Canopy Growth Corporation reports fourth quarter and fiscal 2019 results with annual sales of $226.3M

. Sales of Storz &amp; Bickel vaporizer devices, along with revenue from other strategic sources including extraction services, and clinic partners, resulted in <span class="xn-money">$34 million</span> in other revenue generated in fiscal 2019." data-reactid="60">To begin diversifying the Company's business into higher margin cannabis products and to complement intellectual property ("IP") being developed internally for the expected high growth vape category, Canopy Growth acquired medical devices company Storz & Bickel in Q3. Sales of Storz & Bickel vaporizer devices, along with revenue from other strategic sources including extraction services, and clinic partners, resulted in $34 million in other revenue generated in fiscal 2019.

As Storz & Bickel continues to become further and fully integrated within the Canopy Growth ecosystem, the Company anticipates that sales and revenue generated will continue to increase as we expand product availability within our internal and partnered sales channels. Additionally, through this acquisition, the Company gained invaluable access to Storz & Bickel's IP portfolio which has greatly benefited our innovation teams as we look forward to unveiling our own branded vape technology in fiscal 2020.

Gross Margin (before the IFRS fair value impacts in cost of sales)¹ Overview

Gross margin (before the IFRS fair value impacts in cost of sales) for fiscal 2019 grew 35% to $51 million, driven by growth in our medical channel and the launch of the Canadian recreational channel. The gross margin percentage decreased during the year from 48% to 22%, largely driven by the continued expansion work on several of our large-scale greenhouse facilities throughout the year, resulting in under-utilization impact in cost of sales. The impacts of under-utilization continued into Q4, resulting in a gross margin percentage of 16%, which is down from 34% in the corresponding period from the prior year, and 22% in Q3. The impact in Q4 fiscal was primarily attributed to $24 million of operating expenses for facilities not yet cultivating, cultivating but not yet harvesting, or facilities that had under-utilized capacity. Additionally, Q4 incurred some non-recurring costs related to an unusual weather event and other one-time activities.  We expect these facilities to be fully operational in the months ahead, resulting in a return to normalized operating costs for our cultivation facilities.

As production ramp-up begins for the next generation of recreational products, there will be costs related to the ramp-up of advanced manufacturing that will impact reported gross margin during the initial start-up phase, but management expects the impact to be less material relative to the size and scale of the revenue related to the new generation of products.

Inventory production costs expensed to cost of sales in fiscal 2019 were $175.4 million, as compared to $40.2 million in fiscal 2018. The impact of changes in the fair value of biological assets in fiscal 2019 was due in large part to the commencement of growing at the Company's facility in Mirabel, Quebec increased utilization at our facilities in Aldergrove and Delta, British Columbia, and 27 new grow rooms at the facility in Smiths Falls, Ontario.

 

 

Canopy Growth continues to make significant investments to scale our business in Canada and globally, including investments building our corporate capabilities, developing our production infrastructure, investing in the marketing and development of new value-added consumer products for the Canadian recreational cannabis market as well as the global CBD market. Work is underway to bring these new consumer products to these markets towards the end of fiscal 2020. Additionally, the Company continues to invest in the development and expansion of medical cannabis operations in jurisdictions outside of Canada including Colombia, Spain, Germany, Denmark, Lesotho, South Africa and Australia. In addition, we are investing in the research and development of cannabis-based medical therapies, including in required clinical trials, in advance of potential future commercialization. We believe it is necessary to make these investments, many of them made pre-revenue, to position the company for long-term success.

Sales and marketing increased from $38.2 million in fiscal 2018 to $154.4 million in fiscal 2019, reflecting investments in brand-building, consumer marketing, and promotional campaigns focused on our Tweed, Tokyo Smoke, Spectrum Therapeutics, active partner brands, as well as the development of cannabis and CBD consumer products and brands expected to be launched towards the end of fiscal 2020. In addition, staffing costs increased in marketing and sales functions, our customer care centre, cannabis retail and education programs, and our medical outreach program.

General and administrative expenses in fiscal 2019 were $168.5 million, reflecting our ongoing investments in building commercial capacity, governance and public company compliance costs associated with TSX and NYSE listings, legal and professional services in expanding operations, enhancing our information technology capabilities, scaling efforts ahead of market expansion, compliance costs associated with meeting Health Canada regulatory requirements, and employee compensation costs associated with the above.

Research and development expenses incurred in fiscal 2019 were $15.2 million. This is primarily attributable to our R&D team conducting research into a variety of innovation and intellectual property opportunities, as we prepare for new format introductions in fiscal 2020.

