Mr. Bruce Linton reports
CANOPY GROWTH CORPORATION REPORTS SECOND QUARTER FISCAL 2017 FINANCIAL RESULTS
Canopy Growth Corp. has released its financial results for the second quarter of fiscal 2017 ended Sept. 30, 2016.
Consolidated financial results include the accounts of the company and its wholly owned subsidiaries, Tweed Inc., Tweed Farms Inc. and Bedrocan Canada Inc.
Second quarter fiscal 2017 highlights
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Revenue of $8.5-million, a 22-per-cent increase over first quarter 2017 and 245 per cent over the three-month period ended Sept. 30, 2015;
- Over one metric tonne sold in the quarter, specifically 1,169 kilograms and kilogram equivalents, representing an increase of 19 per cent over first quarter 2017 and an increase of 267 per cent over second quarter 2016;
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Harvested 1,711 kilograms during the second quarter ended Sept. 30, 2016;
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Net income for the quarter ended Sept. 30, 2016, was $5.4-million, including a non-cash unrealized gain on changes in the fair value of biological assets of $16.1-million, compared with net income of $3.9-million in same period last year, including a non-cash unrealized gain on the change in fair value of biological assets totalling $12.5-million;
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Expenses in the quarter included initial costs to establish Brazil amounting to $300,000 and related legal expenses of $600,000 and $300,000 related to uplisting to the Toronto Stock Exchange;
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Over 24,400 registered patients at Sept. 30, 2016;
- Listed common shares on the Toronto Stock Exchange;
- Exported Tweed-branded medical cannabis for sale to German patients for the first time;
- Starting with Lemon Skunk available for sale, Tweed launched DNA-certified products, coming with a seal of approval from the world's most decorated cannabis breeders;
- Opened a world-class, first-of-its-kind-in-Canada, cannabis-breeding facility;
- Announced partnership with related party Delivra Inc. to supply Tweed and Bedrocan Canada with cannabis-infused topical product formulations;
- Closed bought-deal financing that raised gross proceeds of $34.5-million;
- $45.4-million in cash and cash equivalents at quarter-end.
Subsequent to second quarter 2017
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Tweed launched three Leafs By Snoop strains for sale, Sunset, Ocean View and Palm Tree CBD, in Canada.
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Recent licence amendments increased the corporation's licensed production capacity to over 13,500 kilograms of dried cannabis and 6,700 kilograms of cannabis oil, representing over seven million millilitres of finished cannabis oil.
- The corporation announced an expansion strategy in partnership with related party The Goldman Group.
- Canopy Growth acquired Quebec-based licensed producer applicant Vert Medical Inc. (renamed Vert Cannabis Inc.) and majority ownership of licensed hemp producer Groupe Hemp.
"Strong growth in registered patients drove our revenues higher during the second quarter," said Bruce Linton, chairman and chief executive officer. "We continue to believe that variety, quality and consistency of supply are key to driving market share in the legal cannabis market.
"These last months have seen Tweed introduce stronger genetics and growing practices into its production processes, retiring earlier strains and advancing quality to an entire new level. The fruits of this work to expand strain variety and inventory, as well as harvesting the entire 350,000-square-foot Tweed Farms greenhouse for the first time just after quarter's end, will begin to appear in our store this quarter. Our recent acquisition of Quebec-based Vert Medical and the expansion strategy we announced with the Goldman Group represent a continuation of our plan to rapidly expand the largest cannabis production platform in the industry."
Second quarter 2017 revenue review
Revenue for the second quarter ended Sept. 30, 2016, was $8.5-million compared with revenue of $2.5-million in the three months ended Sept. 30, 2015, and $7.0-million for the first quarter of fiscal year 2017. Revenue in the six months ended Sept. 30, 2016, totalled $15.5-million as compared with $4.2-million in the same period last year.
The corporation had over 24,400 registered patients at Sept. 30, 2016, compared with over 16,600 at June 30, 2016, and over 6,200 at Sept. 30, 2015.
Second quarter 2017 product sales review
The total grams sold during the quarter ended Sept. 30, 2016, were 1,169 kilograms and kilogram equivalents at an average price of $7.01 per gram, up from 984 kilograms and kilogram equivalents at an average price of $7.09 per gram in the first quarter of fiscal 2017 and up from 319 kilograms sold during the three-month period ended Sept. 30, 2015, at an average price of $7.54 per gram. Year to date, the company has sold 2,153 kilograms and kilogram equivalents at an average price of $7.05 per gram compared with 535 kilograms at an average price of $7.62 per gram in the six months ended Sept. 30, 2015.
Second quarter 2017 cost of sales review
Plants that are in preharvest are considered biological assets and are capitalized on the balance sheet at fair market value less cost to sell at their point of harvest. Costs to sell include trimming, drying, testing, fulfilment and shipping costs. As they continue to grow through the preharvest stages, a corresponding non-cash unrealized gain is recognized in income through cost of sales, reflecting the changes in fair value of the biological assets. At harvest, the biological assets are transferred to inventory at their fair value, which becomes the deemed cost for inventory. Inventory is later expensed to cost of sales, inclusive of postharvest and shipping costs, when sold and offsets against the gain on biological assets. In addition, the cost of production is expensed through cost of sales and represents overheads and other production costs of growing and selling the plants. Together, the unrealized gain from changes in the fair value of biological assets, inventory expensed and the cost of production comprise cost of sales. The company expects cost of sales to vary from quarter to quarter based on the number of preharvest plants, the strains being grown and where the preharvest plants are in the grow cycle at the end of the period.
