EX-99.2 3 cgc-ex992_7.htm EX-99.2 cgc-ex992_7.htm

Exhibit 99.2

canopy growth corporation

 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the three and nine months ENDED december 31, 2018

february 14, 2019

 


 

Canopy Growth Corporation (“the Company” or “Canopy Growth”) is a publicly traded corporation, incorporated in Canada, with its head office located at 1 Hershey Drive, Smiths Falls, Ontario. Common shares of Canopy Growth trade on the Toronto Stock Exchange (“TSX”) under the ticker symbol “WEED” and on the New York Stock Exchange (“NYSE”) under the symbol “CGC”.

This Management’s Discussion and Analysis of the Financial Condition and Results of Operation (“MD&A”) is dated February 14, 2019. It should be read in conjunction with the Company’s unaudited condensed interim consolidated financial statements (the “Interim Financial Statements”) for the three and nine months ended December 31, 2018, including the accompanying notes.

This MD&A was prepared with reference to National Instrument 51-102 – Continuous Disclosure Obligations of the Canadian Securities Administrators. Under the U.S./Canada Multijurisdictional Disclosure System, we are permitted to prepare this MD&A in accordance with Canadian disclosure requirements which may differ from U.S. disclosure requirements. This MD&A provides information for the three and nine months ended December 31, 2018 and up to and including February 14, 2019.

The Interim Financial Statements and this MD&A have been reviewed by the Company’s Audit Committee and were approved by the Company’s Board of Directors on February 14, 2019.

The accompanying Interim Financial Statements were prepared in compliance with International Financial Reporting Standards 34 – Interim Financial Reporting (“IAS 34”), in accordance with subparagraph 3.2(1) (b) of NI 52-107 and include the accounts of the Company and its subsidiaries and the Company’s interests in affiliated companies (see page 5). All intercompany balances and transactions have been eliminated on consolidation.

Additional information including this MD&A, the Interim Financial Statements, and press releases have been filed electronically through the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com or at www.sec.gov/edgar and also on the Company’s website at www.canopygrowth.com.

Canopy Growth does not engage in any unlawful U.S. marijuana-related activities as defined in Canadian Securities Administrators Staff Notice 51-352. While the Company has several partnerships with U.S.-based companies that may themselves participate in the U.S. cannabis market, these relationships are licensing relationships that see intellectual property developed in the United States brought into Canada, and in no manner involves Canopy Growth in any unlawful US activities respecting cannabis.  Where a non-controlled affiliate has expressed an intent to enter the U.S. cannabis market, the Company has taken steps to insulate itself from all economic and voting interests until such time that U.S. federal laws change in favour of cannabis related activities. (See Corporate Position on Conducting Business in the United States)

Financial information contained herein is expressed in thousands of Canadian dollars, except share and per share amounts, or as otherwise stated.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This MD&A contains certain “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and “forward looking information” within the meaning of Canadian securities legislation, including but not limited to statements relating to:

assumptions and expectations described in the Company’s critical accounting policies and estimates;

the Company’s expectations regarding the adoption and impact of certain accounting pronouncements;

the Company’s expectations regarding legislation, regulations and licensing related to the cultivation, production and sale of cannabis and hemp products by the Company’s wholly-owned subsidiaries;

the expected number of users of medical cannabis or the size of the legal medical cannabis market in Canada and internationally;

the expected number of users of recreational cannabis or the size of the legal recreational cannabis market in Canada and internationally;

the expected number of users of hemp or the size of the legal hemp market in Canada and internationally;

the potential time frame for the implementation of legislation to legalize regulated medical or recreational cannabis, or hemp internationally and the potential form implementation of the legislation will take, including the method of delivery and framework adopted or to be adopted by various international jurisdictions;

the ability to enter and participate in international market opportunities;

the Company’s expectations with respect to the Company’s future financial and operating performance;

the Company’s expectations with respect to future performance, results and terms of strategic initiatives, strategic agreements and supply agreements;

product sales expectations;

development of affiliated brands, product diversification and future corporate development;

anticipated results of research and development;

inventory and production capacity expectations including discussions of plans or potential for expansion of capacity at existing or new facilities;

expectations with respect to future expenditures and capital activities;

statements about expected use of proceeds from fund raising activities; and

the Company’s ability to achieve profitability without further equity or debt financing.

 

The words “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates” “forecasts”, “intends”, “anticipates”, or “believes” or variation (including negative variations) of such words and phrases, or statements that certain actions, events, or results “may”, “could”, “would”, “might”, or “will” be taken, occur or to achieve are all forward-looking statements. Forward-looking statements are based on the reasonable assumptions, estimates, internal and external analysis and opinions of management made considering its experience and perception of trends, current conditions and expected developments, as well as other factors that management believes to be relevant and reasonable at the date that such statements are made. Forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. This MD&A should be read in conjunction with the risk factors described in the “Risk and Uncertainties” section of this MD&A and as described in the Company’s annual information form for the year ended March 31, 2018. Although the Company has attempted to identify important factors that could cause actions, events or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events, or results to differ from those anticipated, estimated or intended. Forward-looking statements contained herein are made as at the date of the MD&A. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on the forward-looking statements. The Company does not undertake to update any forward-looking statements except as required by applicable securities laws.

 

 

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CORPORATE STRATEGY

Canopy Growth, an early mover in Canadian and international markets, is a multi-brand cannabis and hemp company that management believes its strong focus on and investment in the development of intellectual property, domestic and international markets, differentiated products, brands, increased cannabis and hemp supply, securing channels to market, and education, to help citizens safely, effectively and responsibly use cannabis and hemp, will create a dominant global business with the potential to generate a significant and sustained return on invested capital over the long-term.

To achieve this, the Company will continue making deliberate investments, including via acquisition and entering into strategic partnerships to:

Invest in the development of international markets in which cannabis or hemp is or is expected to become federally legal/permissible, with the goal of increasing the Company’s total addressable market over the medium to long term;

Invest in research and development activities to increase cultivation efficiency and yield and to develop protectable intellectual property;

Invest in research and development activities related to the development and production of value-added, higher-margin cannabis and hemp-based consumer products to increase the Company’s total addressable market over the medium to long-term and to develop protectable intellectual property;

Invest in research and development activities related to the development of value-added, higher margin, cannabis and hemp-based medical treatments to increase the Company’s total addressable market over the medium to long-term and to develop protectable intellectual property;

Invest in the marketing, production and sale of value-added, higher margin, cannabis and hemp based consumer and medical products as permitted by regulations;

Invest in research and development activities to increasing the capacity and efficiency of the Company’s post-harvest processing capabilities and to develop protectable intellectual property;

Invest in research and development activities related to packaging automation to improve operating efficiencies and develop protectable intellectual property;

Implement retail sales strategies, effective sales management and market support capabilities to help drive and participate in the growth of the Canadian Regulated Recreational, or Adult Access market;

Increase the strength and differentiation of the Company’s multiple brands;

Implement robust information technology systems including Enterprise Resource Planning;

Increase the efficiency and effectiveness of the Company’s customer engagement resources;

Support and participate in the development of social responsibility initiatives related to cannabis; and

Foster a positive, challenging and rewarding work environment for the Company’s staff.

 

In the third quarter, Canopy Growth closed the previously announced strategic $5 billion investment from Fortune 500 beverage leader Constellation Brands. These funds will be deployed towards the Company’s core strategic objectives of (i) intellectual property development or acquisition, and (ii) replicating the Company’s Canadian platform for success across many international markets.  These objectives will be achieved through international acquisitions as well as continued internal investments across the globe.

BUSINESS TRANSITION

 

In the period leading up to legalizing recreational cannabis in Canada on October 17, 2018, while operating in an existing medical cannabis market, the Company began expanding its Canadian business model from  business to consumer (“B2C”) transactions to a hybrid-business model dominated by business to business (“B2B”) transactions in a new expanded market, both through provincial on-line and brick and mortar stores as well as continuation of B2C online medical sales and introducing brick and mortar retail stores where permitted in a recreational market.

 

From inception of the Company’s business up to the launch of the recreational market in Canada on October 17, 2018, the Company has been in control of every aspect of the sales process to the Company’s Canadian end customers, from product selection, to inventory management and logistics, to the operation of the Company’s online medical cannabis sales portal.

 

With the opening of the new recreational cannabis market in Canada on October 17, 2018, the Company’s business transitioned largely to a B2B model. Being a brand new market, it will take some time for Licensed Producers (“LP”), including Tweed Inc. (“Tweed”), and provincial/territorial agencies to develop an understanding and readiness for the real demand profile for regulated recreational cannabis products, including the type/strain and quantity of products.  

