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A worker pushes a cart of marijuana plants at the Canopy Growth Corp. facility in Smiths Falls, Ont. on Jan. 4, 2018.Chris Wattie

Cannabis leader Canopy Growth Corp. is still at the early stage when profits are elusive, despite an exploding share price that has made the company worth more than $8-billion.

So while there’s a chance that the typical Street game of beat-or-meet earnings expectations will play out Wednesday morning when the company releases fourth-quarter and full-year earnings, investors will be well-advised to focus on Canopy’s exploding share count as well.

The issuance of new shares can bring much-needed capital to a company, or help compensate employees without using precious cash. But each new share gives existing stockholders a little bit less of the pie, and, all things equal, reduces earnings per share. The hope is that the benefits of the new shares outweigh this “dilutive” effect.

On Tuesday, Canopy filed a proxy circular for a special shareholders’ meeting July 30. (The company’s regular annual meeting is slated for September.) The good news is that the company seeks authorization to pursue a stock split – perhaps 2-for-1 or 3-for-1 – sometime in the future. Perhaps less exciting is that the company also wants to expand the number of shares available for its employee compensation plans.

Canopy, which has 201 million shares outstanding, has already promised another 17.2 million shares to employees for its stock plans, leaving just 2.7 million shares to go under its current, shareholder-approved program. The company is asking to amend the plan to reserve another 13.1 million shares, with a goal of keeping the total stock plan below 15 per cent of the company’s shares. (A 2017 study by compensation consultant FW Cook of 300 U.S. companies found the median “overhang,” the potential dilution from outstanding equity awards, of 3.4 per cent.)

Chief executive Bruce Linton said Tuesday afternoon that he wants Canopy’s compensation plans to make the company “feel like a tech company – doubling every year is not enough. I use options to create alignment so everyone feels like an owner.”

Indeed, in its proxy circular, Canopy explains to shareholders that equity-based compensation allows it to lower its cash compensation costs. And, throughout its history, “with limited access to debt financing, Canopy Growth is largely dependent upon equity financing to provide the capital necessary to grow its business.”

While shareholders must still approve the changes, there are more potential share issuances lurking. While many are aware international liquor giant Constellation Brands bought a stake equal to 9.9 per cent of Canopy’s shares last October, it’s less known that Constellation also got warrants to purchase another 18.9 million Canopy shares, potential dilution of an additional 9.9 per cent.

That block of Constellation warrants, combined with the outstanding stock awards, means the company has issued claims on 40.6 million, so-far-unissued new shares – nearly 20 per cent more than what’s outstanding today. The stock-plan amendment to be considered July 30 would push that above 25 per cent.

And those figures don’t include shares underlying a big new debt issue the company closed this week. Canopy sold $600-million worth of convertible debentures, which allow the holders to convert their bonds to Canopy common stock at the price of $48.18 a share. Canopy closed at $41.08 Tuesday.

That means Canopy could issue another 12.4 million shares to the noteholders, who will receive 4.25 per cent annual interest as they watch Canopy’s share price. The deal was oversubscribed, given initial plans for a $460-million offering, and Canopy’s cost of funds came out lower than analyst Keith Carpenter of AltaCorp Capital expected, given his forecast of 7 per cent interest rate.

Mr. Linton says the notes have a feature that allows them to be settled in three years with the stock-conversion rights removed.

Enough about 2023: What about Wednesday’s report? Analysts expect, on average, a loss of 3 cents a share on just under $25-million in revenue. With Canopy’s quarterly EPS coming in at small losses each quarter, each penny deviation yields big percentage beats, so it may be helpful to look at the top line – and Canopy has missed revenue expectations in each of the past six quarters, with double-digit misses in four of them.

That’s led to some meaningful post-earnings drops – in four of those past six quarters, Canopy shares have fallen at least 5 per cent in the seven trading days after an earnings release.

The Canadian earnings calendar is otherwise light, with Corus Entertainment Inc. the only other member of the S&P/TSX Composite Index scheduled to report. Corus, which hovers around 52-week lows, is expected to report, on average, EPS of 36 cents on revenue of just more than $452-million.

While the company has posted big earnings beats in two of the past three quarters, including its most recent report, it missed EPS expectations in the five prior quarters, according to Thomson Reuters Eikon. And that one miss in the past three was a blow to shareholders: The stock fell 26 per cent over the seven trading days after the report on the November, 2017, quarter.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 24/05/24 10:28am EDT.

SymbolName% changeLast
WEED-T
Canopy Growth Corp
-0.16%12.51
STZ-N
Constellation Brands Inc
+1.67%249.22

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