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 March 31, 2022 (the "Annual Report") and Part I, Item 1A,
Risk Factors, of the Annual Report. This MD&A provides additional information on
our business, recent developments, financial condition, cash flows and results
of operations, and is organized as follows:
•
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 second quarter of fiscal 2023 in comparison to the second
quarter of fiscal 2022, and for the six months ended September 30, 2022 in
comparison to the six months ended September 30, 2021.
•
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
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). Our Interim Financial Statements, and the financial information
contained herein, are reported in thousands of Canadian dollars, except share
and per share amounts or as otherwise stated. We have determined that the
Canadian dollar is the most relevant and appropriate reporting currency as,
despite continuing shifts in the relative size of our operations across multiple
geographies, the majority of our operations are conducted in Canadian dollars
and our financial results are prepared and reviewed internally by management in
Canadian dollars.
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:
•
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 U.S. Drug Enforcement
Administration, the U.S. Federal Trade Commission, the U.S. Patent and Trademark
Office, 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;
•
the Company's ability to execute on its strategy to accelerate the Company's
entry into the U.S. cannabis market;
•
expectations regarding the potential success of, and the costs and benefits
associated with the Reorganization (as defined below);
•
expectations to capitalize on the opportunity for growth in the United States
cannabis sector and the anticipated benefits of such strategy;
•
the timing and outcome of the Floating Share Arrangement (as defined below), the
anticipated benefits of the Floating Share Arrangement, the anticipated timing
of the Acreage (as defined below) special meeting of shareholders and the
acquisition of the Fixed Shares (as defined below) and the Floating Shares (as
defined below) by Canopy USA (as defined below), the satisfaction or waiver of
the closing conditions set out in the Floating Share Arrangement Agreement (as
defined below) and
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the Acreage Arrangement Agreement (as defined below), including receipt of all
regulatory approvals, and the anticipated timing and occurrence of the Company's
exercise of the option to acquire the Fixed Shares and closing of such
transaction;
•
the issuance of additional common shares to satisfy the payments to the Holders
(as defined below) and to satisfy any deferred and/or option exercise payments
to the shareholders of Wana (as defined below) and Jetty (as defined below) and
the Non-Voting Shares (as defined below) issuable to Canopy Growth from Canopy
USA in consideration thereof;
•
the potential conversion of common shares held by the CBI Group (as defined
below) to Exchangeable Shares (as defined below), including the termination of
the Second Amended and Restated Investor Rights Agreement (as defined below);
•
the anticipated timing and occurrence of the Meeting (as defined below) to
approve the Amendment Proposal (as defined below);
•
the timing of the Paydown (as defined below) and the reduction in interest
rates;
•
the potential settlement of Notes (as defined below) following the Meeting;
•
expectations related to our announcement of certain restructuring actions (the
"Restructuring Actions"), the Reorganization, 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;
•
expectations regarding the potential success of, and the costs and benefits
associated with the Reorganization, our acquisitions, joint ventures, strategic
alliances, equity investments and dispositions;
•
the Acreage Amended Arrangement (as defined below) and the Floating Share
Arrangement, including the occurrence or waiver (at our discretion) of the
Triggering Event (as defined below), the anticipated timing and occurrence of
the Company's exercise of the option to acquire the Fixed Shares and the
satisfaction or waiver of the conditions to closing the acquisition of Acreage;
•
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;
•
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;
•
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;
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•
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
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 Securities and Exchange Commission (the "SEC") and
other regulatory agencies and made by our directors, officers, other employees
and other persons authorized to speak on our behalf. Such factors include,
without limitation, our limited operating history; the risks that the stock
exchanges on which we are listed may disagree with our interpretations of their
policies, including that financial consolidation of Canopy USA may be
permissible in the event that Canopy USA closes on the acquisition of Wana,
Jetty or the Fixed Shares of Acreage; inherent uncertainty associated with
projections; the diversion of management time on issues related to Canopy USA;
the ability of parties to certain transactions to receive, in a timely manner
and on satisfactory terms, the necessary regulatory, court and shareholder
approvals; the risks that our Restructuring Actions will not result in the
expected cost-savings, efficiencies and other benefits or will result in greater
than anticipated turnover in personnel; risks that we may be required to write
down intangible assets, including goodwill, due to impairment; changes in laws,
regulations and guidelines and our compliance with such laws, regulations and
guidelines; the risk that the COVID-19 pandemic may disrupt our operations and
