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Canopy Growth Corp
Symbol WEED
Shares Issued 348,438,775
Close 2019-11-13 C$ 24.45
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Canopy Growth loses $374.62-million in fiscal Q2

2019-11-14 06:38 ET - News Release

Mr. Mark Zekulin reports


Canopy Growth Corp. has released its financial results for the second quarter ended Sept. 30, 2019. This press release is intended to be read in conjunction with the company's condensed interim consolidated financial statements and management discussion and analysis for the three and six months ended Sept. 30, 2019, which will be filed on SEDAR and will be available at the company's website.

Key highlights include:

  • The company has established leading market share across the country including a noteworthy share of over 35 per cent in Alberta, Canada's most developed provincial recreational market.
  • Consumer demand for cannabis continues to increase versus the first quarter of 2020 with company-owned recreational same-store sales growth of 17 per cent and global medical organic growth of 23 per cent.
  • More than 30 SKUs (stock-keeping units) were submitted to Health Canada for Cannabis 2.0 products across chocolate, vapes and beverage formats.
  • As part of a management-initiated portfolio review, the company has taken a restructuring charge of $32.7-million for returns, return provisions and pricing allowances primarily related to its softgel and oil portfolio. Additionally, management has recorded an inventory charge of $15.9-million to align the portfolio with the new strategy. This new strategy includes new retail pricing architecture, a rationalized package assortment and a focused marketing/educational strategy to further develop this category. The Q2 2020 gross margin impact of the portfolio restructuring costs is $40.4-million. With this acute restructuring charge, management believes that current inventory levels both internally and externally are in line with demand forecasts.
  • Consolidated Q2 2020 gross revenue, excluding the portfolio restructuring costs, was up 6 per cent to $118.3-million including increases from full-quarter benefits of the C3 and ThisWorks acquisitions (flat excluding incremental revenue from acquisitions). Net of the portfolio restructuring costs, revenue was $76.6-million, a decrease of 15 per cent over Q1 2020.
  • Cannabis gross revenues for the second quarter of 2020, excluding the portfolio restructuring costs, was $94.7-million, an increase of 2 per cent over Q1 2020.
  • The company ended Q2 2020 with $2.7-billion in cash and cash equivalents and marketable securities available for sale, with its Canadian infrastructure and global M&A (merger and acquisition) programs substantially completed.

Management commentary

"The last two quarters have been challenging for the Canadian cannabis sector as provinces have reduced purchases to lower inventory levels, retail store openings have fallen short of expectations and Cannabis 2.0 products are yet to come to market," said Mark Zekulin, chief executive officer, Canopy Growth. "However, we believe these conditions are a short-term headwind in what is a brand new industry, and Canopy continues to be best positioned with cash on hand, a world-class infrastructure and a portfolio of intellectual property to deliver sustained, long-term market leadership."

Added Mr. Zekulin: "We took the necessary steps to address inventory levels on our oils and softgels; looking beyond this, the fundamentals are strong: Our retail store sales are growing on an overall and same-store basis, our Canadian medical revenues are up, and international medical sales are growing on both an organic and inorganic basis. And, even though revenue is muted during the quarter due to the restructuring charge, actual cannabis shipments grew quarter over quarter, which is a great accomplishment in light of the inventory reset that's occurring at the provinces. We believe our fundamentals are strong and are confident we're moving in the right direction.

"After five years of investment in market research, product development, product marketing, production engineering, as well as production facility design, construction and qualification, we are ready to bring our Cannabis 2.0 product offerings to market," said Mr. Zekulin. "This marks the end of significant expansion investments in Canada and we are confident that the high quality, differentiated beverage, vape and edible products that we are bringing to market combined with a retail channel that we expect to grow significantly next fiscal year, will drive the next leg of growth for our business."

