Mr. Bruce Linton reports
CANOPY GROWTH CORPORATION REPORTS FIRST QUARTER FISCAL 2018 FINANCIAL RESULTS
Canopy Growth Corp. has released its consolidated financial results for the first quarter fiscal 2018, the period ended June 30, 2017.
First quarter 2018 highlights
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First quarter revenue was $15.9-million, a 127-per-cent increase over the three-month period ended June 30, 2016, when revenue totalled $7.0-million, and an 8-per-cent increase over fourth quarter of fiscal 2017 revenues of $14.7-million;
- Launching the Tweed Main Street on-line store, which required moving individual Tweed, Mettrum and Bedrocan e-commerce sites off-line and the migration of customers to a single database and new e-commerce platform, reduced sales activity over a period of approximately 10 business days in April. Reduced sales activity in the month of April negatively impacted revenues in the first quarter fiscal 2018. In addition, Mettrum growing operations were mostly inactive through the later half of the fourth quarter fiscal 2017 and first quarter fiscal 2018 while being integrated with new standard operating and quality control procedures resulting in lower availability for sale of Mettrum-branded products in the first quarter fiscal 2018;
- Sold 1,830 kilograms and kilogram equivalents; an 86-per-cent increase over first quarter fiscal 2017;
- Harvested 5,575 kg, mostly attributed to the Tweed Farms greenhouse harvest, compared with 1,882 kg during the same period last year, representing a 196-per-cent increase over first quarter fiscal 2017;
- The weighted average cost per gram of cultivation to harvest and postharvest costs before shipping and fulfilment was $1.28 per gram. This compares with $1.64 per gram in the first quarter of last year and to $1.46 per gram in the fourth quarter of last year;
- The first quarter gross margin before non-cash gains or losses was $9.0-million or 57 per cent of revenue as compared with $4,205 and 60 per cent of revenue in the same quarter of last year, and 64 per cent for the fourth quarter of fiscal 2017. The first quarter gross margin before non-cash gains or losses includes the costs associated with resetting the Mettrum grow operations and centralizing all shipping and fulfilment activities in Smiths Falls as part of the one store implemented in the first quarter, as well as costs associated with subsidiaries that are not yet cultivating or selling cannabis. Excluding these costs totalling $1.4-million, the gross margin before non-cash gains or losses would have been $10.4-million or 66 per cent of revenue;
- Net loss in the first quarter of fiscal 2018 amounted to $4.4-million, or three cents per basic and diluted share, compared with a net loss of $3.9-million, or four cents per basic and diluted share, in the first quarter of fiscal 2017;
- Launched the sale of Canada's first encapsulated cannabis oil soft gels on June 19, 2017;
- Partners AB Laboratories Inc., Canada's Island Garden, JWC Ltd. and PUF Ventures Inc. joined the CraftGrow program during quarter; Canada's Island Garden products released for sale on June 24, 2017;
- On June 24, 2017, announced flowering capacity increases at Smiths Falls and Bowmanville facilities, of 33 per cent and 200 per cent, respectively; also announced industrial cannabis oil extraction system now operational;
- $115.5-million in cash and cash equivalents at quarter-end.
Subsequent to first quarter 2018
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On July 26, 2017, the company completed a private placement with one investor of common shares. Pursuant to the offering, the company issued 3,105,590 shares at a price of $8.05 per share, for aggregate gross and net proceeds of $25-million.
- The company's wholly owned subsidiary Spektrum Cannabis GmbH successfully passed the first stage of the tender application process to become a licensed producer of medical cannabis in Germany.
- Subsidiary Canopy Rivers entered into financing arrangements to provide growth capital and strategic support to two cannabis producers and applicants regulated pursuant to the ACMPR (access to cannabis for medical purposes regulations). The investments totalled $8.0-million and comprised convertible debt, subscribed equity and production linked structures.
"Our focus in the first half of calendar 2017 has been preparing our business to lead the legal recreational market that is set to open in Canada in 2018, while continuing to be the clear leader in the ongoing medical market," said Bruce Linton, chairman and chief executive officer. "Believing business to consumer e-commerce sales will form the backbone of the Canadian cannabis market in 2018 and beyond, we have taken deliberate steps this year to stress our platform and in some cases break it, all as part of a warm-up exercise.
"Recording sales of $1-million in a single day earlier this year revealed many points in our sales, fulfilment and shipping infrastructure that needed strengthening. With many customers asking to be able to access all products under the canopy, it made perfect sense for us to transition, in April, from multiple, single brand sites to the Tweed Main Street marketplace. Bringing all products of our many leading brands together under one roof, to provide a shopping experience similar to what customers expect in many other markets, has strengthened our leadership position.
