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

Regina Leader-Post - - FINANCIAL POST - GEOFF ZOCHODNE Fi­nan­cial Post gzo­chodne@post­media.com Twit­ter.com/Ge­of­f­zo­chodne

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.

SEAN KIL­PATRICK/THE CANA­DIAN PRESS

Canopy Growth says its quar­terly dip was driven in part by in­creased ex­penses, some of which the firm said were tied to prepa­ra­tions for the com­ing recre­ational mar­i­juana mar­ket.

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