those of our suppliers and distribution channels and negatively impact the
demand for and use of our products; consumer demand for cannabis and U.S. hemp
products; inflation risks; the risks and uncertainty regarding future product
development; our reliance on licenses issued by and contractual arrangements
with
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various federal, state and provincial governmental authorities; the risk that
cost savings and any other synergies from the CBI Group Investments may not be
fully realized or may take longer to realize than expected; the implementation
and effectiveness of key personnel changes; risks associated with jointly owned
investments; risks relating to our current and future operations in emerging
markets; risks relating to inventory write downs; future levels of revenues and
the impact of increasing levels of competition; risks related to the protection
and enforcement of our intellectual property rights; our ability to manage
disruptions in credit markets or changes to our credit ratings; future levels of
capital, environmental or maintenance expenditures, general and administrative
and other expenses; the success or timing of completion of ongoing or
anticipated capital or maintenance projects; risks related to the integration of
acquired businesses; the timing and manner of the legalization of cannabis in
the United States; business strategies, growth opportunities and expected
investment; the adequacy of our capital resources and liquidity, including but
not limited to, availability of sufficient cash flow to execute our business
plan (either within the expected timeframe or at all); counterparty risks and
liquidity risks that may impact our ability to obtain loans and other credit
facilities on favorable terms; the potential effects of judicial, regulatory or
other proceedings, or threatened litigation or proceedings, on our business,
financial condition, results of operations and cash flows; risks related to
stock exchange restrictions; risks associated with divestment and restructuring;
volatility in and/or degradation of general economic, market, industry or
business conditions; our exposure to risks related to an agricultural business,
including wholesale price volatility and variable product quality; third-party
manufacturing risks; third-party transportation risks; compliance with
applicable environmental, economic, health and safety, energy and other policies
and regulations and in particular health concerns with respect to vaping and the
use of cannabis and U.S. hemp products in vaping devices; the anticipated
effects of actions of third parties such as competitors, activist investors or
federal, state, provincial, territorial or local regulatory authorities,
self-regulatory organizations, plaintiffs in litigation or persons threatening
litigation; changes in regulatory requirements in relation to our business and
products; and the factors discussed under the heading "Risk Factors" in the
Annual Report and in Item 1A of Part II of this Quarterly Report. Readers are
cautioned to consider these and other factors, uncertainties and potential
events carefully and not to put undue reliance on forward-looking statements.
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 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 SEC and other regulatory agencies and made by our directors,
officers, other employees and other persons authorized to speak on our behalf
are expressly qualified in their entirety by these cautionary statements.
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 Canada pursuant to the Cannabis
Act, and globally pursuant to applicable international legislation, regulations,
and permits. 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) BioSteel Sports Nutrition Inc. ("BioSteel") sports nutrition
beverages, mixes, protein, gum and mints, some of which have been infused with
hemp-derived CBD isolate; and (iii) This Works beauty, skincare, wellness and
sleep products, some of which have been blended with hemp-derived CBD isolate.
Our core operations are in Canada, the United States, and Germany.
On October 17, 2018, the Cannabis Act came into effect in Canada, regulating
both the medical and recreational cannabis markets in Canada and providing
provincial, territorial and municipal governments the authority to prescribe
regulations regarding the distribution and sale of recreational cannabis. On
October 17, 2019, the second phase of recreational cannabis products was
legalized pursuant to certain amendments to the regulations under the Cannabis
Act. We currently offer product varieties in dried flower, oil, softgels, vape
pen power sources, pod-based vape devices, vape cartridges, cannabis-infused
beverages and cannabis-infused edibles, with product availability varying based
on provincial and territorial regulations. Our recreational cannabis products
are predominantly sold to provincial and territorial agencies under a
"business-to-business" wholesale model, with those provincial and territorial
agencies then being responsible for the distribution of our products to
brick-and-mortar stores and for online retail sales. As described under "Recent
Developments" below, on September 27, 2022, we announced that we have entered
into agreements to divest our retail business across Canada, which includes the
retail stores operating under the Tweed and Tokyo Smoke banners under a
"business-to-consumer" model. In the first quarter of fiscal 2022, we completed
the acquisitions of (i) The Supreme Cannabis Company, Inc. ("Supreme Cannabis"),
a producer of recreational, wholesale and medical cannabis products with a
diversified portfolio of distinct
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cannabis products and brands; and (ii) AV Cannabis Inc. ("Ace Valley"), an
Ontario-based cannabis brand focused on premium, ready-to-enjoy products
including vapes, pre-roll joints and gummies.
