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Cans are filled with drinks and sent down a line for labelling.
Canopy Growth unveiled the company’s edible products at Hotel Arts in Calgary on Monday, December 9, 2019.
Perhaps the best way to consider the financial snapshot laid down on Valentine’s Day by Canopy Growth is that it offers a glimpse of a bygone era.
The Smiths Falls cannabis company won the lottery in the fall of 2018 when Constellation Brands, the U.S. beer, wine and spirits giant, invested $5.1 billion to acquire a strong minority of its shares. Under the tutelage of Bruce Linton — Canopy Growth’s founder and co-CEO until last July — the Smiths Falls firm went on a spending spree not seen in these parts since the telecom bubble of 2000.
Canopy Growth laid it all out in its detailed filing Friday. During the nine months ended Dec. 31, Canopy Growth shelled out $549 million to fund company operations, $611 million to build out marijuana, bottling and other facilities, $511 million for the cash portion of acquisitions and $441 million for an option to acquire Acreage Holdings should the U.S. finally legalize marijuana.
At the end of the year, Canopy Growth’s seemingly inexhaustible supply of cash had shrunk to $2.3 billion — sizeable, yes, but not if the spending continued at pace.
It’s why Constellation Brands inserted itself into Canopy Growth’s affairs last summer. This coming year, it will make its influence felt even more, by tightening operations and making sure its investment will one day pay off.
“A thorough strategic review is underway,” said David Klein, the former chief financial officer of Constellation Brands who took over as Canopy Growth’s CEO last month. “We will rightsize our business over the next 90 days … in a thoughtful and measured fashion.”
Klein stressed that the idea was to focus strongly on niches and market segments where Canopy Growth can “win,” and not spread its effort across so many product lines. “We need more focus and discipline,” Klein added. “We need to work across every line item.”
That said, Klein — who has been joined on Canopy Growth’s board by two other senior Constellation Brands officials — said “we need to move faster and make bolder moves in the U.S,” suggesting he is prepared to invest at least some of Canopy Growth’s cash pile in bolstering the firm’s retail presence south of the border.
What has Constellation Brands got so far for its massive investment? A company that generated net revenues of $123.8 million in its third fiscal quarter ended Dec. 31 but also suffered a net loss of $124.2 million. Yes, sales were up substantially from $83.0 million during the same quarter a year earlier, but that period included just two-and-a-half months’ worth of recreational cannabis sales. Canada legalized recreational marijuana Oct. 17, 2018.
It was that seminal event that prompted Canopy Growth’s once-in-a-lifetime investment surge.
Drilling deeper into the company’s numbers, as Klein certainly has, reveals a range of possibilities for generating new revenues, including cannabis-laced drinks, chocolates (which are already selling) and vaping products. Momentum is growing on the retail front — especially in Ontario, which until December had done the least to encourage the rollout of legal cannabis.
Canopy Growth reported that as of this week it was operating 28 retail stores under the Tweed and Tokyo Smoke banner and had acquired the licence or right to apply for a license in 45 more locations in Newfoundland, Manitoba, Saskatchewan and Alberta. The company said it has acquired nine multi-year licensing agreements for stores in Ontario and expects to begin operating them in May. The Ontario government has said it plans overall to allow new cannabis retailers at the rate of about 20 per month starting in April.
Canopy Growth added it has submitted an application for a store at its headquarters in Smiths Falls.
One of the big question marks hanging over the company is where Klein will trim the workforce that Linton built up so aggressively. The company employed nearly 4,900 at the end of December, up substantially from 2,700 at yearend 2018. More than 1,000 work at Smiths Falls and several hundred more are in Kanata.
Indeed, between Mar. 31 and Dec. 31, Canopy Growth spent $207 million related to topping up employees’ pay with shares — up from $79 million during the same period a year earlier.
Not that many share options are worth a lot these days. Fewer than 25 per cent of the 33.6 million share options outstanding as of Dec. 31 were exercisable for less than $25.50 per share — roughly where the company’s share price stood Thursday, before Klein revealed plans to rightsize the company. Canopy Growth’s shares jumped 15 per cent in Friday morning trading.
Employees are thus left with the twin hope that Klein’s strategies pay off, and that, if these do, they will still be around to reap their reward.
Copyright Postmedia Network Inc., 2020