Canopy Growth Corporation (TSX: WEED) (NYSE: CGC) stock dropped over 10% after the company announced its financial results for the first quarter ending June 30, 2019. The worst of the news in the release was that the company’s fiscal first-quarter net losses of C$1.28 billion, or C$3.70 a share, dwarfed last year’s losses of C$91 million, or 40 cents a share. The loss was attributed to a non-cash charge of $1.2 billion in Canopy’s extinguishing warrants related to the Constellation Brands Inc. (NYSE: STZ) investment.
“The Company has two primary objectives as we complete Q1 2020 and look to the remainder of the fiscal year,” said Mark Zekulin, CEO, Canopy Growth. “First, the Company remains focused on laying the foundation for dominance in an emerging global opportunity. This means investments in developing intellectual property, building brands, building international reach, and ensuring scaled production capability for current and future products. Second, we are fixated on the process of evolving from builders to operators over the remainder of this fiscal year, 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 that its gross revenue in the medical market was $23.6 million, of which $16.4 million dollars or 70% of gross medical revenue was generated by oil sales. Oil sales in the medical market include sales by subsidiary C3, as well as the company’s traditional finished oils and softgels. Dried flower sales accounted for $7.2 million dollars of gross medical revenue. When it came to adult-use sales, Canopy delivered gross revenue of $60.8 million from the sale of dry flower format products in the Canadian recreational market, representing an increase of 88% from dried flower sales in Q4 2019. Included in dried cannabis sales in Q1 2020 are sales of 1.4 million higher-margin, pre-rolled cannabis products which represented $9.7 million – or 16% – of our total recreational cannabis revenue.
Gross Margins Fall
Last year’s first-quarter gross margins were $11.1 million or 43% of net revenue. This year the gross margins were $13.2 million or 15% of net revenue. The company blamed that drop on the impact of operating costs of $16.2 million relating to facilities not yet cultivating cannabis or producing cannabis-related products, or which had an under-utilized capacity that resulted in adjustments related to the net realizable value of inventory. “Additionally, there was a shift in product mix in Q1 2020 away from higher-margin, advanced manufactured products due to inventories evening out.”
The adjusted EBITDA in Q1 2020 accounted for a loss of $92.0 million, as the company said it reflected continuing losses in core operations in Canada and Europe. The company had a laundry list of reasons why the expenses had risen:
- Increase in sales and marketing expense in Q1 2020 primarily due to increased staffing as it builds-out the network of Tweed and Tokyo Smoke-branded retail stores in Canada
- Increased number of employees in our marketing and sales functions supporting domestic and international markets
- Investing ahead of revenue to prepare for marketing campaigns for the launch of the second phase of recreational cannabis consumer products in Canada, as well as CBD products in the United States, both expected later this year.
- Increase in research and development expense in Q1 2020 over Q1 2019 was due to Canopy Growth’s investment in new research and development efforts. Costs associated with hiring advanced degree researchers and engineers, in areas of vape R&D, plant genetics, applied technology and cannabis-based medical therapy clinical research.
- Increase in costs associated with enhancing our finance and information technology capabilities, higher public company compliance and regulatory requirements, and administrative costs associated with expanding our operations.
- Acquisition-related costs in Q1 2020 increased significantly over Q1 2019 due to higher merger and acquisition activity during the current period, most notably entering into and implementing the plan of arrangement with Acreage and closing the acquisitions of C3 and This Works
- Increase in share-based compensation expense is primarily attributable to the continued increase in the number of stock options granted to employees, which is primarily related to the increase in the number of employees of the Company from approximately 1,400 at June 30, 2018, to approximately 3,850 at June 30, 2019.
Life After Linton
Mark Zekulin was appointed as the company’s sole Chief Executive Officer and Rade Kovacevic was appointed President of the Company upon the termination of Bruce Linton as Co-Chief Executive Officer of the Company. A search has begun to find Mr. Zekulin’s replacement as the company’s Chief Executive Officer. The stock went into a tailspin after Linton’s public dismissal and had only just begun to recover when the earnings were announced following the close of trading on Wednesday.