Canopy Growth Corporation Reports Second Quarter Fiscal Year 2023 Financial Results
SMITHS FALLS, ON, Nov. 9, 2022 /PRNewswire/ – Canopy Growth Corporation (“Canopy Growth” or the “Company”) (TSX: WEED) (NASDAQ: CGC) today announces its financial results for the second quarter ended September 30, 2022. All financial information in this press release is reported in Canadian dollars, unless otherwise indicated.
- Announced comprehensive plan to fast track entry into the U.S. cannabis market through the creation of a new U.S. domiciled holding company, Canopy USA, LLC (“Canopy USA”), which is expected to accelerate growth and market expansion.
- In respect of the acquisition of Acreage Holdings, Inc. (“Acreage”), the 30-day HSR waiting period has expired.
- Delivered net revenue growth of 7% in Q2 FY2023 relative to Q1 FY2023, despite the continued impacts of macroeconomic headwinds and evolving Canadian cannabis market dynamics.
- Achieved 299% net revenue increase for BioSteel as compared to the prior year, driven by increased investment. Acquired manufacturing facility subsequent to quarter end, which is expected to support ongoing rapid U.S. expansion for the brand and drive gross margin improvement.
- Increased Canadian medical cannabis revenues by 8% versus Q2 FY2022 through continued focus on expansion of product offerings. Stabilized revenues in Canadian adult-use and saw market share growth across key brands including Doja, Tweed, and Deep Space compared to the prior quarter.
- Announced divestiture of Canadian retail operations, ensuring cost reduction program remains on track to deliver $70-$100 million in Selling, General & Administrative (“SG&A”) savings. In addition, the Company continues to assess opportunities to focus the Company’s Canadian cannabis operations.
Our second quarter marks a key inflection-point for Canopy, demonstrating momentum across our key businesses and accelerating our entry into the U.S. cannabis market through the creation of Canopy USA.
David Klein, Chief Executive Officer
Canopy is ideally positioned to capitalize on this once-in-a-generation opportunity and accelerate our path to North American cannabis market leadership.
“We delivered solid sequential quarterly net revenue growth and improved margins, led by another record quarter for BioSteel, the stabilization of our Canadian cannabis business, and continued actions to reduce overall costs. We are pressing forward on our path to profitability in Canada and expect Canopy USA will meaningfully enhance our growth and profitability over time once it closes the announced acquisitions of Acreage, Jetty, and Wana.”
Judy Hong, Chief Financial Officer
Second Quarter Fiscal 2023 Financial Summary
Net revenue of $118 million in Q2 FY2023 declined 10% versus Q2 FY2022. The decrease is primarily attributable to increased competition in the Canadian adult-use cannabis market, the divestiture of C³ Cannabinoid Compound Company GmbH (“C3”), and softer performance from This Works, offset by revenue growth at BioSteel. Excluding the impact from the divestiture of C3, net revenue declined 1% versus Q2 FY2022. When adjusting for both the impact of C3 and the ongoing divestiture of our Canadian retail business, revenues for the period increased 2% versus Q2 FY2022. Net revenue increased 7% in Q2 FY2023 relative to Q1 FY2023, despite the continued impacts of macroeconomic headwinds and evolving Canadian cannabis market dynamics.
Reported gross margin in Q2 FY2023 was 3% as compared to (54%) in Q2 FY2022. Excluding non-cash restructuring costs recorded in cost of goods sold of $8 million, adjusted gross margin was 10%. Gross margin in Q2 FY2023 was impacted by lower production output and price compression in the Canadian adult-use cannabis business, the divesture of C3, and a decrease in the amount of payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program.
Total SG&A expenses in Q2 FY2023 were flat versus Q2 FY2022, driven by year-over-year reductions in General & Administrative (“G&A”) and Research & Development (“R&D”) expenses, offset by increases in Acquisition-Related Costs and Sales and Marketing expenses. The increase in Sales and Marketing expenses was primarily driven by the investment in the BioSteel NHL partnership announced in July 2022.
Net Loss in Q2 FY2023 was $232 million, which is a $216 million increase in the net loss versus Q2 FY2022, driven primarily by non- cash fair value changes and an increase in asset impairment and restructuring costs, partially offset by improved margins.
Adjusted EBITDA loss in Q2 FY2023 was $78 million, an $85 million improvement in Adjusted EBITDA loss versus Q2 FY2022 due to the improvement in gross margin and reductions in G&A and R&D expenses.
