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Do Canopy Growth Corp.’s (TSX:WEED) Latest Quarterly Results Show Positive Promise?

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Canopy Growth Corp. (TSX:WEED)(NYSE:CGC) released its latest quarterly results on Tuesday after market, and there are some interesting and concerning highlights from the latest report that I wish to briefly discuss today.

Let’s quickly take a dive.

Improved revenue growth

Canopy’s latest quarterly revenue of $25.9 million is 63% higher than comparable quarterly sales last year, demonstrating desirable growth. The 14% sequential growth over the previous quarter was a satisfactory achievement compared to the 5% sequential growth recorded during the quarter ended March 31, 2018.

The company managed to realize an ever-improving average price per gram of cannabis of $8.94 for the quarter, which is much better than the $8.43 realized in the prior quarter and 12% better than the $7.96 for the comparable quarter last year thanks to the growing contribution from high-priced cannabis oils and soft gels, as well as the surprise Germany revenue performance.

Surprise Germany revenue consistency

Canopy’s Germany subsidiary, Spektrum Cannabis, continues to record impressive sales performance in the new growth market. Sales to Germany grew more than 44% quarter-on-quarter due to strong volume growth and a further price improvements, reinforcing a strong 124% sequential growth during the previous quarter.

Improved cannabis oil and gel capsules sales performance

There was a welcome gradual increase in cannabis oils and gel capsules’ contribution to total sales from 23% of revenue in a previous quarter to 26% of sales during the quarter to June 2018. This improves realizable prices per gram and could be a critical margin improvement component in the recreational market.

Oil sales, including gel capsules, accounted for only 19% of product revenue in the comparable quarter ended June 30, 2017.

Fantastic inventory growth

Canopy’s inventory growth rate picked up significantly during the quarter. Dried cannabis inventory increased 25.4% to 19,721 kilograms. The biggest and most impressive ramp-up in inventory production was in high-priced oils and soft gels categories, where the company boosted cannabis oil inventory by 113% to 14,895 litres, and soft gel capsules inventory jumped 196% to 1,055 kilo grams during the quarter.

This is commendable execution that places the company in a much better position to adequately meet provincial supply commitments, continue to meet medical patients’ requirements while preparing the leading cannabis producer to better meet any product demand surges – just in case analysts are underestimating the growth potential of recreational and emerging export markets.

New cost metric?

No new cost metric has been introduced yet. I quickly scanned the earnings release searching for a new cost measure to replace the dropped production cost per gram metric, but I couldn’t find any. Investors may suspect that management suspended this cost measure to avoid the embarrassment from a ballooning per gram cost as it worked on populating new grow facilities with young crop, with severe consequences on gross margins.

Operating cost containment

The net loss after tax for the quarter, at $90.98 million, was nearly double the total net loss for the entire prior financial year of $54.13 million. Operating expenses grew nearly 25%, but the adjusted EBITDA was almost in line with last quarter performance.

The operating loss at $30.7 million was not so bad, but the bottom line was violently disturbed by a single “other expense” line that introduced a net expense of $60.4 million, which was mainly composed of convertible debt issuance costs related to the recent oversubscribed debenture offering and fair value changes in financial assets as well as losses on derivatives.

That said, the BC Tweet derivative liabilities are set to reverse, as the joint venture was subsequently fully acquired by Canopy in July.

Investor takeaway

The latest news that Constellation Brands intends to invest over $5 billion in Canopy Growth at a 51% premium to the stock’s closing price on Tuesday is a very bullish news update from the biggest institutional investor, showing further validation for the marijuana firm’s business model.

The recent sharp increase in net losses is concerning, but rising operating expenses should be expected as the company prepares for adult use market sales set to debut in October this year.

The company’s accelerated plans through the Hiku Brands Company Ltd. acquisition to capture more direct retail sales space in all provinces that allow private retail store establishments could prove crucial in defending market share from an aggressive competitor Aurora Cannabis Inc. that’s leveraging on its investee Alcanna Inc.’s prowess in managing retail stores for controlled substances.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Brian Paradza has no position in any of the stocks mentioned.

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