Canopy Growth, Canada’s once-cannabis star, reports .1 billion loss after big write-down

Canopy Growth, Canada’s once-cannabis star, reports $2.1 billion loss after big write-down

Staff work in a marijuana grow room on display at the new visitor center at the Canopy Growth plant in Smiths Falls, Ont. August 23, 2018Sean Kilpatrick/The Canadian Press

Canada’s Canopy Growth Corp. WEED-T reported a loss of $2.1 billion in the first quarter of its 2023 fiscal year, another major blow to the former cannabis star as it tries to restructure its business to win back investors.

The lion’s share of the loss came from a $1.7 billion write-down on Canopy’s cannabis operations, a non-cash charge related to a decline in the company’s stock market value in the first quarter ended June 30.

Goodwill is often accrued through the payment of premiums for acquisition targets, and Canopy has now written off all the goodwill it has built up in the cannabis division. The company now also operates a consumer products division that includes BioSteel energy drinks, which was one of the few bright spots this quarter.

The hemp sector has struggled for a long time, but Canopy’s stock has outperformed its peers so far. That has changed over the past few months as investors have been rapidly dumping the company’s stock.

In May, Canopy, once Canada’s largest LP (or licensed cannabis producer) by market share, revealed that in the second quarter of 2022 half of the fiscal period will not make money – at least barring certain expenses – as previously promised. It also extended the break-even period by two years to 2024.

A month later, Canopy announced it would convert some of its bonds into equity to reduce its troubling debt load. It agreed to issue new shares that diluted the number of existing shareholders and, as part of the swap, return 345 million euros next summer. USD in cash.

Investors revolted. In June alone, Canopy’s share price fell 42 percent on the Toronto Stock Exchange. Its shares have more than doubled in the past year. On Friday, Canopy shares were down 7 percent by midday.

The new goodwill write-down announced Friday morning dominated Canopy’s first-quarter loss, but the company’s core business also struggled, with total revenue down 19 percent to $110 million. USD compared to last year.

Canopy’s Canadian recreational cannabis operations — once its bread and butter — were the main driver, with revenue from the unit down 35 percent. up to 39 million USD compared to the same quarter last year. Canopy attributed much of the decline to competitive pricing for non-premium hemp, which is extremely oversupplied in the Canadian market.

“The Canadian market has played out really differently than we expected,” Chief Financial Officer Judy Hong said on a conference call with analysts and investors on Friday.

Canopy’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), which strips out certain expenses and is generally a more favorable metric for reporting companies, fell 18 percent from $75 million. USD loss a year ago.

A tough quarter worries Constellation Brands Inc. STZ-N”, for the US alcohol giant, which invested a total of 5.2 billion USD to Canopy when it looked like recreational weed might be the next big thing. Constellation invested in two tranches, the second being a $5 billion check that valued Canopy shares at $48.60 each. By midday Friday, Canopy shares were trading at around $3.40 on the TSX.

Canopy, now run by Constellation’s elected leaders, is trying to turn itself around, and management outlined a revitalization plan in May. Canada’s focus is on premium cannabis, a response to the country’s oversupply of cut-medium weed. Canopy also plans to cut more costs — especially sales, marketing and general expenses, which it expects to cut by 25 percent. About half of the cost savings are expected to come from job cuts.

However, the current leadership team has pushed hard for the United States to legalize recreational cannabis at the federal level. After the 2020 With Joe Biden winning the presidency and Democrats taking 50 seats in the US Senate, there was high hope that this would happen. But with Republicans looking set to retake the Senate in the midterm elections this fall, many analysts believe those dreams are gone.

On Friday, CEO David Klein reiterated his commitment to US expansion. Canopy currently has a number of brands in the US market, but their growth is limited by regulations that prevent business from crossing state lines. “We continue to see the US as the largest and most important market in the world,” he said.

But he acknowledged the challenges. “We made a big bet on the U.S., and it’s taking longer than we’d like,” Mr. Klein said.

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