APHRIA INC (APHA) Q3 2019 Earnings Call Transcript

David like me a fellow Canadian, he his Real Madrid’s Global Head of Partnerships, David has over 25 years of marketing and international experience, which we believe will help Aphria as we navigate our strategic growth priorities in new and existing markets. Going forward, we will continuously evaluate our team and Board of Directors to add best-in-class talent to our organization.

At Aphria, we remain committed to strong corporate governance and promoting a culture of integrity and ethical behavior throughout the organization. I’d like to thank the Special Committee’s diligence and independence in undertaking its review of our LATAM assets. The work of the Special Committee has affirmed for me and the Board that the LATAM transaction was executed at an acceptable value and is consistent with the Company’s international growth strategy.

The team at Aphria is energized and excited. We are embarking on a renewed path forward. With the help of a leading consulting firm, we are intensively working on a 90-day strategic plan to prioritize our long-term strategic objectives. We will define a set of strategic platforms and translate our objectives into an execution roadmap. We believe the opportunities for long-term value creations are very strong in both Canada and internationally.

I will now review our progress in key geographic regions, before turning the call over to Carl to review our financials. Today Aphria has presence in more than 10 countries across five continents with five high quality brands, including our Solei brand dedicated to novice and first time users; RIFF, our brand dedicated to community and culture; Good Supply, our brand offering cannabis enthusiasts a great value; Broken Coast, our super premium British Columbia-grown craft brand with quality that we believe remained unmatched in this industry, including products from both medical and adult-use and of course Aphria, our medical consumer brand. These brands were developed to address distinct segments of the Canadian cannabis market.

We put consumers’ needs at the forefront of our strategy. As regulations change, we will proactively evolve our portfolio brands and our products. From a production standpoint, we are really excited to have recently reached a major corporate milestone with Aphria One receiving Health Canada expansion approvals for Part IV and Part V. This brings the current annualized production capacity for the total Company to 115,000 kilograms. We look forward to addressing industrywide supply constraints with our expanded production capacity and sophisticated proprietary automation technology that can help ensure Aphria remains at the forefront of the cannabis cultivation and innovation worlds.

I would just add Aphria Diamond last week and the facility is truly a state-of-the-art for the industry and we believe we will increasingly set us apart from the competition. The license application continues to progress at Health Canada where staff are working diligently to bring more cultivation on line. We believe our Canadian business will be a significant contributor to our results over the next several years with the potential for us to create one of the largest production footprints in the cannabis industry.

In Europe and Lesotho, we continue construction on the EU-GMP oil processing facilities. We recently launched CannRelief, a CBD-Based nutraceutical and cosmetic product line, for the German market. These products are being produced in the EU and distributed by our subsidiary CC Pharma which has access to more than 13,000 pharmacies throughout Germany. This provides a natural extension to Aphria’s growing business opportunities in the German medical cannabis market. We look forward to providing a full range of CannRelief CBD products this year. Importantly, Aphria has just recently been awarded a provisional approval in Germany for a medical cannabis cultivation license. We believe this is a validation of our strategic approach to supporting the German medical cannabis market with high-quality domestic state-of-the-art indoor production to secure vital supply for the patients.

Since, Germany Cannabis as a Medicine Act was enacted in March of 2017, the country is growing medical cannabis needs currently estimated at 40,000 patients has been exclusively supplied by imports. We look forward to seeking to supply German patients with domestically grown high-quality medical cannabis. In Latin America, we generated approximately CAD2.7 million in sales since our LATAM acquisition. We also continue the build-out of herb houses in Jamaica and are waiting final approval of our conditional licenses. Aphria continues to execute on its medical and adult-use cannabis growth initiatives internationally.

We believe we have great momentum in Latin America, Germany and across international markets as we continue to strengthen our global footprint. At Aphria, we will continue to drive sustainable long-term shareholder value by leveraging our strong brand positioning, superior distribution model, product innovation, industrial-scale cultivation and automation, medical-use leadership and last but not least, our strategic global platform.

