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Canopy Growth (WEED.T) shows signs of gangrenous rot and needs amputation

In the esteemed sport of pugilism, as unseemly as it might sound, prizefights have been won and lost on the basis of sheer size alone.

Canopy Growth (WEED.T) towers above even the largest competitors in its weight class, a veritable heavyweight in every sense of the word.

But even large men can be toppled, and though Canopy has yet to meet its Jack Dempsey, a peek into the company’s latest financial documents can only evoke a picture of a lumbering creature collapsing under the brunt of its own bulk.

The question one must ask at this point in the beast’s growth cycle can only be, ‘is Canopy too big to succeed?’

The company has a warchest of $1.1 billion, a considerable sum until one remembers Canopy was given $5 billion by Constellation Brands (STZ.NYSE) one year ago.

In the last six months, Canopy’s cash position has decreased by nearly $1.4 billion and the market has not been kind.WEED.T, Canopy-growth, cannabis, inventory, burn rateSince releasing their financial documents yesterday, the company’s stock has dropped over $4, coming to rest at $20.29 at end of day Friday.

Inside each of these quarterly reports, buried between sans-serif type and the rich linguistics of bean counters, is a story.

Canopy’s story is one of a company too hell-bent on maintaining its status as the largest player in the cannabis sector. In a twist of irony, it is this obsession with size at all costs which has cost the company its substance.

Revenue for the quarter totaled just over $85 million, a quarter-over-quarter decrease of nearly $20 million.

On the conference call, I am told that management blamed Ontario for slow store rollouts.

This may be true, but the following is damning nonetheless: Canopy transferred $300 million of biological assets to inventory upon harvest during the six months ended September 30 while only recording $189,012 over the same period.

Canopy is harvesting more than it can sell. But that isn’t stopping the company from spending prodigiously.

Against revenue of $85 million, the company spent $60 million on sales and marketing, barely recouping their investment.

The company also lost out on $109 million due to the extinguishment of warrants issued to Constellation Brands.

Extinguishment of Warrants. The parties hereto acknowledge that, although the original Warrants issued to the Holder will not be physically delivered to the Company at the Closing, upon the consummation of the Exchange, the Warrants shall be cancelled and shall be null and void, and any and all rights arising thereunder shall be extinguished and the Company shall no longer be required to reserve shares of Common Stock for issuance upon the exercise of the Warrants.

Canopy also took a restructuring charge of $32.7 million for “returns, return provisions, and pricing allowances primarily related to its softgel & oil portfolio.”

With a cash burn of $14 million in six months, we may be seeing the end of Canopy before the end of fiscal year 2020.

Short ’em, boys. Broker willing.

 

–Mr. Millionaire

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