Legalization costs put a damper on Canopy growth bid
Medical pot firm posts $1.6M loss in Q2 despite 107% boost in revenue to $17.6M
Canopy Growth Corp. reported Tuesday that it took a $1.6-million loss in its fiscal second quarter, a slip that comes as the Smiths Falls, Ont.-based medical marijuana company gears up for Canada’s planned legalization of recreational cannabis and basks in a groundbreaking deal with a U.S.-based alcohol giant.
Canopy reported a 107-per-cent increase in revenue for its second quarter, to $17.6 million, but a net loss of $1.6 million, or one cent per share. Canopy, Canada’s largest medical marijuana producer, had reported a net gain of $5.4 million, or five cents per share, for the same period last year.
But Bruce Linton, the company’s chief executive, told a conference call Tuesday morning that the events that have taken place since the end of the quarter, including a deal to sell a stake to Constellation Brands, have overshadowed the quarterly results.
“It seems that, with our company and maybe this sector generally, the subsequent events are greater than the prior period’s total events,” Linton said. “The company, I think, is doing what we usually do, which is really just driving ahead, looking out a year, 18 months, and making sure we’re doing the actions today that establish us as the continued leader.”
The quarterly dip was driven in part by increased expenses, some of which the company said were tied to preparations for Canada’s coming recreational marijuana market, which the federal government has aimed to legalize by July 2018.
Canopy’s operating expenses spiked in its second quarter, to approximately $29.9 million from $9.7 million for the same period last year. Sales and marketing costs for the quarter rose to $7.6 million from $2.8 million last year, with the company saying that the added costs “include staffing and resourcing the marketing and sales functions needed in the coming regulated recreational and international markets, costs associated with the Company’s medical outreach program, and the growing customer care centre which interfaces directly with the Company’s expanding base of customers.”
Canopy reported that its number of registered medical marijuana customers shot up from more than 24,000 clients at the end of Sept. 2016, to over 63,000 at Sept. 30 of this year.
But the results also covered a period preceding Canopy’s announcement on Oct. 30 that it would sell 9.9 per cent of itself to Constellation Brands Inc., a U.S.based beverage company, for approximately $245 million. The deal, which closed on Nov. 2, also includes warrants that could allow Constellation to double its stake in Canopy for the same price.
“With our objective to win and retain significant future market share, and backed by the recent $245 million investment from Constellation, we remain focused on the expansion of our cultivation capacity, extraction platform and finished branded products programs,” said Linton in a release. “Our relationship with Constellation and the commitment to work together to develop and market regulated recreational cannabisbased beverages, when and where they are federally legal, is a critical step in our move up the value chain.”
The transaction was heralded by some as a game-changer for Canada’s cannabis industry, with an established, out-of-market player giving a vote of confidence in the country’s marijuana business. Constellation’s brands include Corona beer and Kim Crawford wines.
The Constellation deal has helped reward Canopy shareholders. The company’s stock price is up 55.09 per cent over the past month, and 118.38 per cent for the year. Shares of Canopy closed at $19.96 Tuesday, down 2.06 per cent for the day.
The latest results from Canopy also come as provinces across Canada prepare their preferred retail systems ahead of legalization. Canopy struck what it described as an “historic” two-year agreement with New Brunswick during its second quarter, which will see the company help supply the province’s coming recreational market. The deal is for four million grams of cannabis in its first year, terms Canopy valued at $40 million.
For its fiscal year-to-date, Canopy says it has now sold 3,850 kilograms and kilograms equivalent of cannabis at an average price of $7.98 per gram, an increase over the 2,153 kilograms the company says it sold at an average price of $7.05 per gram for the six months ended Sept. 30, 2016.
Meanwhile, the company’s cost per gram to harvest slipped to 72 cents for the three months ended Sept. 30, down from 76 cents for the quarter ended June 30 and 86 cents for the quarter ended March 31. Canopy said the lower costs were due to expanded growing operations and greater plant yields.