Aphria Inc (TSE:APHA) (NYSE:APHA) Interim CEO Irwin Simon joins Midas Letter to discuss the company’s latest quarterly financial results. Aphria reported its second consecutive quarter of profitable growth with a net income of CAD$16.4 million. Net revenue was reported to be CAD$126.1 million in the first quarter, which represents an increase of 849% from prior year quarter and a decrease of 2% from the quarter prior. The company’s profits were primarily the result of a shift in its ownership stake in Althea Group Holdings Ltd which added CAD$24.3 million to its long-term investment profits. Changes in value to its convertible debentures also added a further CAD$30 million approximately. The CEO stated “rec cannabis sales are up 8 percent; our overall sales are up 400 percent versus a year ago.” Mr. Simon also discussed the company’s development with regards to corporate governance and management changes.
James West: Aphria interim CEO Irwin Simon joins me now. Irwin, welcome.
Irwin Simon: Thank you. Nice to be here.
James West: It’s great to finally have you here. Irwin, you guys put out a great press release; congratulations on those earnings. Let’s talk about them. What is the – give me an overview of what the picture looks like.
Irwin Simon: So as we announced today, number one, our rec cannabis sales are up 8 percent; our overall sales are up 400 percent versus a year ago. You know, with that, our profitability is 4 times what it was last quarter. We’re profitable here in Canada with our Canadian rec sales; we’re profitable, you know, with the total company. We have over 600,000 plants in Aphria One. Health Canada, on Friday, told us they were expediting our license in regards to our Aphria Diamond facility. When those two come onstream, we will have, you know, 2.5 million square feet of growing space. We’ll have 265,000 kilos of ability to grow.
We’ve grown share in our Soleil product line, our Broken Coast – which we had a small fire that caused a little bit of a hiccup, but our Broken Coast is, you know, one of the most consumed products or demand products here in Canada. You know, we have our licenses in Germany, we’re building out our facilities in Latin America, in Colombia, so a lot of things going right. There’s a lot of things going right, and listen: it’s been a tough, you know, six months prior to that with Aphria, and a lot of things heading in the right direction.
James West: Sure. I don’t want to dwell on that, but in the interests of credibility, if I don’t ask you some tougher questions…
Irwin Simon: Absolutely. You should.
James West: I’ll be shot down and crucified by the social media. So, what most people want to know is, you know, there were some questions about how certain transactions were done within the organization which resulted in management changes. So, without asking any questions to lead or imply anything, can you tell me how everything has improved on the governance side overall?
Irwin Simon: So number one is, you know, in regards to the governance, the Board has changed, the leadership at the top has changed in regards to myself as Chairman and interim CEO. Listen, I ran a public company in the US, around the world, which I was the founder for 25 years; I’m big on process, I’m big on corporate governance. There are, you know, new Board members joined our Board already; there’s an additional Board member that will be joining our Board at our AGM.
In regards to disclosures, you know, any conflict of interest, every meeting, we bring that up. In regards to, you know, any acquisitions, you know, in regards to that, if there’s any investments or conflicts…so there is, put in place by the special committee that was, you know, there at that time, a tremendous amount of process that we would go through. And again, it’s not that we should have to go through a list; there just should be good corporate governance every single day of the week in a public company.
You know, we trade on the New York Stock Exchange, we trade here in Toronto, so basically, there’s rules to follow, and I know the importance of that. If investors are invested in our product, they should have good governance, and they should be getting their responsibility that the company is. The same thing when a consumer buys our product. If they’re paying for our product, they should know they’re getting a quality product that’s gone through strict regulations and gone through process, and that should be the same thing with our shareholders.
James West: Fantastic. Okay, so you’re obviously scaling into a market that is going to grow, probably, with the advent of Cannabis 2.0. But the scale at which capacity is growing out is, I mean, and I recall from earlier that Aphria was very cost-conscious about cost per gram of production over time, and I’m curious as to how that’s ramping up with these larger scales. Are you still targeting lower or prioritizing, rather, low cost of production, and is that a realistically attainable goal in this new, big scaleup, anytime soon?
Irwin Simon: So first of all, quality is number one, and putting out the best quality products out there that consumers want. And that’s, you know, our number one priority.
Number two is, listen: anybody that comes out and says ‘we’re going to be a low-cost producer and that’s what we’re going to focus on’, you know, every company that I’ve been involved in, we always want to be a smart, strategic, low-cost producer. And that is something that we want to be just from everyday course of the business. It’s not that here’s this strategic plan; we’re going to be a branded consumer products company, number one. We’re going to put out quality products, we’re going to follow the strict regulations of the Health Canada, and by the way, we are going to be a low-cost producer. And that’s going to come from good grow. That’s going to come from our processing, which is automated out there, getting our yields out there. It’s going to come from the way we ship our products today, and how many different handling is in place. And that’s what’s going to, you know, allow us to be that low-cost producer. There’s not one simple, special sauce out there that you drink that says we’re a low-cost producer because we drank this sauce. It’s an integrated program.
