Canopy Growth (CGC 5.65%) reported its first-quarter numbers earlier this month. And while investors were likely taken aback by the impressive profit the company posted during the period, which totaled 390 million Canadian dollars, they likely knew it was too good to be true. After all, this is a company that has struggled with consistency and sales growth in the past. Breakeven remains an elusive target for the business.
Although the Canadian pot producer is certainly making strides in transforming its business into a leaner operation, there are still many problems that investors simply shouldn't overlook. Below are just three of the most concerning items from the company's Q1 results.
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1. Quarterly sales were down sequentially
For the period ending June 30, Canopy Growth's net revenue totaled CA$136.2 million, for a year-over-year increase of 23%. However, when comparing those numbers to the previous three months, when the top line was CA$148.4 million, that's a decline of more than 8%. It's a troubling figure because the Canadian pot market has been growing in size, hitting a record of CA$313.3 million this past May. It was also the third month in a row that sales were up nationwide.
But that hasn't translated into strong sales numbers for the company. Canopy Growth's revenue from the Canadian recreational market was just CA$60 million in Q1, down from CA$61.1 million in the fourth quarter. Even beverage sales didn't show much movement. In its beverages, edibles, and topicals segment, sales from both recreational and medical markets topped CA$13.3 million this past quarter, versus CA$13.5 million in Q4.
Without some strong sales growth, it's going to be difficult for the company to hit breakeven, especially as it continues to add more products to its portfolio. The company boasts a "robust innovation pipeline" that calls for more than 100 products to launch before the end of the current fiscal year.
2. Impairment charges increased
A big problem with adding too many products is that slow-moving ones can result in impairment charges. And that nasty phrase popped up yet again on the company's financials in Q1. Under its asset impairment and restructuring costs, Canopy Growth incurred CA$89.2 million worth of expenses -- seven times the CA$12.8 million it reported a year earlier. It's also higher than Q4, when those expenses totaled CA$74.8 million for the period ending March 31.
While the company can dismiss that number, claiming it's due to changes in the business -- or, as the line suggests, restructuring -- that doesn't mean investors should do the same. It's still an expense that will weigh down the bottom line, even if it is conveniently removed from the company's adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) calculation. It's important because recurring impairment charges suggest the business isn't being run efficiently. And that can make it difficult to generate a profit and generate positive cash flow, which was yet another problem in Q1.
3. Cash burn soared
An area I never ignore on a cannabis company's financials is its cash burn. It's not as subjective a calculation as adjusted EBITDA, and it can help investors gauge the health of a company's operations. Unfortunately, the picture wasn't pretty for Canopy Growth in Q1 -- the business used up CA$165.8 million in cash during the period in its day-to-day operating activities alone. A year ago, that number was just CA$118.5 million.
The statement of cash flow makes it clear how the company turned a profit. Canopy Growth recorded CA$658.2 million in non-cash fair value adjustments, which propped up its bottom line (adjusted EBITDA was a negative CA$63.6 million). Canopy Growth investors may not be too concerned about the company's cash, given that as of June 30 it still reported cash and cash equivalents of CA$559.8 million (plus CA$1.5 billion in short-term investments). But that stockpile won't last forever; if the company continues its rate of cash burn, it might need to dip into its investments (or issue more shares) within 12 months.
Canopy Growth still isn't a buy
It has been a sobering year for Canopy Growth so far, and the stock has fallen more than 26% in value year to date -- even as the Horizons Marijuana Life Sciences ETF is up 12%. For all the potential the company believes it possesses, including its goal of being in the U.S. market within a year, it has continued to underperform. The stock trades at an egregious multiple of 12 times its future revenue (rivals Tilray and Aurora Cannabis trade at multiples of just 7 and 5, respectively) and remains vastly overvalued. These latest results do little to change that, which is why, despite its struggles this year, it wouldn't be surprising to see the pot stock continue to fall further in the weeks and months ahead.
