Canopy Growth Corporation (“Canopy Growth” or the “Company”) (TSX:WEED) (NASDAQ: CGC) today announces its financial results for the third quarter ended December 31, 2022. Canopy Growth is also announcing significant changes to the Company’s Canadian cannabis business. All financial information in this press release is reported in Canadian dollars, unless otherwise indicated.
Highlights
- Canopy Growth announced today that it is transitioning to an asset-light model in Canada by exiting cannabis flower cultivation in the Company’s Smiths Falls, Ontario facility, ceasing the sourcing of cannabis flower from the Mirabel, Quebec facility, and moving to a third-party sourcing model for cannabis beverages, edibles, vapes, and extracts.
- Today’s changes come in addition to multiple cost reduction activities within FY2023, including the divestiture of Canopy Growth’s Canadian retail operations, the organizational restructuring of certain corporate functions, and the closure of the Scarborough, Ontario research facility.
- As a result of the cost reduction initiatives undertaken in fiscal 2023, the Company intends to close its 1 Hershey Drive facility in Smiths Falls, Ontario, in addition to reducing headcount across the business by approximately 60%, including 800 positions impacted by the changes announced today, of which 40% are impacted immediately.
- Management expects these cost reduction initiatives will reduce annual Cost of Goods Sold (“COGS”) and Selling, General & Administrative (“SG&A”) expenses by a combined $140-$160 million over the next 12 months, bringing the total cost reduction target to $240-$310 million inclusive of the reductions announced in April 2022.
- Canopy Growth continues to progress its U.S. strategy through Canopy USA, LLC (“CUSA”) and is committed to remaining dual‑listed on the TSX and the Nasdaq.
- Based on our current revenue run rate and these cost reduction initiatives, management reaffirms its expectation to achieve positive Adjusted EBITDA in FY2024, with the exception of investment in BioSteel.
“Canopy must reach profitability to achieve our ambition of long-term North American cannabis market leadership. We are transforming our Canadian business to an asset-light model and significantly reducing the overall size of our organization. These changes are difficult but necessary to drive our business to profitability and growth.”
David Klein, Chief Executive Officer
“The right-sizing of our Canadian business is expected to significantly reduce our cash costs. Canopy is firmly on the path to deliver at least quarterly breakeven adjusted EBITDA in our Canadian cannabis business in Fiscal 2024, even at current revenue run-rate.”
Judy Hong, Chief Financial Officer
Third Quarter Fiscal 2023 Financial Summary
| (in millions of Canadian dollars, unaudited) | Net Revenue | Gross margin percentage | Adjusted gross margin percentage1 | Net loss | Adjusted EBITDA2 | Free cash flow3 | |
| Reported | $101.2 | (2%) | 1% | $(266.7) | $(87.5) | $(145.8) | |
| vs. Q3 FY2022 | (28%) | (900 bps) | (1,200 bps) | (131%) | (30%) | 13% |
Revenues:
Net revenue of $101 million in Q3 FY2023 declined 28% versus Q3 FY2022. The decrease is primarily attributable to increased competition in the Canadian adult-use cannabis market, the divestiture of C3 Cannabinoid Compound Company GmbH (“C³”), a decline in our U.S. CBD business, and softer performance from Storz & Bickel and This Works. When adjusting for both the impact of the divestiture of C3 and our Canadian retail business, revenues for the period decreased 23% in Q3 FY2023 versus Q3 FY2022.
Gross margin:
Reported gross margin in Q3 FY2023 was (2%) as compared to 7% in Q3 FY2022. Excluding non-cash restructuring costs recorded in COGS of $4 million, adjusted gross margin4 was 1%. Gross margin in Q3 FY2023 was impacted primarily by a decrease in the amount of payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program, the divestiture of C3 and lower gross margins in the BioSteel business segment primarily attributable to the write-down of aged inventory, and higher distribution and warehousing costs. While lower production output and price compression in the Canadian adult‑use cannabis business continued to pressure gross margins, the Canadian cannabis segment saw an improvement in gross margins in Q3 FY2023 compared to Q3 FY2022 and compared to Q2 FY2023.
