Aphria Inc. (OTCQB: APHQF, TSX: APH)

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When Health Canada, Canada’s federal health authority that governs cannabis regulation, first licensed Aphria Inc. to produce medical marijuana in November, 2014, it appeared that the company might be late to the dance. By that time 13 other companies had been issued grow licenses, so the field was already quite crowded. Over the past two years, however, Aphria has quickly emerged as one of the heaviest hitters in Canada’s rapidly growing cannabis industry.

One month after receiving its license, in December, 2014, 52 million Aphria shares began trading on Toronto’s TSX venture exchange under the symbol APH. At the time, the company immediately caught investors’ attention, in part due to the impressive pedigree of its management team, headed by Vic Neufeld, who previously served as CEO of Jamieson Laboratories, a major vitamin manufacturer.

As it turns out, Aphria was anything but late to Canada’s burgeoning medical cannabis trade. In fact, prior to receiving their full license, the company had been operating on a partial Health Canada permit which allowed them to grow and inventory cannabis. That job fell to Neufeld’s partners in the company, greenhouse operators Cole Cacciavillani and John Cervini, who were a perfect pit for Aphria—already growing and distributing flowers and vegetables for large Canadian retail chains.

Blowout Q1 Results            

CEO Vic Neufeld

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Flash forward two years later to October, 2016, when the company reported Q117 results, and you’re looking at one of the two biggest players in Canada’s bullish public cannabis sector. For the period, Aphria banked sales of $4.37 million, along with a profit of $895,000. That compares year-over-year to Q116 sales of $950,000, and a loss of $476,000, topping analyst expectations and putting the company at the forefront of Canadian cannabis purveyors.

“Aphria continues to deliver on all operating metrics,” said company CEO Vic Neufeld in response to those results. “Patient onboarding, harvest yields, delivering in-demand strains, kilograms sold and low production costs have again generated stellar top-line and bottom-line results.” Neufeld also referenced a major company expansion that began in April, 2016—a $6.5-million deal to acquire 360,000 square feet of existing production space, located on 36 acres of land in Ontario from its co-founder and COO Cole Cacciavillani.

“Completion of the part II expansion remains on schedule,” Neufeld stated. “Part III expansion just kicked off in the last two weeks. With expected annualized yields increasing to 18,000 kg upon completion of the expansions, Aphria is strategically positioned for continued sustainable growth.”

The company’s growth has caught the attention of several market analysts. “Aphria is already an industry leader in terms of production cost, profitability, registered clients, and sales volume,” said Clarus Securities’ Noel Atkinson, in the immediate wake of the expansion news. “This deal ticks the last box—scale of production facilities—to have Aphria now considered truly on equal footing with Canopy as the two top players in the Canadian MMJ sector and we would argue Aphria is more attractive than Canopy due to its much higher profitability.”

Cash Is King

One of the most eye-catching things about Aprhria is the quantum increase in cash on hand, as a series of big-money investors have given the company votes of confidence through direct investments. At the end of 2015 the company reported cash from financing at an anemic $70,000. By August, 2016, the company had raised a massive $43.7 million in financing. “Following the money” is usually a good investment strategy, and above all, that kind of money puts Aphria in an extraordinary cash flow position to rapidly scale up and expand.

Expansion and Diversification  

APHRIA 3   In October Aphria announced that it had partnered with MassRoots, Inc. (OTC: MSRT) to help build awareness of the Aphria brand in Canada. The $250,000 deal included Aphria’s purchase of 500,000 shares of MassRoots common stock, along with warrants to purchase an additional 500,000 shares at $0.90 per share, valid until October 17, 2019. 

Aphria also signed a licensing deal with Tokyo Smoke, a premium cannabis-oriented lifestyle brand. That transaction is unique to the Canadian cannabis industry, as it links a mainstream consumer lifestyle brand with a licensed producer, setting a precedent for how future cannabis brands may operate in Canada.

 

Conclusion    

APHRIA 4With Health Canada reporting that they have received in excess of 1,000 license applications to enter the booming cannabis market, and more than a dozen companies already vying for supremacy in the industry, it’s clear that fierce competition has already been unleashed. That said, demand for cannabis in Canada and beyond is huge, and Aphria has an unparalleled cash war chest to capitalize on that demand. It’s also the first publically traded cannabis company north of the border to report a profit.

From where we sit, all of these factors should translate into ongoing share price appreciation for Aphria investors. The company’s current market cap and share structure may temporarily mitigate against rapid gains in the immediate days and weeks ahead, but over the long haul an Aphria investment appears to be one of the better places to put your speculative trading dollars to work.