I would now like to turn the call over to Carl.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carl A. Merton — Chief Financial Officer” data-reactid=”57″>Carl A. Merton — Chief Financial Officer

Thank you Irwin, and good morning. Please note all financial references are in Canadian dollars, unless I mention otherwise. Before, I get into the financial results, I would like to remind everyone, it is still early in terms of legalization in Canada, and as with every industry in its early stages, we are continuously, learning and improving including refining our methods for cultivation, production, packaging and distribution.

Aphria has a history with multi-generational expertise in commercial agricultural — agriculture and we believe the challenges we faced in the quarter, particularly supply shortages were based on proactive decisions we made and they are temporary in nature with our expectation, that our fourth quarter cannabis sales will be similar to the third quarter, as we continue to position our business for a long-term growth and success. With the changes to our growing method now stabilized, we are positioned to implement our new cannabis leading industrial scale automation and necessity to remain at the leading edge of cost to supply. We believe the steps we have taken will help fuel the growth of our strategic initiatives in Canada and internationally and generate long-term shareholder value.

As Irwin mentioned, our annualized production capacity today between Aphria One including Part IV and V and Broken Coast is 115,000 kilograms. Applying our current average selling price in adult-use this level of production results in CAD0.5 billion in sales annually, once we are in full crop rotation. Once fully licensed, Aphria Diamond is expected to increase this annualized capacity to 255,000 kilograms. Using the same logic, this level of production could result in more than CAD1 billion in Canadian cannabis sales, once we’re in full crop rotation. But that isn’t enough. In addition, we are continuing to expand our processing capabilities with our new extraction center of excellence, which is still under construction. As we gain production scale and invest in automation, we expect to realize greater efficiencies and further support our growth opportunities in Canada and initially. At Aphria, we have the greenhouse space, the cultivation expertise, the automation technology and the raw materials to position us for success.

Moving to our financial results. Net revenue in Q3 increased 617% over the prior year period to CAD73.6 million compared to Q2 net revenue increased 240% driven by CAD57.6 million of distribution revenue from CC Pharma and ABP in Argentina. The Company sold 2,637 kilogram equivalents of cannabis in Q3, down 23% compared to 3,409 kilogram equivalents sold in Q2. Adult-use cannabis accounted for 1,329 kilogram equivalents and medical cannabis accounted for 1,274 kilogram equivalents. The decrease in cannabis revenue and kilograms sold compared to Q2 was primarily related to lower inventory levels entering the quarter; supply shortages as we transitioned growing methods and allocated more space to mother plants in order to prepare for the Aphria One and Aphria Diamond expansions, as well as temporary packaging and distribution challenges.

We made the strategic decision to transition our growing method in order to remain competitive. We are focused on maintaining industry-leading cost of supply. In order to achieve this, the cost savings associated with scale and industrial automation will be an important component.

The average selling price of adult-use cannabis before excise tax, decreased to CAD5.14 per gram in Q3 compared to CAD6.32 per gram in Q2 due to a shift to smaller package sizes to maximize our SKU assortment and maximize shelf space for our brands. The average selling price of medical cannabis before excise tax increased to CAD8.03 per gram in Q3 compared to CAD7.51 in Q2, primarily related to higher oil sales. During the quarter, our cash cost per gram increased from CAD1.34 last quarter to CAD1.48. Included in this figure is CAD0.20 a gram related to the strategic decision to allocate flowering space to mothers to facilitate the ramp up of our Part IV and Part V and Aphria Diamond expansions.

Our all-in cost per gram increased from CAD2.60 a gram to CAD3.76 a gram. This temporary increase was driven primarily by an increase in packaging costs from CAD0.97 a gram to CAD1.98 a gram in the quarter. Our increased packaging costs per gram were a result of the demand from the adult-use market and in order to comply with the packaging requirements under the Cannabis Act.

