Canopy Growth Q2 F2019 Rundown Sept. 30, 2018

After doing TRST last night, this is a sober reminder of the fact that this industry has a looong way to go.


To be fair to ACB, where I inserted a similar narrative for those that do not read the entire post,.… I will also talk about Net Operating Profit versus Net Income here.


  • CGC lost $330 million Net Income for the Q, with IFRS voodoo removed it was negative $290 million. Their Net Operating Income with IFRS voodoo backed out was negative $174 million. Net Operating Profit is the profit generated by the business itself and not the investment side of the equation.  The latter materially dragged CGC results down from their $174 million Operations related loss to negative $290.


Open the Financials and the MDA and hang on…. Here we go….


CGC recorded their first drop in sales since I have been spreading their quarterly statements. Previously their lowest increase was 5%. This Q saw a decline of 10%, and when the $0.7 million of rec sales are backed out that decreases to 13% of medical sales for an aggregate of $21 million, or a $3 million decrease.

Kgs sold dropped 498 KGs to 2,197 or 18%, with Germany dropping 84 kgs and Canada dropping 414 kgs.

Revenue per gram was $9.87 an improvement of 10% from last Q, largely owing to an increase in higher value oil sales to 34% of cannabis sales mix from 26% last Q.

Embedded in above, Germany also saw a decline of over $1 million to $2.2 million QoQ, giving back the entire Q1 F19 increase. Per gram revenue in Germany saw a decline of under 1% to $13.58/gram.

Non-cannabis sales [not sure what it is other than accessories] dropped $0.2 million to $1.6 million.

Gross Margin:


CGC 30-Sep-17 31-Dec-17 31-Mar-18 30-Jun-18 30-Sep-18
Gross Margin without IFRS 57.4% 57.8% 37.3% 42.8% 28.2%
GM less unproductive space 64% 71% 63% 65% 77%

Unadjusted gross margin is the lowest of peer set and it dropped precipitously QoQ. And I don’t think that includes waste of the $16 million in destroyed plants which was below the line in FVI and GoB.


When adjusting for drag from non performing cultivation space and backing out a mgmt provided $7 million figure, gross margin bumps to 77%.  But again, it looks like waste is not included in that mgmt provided figure, which in my opinion is incomplete.


Using the mgmt provided figure divided by grams sold in the Q cost per gram improves dramatically to $2.42/gram from $3.32 for the previous two Q’s. Unadjusted its $5.63/gram up from $5.32/gram last Q.
We are now a few quarters removed from CGC eliminating their own Cost Per Gram metric which they have not replaced by any other metric that I know of.


Other than breaking out the $16 million loss on BC Tweed harvest they have provided no further breakdown of the $54 million in FVI and Other Charges to Inventory.  If that figure is divided by grams sold it yields a $23.44/gram, and if I back out the $16 million in BC Tweed writedown it is still at $16.16/gram.  Not one analyst asked any questions about this. This cannot be FVI alone, there is something else in there.


If I had to hazard a guess… they are reversing previous GoB capitalized to inventory to get their booking cost to a defensible $ figure so they do not have writedowns at year end like the previous two year ends.  I reiterate… this is a guess as there is little disclosure surrounding one of the biggest numbers on their income statement.


Absolute Gross Margin b4 IFRS voodoo was $6.7 million. The lowest absolute GM I have from the current reporting format was $9 million June 30, 2017 the first Q where the reporting format has been provided.

Operating Expenses

 Trend Analysis cgc sga trend

Peer Analysis

cgc sga peer

Selling and Marketing expenses increased by $22 million to $39 million for the quarter.  This was a jump from 67% of sales last Q in $’S to 167% of sales this Q. This is by and far the highest in the peer set with ACB the second highest at 99% of sales.  This is likely to start normalizing after the Oct 17 restrictions were put in place.

G&A increased $17 million QoQ to $39 million and are 159% of sales versus pervious Q 76%. Cronos at 128% of sales is the next highest in peer set followed by ACB at 121%.

SBC in the Q increased to $96 million from $30 million last Q.  This is 410% of sales or 174% on a TTM. Something to keep in mind, SBC has a 2-3 year tail on it.  At some point wages will start being the currency for employees and cash will be the currency for acquisitions.  When employees are paid in cash while SBC still has 2-3 years to tail off… you get a double whammy [This holds for entire industry].