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
Canada, and in several other countries where it is federally permissible to do
so.
Subsequent to the passage of the 2018 Farm Bill in December 2018, we began
building our hemp supply chain in the United States through our investment in
processing, extraction and finished goods manufacturing facilities. In the
United States, we currently offer (i) a line of premium quality, hemp-derived
wellness gummies, oils, softgels and topicals under the Martha Stewart CBD
brand; (ii) a line of premium, ready-to-drink CBD-infused sparkling waters under
the Quatreau brand; and (iii) whisl, a CBD vape.
In June 2019, we implemented a plan of arrangement pursuant to an arrangement
agreement (the "Acreage Arrangement Agreement") with Acreage Holdings, Inc.
("Acreage"), a U.S. multi-state cannabis operator. In September 2020, we entered
into a second amendment to the Acreage Arrangement Agreement (the "Acreage
Amending Agreement") and implemented an amended and restated plan of arrangement
(the "Acreage Amended Arrangement"). Pursuant to the Acreage Amended
Arrangement, following the occurrence or waiver (at our discretion) of changes
in U.S. federal law to permit the general cultivation, distribution, and
possession of marijuana or to remove the regulation of such activities from the
federal laws of the United States (the "Triggering Event") and subject to the
satisfaction or waiver of the conditions set out in the Acreage Arrangement
Agreement (as modified by the Acreage Amending Agreement), we (i) agreed to
acquire approximately 70% of the issued and outstanding shares of Acreage, and
(ii) obtained the right (the "Acreage Floating Option") to acquire the other
approximately 30% of the issued and outstanding shares of Acreage. In connection
with the Floating Share Arrangement Agreement, Canopy Growth has irrevocably
waived the Acreage Floating Option existing under the Acreage Arrangement
Agreement. The acquisition of Acreage, if completed, will provide a pathway into
cannabis markets in the United States; however, we and Acreage will continue to
operate as independent companies until the acquisition of Acreage is completed.
On October 14, 2021, we entered into definitive option agreements (the "Wana
Agreements") with Mountain High Products, LLC, Wana Wellness, LLC and The Cima
Group, LLC (collectively, "Wana") providing us with the right, upon the
occurrence or waiver (at our discretion) of the Triggering Event, to acquire
100% of the outstanding membership interests of Wana. Wana manufactures and
sells gummies in the state of Colorado and licenses its intellectual property to
partners, who manufacture, distribute, and sell Wana-branded gummies across the
United States, including in California, Arizona, Illinois, Michigan and Florida,
and across Canada. Until such time as we exercise our right to acquire Wana, we
will have no economic or voting interest in Wana, and we and Wana will continue
to operate independently. Additionally, on May 17, 2022, we and Lemurian, Inc.
("Jetty") entered into definitive agreements (the "Jetty Agreements") providing
us with the right to acquire up to 100% of the outstanding equity interests in
Jetty upon the Triggering Event. Jetty is a California-based producer of
high-quality cannabis extracts and pioneer of clean vape technology.
As described below under "Recent Developments", on October 25, 2022, we
announced a strategy to accelerate our entry into the U.S. cannabis industry
through the creation of a new U.S.-domiciled holding company, Canopy USA, LLC
("Canopy USA") (the "Reorganization"). Following the implementation of the
Reorganization, Canopy USA, as of October 24, 2022, holds our U.S. cannabis
investments, which is expected to enable Canopy USA, following, among other
things, the Meeting, to exercise its rights to acquire Acreage, Wana, and Jetty.
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 Canada includes indoor and greenhouse
cultivation space; post-harvest processing and cannabinoid extraction
capability; advanced manufacturing capability for softgel encapsulation and
pre-rolled joints; a beverage production facility; and confectionary
manufacturing. These capabilities allow us to supply the recreational and
medical markets with a complimentary balance of flower products and extracted
cannabinoid input for our oil, CBD, ingestible cannabis, cannabis extracts and
cannabis topical products.