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Evidence of these early challenges were observable on launch of recreational cannabis on October 17, 2018 and through to December 31, 2018.  Management believes these challenges throughout the sector supply chain will continue in the months to come before stabilizing.

 

In transitioning to a largely B2B model in Canada, the Company wholesales large quantities of cannabis as requested by provincial/territorial agencies for distribution to new brick & mortar and online retail stores.  In this model, sales of the Company’s products are impacted by many factors that are beyond the Company’s control including the profile of cannabis products (type/strain) being purchased by provincial/territorial agencies, the size and frequency of wholesale cannabis orders received from provincial/territorial agencies, the effectiveness of inventory and distribution management systems operated by provincial/territorial agencies, the size of brick & mortar retail networks and the quality of the shopping experience delivered by online and brick and mortar retail stores.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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CORPORATE STRUCTURE

Controlled subsidiaries

 

Legal entity

 

Defined as

 

% Ownership

 

 

Accounting method

 

Tweed Inc.

 

Tweed

 

100.0%

 

 

consolidation

 

Tweed Farms Inc.

 

Tweed Farms

 

100.0%

 

 

consolidation

 

1955625 Ontario Inc.

 

1955625 Ontario Inc.

 

100.0%

 

 

consolidation

 

Spectrum Cannabis Canada Ltd.

   (formerly Mettrum Ltd.)

 

Spectrum Cannabis

 

100.0%

 

 

consolidation

 

BC Tweed Joint Venture Inc.

 

BC Tweed

 

100.0%

 

 

consolidation

 

Tweed Grasslands Cannabis Inc.

 

Tweed Grasslands

 

100.0%

 

 

consolidation

 

Mettrum Hempworks Inc.

 

Mettrum Hempworks

 

100.0%

 

 

consolidation

 

Hiku Brands Company Ltd.

 

Hiku

 

100.0%

 

 

consolidation

 

POS Holdings Inc.

 

POS

 

0.0%

 

 

consolidation

 

Spektrum Cannabis GmbH

 

Spektrum Cannabis

 

100.0%

 

 

consolidation

 

Vert Cannabis Inc.

 

Vert Cannabis

 

100.0%

 

 

consolidation

 

11065220 Canada Inc.

 

11065220 Canada Inc.

 

100.0%

 

 

consolidation

 

2344823 Ontario Inc. d/b/a

   Bodystream

 

Bodystream

 

100.0%

 

 

consolidation

 

Apollo Applied Research Inc. and

   Apollo CRO Inc.

 

together "Apollo"

 

100.0%

 

 

consolidation

 

EB Transaction Sub I, LLC

 

Transaction Sub I

 

100.0%

 

 

consolidation

 

Spot Therapeutics Inc.

 

Spot

 

100.0%

 

 

consolidation

 

Spectrum Cannabis Australia

   PTY Ltd.

 

Spectrum Australia

 

100.0%

 

 

consolidation

 

Spectrum Cannabis Farms Australia

   PTY Ltd.

 

Spectrum Australia

   Farms

 

100.0%

 

 

consolidation

 

Spectrum Cannabis Czech s.r.o

 

Spectrum Czech

 

100.0%

 

 

consolidation

 

Spectrum Cannabis Chile SpA

 

Spectrum Chile

 

100.0%

 

 

consolidation

 

Spectrum Cannabis (Lesotho) PTY

   Ltd. (formerly DaddyCann Lesotho

   PTY Limited)

 

DCL

 

100.0%

 

 

consolidation

 

Storz & Bickel GmbH & Co, KG

 

S&B

 

100.0%

 

 

consolidation

 

Canopy Health Innovations Inc.

 

CHI

 

100.0%

 

 

consolidation

 

Canopy LATAM Corporation

 

Canopy LATAM

 

100.0%

 

 

consolidation

 

Spectrum Cannabis

   Colombia S.A.S.

 

Spectrum Colombia

 

100.0%

 

 

consolidation

 

Les Serres Vert Cannabis

 

Vert Mirabel

 

66.7%

 

 

consolidation

 

Spectrum Cannabis Denmark Aps

 

Spectrum Cannabis

   Denmark

 

82.0%

 

 

consolidation

 

Grow House JA Limited

 

Tweed JA

 

49.0%

 

 

consolidation

 

Canopy Rivers Corporation

 

Canopy Rivers

 

27.2%

 

 

consolidation

Investments in affiliates

 

Legal entity

 

Defined as

 

% Ownership

 

 

Accounting method

 

Agripharm Corp.

 

Agripharm

 

40.0%

 

 

equity

 

10730076 Canada Inc.

 

PharmHouse

 

49.0%

 

 

equity

 

Bedrocan Brasil S.A.

 

Bedrocan Brasil

 

39.4%

 

 

equity

 

Entourage Phytolab S.A.

 

Entourage

 

40.0%

 

 

equity

 

N49AROW Global Ventures, ULC

 

N49AROW

 

25.0%

 

 

equity

 

Beckley Canopy Therapeutics

 

BCT

 

42.2%

 

 

equity

 

AusCann Group Holdings Ltd.

 

AusCann

 

11.1%

 

 

FVTOCI and FVTPL

 

Vapium Incorporated

 

Vapium

 

12.2%

 

 

FVTOCI

 

Headset Inc.

 

Headset

 

7.9%

 

 

FVTOCI

 

HydRx Farms Ltd. (operating as

   Scientus Pharma Inc.)

 

HydRx

 

9.6%

 

 

FVTOCI

 

Slang Worldwide Inc.

 

Slang

 

0.0%

 

 

FVTPL

 

TerrAscend Corp

 

TerrAscend

 

0.0%

 

 

FVTPL

 

Civilized Worldwide Inc.

 

Civilized

 

25.5%

 

 

equity

 

CanapaR Corp.

 

CanapaR

 

46.0%

 

 

equity

 

James E. Wagner Cultivation Ltd.

 

JWC

 

14.2%

 

 

FVTOCI

 

Radicle Medical Marijuana Inc.

 

Radicle

 

23.8%

 

 

equity

 

LiveWell Foods Canada Inc.

 

LiveWell

 

10.0%

 

 

FVTOCI

 

Solo Growth Corp.

 

Solo Growth

 

9.7%

 

 

FVTOCI

 

Good Leaf, Inc.

 

Good Leaf

 

8.8%

 

 

FVTOCI and FVTPL

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HIGHLIGHTS

Third Quarter Fiscal 2019 Highlights

 

Results

 

Net revenue, after deducting excise taxes of $14,655, was $83,048 representing a 283% increase over the quarter ended December 31, 2017 when revenue totaled $21,700 and a 256% increase compared over revenues of $23,327 in the second quarter of fiscal 2019.  Revenue from the new Canadian recreation market accounted for 71% of net revenue in the third quarter; medical products accounting for 20% of third quarter net revenue, with other revenues (accessories, such as merchandise and devices, and clinics) making up the remainder.

 

10,102 kilograms and kilogram1 equivalents were sold in the third quarter ended December 31, 2018, representing an increase of 334% over the third quarter of last year, and an increase of 360% over the second quarter of fiscal 2019 in which 2,330 and 2,197 kilograms and kilogram equivalents were sold, respectively.  Recreation accounted for 8,288 kilogram and kilogram equivalents sold in the third quarter, of which 89% was sold directly to the provinces and the remainder through direct retail and on-line consumer channels. Medical accounted for 1,814 kilograms and kilogram shipments in the quarter, representing a decline from the prior quarters which were entirely medical markets, due in part to repositioning to a more limited medical focused Spectrum brand offering affecting supply availability for the on-line product offerings and to available competing offerings through the newly legal recreation market in Canada.

 

Approximately 2.8 million units were shipped in the third quarter as compared to approximately 0.1 million units in the same quarter last year, reflecting the increase scale and automation of Canopy Growth’s shipping and fulfilment capability in the last year.  A “unit” represents a discrete packaged item.

 

Oil sales, including gel caps, accounted for 33% of third quarter product revenue (reported revenue net of merchandise and clinic revenue). In comparison, oil sales, including gel caps, accounted for 23% of product revenue in the three month period ended December 31, 2017.  Approximately 30% of fiscal 2019 third quarter recreation sales were comprised of oils, including gel caps.  Oils, including gel caps, made up 42% of medical sales in the third quarter of fiscal 2019.

 

International medical cannabis sales, consisting primarily of sales in Germany, accounted for 16% of net medical product revenue in the third quarter as compared to 5% in the same quarter last year when medical access was still in its emerging phase after being introduced earlier in calendar 2018.

