Canopy Growth Corporation — Form 8-K Summary
Filing date: September 23, 2020. The filing reports material agreements and transactions involving Acreage Holdings, Inc. and does not provide a new quarterly or annual financial statement.
Business Context and Transaction
Canopy Growth and Acreage implemented a second amendment to their existing arrangement agreement and an amended plan of arrangement effective September 23, 2020. The transaction restructures Canopy Growth’s potential future acquisition of Acreage, which remains contingent on changes to U.S. federal cannabis law or waiver of the related triggering event and satisfaction or waiver of closing conditions.
- Canopy Growth paid an upfront amount of US$37.5 million to Acreage shareholders and certain securityholders.
- Acreage exchanged its existing securities into Fixed Shares and Floating Shares, with corresponding replacement securities for options, restricted stock units, compensation options and warrants.
- Upon the triggering event, Canopy Growth will have the right to acquire all Fixed Shares at an exchange ratio of 0.3048 Canopy Growth shares per Fixed Share, subject to adjustment.
- Canopy Growth will also have a 30-day right to acquire all Floating Shares at a value-based ratio, subject to a minimum price of US$6.41 and other adjustments.
- The Canopy and Floating Call Options expire 10 years after the amendment date.
Financial Metrics, Funding and Liquidity
- The filing does not provide revenue, profit, operating cash flow, margins, consolidated debt, or Canopy Growth liquidity metrics for a comparable reporting period.
- Canopy Growth’s affiliate agreed to provide Universal Hemp, LLC, an Acreage affiliate, with a secured loan of up to US$100 million.
- US$50 million was advanced on September 23, 2020. A further US$50 million is conditional on specified EBITDA and interest-coverage requirements.
- The loan bears annual compounded interest at 6.1%, is payable annually in cash, and matures 10 years after the initial advance.
- Loan proceeds are restricted to lawful U.S. hemp operations and must be maintained in a segregated bank account. Payments generally may not be funded from U.S. cannabis operations before the triggering event date.
Material Changes and Operating Restrictions
- Acreage may issue up to 32.7 million additional shares or proportionate convertible securities without an exchange-ratio adjustment, subject to specified categories and limitations.
- Additional equity issuances, debt arrangements, acquisitions, hiring and certain payments generally require Canopy Growth consent or must comply with detailed exceptions.
- Acreage is required to limit operations to identified states and received consent to divest assets outside those states.
- Canopy Growth receives extended governance, pre-emptive, top-up, audit, inspection and business-plan approval rights under specified circumstances.
Guidance, Risks and Contingencies
- The arrangement incorporates an initial business plan with financial targets for fiscal years 2020 through 2029.
- If Acreage achieves less than 90% of specified quarterly revenue and earnings targets, additional austerity restrictions may apply.
- If it achieves less than 80% of annual targets, certain Canopy Growth non-competition and exclusivity restrictions may terminate.
- If it achieves less than 60% of trailing-12-month targets before the proposed acquisition, a material adverse impact may be deemed to have occurred and Canopy Growth may not be required to complete the Fixed Share acquisition.
- Key contingencies include changes in U.S. federal cannabis law, the occurrence or waiver of the triggering event, satisfaction of closing conditions, Acreage’s financial performance, completion of non-core divestitures and the availability of financing.
- The debenture includes customary defaults, including material breaches, failure to complete non-core divestitures within 18 months and uncured breaches of the arrangement agreement.
- The company identifies regulatory, licensing, political, financing, market, COVID-19, anti-money-laundering, enforcement and asset-divestiture risks.
Important Facts for Investors to Verify
- Whether and when U.S. federal law changes sufficiently to constitute the triggering event, or whether Canopy Growth waives that condition.
- Whether Canopy Growth ultimately exercises the Fixed and/or Floating Call Options and the final number of Canopy Growth shares or cash payable.
- Acreage’s performance against the specified revenue and earnings targets and the resulting effect on Canopy Growth’s rights and obligations.
- Whether the additional US$50 million loan advance conditions are satisfied.
- Completion and proceeds of Acreage’s non-core divestitures, along with compliance with the arrangement’s debt, equity issuance and operating restrictions.
- The detailed terms in Exhibits 10.1 and 10.2, portions of which are redacted; the filing text does not provide a complete description of all contractual rights and obligations.