Segment Reporting
Prior to the second quarter of fiscal 2022, we had the following two reportable
segments: (i) global cannabis; and (ii) other consumer products. Following the
completion of certain restructuring actions which were initiated in the fourth
quarter of fiscal 2022,
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and which were aligned with our strategic review of our business, we have
changed the structure of our internal management financial reporting.
Accordingly, in the second quarter of fiscal 2023 we are reporting our financial
results for the following five reportable segments: (i) Canada cannabis; (ii)
rest-of-world cannabis; (iii) Storz & Bickel; (iv) BioSteel; and (v) This Works,
with the principal activities of each of these reportable segments described
above under "Business Overview".
These segments reflect how our operations are managed, how our Chief Executive
Officer, who is the Chief Operating Decision Maker ("CODM"), allocates resources
and evaluates performance, and how our internal management financial reporting
is structured. Our CODM evaluates the performance of these segments, with a
focus on (i) segment net revenue, and (ii) segment gross margin as the measure
of segment profit or loss. Accordingly, information regarding segment net
revenue and segment gross margin for the comparative periods has been restated
to reflect the aforementioned change in reportable segments. The remainder of
our operations include revenue derived from, and cost of sales associated with,
our non-cannabis extraction activities and other ancillary activities; these are
included within "other".
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. 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 second 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 the United States, there have been a number of supply chain
challenges, such as container ships facing delays due to congestion in ports,
impacting many industries, including the industries in which we operate.
Although we have not yet seen a significant impact, we continue to monitor our
supply chain closely. The uncertain nature of the impacts of the COVID-19
pandemic may affect our results of operations into the third quarter of fiscal
2023.
We believe we have sufficient liquidity available from cash and cash equivalents
and short-term investments on hand of $746.7 million and $396.7 million,
respectively, at September 30, 2022, to enable us to meet our working capital
and other operating requirements, fund growth initiatives and capital
expenditures, settle our liabilities, and repay scheduled principal and interest
payments on debt for at least the next twelve months. Refer to "Part 3 -
Financial Liquidity and Capital Resources" for further information.
Recent Developments
Reorganization - Creation of Canopy USA
On October 25, 2022, Canopy Growth completed the Reorganization, which included
the creation of Canopy USA. Following the implementation of the Reorganization,
Canopy USA, as of October 24, 2022, holds the U.S. cannabis investments
previously held by Canopy Growth, which is expected to enable Canopy USA,
following, among other things, the Meeting, to exercise its rights to acquire
Acreage, Wana, and Jetty.
Canopy USA has an ownership interest in the following assets, among others:
•
Acreage - The shares to be acquired upon the exercise of the option to acquire
approximately 70% of the total shares of Acreage at a fixed share exchange ratio
of 0.3048 of a common share of Canopy Growth. In addition, Canopy USA will
acquire all of the issued and outstanding Class D subordinate voting shares of
Acreage (the "Floating Shares") subject to, among other things, the terms and
conditions of the Floating Share Arrangement Agreement (as defined below).
Acreage is a leading vertically-integrated multi-state cannabis operator, with
its main operations in densely populated states across the Northeast U.S.
including New Jersey and New York.
•
Wana - The option to acquire 100% of the membership interests of Wana, a leading
cannabis edibles brand in North America.
•
Jetty - The option to acquire 100% of the shares of Jetty, a California-based
producer of high-quality cannabis extracts and pioneer of clean vape technology.
In addition, as of October 24, 2022, Canopy USA controls a conditional ownership
position, assuming conversion of its exchangeable shares and the exercise of its
option but excluding the exercise of its warrants, of approximately 13.7% in
TerrAscend Corp. ("TerrAscend"), a leading North American cannabis operator with
vertically integrated operations and a presence in Pennsylvania, New Jersey,
Michigan and California as well as licensed cultivation and processing
operations in Maryland. Canopy USA's direct and indirect interests in TerrAscend
includes control over all exchangeable shares, options and warrants previously
held
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by Canopy Growth in TerrAscend as well as the debentures and loan agreement
between Canopy Growth and certain TerrAscend subsidiaries.
