Canopy Growth Corporation — Form 10-Q summary
Business context and period: Canopy Growth produces and sells cannabis, hemp-derived and other consumer products in Canada and international markets, and holds investments through Canopy Rivers. This unaudited report covers the quarter and six months ended September 30, 2020 (fiscal 2021 Q2). Amounts are Canadian dollars unless noted.
Financial performance
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net revenue | $135.3 million, up 77% from $76.6 million | $245.7 million, up 47% from $167.1 million |
| Gross margin | $26.1 million; 19%, versus $3.6 million; 5% | $32.6 million; 13%, versus $21.9 million; 13% |
| Net income (loss) | $(96.6) million, versus $242.7 million income | $(224.9) million, versus $48.6 million income |
| Net income (loss) attributable to Canopy Growth | $(32.1) million, versus $258.9 million income | $(140.6) million, versus $73.0 million income |
| Adjusted EBITDA loss | $(85.7) million, versus $(150.4) million | $(177.9) million, versus $(243.8) million |
| Operating cash flow | Not separately reported in the supplied quarterly summary | $(280.3) million, versus $(372.1) million |
| Free cash flow | $(190.4) million, versus $(442.1) million | $(370.5) million, versus $(812.2) million |
Quarterly revenue growth reflected stronger Canadian recreational sales, including business-to-business sales, and higher “other” revenue from Storz & Bickel, This Works and BioSteel. Six-month growth also benefited from a full-period contribution from acquired businesses. Quarterly gross margin improved year over year, but the six-month margin rate was unchanged; underused facilities and start-up costs remained a drag.
Balance sheet, liquidity and debt
- At September 30, 2020, cash and cash equivalents were $673.3 million and short-term investments were $1.049 billion, totaling approximately $1.722 billion. Combined cash and short-term investments fell approximately $254.3 million from March 31, 2020.
- Total assets were $6.574 billion; total liabilities were $1.421 billion. Current assets were $2.292 billion and current liabilities were $324.5 million.
- Reported debt was $533.7 million, including $522.2 million carrying value for $600 million principal of 4.25% convertible notes due July 2023. Total debt principal, excluding fair-value adjustments, was $611.5 million. Management reported $34.7 million available under its $40 million FCC revolving facility; the $5.3 million FCC balance was repaid in October 2020.
- Six-month investing cash outflow was $568.1 million, including $90.2 million of property and equipment purchases and investments related to Acreage. Financing cash inflow was $250.8 million, primarily from CBI’s exercise of warrants, generating $245.0 million.
Material changes and unusual items
- PharmHouse entered Canadian creditor-protection proceedings in September after projected offtake cash flows became uncertain and it could not meet obligations. Canopy recognized $94.7 million of expected credit losses and related charges, a $25 million liability for its financial guarantee, and a $32.4 million impairment of its PharmHouse equity investment. The company estimated PharmHouse assets’ orderly-liquidation value at approximately $65 million against a fully drawn $90 million credit facility. Multiple loans and accrued interest were also identified as potentially unrecoverable.
- Asset impairment and restructuring costs were $46.4 million for the quarter and $59.2 million for the six months, related to facility valuations and closures, exits from South Africa and Lesotho, marketing reductions and R&D rationalization.
- Reported results included substantial non-cash fair-value movements. Six-month other income, net, was $269.5 million, down from $542.7 million, while the current-period net loss included a $32.3 million fair-value expense on convertible notes. These items make reported earnings volatile and are not equivalent to operating cash generation.
- The Acreage arrangement was amended and implemented in September. The fixed-share exchange ratio was reduced, Canopy paid Acreage shareholders $49.8 million, and Canopy advanced $67.0 million to an Acreage subsidiary under a secured debenture. The arrangement remains contingent on a U.S. federal-law triggering event.
- On November 1, 2020, a Delta, British Columbia production facility that had been non-operational since March was damaged by fire. The financial impact and potential insurance recoveries were undetermined when reported.
Outlook, commentary and risks
Management said it believed available liquidity was adequate for working capital, growth initiatives, capital spending and scheduled debt service for at least the next 12 months. It also acknowledged ongoing losses and no assurance of market acceptance or sufficient positive operating cash flow. The filing provides no quantified revenue, margin or profitability guidance.
Management reported minimal operational disruption from COVID-19 at the filing date, but said the pandemic could continue to affect demand, discretionary spending, suppliers and distribution channels. Other key risks include cannabis and hemp regulation, competition and pricing, agricultural production risks, liquidity and funding needs, and the uncertainty of the PharmHouse restructuring and Acreage transaction.
The filing also disclosed a proposed class action alleging inaccurate THC/CBD product labeling; the class had not been certified. A separate $500 million claim brought by the PharmHouse joint-venture partner was stayed, with discontinuance directed without prejudice to possible recommencement against defendants other than PharmHouse after January 1, 2021. Management reported disclosure controls effective as of September 30, 2020 and no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Recovery prospects and final exposure from PharmHouse, including the guarantee, loans, interest receivable, DIP financing and equity impairment.
- Whether revenue growth and gross-margin improvement can continue as production capacity is rationalized and underused-facility costs persist.
- Cash burn, liquidity after capital spending and commitments, and the timing of any move toward positive operating cash flow.
- How much reported earnings depend on fair-value changes in warrants, convertible notes, Acreage and other investments rather than core operations.
- Progress and conditions for the amended Acreage arrangement, including the U.S. federal-law trigger, and the recoverability and terms of the Acreage Hempco debenture.
- The eventual financial and operational effects of the facility fire, the labeling class action and any renewed PharmHouse-related litigation.