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Falling cannabis prices and economic shutdowns are hitting Aphria Inc. hard, with Canada’s largest cannabis producer reporting a $68-million operating loss days before shareholders vote on a major merger with rival Tilray Inc.

Early this year, Aphria’s stock had skyrocketed as retail investors rushed back into the cannabis sector. From Jan. 1 to early February, its shares soared 280 per cent, and the appreciation sent Aphria’s share-based compensation 600 per cent higher in the third quarter of 2021.

Yet the company’s operating woes are forcing investors to reconsider their lofty expectations, and Aphria’s shares plummeted 14 per cent on Monday.

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The company, which has a 12.1-per-cent market share in Canada, attributed its poor performance last quarter to economic shutdowns at home and in Germany, where it has a drug importation company.

“In Canada, our largest market, the provincial lockdowns extended through most of the quarter, and the provincial boards lower their inventory levels in view of the limitation imposed on the operation of cannabis stores,” chief executive officer Irwin Simon said on a conference call. The company declined to comment.

Aphria is also facing fundamental headwinds. With an oversupply of cannabis in Canada, prices keep falling, with the average selling price of adult-use cannabis before excise tax dropping to $3.82 a gram last quarter from $4.29 a gram in the prior quarter.

Canada’s pricing dynamics are one of the main reasons Aphria is hoping to acquire Tilray, a deal that was announced in December and marked the first major takeover in Canada since recreational cannabis was legalized in 2018.

“The market in Canada is way oversaturated – there’s too many [licensed producers]; there’s too much [growing capacity] for the size of the market here,” Mr. Simon told the Globe in December.

Leamington, Ont.-based Aphria and Nanaimo, B.C.-based Tilray believe they can save money in Canada by combining their operations and cutting costs, but they are also pitching it as an international opportunity. Tilray owns a large growing facility in Portugal, and Aphria has its German business, creating a combined entity with a production and distribution network within the European Union.

Aphria’s shareholders are set to vote on the transaction on Wednesday, and Tilray’s will vote on Friday. Because the merger is share-for-share, the two stocks have traded in tandem of late and Tilray’s shares dropped 13 per cent Monday.

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In total, Aphria reported a $361-million net loss last quarter, bringing its loss for the first nine months of fiscal 2021 to $487-million. After adjusting for non-cash costs last quarter, which included a large loss on its convertible debentures, Aphria reported a $47.9-million adjusted loss.

Aphria reported an adjusted loss of $42.9-million over the first nine months of fiscal 2021, down from $50.7-million over the same period in fiscal 2020.

With a report from Mark Rendell

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