 

Average sales price per gram, net of excise tax, was $7.33 for the third quarter, as compared to $8.30 last year in the same quarter and $9.87 in the second quarter of fiscal 2019, due to a higher proportion of B2B recreational sales to provincial crown corporations, slightly offset by higher average pricing in the retail channel to achieve an overall recreation average price of $6.96. The average medical sales price per gram was $9.03, net of excise taxes and more directly compares to the prior quarter figures above.

 

Spektrum Cannabis sold 204 kilograms in Germany, all medical, at an average price of $13.28 per gram, up from 164 kilograms at an average price of $13.58 per gram in the second quarter of fiscal 2019, representing quarter over quarter increase of 22% on kilograms sold but down slightly on a price per gram basis due to mix.

 

Harvested 7,556 kilograms in the third quarter as compared to 15,217 kilograms in the second quarter of fiscal 2019 and 7,961 kilograms in the third quarter of fiscal 2018.  The lower harvest in the third quarter was due in part to timing at quarter end and certain greenhouses undergoing further retrofits.

 

Net income for third quarter of fiscal 2019 was $74,860, or $0.22 per basic share and a net loss of $0.38 per fully diluted share, due to the dilutive impact assuming the convertible debt was converted at the beginning of the quarter and compares to net income of $11,014 and $0.01 per share in the same quarter last year. The fiscal 2019 net income was driven principally by fair value changes on financial liabilities more than offsetting the loss from operations.

 

Cash, cash equivalents and marketable securities

 

Consolidated cash, cash equivalents and marketable securities totaled $4,915,288 at December 31, 2018.

 

Innovation

Completed cannabis consumption safety trials key to validating safety of consumer products as well as animal and human medicines, data expected to be released by end of fiscal 2019.

Completed clinical trials of CBD-based anti-anxiety treatment for companion animals, data expected to be released by end of fiscal 2019; The Company believes that the clinical trial activities completed and underway will position Canopy Growth to publicly announce cannabis-based companion animal products in the first half of calendar 2019.

Acquired the assets, including over 40 cannabis-related patent applications filed representing over 1,500 inventions, of Colorado-based hemp researcher, ebbu, Inc. (“ebbu”). Intellectual Property (“IP”) and R&D advancements

 

1 

Kilogram equivalents refers to cannabis oils where 8 ml is the equivalent of approximately 1 gram of dried cannabis.

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achieved by ebbu’s team apply directly to Canopy Growth’s hemp and THC-rich cannabis genetic breeding program. The Company believes applying ebbu’s IP has the potential to vastly reduce the cost of CBD production. In addition, ebbu’s IP portfolio will contribute to the clinical formulations program being executed by Canopy Health Innovations Inc. (“Canopy Health”).

Acquired Storz & Bickel GmbH & Co. KG and related IP (collectively, “Storz & Bickel” or “S&B”). With a 22-year track record of breakthrough innovations, Storz & Bickel is widely recognized as the global leader for the design and manufacture of medically approved vaporizers, most notably the Volcano® Medic and the Mighty® Medic. Storz & Bickel has spent the last two decades developing an automated and internationally certified factory, achieving ISO 13485 certification in 2009. Storz & Bickel has exported devices to 50 markets around the world.  Leveraging S&B will help the Company bring vaporizer products to market that set a new bar for quality, functionality and safety.

Company’s intellectual portfolio increased to 32 issued patents and over 140 patent applications.

 

EVENTS SUBSEQUENT TO QUARTER-END

On January 9, 2019, the Company announced the addition of Spectrum Cannabis Peru S.A.C. (“Spectrum Cannabis Peru”) to the Canopy LATAM (Latin America) group of companies.  With Peru poised to introduce new regulations for the use of medical cannabis, Spectrum Cannabis Peru will support the opening of the Peruvian market while leveraging Canopy Growth’s global expertise in patient and physician education, as well as in medical cannabis production.

On January 14, 2019, Canopy Growth announced that it had been granted a hemp processing and production license by New York State and its commitment to invest in New York in order to establish a Hemp Industrial Park. Canopy Growth intends to invest between $100 million USD and $150 million USD in its New York operations, capable of producing tons of hemp extract on an annual basis.

On January 21, 2019, the Company announced that Spectrum Cannabis Polska, after completing a rigorous regulatory approval process, completed its first import of medical cannabis into Poland. According to the Polish Pharmaceutical Chamber, which represents about 15,000 pharmacies in Poland, it is estimated that up to 300,000 patients could qualify for medical cannabis treatment.

On January 21, 2019, the Company announced Spectrum Biomedical UK, a new company focused on providing access to cannabis-based medicinal products to UK patients with a wide range of symptoms.  Spectrum UK aims to provide patients reliable access to Spectrum Cannabis products and information physicians can use to support them in their practice.

On February 4, 2019, Canopy Rivers announced a bought deal transaction and concurrent with the bought deal transaction, Canopy Growth will participate through a private placement expected to close on or about February 27, 2019. Refer to the Canopy Rivers section below for details.

DESCRIPTION OF THE BUSINESS

CANNABIS REGULATORY FRAMEWORK IN CANADA

On October 17, 2018, the Cannabis Act went into effect which governs both the medical and recreational regulated markets in Canada.  

Prior to October 17, 2018, legal access to and use of medicinal cannabis in Canada was regulated by the Access to Cannabis for Medical Purposes Regulations (“ACMPR”).  The Cannabis Act now applies to both medical and recreational use of cannabis.  Medical patients are required to obtain a medical approval from their healthcare practitioner and provide a medical document to the licensed producer from which they wish to purchase cannabis.  Health Canada recently reported that over 342,000 patients had enrolled by September 30, 20182. By 2024, Health Canada estimates that the number of patients using medical cannabis will grow to 450,000 creating a market worth an estimated $1.3 billion3, estimates that management believes is conservative considering the growth in patient enrollment that has been experienced to date in the program.

At the onset of the regulated recreational cannabis market, permitted products are essentially the same as what is currently offered in the medical cannabis market – dried flowers, oils and soft-gel with the addition of pre-rolled cannabis products. As this product offering represents only a portion of the products available on the illicit market, the federal government has indicated that value-added products including higher concentrated oils and ingestibles will be permitted

 

2 

http://www.hc-sc.gc.ca/dhp-mps/marihuana/info/market-marche-eng.php

3 

http://www.cbc.ca/news/canada/1-3b-medical-marijuana-free-market-coming-to-canada-1.1872652

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for sale within a year of the opening of the regulated recreational cannabis market. Federal legislation gives responsibility for regulating the distribution and retail of recreational cannabis to the provinces and territories.

CIBC World Markets reports estimates of the potential value of the regulated recreational cannabis market in Canada range from $5.0 billion to $10.0 billion per year. To put the potential size of the Canadian regulated recreational market in context, Statistics Canada valued the beer market in Canada, in 2014, at $8.7 billion.4

LEGALIZAtiON/permissibility Of CANNABIS in international jurisdictions

In 2014, a limited number of countries in the world, in addition to Canada, specifically, Israel, Czech Republic, Netherlands and Uruguay had established federally legal cannabis access regimes.

 

Since 2014, the actions of governments around the world have signaled a significant change in attitudes towards cannabis. To date, federal governments in over 30 additional countries including Argentina, Austria, Australia, Brazil, Denmark, Chile, Colombia, England, Germany, Greece, Israel, Italy, Jamaica, Lesotho, Mexico, Netherlands, Norway, Poland, Puerto Rico, South Africa, Switzerland and Turkey have formally legalized medicinal cannabis access to either foster research into cannabis-based medical treatments and/or towards increasing legal access to medical cannabis for their citizens.

 

In addition, many other countries including Belgium, Ireland, France, Portugal, Spain, India, Malaysia, South Korea and Thailand have established formal government efforts to explore the legalization of medicinal cannabis access.

 

In the United States of America, multiple legislative reforms related to Cannabis are currently being considered by the federal government.  On December 20, 2018, the Agricultural and Nutrition Act, H.R. 25 (the “Farm Bill”), which included the language of the Hemp Farming Act of 2018, legalize the cultivation of Hemp to produce the CBD and other cannabinoids, except for THC.  Further, management believes The Strengthening the Tenth Amendment Through Entrusting States Act (the “States Act”), S.30326, if passed in its current form, would make cannabis federally permissible (not illegal) in US states where cannabis is state legal.  