Since the launch of adult-use cannabis, we have reevaluated all of the total packaging used in our products, the materials used themselves and the source of the materials we need to multiple levels of cost improvement. We are also working on packaging automation over the next two quarters and expect labor cost to decrease as that comes on line. Near term, we expect consistent packaging cost as we work through our existing inventory of materials, but expect to gain efficiencies from this automation and other cost savings initiatives in the mid-term.

Adjusted gross profit increased to CAD13.4 million in Q3 from CAD10.1 million in Q2. Adjusted gross margin was 18.2% in Q3 compared to 46.9% in Q2, reflecting an increase in revenues from our distribution business, which operates with lower gross margins than our cannabis business, typically in the 10% to 15% range. The margin decline was also due to the previously mentioned increased packaging costs, as we build scale and automation and wait for Part IV and Part V to begin producing plant.

SG&A costs in Q3 increased to CAD106 million, up from CAD27.5 million in the prior quarter. The increase was primarily due to a CAD50 million impairment for the LATAM acquisition, an increase in non-cash share-based compensation and the inclusion of a full quarter of LATAM and two months of CC Pharma. As disclosed in our earnings release today, the basis for this impairment arises from our reassessment of the discount rate and the financial forecasts for those entities as a result of new financial information received from the financial advisors to the Special Committee who reviewed the LATAM transaction. Please note, despite the recording of the impairment of CAD50 million our investment in the LATAM assets remains CAD30 million more than the originally agreed purchase price of approximately CAD195 million, a purchase price that was both supported and confirmed as consistent with other transaction in the cannabis industry during our Special Committee review of LATAM.

Net loss in the third quarter was CAD108.2 million or $0.43 per share compared to net income of $54.8 million or CAD0.22 per share in Q2. Excluding the non-cash impairment charges, adjusted net loss was CAD50.2 million or CAD0.20 per share in the third quarter. The adjusted EBITDA loss for the period was CAD14.4 million based on an adjusted EBITDA loss from Canadian cannabis operations of CAD13.8 million and adjusted EBITDA loss from Aphria International of CAD0.6 million. In the previous quarter, the Company reported adjusted EBITDA loss of CAD9.5 million based on an adjusted EBITDA loss from Canadian cannabis operations of CAD6.1 million and an adjusted EBITDA loss from Aphria International of CAD3.4 million.

The increase in the adjusted EBITDA loss was primarily attributable to an increase in general and administrative cost to support our planned capacity expansions, higher overhead costs related to supply shortages as well as a temporary increase in packaging and distribution costs for the adult-use market. The decrease in adjusted EBITDA loss for Aphria International is primarily attributable to the inclusion of CC Pharma’s operating results in the quarter of CAD3 million of positive adjusted EBITDA. We expect our fourth quarter results to be similar to those experienced in the third quarter.

Moving to liquidity, as of February 28th, 2019, the Company had near cash of CAD134.7 million available for use. This amount, combined with the proceeds from the liquidation of the GA Opportunities Corp notes and option agreement announced today, is sufficient to fund previously announced CapEx and strategic initiatives. During the quarter, the Company invested CAD3.4 million on maintenance CapEx and CAD25.6 million on growth CapEx related to Aphria One’s Part IV, Part V and Aphria Diamond expansions as well as the extraction center of excellence.

In summary, we made significant progress on our strategic initiatives in the third quarter and are confident in our ability to create long-term shareholder value. Though we do not provide guidance to the market, on a pro forma basis, when applying our average selling price to our production capacity, our corporate objectives are for: one, annualized revenue of CAD500 million by the end of the calendar year and two, annualized revenue of CAD1 billion by the end of calendar year 2020, which could help strengthen our position as a leading global cannabis company.

That concludes our formal remarks. Irwin and I, are now available for your questions. Denise, back to you.

