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Aphria Sells Off as Asset Impairment, ATM Program Weigh on Stock

Today, Aphria Inc (NASDAQ:APHA) (APHA:TSE) announced fourth quarter and year-end results to the public. Although investors had been pricing-in robust results—as evidenced by the start-of-week ↑16.90% price surge and pre-ER upgrade by Cantor Fitzgerald analyst Pablo Zuanic—it wasn’t meant to be. By day’s end, APHA cratered ↓18.70% as factors beyond the largely in-line expectations wasn’t enough to sustain recent momentum. TDR breaks down the primary reasons for today’s dystopia.

In terms of core business expectations for the quarter, Aphria largely delivered as promised. While it perhaps wasn’t the exclamation point investors were hoping for, the company nailed many of the important metrics that mattered.

Aphria posted a healthy 27% increase ($56.7M) in core gross adult-use cannabis revenue, beating Pablo Zuanic’s 25% estimate and 20% sequential sales growth for the overall recreational market. The company also posted a fifth consecutive year of positive adjusted EBITDA, rising ↑49% from the prior quarter to $8.60M, while overall net revenue increased to $152.2M versus an average street estimate of $148.95M. And cash cost to produce dried cannabis per gram fell another ↓5% to $0.88 in Q4 2020—among the lowest in Canada.

But while there are plenty of positive takeaways in the report, it wasn’t all peaches and cream. Like the old saying goes: The Devil is in the details. On this day, Satan was having none of it.

For example, Aphria recorded a $64.0M non-cash impairment with respect to certain of the company’s international businesses. While COVID was listed as the official cause, it wasn’t the first time Aphria was forced to write down assets. This allowed Q4 net loss to balloon to $98.8M, or $0.38/share, compared to a net income of $5.7M the prior quarter. These are not the type of optics that generally sustain bullish momentum in a post-earnings aftermath.

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Secondly, Aphria announced the establishment of an at-the-market (ATM) equity program under which the company may sell an aggregate of up to US$100,000,000 of its common shares. Any sales under the ATM Program will be made through “at-the-market distributions” as defined in National Instrument 44-102. The program will be in effect until the earlier of December 22, 2021 or the issuance and sale of all of the common shares pursuant to the program. Net proceeds, if any, will go towards funding Canadian and international expansion, working capital, general corporate purposes or to repay indebtedness.

However by doing so, Aphria may potentially sell upwards of 20.28M shares (based on today’s end-of-day price in USD), thus diluting existing shareholders by approximately seven percent. Such ATM programs have become an increasingly popular way of raising money, with HEXO Corp., Aurora Cannabis and OrganiGram all initiating similar programs in recent times.

The ATM follows a similar money-raising maneuver undertaken in January 2020, when Aphria generated C$100 for company coffers by selling 14.05 million units to a strategic investor. Unlike that immediate sale, the ATM will generate cash through public market selling over a period of time. 

Lastly, Aphria did not provide a business outlook for FY2021, which is something investors are unaccustomed to. Although this was not surprising given the company suspended its revenue and adjusted EBITDA guidance entirely in Q3 2020 due to COVID-19, guidance would have gone a long way towards providing heightened visibility for the upcoming fiscal year. 

Indeed, providing a business outlook was one of TDR’s 3 Things to Look For When Aphria Releases Q4 and Full Year 2020 Earnings Results published on Monday. 

Final Thoughts

As with any large decline, investors must keep the move in context. 

Even after today’s weakness, APHA only relinquished gains generated over the previous two sessions (although it did finish at the low), which is insignificant in a historical context. However, this retrenchment largely discounts the expectation of a $100M ATM program and the purge of additional underperforming assets from the balance sheet. In other words, APHA stock is trading slightly lower than where it was last Friday even after shedding two large landmines in the process. 

But from an operational point of view, most core business results held firm. This key takeaway must not get lost on investors despite today’s less-than-optimal price action.

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