 

Figure 1: Map of countries with/exploring federally legal cannabis access regimes in 2018

 

The forty-first meeting of the Expert Committee on Drug Dependence (“ECDD”) was held in Geneva, Switzerland, November 12 to16, 2018. At that meeting, the ECDD undertook a critical review of whole-plant cannabis and cannabis extracts. The Director-General of the World Health Organization sent a letter to the UN Secretary General on January 24, 2019, outlining its recommendations that included the recommendation that cannabis be removed from Schedule IV of the 1961 Convention on Narcotic Drugs.  The UN’s Commission on Narcotic Drugs may decide to consider, and vote upon, those recommendations at its next annual session, which will be held March 22 to 26, 2019, in Vienna, Austria, however since the recommendations were only released in January it’s possible that consideration will be postponed until 2020.

 

4 

http://www.statcan.gc.ca/daily-quotidien/150504/dq150504a-eng.htm

5 

https://agriculture.house.gov/farmbill/

6 

https://www.congress.gov/bill/115th-congress/senate-bill/3032/text

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Canopy Growth will only conduct business activities related to growing or processing cannabis or hemp in jurisdictions where it is federally lawful to do so.  

 

OVERVIEW OF CANOPY GROWTH CORPORATION

At December 31, 2018, there were approximately 2,700 full-time employees in the Company as compared to approximately 2,000 at September 30, 2018 and approximately 700 at December 31, 2017.

Canopy Growth is a multi-brand cannabis and hemp company that management believes its strong focus on and investment in the development of intellectual property, domestic and international markets, differentiated products, brands, increased cannabis and hemp supply, securing channels to market, and education, to help citizens safely, effectively and responsibly use cannabis and hemp, will create a dominant global business with the potential to generate a significant and sustained return on invested capital over the long-term.

INTELLECTUAL PROPERTY – PATENT PORTFOLIO

The Company’s intellectual portfolio has increased to 32 issued patents and over 140 patent applications with more applications under development.  Protectable inventions cover cannabis-based beverage production, cannabis-based medical treatments, device & delivery technologies, large-scale cannabis processing and plant genetics. The portfolio features broad geographic coverage.

INTELLECTUAL PROPERTY - RESEARCH & DEVELOPMENT

Management believes a significant potential future opportunity exists, within an appropriate regulatory framework, to improve the Company’s profit margins by vertically integrating up the value chain towards products that treat cannabis and cannabinoids as ingredients rather than the base product. This view applies to the medical and regulated recreational cannabis/cannabinoid markets. The Company has been investing for over two years in research and development activities related to the development of medical and recreational products.

Development of Cannabis-Based Medical Therapies - Canopy Health Innovations

Canopy Growth established the cannabis research incubator and now wholly-owned subsidiary Canopy Health, to develop and research clinically ready cannabis drug formulations and dose delivery systems. Canopy Health has put a team in place to evaluate, prepare for, and develop cannabis drug formulations and dose delivery systems. The role of the Canopy Health is to act as the pre-clinical and clinical research arm of the Company, which would include elements of product design and ingredient selection, formulation, safety and efficacy testing, and pre-clinical and clinical trials (to the extent required), for a range of products which are anticipated to be developed as the regulatory framework and market evolve. Canopy Health established a division called Canopy Animal Health (“CAH”) to create Cannabis-derived products for applications in veterinary medicine.

The development and maintenance of a robust IP program, including filing provisional applications, conversion of provisional applications into non-provisional utility filings, prosecution of utility filings through to issuance, and extending filings into various additional countries, is a key element of the Canopy Health’s strategy. IP is important in order to create competitive advantage in the marketplace and provide an opportunity to earn appropriate economic returns on R&D investments.

To date, Canopy Health has filed forty-three (43) US provisional patent applications, across a range of cannabis and cannabinoid uses, compositions, formulations, indications, methods of delivery, and dosing regimens.

On June 12, 2018, the Company announced that Canopy Health has received approval from Health Canada to proceed with Phase IIb “in-human” clinical trials to evaluate the use of medical cannabis in the treatment of insomnia. The trial is being conducted in collaboration with a leading Canadian research institution.    

On August 8, 2018, the Company announced that CAH has received approval from the Veterinary Drug Directorate of Health Canada to research the effectiveness of cannabidiol to treat anxiety in certain animals. Canopy Health has a total of 15 clinical trials underway or planned.

 

 

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Development of Cannabis-based Consumer Recreational Products

The Canadian federal government has indicated that the sale of value-added cannabis-based Consumer Recreational products will be permitted within one of year of the opening of the legal recreational cannabis market in Canada. These products can be expected to include higher concentrated vaping oils (along with related device hardware), edibles and beverages.

Canopy Growth is actively laying the foundation for these products through investment in a range of research and development efforts, the licensing of intellectual property from innovative entrepreneurs in the cannabis industry, the acquisition of select technologies and investing in and constructing and outfitting edible and beverage production facilities.

Development of Cannabis-based Beverages

Management believes the benefits that cannabis-based beverages can offer consumers including tailored consumption experiences, consumption with reduced/no weight gain, no “hangover”, and limited/no negative interaction with traditional pharmaceutical medications, could cause significant demand to develop for cannabis-based beverages and resulting disruption to traditional alcohol beverage markets.

 

Canopy has invested significant resources in researching and developing technologies, processes and applications involved in the creation of clear, shelf-stable cannabis-based beverages that offer a social experience that is superior to that of traditional sugar-based alcoholic beverages, specifically, a rapid on-set and shorter duration. Like the IP program at Canopy Health, Canopy Growth has built, or otherwise secured, protected status, through pending patents and other IP forms.

CBD Products

The Company has taken steps to diversify its cannabis-related business into the development, production and sale of hemp-based medical, regulated recreational and industrial products. Hemp and cannabis come from the Cannabis sativa L specie but are genetically distinct and are further distinguished by use, chemical makeup and cultivation methods. Hemp, which refers to the non-psychoactive (less than 0.3% THC) varieties of Cannabis sativa L, is a renewable raw material used in thousands of products including health foods, body care, clothing, construction materials, biofuels and plastic composites. The Company believes that entry into the regulated hemp market, whose regulations allow for more robust consumer-facing brand marketing, advertising and retail channels, will serve to strengthen the Company’s consumer facing brands in the future.

Management believes the Company’s expertise in large-scale cannabinoid extraction processes with its unique whole-plant hemp harvesting knowledge and library of stable CBD-rich hemp genetics, acquired through the acquisition of Green Hemp Industries Ltd. in fiscal 2018 and its relationship with POS Holdings Inc. (“POS”) described below, positions Canopy Growth as a leader in low-cost, high yield CBD production.

On November 23, 2018 the Company acquired effective control for accounting purposes over the operations of POS, a bio-processing facility located in Saskatchewan, Canada as a result of a debenture financing transaction which was entered concurrent with the grant of an option to acquire POS.

In July 2018, prior to completing the transaction, the Company had entered into an agreement whereby the Company was granted an option to acquire all the assets of POS in exchange for $6,000. The amount advanced for this option was to be applied against the purchase price of the assets of POS when the option was exercised and had been recorded as a deposit. In addition, the Company had entered into an agreement for processing services to be conducted by POS on behalf of the Company and had made advances of $13,864 under this agreement. Since processing under this agreement has not yet commenced, all the amounts advanced prior to November 23, 2018 had been recorded as a prepaid expense. The deposit and prepaid amounts form part of the consideration transferred. On closing November 23, 2018, the Company advanced a further $109,094 pursuant to a convertible debenture for total cash consideration of $128,958.

The acquisition of ebbu with research and resultant IP related to hemp-based CBD and other non-THC cannabinoids along with receiving a hemp license in the State of New York (See EVENTS SUBSEQUENT TO QUARTER-END) are other key elements in the deployment of Canopy Growth’s hemp and CBD product strategy.

 

 

11


 

INTERNATIONAL DEVELOPMENT

Management believes that a significant opportunity exists today to leverage the Company’s intellectual property, expertise, financial strength and business model in federally legal/permissible cannabis markets around the world. In addition, management believes future opportunities are likely to exist for the Company in jurisdictions where governments are actively moving towards such a legal framework. Subject to regulatory approval, strategic international business opportunities pursued by the Company could include:

Providing advisory services to third-parties that are interested in establishing licensed cannabis cultivation and sales operations;

The export of cannabis and cannabis-based medicines to countries outside of Canada; and

Ownership of cannabis cultivation, value-added cannabis-based product production and sales operations in countries outside of Canada, where it is federally legal/permissible to do so.

 

Canopy Growth, with the assistance of international subsidiaries or partners, has secured the necessary agreements to export cannabis to Australia, Brazil, Czech Republic, Denmark, Germany, Poland, Spain and certain Caribbean countries. Management believes that an opportunity will exist, for some time to come, to export medical cannabis to countries that require a secure supply of medicinal cannabis but have yet to develop domestic production capabilities.