Acquisition-related expenses were $23.4 million in fiscal 2019, with Canopy Growth closing on several transactions in the year including the acquisition of HIKU Brands Company Ltd., ebbu, Inc., Storz & Bickel GmbH & Co. KG, and Canopy Health Innovations Inc. Acquisitions announced subsequent to fiscal 2019 – including This Works Products Limited, Canamo y Fibras Naturales, S.L. ("Cafina"), and the future acquisition of Acreage – incurred related expenses throughout fiscal 2019 as well.

Share-based compensation, a non-cash expense, was $182.8 million in fiscal 2019, up from $29.6 million in fiscal 2018 with $74.7 million accounted for in Q4, representing an increase from $11.9 million in Q4 fiscal 2018. The increase is primarily due to increased number of employees granted stock options as headcount increased to 3,200 employees from 1,000 year-over-year and accounting for the increase in fair value of stock options granted considering the 80% increase in the Company's share price that occurred over fiscal 2019. 

Balance Sheet Highlights

At March 31, 2019, the Company's cash and cash equivalents available and marketable securities totaled $4.5 billion, representing an increase of $4.2 billion from March 31, 2018. The increase is principally due to the investment of approximately $5 billion dollars by Constellation Brands, Inc. ("Constellation Brands") on November 1, 2018 and the issuance of convertible senior notes with an aggregate principal amount of $600 million. This increase was partially offset by $644 million invested in the expansion of our cannabis production, distribution, and physical retail store assets, $380 million invested in the acquisition of subsidiaries, and investments made in operations including those related to strengthening corporate capabilities, developing and executing recreational cannabis brand-related campaigns, developing and preparing to launch value-added cannabis products in fiscal 2020 and conducting research and development into cannabis-based medical therapies.

Inventory at March 31, 2019 amounted to $262.1 million (March 31, 2018 - $101.6 million), including $38 million in finished goods and $165.5 million of work-in-progress. In addition, biological assets amounted to $79 million, which together with inventory totaled $341.1 million. The Company has scaled production and increased automation capacity and expects to achieve a Q1 fiscal 2020 harvest of approximately 34,000 kilograms which is expected to be available for sale in all channels starting in Q2 fiscal 2020.

Fourth Quarter and Fiscal Year 2019 Adjusted EBITDA summary²

Adjusted EBITDA amounted to a loss of $257.0 million in fiscal 2019, as compared to a loss of $36.1 million in fiscal 2018. The year-over-year loss is largely reflective of the investments made in fiscal 2019 sales and marketing, and general and administration costs as described above.

Depreciation and amortization, a non-cash expense, increased $4.9 million from Q3 fiscal 2019, due to the depreciation expense recorded on assets put into operation during Q4 fiscal 2019. These assets largely related to production and warehouse equipment. 

Other expense, net, increased $368.3 million from Q3 2019, primarily related to non-cash fair value changes on our senior convertible notes which have been recorded through the statement of operations. These fair value changes are due to the increase in Canopy Growth's stock price from December 31, 2018 to March 31, 2019.

Events Subsequent to Fiscal Year 2019

• In April, Canopy Growth and Acreage announced that they entered into an agreement granting Canopy Growth the right to acquire 100% of Acreage's shares, once the production and sale of cannabis becomes federally permissible in the United States. On June 19, Acreage and Canopy Growth shareholders voted to approve the agreement. Initial implementation of the transaction is subject to approval by the Supreme Court of British Columbia and satisfaction of certain other closing conditions. Canopy Growth and Acreage expect the transaction to be implemented on or about June 27, 2019. Upon approval of certain modifications to the investor rights agreement with Constellation Brands, as well as terms of existing warrants, Canopy Growth will record a material, non-cash charge during the first quarter of fiscal year 2020. We expect this non-cash charge to have a materially negative impact on net income in the first quarter of fiscal 2020. 

The audited Consolidated Financial Statements and Management's Discussion and Analysis for the twelve months ended March 31, 2019 will be filed on SEDAR after financial markets close on Friday, June 21, 2019, and will be available at www.sedar.com. The basis of financial reporting in the Audited Condensed Consolidated Financial Statements and Management's Discussion and Analysis is in thousands of Canadian dollars, unless otherwise indicated.

Note 1: Gross margin (before the IFRS fair value impacts in cost of sales) is a key operational metric that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. This measure is calculated as net revenue less inventory production costs expensed to cost of sales and may be computed from the consolidated statements of operations presented within this news release. 