"Earlier this year we undertook a strain cultivation planning effort, the direct result of which has been a wave of dried cannabis products coming into Tweed Main Street that began in the first quarter. The next wave, in oil supply, has begun and we expect it to grow in the fall as the capacity of our new oil extraction system reaches the market. Lastly, with the addition of Canada's first soft gel caps and cannabis from our first CraftGrow partner, Canada's Island Garden, the ramp of products available through Tweed Main Street is just beginning."
First quarter fiscal 2018 revenue review
Revenue for the first quarter fiscal 2018 was $15.9-million, an 8-per-cent increase over the fourth quarter fiscal 2017 in which revenue was $14.7-million and an increase of 127 per cent over the prior year period in which revenue was $7.0-million.
First quarter fiscal 2018 product sales review
During the first quarter fiscal 2018, Canopy Growth sold 1,830 kilograms and kilogram equivalents at an average price of $7.96 per gram, up from 984 kilograms and kilogram equivalents at an average price of $7.09 per gram during the prior year period.
First quarter fiscal 2018 weighted average cost per gram
Canopy Growth is introducing a revised presentation of the weighted average per gram costs. The new presentation identifies:
- Costs to harvest (from cloning to harvest) include all of the cash operating costs including principally growing labour, utilities such as hydro and water, grow nutrients, rent, and allocated overheads.
- Postharvest costs include all cash operating costs associated with trimming, milling, drying, conversion to oils and gel caps, lab services and testing, and allocated overheads.
- Cost per gram for shipping and fulfilment includes all cash operating costs associated with labour for prepackaging and dispensing and order fulfilment and shipping along with package materials such as bottles, boxes and labels, as well as all shipping costs and allocated overheads. In addition, royalties paid under licensing arrangements are included in the cost per gram for shipping and fulfilment.
WEIGHTED AVERAGE COST PER GRAM IN FORMATION
Three months ended
June 30, 2017 March 31, 2017 Dec. 31, 2016 Sept. 30, 2016 June 30, 2016
Cost per gram to harvest $ 0.76 $ 0.87 $ 0.87 $ 0.99 $ 1.10
Postharvest cost per gram $ 0.51 $ 0.60 $ 0.54 $ 0.71 $ 0.54
Cost per gram before
shipping and fulfilment $ 1.28 $ 1.46 $ 1.41 $ 1.70 $ 1.64
Cost per gram for
shipping and fulfilment $ 1.50 $ 1.44 $ 1.17 $ 1.01 $ 1.01
Weighted average cost per gram $ 2.78 $ 2.90 $ 2.58 $ 2.71 $ 2.65
The weighted average cost per gram decreased compared with the fourth quarter of last year primarily due to improving efficiencies in preharvest and postharvest activities partially offset by higher fulfilment costs. The increase over the same quarter last year was primarily due to higher fulfilment costs, primarily in packaging, as well as royalties paid on select strains.
In the first quarter fiscal 2018, the combined weighted average cost per gram of cultivation to harvest and postharvest costs, and not including shipping and fulfilment costs, was $1.28 per gram. This compares with $1.64 per gram in the same period last year and to $1.46 per gram in the fourth quarter of last year. The cost per gram to point of harvest was 76 cents per gram, the fourth consecutive quarter when the cost to point of harvest was less than $1 per gram.
The total weighted average cost per gram to produce, harvest and sell cannabis, including cost per gram for shipping and fulfilment in the first quarter fiscal 2018 was $2.78 as compared with $2.65 in the same quarter of last year and $2.90 in the fourth quarter of fiscal 2017.
First quarter fiscal 2018 gross margin review
The first quarter gross margin before non-cash gains or losses was $9.0-million or 57 per cent of revenue as compared with $4,205 and 60 per cent of revenue in the same quarter of last year, and 64 per cent for the fourth quarter of fiscal 2017. The first quarter gross margin before non-cash gains or losses includes the costs associated with resetting the Mettrum grow operations and centralizing all shipping and fulfilment activities in Smiths Falls as part of the one store implemented in the first quarter, as well as costs associated with subsidiaries that are not yet cultivating or selling cannabis. Excluding these costs totalling $1.4-million, the gross margin before non-cash gains or losses would have been $10.4-million or 66 per cent of revenue.
First quarter fiscal 2018 operating expense review
Sales and marketing expenses in the first quarter fiscal 2018 were $6.4-million, or 40 per cent of revenue, including three months of Mettrum operations amounting to an increase of $2.2-million. In comparison, sales and marketing expenses were $2.3-million or 32 per cent of revenue in the same period last year. These expenditures are consistent with the company's view that early-mover advantage and strong brand recognition are essential to the company's successful continuing customer acquisition strategy. These costs represent a strategic investment, which management believes will have a future benefit in customer acquisition and retention. Further, the company is making these investments to aggressively seek new domestic and international business opportunities to build for the future.
