5 Reasons Behind Aphria's Disappointing Q3 Results

Shadow of a dollar sign on top of a pile of marijuana leaves

Aphria (NYSE: APHA) became the first big Canadian marijuana producer to report sales from 2019 on Monday morning. It also became the first to disappoint investors .

The company's share price sank by a double-digit percentage Monday after Aphria missed analysts' estimates on both the top and bottom lines. For the quarter ending Feb. 28, 2019, Aphria reported net revenue of 73.6 million Canadian dollars (US$55.3 million). Although this amount reflected a 240% jump over the previous quarter and was 617% higher than the prior-year period, it fell below the average analysts' revenue estimate of CA$85.2 million (US$64 million).

Aphria also posted a big net loss of CA$108.2 million (US$81.3 million), or CA$0.43 per share (US$0.32). Analysts expected earnings per share of CA$0.03 (US$0.02).

Why did Aphria fail to deliver in its fiscal Q3 results? Here are five key reasons.

1. Supply shortages

The biggest reason Aphria didn't meet revenue expectations was its production capacity. Aphria said it "transitioned growing methods during the late fall and early winter," a move that's good for the long term but caused supply shortages over the short run.

However, the company received very good news on this front after its fiscal third quarter ended. In March, Aphria obtained a license for its Aphria One facility expansion. This license boosts the company's annualized production rate to 115,000 kilograms.

2. Packaging and distribution challenges

Another reason for Aphria's revenue shortfall was what the company called "temporary packaging and distribution challenges." The problem stemmed from the Canadian government's packaging requirements for adult-use recreational marijuana products. Aphria had primarily manual processes in place during the last quarter and couldn't get nearly as much product packaged and shipped as it would have liked.

Aphria's interim CEO Irwin Simon said in the company's Q3 conference call that Aphria is implementing automation over the next couple of quarters. This should help reduce bottlenecks in the future.

3. Big non-cash impairment

Lower-than-expected revenue was one factor behind Aphria posting a big net loss. However, the company also reported a significant non-cash impairment of CA$50 million ($US37.6 million) related to its LATAM Holdings acquisition last year.

This impairment stemmed from lower gross margins and EBITDA margins identified by financial advisors to the board of directors' special committee reviewing the LATAM Holdings acquisition as well as higher-than-expected expenses for the operations. However, Aphria CFO Carl Merton was quick to point out that the impairment didn't in any way affect the special committee's determination that Aphria didn't overpay for LATAM Holdings, as short-sellers alleged last year.

4. Higher expenses related to capacity expansion

Even adjusting for the non-cash impairment, Aphria still recorded negative EBITDA in the third quarter. One key reason for that was that the company's general and administrative expenses increased dramatically due to its planned capacity expansion efforts.

Aphria's G&A costs skyrocketed more than 700% year over year to CA$22.4 million (US$16.8 million). Of course, this spending increase should pay off as the company's added capacity comes online.

5. Higher packaging and distribution costs

New packaging requirements for the adult-use recreational marijuana market in Canada delt Aphria a double-whammy. These requirements negatively affected its supply, and they also resulted in higher costs. Carl Merton said the company's packaging costs per gram more than doubled.

The good news, though, is that Aphria has already changed its packaging and obtained new lower-cost suppliers. This should reduce the company's packaging costs in future quarters, although Merton stated that there is still some inventory of the older, higher-cost packaging to be worked down.

What to expect in Q4

Will Aphria's fourth-quarter results reflect a significant improvement from the third quarter? Don't count on it.

Although the company received licensing for its Aphria One expansion, the added supply won't hit until Aphria's fiscal Q1. It's also going to take a couple of quarters for the company's packaging automation solutions to make an impact. Both Irwin Simon and Carl Merton said investors should expect Q4 sales to be similar to those in Q3.

Aphria's long-term prospects appear bright, though. The company doesn't provide guidance but thinks that CA$500 million (US$375.5 million) in revenue is achievable in calendar year 2019.

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Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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