marijuana company canopy growth (CCG -5.23%) is trading at multi-year lows. The cannabis producer is struggling to find ways to grow and appears to be in an endless waiting pattern, waiting for the US to legalize pot so it can execute several pending deals, including one from 2019 involving the acquisition of multi-state operator Area holdings.
There’s no timeline as to when (or if) this deal might finally cross the finish line. And in the meantime, Canopy Growth still needs to bolster its existing operations, which frankly doesn’t look great right now. When the cannabis company released its latest quarterly results last week, two worrying numbers stood out to me.
Gross margin was deep in the red
For the first three months of 2022 (the company’s fourth quarter), Canopy Growth’s net revenues totaled C$111.8 million. This equates to a 25% year-over-year decline. And as bad as that may be for what is supposed to be a growing business, it pales in comparison to the gross margin, which was negative C$159.2 million. While the company’s cost of goods sold for its other consumer products (e.g. vaporizers, skin care products) was lower than that segment’s revenues, it was the company’s primary cannabis business. Canopy Growth that was problematic:
What is troubling is that even after adjusting its gross margin for non-cash restructuring costs, the company adjusted gross margin was still negative at 32% of revenue. In the prior year period, this was a positive turnover of 14%. It wasn’t a big margin a year ago, and it’s downright disastrous right now. If a company can’t even generate a positive gross margin, it spells disaster for the rest of the finances – operating expenses and overheads will further depress the company’s bottom line. For the period, the company posted a net loss of C$578.6 million, compared to a loss of C$616.7 million in the prior year quarter.
Impairment accusations keep popping up
Cannabis investors are probably already familiar with depreciation expenses. It is not uncommon for a licensed producer to periodically have to deduct inventory or goodwill. But while these types of expenses are meant to be one-time, they continue to show up in Canopy Growth’s financial statements.
For the full year (period ending March 31), the company’s asset impairment and restructuring costs decreased by 31%. However, at C$369.3 million, they still make up a significant portion of net revenue at 71%. Although some investors may scoff at depreciation since it is a non-cash item, it is something that should not be ignored, as it could suggest problems with the operations of the business (eg. example, slow-moving inventory that has not been sold).
Is Canopy Growth worth taking a chance despite these risks?
Canopy Growth has the potential for significant growth once the United States legalizes marijuana. But I wouldn’t expect that to happen anytime soon. So unless you’re an extremely patient investor ready to ride that roller coaster, Canopy Growth may not be worth investing in right now because its business seems fraught with trouble.