Free Cash Flow3:
Free Cash Flow in Q2 FY2023 was an outflow of $135 million, a 34% increase in outflow versus Q2 FY2022. Relative to Q2 FY2022, the outflow increase is due to the timing of certain payments in each period. Year-to-date Free Cash Flow in FY2023 is in line with the prior year period.
Cash and short-term investments amounted to $1,143 million at September 30, 2022, representing a decrease of $229 million from $1,372 million at March 31, 2022 reflecting primarily Adjusted EBITDA losses and interest costs.
1 Adjusted gross margin is a non-GAAP measure, and for Q2 FY2023 excludes $8.0 million of restructuring costs recorded in cost of goods sold (Q2 FY2022 – excludes $3.1 million related to the flow-through of inventory step-up associated with the acquisition of Supreme Cannabis and $nil of restructuring costs recorded in cost of goods sold). See “Non-GAAP Measures”.
2 Adjusted EBITDA is a non-GAAP measure. See “Non-GAAP Measures”.
3 Free cash flow is a non-GAAP measure. See “Non-GAAP Measures”.
Canadian cannabis business proved resilient with stabilized revenue in adult-use cannabis, benefiting from mainstream and premium flower innovation and growth in medical cannabis
- Canadian medical cannabis net revenue increased 8% versus Q2 FY2022 driven by growth in patient registrations and continued expansion of product offerings.
- Doja, premium flower and pre-rolled joint brand, increased market share by 2 bps versus Q1 FY2023 to 2.4%4. Mainstream brands Tweed and Vert increased market share by 10 bps and 13 bps, respectively, versus Q1 FY2023. Deep Space beverages increased market share by 67 bps versus Q1 FY2023 to 11.5%.
- High’er Education, the Company’s budtender engagement program, has facilitated over 10,000 budtender interactions in its first year. The programming focuses primarily on education and product knowledge to drive budtender recommendations.
Gains in distribution and sales velocity of BioSteel RTD drove record revenue in Q2 FY2023
- BioSteel revenue in Q2 FY2023 increased 299% versus Q2 FY2022 with BioSteel Ready-to-Drink (“RTD”) beverages achieving 34% All Commodity Volume, (“ACV”)5 in the U.S., up from 6.5% in Q2 FY2022. Year-to-date in FY2023, BioSteel has secured distribution with, among others, Walmart, Rite Aid, and Winn Dixie.
- BioSteel signed a multi-year partnership with the National Hockey League and the National Hockey League Players Association as the Official Hydration Partner. This partnership provides BioSteel with league-wide rink side marketing and product supply rights, retail activation rights, and a community engagement platform.
- On November 8, 2022, the Company acquired a manufacturing facility, which is expected to support ongoing rapid U.S. expansion for the brand and drive gross margin improvement.
4 Unless otherwise indicated, market share data disclosed in this press release is calculated using the Company’s internal proprietary market share tool that utilizes point of sales data supplied by third-party data providers, government agencies and our own retail store operations across the country.
5 IRI data for the 13 weeks ended October 2, 2022.
Canopy USA is expected to fast track entry into the U.S. cannabis market and create a truly North American cannabis brand powerhouse while accelerating Canopy Growth’s path to profitability
- Canopy Growth has established Canopy USA – a new U.S.-domiciled holding company, which now holds the Company’s U.S. cannabis investments. This structure will enable Canopy USA to acquire each of Acreage, Jetty, and Wana and capitalize on the market opportunity presented by the U.S. cannabis market. The strategy and positioning of Canopy USA are true differentiators and will unlock potential expansion opportunities presented by the scalable and ideally-positioned U.S. cannabis ecosystem, positioning Canopy for profitable growth.
- Acreage6 continued to make strong progress in the third quarter of calendar 2022 with revenue increasing 28% year over year and delivering their 7th consecutive quarter of positive Adjusted EBITDA7 (as calculated by Acreage and set forth in Acreage’s Third Quarter 2022 Financial Results press release available under Acreage’s profile on SEDAR at www.sedar.com and through EDGAR at www.sec.gov/edgar). Acreage Superflux Margalope Live Resin Vape Cartridge was awarded the Best Vape Pens category at the High Times Cannabis Cup in Illinois. Subsequent to the end of the quarter, Acreage’s social equity joint venture in Connecticut was approved for both a Disproportionately Impacted Area Cultivation License and Adult-Use Cannabis Retail License.
