Canopy’s huge loss obscures pot firm’s path to profitability
Well, on the face of it this really doesn’t look good. Canopy Growth — the Smiths Falls cannabis products giant — reported a net loss of $1.3 billion on revenues of just $90.5 million for its first quarter ended June 30.
But if you drill down a little deeper, there are actually some good things happening. First you need to separate two very different items — how the company is financed and structured, and how it operates.
That massive loss doesn’t actually involve cash. It’s an accounting entry that reflects a decision by Constellation Brands — Canopy Growth’s most significant shareholder — to delay exercising warrants to buy more shares. Constellation Brands, remember, shelled out $5.3 billion in separate transactions in 2017 and 2018 to acquire up to 38 per cent of Canopy Growth’s equity. Those deals included a significant number of warrants giving Constellation Brands the right to buy Canopy Growth shares in 2020 and beyond for a set price.
Since Canopy Growth still had $3.1 billion cash in its coffers at the end of June, there’s no need for Constellation Brands to stretch its own balance sheet in order to exercise those particular warrants. The $1.1-billion writedown is an accounting estimate of the cost of extinguishing the warrants. Whether the Victor, New York, wine-beer-and-spirits giant still intends to acquire a majority stake in Canopy Growth down the road remains a little unclear, but it remains a key player in Canopy Growth’s future.
This brings us to Canopy Growth’s operations. The firm reported Wednesday that it sold $90.5 million worth of recreational and medical cannabis in its first fiscal quarter ended June 30. While that was considerably better than the $26 million in sales recorded during the same period a year ago, the total was well short of the consensus estimate of $109 million — and even slipped below the $94 million revenue tally recorded in the quarter ended March 31.
In part the decline from the March quarter reflects a drop in the average selling price for recreational marijuana — which accounted for 86 per cent of the firm’s cannabis sales by volume.
The recreational strains sold for an average of $6.35 per gram in the June quarter compared with $7.28 per gram in the
March quarter. Another factor in generally weak revenues was of course the extreme paucity of retail outlets in the major market of Ontario.
And, not least, the sale of edibles and cannabis-infused beverages across Canada won’t begin until December at the earliest. It’s expected that a wider array of products combined with more interesting retail shops will lead to a sharp rise in cannabis revenues for Canopy Growth and its competitors alike.
Certainly Canopy Growth looks ready to feed such demand if it transpires. The company said it had harvested nearly 41,000 kilograms of cannabis product in the March quarter — up sharply from 14,500 kilograms in the January-to-March period.
“Our recent harvests are proof that our focus on operational excellence is working,” chief executive Mark Zekulin said in a statement.
“We look forward to showing both our Canadian and U.S. customers what we’ve been working on behind the scenes to prepare for the next wave of products coming later this year.”
Indeed, Zekulin signalled to investors that the multi-year period of intensive spending and building is nearly at an end. “We are fixated on the process of evolving from builders to operators over the remainder of this fiscal year,” he noted, “meaning that as our expansion program comes to a close in Canada, and as new value-add products come to market in Canada, we demonstrate a sustainable, high-margin, profitable Canadian business.”
The company reported Wednesday that its global head count reached 3,850 in June, up from 1,400 a year earlier. All that hiring and investing — particularly in Smiths Falls — has hurt Canopy Growth’s bottom line.
Looking at just the cost of operations in the June quarter, the company recorded an operating loss of $123 million, up sharply from $30.7 million in the same quarter a year ago.
The company has taken a ton of risks and spent a fortune to lay the groundwork for a revenue machine. The next two quarters could tell the tale of whether there’s going to be a payoff.