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Aphria Inc. CEO Vic Neufeld on Financial Results, US Cannabis Assets and TSX Pressure

— James West

Aphria Inc. (TSE:APH) CEO Vic Neufeld discusses his company’s latest financial results, the TSX reticence toward Canadian cannabis issuers with U.S. cannabis assets, and how Aphria has overcome those issues, and comments on accounting practices of ACMPR companies.


James West:     Vic, thanks for joining me again.

Vic Neufeld:     My pleasure, James.

James West:     Vic, let’s start off with a discussion about your Q1 2018 earnings. What’s happening, and how come it’s looking so good?

Vic Neufeld:     They were stellar results – blew almost every metric away from our expectations and what the Street had expected, and it all starts with growing – growing to scale, growing to mass, low-cost producer status. And it’s having a medical platform with our go-to-market strategies that are clicking on all cylinders. So we are very, very excited about not just Q1, but going forward, Q2 and onward.

James West:     Sure. So your EBITDA is rising, your production is rising. Is it safe to categorize everything at Aphria is going according to plan?

Vic Neufeld:     Yes. I’m going to throw a footnote in: we have now commenced, with a lot of effort and energy, the development of our recreational brand. So I think in Q1 there was a few dollars spent, but more importantly, Q’s 2 and 3, as we’re leading up to July 1 of 2018, I think we will be spending more in the marketing area. Again, more of a creation of the brand, and how to have our activation plans ready to rock and roll.

And again, I put a caveat there, because Health Canada still needs to advise of what sort of products are going to be available in Phase I, II and III, but also the advertising rules.

James West:     Right.

Vic Neufeld:     So we’re being very focused, yet very flexible to change our plans that are already in a canned version, so to speak. So I think you’re going to see a little more below the GP line cost structures in Q2 and Q3, but eight consecutive EBITDA quarters – that’s important for us. The Street is expecting that of us.

James West:     Sure. And I know that you have a keen focus on how you report your accounting.

Vic Neufeld:     This is true.

James West:     So we had a guest in who was a forensic accountant for the OSC, and he was making a case that many of the cannabis companies are essentially stockpiling marijuana in an effort to sort of juice up the balance sheet, and that is something that Aphria has never done, nor do you plan to do.

Vic Neufeld:     Um, you’ve captured everything right there, James.

James West:     Sorry, that’s my job!

Vic Neufeld:     Throw that in a question to me! You know, the way the IFRS rules work, the more you grow versus sell, it, as you used the expression, it juices the income statement in a very fictitious manner, I may add. And it’s hard for investors to sit back and read quarterly statements, to properly digest that.

Aphria today has 12 analysts following us. Every analyst now is well, well versed in what our issues are when it comes to IFRS, but also just typical accounting policies on what to record in cost of goods sold that truly should be there.

So as you saw on our last quarter, we do have our continued definition.

James West:     And I also noticed that you raised $80 million in a bought deal financing. What’s the status of that at this point?

Vic Neufeld:     Proceed flank speed. We were oversold, so the shoe should be exercised. It’ll be about a $92 million bought deal, the largest in the space to date. I really do believe that that shows confidence, that investors, especially institutionals for the most part that jumped in, really have the confidence in management, our strategies, and where Aphria is heading. So we’re very proud of what we’ve been able to accomplish.

James West:     Sure. So the issues that have been sort of plaguing the new cycles lately, in reference to the TSX and CDS making noises that they might somehow negatively impact Canadian-listed companies with US marijuana assets…

Vic Neufeld:     Okay, so I just want to go back to your bought deal question. I want it to be made explicitly clear that none of those dollars raised are earmarked for anything to do with US activity. The raise was primarily for strategic expansion and investments, both in Canada and also, perhaps, on an international front where there is no legal issues in terms of medical cannabis.

So back to your question: when the disclosure requirements came out in the staff notice, thumbs up. We’re in full agreement and very much endorsing the concept of, the more you can share with investors for them to make astute decisions based on complete and accurate disclosures, is something we really, really, really want the bar to be high. And so when the CS came out, that’s great.

The TSX, the staff notice, it again spoke to investments in the US, directly and indirectly, actively and passively. So here’s an update: we felt that in good partnering, and when they reached out to us, literally within two or three days after the announcements were released, if we wanted to engage in dialogue; absolutely. So we’ve already had our first kickoff meeting with the Exchange, wherein we talked about some of our ancillary investments.

What we have indicated is our willingness and, quite frankly, we’ve already started to execute on some of my undertakings with the Exchange on divesting of direct US investments, for the most part in states where recreational and medical reside. On the other direct investment called Copper State, our investment in Arizona, which really began 16 months ago, even though we do not necessarily agree with the position taken, we have agreed, though, to do whatever is possible given our shareholder agreements with Copper State, to actually bend out of Aphria the Copper State investment into Liberty, which is one of our sister companies and is the one that is housing all of our US activities.

James West:     Sure.

Vic Neufeld:     So that will take direct investment off the table and now we were in a position to discuss and come to a conclusion on an indirect investment, and that is, Aphria’s 37 percent interest today of Liberty, and after the vend-in will be something greater than that, but below 50 percent. And that’s a position that again we have been asked, and are in the process of sharing our legal defense memorandums and opinions.

Whether it’s the Rohrabacher Amendment or the Leahy Bill that’s in passage, or at least trying to get through passage in Congress, Jeff Sessions just came out two weeks ago that more time and energy needs to be spent on the research and development of medical cannabis. And this is the Attorney General. So we know there’s a lot of shifting of, not behaviour necessarily, but thinking of what medical cannabis is all about.

James West:     So the purchase of 10 percent of Canopy Growth by Constellation Brands, an NYSE-listed Fortune 500 company, throws the whole dialogue into a different light. I mean, I don’t understand how the US banking system or the justice system can criticize Canadians for investing in US assets while one of their flagship US companies is investing in Canadian assets! How do you reconcile that sort of contradiction?

Vic Neufeld:     The concept of Aphria through Liberty and whether it’s Florida, it’s Arizona and hopefully, knock wood, Ohio in November, there are differences of interpretation; I realize that. But when you really look through it, it’s a US organization touching or playing in a cannabis space. And what Constellation has done, I think, adds more substantive defense to what we’ve done, Arizona 16 months ago and Florida probably about 8 months ago.

It remains to be seen, but when a New York Stock Exchange company invests in cannabis – I don’t care what country, and it’s legal, but in their own jurisdiction it’s not – that kind of sends a message that the big boys really want in, and this is just a big beverage guy, Constellation. I mean, Diageo and Bacardi are out there too, but you’ve got all of the energy drink guys waiting, you’ve got tobacco –

James West:     Big Pharma.

Vic Neufeld:     Big Pharma. You’ve got Bacardis of the world, you’ve got other spaces that, again, probably were taken aback a bit in terms of ‘why now’, why not post-July 2018. I think Constellation was very strategic in buying in at a cheaper price, so to speak. One could almost say that Canopy should have held out a bit longer. But back to your question, the fact remains: they got a US company now, major global player, but on the NYSE, making a substantial, 10 plus another 10, 20 percent is influence. It remains to be seen now how the TSX, but also US government regulators, view this.

James West:     Sure. Vic, we’re going to leave it there for now. Thank you very much for joining us today.

Vic Neufeld:     Great. Thanks for having me.

James West

James West

Editor and Publisher

I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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