Valued at $12.6 billion in market capitalization, Smiths Falls, Ontario-based Canopy Growth (CGC) is by far the largest Canada-based, U.S.-listed legal marijuana company. As such, it garners a lot of the attention Wall Street gives to the cannabis industry.
As such, it’s no great surprise that when Canopy appointed a new chief financial officer in June, the marijuana industry specialists at Jefferies wanted to meet with him. This week they got their chance.
In a note published Thursday, Jefferies analyst Owen Bennett recapped his findings from a morning meeting with Mr. Mike Lee of Canopy Growth. Three topics in particular stood out.
Closing the GAAP
Firstly, as close followers of Canopy stock will be aware, despite being listed on the New York Stock Exchange, this company does not currently file 10-Q, 10-K, and similar “GAAP” (generally accepted accounting principles) reports with the SEC. Instead, the company reports its financials via “6-K” filings, a form commonly used by foreign issuers of securities also listed in the U.S.
That could change, however, as Canopy hones its focus on the U.S. market. As Lee apparently told Bennett, Canopy’s business is “getting much more complex” as the company grows, and Lee is feeling a need to tighten up the company’s reporting, closing Canopy’s budgets every month for example, rather than just once every three months. The company also intends to begin “moving to US GAAP” as its accounting standard, saying its financials will look “cleaner” that way.
Planting seeds in the US
Speaking of the U.S., Canopy revealed that it has already begun planting its first crop of hemp in the U.S. — “going into the ground now.” 65 Canopy employees are employed in the U.S. business already, and the company is “moving as quick as possible” to grow this business.
As for how fast Canopy intends to grow, Lee suggested that fiscal Q1 2020 sales, due out perhaps two months from now, will show no “significant” change from the fiscal Q4 2019 sales of $94.1 million that were reported three weeks ago. The 16% gross margin that Canopy posted in Q4, too, will probably not change much in Q1 — which could cause significant disappointment. One year ago, Canopy was grossing as much as 34% from its product! (Still, Canopy is sticking with its prediction that gross margins will improve as the year progresses, perhaps touching 40% in fiscal Q4 2020).
On the other hand — and this is perhaps the single most important revelation from Jefferies’ meeting with Canopy’s new CFO — Canopy is no longer promising to hit an annual rate of CAD$1 billion in marijuana sales this year. As Bennett noted, “the company did appear to try to distance themselves from the CAD 1bn sales run rate by Q4 this year they have previously communicated.”
Again, this probably isn’t going to win Canopy any fans in the investor community. Bennett, for his part, is maintaining his “hold” rating on Canopy stock, and his price target of CAD$77 per share (USD $59 and change).
To read more on the nitty gritty of what’s going on in the rising cannabis industry, click here.