News

Big Weed is struggling to break even

Canadian LPs are spending millions to boost production, hoping it will pay off
August 14, 2017, 2:56pm

Canada’s largest weed producer has no problem bringing in a hefty stream of revenue each fiscal quarter but it is still struggling to consistently chart a profit.

In its latest earnings report, Canopy Growth Corporation failed to break even, posting a net loss of $4.4 million in the first quarter of the 2017 fiscal year. It did however, see a 127 percent increase in revenue over the three month period of April 1 to June 30, 2017.

“Launching the Tweed Main Street online store, which required moving individual Tweed, Mettrum and Bedrocan e-commerce sites offline, reduced sales activity over a period of approximately 10 business days in April,” said CEO Bruce Linton in a press release, alluding to the fact that Canopy could have in fact, turned in a larger revenue last quarter.

But the fact of the matter is that some of the biggest weed producers in Canada are scrambling to break even.

“Based on my old numbers, I think Canopy will only start charting consistent profit in two years from now… June 2019,” Beacon Securities analyst Vahan Ajamian told VICE Money.

Vancouver-based Aurora Cannabis, another large player in Canada’s booming marijuana sector most recently reported a net income of $2.53 million in the final quarter of the 2016/2017 fiscal year. But in reality, that was a bit of an accounting fluke.

Part of its revenue included the “gain on changes in fair value of biological assets” — accounting rules require the company to account for an increase in the value of plants used in production, which tends to keep fluctuating as the plant grows, degenerates or reproduces.

“Had the company not enjoyed this accounting adjustment, it would have reported a large loss,” according to Alan Brochstein, prominent weed investor and founder of NewCannabisVentures.com.

Many weed industry observers are predicting that there will be a significant supply crunch once weed becomes officially legal in Canada next July — Big Weed has been investing a large amount of money in boosting marijuana production, in anticipation of next July’s surge in demand for recreational cannabis.

Canadian weed producers are also investing heavily overseas to take advantage of the first-mover advantage they seem to have on a global scale, since Canada is one of only two countries that would have formally legalized weed for recreational consumption come July 2018.

Those factors, to some extent explains the uphill battle to attain profits.

Aurora Cannabis began construction of its 800,000 square-foot Aurora Sky production facility in Edmonton last year, a project that is said to be costing the company a remarkable $110 million.

Canopy Growth has been investing heavily in a new oil extraction system which they hope will speed up the production of their soft gel cannabis oil capsules which went on sale this summer.

In its latest earnings report, the company claims that its prior production-boosting investments in its Bowmanville and Smiths Falls facilities has paid off — flowering capacity has increased by 200 percent and 33 percent respectively.

“Look, they are making investments in branding, sales, marketing and new facilities because they want to become big players in a big market, instead of being a dominant player in a small market,” Ajamian said.

“They are on the ground in Chile, exporting to Germany. They are investing in the long-game.”

But some companies are choosing a different path to profitability.

Aphria Inc., remains one of the only licensed cannabis producers in Canada that has posted profits in five consecutive quarters — the company claims its manufacturing costs per gram are some of the lowest in the industry.

Aphria, it seems, is focused on being a low-cost producer, says one analyst who declined to be named. “I think they’re gunning to be the Budweiser of weed, so their production costs are going to be much lower in the short-run,” he said.

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