Further, management believes that over time many countries will move to establish domestic production capabilities, in part due to the economic development opportunities that this represents. Many countries are looking to Canada, and its regulatory framework for the production and commercialization of medical cannabis, with much interest and respect. As Canada has developed an enviable regulatory model, companies acting within that framework have expertise, knowledge and potentially product to share with the global community.

To date, the Company has announced subsidiaries, partnerships or business activities in Germany, Chile, Peru, Columbia, Denmark, Jamaica, Lesotho, Australia, Brazil, Czech Republic, the UK, Poland Spain, and the United States as described below.  

Figure 2: International subsidiaries, partnerships or business activities

 

12


 

 

Europe

Spektrum Biomedical UK

Subsequent to the end of the third quarter of fiscal 2019, the Company announced Spectrum Biomedical UK, a new company focused on providing access to cannabis-based medicinal products to UK patients with a wide range of symptoms.  Spectrum UK aims to provide patients reliable access to Spectrum Cannabis products and information physicians can use to support them in their practice.

Spektrum Cannabis GmbH

Spektrum Cannabis GmbH (“Spektrum”) is a German-based pharmaceutical distributor. Spektrum has the necessary approvals in Canada and Germany to export/import medical cannabis for sale to German patients. To date, Spektrum distributes cannabis products to over 1,200 pharmacies across Germany. Spektrum’s processing facility is GMP certified by Regierungspraesidium Tübingen.

Spectrum Denmark ApS

Spectrum Denmark ApS (“Spectrum Denmark”) was established to produce, cultivate and distribute medical cannabis products in Denmark. Spectrum Denmark will also seek to establish operations in other jurisdictions in Europe where federally lawful and regulated. In fiscal 2018, Spectrum Denmark purchased a 430,000 sq. ft. operating greenhouse facility in Odense, Denmark (“Odense”) and received a cannabis production license by Laegemiddelstyrelsen, Denmark’s Medicines Agency. The license was issued without conditions, meaning that Spectrum Cannabis Denmark will not be limited to a production cap or limited to the product formats it can produce. Spectrum Denmark recently received clones from our Spanish partner for purposes of testing and are now held as mother plants.

Spectrum Czech ApS

In the first quarter of fiscal 2019, the Company acquired Annabis Medical s.r.o (“Annabis Medical”). Annabis Medical is the leader in the Czech Republic’s medical cannabis industry and currently imports and distributes cannabis products pursuant to federal Czech licenses, with products for sale through pharmacy channels across the Czech Republic. Annabis Medical was renamed Spectrum Czech ApS.

Spectrum Cannabis Polska

Subsequent to the end of the third quarter of fiscal 2019, the Company announced that Spectrum Cannabis Polska, after completing a rigorous regulatory approval process, completed its first import of medical cannabis into Poland. According to the Polish Pharmaceutical Chamber, which represents about 15,000 pharmacies in Poland, it is estimated that up to 300,000 patients could qualify for medical cannabis treatment.

Alcaliber S.A.

In fiscal 2018, the Company and its wholly-owned subsidiary Spektrum announced a supply license agreement with Spain’s Alcaliber, S.A. (“Alcaliber”). Per the supply license agreement, Canopy Growth and Spektrum will grant Alcaliber a license to use certain strains and seeds to be grown and cultivated at Alcaliber’s facilities for sale worldwide. In the fourth quarter of fiscal 2018, Canopy Growth confirmed that it had completed a transfer of 1,500 cannabis clones to Alcaliber completing the first phase of the partnership announced on September 11, 2017. Alcaliber shipped the first group of clones to Spectrum Denmark in the first quarter of fiscal 2019.

Alcaliber specializes in research and development, breeding and cultivation, and the extraction, purification and preparation of Narcotic Raw Materials (“NRMs”) and Active Pharmaceutical Ingredients (“APIs”). Alcaliber has been granted a license to cultivate, produce, manufacture, export/import, and commercialize cannabis for medical and scientific purposes by the Spanish Agency of Medicinal Products and Medical Devices.

Asia/Pacific

Spectrum Australia

In the first quarter of fiscal 2019, Canopy Growth and the Victoria State Government announced the launch of Spectrum Australia. The Victoria facility, when completed, will enable domestic cultivation and production of high quality medical cannabis for patients while serving as a distribution hub for other jurisdictions in APAC. It will also operate as the APAC

13


 

Research and Development Center for the Company, supporting the ongoing research collaboration between Spectrum Australia and Agriculture Victoria on innovations in medical cannabis cultivation and production.

In fiscal 2018, the Company and the Victorian State Government signed a MOU to further develop research and technical capabilities in the production of medical cannabis in Australia. The work will focus on medical applications for cannabis genetics, strain development, cultivation, and processing. This partnership will directly contribute to the emerging medical cannabis industry in Australia, allowing for improved patient access in that market, creating a leadership position for Australia and Canopy Growth in the Asia Pacific geography.

AusCann Group Holdings Ltd.

In exchange for consultation in several areas including production, quality assurance and operations and strategic advisory services, the Company initially received a 15% interest and options in Auscann (ASX:AC8). Following subsequent dilutive financings, now owns an 11.1% interest.

The Company has an exclusive supply agreement with AusCann, whereby Canopy Growth will act as AusCann’s exclusive supplier of medical cannabis for the Australian market, beginning with the transfer of a range of medicines for research and commercialization in Australia.

Africa

Spectrum Cannabis Africa

Spectrum Cannabis Africa has received license approval, under the South African unregistered medicines program, to facilitate prescriptions for Spectrum Cannabis Oil products that are necessary to seek a permit to import products into South Africa.  

Spectrum Lesotho

In the first quarter of fiscal 2019, Canopy Growth announced that it had acquired DaddyCann Lesotho PTY Ltd., trading as Highlands (“Highlands”) and since renamed Spectrum Cannabis Lesotho (Pty) Ltd (“Spectrum Lesotho”). Based in the Kingdom of Lesotho, Spectrum Lesotho holds a license to cultivate, manufacture, supply, hold, import, export and transport cannabis and its resin.

Combining the domestic and regional knowledge of Spectrum Lesotho with the global experience and expertise of Canopy Growth is the latest example of the Company establishing a meaningful local presence. With the objective of future local production to serve the regional market, these operations are part of Canopy Growth’s commitment to the Lesotho economy including supporting job creation and lasting community engagement. All key members of Spectrum Lesotho’s management team will continue to lead the organization.

Spectrum Lesotho has commenced cultivation operations at its facility near the Capital City, Maseru.  The facility, covering approximately 48,400 sq. ft. includes a propagation room, vegetation greenhouse, and an outdoor growing area.

 

Caribbean

Tweed JA

The Company owns 49% of Tweed JA, a Jamaican company that recently received its cultivation license after completing construction of the greenhouse. Canopy Growth believes that the production and formulation model it has built in Canada, combined with the strength of the existing team in Jamaica, made up of experienced entrepreneurs with substantial cannabis cultivation experience, will drive the national conversation around cannabis forward, and promote Jamaica's well-established and renowned ganja, oils and other cannabis products on a global level. The post-harvest building is expected to be completed in the first half of calendar 2019. The processing license is expected to follow completion of the post-harvest building in the first calendar quarter of 2019. Tweed JA completed a clone transfer of Tweed genetics into Jamaica and has commenced the production of cannabis for medical purposes. Tweed JA expects to be selling medical cannabis in Jamaica by the second half of calendar 2019.

 

 

14


 

LATAM

Canopy LATAM, headquartered in Sao Paulo, Brazil, will focus on advancing medical cannabis through the Spectrum brand and capturing market share across the region comprised of Brazil, Columbia and Chile, home to more than 600 million people, as individual nations modernize their medical cannabis legislation.

Spectrum Cannabis Colombia

Spectrum Cannabis Colombia will serve as a regional production and processing hub for Canopy LATAM. Further, Spectrum Cannabis Colombia owns a uniquely-positioned 126 hectare farm suitable for growing and future operations. This site receives a steady supply of fresh water from a natural lagoon, has favourable electricity rates, and is currently licensed for 126 hectares (4.5 million sq. ft.) of production capacity.

Spectrum Chile SpA

Medical cannabis markets in Chile are emerging and the Company plans to enter the market aggressively in order to position itself as a leader. Through a strategic partnership with a domestic Chilean medical cannabis company, Spectrum Chile will work to ensure Chilean patients have access to high-quality cannabis products.

