In most widespread tragedies, there are some winners. The holders of stock in Aphria Inc. (NYSE: APHA) are an example. In general, the cannabis industry and publicly traded cannabis companies are among those coronavirus winners.
There is more and more proof that, among people who are shut in because of the raging increase in COVID-19 infections, pot use is on the rise. Merrill Lynch analysis recently pointed out that they have evidence that the increase is significant.
The optimism about Aphria and its peers, particularly rivals Aurora Cannabis Inc. (NYSE: ACB) and Cronos Group Inc. (NASDAQ: CRON), has grown. None has sharply outdistanced the stock market, but some have recovered, relatively speaking. Cannabis stocks are no longer considered almost worthless.
After brutal sell-offs during the past year, some of the pot stocks have bounced back, a relief for many investors. Aphria is about equal with the performance of the S&P 500 in the past month. While the market is down 22%, Cronos, a competitor, is only off 9%, which shows capital is not moving out of the sector. Slowly, some of these have become stocks to buy for people with an appetite for risk.
Still, heavy debt loads that compromised balance sheets and heavy losses made earnings reports disappointments quarter after quarter.
Aphria did raise $100 million in January, which gives it a financial advantage within the industry. The company said it intends to use the proceeds from the sale to finance international expansion. They also will be used for working capital and for general corporate purposes.
However, marijuana stocks in general have suffered from balance sheet malaise.
Pot sales are divided into two categories. While medical cannabis has been a steady business, it is recreational use that has risen recently. The industry has finally become a winner.
Bad Things Happened to Pot
Marijuana stocks were savaged in the second half of last year and some prices dropped by 20% to 30%. Much of it had to do with financial problems. However, boards of directors threw out top management in some cases, another sign of instability.
Aphria is near the top of the list of scandal-plagued companies. Co-founders Cole Cacciavillani and Vic Neufeld, who was chief executive officer, resigned in January and then left the board effective March 1 last year. The board issued a statement that said among other things: “[C]ertain of the non-independent directors of the company had conflicting interests in the acquisition that were not fully disclosed to the board.” New CEO Irwin Simon was tasked with a turnaround.
Short sellers have savaged the companies, betting on losses and a drop-off in share prices.
Another issue was that an increasing number of pot companies made it to the initial public offering stage. The competition for the market ratcheted up. In Canada alone, there are four relatively large publicly traded pot companies.
BDS Analytics, a research firm that covers the industry, recently reported that pot prices are dropping. Its Cannabis Price Index (CPI) showed a 1.3% reduction in prices in January, compared with the previous month. The decline from January 2019 was 2.1%.
Aphria Results Tell the Story of the Industry
In the most recent quarter of its fiscal year that ended November 30, Aphria revenue was $120 million, up from $21 million the year before. Gross profits were $40 million, compared to last year’s $6 million, a margin that looked strong against total revenue.
The company had an operating loss of $10 million, compared to a loss of $21 million the year before. Bottom lines in general look about the same among its rivals.
The revenue growth is encouraging. However, the balance sheet was ugly when the asset to liability ratio is unfavorable. Long-term debt was said to be $132 million, and convertible debentures were $358 million.
This was against a cash balance of $498 million.
Cannabis 2.0 May Help
The industry has hoped that cannabis 2.0 will help turn things around. Perhaps people would rather use pot without smoking. Enter edible, vapable and flavored liquid forms of cannabis.
Has the expansion of product offerings helped the industry? Over a year after the market for these new “delivery systems” began, there is no evidence it has helped rocket sales.