Operating expenses:
Total SG&A expenses in Q3 FY2023 increased by 5% versus Q3 FY2022, driven by year-over-year increases in acquisition-related expenses primarily relating to the Company’s previously announced transaction with respect to the formation of CUSA and higher General & Administrative (“G&A”) expenses. The increase in G&A expenses was primarily due to a decrease in the amount of payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program. The decrease in Sales and Marketing expenses is net of the impact of incremental investments in BioSteel, relating to the activation of the National Hockey League (“NHL”) partnership announced in July 2022. Excluding acquisition-related expenses, the impact of the disposition of C3 and the COVID-19 relief program, total SG&A expenses decreased 10% in Q3 FY2023 compared to the prior year period.
Net Loss:
Net Loss in Q3 FY2023 was $267 million, which is a $151 million increase in the net loss versus Q3 FY2022, driven primarily by non‑cash fair value changes and an increase in asset impairment and restructuring costs.
Adjusted EBITDA5:
Adjusted EBITDA loss in Q3 FY2023 was $88 million, a $21 million increase in Adjusted EBITDA loss versus Q3 FY2022 primarily driven by a decrease in the amount of payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program.
Free Cash Flow6:
Free Cash Flow in Q3 FY2023 was an outflow of $146 million, a 13% decrease in outflow versus Q3 FY2022. Relative to Q3 FY2022, the decrease in outflow is due to the timing of certain payments in each period. Year-to-date Free Cash Flow in FY2023 is a 7% decrease in outflow versus the comparable period in FY2022, representing the impact of reduced capital expenditures and impacts of cost reduction actions, partially offset by investments in growth initiatives at BioSteel and costs related to the formation of CUSA.
Cash Position:
Cash and short-term investments amounted to $789 million at December 31, 2022, representing a decrease of $583 million from $1,372 million at March 31, 2022 reflecting the impact of cash used in operating activities, the first tranche of the term loan credit agreement repayment of $118 million, as well as cash used for acquisitions and investments, including the acquisition of the Verona, Virginia manufacturing facility for BioSteel and a premium payment made to obtain an option to acquire Acreage Holdings, Inc. (“Acreage”) outstanding debt as part of the October 2022 CUSA announcement. Gross debt amounted to $1,206 million at December 31, 2022, representing a decline of $295 million from $1,501 million at March 31, 2022.
| Canopy USA strategy is expected to fast track entry into the U.S. cannabis market |
| · Canopy Growth continues to progress its U.S. strategy through CUSA and is committed to remaining dual-listed on the TSX and NASDAQ through continued engagement with NASDAQ on a path forward that is focused on delivering on the benefits of this transformational strategy. As a result of the formation of CUSA, the Company expects to reduce its annual operating expenditures through a more streamlined and singular approach to its U.S. strategy. In the near term, CUSA is expected to generate revenue and cost synergies by leveraging its brand portfolio, routes to market and operations of the full U.S. cannabis ecosystem while eliminating redundancies and the public company reporting costs of Acreage, all of which are expected to be realized while cannabis remains federally illegal in the United States. |
| · In light of NASDAQ’s objections to the consolidation of CUSA into the financials of Canopy Growth, we are prepared to make changes to the structure of our interest in CUSA such that Canopy Growth would not be required to consolidate the financial results of CUSA into Canopy Growth’s financial statements, which may include: (1) reducing Canopy Growth’s economic interest in CUSA on an as-converted basis to no greater than 90%, (2) reducing the number of managers on CUSA’s board of managers from four to three, including, reducing Canopy Growth’s nomination right to a single manager, (3) modifying the terms of the Protection Agreement entered into with CUSA and CUSA’s Limited Liability Company Agreement in order to eliminate certain negative covenants and (4) modifying the terms of the agreements with third-party investors in CUSA to, among other things, remove their right to guaranteed returns. |
| Business Highlights | |
| Aligning Canadian Cannabis Operations to Challenged Market Realities | |
| · On April 26, 2022, the Company announced a series of initiatives to reduce costs and drive efficiency, which were expected to generate savings of $100-$150 million within 12-18 months of the announcement. To date, these initiatives have generated approximately $80 million in savings. | |
