Canopy Growth Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2021. Unaudited financial statements are prepared under U.S. GAAP and reported in Canadian dollars; amounts below are C$ millions unless stated otherwise.
Business context and reporting period
Canopy produces and sells cannabis and cannabinoid products in Canada and international markets, and consumer products including vaporizers, wellness products and sports nutrition. It reports two segments: global cannabis and other consumer products. During the quarter, results included the acquisitions of Supreme Cannabis (completed June 22, 2021) and Ace Valley (completed April 1, 2021).
Key financial metrics
| Metric | Three months ended Sept. 30, 2021 | Six months ended Sept. 30, 2021 |
|---|---|---|
| Net revenue | C$131.4 million | C$267.6 million |
| Gross margin | (C$71.1 million); (54%) | (C$43.9 million); (16%) |
| Operating loss | C$215.4 million | C$403.1 million |
| Net income (loss) | (C$16.3 million) | C$373.6 million |
| Net income (loss) attributable to Canopy | (C$11.1 million) | C$381.4 million |
| Adjusted EBITDA loss, non-GAAP | C$162.6 million | C$226.2 million |
| Cash used in operating activities | Not separately summarized here | C$251.7 million |
| Free cash flow, non-GAAP | (C$101.3 million) | (C$287.4 million) |
For the quarter, global cannabis net revenue was C$95.3 million and other consumer products revenue was C$36.0 million. Global cannabis gross margin was negative C$82.6 million (negative 87%); other consumer products gross margin was C$11.5 million (32%).
At September 30, cash and cash equivalents were C$807.6 million and short-term investments C$1,150.3 million. Current assets were C$2,503.0 million versus current liabilities of C$259.9 million. Total debt carrying value was C$1,526.6 million, including C$901.6 million under the US$750 million secured credit facility; the facility has no scheduled principal amortization and matures March 2026. Total liabilities were C$2,175.7 million and shareholders’ equity C$4,245.6 million.
Material changes versus the prior comparable period
- Quarterly net revenue fell 3% from C$135.3 million; six-month net revenue rose 9% from C$245.7 million.
- Quarterly gross margin swung from C$26.1 million positive to C$71.1 million negative. The principal driver was C$86.8 million of inventory write-downs in the quarter, largely excess Canadian cannabis inventory; six-month write-downs were C$92.9 million.
- Quarterly net loss narrowed from C$96.6 million to C$16.3 million, while the six-month period moved from a C$224.9 million net loss to C$373.6 million net income. The six-month profit included substantial noncash fair-value income: C$438.0 million on the Acreage arrangement and C$510.8 million on the CBI warrant derivative liability. It therefore does not indicate operating profitability; six-month Adjusted EBITDA remained a C$226.2 million loss.
- Six-month cash used in operations improved from C$280.3 million to C$251.7 million, and free cash flow outflow improved from C$370.5 million to C$287.4 million. Cash and cash equivalents declined C$347.0 million from March 31, 2021.
- Quarterly Canadian recreational revenue decreased 4%, medical cannabis revenue decreased 6%, and other consumer products revenue decreased 12%. U.S. CBD and BioSteel growth partly offset declines, including lower Storz & Bickel sales.
Outlook, commentary, risks and unusual items
- Management said available cash, short-term investments and facility capacity were sufficient for working capital, planned growth and debt service for at least the next 12 months. It also acknowledged continuing operating and Adjusted EBITDA losses and that future positive cash flow and adequate market acceptance are not assured. No quantified revenue or earnings guidance was provided.
- Management attributed pressure on Canadian cannabis results to insufficient supply of in-demand flower formats, price compression, increased competition and weaker-than-forecast inventory demand. Higher shipping and warehousing costs also affected several businesses.
- Restructuring and facility closures generated C$91.8 million of impairment and restructuring costs in the six months. Management cited closures planned for Niagara-on-the-Lake and Langley, in addition to previously announced Canadian facility closures.
- Quarterly results benefited from C$6.9 million in government payroll subsidies in gross margin and C$10.6 million in general and administrative expense; six-month amounts were C$14.2 million and C$23.3 million, respectively.
- On October 14, 2021, after quarter-end, Canopy announced Wana option agreements and paid US$297.5 million upfront for the right to acquire Wana entities after a U.S. federal-law triggering event. Further exercise and deferred payments may be due; Canopy has no current ownership or control of Wana.
- Key risks include uncertain U.S. cannabis legalization and regulation, competition and pricing, supply-chain disruption, foreign-exchange and equity-price volatility, continued cash burn, and the ability to integrate acquisitions and realize expected benefits. The company also disclosed a pending securities class action; defendants had moved to dismiss the plaintiffs’ third amended complaint.
Important facts for investors to verify
- Whether inventory write-downs and excess Canadian stock levels persist, and whether gross margins recover without relying on temporary subsidies.
- Operating cash burn, capital spending and liquidity after the US$297.5 million Wana upfront payment; assess the facility’s US$200 million minimum-liquidity covenant and secured status.
- The composition and sustainability of six-month reported net income, especially the large noncash fair-value gains, versus recurring operating performance and Adjusted EBITDA.
- Acquisition integration, contribution and remaining obligations relating to Supreme Cannabis and Ace Valley, and the potential future cash or share consideration for Wana.
- Exposure to share-price-sensitive fair-value items, including the Acreage arrangement, CBI warrants and convertible notes, and the assumptions underlying those valuations.
- Developments in the class action and the timing and conditions for any future Acreage or Wana transaction tied to U.S. federal law.