0001564590-19-032186.txt : 20190814 0001564590-19-032186.hdr.sgml : 20190814 20190814171440 ACCESSION NUMBER: 0001564590-19-032186 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20190814 FILED AS OF DATE: 20190814 DATE AS OF CHANGE: 20190814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Canopy Growth Corp CENTRAL INDEX KEY: 0001737927 STANDARD INDUSTRIAL CLASSIFICATION: MEDICINAL CHEMICALS & BOTANICAL PRODUCTS [2833] IRS NUMBER: 000000000 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-38496 FILM NUMBER: 191027569 BUSINESS ADDRESS: STREET 1: 1 HERSHEY DRIVE CITY: SMITH FALLS STATE: A6 ZIP: K7A0A8 BUSINESS PHONE: 855-558-9333 MAIL ADDRESS: STREET 1: 1 HERSHEY DRIVE CITY: SMITH FALLS STATE: A6 ZIP: K7A0A8 6-K 1 cgc-6k_20190814.htm 6-K cgc-6k_20190814.DOCX.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16

UNDER THE SECURITIES EXCHANGE ACT OF 1934

For the month of August 2019.

Commission File Number 001-38496

 

Canopy Growth Corporation

(Translation of registrant’s name into English)

 

 

 

 

 

 

1 Hershey Drive

Smiths Falls, Ontario

K7A 0A8

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-For Form 40-F:
Form 20-F               Form 40-F

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant’s “home country”), or under the rules of the home country exchange on which the registrant’s securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant’s security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 

 

 

 

 

 

 

 

 


 

 

 

Exhibit Index

 

 

 

 

    Exhibit No.    

  

    Description    

 

 

99.1

 

Consolidated Interim Financial Statements for the three months ended June 30, 2019 and 2018

99.2

 

Management’s Discussion and Analysis of the Financial Condition and Results of Operations for the three months ended June 30, 2019

99.3

 

Certification of Chief Executive Officer

99.4

 

Certification of Chief Financial Officer

 

 

 

 


 

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

CANOPY GROWTH CORPORATION

 

 

By:

 

/s/ Phil Shaer

 

 

Phil Shaer

Chief Legal Officer

Dated: August 14, 2019

 

 

 

 

 

EX-99.1 2 cgc-ex991_8.htm EX-99.1 cgc-ex991_8.htm

Exhibit 99.1

 

canopy growth corporation

cONDENSED INTERIM Consolidated financial statements

(UNAUDITED)

for the three months ended june 30, 2019 and 2018

(in Canadian dollars)

 

 

 

 

 

 

 

 

 

 

 

 


 

canopy growth corporation

 

Table of Contents

 

 

 

 

Page 2

 


 

 

CANOPY GROWTH CORPORATION

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

UNAUDITED

 

 

 

 

 

June 30,

 

 

March 31,

 

(Expressed in CDN $000's)

 

Notes

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

3

 

 

$

1,816,632

 

 

$

2,480,830

 

Marketable securities

 

 

4

 

 

 

1,324,255

 

 

 

2,034,133

 

Amounts receivable

 

 

5

 

 

 

102,766

 

 

 

106,974

 

Biological assets

 

 

6

 

 

 

102,908

 

 

 

78,975

 

Inventory

 

 

7

 

 

 

393,738

 

 

 

262,105

 

Prepaid expenses and other current assets

 

 

8

 

 

 

124,042

 

 

 

107,123

 

 

 

 

 

 

 

 

3,864,341

 

 

 

5,070,140

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in equity method investees

 

 

9

 

 

 

113,321

 

 

 

112,385

 

Other financial assets

 

 

10

 

 

 

746,691

 

 

 

363,427

 

Property, plant and equipment

 

 

11

 

 

 

1,429,285

 

 

 

1,096,340

 

Intangible assets

 

 

12

 

 

 

528,607

 

 

 

519,556

 

Goodwill

 

 

12

 

 

 

1,931,915

 

 

 

1,544,055

 

Other long-term assets

 

 

 

 

 

 

31,391

 

 

 

25,902

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,645,551

 

 

$

8,731,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

 

13

 

 

$

256,819

 

 

$

226,533

 

Current portion of long-term debt

 

 

14

 

 

 

18,288

 

 

 

103,716

 

Other current liabilities

 

 

15

 

 

 

97,647

 

 

 

81,414

 

 

 

 

 

 

 

 

372,754

 

 

 

411,663

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

14

 

 

 

787,508

 

 

 

842,259

 

Deferred tax liability

 

 

22

 

 

 

104,118

 

 

 

96,031

 

Share repurchase credit liability

 

 

25

 

 

 

1,274,972

 

 

 

-

 

Other long-term liabilities

 

 

15

 

 

 

212,989

 

 

 

140,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,752,341

 

 

 

1,490,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

Share capital

 

 

16

 

 

 

6,074,786

 

 

 

6,026,618

 

Other reserves

 

 

 

 

 

 

2,902,704

 

 

 

1,673,472

 

Accumulated other comprehensive income

 

 

 

 

 

 

(34,057

)

 

 

28,630

 

Deficit

 

 

 

 

 

 

(3,334,686

)

 

 

(777,087

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity attributable to Canopy Growth Corporation

 

 

 

 

 

 

5,608,747

 

 

 

6,951,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-controlling interests

 

 

18

 

 

 

284,463

 

 

 

289,815

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity

 

 

 

 

 

 

5,893,210

 

 

 

7,241,448

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,645,551

 

 

$

8,731,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

 

 

 

Page 1

 


 

 

CANOPY GROWTH CORPORATION

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

 

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

 

UNAUDITED

 

 

 

 

 

June 30,

 

 

June 30,

 

(Expressed in CDN $000's except share amounts)

 

Notes

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

19

 

 

$

103,391

 

 

$

25,916

 

Excise taxes

 

 

19

 

 

 

12,909

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenue

 

 

19

 

 

 

90,482

 

 

 

25,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory production costs expensed to cost of sales

 

 

 

 

 

 

77,313

 

 

 

14,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin before the undernoted

 

 

 

 

 

 

13,169

 

 

 

11,084

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value changes in biological assets included in

   inventory sold and other inventory charges

 

 

7

 

 

 

46,130

 

 

 

26,388

 

Unrealized gain on changes in fair value of biological

   assets

 

 

6

 

 

 

(139,019

)

 

 

(57,289

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

 

 

 

 

106,058

 

 

 

41,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

 

 

 

 

 

45,096

 

 

 

17,266

 

Research and development

 

 

 

 

 

 

8,474

 

 

 

756

 

General and administration

 

 

 

 

 

 

62,271

 

 

 

19,588

 

Acquisition-related costs

 

 

 

 

 

 

13,182

 

 

 

1,884

 

Share-based compensation expense

 

16(b)(d),17(e)

 

 

 

77,081

 

 

 

23,072

 

Share-based compensation expense related to

   acquisition milestones

 

16(c)

 

 

 

10,281

 

 

 

7,095

 

Depreciation and amortization

 

 

 

 

 

 

12,779

 

 

 

3,030

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

229,164

 

 

 

72,691

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

 

 

 

 

(123,106

)

 

 

(30,706

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on extinguishment of warrants

 

 

25

 

 

 

(1,176,350

)

 

 

-

 

Other income (expense), net

 

 

21

 

 

 

32,621

 

 

 

(62,995

)

Total other (expense) income, net

 

 

 

 

 

 

(1,143,729

)

 

 

(62,995

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

 

 

 

 

(1,266,835

)

 

 

(93,701

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (expense) recovery

 

 

22

 

 

 

(14,333

)

 

 

2,723

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

$

(1,281,168

)

 

$

(90,978

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

Canopy Growth Corporation

 

 

 

 

 

$

(1,283,055

)

 

$

(80,277

)

Non-controlling interests

 

 

18

 

 

 

1,887

 

 

 

(10,701

)

 

 

 

 

 

 

$

(1,281,168

)

 

$

(90,978

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

$

(3.70

)

 

$

(0.40

)

Weighted average number of outstanding

   common shares:

 

 

 

 

 

 

346,779,156

 

 

 

200,160,740

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

 

 

 

Page 2

 


 

  

CANOPY GROWTH CORPORATION

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

 

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

 

