Canopy Growth Corporation Reports Fourth Quarter and Fiscal Year 2018 Financial Results

Published: June 27, 2018

Canopy Growth Corporation Reports Fourth Quarter and Fiscal Year 2018 Financial Results

SMITHS FALLS, ONJune 27, 2018 /CNW/ – Canopy Growth Corporation (TSX: WEED) (NYSE: CGC) (“Canopy Growth” or “the Company”) today released its consolidated financial results for the fourth quarter and fiscal year ended March 31, 2018. All financial information in this press release is reported in Canadian dollars, unless otherwise indicated.

“With the recent launch of our Spectrum Softgels, strong sales in Canada and Germany and the expansion of our global footprint into Africa and further into Europe and Australia, we continue to drive our global leadership position in medical cannabis forward,” said Bruce Linton, Chairman & Chief Executive Officer. “The efforts of Canopy Growth and Canopy Health Innovations to develop a range of patented, insurance coverage eligible cannabis-based medicines took a critical step forward with the recent receipt of approval to conduct its first in a planned series of clinical trials. Believing that combining Canopy Health’s growing intellectual property portfolio with our production and advanced manufacturing platform will speed time to market of disruptive medicines, we made the decision to pursue full ownership of Canopy Health Innovations.”

Added Linton, “For many months, provincial and territorial agencies have thoroughly evaluated our business, including our product inventory, operational capabilities, IT systems as well as our cannabis retail and education programs. Being the only company selected by all provinces and territories with announced supply and retail partners, speaks to our readiness for the adult recreational cannabis market that is expected to open in less than three months.”

As Canopy Growth continues to grow and evolve its global management team, the Company is pleased to announce that Mark Zekulin, current President, has taken on the role of President and Co-CEO. Mark has been with Canopy Growth since its inception and in the role of President has overseen all Company operations and execution, with the exception of Finance and IT. The addition of the Co-CEO title reflects Mark’s current integration in the strategic operation of the Company, formalizing the current structure of the organization. Mark will continue to report to Bruce Linton, Chairman and CEO, who oversees the Company’s global strategy and execution, as well as capital markets. Tim Saunders, EVP and CFO will continue in his current role reporting to Mr. Linton.

Investment for the Canadian Recreational Cannabis Market

The Company continues to invest significant effort, capital and resources in activities and programs to prepare the Company to participate in and lead the Canadian recreational cannabis market. These investments cover the Company’s entire business operations including production, fulfillment, marketing, sales and general administration. With the passing of Bill C-45 (“The Cannabis Act”) on June 19, 2018 and the roll out of the recreational market on October 17, 2018, Management believes the prudent investments made in the fourth quarter and to date by the Company will foster strong demand for the Company’s products in the Canadian recreational cannabis market and prepare the Company to supply very large quantities of cannabis and generate significantly greater revenues beginning in the second quarter of fiscal 2019.

The Company continues to invest in the development of marketing and branding programs, the development of new or expected product SKUs, the development of recreational product packaging, building the Company’s business to business sales functions, the development of cannabis retail and education programs as well as the ongoing investment in information technology. The Company made investments in capacity early in order to position itself as an early leader in terms of cannabis and cannabis oil production. Investments have been made in product development capabilities in the Company’s Dealer’s Licence Area for phase two of legalization, which may include ingestibles.

Beginning in the third quarter and through the fourth quarter of fiscal 2018, the Company began implementing a series of changes to its operations, primarily at its facility in Smiths Falls, Ontario, to better prepare the Company to become a trusted supplier to the Canadian recreational market.  These changes included:

  • The re-purposing of 4 of the 24 flower rooms to provide additional mother/clone rooms for the purpose of cultivating 200,000 clones that helped plant over 1.7 million sq. ft of greenhouses in British Columbia and Quebec in the fourth quarter of fiscal 2018 and in the first quarter of fiscal 2019; and
  • The re-purposing of an additional 3 flower rooms to build a large footprint pre-pack room that will help the Company ready a significant amount of product for shipment to provincial and territorial agencies beginning in the second quarter of fiscal 2019.

These operational changes, which decreased the amount of cannabis that the Company harvested, combined with higher overheads in the fourth quarter of fiscal 2018, led to decreased gross margins in the fourth quarter of fiscal 2018.

Management Preamble

The Company will no longer report on the weighted average cost per gram metric. There are three reasons for this. First, a gram is a measurement of the weight of the plant only. Management believes it will be more meaningful in the future to consider milligrams of THC or CBD cannabinoids representing ingredients to new, evolving product formats as they are introduced beyond the traditional cannabis flower, including oils and capsules. Second, management believes other key performance indicators will evolve as the legal recreational and retail market takes hold in Canada. Lastly, there is no industry standard for cost per gram components or classification to draw a meaningful comparison.

