Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) saw its shares take a beating Friday after it posted disappointing fourth-quarter results, highlighted by larger than expected losses and soaring costs.
The world’s largest pot company by market valuation posted late Thursday a net loss of $323.4 million in the quarter ending March 31, or $0.98 per share, a sharp rise compared to the $ $61.5 million recorded in last year’s quarter.
Quarterly operating expenses totalled $242.9 million, up from $56.2 million during its financial fourth quarter in 2018. The losses were mainly due to acquisition-related, compensation, and sales and marketing costs rising sharply.
Shares for Canopy Growth fell 7.6 per cent when markets closed Friday as analysts expected the company to report a much lower net loss of $63.5 million.
However, the Smith Falls, Ont.-based company reported net revenue of $94.1 million, up from $22.8 million a year earlier and more than the $92.6 million expected by analysts. For the full year, its revenues hit $226.3 million, nearly triple 2018’s sales of $77.9 million.
During the quarter, Canopy benefited from large fair value changes, which added $53.5 million back to gross profit. However, despite the inflated gross profit figure, it wasn’t nearly enough to cover the company’s operating expenses.
Share-based compensation expense of $74.7 million was the largest company expense and it rose by 526 per cent year over year. General and administrative costs of $65.7 million were also a big cost item and were well above the $16.9 million that Canopy incurred a year ago for this line item. Acquisition-related expenses also added $13.8 million to the company’s operating expenses in Q4, which were barely noticeable a year ago, totalling just $915,000.
In total, Canopy Growth posted a net operating loss of $174.5 million compared to $51 million last year. Other expenses, which were mainly related to non-cash fair value changes, totalled $133.5 million.
– Bruce Linton, Chairman and Co-CEO of Canopy Growth
More expenses on their way
In the earnings release, Canopy Growth did note that related to its deal with Acreage Holdings, Inc. (CSE:ACRG.U), it will “record a material, non-cash charge during the first quarter of fiscal year 2020. We expect this non-cash charge to have a materially negative impact on net income in the first quarter of fiscal 2020”
Given the company’s rapid expansion and focus on dominating the market, investors know by now they can expect losses and expenses along the way. Although Canopy has indicated that profitability is an eventual target, it seems like a long shot given the company’s rapidly rising expenses and the likelihood it will remain the same as it continues to pursue growth.
Bottom line
Even with a big benefit from fair value changes in its gross profit, Canopy Growth came nowhere near recording an operating profit this quarter. Unless it significantly grows its sales or can find a way to improve on its slim margins, it’s hard to imagine the company will generate enough in gross profit to cover its operating expenses. And with more supply set to hit the industry, cannabis prices will likely feel some downward pressure, which makes it even more difficult for Canopy to continue to grow its top line.
Canopy Growth Corporation reports fourth quarter and fiscal 2019 results with annual sales of $226.3M: https://t.co/sEcvf1OZBW#FutureGrowth pic.twitter.com/Nf5tsvVgNB
— Canopy Growth (@CanopyGrowth) June 21, 2019
