A trio of Canadian cannabis companies reported quarterly profits over the past two weeks and all produced net income, but in each case this was due to non-cash gains that indicate they are not yet profitable from sustainable way.
Two of the three also missed consensus revenue estimates as the Canadian market continues to feel the impact of the pandemic on brick-and-mortar stores and competition and overcapacity create pricing pressures.
Nearly three years after adult use was fully legalized in Canada, the numbers remind investors that the industry still has a long way to go before it starts making money.
“Caution should be exercised when looking at Canadian cannabis companies versus their US counterparts which are highly profitable and continue to grow,” said Korey Bauer, chief investment officer and portfolio manager of the Cannabis Growth Fund of Foothill Capital Management. “Valuations look much better in the US at these current levels.”
Tilray Inc. TLRY, -0.35% TLRY, +0.11% rolled the ball with its fiscal fourth quarter results last week, which showed net income of $33.5 million, or 18 cents per share, after a loss of $84.3 million, or 39 cents per share, in the period of the year former. The profit was driven by $121.5 million of net non-operating income which was recognized due to an unrealized gain on the company’s convertible debt. This is due to changes in stock and bond prices.
Revenue rose to $142.2 million from $113.5 million a year ago, lagging the FactSet consensus of $199 million, though at least one analyst, Cantor Fitzgerald’s Pablo Zuanic , said before publication that the consensus figures appeared to offer an “apples to oranges” comparison. . The numbers were based on Aphria’s 13 weeks of numbers before the merger and Tilray’s four weeks after the merger. The two companies completed their merger in May, creating the the world’s largest cannabis company by revenue.
This was followed on Friday by Canopy Growth Corp. GCC, +0.05% WEEDS, +0.79%, the former star of the industry thanks to the C$5 billion investment it secured from Constellation Brands Inc. STZ, -0.32% in 2018, much of which has already been spent.
Canopy posted net income of C$392.4 million ($312.4 million), or 84 cents per share, for the quarter to June 30, after a loss of C$108.5 million, or 30 cents per share, during the prior year period. This figure is attributable to other income of C$581 million, mainly due to non-cash changes in fair value of C$601 million.
Like Tilray, Canopy’s income below estimates, at C$136 million, up 23% from the prior year period, but below the FactSet consensus of C$151 million.
Canopy CEO David Klein said the company is still targeting positive adjusted EBITDA — earnings before interest, taxes, depreciation and amortization — by the end of fiscal year 2022, but that metric doesn’t has little to do with actual profit and is an adjustment of an already adjusted number.
Canopy defines Adjusted EBITDA as “reported net profit (loss), adjusted to exclude income tax recovery (expense); other income (expenses), net; loss on investments using the equity method; share-based compensation expense; depreciation and amortization expenses; impairment of assets and restructuring costs; restructuring costs recognized in cost of goods sold; and charges related to the transfer of increased inventory in business combinations, and further adjusted to remove acquisition-related costs.
Cantor Fitzgerald analyst Pablo Zuanic noted that Canopy’s net cash has shrunk to “just” C$961 million. “In addition to a strong balance sheet and the backing of Constellation Brands, Canopy Growth has yet to prove it has the skills and capabilities to excel in the United States and abroad. Given the mixed results in Canada so far, it’s not yet clear to us. he wrote in a note to clients. Cantor considers the Canopy action to be neutral.
Cronos Group Inc. CRON, -1.35% CRON, -0.86% posted net income of $47.1 million, or 15 cents per share, after a loss of $106.9 million, or 31 cents per share, a year ago. This figure is attributable to other income of $117.5 million from a gain of $115.2 million on the revaluation of derivative liabilities.
Cronos recorded revenue of $15.6 million, beating the FactSet consensus of $14.9 million.
“Investors need to do their due diligence and always exercise caution in emerging sectors,” Foothill’s Bauer said. “The long term looks extremely promising for the cannabis industry and we believe it will grow into a $50+ billion global market over the next 5 years and potentially $100+ billion by the end of the decade. “
Tilray shares were flat on Friday but have gained 75% year-to-date. The canopy was slightly lower and is down 22% since the start of the year. Cronos fell 1.5% and is up 5% year-to-date.
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