Canopy growth still three or five years away from profitability, the company recognizes after disappointing results

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Canopy Growth Corp. is still three to five years away from profitability, the company acknowledged on Thursday, after publishing quarterly financial results that show a decline in revenues, stubbornly low gross margins and a huge net loss due to a one-time accounting change .

The results were well below analysts' expectations, dropping the price of Canopy's shares on Thursday by 14.5 percent and spurring a wider sell-off in cannabis stocks that led to the marijuana index North American Solattiva at its lowest level so far this year.

Canopy's inability to increase revenue despite being the leader in a growing industry indicates operational problems and difficult choices that the company must face on which products to focus on. Canopy has stolen $ 6.4 million from its revenue, for example, because it expects cannabis oil and softgel products to be returned unsold.

The story continues under the announcement

The lackluster results, the first since Canopy fired its CEO Bruce Linton, also highlight structural problems across the sector, including the lack of retail stores in major provincial markets such as Ontario and Quebec. And they indicate the casual way in which Canopy, like many other marijuana companies, has moved from the medical to the recreational market in the last 10 months.

Canopy reported on Wednesday evening that quarterly revenue fell to $ 90.5 million, down 4% from the previous quarter. It also recorded a net loss of $ 1.28 billion, most of which was attributed to a one-off commission relating to revaluations of warrants held by Constellation Brands Inc., which holds a significant stake in the company.

The results received negative coverage from most analysts following the company, many of whom suggested that Canopy has a long road to profitability. The Bank of Montreal analyst Tamy Chen wrote in a note to clients that "margins and cash flows could further deteriorate".

"Although Canopy is already making early capital investments for value-added products, the costs for the production of these formats are substantially higher than current products, which would involve significant investments in working capital and [operating expenses]," wrote Chen.

Ryan Tomkins, an analyst at Jefferies International Ltd., was even more blunt in a note: "While high collection figures should mitigate concerns about crop failure, elsewhere we see little to reassure investors that significant sales growth [ sustainable] and profitability will be visible in the near future. "

On a call from the analyst on Thursday, the best Canopy brass instruments offered a candid vision of the Canopy race to establish a dominant position in the Canadian recreational market and the ways in which that speed has come back to haunt them, in the form of a greenhouse retrofit and a sector – the 15% gross margin.

In the autumn of 2017, Canopy worked with a British Columbia vegetable company to transform 3 million square feet of greenhouse infrastructure into B.C. towards cannabis production. The BC Tweed greenhouses, acquired by Canopy the following summer, would fuel the company in the recreational market once the doors are opened for legal adult use in October 2018.

The story continues under the announcement

"We were basic things that we had to improve and we knew to be the case in greenhouses, but we didn't want to miss this opportunity to create more stocks and sales in the first quarter of legalization to get that strong market share," Rade Kovacevic, president of Canopy, stated at the call of the analyst.

Canopy entered the recreational market with an enormous amount of products, selling far more than its closest competitors in the first full quarter of recreational sales. During the next two quarters, however, he had to occupy a large part of his structures in the B.C. off-line to convert them correctly from vegetable greenhouses to structures more suitable for cannabis cultivation. Canopy made a similar choice with its facility in Mirabel, Quebec. These greenhouses have returned to full production only in recent months.

Canopy states that its gross margins are due to the management of the facilities while they did not produce products.

Not only were the greenhouses ill-equipped to cause operational inefficiencies. As part of his production chain, Canopy spent the last year developing temporary solutions to bring products to market, increasing costs.

"In Smiths Falls, in order to place pre-filled joints on the market, we closed the growing premises and turned them into a structure that could, on a semi-manual and semi-automated basis, create pre-filled joints," said the CEO of Canopy Mark Zekulin, who is now the only CEO of the company after Mr. Linton was fired.

"These are the natural things we did in a first market to make sure we have products online and to meet the needs of our customers, but this has led to inefficiencies and will be resolved slowly as the rest of Smiths Falls will be properly online. "," Mr Zekulin said.

The story continues under the announcement

Canopy is nothing but the only cannabis company that has resorted to improvised solutions to establish a support point in the recreational market, fill contractual obligations with provincial wholesalers and try to meet expectations very high of investors. Stories abound with producers asking employees to stay late to manually add excise stamps to packages; many companies still lack automated packaging lines, while others are converting licensed cultivation spaces into production spaces to conduct basic logistics operations.

The Canopy stumbles in the last two quarters, however, have been amplified by the high expectations it had set itself in the beginning.

"Obviously our competitors have now begun to increase their offerings, which means that they are able to increase revenue from a lower base … and [resume] a market share," said Zekulin.

But Mr. Zekulin said his company is ready for growth. The canopy has collected 40,960 kilograms in the last quarter in its recently renovated greenhouses, which is by far the largest crop in the industry. It is also investing heavily in value-added products such as beverages and vaporizers, which will become legal in the coming months.

"We are well aware that our business will be increasingly judged in the future by financial parameters, including the achievement of positive gains," he said.

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