Ownership of U.S. Cannabis Investments
Following the implementation of the Reorganization, the shares and interests in
Acreage, Wana, Jetty, and TerrAscend are held, directly or indirectly, by Canopy
USA, and Canopy Growth no longer holds a direct interest in any shares or
interests in such entities. Canopy Growth holds non-voting and non-participating
shares (the "Non-Voting Shares") in the capital of Canopy USA. The Non-Voting
Shares do not carry voting rights, rights to receive dividends or other rights
upon dissolution of Canopy USA, but are convertible into common shares of Canopy
USA (the "Canopy USA Common Shares"). To facilitate the creation of the
Non-Voting Shares, Canopy USA has raised funds from a third-party investor and
has agreed to issue additional Canopy USA Common Shares to the shareholders of
Wana as additional consideration in exchange for the option to acquire Wana and
reduce the future payments owed in connection with the exercise of each of the
options to acquire Wana to US$1.00, resulting in an aggregate exercise price of
US$3.00 (the "Wana Amendments"). The value of the Canopy USA Common Shares to be
issued to the shareholders of Wana will be equal to 7.5% of the fair market
value of Wana as of no earlier than January 1, 2023 (the "Wana Value Payment").
In connection with the Wana Amendments, Canopy Growth has also agreed to issue
common shares to the shareholders of Wana with a value equal to the Wana Value
Payment as of no earlier than January 1, 2023, subject to certain limitations.
Canopy Growth has also agreed to register the resale of the common shares issued
in connection with the Wana Amendments.
Canopy Growth has the right to convert its Non-Voting Shares into Canopy USA
Common Shares and Canopy USA retains a call right to repurchase all Canopy USA
Common Shares that have been issued to third parties, subject to certain time
limitations.
Canopy Growth and Canopy USA have also entered into a protection agreement (the
"Protection Agreement") to provide for certain covenants in order to preserve
the value of the Non-Voting Shares held by Canopy Growth until such time as
Canopy Growth controls Canopy USA. Canopy Growth also has two designees on the
four-person board of managers of Canopy USA.
Upon closing of Canopy USA's acquisition of Acreage, Canopy Growth will receive
additional Non-Voting Shares from Canopy USA in consideration for the issuance
of Company common shares that shareholders of Acreage will receive in accordance
with the terms of the Existing Acreage Arrangement Agreement (as defined below)
and the Floating Share Arrangement Agreement.
In addition, subject to the terms and conditions of the Protection Agreement and
the terms of the option agreements to acquire Wana and Jetty, as applicable,
Canopy Growth may be required to issue additional common shares in satisfaction
of certain deferred and/or option exercise payments to the shareholders of Wana
and Jetty. Canopy Growth will receive additional Non-Voting Shares from Canopy
USA as consideration for any Company common shares issued in the future to the
shareholders of Wana and Jetty.
Until such time as Canopy Growth converts the Non-Voting Shares into Canopy USA
Common Shares, Canopy Growth will have no economic or voting interest in Canopy
USA, Wana, Jetty, TerrAscend, or Acreage. Canopy USA, Wana, Jetty, TerrAscend,
and Acreage will continue to operate independently of Canopy Growth.
Acreage Agreements
On October 24, 2022, Canopy Growth entered into an arrangement agreement with
Canopy USA and Acreage (the "Floating Share Arrangement Agreement"), pursuant to
which, subject to approval of the holders of the Floating Shares and the terms
and conditions of the Floating Share Arrangement Agreement, Canopy USA will
acquire all of the issued and outstanding Floating Shares by way of a
court-approved plan on arrangement (the "Floating Share Arrangement") on the
basis of 0.45 of a Company common share in exchange for each Floating Share
held. In connection with the Floating Share Arrangement Agreement, Canopy Growth
has irrevocably waived the Acreage Floating Option existing under the Acreage
Arrangement Agreement.
It is expected that the Floating Share Arrangement will be effected by way of a
court-approved plan of arrangement under the Business Corporations Act (British
Columbia). The Floating Share Arrangement requires the approval of: (i) at least
two-thirds of the votes cast by the holders of the Floating Shares; and (ii) at
least a majority of the votes cast by the holders of the Floating Shares,
excluding the votes cast by "interested parties" and "related parties" (as such
terms are defined in Multilateral Instrument 61-101 - Protection Of Minority
Security Holders In Special Transactions), at a special meeting of Acreage
shareholders expected to be held in January 2023.
