/Canopy Growth reports bigger loss on charges in ‘challenging’ times for cannabis sector

Canopy Growth reports bigger loss on charges in ‘challenging’ times for cannabis sector

Canopy Growth Corp. shares plunged in morning trading Thursday as investors reacted to the company’s quarterly earnings, which saw revenue plummet by as much as 15 per cent — the biggest decline since legalization — due to a $32.7 million charge from returned products.

Within an hour of markets opening, Canopy’s stock had declined by more than 15 per cent, and hovered at the $20 mark. U.S.-listed shares of Canadian pot producer fall as much as 16.2% to hit a record low of US$15.50.

It is increasingly unlikely that we will achieve our Q4 milestone of $250 million in revenue

Canopy CEO Mark Zekulin

Canopy reported net revenue of $76.6 million for the period ending Sept. 30, 2019, compared to $90.5 million in the previous quarter, driven by a hit from “returns and pricing changes” related to weak sales of Canopy’s oil and soft gel capsules on the recreational market.

The Smiths Falls, Ont.-based licensed producer also took a $15.9 million write-down on inventory, attributing the charge to “excess recreational cannabis inventory resulting from current and forecasted sell-in rates of oil and softgel products.”

Gross margins slid into negative territory due to a $40.4 million impact from write-downs and returns. The company’s net loss widened by 13 per cent from a year ago to $374 million, owing primarily to a surge in operating expenses.

“It is increasingly unlikely that we will achieve our Q4 milestone of $250 million in revenue,” acknowledged Canopy CEO Mark Zekulin on a conference call with investors and analysts Thursday morning.

While Canopy’s international medical revenue increased by 72 per cent from the previous quarter, its domestic revenue — both medical and recreational — declined by seven per cent. Canopy’s acquisition of C3, a German CBD pharmaceutical company generated $14 million in revenue for the quarter.

Although the company reportedly increased its share of the market in Alberta, where there are more than 300 private retail stores, its adult-use revenue across the country declined by almost 10 per cent from the previous quarter.

On the conference call, Canopy’s chief financial officer Mike Lee told analysts that the soft gels “issue” was “fully behind” the company, and there remained less than $10 million left of unsold product in provincial warehouses as of the end of last quarter. The $32.7 million figure included actual returns from provincial wholesalers which amounted to $20.5 million with an additional $6.4 million to be returned in the coming weeks, according to Lee.

Canopy’s management appeared to pin the company’s latest headwinds largely on the lack of a retail footprint in Ontario, and the provincial government’s inability so far to commit to increasing the store count across Canada’s largest market.

“There is still a $6 billion Canadian market, if you include the illicit market. That is all there, we are just waiting for stores,” said Mark Zekulin, Canopy’s CEO on the conference call. “Look, if Ontario doesn’t open stores for another year, we all have a problem. There’s no reason to expect that. Hopefully they will listen to calls like this and hopefully that will happen,” he added.

Cannabis production at Canopy Growth Corp. in Smith’s Falls, Ont.

Tony Caldwell/Postmedia

In supplemental information provided to investors as part of its earnings release, Canopy detailed a scenario where Ontario would open 40 new stores every month starting January 2020. Zekulin declined to confirm if the provincial government had committed to that 40 store per month number, but said that licensed producers have been putting “a lot of pressure” on the government to increase the number of stores.

“What we put out on that deck to investors is an illustrative case. The big variable is how many stores will actually be rolled out next year. The Ontario government is saying they are going to do all these things, but we have not seen any action,” he said.

Analysts on the call also took aim at the company’s spending habits.

Canopy posted an adjusted EBITDA loss of $155.7 million in the quarter as it ramped up spending on sales and marketing (up 23 per cent) and general and administrative expenses (up 41 per cent). It was widely assumed that Canopy would rein in its operating expenses after the firing of former CEO Bruce Linton, whose strategy of rapidly scaling up at the expense of the company’s core business of growing pot domestically, sparked the ire of Canopy’s biggest investor, Constellation Brands.

“I think it is fair to say we have built this company for the long term. We are fortunate to have $2.5 billion in the bank. We are not taking drastic steps that will undermine our long-term future … because we can afford to do that,” said Zekulin.

Management also confirmed that Zekulin would step down as CEO by the end of 2019, and a new CEO would be appointed “in the coming weeks.”

A number of other cannabis companies have reported weaker-than-expected results this week.

Organigram Holdings Inc. pre-released its quarter earnings for the period ending Aug. 31, 2019 which showed a 34 per cent decline in revenue, attributed in part to a $3.7 million charge on product returns and lower pricing. They too cited a lack of retail stores in Ontario as one of the factors contributing to weak results.

Aurora Cannabis Inc. will release its results for the quarter after markets close, Thursday.

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