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Aphria Falls Most Since December on Writedown, Revenue Miss

Kristine Owram
Aphria Falls Most Since December on Writedown, Revenue Miss

(Bloomberg) -- Aphria Inc. slid as much as 16 percent Monday, the most since early December when the cannabis company was under attack by short-sellers, after reporting a writedown and revenue that missed expectations.

The company’s results for the quarter ended Feb. 28 included a significant reduction in gross margin, to 18 percent from 47 percent in the prior quarter, and a decrease in kilograms sold. This was partly due to packaging and distribution challenges in the early days of Canada’s legal recreational pot market, and a transition to new growing methods.

Investors shouldn’t expect much change in the company’s next quarterly report, the Leamington, Ontario-based pot producer cautioned Monday. Aphria is investing in automation and the development of new growing facilities, but said those won’t take effect until the “mid term.” The company expects to reach C$1 billion in annualized revenue by the end of calendar 2020 as new growing facilities come online, up from an estimated C$218 million in the fiscal year ended May 31.

“We believe the challenges we faced in the quarter, specifically supply shortages, were based on proactive decisions we made and they are temporary in nature,” Chief Financial Officer Carl Merton said on the company’s earnings call Monday. However, “it is still early in terms of legalization in Canada, and as with any industry in its early stages, we are continuously learning and improving.”

Aphria booked a C$50 million ($38 million) non-cash charge on the value of its Latin American assets, the main subject of the short-seller allegations which accused Aphria of paying inflated prices to buy assets from insiders. An impairment test, which was requested by the Ontario Securities Commission, found that the assets had lower margins and higher-than-expected expenses than originally forecast.

The company also announced a complex financial arrangement that will likely result in the end of a hostile takeover bid from Green Growth Brands Inc. That offer is currently worth about 47 percent less than the current value of Aphria’s shares, the biggest discount of 83 deals currently tracked by Bloomberg.

“It’s just out of our reach,” Peter Horvath, CEO of Green Growth, said in a phone interview. “It was challenging as we structured it and it got out of the range of negotiable solutions.”

Aphria will receive C$89 million for terminating an arrangement with GA Opportunities Corp., Green Growth’s second-largest shareholder, that gave Aphria the option to buy Green Growth shares. Green Growth expects to sell its 3 million shares of Aphria, and will also repurchase 27.3 million of its own shares held by GA Opportunities Corp.

The two companies have agreed to a 12-month standstill period and are now in discussions about a potential commercial arrangement. Irwin Simon, Aphria’s interim Chief Executive Officer, said that “could” include opportunities in the U.S.

“The U.S. market is changing dramatically and I want to make sure we get it right,” Simon said on a call with analysts. “If it’s hemp, if it’s CBD, if it’s the right partnership, and as part of our strategic plan we’re reviewing what our options are in the U.S. market.”

Aphria reported quarterly revenue of C$74 million, missing the average analyst estimate of C$84 million, and a net loss of C$108 million. Its average retail selling price of recreational pot before excise taxes fell to C$5.14 from C$6.32 in the prior quarter due to a temporary shift to smaller package sizes.

Other cannabis stocks also retreated Monday, with Tilray Inc. losing as much as 8 percent to the lowest since August and Cronos Group Inc. falling as much as 8.7 percent. Organigram Holdings Inc. lost 8.4 percent after reporting an unexpected quarterly loss.

(Adds Green Growth quote in paragraph 7, other pot stock moves at end.)

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Morwenna Coniam

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