UNAUDITED

 

 

 

 

 

June 30,

 

 

June 30,

 

(Expressed in CDN $000's)

 

Notes

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

$

(1,281,168

)

 

$

(90,978

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) that will not be

   reclassified to net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Fair value changes on equity instruments at FVOCI

 

 

10

 

 

 

(30,688

)

 

 

11,157

 

Fair value changes of own credit risk of financial

   liabilities designated at FVTPL

 

 

14

 

 

 

14,610

 

 

 

(9,420

)

Deferred income tax recovery (expense) on the

   above items

 

 

22

 

 

 

4,066

 

 

 

(230

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,012

)

 

 

1,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss) that may be

   reclassified to net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

 

(60,744

)

 

 

(1,320

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(60,744

)

 

 

(1,320

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income

 

 

 

 

 

 

(72,756

)

 

 

187

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

 

 

 

 

$

(1,353,924

)

 

$

(90,791

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss attributable to:

 

 

 

 

 

 

 

 

 

 

 

 

Canopy Growth Corporation

 

 

 

 

 

$

(1,345,742

)

 

$

(87,163

)

Non-controlling interests

 

 

18

 

 

 

(8,182

)

 

 

(3,628

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(1,353,924

)

 

$

(90,791

)

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

 

 

 

 

 

Page 3

 


 

 

CANOPY GROWTH CORPORATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

 

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other

 

 

 

 

 

 

 

 

 

 

 

 

 

UNAUDITED

 

 

 

 

 

 

 

 

 

 

 

Other reserves

 

 

comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

(Expressed in CDN $000's except share amounts)

 

Note

 

Number

of shares

 

 

Share

capital

 

 

Share-based

reserve

 

 

Warrants

 

 

Ownership

changes

 

 

Exchange

differences

 

 

Fair value

changes,

net of tax

 

 

Deficit

 

 

Non-controlling

interests

 

 

Shareholders'

equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

 

 

199,320,981

 

 

$

1,076,838

 

 

$

57,982

 

 

$

70,455

 

 

$

(1,019

)

 

$

608

 

 

$

45,558

 

 

$

(91,649

)

 

$

84,465

 

 

$

1,243,238

 

Issuance of shares from acquisitions

 

 

 

 

717,097

 

 

 

26,202

 

 

 

694

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

26,896

 

Exercise of warrants

 

 

 

 

35,110

 

 

 

322

 

 

 

-

 

 

 

(189

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

133

 

Exercise of Omnibus Plan stock options

 

 

 

 

637,187

 

 

 

9,414

 

 

 

(4,318

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,096

 

Other share issuances

 

 

 

 

609,741

 

 

 

11,991

 

 

 

(3,310

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,681

 

Share-based compensation

 

 

 

 

-

 

 

 

-

 

 

 

23,521

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

23,521

 

Issuance of restricted share units

 

 

 

 

-

 

 

 

-

 

 

 

2,247

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

2,247

 

Other share issue costs

 

 

 

 

-

 

 

 

(282

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(282

)

Ownership change arising from changes

   in non-controlling interest

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(499

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,040

 

 

 

541

 

Additional non-controlling interest

   relating to share-based payments

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

5,183

 

 

 

5,183

 

Net loss

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(80,277

)

 

 

(10,701

)

 

 

(90,978

)

Other comprehensive (loss) income

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,320

)

 

 

(5,566

)

 

 

-

 

 

 

7,073

 

 

 

187

 

Balance at June 30, 2018

 

 

 

 

201,320,116

 

 

$

1,124,485

 

 

$

76,816

 

 

$

70,266

 

 

$

(1,518

)

 

$

(712

)

 

$

39,992

 

 

$

(171,926

)

 

$

87,060

 

 

$

1,224,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

 

 

 

 

337,510,408

 

 

$

6,026,618

 

 

$

507,672

 

 

$

1,589,925

 

 

$

(424,125

)

 

$

41,225

 

 

$

(12,595

)

 

$

(777,087

)

 

$

289,815

 

 

$

7,241,448

 

Exercise of warrants

 

16(a)(ii)

 

 

12,060

 

 

 

897

 

 

 

-

 

 

 

(470

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

427

 

Exercise of Omnibus Plan stock options

 

16(b)

 

 

1,713,592

 

 

 

28,671

 

 

 

(12,594

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,077

 

Issuance of shares upon completion of

   acquisition milestones

 

16(a)(i)

 

 

482,321

 

 

 

18,674

 

 

 

(18,674

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Other share issue costs

 

 

 

 

-

 

 

 

(74

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(74

)

Extinguishment of warrants

 

25

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,176,350

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,176,350

 

Share repurchase credit liability

 

25

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,274,544

)

 

 

-

 

 

 

(1,274,544

)

Share-based compensation

 

 

 

 

-

 

 

 

-

 

 

 

84,769

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

84,769

 

Ownership change arising from changes

   in non-controlling interest

 

18

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(149

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

236

 

 

 

87

 

Additional non-controlling interest

   relating to share based payments

 

18

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,594

 

 

 

2,594

 

Net income (loss)

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,283,055

)

 

 

1,887

 

 

 

(1,281,168

)

Other comprehensive loss

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(60,744

)

 

 

(1,943

)

 

 

-

 

 

 

(10,069

)

 

 

(72,756

)

Balance at June 30, 2019

 

 

 

 

339,718,381

 

 

$

6,074,786

 

 

$

561,173

 

 

$

2,765,805

 

 

$

(424,274

)

 

$

(19,519

)

 

$

(14,538

)

 

$

(3,334,686

)

 

$

284,463

 

 

$

5,893,210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

 

 

 

 

 

Page 4

 


 

 

CANOPY GROWTH CORPORATION

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

 

FOR THE THREE MONTHS ENDED JUNE 30, 2019 AND 2018

 

UNAUDITED

 

 

 

 

 

June 30,

 

 

June 30,

 

(Expressed in CDN $000's)

 

Notes

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net inflow (outflow) of cash related to the following activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

$

(1,281,168

)

 

$

(90,978

)

Adjustments for:

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of property, plant and equipment

 

11

 

 

 

16,226

 

 

 

3,661

 

Amortization of intangible assets

 

12

 

 

 

7,165

 

 

 

2,632

 

Share of loss on equity investments

 

9

 

 

 

1,833

 

 

 

2,569

 

Fair value changes in biological assets included in

   inventory sold and other charges

 

 

 

 

 

 

46,130

 

 

 

26,388

 

Unrealized gain on changes in fair value of biological

   assets

 

 

 

 

 

 

(139,019

)

 

 

(57,289

)

Share-based compensation

16(b-d),17(e)

 

 

 

87,362

 

 

 

30,951

 

Other assets

 

 

 

 

 

 

-

 

 

 

(3,120

)

Loss on extinguishment of warrants

 

 

 

 

 

 

1,176,350

 

 

 

-

 

Other income and expense

 

 

 

 

 

 

(21,400

)

 

 

58,152

 

Income tax expense

 

 

 

 

 

 

14,333

 

 

 

(2,951

)

Non-cash foreign currency

 

 

 

 

 

 

2,834

 

 

 

834

 

Changes in non-cash operating working capital items

 

 

23

 

 

 

(68,936

)

 

 

(38,490

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

 

 

 

 

(158,290

)

 

 

(67,641

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Investing

 

 

 

 

 

 

 

 

 

 

 

 

Purchases and deposits of property, plant

   and equipment

 

 

 

 

 

 

(211,824

)

 

 

(153,654

)

Purchases of intangible assets

 

 

 

 

 

 

(1,768

)

 

 

(2,815

)

Redemption (purchase) of marketable securities

 

 

 

 

 

 

687,818

 

 

 

(1,212

)

Investments in equity method investees

 

9

 

 

 

(2,824

)

 

 

(3,500

)

Investments in other financial assets

 

 

 

 

 

 

(29,414

)

 

 

(21,759

)

Premium paid for Acreage Call Option

 

25

 

 

 

(395,190

)

 

 

-

 

Net cash outflow on acquisition of subsidiaries

 

24

 

 

 

(430,948

)

 

 

(41

)

Change in acquisition related liabilities

 

15

 

 

 

(21,447

)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

 

 

 

 

(405,597

)

 

