Canopy Growth Corp

Canopy Growth Corporation (TSX: WEED) (NYSE: CGC) Achieved Significant Improvements Among Other Cannabis Earnings

Source: Canopy Growth Corporation
" Canopy Growth has witnessed solid financial estimate revision activities over the past months. As a result, it achieved significant improvements in solid net revenue, stronger GPM, reduced operating loss and narrower adjusted EBITDA loss. "

Summary

  • Canopy Growth reported third-quarter fiscal 2020 results recently, which leading a 62% increase in net revenue to $123.8 million.
  • Gross profit margins accounted for $41.8 million, or 33.8% of net revenue, along with net loss for $124.2 million and adjusted EBITDA loss for $91.7 million.
  • Q3 fiscal 2020 SG&A expenditure reduced to $129.5 million from $148.3 million in Q2 fiscal 2020, responsible for 104.6% of net revenue.
  • Canopy Growth overcame financial obstacles by amending earnings estimate and restructuring operations to meet its fiscal 2020 guidance.

Introduction

Canopy Growth Corporation (CGC) (TSX: WEED, NYSE: CGC) is one of the most diversified cannabis companies, with a portfolio of distinct brands. Through its brands, CGC offers a range of full-spectrum cannabis products including dried, oil and soft-gel capsules, as well as medical devices. After a merger with Bedrocan Canada in 2015, Ontario-based Canopy Growth has operations in over a dozen countries across five continents. From product and process innovation to market execution, Canopy Growth has built a large and loyal following by focusing on quality products and meaningful customer relationships globally.

CGC_Web_Banner
Source: Canopy Growth Corporation

Fiscal Q3 2020 Results

On February 14, 2020, Canopy Growth announced its financial results for the third quarter ended December 31, 2019. Net revenue soared by 62% to 123.8 million Canadian dollars with $41.8 million gross profit margins (GPM), which ascended from -12.7% in the prior quarter to 33.8% of total net revenue. Improvements of GPM in this quarter were primarily due to higher facility utilization resulting in relatively lower costs.

Cannabis product revenue in fiscal Q3 2020 totaled $102.2 million, consisting of $68.7 million in recreational cannabis sales and $33.5 million in medical cannabis sales. The increases in recreational cannabis sales and medical cannabis sales accounted for 131% and 5%, respectively. Specifically, the boost in recreational cannabis sales resulted from over 140 stores becoming active and higher sales of premium dried flower and pre-roll joints, leading accumulated sales in total cannabis net revenue.

Moreover, the net loss dropped drastically from $374.6 million over the prior quarter to $124.2 million, as well as adjusted EBITDA loss declined by 41% from 155.7 million to $91.7 million. The decreases in operating loss and net loss were driven by a reduction in selling, general and administration (SG&A) expenses and lower stock-based compensation compared to the prior quarter. To be more specific, SG&A expenditures dwindled 46% to $129.5 million, compared with $148.3 million in the prior quarter. Likewise, adjusted EBITDA loss narrowed $64 million from Q2 2020, resulted from higher sales, improved GPM and reduced operating expenses.

Quarterly Financials of CGC
Source: Canopy Growth Corporation Public Filings

Financial Analysis

Canopy Growth has witnessed solid financial estimate revision activities over the past months. As a result, it achieved significant improvements in solid net revenue, stronger GPM, reduced operating loss and narrower adjusted EBITDA loss. Besides, CGC initiated cost cutdown and operational restructuring to pave its path to profitability.

Profitability

In Q3 fiscal 2020, CGC’s net revenue surged to 123.8 million Canadian dollars, generating from recreational sales, medical sales, and strategic acquisitions. Cannabis product revenue was driven by sales of dry cannabis, cannabis oil and soft gels offered in the recreational and medical cannabis markets. In addition, strong organic growths of acquired businesses including This Works and Storz & Bickel contributed to additional gains in net revenue during this quarter.

