Canopy Growth Corporation downgraded Strong Sell Canopy Growth Q3 2023 earnings
CGC’s fiscal year ends in March, so the quarter ending December is the third quarter of the fiscal year. Winner of $101.2 million, missed the top line by a mile. Estimates were close to $117 million. Note that most US-based sites show estimates in US dollars and were close for this quarter $87 million. Equally alarming was the decline from year to year. Net sales fell 28% from Q3 to 2023. There was a broad-based decline on all levels, ranging from bad to terrifying.
CGC Quarterly Results Press Release
The last hope for the bulls was the growth of BioSteel. This sports/nutrition supplement line had shown rapid growth in its early days. In fact, last quarter’s growth number was so impressive that we simply gave CGC a sell versus a strong sell rating. You can see below that BioSteel was just one of two categories that grew last quarter.
CGC Q2-2023
When this segment is at its peak, there will be little hope for the company to grow out of the hole it’s in. And it is indeed a very big hole. The company had a net loss of $267 million in the last 3 months.
CGC Quarterly Results Press Release
That’s 15% of its market cap. Even if you just look at the operating loss, it’s pretty brutal. In fact, we believe that the direct GAAP look is the best way to study chronic money losers like CGC. This $1.8 billion in asset impairment over the past 9 months is a real cost.
CGC 8-K
Again, this “depreciation” is hardly unique. Here the 3 previous years.
CGC10-K
2023 seems to be the grand finale where CGC has burned more than the last 3 years together. This clip of Drogon Vs Lannisters does it justice better than anything we can say.
restructuring
Apparently, Canopy Growth Corporation is aware of this, too, and we’ve seen it embark on yet another restructuring initiative. This restructuring includes 5 steps.
1) Canopy Growth Corporation will transition to a third-party sourcing model for cannabis beverages, edibles, vapes, and extracts.
2) It will close its Ontario research facility and its Hershey Drive facility while reducing headcount by 60%.
3) Aim to reduce costs by nearly $300 million within a year.
4) The company plans to maintain its dual listing status and continue with its US growth plans.
5) It expects, with the exception of BioSteel, to surprisingly achieve a positive EBITDA run rate in one year.
outlook
Canopy Growth Corporation’s cash burn continues unabated. In the last 9 months, working capital is down about $565 million (8-K Link). Keep in mind that $213 million of total working capital is in inventories.
CGC 8-k
CGC’s debt-swapping maneuver prevented this liquidity drop from becoming catastrophic. But the rest of these bonds still mature in 6 months. Assuming $455 million is paid out — and the bonds certainly think it will — we’ll end up with $333 million in cash and short-term investments. CGC burns $100 million in a typical quarter, though announced restructurings will make that number more volatile. Nonetheless, we believe this will peak soon. That’s because there are other hurdles for Canopy Growth Corporation to get through next year.
CGC’s credit facility is based on LIBOR plus 8.5%. So it’ll be paying 13.5% interest pretty soon. In addition, the credit facility requires at least $200 million in liquidity at all times.
Oops. our bad. That is 200 million US dollars, so about $270 million in loonie dollars. So you can see how a $100 million quarterly cash flow deficit coupled with the repayment of these promissory notes means there’s going to be a showdown in 6 months.
Verdict
We downgrade Canopy Growth Corporation to Strong Sell as the company has only two paths to take. One is that the banks will take over in 6 months. If the repayment of these promissory notes results in a breach of the loan agreement, the equity is worth zero. An alternative is another round of extreme dilution. This could be done by replacing the 2023 Notes with shares. This would require some extreme negotiation and likely lead to volatility in the stock. Assuming the better outcome occurs, we would expect the stock count to at least double from here. This stems from our assumption that the stock price would have to be at a huge discount (<$1.00) to get bondholders on board.
Data from YCharts
CGC also has some interests in other companies (see other financial assets above). These are likely to be extremely illiquid, but present an external opportunity to prolong this drama. We recommend investors who have missed the writing on the wall in search of “growth” over the last 3 years to take this “better late than never” opportunity to exit.