 

(182,981

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Financing

 

 

 

 

 

 

 

 

 

 

 

 

Payment of share issue costs

 

 

 

 

 

 

(74

)

 

 

(301

)

Proceeds from issuance of shares by Canopy Rivers

 

 

 

 

 

 

86

 

 

 

787

 

Proceeds from exercise of stock options

 

16(b)

 

 

 

16,077

 

 

 

1,758

 

Proceeds from exercise of warrants

 

16(a)(ii)

 

 

 

427

 

 

 

133

 

Issuance of long-term debt

 

14(i)

 

 

 

-

 

 

 

600,000

 

Payment of long-term debt issue costs

 

14(i)

 

 

 

-

 

 

 

(16,045

)

Repayment of long-term debt

 

 

 

 

 

 

(98,207

)

 

 

(374

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used) provided by financing activities

 

 

 

 

 

 

(81,691

)

 

 

585,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(18,620

)

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (outflow) inflow

 

 

 

 

 

 

(664,198

)

 

 

335,336

 

Cash and cash equivalents, beginning of period

 

 

 

 

 

 

2,480,830

 

 

 

322,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

 

 

 

 

$

1,816,632

 

 

$

657,896

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refer to Note 23 for supplementary cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

 

 

 

 

Page 5

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

1.

Description of business

Canopy Growth Corporation is a publicly traded corporation, incorporated in Canada, with its head office located at 1 Hershey Drive, Smiths Falls, Ontario with its common shares listed on the TSX, under the trading symbol “WEED” and as of May 24, 2018 on the NYSE, under the trading symbol “CGC”. References in these condensed interim consolidated financial statements to “Canopy Growth” or “the Company” refer to Canopy Growth Corporation and its direct and indirect subsidiaries.

The principal activities of the Company are the production, distribution and sale of cannabis as regulated by the Access to Cannabis for Medical Purposes Regulations (“ACMPR”) in Canada, up to and including October 16, 2018. On October 17, 2018, the ACMPR was superseded by The Cannabis Act which regulates the production, distribution, and possession of cannabis for both medical and adult recreational access in Canada. The Company is also expanding to jurisdictions outside of Canada where federally lawful and regulated for cannabis and/or hemp including subsidiaries which operate in the United States, Europe, Latin America and the Caribbean, Asia / Pacific, and Africa. Through its partially owned subsidiary Canopy Rivers Inc. (“Canopy Rivers”), the Company also provides growth capital and a strategic support platform that pursues investment opportunities in the global cannabis sector, where federally lawful.

2.

Basis of presentation

(a) Statement of compliance

These condensed interim consolidated financial statements have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting. Certain information and footnote disclosures normally included in the audited annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), have been omitted or condensed. These condensed interim consolidated financial statements should be read in conjunction with Canopy Growth’s March 31, 2019 audited annual consolidated financial statements. Except for the adoption of IFRS 16, Leases (“IFRS 16”), as described in Note 2(c) to these condensed interim consolidated financial statements, these condensed interim consolidated financial statements have been prepared on a basis consistent with the accounting policies disclosed in the March 31, 2019 audited annual consolidated financial statements.

 

These condensed interim consolidated financial statements are unaudited and reflect adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods in accordance with IFRS.

 

The results reported in these condensed interim consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for an entire fiscal year. The policies set out below are consistently applied to all periods presented, unless otherwise noted.

These condensed interim consolidated financial statements were approved by the Board of Directors and authorized for issuance by the Board of Directors on August 14, 2019.

All figures are presented in thousands of Canadian dollars unless otherwise noted.

 

(b) Basis of presentation

These condensed interim consolidated financial statements have been prepared on a historical cost basis except for biological assets and certain financial assets and liabilities which are measured at fair value.

 

(i) Consolidation

These condensed interim consolidated financial statements are comprised of the financial results of the Company and its subsidiaries, which are the entities over which Canopy Growth has control. An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and can affect those returns through its power over the investee. Non-controlling interests in the equity of Canopy Growth’s subsidiaries are shown separately in equity in the condensed interim consolidated statements of financial position. Information on the Company’s subsidiaries with non-controlling interests is included in Note 18.

 

 

 

Page 6

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The Company measures goodwill as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquiree, less the net recognized amount of the identifiable assets and liabilities assumed, all measured as of the acquisition date. Any excess of the fair value of the net assets acquired over the assumed consideration paid is recognized as a gain in the condensed interim consolidated statements of operations. The Company elects on a transaction-by-transaction basis whether to measure non-controlling interest at its fair value or at its proportionate share of the recognized amount of the identifiable net assets, at the acquisition date.

 

Transaction costs, other than those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination are expensed as incurred.

 

Refer to Note 24 for additional information on the Company’s acquisitions.

(ii) Investments accounted for using the equity method

Investments accounted for using the equity method include investments in associates, which are entities over which the Company exercises significant influence, and joint arrangements representing joint ventures. Significant influence is the power to participate in the financial and operating policy decisions of the investee but without control or joint control over those policies. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The Company accounts for its investments in associates and joint ventures using the equity method of accounting. Under the equity method, investments in associates and joint ventures are initially recognized in the condensed interim consolidated statements of financial position at cost, and subsequently adjusted for the Company’s share of the net income (loss), comprehensive income (loss) and distributions of the investee. The carrying value is assessed for impairment at each statement of financial position date.

Refer to Note 9 for additional information on the Company’s investments accounted for using the equity method.

(c) Adoption of IFRS 16, Leases and resulting changes to lease accounting policy

On April 1, 2019 the Company adopted IFRS 16 using the modified retrospective approach. Therefore, the comparative information has not been restated and continues to be reported under IAS 17, Leases (“IAS 17”) and IFRIC 4, Determining Whether an Arrangement Contains a Lease (“IFRIC 4”).

 

Lease accounting policy applicable from April 1, 2019

Definition of a lease

At the inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys this right the Company assesses whether:

 

The contract involves the use of an identified asset – this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset;

 

The Company has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and

 

The Company has the right to direct the use of the asset. The Company has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used.

 

At inception or reassessment of a contract that contains lease and non-lease components, the Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

 

 

 

 

 

Page 7

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

Accounting as a lessee under IFRS 16

The Company recognizes a right-of-use asset and lease liability on the consolidated statements of financial position at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

 

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of its useful life or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

 

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate.

 

Lease payments included in the measurement of the lease liability comprise (a) fixed payments, including in-substance fixed payments; (b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; (c) amounts expected to be payable under a residual value guarantee; and (d) the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

 

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in the consolidated statements of operations if the carrying amount of the right-of-use asset has been reduced to $nil.

Transition to IFRS 16

 

Practical expedients

On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions represent leases. The Company applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into, or changed, on or after April 1, 2019.

The Company used the following additional practical expedients:

 

Applied a single discount rate to a portfolio of leases with similar characteristics;

 

Adjusted the right-of-use assets by the amount of any onerous contract provisions recognized under IAS 37, Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application, as an alternative to an impairment review;

 

Applied the exemption not to recognize right-of-use assets and lease liabilities for short-term leases with terms less than 12 months and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line or other systematic basis over the lease term;

 

Excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application; and

 

Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

 

 

Page 8

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

Leases classified as finance leases under IAS 17

For leases that were classified as finance leases under IAS 17, the carrying amounts of the right-of-use asset and the lease liability at April 1, 2019, are determined as the carrying amounts of the lease asset and lease liability under IAS 17 immediately before that date.

Impacts on consolidated financial statements

On transition to IFRS 16, the Company elected to measure the right-of-use assets at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments. As at April 1, 2019, the Company recognized $99,880 of right-of-use assets, net of onerous lease provisions of $10,703, and $110,583 of lease liabilities, with a nil impact on deficit. The transition to IFRS 16 did not have a material impact on the Company’s results of operations or liquidity.

 

When measuring lease liabilities, the Company used its incremental borrowing rate at April 1, 2019. The weighted-average rate applied was 4.5%. Right-of-use assets are recognized in Property, plant and equipment (see Note 11), and lease liabilities are recognized in Other current liabilities and Other long-term liabilities (see Note 15).

 

3.

