APHA misses consensus top-line estimates

Before the open yesterday, APHA reported fiscal Q1 net revenues of C$145.7 million vs. FactSet C$159.6 million, missing consensus estimates by -8.7% and posting a sequential decline of 4.3%.  Net cannabis revenue grew 17.8% QoQ and 103% YoY to C$62.5 million, while distribution revenue fell -17.1% QoQ and -13.8% YoY to C$82.2 million. The company attributed the top-line decline to lower distribution revenue at CC Pharma in Germany, with COVID-19 reducing the number of in-person visits to physicians and pharmacies. Net loss per share was C$0.02 vs. FactSet C$0.03, a slight beat. The company posted record gross revenue for adult-use cannabis at C$69.6 million. Gross margin before fair value adjustments increased 345 bps sequentially to 29.7%. Inventory grew 21.6% QoQ to C$321.3 million, which puts APHA’s inventory turnover ratio on an LTM basis at 2.1x versus a year ago; it is 3.4x. Given the supply issue that has plagued Canadian LPs, future write-downs and impairment charges seem inevitable.

The stock traded down 18.4% on the news.

We elevated APHA from our SHORT bias list to a Best Idea SHORT in October 2019.

Scotts Miracle-Gro is the leading contributor in funding NJ legalization efforts (SMG)

According to the most recent state financial disclosure report, Scotts Miracle-Gro is the leading contributor to legalize adult-use marijuana in New Jersey. So far, the lawn and garden care giant has donated $800,000 of the roughly $1.3 million raised for legalization efforts. The NJ chapter of the ACLU is the second-largest contributor, donating approximately $323,500. Notably absent from the election finance report is the U.S. MSOs. Scotts Miracle-Gro, through its hydroponics subsidiary Hawthorne Gardening, manufactures equipment, potting soils, and fertilizers for cannabis growers, and the company stands to benefit from legalization trends nationwide, which would likely increase the number of consumers cultivating their own marijuana.

The Mexican Senate will likely vote on marijuana legalization month by the end of the month.

Per the Mexican Senate’s majority leader, Ricardo Monreal of the MORENA party, the bill is “likely to pass” before October’s end. If the Senate passes the bill, it will have to before Mexico’s congress's other chamber.

Mexico’s Supreme Court issued a mandate in 2018 to end the federal prohibition on marijuana due to it determining that a ban on personal use/possession was unconstitutional. Since then, the legalization bill has undergone revisions as it advances through various state committees and has recently been delayed due to the coronavirus pandemic.

The legalization bill proposes allowing legal age adults to possess and cultivate personal possession with personal possession capped at 28 grams. It also permits individuals to grow up to 20 registered plants, with yield caps, and medical marijuana patients would be eligible to grow more than 20 registered plants. The bill would establish a decentralized regulatory body responsible for managing the market and issuing licenses. Cannabis sales would be taxed at 12%, and a substance misuse treatment fund would be set up.

While marijuana is de facto legal for personal use in Mexico, adult-use legalization at the federal level would open commercial opportunities for the industry for both possession and cultivation. Legalization in Mexico could be a future headwind to Canadian cannabis companies, which have been struggling with inventory oversupply. Federally licensed producers in Canada have made international contracts with countries that have legalized/decriminalized marijuana to varying extents, e.g., Aphria (APHA) shipping cannabis to Germany, and Mexican companies could produce significant competition and threaten the international revenue streams of Canadian LPs.