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Neufeld out as Aphria posts middling Q2 financial report

Aphria Inc. reported a 63 percent rise in net revenue for the second quarter of the fiscal year 2019, coming in below analyst expectations and disappointing investors who had high hopes following the legalization of recreational cannabis in Canada. Overall, the company brought in CA$21.7 million ($16.35 million) compared to CA$8.5 million ($6.41 million) over the same period last year.

Net income was net income of $54.8 million, although the bulk of that was a result of the company’s divestiture from their positions in Hiku Brands and Liberty Health Sciences.

More importantly, Aphria announced the impending departure of CEO Vic Neufeld and Co-founder Cole Cacciavillani, who are set to transition out of their roles in the coming months. Neufeld had been under fire of late, ever since the release of a short-seller report by Hindenburg Research caused stock prices to tank and investors to lose faith in both the company and its management.

“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 in a statement.

Medical sales declined, as did cannabis oil sales in the second quarter, leading less than expected revenue overall. Expectations were high following the legalization of cannabis in Canada this past October, but mounting problems for both Aphria and the sector as a whole have led many investors to reevaluate their portfolios.

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“This is the first quarter to partially include adult-use sales, helping to drive 63 [percent] 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.”

Vic Neufeld/ Source: Twitter

An earnings report like no other

The consensus among Wall Street analysts is that few earnings reports — cannabis or otherwise —have been more important than this one. While a positive report could have done wonders for damage control for the company’s recent self-inflicted fall from grace, chances are most investors will be looking to the future.

In early morning trading, Aphria stock was up 7.5 percent following the release of the report.

In the beginning, Aphria initially attracted starry-eyed investors eager to get in on the ground floor of a startup industry; people were excited by Aphria’s low cultivation costs compared to competitors Canopy Growth (NYSE:CGC) and Aurora (NYSE:ACB). The tide began to turn for investors on the accusations of questionable Latin American acquisitions and the Nuuvera debacle.

Aphria Records 63% Net Revenue Growth in Fiscal 2019 Second Quarter; Announces Executive Team Transition https://t.co/dkdcWk9lfB

— aphria (@aphriainc) January 11, 2019

In early December, Hindenburg Investment Research and Quintessential Capital Management published allegations regarding self-dealing regarding the Latin American assets, and as a result, Aphria stock plummeted.

Many investors and analysts alike remain concerned that Aphria has not issued a strong rebuttal to any of these claims, nor have they offered any detailed explanation, despite the company’s management team promise to do just that. Smelling blood in the water, Green Growth (OTCQB:GGBXF), a much smaller cannabis company, floated a hostile takeover bid; Aphria has discounted the offer, but Green Growth remains committed to it.

The result is that analysts are mixed on Aphria. Easterly Winds speculated the company would be the first to suffer when the cannabis bubble bursts, as investors realize the stock represents a poor value for shareholders.

[Canaccord Genuity analyst shifts focus from opportunity to execution for US cannabis stocks in 2019]

Describing Aphria as a “tragedy that has already happened,” Easterly suspects the company might be the first in a series of “high-profile bankruptcies and material write-downs of largely worthless assets.” They stated that cultivation assets being acquired at book value represents the absolute best scenario for the beleaguered company.

The pre-financial pump

Aphria tried to bolster news by announcing the completion of its previously announced acquisition of German CC Pharma GmbH, a leading distributor of pharmaceutical products and medical cannabis to more than 13,000 pharmacies in Germany and throughout Europe.  In a press release, Aphria reiterated its strong global footprint and the importance of the German market to the overall global strategy.

Aphria’s Managing Director in Germany, Hendrik Knopp, stated that the company’s several strategic acquisitions and partnerships made in the last 18 months secured Aphria as the “front runner in the German medical cannabis market."

The company certainly has a great track record at raising cash, reflected by their well-capitalized balance sheet totaling around $240 million in total cash and short-term investment. Analysts not so keen on the Aphria stock say the company’s cash will run out in one year and that Aphria will need to complete a substantial funding raise in the 2019 calendar year. However, the ongoing questions about the Latin American operations will largely hinder Aphria’s ability to raise substantial funding — another impact of the self-inflicted issues.

The report does only encompass one-and-a-half months of sales from recreational cannabis legalization in Canada.

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While Aphria has substantially increased the volume of cannabis it is selling (more than 5,000 kilograms), striking supply deals with all Canadian provinces as well as the Yukon Territory, the selling price has nevertheless largely decreased.

As its competitors Cronos (NASDAQ: CRON) and Canopy team up with big players who are infusing billions in cash into the companies, Aphria must keep pace. Unfortunately, with results like this, that doesn’t seem likely.

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