CANOPY GROWTH CORPORATION Introduction
This Management's Discussion and Analysis ("MD&A") should be read together with
other information, including our unaudited condensed interim consolidated
financial statements and the related notes to those statements included in Part
I, Item 1 of this Quarterly Report (the "Interim Financial Statements"), our
consolidated financial statements appearing in our Annual Report on Form 10-K
for the year ended
• Part 1 - Business Overview. This section provides a general description of our
business, which we believe is important in understanding the results of our
operations, financial condition, and potential future trends.
• Part 2 - Results of Operations. This section provides an analysis of our
results of operations for the first quarter of fiscal 2023 in comparison to
the first quarter of fiscal 2022.
• Part 3 - Financial Liquidity and Capital Resources. This section provides an
analysis of our cash flows and outstanding debt and commitments. Included in
this analysis is a discussion of the amount of financial capacity available to
fund our ongoing operations and future commitments.
We prepare and report our Interim Financial Statements in accordance with
Special Note Regarding Forward-Looking Statements
This Quarterly Report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and other applicable securities laws, which involve certain known and unknown risks and uncertainties. Forward-looking statements predict or describe our future operations, business plans, business and investment strategies and the performance of our investments. These forward-looking statements are generally identified by their use of such terms and phrases as "intend," "goal," "strategy," "estimate," "expect," "project," "projections," "forecasts," "plans," "seeks," "anticipates," "potential," "proposed," "will," "should," "could," "would," "may," "likely," "designed to," "foreseeable future," "believe," "scheduled" and other similar expressions. Our actual results or outcomes may differ materially from those anticipated. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.
Forward-looking statements include, but are not limited to, statements with respect to:
• the uncertainties associated with the COVID-19 pandemic, including our
ability, and the ability of our suppliers and distributors, to effectively
manage the restrictions, limitations and health issues presented by the
COVID-19 pandemic, the ability to continue our production, distribution and
sale of our products and the demand for and use of our products by consumers,
disruptions to the global and local economies due to related stay-at-home
orders, quarantine policies and restrictions on travel, trade and business
operations and a reduction in discretionary consumer spending;
• laws and regulations and any amendments thereto applicable to our business and
the impact thereof, including uncertainty regarding the application of U.S.
state and federal law to U.S. hemp (including CBD) products and the scope of
any regulations by the U.S. Food and Drug Administration (the "FDA"), the U.S.
Drug Enforcement Administration (the "DEA"), the U.S. Federal Trade Commission
(the "FTC"), the U.S. Patent and Trademark Office (the "USPTO"), the U.S.
Department of Agriculture (the "USDA") and any state equivalent regulatory
agencies over U.S. hemp (including CBD) products;
• expectations regarding the amount or frequency of impairment losses, including
as a result of the write-down of intangible assets, including goodwill;
• expectations related to our announcement of certain restructuring actions (the
"Restructuring Actions") and any progress, challenges and effects related
thereto as well as changes in strategy, metrics, investments, costs, operating
expenses, employee turnover and other changes with respect thereto;
• expectations regarding the laws and regulations and any amendments thereto
relating to the U.S. hemp industry in the U.S. , including the promulgation of
regulations for the U.S. hemp industry by the USDA and relevant state
regulatory authorities;
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• expectations regarding the potential success of, and the costs and benefits
associated with, our acquisitions, joint ventures, strategic alliances, equity
investments and dispositions;
• the Acreage Amended Arrangement (as defined below), including the occurrence
or waiver (at our discretion) of the Triggering Event (as defined below) and
the satisfaction or waiver of the conditions to closing the acquisition of
Acreage (as defined below);
• the Wana Agreements (as defined below), including the occurrence or waiver (at
our discretion) of the Triggering Event;
• the grant, renewal and impact of any license or supplemental license to
conduct activities with cannabis or any amendments thereof;
• our international activities and joint venture interests, including required
regulatory approvals and licensing, anticipated costs and timing, and expected
impact;
• our ability to successfully create and launch brands and further create,
launch and scale cannabis-based products and U.S. hemp-derived consumer
products in jurisdictions where such products are legal and that we currently
operate in;
• the benefits, viability, safety, efficacy, dosing and social acceptance of
cannabis, including CBD and other cannabinoids;
• the anticipated benefits and impact of the investments in us (the "CBI Group
Investments") from Constellation Brands, Inc. ("CBI") and its affiliates
(together, the "CBI Group ");
• the potential exercise of the warrants held by the CBI Group , pre-emptive
rights and/or top-up rights held by the CBI Group ;
• expectations regarding the use of proceeds of equity financings, including the
proceeds from CBI;
• the legalization of the use of cannabis for medical or recreational in
jurisdictions outside of Canada , the related timing and impact thereof and our
intentions to participate in such markets, if and when such use is legalized;
• our ability to execute on our strategy and the anticipated benefits of such
strategy;
• the ongoing impact of the legalization of additional cannabis product types
and forms for recreational use in Canada , including federal, provincial,
territorial and municipal regulations pertaining thereto, the related timing
and impact thereof and our intentions to participate in such markets;
• the ongoing impact of developing provincial, territorial and municipal
regulations pertaining to the sale and distribution of cannabis, the related
timing and impact thereof, as well as the restrictions on federally regulated
cannabis producers participating in certain retail markets and our intentions
to participate in such markets to the extent permissible;
• the timing and nature of legislative changes in the U.S. regarding the
regulation of cannabis including tetrahydrocannabinol ("THC");
• the future performance of our business and operations;
• our competitive advantages and business strategies;