On October 24, 2022, Canopy Growth also agreed to issue common shares with a
value of US$50.0 million to, among others, certain unitholders (the "Holders")
of High Street Capital Partners, LLC, a subsidiary of Acreage ("HSCP"), in order
to reduce a potential liability of approximately US$121.0 million pursuant to
HSCP's amended tax receivable agreement and the related tax receivable bonus
plans. In connection with the foregoing, 5,648,927 common shares with a value of
approximately US$15.0 million
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were issued to certain Holders on November 4, 2022 as the first installment
under this agreement with a second payment of approximately US$15.0 million in
common shares to occur on the earlier of (a) the second business day following
the date on which the shareholders of Acreage approve the Floating Share
Arrangement; or (b) April 24, 2023. The final payment with a value of
approximately US$20.0 million will be issued immediately prior to completion of
the Floating Share Arrangement. Canopy Growth has also agreed to register the
resale of such common shares under the Securities Act of 1933, as amended. In
addition, on October 24, 2022, a wholly-owned subsidiary of Canopy Growth
("Acreage Debt Optionholder") agreed, subject to certain conditions precedent,
to acquire an option to purchase the outstanding principal, including all
accrued and unpaid interest thereon of Acreage's debt, being an amount up to
US$150.0 million (the "Acreage Debt") from Acreage's existing lenders (the
"Lenders") in exchange for an option premium payment of US$28.5 million (the
"Option Premium"). The Acreage Debt Optionholder will have the right to exercise
its option at its discretion, and the Option Premium will be used towards
settlement of the Acreage Debt. In the event that Acreage repays the Acreage
Debt on or prior to maturity, the Option Premium will be returned to the Acreage
Debt Optionholder. In the event that Acreage defaults on the Acreage Debt and
the Acreage Debt Optionholder does not exercise its option to acquire the
Acreage Debt, the Option Premium will be released to the Lenders.
On October 24, 2022, Canopy Growth and Canopy USA entered into voting support
agreements with certain of Acreage's directors, officers, and consultants
pursuant to which such persons have agreed, among other things, to vote their
Floating Shares in favor of the Floating Share Arrangement, representing
approximately 7.3% of the issued and outstanding Floating Shares.
In addition to shareholder and court approvals, the Floating Share Arrangement
is subject to approval of the Amendment Proposal (as defined below) and
applicable regulatory approvals including, but not limited to, Toronto Stock
Exchange ("TSX") approval and the satisfaction of certain other closing
conditions customary in transactions of this nature. Assuming timely receipt of
all necessary court, shareholder, regulatory and other third-party approvals and
the satisfaction of all other conditions, closing of the acquisition of Acreage
is expected to occur in late 2023.
It is intended that Canopy Growth's existing option to acquire the Class E
subordinate voting shares of Acreage (the "Fixed Shares") on the basis of 0.3048
of a Company common share per Fixed Share will be exercised after the Meeting in
accordance with the terms of the arrangement agreement dated April 18, 2019, as
amended on May 15, 2019, September 23, 2020 and November 17, 2020 (the "Existing
Acreage Arrangement Agreement"). Canopy Growth will not hold any Fixed Shares or
Floating Shares. Completion of the acquisition of the Fixed Shares following
exercise of the option is subject to the satisfaction of certain conditions set
forth in the Existing Acreage Arrangement Agreement. The acquisition of the
Floating Shares pursuant to the Floating Share Arrangement is anticipated to
occur concurrently with the acquisition of the Fixed Shares pursuant to the
Existing Acreage Arrangement Agreement in late 2023 such that 100% of the issued
and outstanding shares of Acreage will be owned by Canopy USA on closing of the
acquisition of both the Fixed Shares and the Floating Shares.
Special Shareholder Meeting
In connection with the Reorganization, Canopy Growth expects to hold a special
meeting of shareholders (the "Meeting") at which Canopy Growth shareholders will
be asked to consider and, if deemed appropriate, to pass a special resolution
authorizing an amendment to its articles of incorporation, as amended (the
"Amendment Proposal"), in order to: (i) create and authorize the issuance of an
unlimited number of a new class of non-voting and non-participating exchangeable
shares in the capital of Canopy Growth (the "Exchangeable Shares"); and (ii)
restate the rights of the Company's common shares to provide for a conversion
feature whereby each common share may at any time, at the option of the holder,
be converted into one Exchangeable Share. The Exchangeable Shares will not carry
voting rights, rights to receive dividends or other rights upon dissolution of
Canopy Growth but will be convertible into common shares.