Spectrum Cannabis Peru

With Peru poised to introduce new regulations for the use of medical cannabis, Spectrum Cannabis Peru will support the opening of the Peruvian market while leveraging Canopy Growth’s global expertise in patient and physician education, as well as in medical cannabis production.

Corporate Position on Conducting Business in THE United States

Canopy Growth will only conduct business activities related to growing or processing cannabis, in jurisdictions where it is federally legal/permissible to do so.  As cannabis is currently federally illegal in the U.S., Canopy Growth does not engage in any U.S. cannabis- related activities as defined in Canadian Securities Administrators Staff Notice 51-352 as of February 14, 2019.

While the Company has several partnerships with U.S.-based companies that may themselves participate in the U.S. cannabis market, these relationships are licensing relationships that see intellectual property developed in the United States brought into Canada, and in no manner involve Canopy Growth in any US activities respecting cannabis.

Further, while the Company will not engage in cannabis-related activities in the U.S related to growing and processing cannabis so long as cannabis is federally illegal, Canopy Growth has developed specific plans related to establishing business operations in the U.S. in the event cannabis becomes federally legal/permissible. The Company has entered into option agreements to purchase certain cultivation infrastructure (for capped capital investment amounts) should cannabis become federally legal/permissible in the U.S.

In respect of the Company’s policy to not engage in any unlawful U.S. cannabis-related activities as defined in Canadian Securities Administrators Staff Notice 51-352, two affiliates of the Company, TerrAscend and Slang, with interests in pursuing cannabis related business in the United States, the Company took steps to structure the Company’s ownership stake interest in the affiliates to insulate the Company.  Under the restructurings and arrangement, the Company has no voting rights and economic interest in these affiliates until cannabis becomes federally lawful/permissible in the United States. Ownership in the affiliates has been held or converted to warrants that are exercisable in circumstances related to cannabis becoming federally lawful/permissible in the United States. The Company monitors its non-controlled affiliates for compliance with U.S. cannabis laws, and would make similar arrangements, if necessary, to ensure the Company’s ongoing compliance with U.S. federal laws.

 

Multiple legislative reforms related to cannabis were recently implemented or are currently being considered by the federal government.  The Farm Bill was recently signed into by law by the US President which federally legalized the cultivation of Hemp to produce CBD and other cannabinoids, except for THC.  The STATES Act, in the current form being debated by the US Senate, if passed into law, would make cannabis federally permissible (not illegal) in US states where cannabis is state legal.  

Leading up to and following passage of the Farm Bill, including its provisions for federally legalizing the production and sale of Hemp-based CBD products, the Company began to seize this potentially large opportunity.  On November 26, 2018, the Company closed its previously announced agreement to acquire the assets of ebbu, an Evergreen, Colorado-based hemp research leader.  Intellectual Property ("IP") and R&D advancements achieved by ebbu’s team apply directly

15


 

to Canopy Growth’s hemp and THC-rich cannabis genetic breeding program and its cannabis-infused beverage capabilities. In addition, ebbu’s IP portfolio will contribute to the clinical formulations program being executed by Canopy Health. Canopy Growth operates a rapidly emerging, field-scale hemp operation based in Saskatchewan and by applying ebbu’s IP, the Company has the potential to vastly reduce the cost of CBD production.  

Canopy Growth, through a newly formed subsidiary, will employ ebbu's assets and personnel to conduct R&D. There will be no production or sale of cannabis products resulting from such R&D in the United States unless and until it would be federally legal/permissible to do so.  

On October 9, 2018, the Company announced that it had completed a legal transfer of cannabis products to a research partner in the United States. To the Company’s knowledge, this was the first export of legal cannabis products from Canada to the United States pursuant to an import permit issued by the federal United States Drug Enforcement Administration (“DEA”). The shipment was completed for the sole purpose of supporting medical research and development. To date, four such shipments have been made under DEA approval.

On January 14, 2019, Canopy Growth announced that it had been granted a hemp processing and production license by New York State and its commitment to invest in New York in order to establish a Hemp Industrial Park. Canopy Growth intends to invest between $100 million USD and $150 million USD in its New York operations, capable of producing tons of hemp extract on an annual basis. Cannabis leader has completed four federally legal shipments of cannabis to the United States.

 

CANNABIS BRANDS

 

 

The Company’s diverse platform of brands “under the Canopy” allows the Company to effectively deploy brands that are targeted towards specific customer demographics, use occasions and product form factors.

 

OWNED BRANDS

Spectrum Cannabis

Spectrum Cannabis is the Company’s international medical brand and will serve as the Company’s physician and patient facing identity across all federally legal jurisdictions where Canopy Growth operates. “Spectrum” in the name refers to the Company’s trademarked colour-coded cannabis strain classification system.

Tweed

A key focus of the Company, since its inception, has been the development of its flagship Tweed brand. From the name, quality and consistency, logo and design aesthetic, to the tone and light-hearted copy, Tweed deliberately chose to incorporate a sense of texture and approachability that welcomes customers and encourages an intimate relationship and trust with the brand. The Tweed brand has evolved towards an adult lifestyle brand to best serve the needs of the regulated recreational market in Canada.

16


 

Van der Pop

Van der Pop is a female focused cannabis brand, with a focus on education and community; a guide to helping women discover and consider cannabis for self-care. Van der Pop dried cannabis whole flower launched in select markets in January 2019. Soft gels are planned to be released in the first half of calendar 2019 while a selection of Van der Pop derivative cannabis products is planned to launch in the second half of calendar 2019.

Maitri

Founded by Quebecers for Quebecers, Maitri focuses on adventure seekers looking to combine the power of the outdoors with cannabis. Maitri continues to build loyal followers through its growing line of designed-in-Quebec accessories. Maitri plans to launch a line of derivative cannabis products in the second half of calendar 2019.

Vert

From the Company’s facility in Mirabel, Quebec, Vert is poised to be a premium supplier of craft cannabis for markets in Canada. Vert intends to launch into the Canadian recreational market in the second half of calendar 2019.

AFFILIATED BRANDS

LBS

Tweed and renowned cannabis business pioneer Snoop Dogg have partnered to bring the LBS (formerly known as Leafs By Snoop prior to October 17, 2018) offering of diverse whole-flower and oil strains, including a high CBD option and mid to high-range THC options to the recreational market.

DNA-Certified

DNA Genetics, world-renowned Cannabis breeders, have won awards in every category in the Cannabis Cup, the world’s preeminent cannabis competition. Tweed has leveraged DNA's expertise in cannabis breeding to bring new, exclusive DNA Certified strains to primarily the recreational market.

Green House Brands and Organa Brands

Green House Brands, through Canopy Growth, is bringing the most awarded and recognized cannabis brand in the world to the Canadian market in the second half of calendar 2019. Established in 1985, the Green House Brands portfolio includes Green House Seed Co. and Strain Hunters, both of which are market exclusive cannabis strains. Green House assets have won numerous accolades, including over 40 High Times Cannabis Cups and 200 plus awards for top genetics, establishing the brand’s leadership in the global cannabis industry. As Strain Hunters, the brand has been featured in documentary series on HBO and VICE, highlighting its globetrotting journeys to find the rarest landrace strains of cannabis.

Organa Brands revolutionized the cannabis industry with the introduction of supercritical CO extracted cannabis oil in 2010 and the introduction of the groundbreaking O.penVAPE device in 2012. Today the company is home to some of the world's largest consumer cannabis brands, including O.penVAPE, Bakked, Magic Buzz and District Edibles. Organa Brands will launch in the Canadian recreational market, through Canopy Growth, in the second half of calendar 2019. 

Retail STRATEGY AND BRANDS

The provinces of New Brunswick[7], Quebec8 , PEI9 and Nova Scotia10 decided that their provincial liquor control agencies will oversee the distribution and retail on non-medicinal cannabis. The provinces of Manitoba11, Newfoundland &

 

7 

http://www2.gnb.ca/content/gnb/en/news/news_release.2017.09.1206.html

8 

http://plus.lapresse.ca/screens/b9063848-7868-4a20-846b-a84fcd3a747f%7C_0.html

9 

https://www.princeedwardisland.ca/en/news/province-sets-next-policy-directions-cannabis-legalization

10 

https://novascotia.ca/cannabis/#cannabis-retail-and-distribution

11 

http://news.gov.mb.ca/news/?archive=&item=42491

17


 

Labrador12, Saskatchewan13, Alberta14, British Columbia15, Ontario16 and the Yukon Territory17  decided that the provincial/territorial liquor control agency will be responsible for distribution and oversee the private retail of non‑medicinal cannabis.

