Canopy Growth Corporation — Q3 FY2023 Form 10-Q
Reporting period: Three and nine months ended December 31, 2022. The interim financial statements are unaudited and prepared under U.S. GAAP. Unless otherwise noted, amounts are Canadian dollars; financial statement figures are in thousands.
Financial performance and liquidity
| Metric | Q3 FY2023 | Comparable period | Change / context |
|---|---|---|---|
| Net revenue | $101.2 million | $141.0 million | Down 28% |
| Gross margin | $(2.4) million; (2%) | $10.1 million; 7% | Down 900 basis points in margin rate |
| Operating loss | $(153.8) million | $(150.0) million | Loss widened modestly |
| Net loss | $(266.7) million | $(115.5) million | Loss widened; includes substantial fair-value and other non-cash effects |
| Adjusted EBITDA loss | $(87.5) million | $(67.4) million | Non-GAAP; loss widened |
- Nine-month results: Net revenue was $329.2 million, down 19%; gross margin was approximately break-even versus a $33.8 million gross loss a year earlier. Net loss was $2.6 billion, versus net income of $258.1 million, primarily reflecting $1.7 billion of goodwill impairment and a sharp reversal in other income/expense. Adjusted EBITDA loss improved to $240.4 million from $293.7 million.
- Cash and cash flow: At December 31, cash and cash equivalents were $598.1 million and short-term investments were $191.1 million, down from $776.0 million and $595.7 million at March 31, 2022. For the nine months, operating cash outflow was $417.8 million; investing provided $342.1 million, largely reflecting short-term investment redemptions; financing used $145.9 million. Free cash flow outflow was $424.0 million (non-GAAP).
- Debt and liquidity: Total debt carrying value was $1.206 billion, including $455.5 million classified as current; total debt was $1.501 billion at March 31. The 4.25% senior notes mature July 15, 2023, with $337.4 million principal outstanding at quarter-end. The secured credit facility carries a floating rate of LIBOR plus 8.50% and matures in 2026. Management stated it believes available liquidity is adequate for at least 12 months, while noting continued operating losses and the need to manage funding requirements.
- Balance sheet: Total assets were $3.020 billion, down from $5.615 billion at March 31, substantially reflecting the goodwill impairment. Shareholders’ equity was $1.428 billion. Common shares outstanding were 494.9 million at December 31; 494.9 million were reported as issued and outstanding on February 7, 2023.
Material changes versus the prior comparable period
- Quarterly revenue declines reflected Canadian adult-use competition and price compression, divestiture of C3, a smaller U.S. CBD business, and softer Storz & Bickel and This Works sales. Canadian medical cannabis revenue increased.
- In Q3, Canada cannabis gross margin remained negative but improved to (11%) from (22%). Rest-of-world cannabis gross margin turned negative, and BioSteel swung to a $7.7 million gross loss from a $1.4 million gross profit. Storz & Bickel and This Works remained gross-margin positive.
- For the nine months, BioSteel revenue rose 106% to $64.2 million, but its gross margin remained slightly negative. Storz & Bickel revenue fell 23%; This Works fell 21%.
- Q3 other expense was $113.3 million, versus $34.3 million of other income a year earlier, driven mainly by fair-value losses on investments and financial instruments and higher interest expense. These items make reported earnings volatile and are not equivalent to operating cash flows.
- Canopy Growth recorded $1.794 billion of asset impairment and restructuring costs for the nine months, including $1.725 billion of goodwill impairment in the first quarter. Goodwill fell from $1.867 billion at March 31 to $142.1 million at December 31.
- The company completed divestitures of its Canadian retail stores and Tokyo Smoke-related intellectual property in Q3. It also acquired a BioSteel manufacturing facility in Virginia for stated consideration of $26.4 million.
Outlook, management commentary and key risks
- Canadian restructuring announced after quarter-end: On February 9, 2023, the company announced an asset-light operating plan, including exiting flower cultivation at its Smiths Falls facility, ceasing flower sourcing from Mirabel, consolidating cultivation in Kincardine and Kelowna, moving toward third-party sourcing for several product formats, and reducing headcount. It intends to close the Hershey Drive facility and is discussing restructuring the Mirabel joint venture.
- The company estimated the restructuring would result in CAD$425–$525 million of pre-tax charges: approximately CAD$400–$485 million of non-cash impairments and CAD$25–$40 million of cash charges, principally severance and shutdown costs. These are preliminary estimates and may differ materially.
- Canopy USA: Planned acquisitions involving Acreage, Wana and Jetty depend on shareholder, court, regulatory and other approvals and specified conditions; Acreage closing was expected in late 2023. Canopy Growth’s ability to consolidate Canopy USA was under discussion with Nasdaq and another exchange. Nasdaq had requested information and stated its position on consolidation of revenue from activities it views as federally unlawful. Delisting, financing and transaction risks remain.
- The U.S. cannabis market presents legal and regulatory risk: cannabis remains federally prohibited despite state-level legalization. The filing also identifies exchange-listing, banking, investment-value, counterparty, competitive, pricing, impairment and liquidity risks. Acreage’s financial statements disclosed substantial doubt about its ability to continue as a going concern.
- The company reported no material changes to internal control over financial reporting and concluded disclosure controls were effective. It reported no legal proceedings in the filing’s legal proceedings section.
- No quantified revenue or earnings guidance is provided in the supplied filing text. Management’s statements about liquidity and future plans are forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- Whether Canopy Growth can meet near-term obligations, including the July 2023 senior-note maturity, the remaining credit-facility paydown due by April 17, 2023, interest costs and liquidity covenants.
- Actual cash burn and progress toward improved gross margins and operating performance, particularly in Canadian cannabis and BioSteel.
- Final restructuring charges, cash costs, savings, facility closures and execution timeline compared with the preliminary CAD$425–$525 million estimate.
- Outcomes of Nasdaq and other exchange discussions, any required Canopy USA structural changes, and the effect on consolidation and listing status.
- Approvals, financing and closing conditions for the Acreage, Wana and Jetty arrangements, including Acreage’s disclosed going-concern uncertainty.
- Changes in fair values of Canopy Growth’s investments and options, and the resulting effects on reported earnings versus cash flow.