Combined SGA and SBC were 736% of Sales. ACB was 291% last Q.

Other expenses included in Opex are R&D, which increased by $1.2 million and acquisition related costs that increased to $3.2 million from $1.9 million last Q.


CGC 30-Sep-17 31-Dec-17 31-Mar-18 30-Jun-18 30-Sep-18
Opex as % of sales 169.2% 205.5% 255.2% 280.5% 774.4%

Opex totalled $181 million or 774% of sales.

Net Operating Profit was negative $214 million from operations but when IFRS voodoo is backed out it improves to negative $174 million.

Other Expenses pulled net income down by a further $116 million.  This was a loss on mark to market of debenture of $223 million offset by gains in Canopy Health of $63 million and Terrascend investments of $48 million.

Net Income was negative $330 million which improves to negative $290 million when IFRS voodoo is stripped.
Breakeven Sales and Adjusted EBITDA

 Trend Analysis

cgc be trend



Peer Analysis

cgc be peer


This graph will be hard to read the details as the spread amongst CGC and its peers has widened considerably.

Adj EBITDA they gave a figure of negative $58 million… I get negative $68 million.  They have an unexplained SBC gap to what is on the income statement of $3.8 million [$99 million vs $95 million on Inc Stmt] and have backed out $4.2 million in “Excess Space Provision in G&A”.  They do not provide an explanation of either, so I do not give them credit for either.

The decrease in EBITDA QoQ was from negative $23 million to negative $58 million.  A lot of that comes from the gross margin reduction of $5 million QoQ and the increase in non Cash Opex described above.

In order to show a breakeven Adj EBITDA with current GM % and Operating Expenses they need quarterly sales of $257 million.

In order to show a Net Operating Profit with current GM % and Opex they need sales of $642 million a quarter a 26 fold increase in quarterly sales.

I fully recognize that GM % will go up and Opex should come down going forward.  So don’t kill the messenger.

Balance Sheet Items of note:


  • Cash went down $228 million in the Q… cash is no longer a worry
  • Bio Assets fell $32 million and were at 25% of anticipated yield. CGC does not provide # of plants and anticipated yield of these plants like most other LP’s have started to do.
    • If I had to guess it is the lower net Selling Price predicated by Rec might be trimming the actual value of plants, but without plant #’s I cannot tell you how much.
  • Inventory increased $32 million with an imputed 16,642 kgs [using an 8:1 conversion factor for Liters extract and soft gels to get KG equivalents] which is a decrease of 1,326 kgs QoQ.
    • FG bud increase QoQ by $1.6 million to $15 million, meaning they sold more than they processed.
      • FG Bud in KGs increased by 486 kgs to 3,080 kgs
    • WIP bud also increased by $22 million to $80 million
      • Increased by 4,414 kgs to 10,990
    • FG Extracts increased nicely by $10 million to $31 million
    • WIP Extracts decreased by $9 million to $5 million
    • Extracts increased by 6,603 litres
    • Softgels increase by $2.1 million to $9.9 million
      • Increased 441 kgs to 1,497
    • So with increase of 23% in cannabis related inventory in $’s versus increase in cannabis by weight of 56%… a reduction in GoB at harvest, driven by reduced selling price, is likely driving the differential [which lends credence to my theory that FVI and Other Charges to Inventory also has the backing out of previous GoB booked embedded within to get inventory booking costs below wholesale.]
  • PPE increased by $181 million to $661 million
  • Invest in Assoc and Other Financial Assets increased by $52 million net. The increases in Canopy Health and Terrascend likely played a role.
  • Goodwill and intangible assets increased by $775 million with BC Tweed transaction and Canopy Health the likely contributors. Goodwill and Intangibles now stands at $1.2 billion or 52% of assets.

Liabilities & Equity

  • CP and LT debt increased $289 with LTD moving to CP Debt with the acceleration of debentures.
  • Shareholder capital spiked $973 million QoQ


Well…. We now have “medical only results” behind us. On to adult rec and international exports as the key catalysts of actual results.

That’s all I got.


Go Blue

This Post Has 2 Comments

  1. Thanks for these write ups.

  2. When you were giving your entertaining and informative presentation at Quadra University, at the HBI on Quadra, there was a lot of interesting science presented, including a bit about growing these psycho-actives from mould???
    Where can I read more about this. preferably in book form.

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