Cash and Cash Equivalents

Cash and cash equivalents are disaggregated as follows:

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

Cash

 

$

1,069,395

 

 

$

1,703,550

 

Cash equivalents

 

 

747,237

 

 

 

777,280

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

1,816,632

 

 

$

2,480,830

 

 

 

4.

MARKETABLE SECURITIES

Marketable securities represent short-term investments not qualifying as cash equivalents. Marketable securities are recorded at fair value through profit and loss, and fair values have been determined based on quoted market prices.

 

 

 

June 30,

2019

 

 

March 31,

2019

 

 

 

 

 

 

 

 

 

 

U.S. government securities

 

$

1,173,441

 

 

$

1,663,245

 

Canadian government securities

 

 

149,379

 

 

 

369,288

 

Term deposits

 

 

1,435

 

 

 

1,600

 

 

 

 

 

 

 

 

 

 

Total marketable securities

 

$

1,324,255

 

 

$

2,034,133

 

 

5.

amounts receivable

Amounts receivable is comprised of:

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

56,960

 

 

$

61,830

 

Indirect taxes receivable

 

 

29,443

 

 

 

27,805

 

Interest receivable

 

 

7,178

 

 

 

7,193

 

Other receivables

 

 

9,185

 

 

 

10,146

 

 

 

 

 

 

 

 

 

 

Total amounts receivable

 

$

102,766

 

 

$

106,974

 

 

 

 

 

 

Page 9

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

6.

Biological assets

The Company’s biological assets consists of seeds and cannabis plants. The continuity of biological assets for the three months ended June 30, 2019 and the year ended March 31, 2019 was as follows:

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

Balance, beginning of period

 

$

78,975

 

 

$

16,348

 

Acquisition of biological assets due to the

   acquisition of consolidated entities

 

 

-

 

 

 

184

 

Unrealized gain on changes in fair value

   of biological assets

 

 

139,019

 

 

 

167,550

 

Increase in biological assets due to

   capitalized costs

 

 

45,935

 

 

 

92,733

 

Net write-off of biological assets

 

 

(7,654

)

 

 

(21,618

)

Transferred to inventory upon harvest

 

 

(153,367

)

 

 

(176,222

)

 

 

 

 

 

 

 

 

 

Balance, end of period

 

$

102,908

 

 

$

78,975

 

 

Biological assets are valued in accordance with IAS 41, Agriculture, based on a market approach where fair value at the point of harvest is estimated based on selling prices less costs to sell at harvest. The Company’s biological assets are primarily cannabis plants, and because there is no actively traded commodity market for plants or dried product, the valuation of these biological assets is obtained using valuation techniques where the inputs are based upon unobservable market data (Level 3).

 

For in-process biological assets, the fair value at point of harvest is adjusted based on the stage of growth. Stage of growth is determined by reference to costs incurred to date as a percentage of total expected costs from inception to harvest. As at June 30, 2019, the average stage of growth for the biological assets was 48%, compared to an average stage of growth of 42% as at March 31, 2019.

 

The significant unobservable inputs and their range of values are noted in the table below. The sensitivity analysis for each significant input is performed by assuming a 5% decrease while assuming all other inputs remain constant:

 

Unobservable Inputs

Range

Weighted Average

Decrease in

Fair Value of

Biological Assets

at June 30, 2019

 

 

Estimated Yield per Plant – varies by strain and is obtained through historical growing results or grower estimate if historical results are not available.

 

6 grams/plant to

339 grams/plant

 

80 grams/plant

 

$

(4,447

)

 

Average Selling Price of Dry Cannabis – varies by strain and is obtained through average selling prices or estimated future selling prices if historical results are not available.

 

$6.69 to $8.21/gram

 

$7.23/gram

 

$

(7,219

)

 

 

 

Page 10

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

7.

Inventory

Inventory is comprised of the following items:

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

Finished goods

 

$

93,132

 

 

$

49,507

 

Work-in-process

 

 

247,212

 

 

 

165,462

 

Supplies and consumables

 

 

53,394

 

 

 

47,136

 

 

 

 

 

 

 

 

 

 

Total inventory

 

$

393,738

 

 

$

262,105

 

 

 

Inventory expensed during the three months ended June 30, 2019, was $96,396 (three months ended June 30, 2018 - $32,244).

 

The fair value changes in biological assets included in inventory sold for the three months ended June 30, 2019 is $27,328 while other inventory charges for the same period is $18,802. Included in other inventory charges is $15,920 of net realizable value adjustments and $2,882 of net write-offs of biological assets.

 

8.

PREPAID EXPENSES AND OTHER CURRENT ASSETS

The Company’s prepaid expenses and other current assets consists of the following:

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

$

41,415

 

 

$

35,286

 

Deposits

 

 

35,850

 

 

 

29,138

 

Prepaid inventory

 

 

27,244

 

 

 

21,267

 

Restricted short-term investments

 

 

19,533

 

 

 

21,432

 

 

 

 

 

 

 

 

 

 

Total prepaid expenses and other current assets

 

$

124,042

 

 

$

107,123

 

 

9.

INVESTMENTS IN EQUITY METHOD INVESTEES

The following table outlines changes in the investments in associates that are accounted for using the equity method. In accordance with IAS 28, Investments in Associates and Joint Ventures in cases where the Company does not have the same reporting date as its associates, the Company will account for its investment one quarter in arrears. Accordingly, certain of the figures in the following table, including the Company’s share of the investee’s net income (loss), are based on values at March 31, 2019 with adjustments for any significant transactions.

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

Share of

 

 

 

 

 

 

Balance at

 

 

 

 

 

Participating

 

 

March 31,

 

 

 

 

 

 

net

 

 

Exchange

 

 

June 30,

 

Entity

 

Instrument

 

share

 

 

2019

 

 

Additions

 

 

loss

 

 

differences

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PharmHouse

 

Shares

 

49.0%

 

 

$

39,278

 

 

$

-

 

 

$

(242

)

 

$

-

 

 

$

39,036

 

Agripharm

 

Shares

 

40.0%

 

 

 

36,127

 

 

 

-

 

 

 

(1,151

)

 

 

-

 

 

 

34,976

 

Beckley Canopy Therapeutics

 

Shares

 

42.2%

 

 

 

11,653

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11,653

 

CanapaR

 

Shares

 

46.8%

 

 

 

18,062

 

 

 

-

 

 

 

(177

)

 

 

-

 

 

 

17,885

 

Other

 

Shares

 

18.2% to 26.8%

 

 

 

7,265

 

 

 

2,824

 

 

 

(263

)

 

 

(55

)

 

 

9,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

112,385

 

 

$

2,824

 

 

$

(1,833

)

 

$

(55

)

 

$

113,321

 

 

 

 

 

 

Page 11

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

10.

OTHER FINANCIAL ASSETS

The following tables outlines changes in Other financial assets. Additional details on how the fair value of significant investments is calculated are included in Note 27.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

options /

 

 

Balance at

 

 

 

 

 

 

 

Accounting

 

March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest

 

 

disposal

 

 

June 30,

 

Entity

 

Instrument

 

Note

 

method

 

2019

 

 

Additions

 

 

FVOCI

 

 

FVTPL

 

 

income

 

 

of shares

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acreage

 

Option

 

25

 

FVTPL

 

$

-

 

 

$

395,190

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

395,190

 

TerrAscend

 

Exchangeable shares

 

 

 

FVOCI

 

 

160,000

 

 

 

-

 

 

 

(20,000

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

140,000

 

PharmHouse

 

Loan receivable

 

 

 

Amortized cost

 

 

40,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

40,000

 

SLANG Worldwide

 

Warrants

 

 

 

FVTPL

 

 

44,000

 

 

 

-

 

 

 

-

 

 

 

(8,000

)

 

 

-

 

 

 

-

 

 

 

36,000

 

HydRx Farms

 

Shares

 

 

 

FVOCI

 

 

17,611

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

17,611

 

Agripharm

 

Repayable debenture

 

 

 

FVTPL

 

 

10,254

 

 

 

3,000

 

 

 

-

 

 

 

1,406

 

 

 

-

 

 

 

-

 

 

 

14,660

 

ZeaKal

 

Shares

 

10(i)

 

FVOCI

 

 

-

 

 

 

13,487

 

 

 

(400

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

13,087

 

AusCann Group Holdings

 

Shares

 