The recovery to cost of sales during the quarter ended Sept. 30, 2016, comprised a non-cash unrealized gain on changes in the fair value of biological assets of $16.1-million, which was partially offset by the inventory expensed of $8.4-million and $300,000 for other production costs, for a net recovery to cost of sales of $7.3-million. The changes in the fair value of biological assets recorded during the quarter were due in large part to the full production at the 350,000-square-foot Tweed Farms greenhouse, with significantly higher expected yields per plant. The greenhouse moved into full production during the first quarter of fiscal 2017. The harvest of this first full production growth cycle at Tweed Farms is expected to be completed within the current quarter.
The recovery to cost of sales during the six-month period ended Sept. 30, 2016, comprised a non-cash unrealized gain on changes in the fair value of biological assets of $22.8-million, which was partially offset by the inventory expensed of $15.1-million and other production costs of $3.9-million for a net recovery to cost of sales of $3.8-million.
Second quarter 2017 gross margin review
The gross margin was $15.8-million, or 186 per cent of revenue, for the three-month period ended Sept. 30, 2016. In the comparative period ended Sept. 30, 2015, the gross margin on the same basis was $9.4-million or 383 per cent of revenue. In the six-month period ended Sept. 30, 2016, gross margin was $19.3-million or 124 per cent of revenue, compared with $13.5-million or 324 per cent of revenue in same period last year. Gross margin includes the unrealized gains on changes in fair value of biological assets, a non-cash value which is discussed in detail in the second quarter 2017 cost of sales discussion above.
Second quarter 2017
adjusted product contribution review
The company's adjusted product contribution is a non-generally accepted accounting principles metric used by management which adjusts the reported gross margin by excluding the fair value measurements as required by international financial reporting standards and measures the cost of sales for the grams actually sold in the period. Management believes this measure provides useful information as it reflects the gross margin based on the company's weighted average cost per gram from seed to sale against the grams sold.
The adjusted product contribution in the second quarter of fiscal 2017 was $5.3-million, or 62 per cent of revenue. In the comparative period last year, the adjusted product contribution was $1.5-million, or 62 per cent of revenue. Year to date, the adjusted product contribution was $9.6-million, or 62 per cent of revenue. In comparison, the adjusted product contribution in the six months ended Sept. 30, 2015, was $2.6-million or 61 per cent of revenue.
Second quarter 2017 operating expense review
For the three months ended Sept. 30, 2016, sales and marketing expenses were $2.8-million, or 33 per cent of revenue, compared with $900,000, or 35 per cent of revenue, in the same period last year. Year to date, the sales and marketing expenses were $5.1-million, or 33 per cent of revenue, compared with $1.9-million, or 45 per cent of revenue, in the same period last year.
The increase in sales and marketing expenses in the three and six months ended Sept. 30, 2016, over the comparative periods last year is due in part to a full quarter and six months of Bedrocan operations, whereas the comparative periods included only one month, amounting to an increase of $300,000 during the second quarter and $400,000 year to date, non-cash share-based compensation of $300,000 during the second quarter and $400,000 year to date related to previously issued escrowed shares, and increased patient support of $400,000 in the second quarter and $700,000 year to date directly attributable to patient growth. Since Sept. 30, 2015, the number of patients has grown from approximately 6,200 to over 24,400 at Sept. 30, 2016. The increase over the comparison periods is also due to increased staffing in the company's customer care centre, launching Tweed's Main Street customer engagement locations and continued positioning of the Tweed brand in preparation for a non-medical market.
General and administrative (G&A) expenses were $4.0-million, or 47 per cent of revenue, in the three-month period ended Sept. 30, 2016, compared with $2.2-million, or 91 per cent of revenue, in the same period last year. In the six-month period ended Sept. 30, 2016, G&A expenses were $6.9-million or 44 per cent or revenue. In comparison, G&A expenses were $3.7-million, or 88 per cent of revenue, in the six-month period ended Sept. 30, 2015.
The increase in G&A expenses over the comparative periods last year is due in part to a full quarter and six months of Bedrocan operations, whereas the comparative periods included only one month, amounting to an increase of $400,000 in the second quarter and $700,000 year to date, fees related to the company's graduation to the TSX in the amount of $300,000 over the quarter and six-month periods, initial expenses in establishing Brazil operations of $300,000 in the quarter and year-to-date period, higher audit and professional services fees of $200,000 in the second quarter and $300,000 year to date, and higher finance charges such as credit-card-payment-processing fees of $100,000 in the second quarter and $200,000 year to date due to increased sales activity. G&A expenses also include extensive use of consultants and advisory services while expanding and commercializing the company's operations, facility costs in Smiths Falls, Tweed Farms and Bedrocan, compliance costs associated with meeting Health Canada requirements, as well as public-company-related expenses. Over all, the increase in G&A over the comparison periods reflects the company's growth and building of commercial capacity and capability.
