Canopy Growth Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter ended September 30, 2023, with six-month results for the period ended September 30, 2023. The company produces and sells cannabis products, vaporizers, and wellness and skincare products. Amounts are in Canadian dollars unless stated otherwise; financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and position
| Metric | Three months ended September 30, 2023 | Prior-year period | Six months ended September 30, 2023 | Prior-year period |
|---|---|---|---|---|
| Net revenue | $69.6 million | $87.9 million | $145.9 million | $180.2 million |
| Gross margin | $23.4 million; 34% | $(0.6) million; (1%) | $37.2 million; 25% | $(4.4) million; (2%) |
| Operating loss, continuing operations | $(7.0) million | $(149.2) million | $(61.7) million | $(1,973.0) million |
| Net loss, continuing operations | $(148.2) million | $(196.5) million | $(158.7) million | $(2,265.6) million |
| Net loss, including discontinued operations | $(324.8) million | $(305.8) million | $(366.7) million | $(2,397.6) million |
| Adjusted EBITDA loss, continuing operations (non-GAAP) | $(11.9) million | $(56.4) million | $(34.8) million | $(118.5) million |
Second-quarter basic and diluted loss per share was $0.43, including $0.21 from continuing operations and $0.22 from discontinued operations. Six-month loss per share was $0.55. The filing attributes improved gross margin and lower Adjusted EBITDA losses mainly to cost savings, restructuring, and reduced inventory write-downs; Adjusted EBITDA is a non-GAAP measure.
- Revenue mix: Second-quarter Canada cannabis revenue was $39.0 million, down 25%; the Canadian adult-use retail channel contributed no revenue after the prior-year divestiture of the retail business. Rest-of-world cannabis revenue fell 15% to $9.0 million; Storz & Bickel fell 11% to $12.0 million; This Works rose 3% to $7.1 million.
- Cash flow: For six months, continuing-operations cash used in operating activities was $172.6 million and continuing-operations free cash flow was $(175.2) million. Including discontinued operations, operating cash outflow was $227.3 million. Investing activities provided $202.7 million, including $152.4 million from property and equipment sales; financing activities used $407.3 million, mainly for debt repayments. Cash and cash equivalents were $240.4 million at September 30, versus $667.7 million at March 31; short-term investments were $30.0 million.
- Debt and balance sheet: Debt carrying value was $681.2 million ($702.5 million principal, per management), versus $1.3 billion at March 31. The secured credit facility had a $560.5 million carrying balance and matures March 18, 2026; its stated rate through December 27, 2023 was LIBOR plus 8.50%, with subsequent pricing tied to prime or SOFR plus specified spreads. A $100 million-principal promissory note is due December 31, 2024 and had a $78.7 million fair value. Total assets were $1.67 billion and total liabilities $918.8 million.
- Equity and dilution: Issued shares increased from 517.3 million at March 31 to 829.1 million at September 30, reflecting, among other items, debt conversions and settlements. The September unit offering raised gross proceeds of US$25 million through 22.9 million shares and warrants. The filing reports 829.1 million shares outstanding as of November 7, 2023.
Material changes, unusual items, and outlook
- BioSteel Canada entered CCAA creditor-protection proceedings on September 14, 2023, and Canopy Growth deconsolidated it. BioSteel results were classified as discontinued operations; the quarter included a $176.6 million discontinued-operations loss, including a $22.2 million deconsolidation loss. The company retained a 90.4% equity interest, but estimated its value at approximately zero; a $29.0 million receivable from BioSteel was recognized at estimated fair value.
- The quarter’s $29.9 million gain on impairment and restructuring primarily reflected the sale of the Smiths Falls production facility at proceeds above its previously impaired carrying value. By contrast, the prior-year six-month period included $1.8 billion of impairment and restructuring charges, substantially goodwill impairment. Other expense in the current quarter was $128.3 million, driven largely by non-cash fair-value declines in investments, including Wana, Acreage, and Jetty.
- The company states that recurring operating losses, short-term debt obligations, and the need for additional financing raise substantial doubt about its ability to continue as a going concern for at least twelve months from issuance. Management plans to use existing cash, asset-sale proceeds, further cost reductions, additional financing, and asset monetization; it gives no assurance these plans will succeed.
- Canopy Growth reported that SEC staff informed it on November 3, 2023 that staff would object to deconsolidating Canopy USA after certain U.S. cannabis acquisitions. The company is assessing further structural changes and expects continued discussions; there is no assurance the proposed structure will be accepted. Acreage transaction deadlines were extended to December 31, 2023, and completion remains conditional. No specific financial guidance is provided in the supplied filing text.
- Disclosure controls were ineffective as of September 30 because of previously reported material weaknesses tied to BioSteel sales accounting and IT general controls. IT remediation actions were completed, but the company said additional operating time and testing were needed before the weaknesses could be considered remediated. The company also disclosed an ongoing SEC investigation related to its BioSteel review and putative shareholder class actions in the U.S. and Canada; it denies the allegations and cannot estimate a potential loss.
Investor verification priorities
- Assess cash burn, available liquidity, asset-sale proceeds, financing needs, and debt service against management’s going-concern warning and the credit facility’s terms.
- Verify whether cost reductions and gross-margin improvements persist as revenue declines, particularly in Canadian adult-use and international cannabis markets.
- Track dilution from debt settlements, share and warrant issuances, and any future financing or transaction consideration.
- Monitor BioSteel creditor proceedings, the SEC investigation, shareholder litigation, and progress in remediating the accounting and IT control weaknesses.
- Confirm the outcome of SEC discussions and required approvals for Canopy USA, Acreage, Wana, and Jetty transactions, including any effect on listing compliance.