 

 

FVOCI

 

 

12,073

 

 

 

2,341

 

 

 

(1,475

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,939

 

Greenhouse

 

Convertible debenture

 

 

 

FVTPL

 

 

5,944

 

 

 

3,000

 

 

 

-

 

 

 

2,023

 

 

 

-

 

 

 

-

 

 

 

10,967

 

James E. Wagner Cultivation

 

Shares

 

 

 

FVOCI

 

 

12,389

 

 

 

-

 

 

 

(3,629

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

8,760

 

CanapaR

 

Options

 

 

 

FVTPL

 

 

7,500

 

 

 

-

 

 

 

-

 

 

 

(2,200

)

 

 

-

 

 

 

-

 

 

 

5,300

 

Radicle Medical Marijuana

 

Repayable debenture

 

 

 

FVTPL

 

 

5,064

 

 

 

-

 

 

 

-

 

 

 

(8

)

 

 

-

 

 

 

-

 

 

 

5,056

 

Good Leaf

 

Shares

 

 

 

FVOCI

 

 

4,611

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4,611

 

Other - classified as FVTPL

 

Various

 

 

 

FVTPL

 

 

17,960

 

 

 

2,677

 

 

 

-

 

 

 

(3,620

)

 

 

-

 

 

 

(922

)

 

 

16,095

 

Other - classified as FVOCI

 

Various

 

 

 

FVOCI

 

 

24,172

 

 

 

-

 

 

 

(5,184

)

 

 

-

 

 

 

-

 

 

 

(1,717

)

 

 

17,271

 

Other - classified as

   amortized cost

 

Loan receivable

 

 

 

Amortized cost

 

 

1,849

 

 

 

7,250

 

 

 

-

 

 

 

-

 

 

 

45

 

 

 

-

 

 

 

9,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

363,427

 

 

$

426,945

 

 

$

(30,688

)

 

$

(10,399

)

 

$

45

 

 

$

(2,639

)

 

$

746,691

 

 

 

(i)

On June 14, 2019, Canopy Rivers acquired 248,473 preferred shares of ZeaKal, Inc. (“ZeaKal”), a California-based plant science company, for $13,487 which represents a 9% equity interest on a fully diluted basis.

 

 

Page 12

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

11.

Property, plant and equipment

A continuity of property, plant and equipment for the three months ended June 30, 2019, is as follows:

 

COST

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers/

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

Additions

 

 

disposals/

 

 

Balance at

 

 

 

March 31,

 

 

 

 

 

 

from

 

 

exchange

 

 

June 30,

 

 

 

2019

 

 

Additions

 

 

acquisitions

 

 

differences

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buildings and greenhouses

 

$

361,958

 

 

$

112

 

 

$

361

 

 

$

48,596

 

 

$

411,027

 

Production and warehouse

   equipment

 

 

175,325

 

 

 

1,027

 

 

 

6,777

 

 

 

8,525

 

 

 

191,654

 

Leasehold improvements

 

 

32,264

 

 

 

121

 

 

 

111

 

 

 

14,574

 

 

 

47,070

 

Land

 

 

37,681

 

 

 

-

 

 

 

-

 

 

 

(561

)

 

 

37,120

 

Office and lab equipment

 

 

23,495

 

 

 

517

 

 

 

560

 

 

 

1,480

 

 

 

26,052

 

Computer equipment

 

 

19,228

 

 

 

145

 

 

 

68

 

 

 

3,065

 

 

 

22,506

 

Right-of-use assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Buildings and greenhouses

 

 

-

 

 

 

104,814

 

 

 

-

 

 

 

-

 

 

 

104,814

 

     Production and warehouse

        equipment

 

 

-

 

 

 

2,614

 

 

 

-

 

 

 

-

 

 

 

2,614

 

Assets in process

 

 

491,722

 

 

 

235,742

 

 

 

1,749

 

 

 

(81,358

)

 

 

647,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,141,673

 

 

$

345,092

 

 

$

9,626

 

 

$

(5,679

)

 

$

1,490,712

 

 

 

ACCUMULATED DEPRECIATION

 

 

 

 

 

 

 

 

 

 

 

Transfers/

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

disposals/

 

 

Balance at

 

 

 

March 31,

 

 

 

 

 

 

exchange

 

 

June 30,

 

 

 

2019

 

 

Depreciation

 

 

differences

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buildings and greenhouses

 

$

13,096

 

 

$

3,783

 

 

$

(8

)

 

$

16,871

 

Production and warehouse

   equipment

 

 

17,497

 

 

 

5,052

 

 

 

(5

)

 

 

22,544

 

Leasehold improvements

 

 

5,497

 

 

 

1,678

 

 

 

(1

)

 

 

7,174

 

Office and lab equipment

 

 

4,116

 

 

 

1,007

 

 

 

(111

)

 

 

5,012

 

Computer equipment

 

 

5,127

 

 

 

1,195

 

 

 

(7

)

 

 

6,315

 

Right-of-use assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Buildings and greenhouses

 

 

-

 

 

 

3,340

 

 

 

-

 

 

 

3,340

 

     Production and warehouse

        equipment

 

 

-

 

 

 

171

 

 

 

-

 

 

 

171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

45,333

 

 

 

16,226

 

 

 

(132

)

 

 

61,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

$

1,096,340

 

 

 

 

 

 

 

 

 

 

$

1,429,285

 

 

 

Page 13

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

12.

INTANGIBLE ASSETS AND GOODWILL

A continuity of the intangible assets for the three months ended June 30, 2019, is as follows:  

 

COST

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers/

 

 

 

 

 

 

 

Balance at

 

 

 

 

 

 

Additions

 

 

disposals/

 

 

Balance at

 

 

 

March 31,

 

 

 

 

 

 

from

 

 

exchange

 

 

June 30,

 

 

 

2019

 

 

Additions

 

 

acquisitions

 

 

differences

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health Canada licenses

 

$

64,600

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

64,600

 

Acquired brands

 

 

64,374

 

 

 

593

 

 

 

154

 

 

 

(236

)

 

 

64,885

 

Licensed brands

 

 

57,802

 

 

 

-

 

 

 

10,294

 

 

 

(78

)

 

 

68,018

 

Distribution channel

 

 

42,400

 

 

 

78

 

 

 

-

 

 

 

(21

)

 

 

42,457

 

Operating licenses

 

 

152,402

 

 

 

-

 

 

 

5,158

 

 

 

(1,219

)

 

 

156,341

 

Intellectual property

 

 

153,797

 

 

 

-

 

 

 

-

 

 

 

(1,315

)

 

 

152,482

 

Software and domain names

 

 

9,701

 

 

 

236

 

 

 

8

 

 

 

308

 

 

 

10,253

 

Intangibles in process

 

 

4,122

 

 

 

2,823

 

 

 

-

 

 

 

(601

)

 

 

6,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

549,198

 

 

$

3,730

 

 

$

15,614

 

 

$

(3,162

)

 

$

565,380

 

 

 

ACCUMULATED AMORTIZATION

 

 

 

Balance at

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

March 31,

 

 

 

 

 

 

Exchange

 

 

June 30,

 

 

 

2019

 

 

Amortization

 

 

differences

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Health Canada licenses

 

$

4,526

 

 

$

475

 

 

$

-

 

 

$

5,001

 

Licensed brands

 

 

124

 

 

 

930

 

 

 

11

 

 

 

1,065

 

Distribution channel

 

 

17,103

 

 

 

2,043

 

 

 

(1

)

 

 

19,145

 

Operating licenses

 

 

495

 

 

 

55

 

 

 

(3

)

 

 

547

 

Intangibles in process

 

 

74

 

 

 

-

 

 

 

-

 

 

 

74

 

Patents

 

 

4,437

 

 

 

3,126

 

 

 

(37

)

 

 

7,526

 

Software and domain names

 

 

2,883

 

 

 

536

 

 

 

(4

)

 

 

3,415

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

29,642

 

 

 

7,165

 

 

 

(34

)

 

 

36,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net book value

 

$

519,556

 

 

 

 

 

 

 

 

 

 

$

528,607

 

 

The net change in goodwill is as follows:

 

As at March 31, 2019

 

$

1,544,055

 

Additions from acquisitions of subsidiaries

 

 

400,807

 

Exchange differences

 

 

(12,947

)

 

 

 

 

 

As at June 30, 2019

 

$

1,931,915

 

 

13.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

 

 

June 30,

 

 

March 31,

 

 

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

Trade payables

 

$

205,033

 

 

$

188,920

 

Accrued liabilities

 

 

51,786

 

 

 

37,613

 

 

 

 

 

 

 

 

 

 

Total accounts payable and accrued liabilities

 

$

256,819

 

 

$

226,533

 

 

The accounts payable and accrued liabilities balance at June 30, 2019 is comprised of amounts for property, plant and equipment of $124,427 (March 31, 2019 – $96,875), professional fees of $19,508 (March 31, 2019 – $24,892), compensation related liabilities of $34,821 (March 31, 2019 – $20,577), and other miscellaneous liabilities of $78,063 (March 31, 2019 – $84,189).

