Canopy Growth Stock Falls After Dramatically Missing Estimates

Canopy Growth (CGC) stock fell over 8%  to trade at roughly $35.25 in early trading after the Canadian cannabis company missed analysts estimates. Canopy Growth reported that its second-quarter fiscal 2019 revenues jumped 33% to C$23.3 million, but analysts had estimated the company should have had revenues of C$60 million. Sales and marketing expenses were $7.6 million or 43% of revenue.

The adjusted EBITDA for the quarter was a loss of C$57.7 million versus last year’s loss of $4.8 million for the same time period in 2018. The after-tax net loss in the quarter was a whopping C$330.6 million or C$1.52 per basic share compared to last year’s net loss of $1.6 million or $0.01 per basic and diluted share.

“With extensive investments over the past year, including most notably in the second quarter, in branding and retail development, our entrance into the retail cannabis market has been a success with our SKU assortment obtaining over 30% listings market share in multi-store physical retail store networks nationwide,” said Bruce Linton, Chairman & Co-CEO. “With substantial product inventories on hand, new product formats coming to market as planned, a captive sales force driving increased demand through physical retail stores and increasing internal and channel efficiencies, we believe based on market conditions today that we will attain significant and sustainable market share of the Canadian recreational market.”

While the losses were huge,  Canopy Growth still has cash and cash equivalents of $429.4 million, representing an increase of $106.8 million from March 31, 2018. The company attributed this to the issuance of $600 million in convertible notes in the first quarter, offset by investment in the expansion of production assets, strengthening corporate capabilities, brand-related campaigns and the establishment of physical retail stores in Newfoundland& Labrador, Manitoba, and Saskatchewan.

During the quarter, the reported fair value changes in biological assets and other inventory charges combined to an expense of $40.6 million and included adjustments to the value of inventory targeted to the recreational market, reflecting wholesale pricing. The company also experienced a net write-off of approximately $16 million related to plants culled in the quarter due to timing issues with respect to having the infrastructure being ready for licensing and receiving harvested plants.

What’s Selling?

Canopy reported that it cannabis oils, including the Softgel capsules, accounted for 34% and 18%, in the respective second quarters of fiscal 2019 of the product revenue. The company sold 2,197 kilograms and kilogram equivalents at an average sale price of $9.87, up from 2,020 kilograms and kilogram equivalents at an average price of $7.99 in the prior year period, representing an increase of 9% and 24% respectively. The higher average price were attributed to changes in the mix of product sold, principally a higher percentage of Softgel sales and sales to Germany.

“With business opportunities expanding globally, we continue to make significant investments in building our international team and footprint including through multiple acquisitions in Latin America completed during the quarter. The completion of, to our knowledge, a world first Canadian export of a US federally legal DEA permitted product, and the announced acquisition of US federally legal hemp R&D specialists, ebbu, are critical stepping stones for our broader entrance into the US market when it is federally-permissible to do so,” concluded Linton.