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 2022 in comparison to the first quarter of fiscal 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
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 ofU.S. state and federal law toU.S. hemp (including CBD) products and the scope of any regulations by theU.S. Food and Drug Administration (the "FDA"), theU.S. Drug Enforcement Administration (the "DEA"), theU.S. Federal Trade Commission (the "FTC"), theU.S. Patent and Trademark Office (the "USPTO"), theU.S. Department of Agriculture (the "USDA") and any state equivalent regulatory agencies overU.S. hemp (including CBD) products; • expectations regarding the laws and regulations and any amendments thereto relating to theU.S. hemp industry in theU.S. , including the promulgation of regulations for theU.S. hemp industry by theUSDA and relevant state regulatory authorities; • 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); 27
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• 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 andU.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 theCBI Group , pre-emptive rights and/or top-up rights held by theCBI Group , including proceeds to us that may result therefrom or the potential conversion of the convertible senior notes (the "Notes") issued byCanopy Growth and held by theCBI 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 ofCanada , 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 inCanada , 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 theU.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 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.
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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 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
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Part 1 - Business Overview
We are a world-leading diversified cannabis and cannabinoid-based consumer
products company with operations in countries across the world. We produce,
distribute and sell a diverse range of cannabis and hemp-based products and
other consumer products for both 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, in
In
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
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markets with a complimentary balance of flower products and extracted
cannabinoid input for our oil, CBD, ingestible cannabis, cannabis extracts and
cannabis topical products. Additionally, we have built a hemp supply chain 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 inCanada 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 34 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 2022. 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. The uncertain nature of the impacts of the COVID-19 pandemic may affect our results of operations into the second quarter of fiscal 2022.
We believe we have sufficient liquidity available from cash and cash equivalents
and short-term investments on hand of
Recent Developments
Acquisition of Supreme Cannabis
On
Acquisition ofAce Valley
On
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Refer to Note 26 of our Interim Financial Statements for information regarding
the fair value of the consideration given and the provisional fair values
assigned to the assets acquired and liabilities assumed for the acquisitions of
Supreme Cannabis and
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