Marijuana company Canopy Growth (CGC 1.28%) is trading at multi-year lows. The cannabis producer has been struggling to find ways to grow and seems to be in an endless holding pattern, waiting for the U.S. to legalize pot so that it can execute on multiple deals it has pending, including one from 2019 involving the acquisition of multi-state operator Acreage Holdings.
There's no timetable as to when (or if) that deal may finally get across the finish line. And in the meantime, Canopy Growth still needs to strengthen its existing operations, which frankly don't look great right now. When the cannabis company released its latest quarterly results last week, there were two concerning numbers that stood out to me.
Image source: Getty Images.
Gross margin was deep in the red
For the first three months of 2022 (the company's Q4), Canopy Growth's net revenue totaled CA$111.8 million. That equates to a year-over-year decline of 25%. And as bad as that is for what's supposed to be a growth business, that pales in comparison to gross margin, which was a negative CA$159.2 million. While the company's cost of goods sold for its other consumer products (e.g. vaporizers, skincare products) was less than revenue for that segment, it was Canopy Growth's core cannabis business that was problematic:
Source: Company filings. Chart by author.
What's troubling is even after adjusting its gross margin for non-cash restructuring costs, the company's adjusted gross margin was still a negative 32% of revenue. In the prior-year period, it was a positive 14% of sales. It wasn't a great margin a year ago, and it's outright disastrous right now. If a company can't even generate a positive gross margin, it spells disaster for the rest of the financials -- operating expenses and overhead will sink the company's bottom line even further. For the period, the company reported a net loss of CA$578.6 million, compared to a CA$616.7 million loss in the prior-year quarter.
Impairment charges continue to pop up
Cannabis investors are likely familiar with impairment expenses by now. It's not unusual for a licensed producer to have to periodically write off inventory or goodwill. But although these types of expenses are supposed to be non-recurring, they continue showing up on Canopy Growth's financials.
Source: Company filings. Chart by author.
For the full year (period ending March 31), the company's asset impairment and restructuring costs were down by 31%. However, at CA$369.3 million, they still represent a sizable chunk of net revenue at 71%. While some investors may scoff at impairment since it's a non-cash item, it's something that shouldn't be ignored, as it could suggest problems with the company's operations (e.g. slow-moving inventory that hasn't been sold).
Is Canopy Growth worth taking a chance on despite these risks?
Canopy Growth has the potential for some significant growth once the U.S. legalizes marijuana. But I wouldn't count on that happening anytime soon. So unless you're an extremely patient investor who is willing to ride this roller coaster, Canopy Growth may not be worth investing in right now as its business looks full of problems.
