Canopy Growth Corp quarterly report, Q1 FY2024

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Business context and reporting period

Canopy Growth Corporation’s unaudited Form 10-Q covers the three months ended June 30, 2023, the first quarter of fiscal 2024 (comparative quarter ended June 30, 2022). Amounts are in Canadian dollars unless noted. The company sells cannabis products in Canada and international markets, alongside vaporizers, sports nutrition products and wellness products.

Financial performance and condition

  • Revenue: Revenue before excise taxes was C$121.1 million; net revenue was C$108.7 million, up 3% from C$105.9 million. BioSteel revenue rose 137% to C$32.5 million and Storz & Bickel rose 16% to C$18.1 million. Canada cannabis declined 26% to C$38.6 million; rest-of-world cannabis declined 26% to C$10.2 million.
  • Gross margin: C$5.9 million, or 5% of net revenue, versus a C$5.6 million loss and negative 5% margin a year earlier. BioSteel remained a drag, with a C$7.8 million gross loss (negative 24% margin); Canada cannabis recorded a C$0.5 million gross loss.
  • Operating costs and earnings: SG&A was C$91.3 million, down 12%. Operating loss was C$91.3 million. Net loss was C$41.9 million, including C$38.1 million attributable to Canopy Growth shareholders; diluted loss per share was C$0.07. The comparison quarter’s C$2.092 billion net loss included C$1.728 billion of impairment and restructuring costs, primarily goodwill impairment.
  • Other income and non-GAAP measures: Other income was C$51.5 million, largely reflecting C$65.1 million of non-cash fair-value gains on financial assets. Adjusted EBITDA loss was C$57.8 million, improved from C$79.0 million. Free cash flow was negative C$150.7 million, compared with negative C$142.8 million.
  • Cash flow and liquidity: Operating cash outflow was C$148.7 million. Investing activities provided C$142.6 million, including C$83.3 million from property sales; financing activities used C$133.1 million, primarily for debt repayment. Cash and cash equivalents fell C$143.7 million during the quarter to C$533.3 million; short-term investments were C$37.8 million.
  • Debt and balance sheet: Debt carrying value was C$1.045 billion at June 30, down from C$1.307 billion at March 31; total principal was approximately C$1.1 billion. Current debt and convertible debentures were C$252.9 million. Total assets were C$2.191 billion and shareholders’ equity C$847.5 million. Required cash principal repayments due within 12 months were C$259.6 million.

Material changes versus the prior comparable period

  • Net revenue increased 3%, but the mix shifted: Canadian adult-use and international cannabis revenue fell, while BioSteel and Storz & Bickel grew. BioSteel’s higher sales did not translate into better gross profit: its gross loss widened from C$1.8 million to C$7.8 million, due to aging-inventory write-downs, warehousing expense and costs at its Virginia facility.
  • Gross margin improved by C$11.5 million, supported by cost reductions, lower inventory write-downs and improved Storz & Bickel performance. SG&A and research and development spending also declined. These improvements were partly offset by BioSteel losses and increased BioSteel advertising and promotion.
  • The reported net loss narrowed sharply, principally because the prior-year quarter included substantial goodwill impairment. The current quarter’s positive other income also included material non-cash fair-value movements and should not be treated as recurring operating performance.
  • Common shares issued and outstanding were 626.7 million at June 30, versus 517.3 million at March 31, primarily reflecting conversion of C$93.2 million of convertible debentures into approximately 84.5 million shares. The filing reports 717.2 million shares outstanding as of August 8, 2023.

Outlook, risks, contingencies and unusual items

  • Going concern: Management states that recurring operating losses, negative operating cash flow, near-term debt obligations and the need for additional financing raise substantial doubt about the company’s ability to continue as a going concern for at least 12 months from issuance. Plans include using cash, selling facilities, further cost reductions, raising debt or equity, and monetizing assets; management gives no assurance these plans will succeed. No specific financial guidance is provided in the filing text.
  • Post-quarter debt actions: In July 2023, the company paid C$93.0 million to reduce credit-facility principal by C$100.0 million. Amendments provide for certain asset-sale proceeds to reduce facility debt and contemplate ending the US$100 million minimum-liquidity covenant following the paydown. The company also redeemed approximately C$193 million principal of notes using about C$101 million cash, 90.4 million common shares and C$40.4 million of convertible debentures. Remaining notes were settled at maturity; none remained outstanding after maturity. The new debentures mature January 15, 2024 and may require cash settlement if shareholder approval for share settlement is not obtained.
  • Restructuring and asset sales: The company continued restructuring Canadian cannabis operations, including closing its Smiths Falls production facility and moving toward a more asset-light model. Current-quarter impairment and restructuring costs were C$2.2 million; certain costs were offset by gains on facility sales.
  • Canopy USA and proposed U.S. investments: May 2023 amendments changed governance and are intended to prevent consolidation of Canopy USA’s financial results. Completion of planned transactions involving Acreage, Wana and Jetty depends on shareholder, regulatory and other conditions, including the proposed Exchangeable Shares and actions by Constellation Brands affiliates. The company does not yet have an economic or voting interest in the relevant Canopy USA assets through its non-voting shares. U.S. federal cannabis law and Nasdaq listing requirements remain important uncertainties.
  • Reporting and legal matters: Disclosure controls were ineffective at June 30 because of material weaknesses involving BioSteel revenue recognition and IT general controls. Prior-period financial statements were restated following an internal review of BioSteel sales. The company is cooperating with an SEC investigation and faces putative securities class actions in the United States and Canada; it says it cannot estimate potential losses.
  • Other items: The company recorded C$8.9 million of acquisition, divestiture and other costs, including about C$5.0 million in legal and audit costs related to the restatement. One customer represented more than 10% of net revenue in the quarter. Fair values of certain investments depend on significant unobservable assumptions.

Most important facts for investors to verify

  • Whether cash generation and asset-sale proceeds can cover operating needs and debt payments, and whether management can secure additional financing.
  • The effect of July 2023 debt transactions on ongoing interest costs, liquidity, covenant requirements and share dilution, including the outcome of required shareholder approvals for the new debentures.
  • Whether BioSteel’s revenue controls have been remediated, whether its sales and receivables are reliable, and the outcome of the SEC investigation and shareholder litigation.
  • Whether BioSteel can improve gross margins after significant sales growth, and whether Canadian cannabis cost reductions can offset continuing revenue declines.
  • The closing conditions and shareholder/CBI decisions affecting Canopy USA, Acreage, Wana and Jetty, and the value ultimately realized from these arrangements.
  • Future changes in share count and the proposed reverse share consolidation, alongside the company’s stated C$533.3 million cash balance and C$37.8 million short-term investments at quarter-end.