Canopy Growth Corporation — Form 10-Q Summary
Reporting period: Three months ended June 30, 2021, the first quarter of Canopy Growth’s fiscal 2022. The unaudited financial statements are prepared under U.S. GAAP and reported in Canadian dollars; amounts below are in millions of Canadian dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue before excise taxes | $155.4 | $119.1 |
| Net revenue | $136.2 | $110.4 |
| Gross margin | $27.2; 20% | $6.5; 6% |
| Operating loss | $(187.7) | $(172.4) |
| Net income (loss) | $390.0 | $(128.3) |
| Net income (loss) attributable to Canopy Growth | $392.4 | $(108.5) |
| Adjusted EBITDA loss | $(63.6) | $(92.2) |
| Net cash used in operating activities | $(165.8) | $(118.5) |
| Free cash flow | $(186.1) | $(180.1) |
Net revenue increased 23%. Canadian recreational cannabis revenue rose 36% to $60.0 million, while other consumer products revenue increased 39% to $43.3 million. Global cannabis revenue grew 17% to $92.9 million. Improved Canadian production-cost leverage and $7.3 million of government payroll subsidies contributed to the higher gross margin. Other consumer products gross margin percentage declined to 32% from 43%, reflecting higher distribution costs and a greater BioSteel contribution.
The reported net income chiefly reflects $580.7 million of other income, largely non-cash fair-value gains. These included $316.3 million from the CBI warrant derivative liability, $150.0 million from the Acreage arrangement liability, $84.2 million on other financial assets and $50.7 million on convertible notes. Accordingly, reported earnings do not represent operating profitability; the company reported an operating loss and an Adjusted EBITDA loss.
Cash and cash equivalents were $559.8 million at June 30, 2021, down from $1,154.7 million at March 31. Short-term investments were $1,491.3 million, up from $1,144.6 million; cash plus short-term investments decreased by $248.1 million during the quarter. Total assets were $6,966.5 million and total shareholders’ equity was $4,145.1 million.
Debt carrying value was $1,560.8 million, including $15.7 million current and $1,545.1 million long-term; principal outstanding, excluding fair-value adjustments on the notes, was approximately $1.5 billion. The US$750 million secured credit facility matures in 2026, carries interest at LIBOR plus 8.50% (with a 1.00% floor), and requires minimum quarterly liquidity of US$200 million.
Material changes and developments
- Canopy acquired Supreme Cannabis on June 22, 2021, issuing shares valued at $260.7 million and assuming debt and other liabilities. The purchase-price allocation was provisional.
- Canopy acquired Ace Valley on April 1, 2021, for $51.6 million cash, with potential additional earn-out consideration.
- Asset impairment and restructuring charges rose to $89.2 million from $12.8 million, mainly reflecting strategic and integration-related operational changes and costs associated with facility closures.
- Selling, general and administrative expenses fell 17% to $112.6 million, including the effects of prior restructuring and $12.7 million of payroll subsidies. Sales and marketing costs increased 34% as spending returned toward more normal levels.
- Operating cash use increased to $165.8 million, primarily due to higher interest paid following the prior-quarter US$750 million debt financing. Investing cash use was $374.6 million, including $346.6 million of net short-term investment purchases. Financing cash use was $45.0 million, including $48.1 million of debt repayments.
Outlook, commentary and risks
Management stated it believed available liquidity, including cash, short-term investments and financing capacity, was adequate for working capital, planned investment, liabilities and scheduled debt service for at least the next 12 months. It also stated that eventual profitability is anticipated, while cautioning that there is no assurance of sufficient market acceptance or positive cash flow. The filing provides no specific revenue, earnings or margin guidance.
- Management reported minimal COVID-19 disruption in the quarter but could not estimate future effects; the pandemic could affect results into the next quarter.
- Management cited continued price compression and unfavorable product mix in Canadian value-priced dried flower, increased competition in Germany, and higher shipping, distribution and warehousing costs.
- The Acreage acquisition depends on a U.S. federal-law triggering event and other conditions. Its valuation, like certain warrant and investment valuations, relies on assumptions and significant judgment.
- Other stated risks include cannabis regulation and licensing, acquisition integration, access to financing, debt refinancing and covenant compliance, foreign currency and interest-rate exposure, and volatility in equity-linked fair values.
- A securities class action remains pending: plaintiffs filed a third amended complaint in June 2021, and the company stated it intended to seek dismissal. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported net income and future results depends on non-cash fair-value movements rather than operating performance.
- Whether revenue growth can translate into improved gross margins and reduced Adjusted EBITDA and operating cash losses, particularly amid price pressure and distribution-cost increases.
- Cash burn, the composition and liquidity of short-term investments, and compliance with the US$200 million minimum-liquidity covenant.
- Debt servicing costs and the terms, collateral and availability of the secured credit facility and potential incremental borrowing capacity.
- Integration results and provisional valuations for Supreme Cannabis and Ace Valley, including assumed debt and earn-out obligations.
- Developments in U.S. cannabis law affecting the Acreage arrangement, as well as the outcome of the pending class action.