- During the third quarter of calendar 2022, Jetty8 strengthened its product portfolio with the launch of half gram solventless vape cartridges and the company’s solventless extraction process received certification under the state of California’s OCal Program, which certifies that the cannabis products have been grown and manufactured under “comparable-to-organic” standards. From July to August 2022, Jetty solventless vape retail sales increased by 30%9. Jetty also received multiple High Times SoCal awards in July 2022 including 2nd Place Concentrates for its Super Lemon Haze Live and 3rd Place Vape for its Banana Punch Solventless Vape Cartridge.
- Wana10 has continued to grow its North American footprint, launching products in Montana and onboarding in additional states. Continuing its portfolio expansion, Wana introduced a range of new SKUs in the states where it operates including launching Wana’s Optimals Fast Asleep in Nevada and Michigan. Wana’s CEO Nancy Whiteman also received the Benzinga Lifetime Achievement Award for her contributions to developing the cannabis industry in the U.S.
- In order to execute on its announced plan with Canopy USA, Canopy Growth requires shareholder approval for the creation and issuance of a new class of exchangeable shares in the capital of the Company. In connection with the proposal to amend the Company’s articles in order to create the exchangeable shares, Canopy Growth filed a preliminary proxy statement with the Securities and Exchange Commission (“SEC”) on October 25, 2022. Once the SEC completes its review of the preliminary proxy statement, a definitive proxy statement and a form of proxy will be filed with the SEC and mailed or otherwise furnished to Canopy Growth shareholders.
6 Until such time as the rights to acquire Acreage is exercised, Canopy USA will have no direct or indirect economic or voting interests in Acreage, Canopy USA will not directly or indirectly control Acreage, and Canopy USA, on the one hand, and Acreage, on the other hand, will continue to operate independently of one another. The Company holds non-voting and non-participating shares in Canopy USA that are exchangeable into common shares of Canopy USA.
7 Canopy Growth and Acreage may calculate Adjusted EBITDA differently as Adjusted EBITDA does not have any standardized meaning and therefore may not be comparable as between the Company and Acreage.
8 Until such time as Canopy USA elects to exercise its rights to acquire Jetty, Canopy USA will have no direct or indirect economic or voting interests in Jetty, Canopy USA will not directly or indirectly control Jetty, and Canopy USA, on the one hand, and Jetty, on the other hand, will continue to operate independently of one another. The Company holds non-voting and non-participating shares in Canopy USA that are exchangeable into common shares of Canopy USA.
9 Based on August 2022 BDSA data for dollars sold.
10 Until such time as Canopy USA elects to exercise its rights to acquire Wana, Canopy USA will have no direct or indirect economic or voting interests in Wana, Canopy USA will not directly or indirectly control Wana, and Canopy USA, on the one hand, and Wana, on the other hand, will continue to operate independently of one another. The Company holds non-voting and non-participating shares in Canopy USA that are exchangeable into common shares of Canopy USA.
Second Quarter Fiscal 2023 Revenue Review11
Revenue by Channel
- Recreational B2B net revenue in Q2 FY2023 decreased 40% over the prior year period driven primarily by lower sales volumes, particularly in value-priced dried flower, resulting from both the strategic shift in our product portfolio and increased competition. These factors were partially offset by a more favourable product mix.
- Recreational B2C net revenue in Q2 FY2023 decreased 23% versus Q2 FY2022 largely driven by increased competition from the rapid growth in third party retail locations across provinces.
- Medical net revenue in Q2 FY2023 increased 8% from Q2 FY2022 driven by larger average order sizes.
- Rest-of-world Cannabis revenue in Q2 FY2023 decreased 55% over Q2 FY2022 due primarily to the divestiture of C3 and a decline in our U.S. CBD business.
- Excluding the impact of the divestiture of C3, Rest-of-world Cannabis net revenue decreased 9% as compared to Q2 FY2022.
Storz & Bickel
- Storz & Bickel vaporizer revenue in Q2 FY2023 decreased 7% over Q2 FY2022 due primarily to continued slowdown in consumer spending, temporary disruptions with certain distributors, and the impact of foreign exchange rates.
- BioSteel sales in Q2 FY2023 increased 299% over Q2 FY2022 due to continued growth in our distribution channels and sales velocities across North America and higher international sales.
- This Works sales in Q2 FY2023 decreased 24% over Q2 FY2022 due in part to softer performance of certain product lines and the impact of foreign exchange rates.