Recreational Sales

Total recreational cannabis sales in Q3 fiscal 2020 climbed to $68.7 million, with a 131% increase in the Canadian market. Recreational B2B and B2C sales increased by 8% to $53.5 million and by 16% to $15.2 million, respectively. The sales surge from Q2 2020 was driven by more available retail stores and distribution leading stronger sales of premium dried flowers and pre-rolls.

Despite the inadequate market conditions, Canopy Growth managed to maintain an estimated 22% market share in the Canadian retail market, by providing best-cost products to meet consumer demand. Detailedly, in addition to five retail locations from last year, CGC announced its corporation with ten retail license holders to open new Tokyo Smoke branded retail cannabis stores in Ontario in the first half of 2020. These independent business owners will inevitably expand CGC’s retail sales range and support to build Tokyo Smoke’s presence across the province. Consequently, it will accelerate the process of migrating illicit cannabis sales to the regulated legal sales market.

As for cannabis 2.0 products, Canopy Growth commenced first shipments of cannabis-infused chocolates and cannabis concentrate vape batteries in December 2019. Further, CGC revised its beverage launch timeline on Jan 17, 2020, after receiving a license for development and production in its beverage facility. Along with revising CGC’s beverage launch timeline, Canopy Growth announced First & Free Hemp-derived CBD products available online on its e-commerce site, leading one quarter ahead of fiscal 2020 guidance.

Cannabis Revenue Breakdown of CGC
Source: Canopy Growth Corporation Public Filings

Medical Sales

Due to the expanse of its brand presence and product offerings, CGC’s medical cannabis sales inflated by 5% to $33.5 million in Canadian and international markets. To be more specific, the availability of product offerings from additional CraftGrow partners and an increase in a number of customers to over 76,700 through its subsidiary, Storz & Bickel GMbH & Co. KG helped boost CGC’s medical sales and expand its market share in the Canadian medical cannabis market. The gain in German cannabis sales benefited from unexpected opportunities of a supply gap in the German market due to Aurora’s short-term permit issue.

Operating Expenses

In Q3 fiscal 2020, operating loss and net loss diminished drastically over prior, as well as adjusted EBITDA loss declined proportionally. Reduced SG&A expenditures and narrowed stock-based compensation led to improvements in operating loss and net loss, compared to huge losses over past quarters. Similarly, a $64 million decrease in adjusted EBITDA loss resulted from higher sales, improved GPM and reduced operating expenses. In other words, the reduction of operating loss and adjusted EBITDA was due to the impact of cost cutdown and operational restructuring.

Upon Mark Zekulin’s departure at the end of last year, David Klein who was previously EVP and CFO at Constellation Brands was appointed the new CEO of Canopy Growth while stepping down all other positions except Canopy Growth’s chair. In addition to CGC’s previously announced corporate transition plan, EVP & CFO Mike Lee summarized Q3 fiscal 2020 operational results and placed his hope on Canopy Growth during the quarterly financial webcast and conference call.

“Actions taken earlier this year are expected to meaningfully reduce stock-based compensation in FY21, and we have started to implement tighter cost controls across the organization. We plan to take further steps to reduce our costs and right-size our business to ensure that we can generate a healthy margin profile and cash generation in the coming years.”

Mike Lee, EVP & CFO of Canopy Growth

Outlook

Based on its Q3 fiscal 2020 results, Canopy Growth continues to chase potentials and opportunities in the highly competitive cannabis market. Under the circumstance that illicit sales impacted the Canadian cannabis market reversely, Canopy Growth succeeds to stand out in the strong cannabis industry. However, CGC still needs to continue improving its financial results, as it suffers serious losses from substantial SG&A expenditure and tremendous stock-based compensation.

Read More about Canopy Growth:

Source: Canopy Growth Corporation

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Jay Yang
JayY@Vapebiz.net
Author Bio
Kentucky-based writer and editor focuses on business, finance, and investment in the cannabis industry. Jay made her first foray into the marijuana market through her friends in college, acknowledging medical cannabinoids in the psychotherapeutic area. Although she stayed active constantly during her college years in social activities including feminist movement and climate change, Jay did preserve with interest in marijuana. By exploring the volatility of weed, Jay intends to dig out innovation, technology, and culture in the cannabis landscape.

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