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Canopy Growth spent more on executive salaries and share-based compensation than its two biggest rivals combined

Bruce Linton, former co-CEO of Canopy Growth Corp., stands for a photograph in the Mother Room at the Canopy Growth Corp. facility in Smith Falls, Ontario, Canada, on Tuesday, Dec. 19, 2017. Chris Roussakis/Bloomberg via Getty Images

Canopy Growth was spending more on share-based compensation and executive salaries than its two biggest rivals combined in the lead-up to co-CEO Bruce Linton’s firing. 

An analysis by The Logic of Canopy and its main competitors’ financials since the beginning of 2016 shows a company far outspending its rivals on acquisitions, as well as research and development, and sales and marketing. 

The company’s revenues have also increased over the same period, though not nearly enough to offset the expenses, sending its net profits plunging 683 per cent, straining its stock price and ultimately forcing the exit of its charismatic co-founder.

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Talking Point

An analysis of Canopy’s financials and its two biggest competitors, Aurora and Cronos Group, shows a company outspending its rivals in areas like research and development, acquisitions, sales and marketing and executive pay. The gap between expenses and revenues at Canopy has grown, while its new U.S. investor, alcohol giant Constellation Brands, increases its influence on Canopy’s board and executive team.

Linton, who co-founded the Smiths Falls, Ont.-based company in 2013, led Canopy (formerly Tweed) to become the first cannabis company to list on Toronto and New York’s stock exchanges, as well as the first to reach a billion-dollar valuation. 

His ouster comes less than two weeks after the company—which has a market cap of over $18 billion—reported net losses of more than $323 million in its 2019 fourth quarter, just shy of its record loss of $330 million posted in the second quarter of fiscal 2019, before legalization.

The poor results have cost Constellation Brands—an American alcohol giant that paid $5 billion in November 2018 for a 37 per cent stake in Canopy—roughly $39 million in earnings in its most recent quarter. In response, Constellation CEO William Newlands told analysts on a call that he was “not pleased” with Canopy’s recent performance. 

At the time Constellation’s investment was announced, Linton said the $5 billion would be “rocket fuel” for Canopy’s expansion plans. The company reported a $74-million profit in the quarter following the deal, after seeing a spike in sales during the first months of recreational legalization.

However, slower-than-expected growth in the cannabis market beyond those early months’ activity created a widening gap between Canopy’s spending and its revenues, said Andrew Kessner, an analyst at stock brokerage firm William O’Neil & Co. “The international market, in particular, [has] gotten off to a slow start,” said Kessner. “That was really what’s been supporting these very high valuations that those companies trade at: the thesis that they would be able to move into the international markets, and then that’s where the money would really come from in future years.”

Canopy and Constellation did not reply to requests for comment.

Statistics Canada data shows that Canadians spent $307 million on recreational cannabis in the first three months after it became legal recreationally. That’s nowhere near on pace to meet the $4.34 billion in legal sales Deloitte had predicted for 2019. And, a recent report on the cannabis industry in Europe found that only three countries—Italy, Germany and the Netherlands—had “meaningful” medical cannabis sales in 2018, while other markets are still weighing laws for medical and recreational weed. 

Despite the headwinds, Canopy has continued to spend. 

In the last quarter of its fiscal 2019, Canopy’s net profit margin—used to measure how much of a company’s spending translates to profits—hit nearly -344 per cent, down from -238 per cent the same quarter in 2018 and -82 per cent the year before that. The lower the percentage, the further the company is from profitability. For Canopy, spending on sales and marketing and administrative costs like salaries fuelled much of its expenses. The company’s biggest cost, however, was its spending on share-based compensation—that is, employee compensation through stock and options. Canopy spent $93.2 million on such compensation in Q4 2019—compared to roughly $49.1 million the same quarter a year earlier—and more than what its competitors, Cronos and Aurora, spent combined in their most recent quarters.  

Kessner noted that the spending reflects a philosophy Linton has expressed to analysts and shareholders in the past: “[Linton] would tell you to look at Amazon, and that they were spending a huge amount of money for a long time and weren’t profitable,” he said. “And then suddenly, they became profitable, once they had really established themselves and established their infrastructure the way that they wanted it to be.”

Top competitors Aurora and Cronos Group are likewise spending heavily relative to their revenues, though less than Canopy. Aurora’s net profit margin was almost -246 per cent in its last quarter and Cronos Group’s was 6,610 per cent, up from -207 per cent in its previous quarter.

“None of them are consistently profitable, and I wouldn’t expect them to be for at least a year,” said Kessner. “But the other companies, they’re not just running around and doing these multi-hundred million-dollar acquisitions.”

Kessner noted that Linton’s removal from the company highlights a conflict between two camps of stakeholders: one that backs Linton’s philosophy of spend big now and profit later, and a more conservative group that’s eager to see a path to profitability. “I think people thought [of Linton] as sort of like a Steve Jobs, Elon Musk [or] Jeff Bezos kind of guy for cannabis,” said Kessner.

“On the other hand, you have investors who are more used to looking at mature companies and really want to see financial discipline on the cost side,” he said. “[They are] growing impatient, and it seems like Constellation management ultimately lost faith in Canopy’s ability to meet the targets that they expected the company would when they made the investment.”

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It also underscores the control Canopy has relinquished through its investment deal with Constellation. The 74-year-old beverage company holds four of the six seats on Canopy’s board. Those executives have consent rights on any sale of Canopy, according to company filings. And, Constellation’s former CFO, Mike Lee, took over the same role at Canopy in June. Linton’s co-CEO Mark Zekulin will serve as sole CEO until a replacement is found, after which he intends to leave the company. 

Canopy’s stock initially dipped on the news of Linton’s departure, but by close on Wednesday, it was up 2.45 per cent and 1.96 per cent on the New York and Toronto stock exchanges, respectively. “Some of the investors who saw that long-term visionary maybe have gotten out of the stock, and some of those who were on the sidelines looking for more financial discipline and a more clear picture in the near term have rotated into the stock,” said Kessner. “I think you’re going to see a shift in the investor base, as well.”