While the truth is clear in the MD&A, we fault Aphria for emphasizing its "profitability" in its press release, where it highlighted it in the sub-header. In fact, we think it was downright deceptive to not mention the real cause of the profit. The press release made no mention of the substantive impact of the convertible note, stating: "The increase in net income was primarily due to the increase in sales and the net fair value adjustment for biological assets, and decrease in the impairment expense, offset by increase in SG&A related to G&A and transaction costs."



Aphria reported an operating loss of C$24 million, but this benefited from one-time gains on adjustments to the fair value of biological assets. Excluding those gains, as we do in the revenue tracker, the operating loss would have been almost C$32 million. To their credit, this was a great improvement from the prior quarter. In general, the loss is similar to most larger peers as a percentage of revenue.



Another metric for calculating profitability is "adjusted EBITDA". This takes the earnings before interest, taxes, depreciation and amortization and incorporates adjustments for one-time factors. Not all companies report this metric on an equivalent basis, but we think Aphria does a good job of calculating it in a helpful manner. The main adjustments to arrive at the C$209K adjusted EBITDA were to remove the non-operating income, the gains from biological assets, C$20 million of one-time transaction costs and C$3 million of share-based compensation.



We have shared our view previously that investors are going to start to look past revenue levels and growth in 2019, with a shift of focus to profitability. We don't think that companies need to maximize profitability at this early stage, but they do need to show that there is a path to profitability. The Canadian LPs have struggled with revenue growth lately, and many haven't been able to show signs of better margins thus far. While we certainly question descriptions of Aphria as being profitable this quarter, we note the improvement over the prior quarter and the strong forward guidance for EBITDA margins in its fiscal 2020.



At the end of June, we suggested that the second half will likely be more favorable for the LPs than the first half of the year, and, despite the shocks the market endured in July, we stand by our outlook. As supply increases, distribution expands and new products are introduced, we expect investors will look at the Canadian LPs and retailers more optimistically. Legalization has presented many challenges thus far, but we expect better times ahead in Canada, and hopefully Aphria's recovery from its challenges is a harbinger of better performance across the sector.