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Report On Business After pushing down production costs, marijuana producer Aphria posts ‘stellar’ quarter

Some of Aphria's medical marihuana plants grow in their greenhouse in Leamington, Ontario.

GEOFF ROBINS/The Globe and Mail

Leamington, Ont. greenhouse-grown medical marijuana producer Aphria Inc. doubled its revenue in the most recent quarter as it drove down the per-gram production costs of its cannabis with improved growing techniques and favourable growing conditions.

The company revealed Wednesday that, according to its proprietary definition of cash cost, it had reduced its per-gram production cost 36 per cent to $1.11 per gram in the fourth quarter of 2017 from $1.73 in the third quarter. Using industry competitors' definition, which does not include indirect labour or quality control costs, Aphria said it reached a per-gram cash cost of $0.79, versus $1.42 a quarter earlier.

"I would call it a stellar quarter," said Noel Atkinson, a research analyst and vice-president of Clarus Securities Inc. who covers the company. He called the lowered production costs "basically an industry record," which "reflects the economies of scale that can be achieved when you're using greenhouses."

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As competitors race to ramp up production ahead of Canada's proposed recreational-marijuana legalization date of July 1, 2018, chief executive Vic Neufeld says Aphria is focusing on shorter-term strategies to improve its performance for investors. That includes improving product quality, reducing production costs, and focusing on the medical market by signing up more patients, he said.

"I don't think anybody really expects on July 1 [2018] that a good chunk of the underground economy moves above ground," Mr. Neufeld said in an interview. "It'll be some movement over time." But he believes Aphria will still have product available for recreational users then anyway. "We'll already be producing 30,000 [kilograms] annualized, which is more than what we conceptually identify is necessary for the medical distribution model."

The company announced its fourth-quarter and fiscal 2017 results Wednesday. Its share price rose 9 per cent to $5.70 on the Toronto Stock Exchange mid-Wednesday.

Revenue for the fourth quarter was $5.7-million, more than doubling the same quarter in 2016.

Aphria revealed a $2.6-million loss, versus a $1.3-million profit a year prior, though that resulted in large part from positive operating income being offset by investment losses. For the full year ending May 31, its profit was $4.2-million – a 955-per-cent rise, which included a $3.6-million gain on the company's investment portfolio and a $3.5-million writeoff related to limits that were imposed on veterans' medical cannabis reimbursement allowances.

The news capped a quarter that saw Aphria jump to the Toronto Stock Exchange from its Venture Exchange; launch a U.S. expansion strategy with a $25-million acquisition in Florida; and receive Health Canada approval for an expansion that already had its first harvest. It also closed a bought deal and debt financing round of more than $105-million to fund working capital and further planned expansion.

With its most recent expansion, the company expects it can produce 9,000 kilograms of dried cannabis a year in Leamington. By November, Aphria hopes to build out another expansion that, with government approvals, would its push capacity to 30,000 kilograms. A year from then, if construction and approvals go smoothly, Mr. Neufeld said a final planned expansion phase could be in full crop rotation – giving the company capacity to produce 100,000 kilograms each year.

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With a $5-a-gram average wholesale price, Mr. Atkinson noted this would give Aphria $500-million a year of revenue potential at full capacity.

Its quarterly earnings before interest, tax, depreciation and amortization – a figure in which Aphria includes share-based compensation and adjustments related to biological assets, among other adjustments – was positive for the seventh-consecutive quarter, the company said, at $2.8-million, or 443 per cent over the same quarter in 2016.

The Ontario government also announced Wednesday that it would seek public input on how to build its framework around recreational marijuana legalization.

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