Canopy Growth Corporation — Form 10-Q Summary
Business context and reporting period. This quarterly report covers the three months ended June 30, 2020, Canopy Growth’s first quarter of fiscal 2021. The company produces and sells cannabis, hemp-derived and other consumer products in Canada and international markets, and holds a controlling interest in Canopy Rivers. Unless stated otherwise, amounts are in Canadian dollars; financial statement figures are in thousands.
Financial performance and position
| Metric | Quarter ended June 30, 2020 | Prior-year quarter |
|---|---|---|
| Revenue before excise taxes | $119.1 million | $103.4 million |
| Net revenue | $110.4 million | $90.5 million |
| Gross margin | $6.5 million; 6% | $18.3 million; 20% |
| Operating loss | $172.4 million | $214.7 million |
| Net loss | $128.3 million | $194.1 million |
| Net loss attributable to Canopy Growth | $108.5 million | $185.9 million |
| Basic and diluted loss per share | $0.30 | $0.54 |
| Cash used in operating activities | $118.5 million | $158.3 million |
| Free cash flow, a non-GAAP measure | $(180.1) million | $(370.1) million |
- At June 30, cash and cash equivalents were $975.9 million and short-term investments were $1.061 billion. Combined, these were about $2.037 billion, up $60.3 million from March 31; cash alone fell $327.3 million.
- Total assets were $6.846 billion, total liabilities $1.584 billion, and shareholders’ equity $5.181 billion. Current assets were $2.614 billion versus current liabilities of $319.7 million.
- Total debt carrying value was $500.4 million, including $477.8 million long term; principal outstanding, excluding fair-value adjustments on convertible notes, was $614.5 million. The $600 million senior notes bear 4.25% interest and mature July 2023.
- Net cash used in investing activities was $426.0 million, including $61.5 million for property, plant and equipment and $382.5 million of net purchases of short-term investments. Financing activities provided $247.3 million, principally from CBI’s exercise of warrants.
Material changes versus the prior-year quarter
- Net revenue increased 22%, but gross margin percentage fell from 20% to 6%. Cost of goods sold increased 44%, exceeding revenue growth.
- Canadian recreational net revenue declined 11% to $44.3 million: business-to-business revenue fell 10% and business-to-consumer revenue fell 12%. Lower dried-flower sales reflected competition and aggressive pricing; Cannabis 2.0 products partly offset the decline.
- Medical net revenue rose 54% to $34.1 million, including growth in Canadian and international markets. Other revenue increased 71% to $32.1 million, reflecting contributions from Storz & Bickel, This Works and BioSteel.
- Operating expenses declined 23% to $178.9 million, including lower share-based compensation and acquisition costs, partly offset by $12.8 million of impairment and restructuring costs. Net loss narrowed, while management-reported Adjusted EBITDA loss was broadly unchanged at $92.2 million versus $93.4 million.
- Cash used in operations and free cash flow outflow both improved year over year. Capital spending was lower as major infrastructure build-out neared completion and the company shifted toward an asset-light approach in some markets.
Outlook, commentary, risks and unusual items
- Management stated it believed available liquidity was adequate for at least the next 12 months, including working capital, growth initiatives, capital expenditures, liabilities and scheduled debt payments. It also cautioned that there is no assurance of market acceptance or sufficient positive cash flow. Fiscal 2021 property and equipment purchase commitments included $73.2 million.
- Management could not estimate the pandemic’s long-term effects and expected COVID-19 to continue negatively affecting second-quarter fiscal 2021 results and potentially results while containment measures remained in effect. It reported minimal production and supply-chain disruption; stores had reopened with click-and-collect and in-store shopping options.
- Gross margin was pressured by underutilized and start-up facilities, lower production and fixed-cost under-absorption, and inventory charges. Inventory write-downs were $19.4 million, compared with $4.8 million in the prior-year quarter. The company harvested 22,990 kilograms versus 40,960 kilograms.
- On June 24, 2020, Canopy and Acreage agreed to propose amendments to their arrangement, including a reduced fixed-share exchange ratio, a potential additional US$37.5 million payment, and an option to acquire floating shares after a U.S. federal cannabis-law trigger. The amendments remained subject to approvals and other conditions. Canopy also agreed to provide Acreage Hempco a secured loan of up to US$100 million; none had been advanced by quarter-end.
- Reported other income included substantial non-cash fair-value movements, including a $35.0 million expense on the Acreage liability and gains on other financial assets and warrant liabilities. Such valuation estimates involve significant judgment.
- A proposed Canadian class action filed July 22, 2020 alleges inaccurate advertised THC/CBD content and labeling; the class had not been certified, and the company was evaluating the claim. Management reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether revenue growth can translate into a recovery in gross margin, given inventory write-downs, capacity utilization and production-cost pressures.
- How quickly recreational sales, especially dried flower and retail, recover amid competition and ongoing pandemic effects; and whether medical and other-product growth is sustainable.
- Cash burn, planned capital spending and liquidity relative to continuing operating losses and commitments, notwithstanding the large short-term investment balance.
- The terms, approvals, timing and potential funding or dilution effects of the amended Acreage arrangement and proposed Hempco loan.
- Potential financial exposure from the proposed product-labeling class action and the sensitivity of reported earnings to non-cash fair-value estimates.