Questions and Answers:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”74″>Operator

(Operator Instructions) Your first question comes from Neal Gilmer from Haywood Securities. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Neal Gilmer — Haywood Securities — Analyst” data-reactid=”76″>Neal Gilmer — Haywood Securities — Analyst

Yeah. Thanks very much, and good morning. Couple of questions, maybe I’ll start off with — maybe on the cannabis sort of 2.0 outlook and so forth. Can you provide an update on the construction for your extraction center of excellence and sort of — what sort of the things you’re sort of putting in place to be prepared for — you know that — the other product formulations that are expected to come to market later this year?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”78″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So, in our MD&A, this morning, we announced that the construction will be finalized about two weeks later than we had originally anticipated, that’s going to push final completion into the month of June. In terms of additional product formats, the facility has blower rooms built in it specifically designed so that we can introduce butane and ethanol extractions into the process. We believe very strongly that the cannabis market is going through a secular change. People over the next few years will not only think of buying cannabis as the product itself, but it’s going to evolve to a situation where people are buying another product with cannabis as one of the ingredients in it. The extraction center of excellence sets us up perfectly for the time period when that occurs.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Neal Gilmer — Haywood Securities — Analyst” data-reactid=”80″>Neal Gilmer — Haywood Securities — Analyst

Okay. Thanks for that. Then maybe on the Part IV expansion. So when are you expecting first sales of harvest sort of that facility? Is that sort of going to be in a fiscal Q1 time frame, I know in your prepared remarks you stated expecting sort of Q4 similar to Q3, is that sort of then when you expect an increase in inventory and obviously then sales?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”82″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Yeah, so there is a — we received our license on March 1st, there is — there is an eight-week period while the first plants go through the flowering stage and then a four to six week period while the clear QA/QC go through drying, curing all of those operations. We expect to see the first bud that’s harvested from the new facility to really be available for sale about second or third week of June. So it will — so all of that capacity increase will come in Q1.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Neal Gilmer — Haywood Securities — Analyst” data-reactid=”84″>Neal Gilmer — Haywood Securities — Analyst

Okay. And then maybe my last question will be your comments, again, with respect to the packaging and distribution sort of bottlenecks. Do you feel that most of that has been addressed on your side at this point, any color you’re having with any of the provinces and then going into — so you know basically my point here being as you bring that product on line in the third week of June you feel you’re well set up to basically satisfy the provincial demand?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”86″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So number one, yes, we feel that we’re in a good position to really get in front of it and the demand is strong. I would say if we had product today, we could easily sell it. So we are able to supply what we can right now as Carl said, by the end of June, we should — Aphria IV and V we should have plants in there and we should absolutely getting into September have ample product to supply the provinces. And in regards to cost — cost reductions in automation, there is a significant plan in place that how to improve all those.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carl A. Merton — Chief Financial Officer” data-reactid=”88″>Carl A. Merton — Chief Financial Officer

We’ve already pulled significant costs out as we’ve changed the packaging both the amount of packaging in the product, but also the package containers themselves. It was a fun and challenging process being ready for legalization on October 17th, and we made decisions that allowed us to expedite product to market and now we’re taking the steps that are necessary to rationalize the cost associated with it.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”90″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

And you can just imagine of us scaling from where we were in sales and how we’re scaling up now and with the difference in regards to the people that we have running Aphria III, IV, V today, Aphria Diamond and you know the process that we’re going through to take a lot of cost out of that business and we feel really good about that.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Neal Gilmer — Haywood Securities — Analyst” data-reactid=”92″>Neal Gilmer — Haywood Securities — Analyst

Okay. Thanks very much. I’ll jump back in the queue.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”94″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Thanks, Neal.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”96″>Operator

Your next question comes from Brett Hundley with Seaport Global. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brett Hundley — Seaport Global — Analyst” data-reactid=”98″>Brett Hundley — Seaport Global — Analyst

