Canopy Growth Corp Q2: Trying to Find a Silver Lining

Canopy Growth Corporation (TSX:WEED) (NYSE:CGC), one of the Canadian marijuana stocks, reported second-quarter 2020, financial results before markets opened on November 14, 2019

SmallCapPower | November 15, 2019: Canopy Growth Corporation (TSX:WEED) (NYSE:CGC), one of the Canadian cannabis stocks and Canada’s largest cannabis cultivator by market cap, reported Q2/20 financial results before markets opened on November 14, 2019. Results were highlighted by a loss of $375.6M on net revenue of $76.5M, as well as an adjusted EBITDA loss of $155.8M, which missed analysts estimates of a $120M net loss, net revenue of $105.7M, and adj. EBITDA loss of $93.8M.

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Figure 1: Canopy Growth’s Financial HighlightsSource: Company Reports, Ubika

Revenue decreases 15% quarter-over-quarter. Second-quarter net revenue slipped 15%. Management blamed the decrease on poor retail store roll-outs, particularly in Ontario. Net revenue also took into account a $32.7M restructuring charge, which Canopy took on its capsules and oils products. The main reason for the charge was that oil and soft gel products were not selling as well as expected and the Company had to refund and reprice the product to realign with consumer preferences. Canopy Growth plans to modify the pricing architecture of oils and soft gels going forward by focusing on a smaller portfolio of products at more competitive price points. Additionally, Canopy wrote down its inventory by $15.9M to align the product portfolio to the new strategy. Average recreational selling price per gram fell 10%, while the medical cannabis selling price per gram fell 8%, as price compression in the sector intensifies due surplus inventories sector wide.

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Operating expense increases to $265.M, up 116% QoQ. Increased operating expenses were driven primarily by deteriorating gross margins and increased SG&A. Gross loss before FV adj was $9.7M, which was mainly a result of the restructuring charge that management mentioned should normalize next quarter. Additionally, the G&A increases were driven largely by one-time back office investments, which are largely in place and should also normalize in subsequent quarters. In other expenses, Canopy Growth recorded a $164M non-cash gain on the value of its convertible debt due to a decreasing stock price since June 2019, which was partially offset by $235M non-cash loss on the fair value of its Acreage call option also due to Acreage’s declining share price.

$2.7B in cash and equivalents remaining on its balance sheet. During the quarter, Canopy Growth had negative cash flow from operations of $201.0M, and spent $228.3M on capital expenditures, mainly in constructing its beverage production facilities, resulting in a quarterly cash burn of ~$430M. On the call, management noted that its global M&A and Canadian Infrastructure plans are substantially complete, and these costs should begin to decrease in the coming quarters.

Key takeaways. Overall, it was a poor quarter for Canopy Growth. Revenue was down, while expenses were up, and pricing competition in Canada is heating up as more production facilities come online. Canopy is now the fourth cannabis company to report decreased selling prices per gram this earnings season. Aphria, Tilray, and Cronos Group also reported lower selling prices, which is leading to industry-wide gross margin compression. However, this does not come as a surprise, as inventories are building up sector wide. Statistics Canada reported August 2019, finished and unfinished inventories of 389,059 kg nationwide, an 11.2% increase MoM. Management also retracted Q4/20 guidance of $250M in revenue and mentioned that profitability may take longer than the 2-5 years originally expected. It was also announced that more details on a new CEO should be coming in a few weeks. Currently, the consensus estimate for Canopy’s Q3/20 revenue is ~$140M, however this likely going to be revised down as analysts digest the Company’s results.

Shares of Canopy Growth Corp ended Thursday’s trading session 14% lower at C$20.96. Canopy stock trade at a market cap of C$8.5 billion.

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