Second quarter 2017
earnings review
Net income for the quarter ended Sept. 30, 2016, was $5.4-million or five cents per basic and diluted share, including a non-cash unrealized gain on changes in the fair value of biological assets of $16.1-million. In the comparative period last year, net income was $3.9-million or six cents per basic share and five cents per diluted share, including a non-cash unrealized gain on changes in the fair value of biological assets of $12.5-million.
Year to date, the company recorded net income of $1.5-million or one cent per basic and diluted share, including a non-cash unrealized gain on changes in the fair value of biological assets of $22.8-million. In the comparative period last year, the company reported net income of $4.9-million or nine cents per basic share and seven cents per diluted share, including a non-cash unrealized gain on changes in the fair value of biological assets of $17.8-million.
Second quarter 2017
balance sheet and year-to-date cash flow review
At Sept. 30, 2016, the corporation's cash, comprising cash and cash equivalents, totalled $45.4-million, representing an increase of $30.0-million from March 31, 2016. The increase is attributable to combined net proceeds from the April, 2016, and August, 2016, bought-deal common share offerings in the first and second quarters of the 2017 fiscal year and the exercise of options and warrants together totalling $44.2-million, partially offset by cash used to finance operations of $8.9-million and investments in facility enhancements totalling $8.7-million. Investments in facility enhancements were primarily improvements at the Smiths Falls facility, including the conversion of growing rooms, in the expansion of cannabis oil extract production capacity and in information technology.
Inventory at Sept. 30, 2016, amounted to $27.6-million (June 30, 2016 -- $24.2-million; March 31, 2016 -- $22.2-million) and biological assets amounted to $13.7-million (June 30, 2016 -- $4.1-million; March 31, 2016 -- $5.3-million), together totalling $41.3-million (June 30, 2016 -- $28.3-million; March 31, 2016 -- $27.5-million). The biological assets increased from fiscal 2016 due to higher-yielding plants, predominantly at Tweed Farms, in the later stage of their growth cycle. Harvested plants were added to inventories during the quarter and quantities maintained to meet the continued growth in sales expected with strain availability, and the expected growing demand for oils.
The unaudited condensed interim consolidated financial statements and management's discussion and Analysis documents have been filed with SEDAR. The basis of financial reporting in the unaudited condensed interim consolidated financial statements and management's discussion and analysis documents is in thousands of Canadian dollars, unless otherwise indicated.
Webcast and conference call information
Canopy Growth will host a conference call and audio webcast with Mr. Linton and Tim Saunders, chief financial officer, at 8:30 a.m. ET today.
Webcast information
A live audio webcast will be available.
Calling information
Toll-free dial-in number: 1-888-231-8191
International dial-in number: 647-427-7450
Conference ID: 10218564
Replay information
A replay of the call will be accessible by telephone until 11:59 p.m. ET on Dec. 12, 2016.
Toll-free dial-in number: 1-855-859-2056
Replay password: 10218564
About Canopy Growth
Canopy Growth is a world-leading diversified cannabis company, offering diverse brands and curated cannabis strain varieties in dried and oil extract forms. Through its wholly owned subsidiaries, Tweed, Tweed Farms and Bedrocan Canada, Canopy Growth operates three state-of-the-art production facilities with over 500,000 square feet of indoor and greenhouse production capacity.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share)
Three months ended Sept. 30, Six months ended Sept. 30,
2016 2015 2016 2015
Revenue $8,498 $2,466 $15,482 $4,176
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Unrealized gain on changes in fair
value of biological assets (16,076) (12,480) (22,760) (17,755)
Inventory expensed to cost of sales 8,414 2,678 15,068 4,171
Other production costs 333 2,820 3,902 4,218
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Recovery to cost of sales, net of the
unrealized gain on changes in fair
value of biological assets (7,329) (6,982) (3,790) (9,366)
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Gross margin 15,827 9,448 19,272 13,542
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Sales and marketing 2,810 873 5,070 1,881
Research and development 503 210 906 249
General and administration 4,031 2,239 6,881 3,655
Acquisition costs 592 1,139 592 1,139
Share of (income) loss in equity investments (170) - 50 -
Share-based compensation expense 960 574 1,848 945
Depreciation and amortization 984 452 1,895 720
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9,710 5,487 17,242 8,589
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Income from operations 6,117 3,961 2,030 4,953
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Interest expense, net (42) (31) (89) (12)
Increase in fair value of acquisition
consideration related liabilities (286) - (298) -
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(328) (31) (387) (12)
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Net income and comprehensive income
before income taxes 5,789 3,930 1,643 4,941
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Income tax expense (359) - (162) -
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Net income and comprehensive
income after income taxes 5,430 3,930 1,481 4,941
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Net income per share, basic 0.05 0.06 0.01 0.09
Net income per share, diluted 0.05 0.05 0.01 0.07
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We seek Safe Harbor.
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