Hey, good morning guys. Just staying on that last theme for a minute. So, if you consider your ongoing productive assets, right, excluding expansion, it sounds like the biggest bottleneck then is around kind of the testing, packaging side as compared to distribution. Am I hearing that right? Basically once you get through some of the bottlenecks related to packaging, you feel like you can more easily distribute that product into provinces?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”100″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Absolutely, right. I think the big thing is, if you look at it here, there’s the grow which today we have a license to grow in IV and V. And then as you look at the front end in regards to packaging and production and automation there and of course, supply. And with that we feel very, very good about, that’s why we feel good about our 2020 plans. If we got supply, we got automation, we got our packaging, we got our costing in place, the orders are there and it’s just pulling all together now.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brett Hundley — Seaport Global — Analyst” data-reactid=”102″>Brett Hundley — Seaport Global — Analyst

Okay. And I just want to make sure that I’m clear on the packaging theme. So, are you guys actually going to be taking some of future packaging requirements in-house? Are you negotiating better rates? Can you just talk a little bit about how that bottleneck eases for you going forward, I’m a little unclear on that still?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”104″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So let’s just give you a couple of examples. So when — in the early days of legalization if you looked at our packaging, there would be an interior package, there would be an exterior package associated. We’re moving to simplify that process. Then you look at the individual packages themselves, again the process for approval from Health Canada came a lot closer to legalization date than I think a lot of people realized, particularly as it related to label approvals and things like that.

And so, the amount of time that was available to go out and to buy and source packaging effectively was limited. We made a decision to make sure we had as much product on the shelf that we could on legalization date. And so we didn’t necessarily buy the best sourced packaging. We’re doing that now. We shifted to that probably in November or December. We still have some of that original inventory that we have to work through and that will see that cost come down over time. But more importantly is the introduction of automation to the process.

In those early days of legalizations we had employee parties with a number of people that were help out, trying to get those packages out the door, we start moving to automation and industrial scale level, just strips that labor out.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carl A. Merton — Chief Financial Officer” data-reactid=”108″>Carl A. Merton — Chief Financial Officer

And this being a new industry today looking for the adequate packaging that Health Canada would allow that would basically support what the product stood for. And from a cost standpoint originally it was just trying to get into business. Now it’s executed upon our strategy and there is so much automation that we’re looking to bring into our facilities where the equipment was not there before. So we had to go out and create and work with engineers of how to manufacture this equipment. Just think there’s nobody out there that has 2.4 — will have 2.4 million square feet of greenhouse that will grow cannabis in the way we’re going to grow it.

So first, taking that and then putting the automation behind it. And just in regards to our rolling facility that was done by hand, where they were doing four a minute, that’s going to an automation now where it will be thousands within minutes or two. So it just — it’s amazing what we’ve taken from a manual to an automation in packaging and products and supply and grow and it’s pretty exciting that’s you know ultimately the end result will be.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brett Hundley — Seaport Global — Analyst” data-reactid=”111″>Brett Hundley — Seaport Global — Analyst

That’s really helpful. So essentially going forward your packaging assets are going to be much more closely aligned with the expansion that you’re bringing on relative to previous?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”113″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

And we’re going to have to be to be able to. If you come back and think about it what we plan on growing and our growth strategy from a packaging and to keep up with that supply and that’s where the automation has come into place and that’s where we’ve brought in outside help and third parties to help us with that, from a sourcing of packaging and the sourcing of equipment to keep up with our growth strategy.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brett Hundley — Seaport Global — Analyst” data-reactid=”115″>Brett Hundley — Seaport Global — Analyst

Got you. Okay. That’s really helpful. Just last one for me and I’ll get out. Irwin, your comment in your script about a 90-day strategic plan, is that a plan where you guys are — when we hear strategic plans on our side of the phone we think you know evaluating all potential options to include strategic partners. Is it something like that or is this just a strategic plan where Aphria is looking on a stand-alone basis how it wants to craft its forward go-to-market strategy? Just some clarity that would be helpful. Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”117″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Great. So again, the 90-day plan is on grow our products, how we produce it, how we sell it, how we market or buy brands in our international strategy. And listen, if there is other opportunities out there with strategic partners, we will continuously look at that. But how we get to CAD1 billion mark by the end of 2020 in the cannabis world in Canada, how we grow international and first and foremost what’s the first 90-day plan here. So there is a 90-day plan that we will make sure we have in place and that will be built around our people, our brands, our strategy or execution and last but not least our balance sheet. And then how we build upon that.

