The stock fell more than 8% in early trading on the news to lately sell at $2.52, a big drop from its year high of $9.61.
The Canadian cannabis giant published its financial results for the third quarter ending Dec. 31, 2022.
Net revenue of $101 million in the quarter declined 28% versus the same period in the previous fiscal year. Canopy blamed the drop in revenue on several factors:
- Increased competition in the Canadian adult-use cannabis market
- The divestiture of C3 Cannabinoid Compound Company GmbH
- A decline in the U.S. CBD business
- Softer performance from Storz & Bickel and This Works.
Canopy acquired the German C3 for C$41 million in 2019 and then sold it in 2021 for C$114 million. C3 reported sales of C$53.8 million in Canopy’s 2020 fiscal year and C$62.3 million in 2021.
The new restructuring also makes sense for Canopy considering historical cash burn has swelled its net losses 131% over the year to $266.7 million. Cash and short-term investments fell by a whopping $583 million to $789 million at the end of December from $1,372 million at the end of March 2022.
The company attributed this to the impact of cash used in operating activities, the first tranche of the term loan credit agreement repayment of $118 million, as well as cash used for acquisitions and investments, including the acquisition of the Verona, Virginia, manufacturing facility for BioSteel and a premium payment made to obtain an option to acquire Acreage Holdings Inc.’s outstanding debt as part of the October 2022 CUSA announcement.
Gross debt amounted to $1.2 billion on Dec. 31, 2022, an improvement over the debt level of $1.5 billion at the end of March 2022.
“Canopy must reach profitability to achieve our ambition of long-term North American cannabis market leadership,” CEO David Klein said in a statement. “These changes are difficult but necessary to drive our business to profitability and growth.”
Canopy Growth said that it would be transitioning to an “asset-light model” in Canada by exiting cannabis flower cultivation in its Smiths Falls, Ontario, facility, ceasing the sourcing of cannabis flower from the Mirabel, Quebec, facility, and moving to a third-party sourcing model for cannabis beverages, edibles, vapes, and extracts.
The changes are in addition to multiple cost reduction activities planned for the year, including the divestiture of Canopy Growth’s Canadian retail operations, the organizational restructuring of certain corporate functions, and the closure of the Scarborough, Ontario, research facility.
The company intends to close its 1 Hershey Drive facility in Smiths Falls, Ontario, in addition to reducing headcount across the business by approximately 60%, or 800 positions. Of those, 40% are impacted immediately.
Management believes these cost reduction initiatives will reduce the annual cost of goods sold and selling, general, and administrative expenses by a combined $140 million–$160 million over the next 12 months, bringing the total cost reduction target to $240 million–$310 million inclusive of the reductions announced in April 2022.
Canopy Growth also said it is still committed to remaining dual–listed on the TSX and the Nasdaq as it continues pursuing its U.S. entrance strategy through Canopy USA.
“The right-sizing of our Canadian business is expected to significantly reduce our cash costs,” said CFO Judy Hong. “Canopy is firmly on the path to deliver at least quarterly breakeven adjusted EBITDA in our Canadian cannabis business in fiscal 2024, even at current revenue run-rate.”