 

The Company is pursuing a cannabis retail presence in provinces, where permitted, to capture retail gross margin (incremental to wholesale margin), capture higher market share and establish direct connections with customers. Controlling the retail environment provides the Company with a powerful marketing engine to build the Tweed, Tokyo Smoke and other company owned brands whilst data and customer feedback collected from owned stores enables the Company to better understand customers and quickly react to their changing needs.

The Company operates in both physical and digital channels to better meet to the needs of our customers. To date, the Company has received licenses or permits to apply for licenses to operate private retail and online sites in each of the provinces that have announced private retail operations – Newfoundland & Labrador (licenses for up to 7 stores), Manitoba (licenses for up to 15 stores) and Saskatchewan (licenses for up to 6 stores). The Company is also pursuing retail licenses in a select number of cities in Alberta and British Columbia; the Company has already secured over 20 development permits in Alberta and is progressing through the provincial cannabis retail licensing process. Finally, the Company is pursuing opportunities to license its Tweed and Tokyo Smoke retail banners in Ontario. As at February 14, 2019, the Company had opened 15 cannabis retail stores, including one Tweed store under license, with more to follow in the coming months, subject to cannabis retail licensing timelines in each province.

The Company has established an owned, technology-enabled direct sales force across the country. This sales force will be responsible for interfacing with cannabis retailers across the country to, among other things, educate retail staff on the Company’s products, foster positive product placement in retail stores and garner real-time/near real-time market intelligence on product demand and to communicate this intelligence back to the Company’s operations.

Tweed and Tokyo Smoke Stores

Canopy Growth finalized its acquisition of HIKU during the second quarter of fiscal 2019, adding the Tokyo Smoke retail network to its network of Tweed stores. Offering two distinct customer experiences will allow the Company to appeal to various consumer demographics without saturating any single segment. Tokyo Smoke operates four retail cannabis stores and an e-commerce platform in Manitoba. Tweed retail now has 10 locations selling cannabis across Newfoundland & Labrador and Manitoba, a licensed store in Saskatchewan and an e-commerce presence in Manitoba and Nunavut. The Company plans to add, in provinces with private retail models, 20 additional Tweed stores and 20 additional Tokyo Smoke stores. In the province of Ontario, the company is exploring partnership opportunities to ensure consumers in the that market can experience the distinct Tweed and Tokyo Smoke retail experiences while working within the provincial framework limited to Licensed Producer ownership at 9.9%.

DOMESTIC CANNABIS Production – OWNED & PARTNER FACILITIES

Through its wholly-owned subsidiaries and partnerships, Canopy Growth operates numerous state-of-the-art production facilities with over 4.3 million sq. ft. of licensed indoor and greenhouse production capacity.  In addition, through wholly-owned subsidiaries and partnerships, the Company is developing several additional production facilities in Canada. The Company has ten licenses issued by Health Canada to cultivate cannabis and 8 licenses from Health Canada to sell cannabis.

 

The Company will continue to place the highest priority on meeting the needs of medical patients, expanding internationally as federal laws permit, and increasing its capacity to serve regulated recreational customers across Canada in the future. To date, the Company has announced capacity expansions totaling over 1.3 million sq. ft. beyond the current licensed footprint for a total of 5.6 million sq. ft licensed facilities when completed.  Construction commenced in October 2018 at Smiths Falls to build a 125,000 square foot bottling facility with four automated bottling and canning lines.  It is expected to be fully completed and ready by the summer of calendar 2019.

 

12 

http://www.releases.gov.nl.ca/releases/2017/exec/1123n01.aspx

13 

https://globalnews.ca/news/3951690/marijuana-to-be-sold-in-private-saskatchewan-stores-and-online/

14 

https://www.alberta.ca/cannabis-framework.aspx

15 

https://globalnews.ca/news/3897846/bc-government-unveils-how-cannabis-will-be-sold-once-legalized/

16 

https://news.ontario.ca/mof/en/2018/08/ontario-announces-cannabis-retail-model.html

17 

https://yukon.ca/en/news/government-yukon-tables-cannabis-control-and-regulation-act

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DOMESTIC CANNABIS Production – ParTNER CAPACITY OFFTAKE

The Company has established several programs designed to help sector partners, both license applicants and LPs, establish and/or grow their licensed operations and achieve greater success faster. Through these programs, additional cannabis production capacity will be secured for sale to the Company’s customers.

Tweed’s Curated CraftGrow Line

Tweed’s curated CraftGrow line was created to introduce high quality cannabis grown by a diverse set of producers to our customers. As of February 14, 2019, CraftGrow partners include AB Laboratories Inc., Delta 9 Cannabis Inc., JWC Ltd., PhyeinMed Inc., PUF Ventures Inc. SweetGrass Inc., TerrAscend Corp. and Valens GroWorks, all with different growing styles and approaches to cannabis. Cannabis grown by AB Laboratories Inc. and JWC Ltd. Is available on the Company’s on-line medical store at www.spectrumcannabis.com.

Agripharm

Agripharm is 40% owned by the Company under a collaborative agreement with Green House and Organa Brands. Pursuant to the agreement, the Company has the right to purchase all the cannabis products produced by Agripharm, subject to the right of Agripharm to sell up to 25% of its products directly in its own physical brick and mortar retail locations.

Canopy Rivers

Canopy Rivers (TSXV:RIV) works collaboratively with Canopy Growth to identify strategic counterparties seeking financial and/or operating support and affiliation with the Canopy Growth group of companies. The result is an ecosystem of complementary companies operating throughout the cannabis value chain. As the portfolio continues to develop, each constituent benefits from opportunities to collaborate with Canopy Growth and among themselves, which the company believes results in an ideal environment for innovation, synergy, and value creation for Canopy Rivers, Canopy Growth, and across the entire Rivers ecosystem.

To date, in collaboration with Canopy Growth, Canopy Rivers has established a diversified portfolio of cannabis industry investments that includes licensed producers, late stage applicants, pharmaceutical formulators, branded developers & distributors, and technology & media platforms. Investments are customized for each counterparty and include a balanced mix of equity, debt, royalty, and profit-sharing agreements.

On February 4, 2019, Canopy Rivers announced that it had entered into an agreement with CIBC Capital Markets (“CIBC”) and Eight Capital (together with CIBC, the “Joint Bookrunners”), under which the Joint Bookrunners have agreed to purchase, together with a syndicate of underwriters (the “Underwriters”), 11,500,000 subordinated voting shares of the Canopy Rivers (the “Subordinated Voting Shares”) on a “bought deal” basis at a price of $4.80 per Subordinated Voting Share (the “Issue Price”) for gross proceeds of approximately $55,000 (the “Bought Deal”).

Concurrent with the Bought Deal, Canopy Growth, will purchase a minimum of 6,250,000 Subordinated Voting Shares on a private placement basis, at a price per Subordinated Voting Share equal to the Issue Price (the “Private Placement” and together with the Bought Deal, the “Offering”) for additional gross proceeds of a minimum of approximately $30,000. Canopy Growth currently owns approximately 26.5% of the issued and outstanding shares of the Canopy Rivers on a non-diluted basis and has elected to subscribe under the Private Placement for more than its pro rata participation right. Following completion of the Offering (prior to giving effect to an over-allotment options granted to the Underwriters), Canopy Growth’s ownership interest in the Canopy Rivers will increase to approximately 27.3% of the issued and outstanding shares of the Canopy Rivers on a non-diluted basis. The combined gross proceeds to the Canopy Rivers under the Offering will be a minimum of approximately $85,000 and is expected to close on or about February 27, 2019.

 

 

 

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RESULTS OF OPERATIONS

The following table sets forth consolidated statements of operations and balance sheet data, which is expressed in thousands of Canadian dollars, except share and per share amounts, for the indicated periods.