 

 

 

Page 14

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

14.

Long-term debT

 

 

 

 

 

June 30,

 

 

March 31,

 

 

 

Maturity Date

 

2019

 

 

2019

 

 

 

 

 

 

 

 

 

 

 

 

Convertible senior notes at 4.25% interest with

   semi-annual interest payments

 

July 15, 2023

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Principal amount

 

 

 

$

600,000

 

 

$

600,000

 

Accrued interest

 

 

 

 

11,898

 

 

 

5,454

 

Non-credit risk fair value adjustment (FVTPL)

 

 

 

 

145,230

 

 

 

183,120

 

Credit risk fair value adjustment (FVOCI)

 

 

 

 

32,520

 

 

 

47,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

789,648

 

 

 

835,704

 

 

 

 

 

 

 

 

 

 

 

 

Term loan facility advanced in the form of prime

   rate operating loan

 

 

 

$

-

 

 

$

95,000

 

Transferred receivables, bearing interest rate of

   EURIBOR plus 0.850%

 

 

 

 

4,234

 

 

 

-

 

Other loans, mortgages, and financings

 

 

 

 

11,914

 

 

 

15,271

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

805,796

 

 

 

945,975

 

Less: current portion

 

 

 

 

(18,288

)

 

 

(103,716

)

 

 

 

 

 

 

 

 

 

 

 

Long-term portion

 

 

 

$

787,508

 

 

$

842,259

 

 

(i) Convertible senior notes

 

On June 20, 2018, the Company issued convertible senior notes (“the notes”) with an aggregate principal amount of $600,000. The notes are subordinated in right of payment to any existing and future senior indebtedness, including indebtedness under the revolving credit facility. The notes will rank senior in right of payment to any future subordinated borrowings.

 

Holders of the notes have the right to exercise the conversion option at a rate of 20.7577 common shares for every $1 of principal amount of notes from September 30, 2018 to January 15, 2023, if (i) the market price of the Company common shares for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during the 5 business day period after any consecutive 5 trading day period (the “measurement period”) in which the trading price per $1 principal amount of the notes for each trading day in the measurement period was less than 98% of the product of the last reported sales price of the Company’s common shares and the conversion rate on each such trading day, (iii) the notes are called for redemption or (iv) upon occurrence of certain corporate events (“Fundamental Change”).

 

The Company may also redeem the notes if certain tax laws related to Canadian withholding tax change subject to certain further conditions. The redemption of the notes shall be at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest.

 

The overall change in fair value of the notes during the three months ended June 30, 2019 was a decrease of $46,056, which included accrued contractual interest of $6,444. Refer to Note 27 for additional details on how the fair value of the notes is calculated.

 

(ii) Alberta Treasury Board (“ATB”) financing

 

On June 14, 2019, the Company repaid its ATB term loan facility. A payment of $95,180 was made to settle the loan balance which included interest of $180.

 

(iii) Transferred receivables

The carrying amounts of the transferred receivables include receivables which are subject to a factoring arrangement. Under this arrangement, C3 has transferred the relevant receivables to PB Factoring GmbH in

 

 

Page 15

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

exchange for cash. The transferred receivables to PB Factoring GmbH is $4,704 and the associated secured borrowing is $4,234.

 

(iv) Other mortgages, loans, and financings

The mortgages are secured by a first charge on the properties in Niagara-on-the-Lake and Bowmanville, Ontario, corporate guarantee from the Company, or a general corporate security agreement.

 

15.

OTHER LIABILITIES

 

 

 

 

 

June 30, 2019

 

 

March 31, 2019

 

 

 

Notes

 

Current

 

 

Long-term

 

 

Total

 

 

Current

 

 

Long-term

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition consideration

   related liabilities

 

 

 

$

28,742

 

 

$

80,780

 

 

$

109,522

 

 

$

22,176

 

 

$

87,747

 

 

$

109,923

 

Lease liabilities

 

(a)

 

 

36,026

 

 

 

79,653

 

 

 

115,679

 

 

 

-

 

 

 

-

 

 

 

-

 

Minimum royalty obligations

 

 

 

 

3,445

 

 

 

24,392

 

 

 

27,837

 

 

 

3,445

 

 

 

24,392

 

 

 

27,837

 

Due to former shareholders

   of Storz & Bickel

 

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

21,447

 

 

 

-

 

 

 

21,447

 

Refund liability

 

 

 

 

8,000

 

 

 

-

 

 

 

8,000

 

 

 

-

 

 

 

-

 

 

 

-

 

Settlement liability

 

(b)

 

 

5,444

 

 

 

14,822

 

 

 

20,266

 

 

 

11,980

 

 

 

16,631

 

 

 

28,611

 

Put liabilities

 

 

 

 

-

 

 

 

8,500

 

 

 

8,500

 

 

 

-

 

 

 

6,400

 

 

 

6,400

 

Other

 

 

 

 

15,990

 

 

 

4,842

 

 

 

20,832

 

 

 

22,366

 

 

 

5,234

 

 

 

27,600

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

$

97,647

 

 

$

212,989

 

 

$

310,636

 

 

$

81,414

 

 

$

140,404

 

 

$

221,818

 

 

 

 

(a)

Lease liabilities

A continuity of lease liabilities for the three months ended June 30, 2019, is as follows:

 

As at April 1, 2019

 

$

110,583

 

Lease additions

 

 

7,505

 

Lease payments

 

 

(3,688

)

Interest expense on lease liabilities

 

 

1,279

 

 

 

 

 

 

As at June 30, 2019

 

$

115,679

 

 

The maturity analysis of the undiscounted contractual balances of the lease liabilities is as follows:

 

Less than one year

 

$

40,409

 

One to five years

 

 

60,027

 

More than five years

 

 

34,510

 

 

 

 

 

 

Total undiscounted lease liabilities at June 30, 2019

 

$

134,946

 

 

(b) Settlement liability

During the year ended March 31, 2019, the Company reached a settlement with certain co-investors in Bedrocan Brasil S.A. and Entourage Phytolab S.A. to facilitate organizational changes to support the Company’s growth in Latin America. Under the terms of the agreement the Company agreed to make cash payments totaling $25,185 and a final payment equal to 1.2% of the fair value of the Company’s Latin American business as of June 30, 2023. The fair value of the settlement was estimated to be $28,611 and was recorded as an expense. The final payment represents a derivative liability that was initially measured at fair value with subsequent period end remeasurements of fair value recorded through net income (loss).

During the three months ended June 30, 2019, payments totalling $8,308 were made, with the remaining change in liability relating to accretion expense and fair value changes.

 

 

 

Page 16

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

16.

Share capital – Canopy Growth

(a) Authorized

An unlimited number of common shares.

 

 

(i)

Issuances of equity

During the three months ended June 30, 2019, the Company issued 482,321 shares as a result of the completion of acquisition milestones, with an increase of $18,674 in share capital, and a corresponding decrease in share-based reserve.

 

 

(ii)

Warrants

 

 

 

Note

 

Number of

whole

warrants

 

 

Average

exercise

price

 

 

Warrant

value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding at March 31, 2019

 

 

 

 

107,848,322

 

 

$

43.80

 

 

$

1,589,925

 

Issuance of Tranche B Warrants

 

25

 

 

38,454,444

 

 

 

76.68

 

 

 

1,176,350

 

Exercise of warrants

 

 

 

 

(12,060

)

 

 

35.36

 

 

 

(470

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding at June 30, 20191

 

 

 

 

146,290,706

 

 

$

52.44

 

 

$

2,765,805

 

1 This balance excludes the Tranche C Warrants, which represent a derivative liability and have nominal value, see note 25.