Note 2: Adjusted EBITDA is a non-IFRS financial measure that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. The Adjusted EBITDA reconciliation is presented within this news release and explained in Management's Discussion & Analysis under "Adjusted EBITDA (Non-IFRS Measure)", a copy of which will be filed on SEDAR after financial markets close on Friday, June 21, 2019.

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About Canopy Growth Corporation
Canopy Growth (TSX:WEED, NYSE:CGC) is a world-leading diversified cannabis, hemp and cannabis device company, offering distinct brands and curated cannabis varieties in dried, oil and Softgel capsule forms, as well as medical devices through the Company's subsidiary, Storz & Bickel GMbH & Co. KG. From product and process innovation to market execution, Canopy Growth is driven by a passion for leadership and a commitment to building a world-class cannabis company one product, site and country at a time. The Company has operations in over a dozen countries across five continents.

The Company's medical division, Spectrum Therapeutics is proudly dedicated to educating healthcare practitioners, conducting robust clinical research, and furthering the public's understanding of cannabis, and has devoted millions of dollars toward cutting edge, commercializable research and IP development. Spectrum Therapeutics sells a range of full-spectrum products using its colour-coded classification Spectrum system as well as single cannabinoid Dronabinol under the brand Bionorica Ethics.

The Company operates retail stores across Canada under its award-winning Tweed and Tokyo Smoke banners. Tweed is a globally recognized cannabis brand which has built a large and loyal following by focusing on quality products and meaningful customer relationships.

From our historic public listing on the Toronto Stock Exchange and New York Stock Exchange to our continued international expansion, pride in advancing shareholder value through leadership is engrained in all we do at Canopy Growth. Canopy Growth has established partnerships with leading sector names including cannabis icons Snoop Dogg and Seth Rogen, breeding legends DNA Genetics and Green House Seeds, and Fortune 500 alcohol leader Constellation Brands, to name but a few. Canopy Growth operates eleven licensed cannabis production sites with over 4.7 million square feet of production capacity, including over one million square feet of GMP certified production space. For more information visit www.canopygrowth.com.

Notice Regarding Forward Looking Statements
This news release contains "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995 and "forward-looking information" within the meaning of applicable Canadian securities legislation. Often, but not always, forward-looking statements and information can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "estimates", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. Forward-looking statements or information involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Canopy Growth or its subsidiaries to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements or information contained in this news release. Examples of such statements include statements with respect to the Company's expectations with respect to the Q1 fiscal 2020 harvest, the Company's expectation for additional finished inventory available for sale in Q2 fiscal 2020, bringing CBD products to market by the end of fiscal 2020, the accelerated market expansion for Acreage, the anticipated benefits of the rebranding of Spectrum Therapeutics on the Company's market share, the potential opportunity for cannabis products in Europe and the anticipated Increase in Canadian and Danish product availability, the anticipated increased sales from Storz & Bickel, the expectation that facilities will be fully operational in the months ahead, the launch of new CBD consumer products and brands in fiscal 2020, the timing for implementation of the transaction with Acreage. Risks, uncertainties and other factors involved with forward-looking information could cause actual events, results, performance, prospects and opportunities to differ materially from those expressed or implied by such forward-looking information, including changes in laws, regulations and guidelines; compliance with laws; international laws; operational, regulatory and other risks; execution of business strategy; management of growth; difficulty to forecast; reliance on licences; risks inherent in an agricultural business; contracts with provincial and territorial governments; constraints on marketing products; risks inherent in acquisitions and investments; expansion into foreign jurisdictions; governmental regulations; cannabis is a controlled substance in the United States; Farm Bill risks; assumptions as to the ability of the parties to receive, in a timely manner and on satisfactory terms, the necessary regulatory and court approvals for the transaction with Acreage; and such risks contained in the Company's management information circular of the Company dated May 17, 2019 and in the annual information form dated June 27, 2018 and filed with Canadian securities regulators and available on the Company's issuer profile on SEDAR at www.sedar.com. Readers are cautioned that the foregoing list of factors is not exhaustive. Although the Company believes that the assumptions and factors used in preparing the forward-looking information or forward-looking statements in this news release are reasonable, undue reliance should not be placed on such information and no assurance can be given that such events will occur in the disclosed time frames or at all. The forward-looking information and forward-looking statements included in this news release are made as of the date of this news release and the Company does not undertake an obligation to publicly update such forward-looking information or forward-looking information to reflect new information, subsequent events or otherwise unless required by applicable securities laws.