SALEABLE FLOWER
APHA reported fiscal Q4 net revenues of CA$152.2M vs. FactSet CA$146.1M, beating topline expectations and growing 18% YoY. Cannabis revenues increased 95% YoY to CA$52.2M and grew 2% QoQ. Interestingly, inventory grew by 195% YoY and 17% sequentially. Yet on the call, the company does not see a supply problem at the company or in the overall industry. Instead, they made up a new term "saleable flower" to explain away the issue. Management explained that there are "lots of pockets of undersupply. We've built the strength of our brands and our #1 positions as an L.P. in all products, categories, by sales, because we have been able to grow flower that people will buy." The CEO is looking at competitors moving towards an "asset light model" through the rationalization of cultivation facilities, as a positive for the company. As this transition occurs, APHA will be the most prominent Cannabis Farmer in Canada and is planning incremental demand for its saleable flower to increase and hoping a substantial wholesale business will bail it out.
BAILING ON LATAM
APHA reported a steep net loss with EPS of -0.39 vs. FactSet -0.03, with the loss attributed mainly to CA$64M in "coronavirus-related impairment charges" from their international operations in Jamaica, Lesotho, Colombia, and Argentina. Saying COVID-19 has depressed tourist demand for cannabis in Jamaica and blocked management from accessing their Lesotho facility? They overpaid for these assets in a transaction that got the former CEO fired, and now COVID has depressed tourist demand? You can't make this up!
ATM OFFERING
During the earnings call, CEO Irwin Simon said, "Additionally, we announced today that we established an at-the-market equity program under the prospectus we filed in August of last year, allowing us to issue common shares in an amount up to USD 100 million, which will provide us additional optionality in the event of an acquisition requiring a cash payment and more flexibility when scheduled debt repayments occur." However, why does a company with a self-proclaimed "one of the strongest balance sheets and cash positions" in the industry need to file a $100M ATM? The CEO went on to say he is looking to buy a "U.S. consumer brands that are consumer brands today but ultimately could be converted to cannabis brands in the future." To me, this is clear where this is going. He is going to buy a small U.S. skincare or similar type of business and claim that they are his future cannabis brands once the U.S. becomes legalized. He claims the company is EBITDA positive and accretive to APHA justifying the acquisition.
DECLINING ASP
The average selling price of medial and recreational cannabis declined -13 and -9% YoY, respectively. So, a massive inventory builds into the market with declining ASP is not a good set up.
We elevated APHA from our SHORT bench to a Hedgeye Cannabis Best Idea SHORT in October 2019.