It also comes back, today, too, from an integrated sales and marketing program. How are we spending the money with our retailers, and what is the benefit, and what are we getting for it? And last but not least, how are we marketing our brands?
You know, there’s a lot of regulations in the way you market your brands here, and what you can spend on advertising. So how are you building awareness to the consumer? How are you getting to know your brands, and when they come into a retailer, how are they buying your brands? So that is, again, as you bring them all together, how do you become that low-cost producer?
James West: Right. Is Aphria still more or less focused on greenhouse growing as opposed to enclosed structures?
Irwin Simon: Listen, we’ve invested in greenhouse growing. We’ve invested a lot of money, so that’s where the focus got to be now, and how we perfect that, as I said, you know, we will have 2.5, 2.6 million square feet of greenhouse growing in Leamington, Ontario. And with that, again, how do we get the yields, how do we get the perfection out of that? You know, listen, I’ve seen different types of growing. So far, you know, no one out there has ever grown cannabis in 2.6 million square feet, okay? So there’s still a lot of learning curves to do. It’s the lighting, it’s the, you know, irrigation systems, it’s the yields, how you’re treating the plants, etcetera.
We’ve come a long in Aphria One; there’s 600,000 plants that was there by the end of July. Incredible. And now we have to, you know, get Aphria Diamond full once we get our license there. But we’re there. Greenhouse is where we are, and greenhouse is where we’re committed to for now.
James West: Great. What about the international strategy, how’s that evolving?
Irwin Simon: You know, the international strategy is evolving well. You gotta remember, you know, internationally, I mean, other than Uruguay and Luxembourg, you know, ultimately, they’re the only countries that have somewhat of, you know, rec that is legal. The rest is medical cannabis. So you know, I see opportunities in Latin America. There’s 650 million people living there. I’ve spent time both in Colombia, I’ve spent time both in Argentina, and the opportunities working with the medical professions, working with drug companies there, is tremendous. So I’m pretty excited about that.
You know, I was in Buenos Aires two weeks ago and working with a hospital there that we work with, and seeing the testing and the results with CBD in toddlers and kids, in epilepsy, and actually supplying CBD to a child ourselves that we’re working with in the UK, and what we’ve seen, where they would have over 300 seizures a day, either down to none or only having a few. So there’s tremendous amount of research coming out in regards to benefits of cannabis with anxiety, with epilepsy, with pain, with sleep, etcetera, and that’s what I’m excited about, is the opportunity for us around the world in regards to the use of medical cannabis.
The big opportunity for us is, you know, becoming GMP certified our of our Leamington facility, and being able to ship that internationally – big opportunity. We’re today investing $40 million-plus in Colombia in regards to building a greenhouse there. We’ve investing in Germany and spending $40 million in building out a facility there to supply the German market from a medical aspect. So we’re investing, and we’re also investing in our Leamington facility to be able to supply GMP-certified product to other countries around the world.
James West: Okay, great. Okay, are you able to give us any guidance on what the rest of the year looks like financially?
Irwin Simon: Listen, as we come back and said, we have stuck to guidance, and I think that was important. You know, feeling good about getting our license at Diamond was important for us, but I think the big thing is, what I’ve come out and said and what the company has said, is this, here: by the end of calendar year 2020, we’ll be on a run rate to do $1 billion of sales in Canada. One billion, that’s billion with a B. I think that’s important.
The big thing is, is this here: it’s not that we have to go out there and create a market. There’s a $5 billion market out there. It’s how we convert the illicit market over to the rec market, and buying through retail stores. So how do we grow, number one? More and more stores are going to open in Canada. I’d say within the next two to three years, we’ll be 3,000 stores or more. Converting the illicit market over to the rec market, and that’s where you’ve got to gain the confidence, you know, of consumers. Letting them know what’s safe, letting them know about brands. And, you know, last but not least, price will be important, okay?
The other thing is, what you’re going to find in, you know, the rec market and from brands, you’re going to find different products in regards to whether it’s vapes, whether it’s edibles, and whether it’s drinks. So there’s a big market out there; it’s just, how do you take share away from it, and how do you pull the consumer out of the illicit market.
Listen, I think there’s over 200 LPs today in regards to the Canadian market; I think there’s a lot of challenges. Raising money today, as I said on my call this morning, cash is king, and we have, you know, over $465 million of cash. I think some of them will run out of money and they’ll go away. As you heard today, CannTrust having to, you know, burn $77 million worth of cannabis; I mean, that was in the marketplace before, so we’re all picking that up.
So there’s going to be a shuffling out of the market, and I think, you know, listen: I think the big thing is this here. This industry has only really been around one year on the rec, and it’s had its stops and starts, had some great things going on, had some good things, and it had some challenges out there.
James West: You bet, Irwin. All right, we’ll leave it there for now. That’s a great contribution. Thanks very much for joining me today.
Irwin Simon: Thank you very much for having me.
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