Fourth Quarter 2018 Highlights

Q4 2018

Q3 2018

% Change

Q4 2017

% Change

Active registered patients

74,000

69,000

7%

55,000

35%

Kilograms and kilogram equivalents sold

2,528

2,330

8%

1,740

45%

Kilograms harvested

4,811

7,961

-40%

1,980

143%

Inventory & Biological Assets (millions)

$118

$108

9%

$61

93%

Revenues (millions)

$22.8

$21.7

5%

$14.7

55%

Average selling price per gram

$8.43

$8.30

2%

$8.03

5%

Cash and Cash Equivalents (millions)

$323

$238

36%

$93

247%

 

  • Fourth quarter revenue was $22.8 million, a 55% increase over the fourth quarter ended March 31, 2017 when revenue totaled $14.7 million
  • Sold a record 2,528 kilograms and kilogram equivalents at an average sales price of $8.43 per gram, representing an increase of 45% and 5%, respectively over fourth quarter fiscal 2017
  • Oil sales, including softgel capsules, accounted for 23% of fourth quarter product revenue compared to 23% in the prior year period. Oil sales in the fourth quarter accounted for 2,152 litres (or approximately 268 kilogram equivalents) of the total kilogram and kilogram equivalents sold compared to 250 litres (or then approximately 250 kilogram equivalents) of the total kilogram and kilogram equivalents sold in the comparison period last year
  • The Company entered a supply Memorandum of Understanding (“MOU”) with the Province of Prince Edward Islandto allocate a minimum supply of 1,000 kg of high-quality cannabis for the first year. The two‑year supply agreement will renew for a third-year upon mutual agreement of the Company and Province; At the time in the fourth quarter, the MOU was the fourth supply-related commitment entered into by the Company (joining commitments signed in prior quarters with Newfoundland & Labrador, New Brunswick, and Quebec.)
  • Net earnings attributable to shareholders of Canopy Growth amounted to a loss of $61.5 million, or $0.31 per basic share
  • Inventory of 15,726 kilograms of dry cannabis, 6,969 litres of cannabis oil and 356 kilograms of softgel capsules at quarter end, inventories are continuing to be scaled to meet management’s expectation of market demands, including the legalized recreational market commencing in October 2018
  • BC Tweed Aldergrove received its cultivation license for a portion of the facility, less than 75 days after facility retrofit began

Fiscal Year 2018 Highlights

FY 2018

FY 2017

% Change

Kilograms and kilogram equivalents sold

8,708

5,139

70%

Kilograms harvested

22,513

10,837

107%

Revenues (millions)

$77.90

$39.9

95%

Average selling price per gram

$8.24

$7.40

11%

 

  • Fiscal year 2018 revenue was $77.9 million, a 95% increase over the prior year when revenue totaled $39.9 million
  • Sold 8,708 kilograms and kilogram equivalents at an average sales price of $8.24 per gram, representing an increase of 70% and 11%, respectively over fiscal 2017
  • Net earnings attributable to shareholders of Canopy Growth Corporation in the fiscal year 2018 amounted to a loss of $70.4 million, or $0.40 per basic share

Subsequent to Fiscal Year 2018

  • Listed common shares of the Company on the New York Stock Exchange, under the symbol CGC
  • Received new or expanded cultivation licenses at BC Tweed Aldergrove, BC Tweed Delta, Vert Mirabel and Tweed Farms, bringing the total Canadian licensed footprint to over 2.4 million sq. ft. with another 3.2 million sq. ft. of expansion underway in Canada
  • Company announced agreements to acquire, subject to certain conditions, the remaining shares of BC Tweed Joint Venture Inc. and Canopy Health Innovations Inc. not currently owned by the Company
  • Completed a three-year conditional supply agreement with the Société des alcools du Québec (“SAQ”) for 12,000 kgs of cannabis products
  • The Company was selected by the Saskatchewan Liquor and Gaming Authority (SLGA) to apply for five cannabis retail permits and operate an online store serving the entire province
  • Canopy Health has received written notice from Health Canada to proceed with Phase IIb “in-human” clinical trials to evaluate the use of medical cannabis in the treatment of insomnia.
  • The Company closed the acquisition of Annabis Medical s.r.o (“Annabis Medical”). Pursuant to federal licenses, Annabis Medical currently imports and distributes cannabis products through the Czech Republic’s legal pharmacy channel.
  • The Company closed the issuance of 4.25% convertible notes amounting to $600 million in gross proceeds, including exercise of an overallotment by the initial purchasers, in a transaction led by Cowen and Company, LLC and BMO Nesbitt Burns Inc. acting as joint bookrunning managers and Eight Capital and Bryan, Garnier & Co. acting as co-managers for this offering. The initial conversion price represented a premium of approximately 25% relative to the last reported closing sale price of the Company common shares on the TSX on June 14, 2018. The transaction was significantly over-subscribed and included the participation by Greenstar Canada Investment Limited Partnership, an affiliate of Constellation Brands, Inc. or $200 million, and the remainder of the offering was widely allocated to institutions, primarily in the United StatesEurope, as well as Canada.