And I got to tell you the most excited I am is I’ve been with Aphria now three, three and a half months is the personnel that we’ve had there, so this is not me. This is what the existing people that at Aphria were doing before and now it’s pulling it all together to put it into a 90-day plan and then a plan going forward.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brett Hundley — Seaport Global — Analyst” data-reactid=”120″>Brett Hundley — Seaport Global — Analyst

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”122″>Operator

Your next question comes from the line of Noel Atkinson with Clarus Securities. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George Anghelache — Clarus Securities — Analyst” data-reactid=”124″>George Anghelache — Clarus Securities — Analyst

Good morning everyone. This is George dialing in for Noel. Two questions here. On Part IV expansion, we understand the labor market is pretty tight in Leamington right now. How is it going with hiring staff for Part IV?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”126″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

We’re in great shape. We were a little more proactive this expansion than we were last expansion, but more importantly there’s so much more automation coming into the facility that as we ramp up the number of new bodies that is necessary is substantially reduced.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George Anghelache — Clarus Securities — Analyst” data-reactid=”128″>George Anghelache — Clarus Securities — Analyst

Okay. Got it. Thank you. And can you give us a sense of the CapEx required to complete projects in Canada and Germany at the moment?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”130″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So, in Germany the build for that facility is EUR25 million.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George Anghelache — Clarus Securities — Analyst” data-reactid=”132″>George Anghelache — Clarus Securities — Analyst

Okay.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”134″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

And we’ve spent EUR8 million of it so far.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George Anghelache — Clarus Securities — Analyst” data-reactid=”136″>George Anghelache — Clarus Securities — Analyst

EUR8 million?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”138″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

And in Canada it’s in the MD&A, I think it’s — there’s another CAD14 (ph) million total.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George Anghelache — Clarus Securities — Analyst” data-reactid=”140″>George Anghelache — Clarus Securities — Analyst

CAD14 (ph) million. Got it. Thank you. And finally last question is, what is the status of the EU-GMP certification guys right now?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”142″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So we continue to move forward with securing the EU certification where we’re pursuing portions of that at both Avanti and at Aphria One so that we’re ideally positioned to move product from both Canada to Europe, but Canada across the world. We continue to move forward in Lesotho with that as well and in Malta.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George Anghelache — Clarus Securities — Analyst” data-reactid=”144″>George Anghelache — Clarus Securities — Analyst

Okay. Okay. Got it. Thank you much. That’s it from me.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”146″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”148″>Operator

Your next question comes from Graeme Kreindler with Eight Capital. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Graeme Kreindler — Eight Capital — Analyst” data-reactid=”150″>Graeme Kreindler — Eight Capital — Analyst

Yes. Hi good morning and thanks for taking my questions. I had a question regarding the sales price in that adult-use market, talking about the — your assortment and shelf space decisions, just wanted to get a bit more context in terms of what the Company is targeting and what changes were made specifically that affected the pricing there?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”152″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So going into the quarter, we recognized that the change in our growing method had reduced our supply levels. And so in order to maintain shelf space and in order to maintain a number of products on the shelf space that we had, we decided to package in smaller sizes. And so our packaging began to concentrate on more of the one gram and the 3.5 gram sizes, single pre-rolls as opposed to the bulk packs. Once the improved harvests start to roll through the facility and we’re able to offer those to the control boards we’ll move back into those larger sized formats.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Graeme Kreindler — Eight Capital — Analyst” data-reactid=”154″>Graeme Kreindler — Eight Capital — Analyst