General and administrative expenses in the first quarter fiscal 2018 and 2017 were $7.5-million, or 47 per cent of revenue, and $2.9-million, or 41 per cent of revenue, respectively. These costs include three months of Mettrum operations amounting to an increase of $1.6-million, higher audit and professional services fees of $700,000, and higher employee compensation costs due to increased staff levels. G&A expenses during the quarter also included extensive use of consultants and advisory services while expanding and commercializing the company's operations, facility costs and compliance costs associated with meeting Health Canada requirements, as well as other public company related expenses including related professional fees.
Fourth quarter and fiscal year 2018
Earnings review
Net loss in the first quarter of fiscal 2018 amounted to $4.4-million, or three cents per basic and diluted share, including the net non-cash effects of the international financial reporting standards accounting for biological assets and inventory which combined to a gain of $10.7-million. In the comparative period last year, the net loss of $3.9-million, or four cents per basic and diluted share, including net non-cash effects of the IFRS accounting for biological assets and inventory which combined to a loss of $800,000.
First quarter fiscal 2018 balance sheet review
At June 30, 2017, the company's cash and cash equivalents totalled $115.5-million, representing an increase of $13.6-million from March 31, 2017. The increase from the end of fiscal 2017 was mainly due to cash held by a controlled subsidiary, Canopy Rivers, amounting to $55.7-million. During the first quarter fiscal 2018, Canopy Rivers raised $36.2-million in an offering and the company advanced $20.0-million in the subsidiary.
Inventory at June 30, 2017, amounted to $65.5-million (March 31, 2017 -- $46.0-million) and biological assets amounted to $9.3-million (March 31, 2017 -- $14.7-million), together totalling $74.8-million (March 31, 2017 -- $60.7-million). At June 30, 2017, the company held 10,715 kilograms of dry cannabis and 2,683 litres of cannabis oils, ranging from concentrated resins, or refined oil, to finished oil. Included in the dry cannabis quantities was 1,235 kilograms available for sale in the company's on-line stores, 2,974 kilograms in process of finishing or awaiting approval for sale, and 6,506 kilograms held for extraction. With the commissioning of the new AES industrial capacity extraction equipment and approval of soft gel capsules by Health Canada, the dry cannabis inventory held for extraction is expected to be converted to oils and capsules by the end of calendar 2017.
The unaudited condensed interim consolidated financial statements and management's discussion and analysis documents for the three months ended June 30, 2017, are available 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 on-line.
Calling information
Toll-free dial-in number: 1-888-231-8191
International dial-in number: 647-427-7450
Conference ID: 64439345
Replay information
A replay of the call will be accessible by telephone until 11:59 p.m. ET on Nov. 14, 2017.
Toll-free dial-in number: 1-855-859-2056
Replay password: 64439345
About Canopy Growth Corp.
Canopy Growth is a world-leading diversified cannabis company, offering distinct brands and curated cannabis varieties in dried, oil and capsule forms. Through its wholly owned subsidiaries, Canopy Growth operates numerous state-of-the-art production facilities with over 500,000 square feet of GMP-certified indoor and greenhouse production capacity, all to an unparalleled level of quality assurance procedures and testing. Canopy Growth has established partnerships with leading sector names in Canada and abroad, with interests and operations spanning four continents.
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share)
Three months ended June 30
2017 2016
Revenue $15,873 $6,984
Inventory production costs expensed to cost of sales 6,848 2,779
Gross margin before non-cash (gains) losses 9,025 4,205
Fair value changes in biological assets included in inventory sold 11,000 3,875
Unrealized gain on changes in fair value of biological assets (21,670) (3,115)
Gross margin 19,695 3,445
Sales and marketing 6,405 2,260
Research and development 133 403
General and administration 7,493 2,850
Operating expenses before the undernoted 14,031 5,513
Acquisition-related costs 836 -
Share of loss in equity investments - 220
Share-based compensation expense 2,881 888
Share-based compensation expense
related to acquisition milestones 1,130 -
Depreciation and amortization 5,057 911
Operating expenses 23,935 7,532
(Loss) from operations (4,240) (4,087)
Interest income (expense) 19 (47)
Other expense, net (120) -
Increase in fair value of acquisition
consideration related liabilities - (12)
Other expenses (101) (59)
Net (loss) before income taxes (4,341) (4,146)
Income tax (expense) recovery (103) 197
Net (loss) after income taxes (4,444) (3,949)
Net (loss) attributable to
Canopy Growth (4,324) (3,949)
Non-controlling interests (120) -
(4,444) (3,949)
We seek Safe Harbor.
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