Fourth Quarter and Fiscal Year 2018 Revenue Review

Revenue for the fourth quarter fiscal 2018 was a record $22.8 million, representing an increase of 55% over the prior year’s quarter in which revenue was $14.7 million. In the three months ended March 31, 2018 and 2017, oils, including the Company’s Softgel capsules, accounted for 23% and 23%, respectively, of the product revenue for each period.

Revenue in the fiscal year ended March 31, 2018 totaled $77.9 million representing an increase of 95% over revenue of $39.9 million in the same period last year.

Fourth Quarter and Fiscal Year 2018 Product Sales Review

During the fourth quarter of fiscal 2018, Canopy Growth sold 2,528 kilograms and kilogram equivalents at an average price of $8.43 per gram, up from 1,740 kilograms and kilogram equivalents at an average price of $8.03 per gram during the prior year period. The higher average price was due to changes in the mix of product sold and increasing sales in Germany by wholly-owned subsidiary Spektrum Cannabis GmbH (“Spektrum Cannabis”).

Oil sales, including gel caps, accounted for 23% of fourth quarter product revenue (reported revenue net of merchandise revenue, clinic revenue and shipping fees). Oil sales in the fourth quarter accounted for 2,152 litres (or approximately 268 kilogram equivalents) of the kilogram and kilogram equivalents sold. Spektrum Cannabis sold 175 kilograms in Germany, all sourced from Canadian domestic production, at an average price of $13.35 per gram.

In fiscal year 2018, the Company sold 8,708 kilograms and kilogram equivalents at an average price of $8.24 per gram compared to 5,139 kilograms at an average price of $7.40 per gram in the fiscal year ended March 31, 2017, representing an increase of 70% and 11%, respectively.

Fourth Quarter and Fiscal Year 2018 Gross Margin Summary1

The cost of sales includes the impact of cash operating costs of subsidiaries not yet cultivating or selling cannabis, such as BC Tweed and Vert Mirabel and higher overheads incurred while preparing operations for the legalization of recreational cannabis. Excluding the costs associated with non-cultivating subsidiaries totaling $5.9 million, the gross margin before the fair value impacts in cost of sales and other inventory charges would have been $14.4 million or 63% of sales.

The fourth quarter fiscal 2018 gross margin including the costs of operating the non-cultivating subsidiaries but before the fair value effects of the IFRS accounting for biological assets and inventory and other inventory charges was $8.5 million or 37% of sales, as compared to $9.1 million or 62% of sales in the fourth quarter of last year.

The fiscal year fiscal 2018 gross margin before the fair value effects of the IFRS accounting for biological assets and inventory and other inventory charges was $40.2 million or 52% of sales, as compared to $24.6 million or 62% of sales last year. The lower gross margin percentage was due primarily to the impact of cash operating costs of subsidiaries not yet cultivating or selling cannabis. Excluding the costs associated with non-cultivating subsidiaries totaling $11.4 million, the gross margin before the fair value impacts in cost of sales and other inventory charges would have been $51.6 million or 66% of sales.

Fourth Quarter and Fiscal Year 2018 Operating Expense Summary

Management believes the ongoing investment in building the Company’s significant and diversified production platform, medical and recreational sales and customer support capabilities, world-leading brands, unparalleled international reach, and partnerships, all of which directly impacted profitability during the current period, is a prudent long‑term investment to strengthen the Company’s global leadership position heading into the next fiscal year. As a result, both sales and marketing and general and administrative expenses were up significantly relative to the same periods last year for the purpose of being ready for the recreation market while currently still operating in a medical market in the fourth quarter and through the first half of fiscal 2019.

Sales and marketing expenses in the fourth quarter fiscal 2018 were $14.8 million, or 65% of revenue. In comparison, Sales and marketing expenses were $4.1 million, or 28% of revenue in the same period last year.

Sales and marketing expenses in the fiscal year 2018 were $38.2 million, or 49% of revenue. In comparison, Sales and marketing expenses were $13.0 million, or 33% of revenue in the same period last year.