The Q2 FY2023 and Q2 FY2022 financial results presented in this press release have been prepared in accordance with U.S. GAAP.
16 Excludes the impact of other revenue adjustments.
17 Other revenue adjustments represent the Company’s determination of returns and pricing adjustments and relate to the Canadian recreational business‐to‐business channel.
18 Includes the impact of other revenue adjustments, which represent the Company’s determination of returns and other pricing adjustments.
Webcast and Conference Call Information
The Company will host a conference call and audio webcast with David Klein, CEO and Judy Hong, CFO at 10:00 AM Eastern Time on November 9, 2022.
A live audio webcast will be available at https://app.webinar.net/nwPeJ3EBZG8
A replay will be accessible by webcast until 11:59 PM Eastern Time on February 7, 2023 at https://app.webinar.net/nwPeJ3EBZG8
Adjusted EBITDA is a non-GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. Adjusted EBITDA is calculated as the reported net income (loss), adjusted to exclude income tax recovery (expense); other income (expense), net; loss on equity method investments; share-based compensation expense; depreciation and amortization expense; asset impairment and restructuring costs; restructuring costs recorded in cost of goods sold; and charges related to the flow-through of inventory step-up on business combinations, and further adjusted to remove acquisition-related costs. Asset impairments related to periodic changes to the Company’s supply chain processes are not excluded from Adjusted EBITDA given their occurrence through the normal course of core operational activities. The Adjusted EBITDA reconciliation is presented within this news release and explained in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2022 (the “Form 10-Q”) to be filed with the SEC.
Free Cash Flow is a non- GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. This measure is calculated as net cash provided by (used in) operating activities less purchases of and deposits on property, plant and equipment. The Free Cash Flow reconciliation is presented within this news release and explained in the Form 10-Q.
Adjusted Gross Margin and Adjusted Gross Margin Percentage are non-GAAP measures used by management that are not defined by U.S. GAAP and may not be comparable to similar measures presented by other companies. Adjusted Gross Margin is calculated as gross margin excluding restructuring and other charges recorded in cost of goods sold, and charges related to the flow-through of inventory step-up on business combinations. Adjusted Gross Margin Percentage is calculated as Adjusted Gross Margin divided by net revenue. The Adjusted Gross Margin and Adjusted Gross Margin Percentage reconciliation is presented within this news release and explained in the Company’s Quarterly Report on Form 10-Q to be filed with the SEC.
About Canopy Growth Corporation
Canopy Growth Corporation (“Canopy”) is a leading North American cannabis and CPG company dedicated to unleashing the power of cannabis to improve lives.
Through an unwavering commitment to our consumers, Canopy delivers innovative products with a focus on premium and mainstream cannabis brands including Doja, 7ACRES, Tweed, and Deep Space. Our CPG portfolio features sugar-free sports hydration brand BioSteel, targeted 24-hour skincare and wellness solutions from This Works, gourmet wellness products by Martha Stewart CBD, and category defining vaporizer technology made in Germany by Storz & Bickel.
Canopy has also established a comprehensive ecosystem to realize the opportunities presented by the U.S. THC market through its rights to Acreage Holdings, a vertically integrated multi-state cannabis operator with principal operations in densely populated states across the Northeast, as well as Wana Brands, a leading cannabis edible brand in North America, and Jetty Extracts, a California-based producer of high-quality cannabis extracts and pioneer of clean vape technology.
Beyond our world-class products, Canopy is leading the industry forward through a commitment to social equity, responsible use, and community reinvestment—pioneering a future where cannabis is understood and welcomed for its potential to help achieve greater well-being and life enhancement.
For more information visit www.canopygrowth.com.
Participants in the Solicitation
Canopy Growth and its directors and executive officers may be deemed participants in the solicitation of proxies from Canopy Growth shareholders with respect to the Amendment Proposal. A list of the names of those directors and executive officers and a description of their interests in Canopy Growth is contained in Canopy Growth’s definitive proxy statement on Schedule 14A filed with the SEC on July 29, 2022 and is available free of charge at the SEC’s website at www.sec.gov, or by directing a request to Canopy Growth Corporation, 1 Hershey Drive, Smiths Falls, Ontario, K7A 0A8 or by email to firstname.lastname@example.org. Additional information regarding the interests of such participants will be contained in the Proxy Statement when it becomes available. Investors should read the Proxy Statement when it becomes available because it will contain important information.