The Amendment Proposal must be approved by at least 66?% of the votes cast on a
special resolution by Canopy Growth's shareholders present in person or
represented by proxy at the Meeting. On October 24, 2022, Greenstar Canada
Investment Limited Partnership ("Greenstar") and CBG Holdings LLC ("CBG"),
indirect, wholly-owned subsidiaries of CBI, entered into a voting support
agreement with Canopy Growth pursuant to which they have agreed, subject to the
terms and conditions thereof, among other things, to vote all of the common
shares beneficially owned, directed or controlled, directly or indirectly, by
them for the Amendment Proposal.
In the event that the Amendment Proposal is approved and subject to the
conversion by CBI of their common shares into Exchangeable Shares, Canopy USA is
expected to exercise the options to acquire Wana and Jetty. If the Amendment
Proposal is not approved, Canopy USA will not be permitted to exercise the
rights to acquire the Fixed Shares, Wana or Jetty and the Floating Share
Arrangement Agreement will be terminated. In such circumstances, Canopy Growth
will retain its option to acquire the Fixed Shares under the Existing Acreage
Arrangement Agreement and Canopy USA will continue to hold an option to acquire
Wana and Jetty as well as exchangeable shares in the capital of TerrAscend.
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Balance Sheet Actions
On October 24, 2022, Canopy Growth entered into agreements with certain of its
lenders under its term loan credit agreement dated March 18, 2021 (the "Credit
Agreement") pursuant to which Canopy Growth will tender US$187.5 million of the
principal amount outstanding thereunder at a discounted price of US$930 per
US$1,000 or US$174.4 million in the aggregate (the "Paydown"). The Paydown will
be made in two equal payments: the first payment by no later than November 10,
2022, and the second payment by no later than April 17, 2023.
Canopy Growth also agreed with its lenders to amend certain terms of the Credit
Agreement (collectively, the "Amendments"). The Amendments include, among other
things, reductions to the minimum Liquidity (as defined in the Credit Agreement)
covenant to US$100.0 million, which is to be reduced as payments are made in
accordance with the Paydown, certain changes to the application of net proceeds
from asset sales and the establishment of a new committed delayed draw term
credit facility in an aggregate principal amount of US$100.0 million. In
addition, the Amendments include the elimination of the additional US$500.0
million incremental term loan facility.
Relationship with CBI
In connection with the Reorganization and assuming approval and adoption of the
Amendment Proposal, CBI has expressed its current intention to convert all of
its common shares of the Company into Exchangeable Shares. However, any decision
to convert will be made by CBI in its sole discretion, and CBI is not obligated
to effect any such conversion.
In connection with the foregoing, on October 24, 2022, Canopy Growth entered
into a consent agreement (the "Consent Agreement") among Canopy Growth, CBG and
Greenstar, pursuant to which the parties agreed, among other things, that
following the conversion by CBG and Greenstar of their respective common shares
into Exchangeable Shares, other than the Notes held by CBI, all agreements
between Canopy Growth and CBI, including the Second Amended and Restated
Investor Rights Agreement, dated as of April 18, 2019, by and among certain
wholly-owned subsidiaries of CBI and Canopy Growth (the "Second Amended and
Restated Investor Rights Agreement") will be terminated. Pursuant to the terms
of the Consent Agreement, CBG and Greenstar also agreed, among other things,
that at the time of the conversion by CBG and Greenstar of their common shares
into Exchangeable Shares, (i) CBG will surrender the warrants held by CBG to
purchase 139,745,453 common shares for cancellation for no consideration and
(ii) all nominees of CBI that are currently sitting on the board of directors of
Canopy Growth (the "Board") will resign from the Board. In addition, pursuant to
the Consent Agreement, Canopy Growth is contractually required to convert its
Non-Voting Shares into Canopy USA Common Shares and cause Canopy USA to
repurchase the Canopy USA Common Shares held by certain third-party investors in
Canopy USA in the event CBG and Greenstar have not converted their respective
common shares into Exchangeable Shares by the later of (i) sixty days after the
Meeting or (ii) February 28, 2023 (the "Termination Date"). The Consent
Agreement will automatically terminate on the Termination Date.
