Gross Sales of $98M; Net Revenue hits record $83M

The biggest weed company by market cap announced its financial results yesterday and a precis of the announcement and management MD&A is post here. -Ed.

SUMMARY

• Cannabis shipments totaled 10,102 kilograms and kilogram equivalents.

• Net income of $74.9 million, including changes in fair values of financial liabilities
included in Other Income.

• Closed the previously announced $5 billion investment by Constellation Brands
Inc and began putting that capital to work for shareholders with key acquisitions
of Storz & Bickel and the assets of ebbu Inc.

• Expanded to new markets including United Kingdom and Peru, and announced
intention to establish operations in New York State, marking the Company’s entry
into the US hemp market.

• Intellectual property portfolio grew to 32 issued patents and over 140 patent
applications, covering a range of target areas from technology to genetics to
clinical formulations.

Smiths Falls, ON – Canopy Growth Corporation (TSX:WEED) (NYSE:CGC) today released its consolidated financial results for the third quarter fiscal 2019 ended December 31, 2018. All financial information in this
press release is reported in Canadian dollars, unless otherwise indicated.

Third Quarter Fiscal 2019 Operational and Financial Highlights


Management Commentary
“Our successful first full quarter with recreational sales in Canada reinforces our long
held strategy of making meaningful investments early in order to secure market share,”
said Bruce Linton, Chairman & Co-CEO, Canopy Growth. “With a strong cash position,
we added strategic assets and IP through acquisitions to accelerate the sophistication of
our inputs with ebbu, and our consumer-facing outputs with Storz and Bickel.”
“The Canadian recreational cannabis market will be dominated in the long term by
businesses delivering excellent products and consumer experiences. Sales from the first
wave of products and retail environments launched in the third quarter demonstrate
that we are capturing consumers’ attention.”
Concluded Linton, “We have developed an unprecedented and unparalleled fully
integrated platform at scale and will continue to expand by making strategic production
investments in regions with federally permissible paths to market for our cannabis and
hemp offerings. We believe this strategy will develop a significant and sustained return
on invested capital over the long-term.”

Product & Production Summary
Oils, including the Company’s Softgel capsules, accounted for 33% of product revenue
(reported net revenue excluding other revenue) in the three months ended December
31, 2018, up from 23% of product revenue in the same period last year, demonstrating
an increased demand for value-added formats. During the third quarter of fiscal 2019,
approximately 30% and 42% of recreational and medical sales, respectively, were
comprised of oils, including Softgel capsules.

To position Canopy Growth to supply the significant quantities of cannabis oil that the
Company expects will be required to meet the needs of future value added products
including vape pens and beverages, the Company took steps during the quarter to
augment its owned current and planned extraction capacity by entering into extraction
supply related agreements with Valens GroWorks Corp., Medipharm Labs Corp., and
POS Holdings Inc. (“POS Holdings”). In addition, during the quarter, the Company
completed the terms of a financing related agreement with POS Holdings to lock in
dedicated extraction support to Canopy Growth.

In the transition from a “medical marijuana” business to a business producing clinically
proven cannabinoid therapies, the Company experienced a decline in its Canadian
medical market demand in the quarter. The decline may be attributed to the initial
adjustment to the available legal recreational market which patients can also access.
Additionally, medical revenues reflected a migration to a tighter medical product range
as well as elevating and re-focusing Spectrum Cannabis to a more pure medical/pharma
focused brand proposition.

International medical revenues in the three months ended December 31, 2018,
consisting primarily of sales in Germany, increased by 170 percent over the same
quarter in the prior year to $2.7 million.
Other revenue for the quarter was $7.5 million, coming from partner clinic revenue,
merchandise sales, and device sales by the Company’s wholly-owned subsidiary Storz &
Bickel following the close of its acquisition on December 6, 2018.
Canadian Regulated Adult Use Market – Cannabis Sales

The Company placed significant focus on shipping core products, backed by deep
inventory levels, into physical retail store networks across the country. In the face of
strong product demand and overall sector supply shortages, the inventory levels have
served to improve the availability of the Company’s products on retail store shelves.
Also, at the end of the quarter, the Company began shipping value-added Softgel
capsules and pre-rolled joint products in recreational channels across the country.

Canadian Regulated Adult Use Market – Retail Footprint
Canopy Growth finalized its acquisition of HIKU during the second quarter, adding the
Tokyo Smoke retail channel to complement its Tweed banner stores. Offering two
distinct customer experiences will allow the Company to appeal to various consumer
demographics without saturating any single segment. Tokyo Smoke operates four
corporate owned retail cannabis stores and an e-commerce platform in Manitoba.
Tweed retail now has 10 corporate owned locations selling cannabis across
Newfoundland & Labrador and Manitoba, plus a licensed store in Saskatchewan and an
e-commerce presence in Manitoba and Nunavut. The Company plans to add, in
provinces with private retail models, 20 additional Tweed stores and 20 additional
Tokyo Smoke stores. In the province of Ontario, the company is exploring partnership
opportunities to ensure consumers in that market can experience the distinct Tweed
and Tokyo Smoke retail experiences while working within the provincial framework.
Third Quarter Fiscal 2019 Gross Margin1 Summary

The Company is in the final stages of completing its Canadian production and extraction
platform. The cost of sales includes the impact of operating costs of cannabis
cultivation subsidiaries not fully commissioned, including our Delta greenhouse and a
number of zones at the Aldergrove greenhouse facility, both going through fit-ups, as
well as Edmonton and Fredericton, also in construction during the quarter. Vert
Mirabel also initiated its first pilot grow cycle, which combined with the other nonproducing assets to result in higher non-recurring overheads. Cost of sales also included costs associated with developing edible and beverage products for which markets will be available later in calendar 2019. Excluding the costs associated with these noncultivating subsidiaries totaling approximately $13.1 million and absorbing medical
excise taxes of $2.1 million in order to ease the burden imposed on patients, the gross
margin2 before the fair value impacts in cost of sales and other inventory charges would
have been $33.5 million or 40% of sales. Gross margin was also impacted by lower
average recreational business to business prices, as compared to historic direct to
consumer medical sales.
Greenhouse facilities operate in zones. Aldergrove, Delta and Mirabel have been
planted in a manner that allows for ongoing harvests, rather than one large harvest, to
increase the utilization of assets such as post harvest processes and provide for a steady
supply of product going forward. The Aldergrove greenhouse began its third harvest
earlier in the current quarter and the Delta facility is expected to begin its next harvest
later in the current quarter.

The Company believes gross margins will expand in the coming quarters when all of its
cultivation facilities reach full utilization and cycle through initial pilot harvests to be
high performing assets. In addition, margins are expected to expand when edibles and
beverages are introduced later in calendar 2019 with lower costs of active ingredients
per serving.

 

(The full release is on the Canopy Growth website

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