Canopy Growth Corporation — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended September 30, 2022; filed November 9, 2022. Results are unaudited, prepared under U.S. GAAP, and stated in Canadian dollars unless noted. The company operates cannabis businesses and consumer-product brands, including Storz & Bickel, BioSteel and This Works.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net revenue | $117.9 million, down 10% year over year | $228.0 million, down 15% |
| Gross margin | $3.8 million; 3% of net revenue | $2.4 million; 1% of net revenue |
| Operating loss | $175.8 million | $2.014 billion |
| Net loss | $231.9 million; $0.47 per share | $2.319 billion; $5.30 per share |
| Adjusted EBITDA loss (non-GAAP) | $78.1 million, versus $162.6 million | $152.9 million, versus $226.2 million |
| Cash used in operating activities | $133.4 million | $273.9 million |
| Free cash flow (non-GAAP) | $(135.4) million | $(278.2) million |
Revenue mix and margins: Q2 Canada cannabis revenue fell 27% to $52.3 million, reflecting competition, price compression and weaker recreational sales; its gross margin remained negative at $(7.7) million. Rest-of-world cannabis revenue fell 55% to $10.6 million, partly following the C3 divestiture, and posted a $(1.3) million gross margin. BioSteel revenue rose 298% to $29.9 million and gross margin improved to $4.4 million. Storz & Bickel revenue declined 7% to $13.5 million; This Works declined 24% to $6.9 million.
Cash, liquidity and debt: At September 30, cash and cash equivalents were $746.7 million and short-term investments were $396.7 million, totaling approximately $1.143 billion. The company reported $1.354 billion of debt carrying value, including $322.0 million current and $1.032 billion long-term; total principal was approximately $1.4 billion. Cash and cash equivalents declined $29.3 million from March 31, while cash plus short-term investments declined $228.2 million. Management said available liquidity was sufficient for at least the next 12 months, while noting continued operating losses and cash requirements.
Material changes and unusual items
- Goodwill impairment: A $1.725 billion charge in the first fiscal quarter wrote off all goodwill assigned to the cannabis operations reporting unit; a further $2.3 million goodwill impairment was recorded in Q2. Six-month impairment and restructuring costs totaled $1.772 billion. Goodwill fell from $1.867 billion at March 31 to $136.5 million at September 30.
- Q2 earnings comparison: Net loss widened from $16.3 million to $231.9 million, principally due to the year-over-year swing in other income/expense and higher impairment and restructuring charges. Q2 gross margin improved substantially from the prior-year loss, which included large inventory write-downs. Adjusted EBITDA loss also narrowed, but remained significant.
- Non-cash valuation volatility: Other expense was $47.8 million in Q2 and $293.4 million for six months, versus prior-year other income of $195.8 million and $776.5 million, respectively. Fair-value movements in investments, warrants, the Acreage arrangement and notes contributed materially; these results may not indicate underlying operating performance.
- Debt exchange and dilution: The company exchanged and cancelled $262.6 million principal amount of 4.25% senior notes due July 2023 for approximately $260.0 million of common shares, plus $5.4 million cash interest. It issued 76.8 million shares in June and July for the transaction. Shares outstanding were 480.3 million at September 30 and 485.9 million as of November 8.
- Cost actions and asset sales: Restructuring continued, including facility closures, cost reductions and changes toward flexible/contract manufacturing. The company agreed to divest its Canadian retail operations; the FOUR20 sale closed October 26, while the OEGRC transaction remained subject to approvals.
Outlook, transactions and risks
No specific numerical revenue, earnings or cash-flow guidance is provided. Management cited continuing competition and price compression in Canadian recreational cannabis, lower consumer spending and distributor disruptions affecting Storz & Bickel, and softer This Works performance. BioSteel growth was attributed to expanded distribution and international sales. Management reported no material adverse Q2 impact from COVID-19, but continued to monitor supply-chain and demand uncertainty.
After quarter-end, Canopy Growth completed the October 25 reorganization establishing Canopy USA to hold its U.S. cannabis investments. Planned pathways to acquire Acreage, Wana and Jetty depend on shareholder, regulatory and other approvals, including a Canopy Growth shareholder amendment proposal and CBI’s potential conversion of its shares. Acreage acquisition was anticipated in late 2023, subject to conditions. Until conversion of Canopy Growth’s non-voting Canopy USA shares, the company stated it has no economic or voting interest in Canopy USA or those businesses.
On October 24, the company agreed to tender US$187.5 million of Credit Facility principal for US$174.4 million in two installments, with the first due by November 10, 2022 and the second by April 17, 2023. Amendments reduced the minimum-liquidity covenant to US$100 million, subject to further reductions as payments are made, and established a US$100 million delayed-draw facility. These were post-quarter agreements; completion and effects require verification. The Credit Facility is secured, bears interest at LIBOR plus 8.50%, and matures in 2026.
Key risks include sustained operating cash burn and the need for future financing; debt service and covenant compliance; further impairments; U.S. federal cannabis restrictions and TSX/Nasdaq listing-policy uncertainty (including Nasdaq’s objection to possible Canopy USA financial consolidation); execution, approval and integration risks for Canopy USA transactions; and Acreage’s disclosed going-concern doubt. Canopy Growth reported its disclosure controls were effective as of September 30 and no material change in internal control over financial reporting. The Ortiz class action settlement received final court approval in June 2022.
Important facts for investors to verify
- Progress and completion of the US$187.5 million Credit Facility paydown, revised covenant terms and delayed-draw facility; confirm liquidity after these cash uses.
- Quarterly operating cash burn, working-capital needs and whether management’s stated 12-month liquidity expectation remains supportable.
- Revenue trends, pricing and gross margins in Canadian cannabis, and whether BioSteel growth translates into durable profitability and cash generation.
- Canopy USA transaction approvals and conditions, CBI’s conversion decision, exchange-listing treatment, and the timing and dilution implications of any acquisitions or share payments.
- Further goodwill or asset impairments, and the sensitivity of reported results to fair-value estimates for investments, warrants and debt.
- Remaining 2023 note maturity obligations and the company’s refinancing or repayment plan.