          SECOND QUARTER FISCAL 2020 FINANCIAL AND OPERATIONAL SUMMARY                                                           
                      (in millions, except where indicated)

                                                    Q2 2020       Q1 2020       Q2 2019
Gross revenue excluding
other revenue adjustments                            $118.3        $111.4         $23.3
Other revenue adjustments                              32.7           8.0             -
Excise taxes                                            9.0          12.9             -
Net revenue                                            76.6          90.5          23.3
Gross margin percentage,
before fair value impacts
in cost of sales                                       -13%           19%           33%
Operating expenses                                    269.4         233.3         181.8
Adjusted EBITDA (loss)                               (155.7)        (92.0)        (61.9)
Attributed as follows
Operations and corporate overhead (loss)             (109.0)        (57.8)        (50.6)
Strategic investments
and business development (loss)                       (36.2)        (18.0)         (4.3)
Non-operating or underutilized 
facilities (loss)                                     (10.5)        (16.2)         (7.0)
Net (loss)                                           (374.6)     (1,281.2)       (330.6)
(Loss) on extinguishment of warrants                      -      (1,176.4)            -
Kilograms harvested (kilograms)                      40,570        40,960        15,217
Cash, cash equivalents and
marketable securities                               2,736.2       3,140.9       4,515.0
Inventory                                             461.8         393.7         262.1

The company sold 10,913 kilograms and kilogram equivalents of cannabis products during Q2 2020, an increase of 3 per cent from the previous quarter. Total gross revenue for Q2 2020, before portfolio restructuring costs, was $118.3-million.

Gross revenue of $32.2-million was generated in the medical channel in Q2 2020, as sales increased 34 per cent from the previous quarter to 1,995 kilogram and kilogram equivalents. Oils and softgels represented 50 per cent of the company's medical sales during the quarter. Canadian medical cannabis gross revenue increased 8 per cent from Q1 2020 to $14.1-million in Q2 2020, as the company's larger harvests in recent months, the broadening of the company's brand and product offerings for the company's medical customers, and an increase in the number of patients registered with Spectrum Therapeutics to 75,600 at Sept. 30, 2019, have resulted in sequential improvements in the number of orders placed by the company's customers and growth in the company's revenue during the quarter.

International medical cannabis gross revenue was $18.1-million in Q2 2020, with the 72-per-cent growth driven primarily by the acquisition in May, 2019, of Q3, which contributed a full quarter of revenue in the amount of $14.0-million to the company's results in Q2 2020. Additionally, the company's German medical business returned to growth in Q2 2020 as the company resolved the supply constraints experienced in previous quarters that led to notable shipments to Germany in July and early August, 2019. Cannabis now on hand today in the company's German facility and held in inventory by German pharmacy customers may serve the partial needs of Q3 2020. While management is very confident in the sustained growth of the German market over the long term, management does not expect this level of growth to repeat in Q3 2020.

Gross revenue from the Canadian recreational channel in Q2 2020 was $29.8-million and reflects portfolio restructuring costs of $32.7-million. Revenue of $13.1-million was generated in the business-to-consumer retail channel, representing sequential growth of 24 per cent from the previous quarter as the company continues to build out its retail store platform across Canada. At the time of this release the company has 27 retail stores open across Canada, operating under the Tweed or Tokyo Smoke banner. Gross revenue from the business-to-business channel was $16.7-million, reflecting the portfolio restructuring costs as described above. Solid product inventory levels at Canopy in the second half of the quarter, supplied by the company's large harvest in the first quarter, helped drive strong shipment velocities of dried flower and prerolled joints across the company's Canadian recreational channels. This resulted in dried bud shipments up 12 per cent quarter over quarter. Revenue from the sale of the company's dry bud products was $59.0-million in Q2 2020 and included revenue of $7.8-million on sales of $1.2-million higher-margin prerolled cannabis products.

Other revenue was $23.6-million in Q2 2020, an increase from $18.8-million in the previous quarter, which was attributable to the acquisition of ThisWorks, which contributed a full quarter of revenue in Q2 2020, and revenue from other strategic sources including extraction services and clinic partners.

Second quarter fiscal 2020 gross margin (before the fair value impacts in cost of sales) overview

The company's reported gross margin before fair value impacts in cost of sales was negative 13 per cent of net revenue in Q2 2020. Gross margin before fair value impacts in cost of sales was 38 per cent for Q2 2020 when adjusted for the following items: (1) operating costs of $10.5-million relating to facilities that were not yet cultivating cannabis, were underutilized or were not yet producing cannabis-related products; (2) the impact of $9.2-million on gross margin of the portfolio restructuring costs, as described above; (3) a charge for excess finished recreational cannabis inventory of $15.9-million resulting from the company's assessment of current and forecasted sell-in rates of certain oil and softgel products, as described above; and (4) other adjustments related to the net realizable value of inventory.