 

 

(b) Omnibus Incentive Plan (“Omnibus Plan”)

Under the Omnibus Plan, the maximum number of shares issuable from treasury pursuant to stock-based awards shall not exceed 15% of the total outstanding shares from time to time less the number of shares issuable pursuant to all other security-based compensation arrangements of the Company. The maximum number of common shares reserved for stock-based awards is 50,957,757 at June 30, 2019. As of June 30, 2019, the only stock-based awards issued have been common share purchase options and restricted share units (“RSUs”) under the Omnibus Plan.

Under the 2017 Employee Stock Purchase Plan, the aggregate number of common shares that may be issued is 400,000, and the maximum number of common shares which may be issued in any one fiscal year shall not exceed 200,000.

 

The Omnibus Plan is administered by the Board of Directors of the Company who establishes exercise prices, at not less than the market price at the date of grant, and expiry dates. Options under the Omnibus Plan generally remain exercisable in increments with 1/3 being exercisable on each of the first, second and third anniversaries from the date of grant, and have expiry dates set at six years from issuance.

 

The following is a summary of the changes in the Company’s Omnibus Plan employee options during the three months ended June 30, 2019:

 

 

 

Options

issued

 

 

Weighted

average

exercise price

 

 

 

 

 

 

 

 

 

 

Balance outstanding at March 31, 2019

 

 

32,831,895

 

 

$

34.10

 

Options granted

 

 

270,000

 

 

 

52.45

 

Options exercised

 

 

(1,713,592

)

 

 

9.38

 

Options forfeited/cancelled

 

 

(690,067

)

 

 

50.88

 

 

 

 

 

 

 

 

 

 

Balance outstanding at June 30, 2019

 

 

30,698,236

 

 

$

35.26

 

 

 

Page 17

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

The following is a summary of the outstanding stock options as at June 30, 2019:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range of Exercise Prices

 

Outstanding at

June 30, 2019

 

 

Weighted Average

Remaining

Contractual Life

(years)

 

 

Exercisable at

June 30, 2019

 

 

Weighted Average

Remaining

Contractual Life

(years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$1.32 - $11.76

 

 

6,169,606

 

 

 

3.59

 

 

 

2,963,765

 

 

 

3.36

 

$11.77 - $35.00

 

 

4,323,849

 

 

 

4.58

 

 

 

915,918

 

 

 

4.59

 

$35.01 - $38.42

 

 

7,470,073

 

 

 

5.49

 

 

 

-

 

 

-

 

$38.43 - $43.12

 

 

6,635,491

 

 

 

5.14

 

 

 

1,013,890

 

 

 

4.86

 

$43.13 - $67.64

 

 

6,099,217

 

 

 

5.46

 

 

 

2,261

 

 

 

3.65

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,698,236

 

 

 

4.90

 

 

 

4,895,834

 

 

 

3.90

 

 

 

At June 30, 2019, the weighted average exercise price of options outstanding and options exercisable was $35.26 and $17.70, respectively (at March 31, 2019 - $34.10 and $13.99, respectively).

The Company recorded $70,816 in share-based compensation expense related to options issued to employees for the three months ended June 30, 2019 (for the three months ended June 30, 2018 - $13,546) and $2,277 in share-based compensation expense related to options issued to contractors (for the three months ended June 30, 2018 - $2,096). The compensation expense for the three months ended June 30, 2019 includes an amount related to 595,000 options being provided in exchange for services which are subject to performance conditions (for the three months ended June 30, 2018 - 420,000).

 

In determining the amount of share-based compensation related to options issued during the year, the Company used the Black-Scholes option pricing model to establish the fair value of options granted during the three months ended June 30, 2019 and 2018 on their measurement date by applying the following assumptions:

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.41%

 

 

2.01%

 

Expected life of options (years)

 

3 - 5

 

 

3 - 5

 

Expected annualized volatility

 

73%

 

 

70%

 

Expected forfeiture rate

 

11%

 

 

12%

 

Expected dividend yield

 

nil

 

 

nil

 

Black-Scholes value of each option

 

$

28.58

 

 

$

21.55

 

 

Volatility was estimated by using the historical volatility of the Company. The expected life in years represents the period of time that options granted are expected to be outstanding. The risk-free rate was based on the zero coupon Canada government bonds with a remaining term equal to the expected life of the options. 

During the three months ended June 30, 2019, 1,713,592 Omnibus Plan options were exercised ranging in price from $0.22 to $40.68 for gross proceeds of $16,077 (for the three months ended June 30, 2018 – 637,187 Omnibus Plan options were exercised ranging in price from $1.72 to $11.80 for gross proceeds of $5,096).

During the three months ended June 30, 2019, the Company issued nil RSUs. As at June 30, 2019, the Company had 148,950 RSUs issued and outstanding, of which 17,300 were exercisable. For the three months ended June 30, 2019, the Company recorded $1,394 in share-based compensation expense related to these RSUs (for the three months ended June 30, 2018 – $2,247).

 

 

Page 18

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

(c) Share-based compensation expense related to acquisition and asset purchase milestones

Share-based compensation expense related to acquisition milestones is comprised of:

 

 

 

Compensation expense

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

Colombia

 

$

2,259

 

 

$

-

 

Canindica

 

 

4,010

 

 

 

-

 

Other

 

 

4,012

 

 

 

7,095

 

 

 

 

 

 

 

 

 

 

 

 

$

10,281

 

 

$

7,095

 

 

During the three months ended June 30, 2019, 482,321 shares (three months ended June 30, 2018 – 271,458) were released on completion of acquisition milestones. At June 30, 2019, there were up to 5,199,283 shares to be issued on the completion of acquisition and asset purchase milestones. In certain cases, the number of shares to be issued is based on the volume weighted average share price at the time the milestones are met. The number of shares has been estimated assuming the milestones were met at June 30, 2019. The number of shares excludes shares to be issued on July 4, 2023 to the previous shareholders of Spectrum Cannabis Colombia S.A.S. (“Spectrum Colombia”) and Canindica Capital Ltd. (“Canindica”) based on the fair market value of the Company’s Latin American business on that date.

 

(d) Other share-based payments

During the three months ended June 30, 2019, the Company recorded share-based payments of $nil (three months ended June 30, 2018 - $112) related to shares issued for payment of royalties and sales and marketing services.

 

17.

Share capital – Canopy Rivers

(a) Authorized

Canopy Rivers is authorized to issue an unlimited number of common shares. There are two classes of common shares: Multiple Voting Shares and Subordinated Voting Shares. Each Multiple Voting Share is entitled to receive 20 votes, while each Subordinated Voting Share is entitled to receive one vote at all meetings of the shareholders. There is no priority or distinction between the two classes of shares in respect of their entitlement to the payment of dividends or participation on liquidation, dissolution or winding-up of the Company.

 

(b) Issued and outstanding

As at June 30, 2019, Canopy Rivers had 36,468,318 Multiple Voting Shares (March 31, 2019 – 36,468,318) and 151,081,576 Subordinated Voting Shares (March 31, 2019 – 150,592,136) issued and outstanding. As at June 30, 2019, the Company held 36,468,318 Multiple Voting Shares (March 31, 2019 – 36,468,318) and 15,223,938 Subordinated Voting shares (March 31, 2019 – 15,223,938) which represented a 27.6% ownership interest in Canopy Rivers and 84.6% of the voting rights (March 31, 2019 – 27.6% and 84.6% respectively). The voting rights allow the Company to direct the relevant activities of Canopy Rivers such that the Company has control over Canopy Rivers and Canopy Rivers is consolidated in these financial statements.

 

 

 

Page 19

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

(c) Initial financing and seed capital options

The 10,066,668 Subordinated Voting Shares acquired by way of share purchase loans, whereby funds were advanced to Canopy Rivers by the Company on behalf of certain employees of the Company and another individual, were initially accounted for as seed capital options and are not considered issued for accounting purposes until the loans are repaid on an individual employee/consultant basis. During the three months ended June 30, 2019, share purchase loans in the amount of $19 (three months ended June 30, 2018 – $288) relating to Canopy Rivers shares held in trust by the Company on behalf of certain Canopy Growth employees were repaid, resulting in the release from escrow of 377,775 Subordinated Voting Shares (three months ended June 30, 2018 – 5,750,000). As at June 30, 2019, there were 3,461,117 seed capital options outstanding (March 31, 2019 – 3,838,892).

