Canopy Growth Corporation — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended December 31, 2020; filed February 9, 2021. The interim financial statements are unaudited, prepared under U.S. GAAP, and reported in Canadian dollars. Unless stated otherwise, amounts below are CAD millions.
Business context and key financial metrics
Canopy produces and sells cannabis, hemp-derived and other consumer products in Canada and international markets. Its reportable segments are Cannabis, Hemp and Other Consumer Products, and Canopy Rivers.
- Q3 revenue: Gross revenue was $169.9 million; net revenue after excise taxes was $152.5 million, up 23% from $123.8 million. Growth reflected other consumer-product revenue, Canadian recreational retail, and C3 medical cannabis.
- Q3 profitability: Gross margin was $24.6 million, or 16% of net revenue, versus $38.2 million, or 31%, a year earlier. Operating loss was $553.6 million; net loss was $829.3 million, including $904.4 million attributable to Canopy Growth shareholders. Basic and diluted loss per share was $2.43.
- Nine-month results: Net revenue was $398.2 million, up 37%; gross margin was $57.2 million, or 14%, versus $60.1 million, or 21%. Net loss was $1.054 billion, including $1.045 billion attributable to Canopy Growth shareholders; loss per share was $2.83.
- Adjusted EBITDA (non-GAAP): Loss of $68.4 million in Q3 versus $97.0 million; nine-month loss of $246.3 million versus $340.8 million.
- Cash flow: Over nine months, operating cash outflow was $367.9 million and investing cash outflow was $328.9 million; financing provided $269.1 million. Free cash flow, a non-GAAP measure defined as operating cash flow less property and equipment purchases, was an outflow of $505.9 million.
- Liquidity: At December 31, cash and cash equivalents were $825.0 million and short-term investments were $768.6 million. Management said these resources, plus $40.0 million of available capacity under its revolving facility, were adequate for at least the next 12 months. Cash and short-term investments together had declined $383.0 million since March 31, 2020.
- Debt and balance sheet: Debt carrying value was $632.2 million, including $600.0 million principal on 4.25% convertible notes due July 2023; principal debt excluding note fair-value adjustments was $604.4 million. Total assets were $6.309 billion and total liabilities $2.014 billion. The company reported $4.184 billion of shareholders’ equity.
Material changes versus the comparable period
- Q3 net revenue rose 23%, but gross margin percentage fell 15 percentage points. Management cited $15.6 million of restructuring-related inventory charges, underused or start-up facilities, and product mix.
- Operating expenses included $400.4 million of asset impairment and restructuring costs in Q3 and $459.6 million for the nine months. Q3 charges included impairments of facilities and intangible assets, closures and sales, and related employee and settlement costs. A further $15.6 million inventory write-down was recorded in cost of goods sold.
- Expected credit losses and related charges were $13.7 million in Q3 and $108.5 million for nine months, largely reflecting PharmHouse exposures. Selling, general and administrative expense fell 15% in Q3 and 14% for nine months; share-based compensation also declined substantially.
- Other income (expense), net swung to an expense of $290.6 million in Q3 from income of $58.0 million, and to an expense of $21.1 million for nine months from income of $600.6 million. Large, primarily non-cash fair-value movements in CBI warrant liabilities, the Acreage arrangement, convertible notes and investments drove the volatility.
- Operating cash outflow improved from $562.0 million to $367.9 million for nine months, while investing outflow rose from $281.4 million to $328.9 million. Capital spending on property and equipment declined to $138.0 million from $610.9 million. CBI warrant exercises generated $245.0 million of financing cash inflow.
Outlook, commentary, risks and unusual items
- Restructuring: As part of an ongoing strategic review, Canopy closed Canadian sites in St. John’s, Fredericton, Edmonton and Bowmanville and ceased outdoor growing in Saskatchewan, eliminating about 220 full-time positions. It reported combined proceeds of $40.7 million from sales of its Aldergrove and Delta facilities. Management said the changes were intended to streamline operations and improve gross margins.
- PharmHouse: The joint venture entered creditor protection in September 2020 and is pursuing a sale or investment process; binding offers were expected around February 16, 2021. Canopy estimated orderly-liquidation asset value at approximately $57.5 million. A $90.0 million PharmHouse credit facility was fully drawn and guaranteed by Canopy Rivers and its subsidiary. Canopy recorded a $32.5 million guarantee liability and identified multiple loans and receivables as potentially unrecoverable.
- Contingent U.S. arrangements: The Acreage acquisition depends on a specified change in U.S. federal cannabis law and other conditions. Canopy’s Acreage arrangement liability was $450.0 million at quarter-end; fair-value estimates are subject to significant judgment. TerrAscend securities also depend on U.S. federal law changes for conversion or exercise.
- Canopy Rivers arrangement: A proposed transaction would transfer specified assets to Canopy Growth for cash and shares and end Canopy Growth’s ownership in Canopy Rivers, subject to shareholder, court and other approvals. The arrangement had not yet closed.
- COVID-19 and market risks: Management reported minimal operating disruption to date but could not estimate the pandemic’s future financial impact. Risks include demand and discretionary spending, competition and pricing, regulation and licensing, agricultural production, foreign exchange, equity-price volatility, and access to capital.
- Litigation: A PharmHouse JV partner’s claim sought $500 million in damages. The claim was discontinued in November 2020, with rights to recommence against defendants other than PharmHouse preserved; it had not been recommenced as of the filing date.
- Guidance: The filing provides no specific revenue, margin, earnings or cash-flow guidance. Management anticipated eventual profitability but cautioned that there is no assurance of sufficient market acceptance or positive cash flow.
Important facts for investors to verify
- Whether revenue growth can translate into improved gross margins after facility closures, inventory charges and utilization changes.
- The cash-burn trajectory and whether liquidity remains adequate given operating and investing outflows, commitments and planned initiatives.
- Recoveries from PharmHouse loans, receivables and the guarantee, and the outcome of its court-supervised restructuring process.
- The assumptions behind large fair-value balances and quarterly swings, particularly the Acreage liability, CBI warrant liability, convertible notes and TerrAscend-related assets.
- Approvals and completion terms for the Canopy Rivers arrangement, and the conditions and timing for any U.S.-law-dependent acquisitions or securities.
- The status of the discontinued PharmHouse-related litigation and any subsequent developments disclosed after this filing.