The company continues to build high-quality, dried flower inventory that it believes will be necessary to meet the increased demand that will be generated by growth in the recreational cannabis retail platform across Canada over the next 12 to 18 months, particularly in the province of Ontario. As the company nears completion of its expansion program in Canada, it expects its gross margins to continue to improve in the coming quarters when all of the cultivation and processing are in use and approaching planned capacity.

The increase in sales and marketing expense in Q2 2020 over the previous quarter was primarily due to prerevenue investments in brand awareness, product marketing and consumer education initiatives focused on preparation for the launch of the company's Cannabis 2.0 products in Canada, and the rollout of CBD products in the United States and other international markets in the coming months. Staffing costs also increased as the company continues to enhance its marketing and sales capabilities in the Canadian, U.S. and international markets, and as the company builds out its network of Tweed- and Tokyo Smoke-branded retail stores in Canada.

The increase in research and development expense in Q2 2020 over the previous quarter was due the company's investment in new research and development efforts. Included in this are costs associated with hiring researchers and engineers, in the areas of vaporizers and vape research and development, new cannabis-based product form factors, including beverages and edibles, plant genetics, applied technology and cannabis-based medical therapy clinical research. As a result, the company incurred higher compensation costs associated with the teams conducting research and development activities, costs associated with advanced product and system development and testing, as well as costs associated with conducting external laboratory testing and clinical trials for CBD-based (cannabidiol) human and animal health products.

General and administration expense increased in Q2 2020 over the previous quarter due to an increase in costs associated with enhancing the company's finance and information technology capabilities, higher public company compliance and regulatory requirements, losses incurred related to legal disputes with a third party supplier, losses associated with additional reserves on onerous retail lease obligations which were driven by an overall softening of the retail real estate market in Canada, and other prerevenue administrative costs associated with expanding the company's operations.

The 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 2,000 at Sept. 30, 2018, to approximately 4,550 at Sept. 30, 2019. The number of outstanding stock options increased from 22.2 million at Sept. 30, 2018, to 32.9 million at Sept. 30, 2019. The company has restructured its formula for granting options, as part of a broader total rewards assessment to ensure overall compensation structures reflect the company's size and maturity.

Second quarter fiscal 2020 adjusted EBITDA summary

Adjusted EBITDA in Q2 2020 amounted to a loss of $155.7-million, reflecting continuing losses in the company's core operations in Canada and Europe as the company scales as a new business serving a completely new sector, makes investments ahead of revenue in many new markets around the world, and makes investments in research and development that the company believes will generate future value as it builds a portfolio of intellectual property that can be used to generate new profit streams in the future. The company believes these prerevenue investments are necessary to position Canopy Growth to generate a significant and sustained increase in shareholder value over the long term.

Total other expense, net, was $109.3-million in Q2 2020 as compared with $1,143.7-million in Q1 2020. The other expense amount recorded in Q1 2020 is reflective of the loss on extinguishment of the warrants held by Constellation, as discussed in the company's Q1 2020 earnings release.

Second quarter fiscal 2020 balance sheet and cash flow summary

At Sept. 30, 2019, the company's cash and cash equivalents available and marketable securities totalled $2.7-billion, representing a decrease of $404.7-million from June 30, 2019. The primary uses of cash during the quarter were for the company's operations, as reflected in the adjusted EBITDA loss for the quarter, and capital spending of $228.3-million as the company nears completion of the buildout of its infrastructure in Canada, most notably the construction of purpose-built, highly scalable advanced manufacturing and beverage production facilities.

Inventory at Sept. 30, 2019, amounted to $461.8-million (March 31, 2018 -- $262.1-million), including $131.5-million in finished goods and $280.1-million of work in process.

The unaudited consolidated financial statements and management's discussion and analysis for the three and six months ended Sept. 30, 2019, will be filed on SEDAR.