Okay understood. Thanks. Then the other question I had is, with respect to the news this morning and the — for the GGB bid and the Company getting, I think it’s CAD89 million in capital there. Can you just walk through the mechanics of how that came to pass? How did you guys end up getting the cash there?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”156″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

It was a long process. We negotiated extensively with Green Growth to try to find a way to exit a bid that appeared on its face to not be supportable at any level, given where the changing share prices went. We had — they had some investments in us. We had optionality through GA Opportunities Corp to access some of their shares and we both recognized that in order to find a resolution on the bid we both needed to exit those positions. And so that was — that became a major focus of the negotiations.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Graeme Kreindler — Eight Capital — Analyst” data-reactid=”158″>Graeme Kreindler — Eight Capital — Analyst

Okay. Thanks. And then the last question here, just looking at the Notice of Variation filing that crossed this morning, looks like you guys have good faith negotiations right now to come up with some sort of commercial arrangement. So just on the back of that, I was just curious as to what the Company’s thoughts are on the US CBD market? A number of your peers have announced some initiatives there. Just what the thoughts are on the market and could the commercial arrangement with GGB be part of that in the near future?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”160″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So, number one, it could be. I think we need to let the bid expire and move away from GGB. But I think, the U.S. market is a big opportunity for us and knowing the U.S. market from my prior experience, there’s lots of opportunities and I think looking for the right opportunity, whether it’s with strategic partners, where — is there other opportunities, it’s something that’s a focus of Aphria today.

Again Canada is a big focus for us. As you know it’s a big, big market. It’s legal there and we have great facilities. International, we have some great international markets that we can really grow our business. There’s some — from a size standpoint and medical cannabis in those markets and then there is the U.S. and the U.S. market is changing dramatically and I want to make sure we get it right if it’s MPF (ph), if it’s CBD, if it’s the right partnership and as part of our strategic plan, we’re reviewing what our options are in the U.S. market.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Graeme Kreindler — Eight Capital — Analyst” data-reactid=”163″>Graeme Kreindler — Eight Capital — Analyst

Okay understood. Thank you very much for that guys.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”165″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Thank you.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”167″>Operator

(Operator Instructions) Your next question comes from John Zamparo of CIBC. Your line is open.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Zamparo — CIBC — Analyst” data-reactid=”169″>John Zamparo — CIBC — Analyst

Hey thanks. Good morning guys. I just wanted to follow up on the previous question as it relates to go-to-market strategy. When you say you’re maximizing your SKU assortment, does this mean you’re looking to build breadth over depth or was that just part of the temporary change for the quarter as it relates to your growing restrictions?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”171″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

It was temporary for the quarter.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Zamparo — CIBC — Analyst” data-reactid=”173″>John Zamparo — CIBC — Analyst

Okay understood. And overall what can you tell us about the lessons you’re learning as it relates to consumer preferences so far? And what would you say is your top priority for derivative products later this year?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carl A. Merton — Chief Financial Officer” data-reactid=”175″>Carl A. Merton — Chief Financial Officer

So I think —

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”177″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Listen I think what we’re learning is as we’ve introduced our brands today, consumers are looking for brands that they can trust, brands that they can rely on, brands that have quality behind it and whether it is Solie or Broken Coast. They already have created lot of brand equity. Our consumers are looking for a variety of different products. They want to try new innovative products. And as (inaudible) come into the market, we see big opportunities and as we’ve done our focus groups and research consumers will be excited about those products.