| · Today, Canopy Growth announced the next series of comprehensive steps to align its Canadian cannabis operations and resources in response to unfavorable market realities, which include:o Transitioning to an asset-light model by exiting cannabis flower cultivation in the Company’s Smiths Falls, Ontario facility, ceasing the sourcing of cannabis flower from the Mirabel, Quebec facility and consolidating cultivation at existing facilities in Kincardine, Ontario and Kelowna, British Columbia;o Moving to an adaptive third-party sourcing model for all cannabis beverages, edibles, vapes, and extracts which will enable the Company to select and bring to market exciting and exclusive formats without the required investment in R&D and production footprint;o As a result of these changes, the Company intends to consolidate flower, pre-rolled joints, softgel, and oil manufacturing in Canopy Growth’s current beverage production facility in Smiths Falls, Ontario. The Company will transition to a flexible sourcing strategy and migrate the existing genetics program to Quebec-based EXKA; ando In addition to the closure of the Scarborough, Ontario facility in January 2023, the Company intends to close the 1 Hershey Drive facility in Smiths Falls, Ontario and is in active discussions with respect to restructuring the joint‑venture entity which holds cultivation facility in Mirabel, Quebec. | |
| · Reflecting today’s announcement and based on information currently available to Management, the Company expects to record estimated pre-tax charges of approximately $425 – $525 million, of which $25 – $40 million is expected to be cash charges. These pre-tax charges are expected to be substantially recorded in the current quarter and the first half of fiscal 2024. The charges the Company expects to incur in connection with these actions are preliminary estimates and are subject to a number of assumptions and risks, and actual results may differ materially. The Company may also incur other material charges7 not currently contemplated due to events that may occur as a result of, or in connection with, these actions. |
| New standalone Canadian cannabis business unit expected to increase agility and accountability, benefit from brand and SKU optimization |
| · The Canadian cannabis business has been reorganized as a standalone business unit, which will have single point of accountability for commercial operations, allowing for agility and accountability. Early progress to-date in Q3 FY2023, shows that customer order fill rates have increased by over 20%, to above 90% in the current quarter. |
| · The Company’s Canadian cannabis business unit is completing a brand and SKU optimization, which is expected to reduce in‑market brand and SKU count by approximately 25% and 50%, respectively, as the Company further focuses on the highest performing and more profitable segments within the Canadian adult-use cannabis market. |
| Demonstrating continued momentum across our Consumer Products businesses; strong sequential revenue growth for Storz & Bickel; meaningful year-over-year gains in BioSteel distribution and sales velocity |
| · Despite a decrease in revenues as compared to Q3 FY2022, Storz & Bickel delivered sequential revenue growth of 50% in Q3 FY2023 driven by traditionally strong seasonal sales. |
| · BioSteel has reached a 10.4% share of convenience and gas channel in Canada, up 300 basis points (“bps”) sequentially, and 13.8% share in Ontario, representing a sequential quarterly increase of 260 bps8. |
| · BioSteel All-Commodity Volume in the U.S. of 34% in Q3 FY2023, represents an increase of 2600 bps compared to the corresponding period of the prior year9. |
| · BioSteel Ready-to-Drink (“RTD”) U.S. scanned sales for the year ended January 1, 2023 increased 157% from prior year10. |
| · Subsequent to the end of Q3 FY2023, BioSteel announced the signing of multi-year partnerships with 6 NHL teams. |
| U.S. THC companies continue to strengthen and expand their businesses |
| · In the third quarter of calendar 2022, Acreage11 reported revenue increasing 28% year over year and delivering their 7th consecutive quarter of positive Adjusted EBITDA12 (as calculated by Acreage and set forth in Acreage’s Third Quarter 2022 Financial Results press release available under Acreage’s profile on SEDAR at www.sedar.com and through EDGAR at www.sec.gov/edgar). Subsequent to the end of their fourth quarter of calendar 2022, Acreage began adult-use retail operations in the state of Connecticut. |
| · In January 2023, Wana13 and TerrAscend Corp. announced an agreement to bring Wana-branded edibles to the new adult-use market in the state of New Jersey and expand availability in the state of Maryland14. |
| · In February 2023, Jetty15 announced the upcoming availability of Jetty products in the state of New York16. |
Third Quarter Fiscal 2023 Revenue Review17
Revenue by Channel
| (in millions of Canadian dollars, unaudited) | Q3 FY2023 | Q3 FY2022 | Vs. Q3 FY2022 | |
| Canada cannabis | ||||
| Canadian adult-use cannabis | ||||
| Business-to-business18 | $21.5 | $33.3 | (35%) | |
| Business-to-consumer | $11.0 | $14.5 | (24%) | |
| $32.5 | $47.8 | (32%) | ||
| Canadian medical cannabis19 | $14.1 | $12.9 | 9% | |
| $46.6 | $60.7 | (23%) | ||
| Rest-of-world cannabis | ||||
| C3 | $- | $9.7 | (100%) | |
| Other rest-of-world cannabis20 | $5.8 | $12.6 | (54%) | |
| $5.8 | $22.3 | (74%) | ||
| Storz & Bickel | $20.2 | $25.2 | (20%) | |
| BioSteel21 | $16.4 | $17.0 | (4%) | |
| This Works | $8.3 | $10.7 | (22%) | |
| Other | $3.9 | $5.1 | (24%) | |
| Net revenue | $101.2 | $141.0 | (28%) |
Canada Cannabis
- Adult-use business-to-business net revenue in Q3 FY2023 decreased 35% over the prior year period driven primarily by lower sales volumes, particularly in value-priced dried flower, resulting from both the strategic shift in our product portfolio and increased competition. These factors were partially offset by a more favourable product mix.
