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Canopy Growth Corp.’s quarterly revenue fell to $90.5-million, down 4 per cent from the prior quarter and well below analyst expectations.

The company also reported a quarterly net loss of $1.28-billion, or $3.70 per share, on Wednesday evening. Most of this was attributed to a one-time charge related to revaluing warrants held by Constellation Brands Inc., which holds a major stake in the company. The company’s operating loss was $123.1-million, an improvement from the $174.5-million operating loss in the preceding quarter.

Shares of the Smith Falls, Ont.-based licensed cannabis producer were down 11 per cent in after-hours trading.

The company’s net revenue in the three months to June 30 fell short of the analyst consensus estimate of around $111-million. Sales were also down from the previous quarter, when Canopy posted net revenue $94.1-million.

Canopy sold $74.1-million worth of cannabis in Canada in the quarter, mostly into the recreational market, and $10.5-million worth of cannabis internationally.

The company’s gross margin on sales was 15 per cent, which is similar to the preceding quarter, but down significantly from the 43 per cent gross margin it posted in the same quarter a year ago.

“The lower gross margin percentage in Q1 2020 was primarily attributable to the impact of operating costs of $16.2-million relating to facilities not yet cultivating cannabis or producing cannabis-related products, or which had under-utilized capacity that resulted in adjustments related to the net realizable value of inventory,” the company said.

Canaccord Genuity Corp. analyst Matt Bottomley said that the $1.17-billion “loss on extinguishment of warrants,” is the result of an accounting calculation, related how far the price of Canopy’s stock is from the exercise price of warrants owned by Constellation Brands.

“It’s a non-cash charge, so it’s really irrelevant from the underlying business. It’s basically an accounting treatment for the fair value change based on how Canopy’s stock traded, relative to what Constellation would buy it back for if it came into the money [with its warrants],” said Mr. Bottomley.

Still, Canopy’s quarter fell short of expectations, said Mr. Bottomley.

“They did see a decline in their net cannabis sales last quarter, so I thought they’d make a new high, but … they’re still below what they did two quarters ago [in revenue], which I find very surprising because there is more retail stores that have opened and their harvest is certainly increasing quarter over quarter," Mr. Bottomley said.

In early July, Canopy fired co-founder and former chief executive Bruce Linton – one of the cannabis industry’s most prominent executives who charted an aggressive course of acquisitions. Mark Zekulin, formerly co-CEO with Mr. Linton, was appointed interim-CEO.

The lower-than-expected sales occurred despite the company selling 10,549 kilogram equivalents of cannabis, an increase of 13 per cent from the prior quarter.

This was partly due to an $6.4-million adjustment Canopy made to net revenues to account for the expectation that some of its oil products will be returned unsold.

“We believe that the risk of an over-supply of certain oil and softgel formats may exist in certain markets due, in part, to incomplete retail platforms in most provinces,” the company said.

“We had previously flagged the buildup of supply at provinces impacting potential follow-on orders. With today’s release, which cited the potential for product returns, we see the implications of a build as ultimately worse than we expected. This will likely take much of the Street off guard,” said Royal Bank analyst Douglas Miehm in a note.

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