So brands are important, quality products are important and last but not least, price is going to be important too and that’s something we’re seeing. Listen the biggest thing out there today is everybody wants supply, supply, supply and that’s what they want to make sure that they’re in stock, they got supply and we can build upon our brands.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Zamparo — CIBC — Analyst” data-reactid=”180″>John Zamparo — CIBC — Analyst

Okay that’s helpful thanks. If we could move to SG&A, is this quarter a good metric to interpret for a reasonable run rate backing out stock comp and the impairment obviously?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carl A. Merton — Chief Financial Officer” data-reactid=”182″>Carl A. Merton — Chief Financial Officer

So this quarter and next quarter will look fairly similar, but you’re going to see substantial changes going forward.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”184″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

And with our sales increasing and automation that’s going to absolutely change what our SG&A numbers look like. And as Carl said this quarter, next quarter there’s similarities, but as we move forth into our second quarter of next year, we expect that to change dramatically.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Zamparo — CIBC — Analyst” data-reactid=”186″>John Zamparo — CIBC — Analyst

Okay and just a couple of quick ones. You mentioned in the press release that the OSC had requested review of the LATAM acquisitions. I know that was part of the mandate of the Special Committee. I just want to confirm, are there any other assets that are currently under review either as a request from the OSC or the Special Committee?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carl A. Merton — Chief Financial Officer” data-reactid=”188″>Carl A. Merton — Chief Financial Officer

No.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”190″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

No. We do our annual impairment tests in Q4 though.

But there is none right now, no. There is none under review.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Zamparo — CIBC — Analyst” data-reactid=”193″>John Zamparo — CIBC — Analyst

Okay understood. And lastly, do you have an idea at the moment of when you might have a permanent CEO in place?

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”195″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

Not yet, and I think with myself and the team, we’re moving in the right direction. And at the time that we will start a search, that will be the time we’ll come back and announce somebody.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Zamparo — CIBC — Analyst” data-reactid=”197″>John Zamparo — CIBC — Analyst

Okay. That’s it from me. Thank you very much.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”199″>Operator

There are no further questions queued up at this time. I’ll turn the call back over to management for closing remarks.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”201″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

So thank you everybody for listening to today’s call. I’ve got to tell you being my first call a lot of exciting news and most important is the excitement about the future that will come in regards to our people, our brands, our supply and our strategy and there’s the 90-day strategy which we’ll execute upon, but there is our strategy as we move forward. There’s not too many industries that are evolving and changing as quick as this one. If you come back and look at the size, CAD150 billion in size, so there’s a lot of low hanging fruit in sales and opportunities for Aphria.

We’ve built out the infrastructure to grow products, to package products. We’ve built out the infrastructure from a sales group to sell products. We’ve built out the infrastructure from a marketing and innovation to be able to develop products and market our products. And with that our international opportunities are tremendous with the infrastructure that we’ve built out. We’ll pull all that together and we will create one of the greatest cannabis companies that is in the world today.

So thank you very much for your time and look forward to speaking to you on our next earnings calls or any follow up questions. Have a good day.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Operator” data-reactid=”205″>Operator

This concludes today’s conference call. Thank you for your participation. You may now disconnect.

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Duration: 46 minutes” data-reactid=”207″>Duration: 46 minutes

Call participants:

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Katie M. Turner — Investor Relations” data-reactid=”209″>Katie M. Turner — Investor Relations

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer” data-reactid=”210″>Irwin D. Simon — Chairman of the Board, Interim Chief Executive Officer

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Carl A. Merton — Chief Financial Officer” data-reactid=”211″>Carl A. Merton — Chief Financial Officer

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Neal Gilmer — Haywood Securities — Analyst” data-reactid=”212″>Neal Gilmer — Haywood Securities — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Brett Hundley — Seaport Global — Analyst” data-reactid=”213″>Brett Hundley — Seaport Global — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="George Anghelache — Clarus Securities — Analyst” data-reactid=”214″>George Anghelache — Clarus Securities — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Graeme Kreindler — Eight Capital — Analyst” data-reactid=”215″>Graeme Kreindler — Eight Capital — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="John Zamparo — CIBC — Analyst” data-reactid=”216″>John Zamparo — CIBC — Analyst

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="More APHA analysis” data-reactid=”217″>More APHA analysis

<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Transcript powered by AlphaStreet” data-reactid=”218″>Transcript powered by AlphaStreet

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