- Adult-use business-to-consumer net revenue in Q3 FY2023 decreased 24% versus Q3 FY2022 largely driven by increased competition from the rapid growth in third party retail locations across provinces.
- Medical net revenue in Q3 FY2023 increased 9% from Q3 FY2022 driven by growth in insured patient registrations and continued expansion of product offerings.
Rest-of-world Cannabis
- Rest-of-world cannabis revenue in Q3 FY2023 decreased 74% over Q3 FY2022 due primarily to the divestiture of C3 and a decline in our U.S. CBD business.
- Excluding the impact of the divestiture of C3, rest-of-world cannabis net revenue decreased 54% as compared to Q3 FY2022, primarily due to declines in sales to Israel and our U.S. CBD business, partially offset by strong growth in Australia.
Storz & Bickel
- Storz & Bickel vaporizer revenue in Q3 FY2023 decreased 20% over Q3 FY2022 due primarily to continued slowdown in consumer spending.
BioSteel
- BioSteel sales in Q3 FY2023 decreased 4% over Q3 FY2022 due to lapping of strong sales in the prior year quarter driven by the timing of distribution load-in in the U.S.
This Works
- This Works sales in Q3 FY2023 decreased 22% over Q3 FY2022 due in part to softer performance of certain product lines and the impact of foreign exchange rates.
The Q3 FY2023 and Q3 FY2022 financial results presented in this press release have been prepared in accordance with U.S. GAAP.
Webcast and Conference Call Information
The Company will host a conference call and audio webcast with David Klein, CEO and Judy Hong, CFO at 10:00 AM Eastern Time on February 9, 2023.
Webcast Information
A live audio webcast will be available at https://app.webinar.net/DpogWGlRL06.
Replay Information
A replay will be accessible by webcast until 11:59 PM Eastern Time on May 8, 2023 at https://app.webinar.net/DpogWGlRL06.
Non-GAAP Measures
Adjusted EBITDA is a non-GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. Adjusted EBITDA is calculated as the reported net income (loss), adjusted to exclude income tax recovery (expense); other income (expense), net; loss on equity method investments; share-based compensation expense; depreciation and amortization expense; asset impairment and restructuring costs; restructuring costs recorded in cost of goods sold; and charges related to the flow-through of inventory step-up on business combinations, and further adjusted to remove acquisition-related costs. Asset impairments related to periodic changes to the Company’s supply chain processes are not excluded from Adjusted EBITDA given their occurrence through the normal course of core operational activities. The Adjusted EBITDA reconciliation is presented within this news release and explained in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2022 (the “Form 10-Q”) to be filed with the Securities and Exchange Commission (the “SEC”).
Free Cash Flow is a non- GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. This measure is calculated as net cash provided by (used in) operating activities less purchases of and deposits on property, plant and equipment. The Free Cash Flow reconciliation is presented within this news release and explained in the Form 10-Q to be filed with the SEC.
Adjusted Gross Margin and Adjusted Gross Margin Percentage are non-GAAP measures used by management that are not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. Adjusted Gross Margin is calculated as gross margin excluding restructuring and other charges recorded in cost of goods sold, and charges related to the flow-through of inventory step-up on business combinations. Adjusted Gross Margin Percentage is calculated as Adjusted Gross Margin divided by net revenue. The Adjusted Gross Margin and Adjusted Gross Margin Percentage reconciliation is presented within this news release and explained in the Form 10-Q to be filed with the SEC.