• the competitive conditions of the industry;
• the expected growth in the number of customers using our products;
• our ability or plans to identify, develop, commercialize or expand our
technology and research and development initiatives in cannabinoids, or the
success thereof;
• expectations regarding revenues, expenses and anticipated cash needs;
• expectations regarding cash flow, liquidity and sources of funding;
• expectations regarding capital expenditures;
• our ability to refinance debt as and when required on terms favorable to us
and comply with covenants contained in our debt facilities and debt
instruments;
• the expansion of our production and manufacturing, the costs and timing
associated therewith and the receipt of applicable production and sale
licenses;
• the expected growth in our growing, production and supply chain capacities;
• expectations regarding the resolution of litigation and other legal and
regulatory proceedings, reviews and investigations;
• expectations with respect to future production costs;
• expectations with respect to future sales and distribution channels and
networks;
• the expected methods to be used to distribute and sell our products;
• our future product offerings;
• the anticipated future gross margins of our operations;
• accounting standards and estimates;
• expectations regarding our distribution network;
• expectations regarding the costs and benefits associated with our contracts
and agreements with third parties, including under our third-party supply and
manufacturing agreements; and
• expectations on price changes in cannabis markets.
Certain of the forward-looking statements contained herein concerning the industries in which we conduct our business are based on estimates prepared by us using data from publicly available governmental sources, market research, industry analysis and on assumptions based on data and knowledge of these industries, which we believe to be reasonable. However, although generally
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indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. The industries in which we conduct our business involve risks and uncertainties that are subject to change based on various factors, which are described further below.
The forward-looking statements contained herein are based upon certain material assumptions that were applied in drawing a conclusion or making a forecast or projection, including: (i) management's perceptions of historical trends, current conditions and expected future developments; (ii) our ability to generate cash flow from operations; (iii) general economic, financial market, regulatory and political conditions in which we operate; (iv) the production and manufacturing capabilities and output from our facilities and our joint ventures, strategic alliances and equity investments; (v) consumer interest in our products; (vi) competition; (vii) anticipated and unanticipated costs; (viii) government regulation of our activities and products including but not limited to the areas of taxation and environmental protection; (ix) the timely receipt of any required regulatory authorizations, approvals, consents, permits and/or licenses; (x) our ability to obtain qualified staff, equipment and services in a timely and cost-efficient manner; (xi) our ability to conduct operations in a safe, efficient and effective manner; (xii) our ability to realize anticipated benefits, synergies or generate revenue, profits or value from our recent acquisitions into our existing operations; (xiii) our ability to continue to operate in light of the COVID-19 pandemic and the impact of the pandemic on demand for, and sales of, our products and our distribution channels; and (xiv) other considerations that management believes to be appropriate in the circumstances. While our management considers these assumptions to be reasonable based on information currently available to management, there is no assurance that such expectations will prove to be correct.
By their nature, forward-looking statements are subject to inherent risks and
uncertainties that may be general or specific and which give rise to the
possibility that expectations, forecasts, predictions, projections or
conclusions will not prove to be accurate, that assumptions may not be correct
and that objectives, strategic goals and priorities will not be achieved. A
variety of factors, including known and unknown risks, many of which are beyond
our control, could cause actual results to differ materially from the
forward-looking statements in this Quarterly Report and other reports we file
with, or furnish to, the
Forward-looking statements are provided for the purposes of assisting the reader in understanding our financial performance, financial position and cash flows as of and for periods ended on certain dates and to present information about management's current expectations and plans relating to the future, and the reader is cautioned that the forward-looking statements may not be appropriate for any other purpose. While we believe that the assumptions and expectations reflected in the forward-looking statements are
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reasonable based on information currently available to management, there is no
assurance that such assumptions and expectations will prove to have been
correct. Forward-looking statements are made as of the date they are made and
are based on the beliefs, estimates, expectations and opinions of management on
that date. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, estimates or opinions,
future events or results or otherwise or to explain any material difference
between subsequent actual events and such forward-looking statements, except as
required by law. The forward-looking statements contained in this Quarterly
Report and other reports we file with, or furnish to, the
Part 1 - Business Overview
We are a world-leading cannabis consumer packaged goods ("CPG") company which
produces, distributes, and sells a diverse range of cannabis, hemp, and CPG
products. Cannabis products are principally sold for recreational and medical
purposes under a portfolio of distinct brands in
On
Our Spectrum Therapeutics medical division is a global leader in medical
cannabis. Spectrum Therapeutics produces and distributes a diverse portfolio of
medical cannabis products to healthcare practitioners and medical customers in
Subsequent to the passage of the 2018 Farm Bill in
In
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On
Our other product offerings, which are sold by our subsidiaries in jurisdictions where it is permissible to do so, include (i) Storz & Bickel vaporizers; (ii) This Works beauty, skincare, wellness and sleep products, some of which have been blended with hemp-derived CBD isolate; and (iii) BioSteel sports nutrition beverages, mixes, protein, gum and mints, some of which have been infused with hemp-derived CBD isolate.