General and Administrative (“G&A”) expenses in the fourth quarter fiscal 2018 were $16.9 million, or 74% of revenue. In comparison, G&A expenses were $5.9 million, 40% of revenue, in the three months ended March 31, 2017. The G&A expenses include higher legal and professional services fees related to investments in governance, expanded operations and supporting business development as well as expanding the Company’s information technology capability. G&A expenses also included higher employee compensation costs due to increased staff levels, necessary use of consultants and advisory services while expanding and commercializing the Company’s operations, compliance costs associated with meeting Health Canada requirements, as well as other public company compliance related expenses including related professional fees.

General and Administrative (“G&A”) expenses in the fiscal year 2018 were $43.8 million, or 56% of revenue. In comparison, G&A expenses were $16.9 million, 42% of revenue, in the prior year period.

Fourth Quarter and Fiscal Year 2018 Adjusted EBITDA Summary (Non-GAAP measure)2

Adjusted EBITDA in the fourth quarter fiscal 2018 amounted to a loss of $22.9 million compared to a loss of $0.1 millionin the same period last year.

Adjusted EBITDA in the 2018 fiscal year amounted to a loss of $41.2 million compared to a loss of $4.7 million in the same period last year.

The Adjusted EBITDA is reconciled and explained in the Management’s Discussion & Analysis under “Adjusted EBITDA (Non-GAAP Measure)” a copy of which will be filed on SEDAR after financial markets close today. The Adjusted EBITDA is reconciled in a table elsewhere in this press release.

Fourth Quarter and Fiscal Year 2018 Earnings Summary

Net loss attributable to shareholders of Canopy Growth Corporation in the fiscal year 2018 amounted to a loss of $70.4 million, or $0.40 per basic and diluted share, including the net fair value effects of the IFRS accounting for biological assets and inventory and other inventory charges which combined to a gain of $34.0 million and net other income of $31.2 million primarily consisting of fair value changes in financial assets of $78.2 million offset by an impairment loss of $28 million related to the settlement agreement reached with Bedrocan International BV as announced on June 11, 2018, and other non-cash fair value increases on BC Tweed and Vert Mirabel put liabilities of $21 million, and non-cash share-based compensation expense and depreciation together amounting to $71.7 million. In the comparative period last year, the net loss attributable to shareholders of Canopy Growth Corporation amounted to $7.5 million, or $0.06 per basic and diluted share including the net fair value effects of the IFRS accounting for biological assets and inventory and other inventory charges which combined to a gain of $14.1 million.

Net loss attributable to shareholders of Canopy Growth Corporation in the fourth quarter of 2018 amounted to a loss of $61.5 million, or $0.31 per basic and diluted share, including the net fair value effects of the IFRS accounting for biological assets and inventory and other inventory charges which combined to an expense of $1.3 million and net other expense of $10.1 million primarily consisting of fair value changes in financial assets of $46.2 million more than offset by an impairment loss of $28 million related to the settlement agreement reached with Bedrocan International BV, fair value increases on BC Tweed and Vert Mirabel put liabilities of $21 million, and a partner sharing expense of $5 millionrelated to the BC Tweed partners, and non-cash share-based compensation expense and depreciation of $25.9 million. In the comparative period last year, the net loss attributable to shareholders of Canopy Growth Corporation amounted to $12.0 million, or $0.08 per basic and diluted share including the net fair value effects of the IFRS accounting for biological assets and inventory and other inventory charges which combined to an expense of $6.6 million.

Fourth Quarter and Fiscal Year 2018 Balance Sheet Highlights

At March 31, 2018, the Company’s cash and cash equivalents totaled $322.6 million, representing an increase of $220.8 million from March 31, 2017.

Inventory at March 31, 2018 amounted to $101.6 million (March 31, 2017 – $46.0 million) and biological assets amounted to $16.3 million (March 31, 2017 – $14.7 million), together totaling $117.9 million (March 31, 2017 – $60.7 million). Inventories are continuing to be scaled to meet management’s expectation of market demands, including the legalized recreational market expected later in calendar 2018.

At March 31, 2018, the Company held 15,726 kilograms of dry cannabis, 6,969 litres of cannabis oils, ranging from concentrated resins, or refined oil, to finished oil, and 356 kilograms of softgel capsules. Included in the dry cannabis quantities was 2,982 kilograms available for sale in the Company’s online stores and 3,480 kilograms in process of finishing or awaiting approval for sale and 9,264 kilograms of extract-grade cannabis held for conversion to saleable oils and capsules.

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