smaller. Other areas that saw big increases in costs were general and administrative expenses of $22 million, which were up around 20 million (703%), and share-based compensation which rose by $8 million (140%). In addition, Aphria also incurred non-operating losses totalling $30 million which led to a total net loss of $108 million for the quarter.
Company Sees a Bright Future Ahead
Although it was disappointing to see Aphria land so far in the red, The Company still has many opportunities to improve. One area where it can continue to drive sales and enjoy cost savings is through higher production levels. The Company has recently received the necessary approvals from Health Canada to work on its Part IV and V expansions. Once completed, Aphria would have a total capacity of 115,000kgs.
We continue to take decisive actions to increase efficiency, including investing additional capital in automation and packaging and adapting production to a new growing method. While this contributed to an increase in our costs, we expect higher future yields per square foot leading to stronger results as we start fiscal year 2020. We believe the steps we have taken will help fuel the growth of our strategic initiatives in Canada and internationally to generate long-term shareholder value
– Irwin D. Simon, Interim CEO and Chairman of Aphria
As of the end of last week, Aphria’s stock was up more than 17% over the past 12 months and year to date it has soared over 70%.