Our products contain THC, CBD, or a combination of these two cannabinoids which are found in the cannabis sativa plant species. THC is the primary psychoactive or intoxicating cannabinoid found in cannabis. We also refer throughout this MD&A to "hemp", which is a term used to classify varieties of the cannabis sativa plant that contain CBD and 0.3% or less THC content (by dry weight). Conversely, references to the term "marijuana" refers to varieties of the cannabis sativa plant with more than 0.3% THC content and moderate levels of CBD.
Our licensed operational capacity in
We operate in two reportable segments:
• Global cannabis, which encompasses the production, distribution and sale of a
diverse range of cannabis and cannabinoid-based consumer products in Canada
and internationally pursuant to applicable international and domestic
legislation, regulations and permits; and
• Other consumer products, which is comprised of the production, distribution
and sale of consumer products by Storz & Bickel, This Works, and BioSteel, and
other revenue sources.
Update on the COVID-19 Pandemic
Management has continued to closely monitor the impact of the COVID-19 global
pandemic, with a focus on the health and safety of our employees, business
continuity and supporting its communities. We established a COVID-19 Management
Committee shortly after the declaration of COVID-19 as a global pandemic and
implemented various measures to reduce the spread of the virus. We have
continued to operate under preventative measures and have experienced minimal
disruption to our production and supply chain. As of the date of this Quarterly
Report, all 33 of our corporate-owned retail stores are open and offering
click-and-collect and/or in-store shopping. Our Canadian medical business, which
operates as an e-commerce channel, has continued largely unchanged. Our
international medical business operates primarily as a pharmacy model, with
pharmacies being deemed essential businesses in
The COVID-19 pandemic, including government measures to limit the spread of
COVID-19, did not have a material adverse impact on our results of operations in
the first quarter of fiscal 2023. However, given the uncertainties associated
with the COVID-19 pandemic, including those related to the distribution and
acceptance of the vaccines and their effectiveness with respect to new variants
of the virus, the use of our products by consumers, disruptions to the global
and local economies due to related stay-at-home orders, quarantine policies and
restrictions on travel, trade and business operations and a reduction in
discretionary consumer spending we are unable to estimate the future impact of
the COVID-19 pandemic on our business, financial condition, results of
operations, and/or cash flows. Recently in
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We believe we have sufficient liquidity available from cash and cash equivalents
and short-term investments on hand of
Recent Developments
Exchanges of Convertible Senior Notes
On
We satisfied the Purchase Price as follows:
• On the initial closings, 35,662,420 common shares were issued to the
Noteholders, other than GCILP, based on a price equal to US$3.50 per common
share, which was the closing price of the common shares on the Nasdaq Global
Select Market ("Nasdaq") on June 29, 2022 . Of this amount, 14,069,353 common
shares were issued to Noteholders on June 30, 2022 , representing our
acquisition and cancellation of an aggregate principal amount of Notes of
$63.1 million .
• On the final closing on July 18, 2022 (the "Final Closing"), 11,896,536 common
shares were issued to Noteholders, other than GCILP, based on the
volume-weighted average trading price of the common shares on the Nasdaq for
the 10 consecutive trading days beginning on, and including, June 30, 2022 ,
being US$2.6245 (the "Averaging Price").
• In addition, on the Final Closing on July 18, 2022 , 29,245,456 common shares
were issued to GCILP based on a price per common share equal to the Averaging
Price. Prior to the Exchange Transaction, GCILP held $200.0 million aggregate
principal amount of Notes. Pursuant to the Exchange Transaction, we acquired
and cancelled $100.0 million aggregate principal amount of such Notes held by
GCILP.
The Notes were issued pursuant to an indenture dated
Plan to Acquire Jetty
On
The Jetty Agreements are structured as two separate option agreements whereby we
have the right to acquire up to 100% of the equity interests in Jetty. As
consideration for entering into the Jetty Agreements, we (i) made an upfront
cash payment in the amount of
The first option agreement is exercisable in two tranches, with the first tranche providing us with the option to acquire 52.78% of Jetty's equity interests, exercisable following the occurrence of the Jetty Triggering Event. The second tranche provides us with the option to acquire 25% of Jetty's equity interests for their fair market value, subject to certain adjustments. Additionally, we expect to make deferred payments computed based on a pre-determined contractual formula. The second option agreement provides us with an option to acquire 22.22% of Jetty's equity interests, exercisable following the occurrence of the Jetty Triggering Event.
Until such time as we elect to exercise our rights to acquire Jetty, we will have no direct or indirect economic or voting interests in Jetty, we will not directly or indirectly control Jetty, and we and Jetty will continue to operate independently of one another. Refer to Note 9 of the Interim Financial Statements for further information regarding the plan to acquire Jetty.
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BioSteel, and
On
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