In the event that CBI does not convert its common shares into Exchangeable
Shares, Canopy USA will not be permitted to exercise the rights to acquire the
Fixed Shares, Wana or Jetty and the Floating Share Arrangement Agreement will be
terminated. In such circumstances, Canopy Growth will retain its option to
acquire the Fixed Shares under the Existing Acreage Arrangement Agreement and
Canopy USA will continue to hold an option to acquire Wana and Jetty as well as
exchangeable shares and other securities in the capital of TerrAscend. In
addition, Canopy USA will exercise its repurchase rights to acquire the Canopy
USA Common Shares held by the third party investors.
Divestiture of Canadian Retail Operations
On September 27, 2022, we announced that we have entered into agreements to
divest our retail business in Canada, which includes the retail stores operating
under the Tweed and Tokyo Smoke banners.
We have reached an agreement (the "OEGRC Transaction") with OEG Retail Cannabis
("OEGRC"), an existing Canopy Growth licensee partner that currently owns and
operates our franchised Tokyo Smoke stores in Ontario. As part of this
agreement, OEGRC will acquire ownership of 23 of our corporate-owned retail
stores in Manitoba, Saskatchewan, and Newfoundland and Labrador, as well as all
Tokyo Smoke-related intellectual property. Any acquired retail stores branded as
Tweed will be rebranded by OEGRC, and the master franchise agreement between us
and OEGRC pursuant to which OEGRC licenses the Tokyo Smoke brand in Ontario will
be terminated on the closing of the OEGRC Transaction.
We also reached an agreement (the "FOUR20 Transaction") with 420 Investments
Ltd. ("FOUR20"), a licensed cannabis retailer, pursuant to which FOUR20 will
acquire the ownership of five of our corporate-owned retail stores in Alberta.
Following the close of the FOUR20 Transaction, these stores will be rebranded
under FOUR20's retail banner.
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Closing of the OEGRC Transaction remains subject to regulatory approvals and
other customary closing conditions. The FOUR20 Transaction closed on October 26,
2022.
Exchanges of Unsecured Senior Notes
On June 29, 2022 and June 30, 2022, we entered into privately negotiated
exchange agreements (the "Exchange Agreements") with a limited number of
holders, including Greenstar (collectively, the "Noteholders"), of our 4.25%
unsecured senior notes due in 2023 (the "Notes"). Pursuant to the Exchange
Agreements, we acquired and cancelled approximately $262.6 million of aggregate
principal amount of the Notes from the Noteholders (the "Exchange Transaction"),
for an aggregate purchase price (excluding $5.4 million paid in cash to the
Noteholders for accrued and unpaid interest) of $260.0 million (the "Purchase
Price"), which was payable in our common shares.
We satisfied the Purchase Price as follows:
•
On the initial closings, 35,662,420 common shares were issued to the
Noteholders, other than Greenstar, based on a price equal to US$3.50 per common
share, which was the closing price of the common shares on the 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 Greenstar, 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 Greenstar based on a price per common share equal to the
Averaging Price. Prior to the Exchange Transaction, Greenstar 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 Greenstar.
•
In total, 62,735,059 common shares were issued in July 2022, representing our
acquisition and cancellation of an aggregate principal amount of Notes of $199.5
million, and a total of 76,804,412 common shares were issued in June and July
2022, representing our acquisition and cancellation of an aggregate principal
amount of Notes of $262.6 million.
The Notes were issued pursuant to an indenture dated June 20, 2018, as
supplemented by supplement no. 1 to the indenture dated April 30, 2019 and
supplement no. 2 to the indenture dated June 29, 2022 (collectively, the
"Indenture"). As a result of supplement no. 2 to the Indenture dated June 29,
2022 (the "Second Supplemental Indenture"), we irrevocably surrendered our right
to settle the conversion of any Note with our common shares. As a result, all
conversions of Notes following the execution of the Second Supplemental
Indenture will be settled entirely in cash.
Purchase of Manufacturing Facility
On November 8, 2022, we completed the purchase of a manufacturing facility from
one of BioSteel's contract manufacturers.
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