 

 

SELECTED OPERATIONAL INFORMATION

 

 

 

 

 

 

 

 

 

(CDN $000's, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

(Restated)

 

 

 

 

 

 

(Restated)

 

Gross revenue

 

$

97,703

 

 

$

21,700

 

 

$

146,946

 

 

$

55,142

 

Net revenue

 

 

83,048

 

 

 

21,700

 

 

 

132,291

 

 

 

55,142

 

Gross margin before fair value impacts in

   cost of sales

 

 

18,290

 

 

 

11,889

 

 

 

35,942

 

 

 

30,069

 

Gross margin before fair value impacts in

   cost of sales %

 

 

19

%

 

 

55

%

 

 

24

%

 

 

55

%

Gross margin

 

 

12,452

 

 

 

16,530

 

 

 

20,453

 

 

 

61,454

 

Gross margin %

 

 

13

%

 

 

76

%

 

 

14

%

 

 

111

%

Operating expenses before acquisition costs

   and non-cash operating expenses

 

 

96,247

 

 

 

20,746

 

 

 

211,949

 

 

 

51,302

 

Total operating expenses

 

 

169,693

 

 

 

42,562

 

 

 

423,028

 

 

 

92,703

 

Loss from operations

 

 

(157,241

)

 

 

(26,032

)

 

 

(402,575

)

 

 

(31,249

)

Adjusted EBITDA1

 

 

(75,081

)

 

 

(5,681

)

 

 

(69,006

)

 

 

(14,359

)

Net loss after taxes

 

 

74,860

 

 

 

11,014

 

 

 

(346,732

)

 

 

227

 

Net loss attributable to Canopy Growth

   Corporation

 

 

67,582

 

 

 

1,583

 

 

 

(349,831

)

 

 

(8,809

)

Net loss per share - basic and diluted

 

$

0.22

 

 

$

0.01

 

 

$

(1.45

)

 

$

(0.05

)

Weighted average shares - basic and diluted

 

 

303,281,549

 

 

 

182,029,481

 

 

 

241,806,351

 

 

 

171,075,324

 

Net loss per share - basic and diluted

 

$

(0.38

)

 

$

0.01

 

 

$

(1.45

)

 

$

(0.05

)

Weighted average shares - basic and diluted

 

 

315,974,640

 

 

 

194,739,044

 

 

 

242,044,822

 

 

 

171,075,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Adjusted EBITDA, a non-GAAP measure, is Earnings Before Interest, Tax, and Depreciation and other non-cash items, and as adjusted for acquisition related items.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selected statements of financial position information

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,115,870

 

 

$

322,560

 

 

 

 

 

 

 

 

 

Marketable Securities

 

 

799,418

 

 

 

-

 

 

 

 

 

 

 

 

 

Biological assets

 

 

31,013

 

 

 

16,348

 

 

 

 

 

 

 

 

 

Inventory

 

 

184,961

 

 

 

101,607

 

 

 

 

 

 

 

 

 

Other working capital

 

 

(131,317

)

 

 

(49,209

)

 

 

 

 

 

 

 

 

Total assets

 

 

8,640,115

 

 

 

1,436,817

 

 

 

 

 

 

 

 

 

Current and long-term debt

 

 

791,496

 

 

 

8,422

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

122,006

 

 

 

61,150

 

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

25,703

 

 

 

33,536

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

7,423,678

 

 

 

1,243,238

 

 

 

 

 

 

 

 

 


20


 

Third quarter RevIEW

Results of Operations for the three and nine months ended December 31, 2018 as compared to the three and nine months ended December 31, 2017.

 

 

SELECTED QUARTERLY INFORMATION

 

(CDN $000's, except share amounts)

 

Q3'19

 

 

Q2'19

 

 

Q1'19

 

 

Q4'18

 

Net revenue - Recreational

 

$

57,687

 

 

$

-

 

 

$

-

 

 

$

-

 

Net revenue - Medical & Other

 

$

25,362

 

 

$

23,327

 

 

$

25,916

 

 

$

22,806

 

Net income (loss) attributable to Canopy

   Growth Corporation

 

$

67,582

 

 

$

(337,136

)

 

$

(80,277

)

 

$

(61,544

)

Net income (loss) per share - basic

 

$

0.22

 

 

$

(1.52

)

 

$

(0.40

)

 

$

(0.31

)

Weighted average shares - basic

 

 

303,281,549

 

 

 

221,725,511

 

 

 

200,160,740

 

 

 

196,571,715

 

Net income (loss) per share - diluted

 

$

0.22

 

 

$

(1.52

)

 

$

(0.40

)

 

$

(0.31

)

Weighted average shares - diluted

 

 

303,281,549

 

 

 

221,725,511

 

 

 

200,160,740

 

 

 

196,571,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q3'18

 

 

Q2'18

 

 

Q1'18

 

 

Q4'17

 

Net revenue - Recreational

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Net revenue - Medical & Other

 

$

21,700

 

 

$

17,569

 

 

$

15,873

 

 

$

14,661

 

Net income (loss) attributable to Canopy

   Growth Corporation

 

$

1,583

 

 

$

(1,338

)

 

$

(9,054

)

 

$

(11,994

)

Net income (loss) per share - basic

 

$

0.01

 

 

$

(0.01

)

 

$

(0.06

)

 

$

(0.08

)

Weighted average shares - basic

 

 

182,029,481

 

 

 

167,226,218

 

 

 

163,884,269

 

 

 

147,060,478

 

Net income (loss) per share - diluted

 

$

0.01

 

 

$

(0.01

)

 

$

(0.06

)

 

$

(0.08

)

Weighted average shares - diluted

 

 

194,739,044

 

 

 

167,226,218

 

 

 

163,884,269

 

 

 

147,060,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

(CDN $000's, except share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net revenue - Recreational

 

$

57,687

 

 

$

-

 

 

$

57,687

 

 

$

-

 

Net revenue - Medical & Other

 

$

25,362

 

 

$

21,700

 

 

$

74,605

 

 

$

55,142

 

Net income (loss) attributable to Canopy

   Growth Corporation

 

$

67,582

 

 

$

1,583

 

 

$

(349,831

)

 

$

(8,809

)

Net income (loss) per share - basic

 

$

0.22

 

 

$

0.01

 

 

$

(1.45

)

 

$

0.01

 

Weighted average shares - basic

 

 

303,281,549

 

 

 

182,029,481

 

 

 

241,722,600

 

 

 

171,046,656

 

Net income (loss) per share - diluted

 

$

0.22

 

 

$

0.01

 

 

$

(1.45

)

 

$

0.01

 

Weighted average shares - diluted

 

 

303,281,549

 

 

 

194,739,044

 

 

 

241,722,600

 

 

 

175,283,177

 

 

 

 

REVENUE

 

Revenue by Channel

 

Three months ended

 

 

Nine months ended

 

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

 

December 31,

 

(CDN $000's)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Recreational revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business to business

 

$

60,141

 

 

$

-

 

 

$

60,141

 

 

$

-

 

Business to consumer

 

 

11,477

 

 

 

-

 

 

 

11,477

 

 

 

-

 

Medical revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canadian

 

 

15,931

 

 

 

19,331

 

 

 

57,198

 

 

 

51,079

 

International

 

 

2,702

 

 

 

988

 

 

 

8,294

 

 

 

1,392

 

Other revenue

 

 

7,452

 

 

 

1,381

 

 

 

9,836

 

 

 

2,671

 

Gross revenue

 

 

97,703

 

 

 

21,700

 

 

 

146,946

 

 

 

55,142

 

Excise taxes

 

 

14,655

 

 

 

-

 

 

 

14,655

 

 

 

-

 

Net revenue

 

$

83,048

 

 

$

21,700

 

 

$

132,291

 

 

$

55,142

 

 

 

 

21


 

Revenue by Form

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

Kilograms

 

 

 

 

 

 

 

 

 

 

Kilograms

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

As a % of

 

 

Kilogram

 

 

 

 

 

 

As a % of

 

 

Kilogram

 

 

 

December 31,

 

 

Gross

 

 

Equivalents

 

 

December 31,

 

 

Gross

 

 

Equivalents

 

(CDN $000's)

 

2018

 

 

Revenue

 

 

Sold

 

 

2017

 

 

Revenue

 

 

Sold

 

Recreational revenue by form

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry bud

 

$

50,244

 

 

 

51

%

 

 

6,394

 

 

$

-

 

 

 

0

%

 

 

-

 

Oil (Includes oil's and gelcaps)

 

 

21,374

 

 

 

22

%

 

 

1,893

 

 

 

-

 

 

 

0

%

 

 

-

 

Medical revenue by form

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry bud

 

 

10,859

 

 

 

11

%

 

 

1,196

 

 

 

13,059

 

 

 

60

%

 

 

1,999

 

Oil (Includes oil's and gelcaps)

 

 

7,774

 

 

 

8

%

 

 

619

 

 

 

4,435

 

 

 

20

%

 

 

331

 

Other revenue

 

 

7,452

 

 

 

8

%

 

 

 

 

 

 

4,206

 

 

 

20

%

 

 

 

 

Gross revenue

 

 

97,703

 

 

 

 

 

 

 

 

 

 

 

21,700

 

 

 

 

 

 

 

 

 

Excise taxes

 

 

14,655

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

Net revenue

 

$

83,048

 

 

 

 

 

 

 

 

 

 

$

21,700

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

 

 

 

 

 

 

 

 

Kilograms

 

 

 

 

 

 

 

 

 

 

Kilograms

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

As a % of

 

 

Kilogram