Transition to U.S. GAAP (generally accepted accounting principles) reporting

As part of its U.S. financial reporting requirements, Canopy Growth confirmed that, as of Sept. 30, 2019, it no longer met the criteria for qualification as a foreign private issuer because (1) more than 50 per cent of the outstanding voting securities are held by residents of the United States and (2) the majority of Canopy Growth's directors are U.S. citizens.

Therefore, as of April 1, 2020, Canopy Growth will be considered a U.S. domestic issuer and a large accelerated filer. As a result of this change, Canopy Growth will be required to issue its consolidated financial statements in conformity with accounting principles generally accepted in the United States, and provide an auditor attestation report under Section 404(b) of the Sarbanes-Oxley Act.

Webcast and conference call information

The company will host a conference call and audio webcast with Mr. Zekulin and Mike Lee, chief financial officer, at 8:30 a.m. Eastern Time on Nov. 14, 2019.

Calling information:

Toll-free dial-in number:  1-888-231-8191

International dial-in number:  647-427-7450

Conference ID:  3878046

Replay information

A replay of the call will be accessible by telephone until 11:59 p.m. ET on Feb. 14, 2020:

Toll-free dial-in number:  1-855-859-2056

Replay password:   3878046

About Canopy Growth Corp.

Canopy Growth is a world-leading diversified cannabis, hemp and cannabis device company, offering distinct brands and curated cannabis varieties in dried, oil and softgel capsule forms, as well as medical devices through Canopy Growth's subsidiary, Storz & Bickel GMbH & Co. KG.

                    FOR THE THREE AND SIX MONTHS ENDED SEPT. 30, 2019, AND 2018
                                           (in thousands)

                                                        Three months ended            Six months ended 
                                                   Sept. 30,     Sept. 30,     Sept. 30,     Sept. 30,
                                                        2019          2018          2019          2018

Revenue                                              $85,621       $23,327      $189,012       $49,243
Excise taxes                                           9,008             -        21,917             -
Net revenue                                           76,613        23,327       167,095        49,243
Inventory production costs expensed
to cost of sales                                      86,321        15,624       159,503        29,029
Gross margin (loss) before the undernoted             (9,708)        7,703         7,592        20,214
Fair value changes in biological
assets included in inventory sold
and other charges                                     69,089        51,496       115,219        77,884
Unrealized (gain) on changes in fair
value of biological assets                           (82,320)      (10,944)     (221,339)      (68,233)
Gross margin (loss)                                    3,523       (32,849)      113,712        10,563
Sales and marketing                                   60,483        40,182       109,710        58,875
Research and development                              11,922         1,944        20,396         2,700
General and administration                            87,861        37,101       150,132        56,689
Acquisition-related costs                              2,562         3,202        15,744         5,086
Share-based compensation expense                      83,767        45,025       160,848        68,097
Share-based compensation expense
related to acquisition milestones                      9,114        50,730        19,395        57,825
Depreciation and amortization                         13,644         3,595        26,423         6,625
Operating expenses                                   269,353       181,779       502,648       255,897
(Loss) from operations                              (265,830)     (214,628)     (388,936)     (245,334)
(Loss) on extinguishment of warrants                       -             -    (1,176,350)            -
Other income (expense), net                         (109,283)     (115,702)      (76,662)     (178,697)
Total other income (expense), net                   (109,283)     (115,702)   (1,253,012)     (178,697)
(Loss) before income taxes                          (375,113)     (330,330)   (1,641,948)     (424,031)
Income tax recovery (expense)                            493          (284)      (13,840)        2,439
Net (loss)                                          (374,620)     (330,614)   (1,655,788)     (421,592)
Net (loss) income attributable to
Canopy Growth                                       (374,184)     (337,136)   (1,657,239)     (417,413)
Net (loss) income attributable to
non-controlling interests                               (436)        6,522         1,451        (4,179)
                                                    (374,620)     (330,614)   (1,655,788)     (421,592)
Net (loss) per share, basic and diluted
Net (loss) per share                                   (1.08)        (1.52)        (4.79)        (1.98)

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