Canopy Growth, once Canada’s cannabis star, posts $2.1-billion loss after major writedown

The cannabis sector has been struggling for quite some time, but until recently Canopy’s shares kept a premium valuation relative to its peers. That has changed in the past few months, as investors have dumped the company’s stock at a rapid pace.

Canada’s Canopy Growth Corp. reported a $2.1-billion loss in the first quarter of its 2023 fiscal year, another major blow for the former cannabis star as it tries to restructure its business in order to win back investors.

The lion’s share of the loss stems from a $1.7-billion goodwill writedown on Canopy’s cannabis operations, a non-cash charge management attributed to a decrease in the company’s stock market value in the first quarter, which ended June 30.

Goodwill often accumulates when paying premiums for acquisition targets, and Canopy has now written off all the goodwill it has compiled in its cannabis division. The company now also runs a consumer products division that includes BioSteel energy drinks, which was one of the few bright spots this quarter.

The cannabis sector has been struggling for quite some time, but until recently Canopy’s shares kept a premium valuation relative to its peers. That has changed in the past few months, as investors have dumped the company’s stock at a rapid pace.

In May, Canopy, once Canada’s top LP (or licensed producer) of cannabis by market share, disclosed it would not make money by the second half of fiscal 2022 – at least after excluding certain costs – as it had previously promised. It also pushed the deadline for profitability out by two years, to fiscal 2024.

A month later, Canopy announced it would swap some bonds for shares in order to reduce its troubling debt burden. It agreed to hand out new stock, which diluted existing shareholders, and as part of the swap, to repay $345-million in cash next summer.

Investors revolted. In June alone, Canopy’s share price on the Toronto Stock

Exchange tumbled 42 per cent. Over the past year, its shares are down more than double that. On Friday, Canopy’s shares closed at $3.50 on the TSX, down 5 per cent.

The new goodwill writedown, reported Friday morning, dominated Canopy’s first quarter loss, but the company’s core business also struggled, with total revenue falling 19 per cent to $110-million from the year prior.

Canopy’s Canadian recreational cannabis operations – once its bread and butter – was a leading factor, with revenue from the unit falling 35 per cent to

$39-million from the same quarter last year. Canopy attributed much of the drop to competitive pricing for non-premium cannabis, because the Canadian market is wildly oversupplied with this product.

“The Canadian market has developed really differently than we expected,” chief financial officer Judy Hong said on a conference call with analysts and investors Friday.

Canopy’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization), which strips out certain costs and is normally a more favourable metric for reporting companies, dropped 18 per cent from the year prior to a loss of $75-million.

The rough quarter is troubling for Constellation Brands Inc., the U.S. alcohol giant that invested a total of $5.2-billion in Canopy back when it seemed like recreational weed could be the next big thing. Constellation invested in two tranches, and the second was a $5-billion cheque that valued Canopy’s shares at $48.60 each. Canopy’s stock has traded at just over $3 for most of the past month.

Canopy, now run by Constellation’s chosen leaders, is trying to turn a corner and management laid out a revitalization plan in May. In Canada, its focus is on premium cannabis, a response to the country’s oversupply of cut-rate mediocre weed. Canopy also plans to cut more expenses – particularly sales, marketing and general costs, which it hopes to reduce by 25 per cent. Roughly half of its cost savings are expected to come from job reductions.

However, the current management team has banked heavily on the United States legalizing recreational cannabis at the federal level. After Joe Biden won the presidency in 2020, and the Democrats took 50 seats in the U.S. Senate, there was enormous hope this would happen. But with Republicans seemingly poised to retake the Senate in midterm elections this fall, many analysts believe those dreams have all but disappeared.

On Friday, chief executive officer David Klein reiterated his commitment to U.S. expansion. Canopy currently has a number of brands in the U.S. market, but their growth is limited by rules that don’t allow businesses to cross state lines. “We continue to see the U.S. as the largest and most important market in the world,” he said.

However, he acknowledged the challenges. “We placed a big bet on the U.S., and it’s taking longer to evolve than we would have liked,” Mr. Klein said.