Extra costs to help Canopy get ‘ready’ for pot’s legalization
A significant spike in expenses led Canopy Growth Corp. to quadruple its first-quarter loss, but the company’s chief executive is defending the spending spree as prudent preparation for the legalization of recreational marijuana next year.
The Smiths Falls-based medical marijuana company, the first in Canada to hit a billion-dollar valuation, reported a $21.1-million loss in the three months ending March 31 compared to a $5.1-million loss in the same period last year despite nearly tripling its revenue to $14.7 million. Its operating expenses also tripled year over year to $23.4 million from $7.7 million.
Canopy’s stock price dropped more than six per cent before closing down 47 cents at $7.99 in Toronto on Tuesday despite reassurances from chief executive Bruce Linton.
In a conference call with analysts, he said the extra spending on consultants, staff and construction to expand its facilities, along with costs associated with the $430-million acquisition of Mettrum, are part of Canopy’s strategy to be “best ready and best positioned” for the recreational market. The federal government committed in April to legalization by July 1, 2018.
“Everything we were doing and are doing is to make sure we are where we want to be for the beginning of 2018,” Linton said.
Canopy has been planning for a 2018 end to prohibition since the beginning of the year, but Linton said he wasn’t able to discuss that in a public forum when he last reported results in February.
It’s “more appropriate now,” he said, given the federal government’s spring announcement. This should help investors understand Canopy’s business decisions, he added.
While Linton hasn’t had a specific dialogue with the government on timing, he believes there’s “no chance” it will wait to legalize on Canada Day. He predicted legalization could land by April 20, a date on which cannabis is celebrated.
“It would play to the crowd that they wish to reach. … I wouldn’t bet against them looking for a good PR position on this.”
Meantime, he said there’s “a lot going on behind the curtain” to determine branded product offerings to submit for bureaucrats’ approval and to develop intellectual property on genetics and breeding. It’s “prudent” to keep investing heavily for another quarter or two rather than focusing on profitability, he said.
“It may sound odd but we’re intentionally not turning (a profit) now so we can make a more substantial hit in 2018,” he said.
Canopy sold 1,740 kilograms and kilogram equivalents at an average price of $8.03 per gram, up from 700 kilograms at $7.16 per gram in the same period last year. But its gross margins fell substantially to 10 per cent of revenue from 53 per cent of revenue last year due to its decision to lower prices on the Tweed Farms Sun-Grown strain. This product will ultimately be used to extract oils for gel capsules, which were recently approved by Health Canada.
Analysts also questioned Canopy about its high inventory after its stockpiles more than doubled in value from last year to $59.6 million. Executives said the volume is due to 4,810 kilograms of dry cannabis being held for extraction, as it took nearly two quarters to get a large-scale extractor up and running.
It is now running well and is expected to produce a large volume of oils at a grade that will work for both the medicinal and recreational markets.