 

(d) Financings during the three months ended June 30, 2019

There were no financings during the three months ended June 30, 2019.

 

(e) Stock option plan

Canopy Rivers has a stock option plan (the “Plan”) under which non-transferable options to purchase Subordinated Voting Shares of the Company may be granted to directors, officers, employees, or independent contractors of the Company. Pursuant to the Plan, the maximum number of Subordinated Voting Shares issuable from treasury pursuant to outstanding options shall not exceed 10% of the issued and outstanding Subordinated Voting Shares. The Plan is administered by the Board who establishes exercise prices, at not less than the market price at the date of the grant, and expiry dates. Options under the Plan generally remain exercisable in increments, with one-third being exercisable on each of the first, second, and third anniversaries from the date of grant, and have expiry dates five years from the date of grant. The Board has the discretion to amend general vesting provisions and the term of any option grant, subject to limits contained in the Plan. The seed capital options are not within the scope of the Plan.

The following is a summary of the changes in Canopy Rivers’ stock options, excluding the seed capital options presented separately, during the three months ended June 30, 2019:

 

 

 

Options

issued

 

 

Weighted

average

exercise price

 

 

 

 

 

 

 

 

 

 

Balance outstanding at March 31, 2019

 

 

12,522,255

 

 

$

1.98

 

Options granted

 

 

1,578,000

 

 

 

3.87

 

Options exercised

 

 

(111,665

)

 

 

0.60

 

 

 

 

 

 

 

 

 

 

Balance outstanding at June 30, 2019

 

 

13,988,590

 

 

$

2.20

 

 

In determining the amount of share-based compensation related to options issued during the year, Canopy Rivers used the Black-Scholes option pricing model to establish the fair value of options granted during the three months ended June 30, 2019 and 2018 on their measurement date by applying the following assumptions:

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

1.35%

 

 

1.34%

 

Expected life of options (years)

 

3 - 4

 

 

1 - 4

 

Expected annualized volatility

 

70%

 

 

69%

 

Expected forfeiture rate

 

nil

 

 

nil

 

Expected dividend yield

 

nil

 

 

nil

 

Black-Scholes value of each option

 

$1.93

 

 

$0.55 - 3.45

 

 

 

 

Page 20

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

Volatility was estimated using companies that Canopy Rivers considers comparable that have trading and volatility history prior to Canopy Rivers becoming public. The expected life in years represents the period of time that options granted are expected to be outstanding. The risk-free rate was based on zero coupon Canada government bonds with a remaining term equal to the expected life of the options.

For the three months ended June 30, 2019, the Company recorded $2,594 (three months ended June 30, 2018 - $5,183) in share-based compensation expense related to these options and the seed capital options with a corresponding increase to non-controlling interests.

 

18.

Non-controlling Interests

The following table presents the summarized financial information about the Company’s subsidiaries that have non-controlling interests. This information represents amounts before intercompany eliminations.

 

As at June 30, 2019

 

Canopy

Rivers

 

 

Vert

Mirabel

 

 

 

 

 

 

 

 

 

 

Ownership interest

 

 

27.6

%

 

 

47.8

%

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

88,750

 

 

$

758

 

Prepaid expenses and other current assets

 

 

4,363

 

 

 

48,575

 

Investments in associates

 

 

81,376

 

 

 

-

 

Other financial assets

 

 

171,643

 

 

 

-

 

Goodwill

 

 

-

 

 

 

5,625

 

Other long-term assets

 

 

20,148

 

 

 

32,275

 

Deferred tax liability

 

 

(4,648

)

 

 

(5,828

)

Other liabilities

 

 

(2,705

)

 

 

(60,389

)

Non-controlling interests

 

 

(272,361

)

 

 

(10,960

)

 

 

 

 

 

 

 

 

 

Equity attributable to Canopy Growth

 

$

86,566

 

 

$

10,056

 

 

 

The net change in the non-controlling interests is as follows:  

 

 

Canopy

Rivers

 

 

Vert

Mirabel

 

 

Other non-

material

interests

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at March 31, 2019

 

$

281,962

 

 

$

6,711

 

 

$

1,142

 

 

$

289,815

 

Net (loss) income

 

 

(2,362

)

 

 

4,249

 

 

 

-

 

 

 

1,887

 

Other comprehensive loss

 

 

(10,069

)

 

 

-

 

 

 

-

 

 

 

(10,069

)

Share-based compensation

 

 

2,594

 

 

 

-

 

 

 

-

 

 

 

2,594

 

Ownership changes

 

 

236

 

 

 

-

 

 

 

-

 

 

 

236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As at June 30, 2019

 

$

272,361

 

 

$

10,960

 

 

$

1,142

 

 

$

284,463

 

 

 

 

Page 21

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

19.

REVENUE

Revenues are disaggregated as follows:

 

 

Three months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Recreational revenue

 

 

 

 

 

 

 

 

Business to business

 

$

50,425

 

 

$

-

 

Business to consumer

 

 

10,638

 

 

 

-

 

Medical revenue

 

 

 

 

 

 

 

 

Canadian

 

 

13,051

 

 

 

21,364

 

International

 

 

10,496

 

 

 

3,370

 

Other revenue

 

 

18,781

 

 

 

1,182

 

 

 

 

 

 

 

 

 

 

Gross revenue

 

 

103,391

 

 

 

25,916

 

Excise taxes

 

 

12,909

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Net revenue

 

$

90,482

 

 

$

25,916

 

 

Included in business to business recreational revenue for the three months ended June 30, 2019 are other revenue adjustments of $8,000, which represent the Company’s estimate of variable consideration that may result from rights of return. Excise taxes are presented net of the impact from the other revenue adjustments.

 

20.

Expenses by nature

Operating expenses are presented on the face of the consolidated statements of operations using a classification based on the functions “Inventory production costs expensed to cost of sales,” “Sales and marketing,” “Research and development,” and “General and administration.” The Company also presents other material operating expenses separately as they are deemed to be items of dissimilar function.

Operating expenses for the three months ended June 30, 2019 include employee compensation and benefits of $58,687 (three months ended June 30, 2018 – $22,652), share-based compensation of $87,362 (three months ended June 30, 2018 – $30,951), and depreciation and amortization of $23,391 (three months ended June 30, 2018 – $6,293).

 

21.

OTHER INCOME (EXPENSE), NET

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

Notes

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value changes on financial

  assets classified as FVTPL

 

 

10

 

 

$

(10,399

)

 

$

(19,347

)

Convertible debt issuance costs

 

 

 

 

 

 

-

 

 

 

(16,045

)

Fair value changes on financial

   liabilities designated as FVTPL

 

14

 

 

 

31,446

 

 

 

(2,820

)

Fair value changes on Put liabilities

 

 

 

 

 

 

(2,100

)

 

 

(18,100

)

Interest income

 

 

 

 

 

 

22,718

 

 

 

1,006

 

Interest expense1

 

 

 

 

 

 

(2,167

)

 

 

(156

)

Foreign currency loss

 

 

 

 

 

 

(2,856

)

 

 

(2,253

)

Accretion of share repurchase credit

 

25

 

 

 

(428

)

 

 

-

 

Fair value changes on acquisition

   consideration liabilities

 

 

 

 

 

 

(1,570

)

 

 

-

 

Share of loss on equity investments

 

9

 

 

 

(1,833

)

 

 

(2,569

)

Other income (expense), net

 

 

 

 

 

 

(190

)

 

 

(2,711

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense), net

 

 

 

 

 

$

32,621

 

 

$

(62,995

)

1 Included in interest expense is $1,279 for interest related to lease liabilities.

 

 

 

Page 22

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

22.

INCOME TAXES

There have been no material changes to income tax matters in connection with normal course operations during the three months ended June 30, 2019.

The Company is subject to income tax in numerous jurisdictions with varying tax rates. During the three months ended June 30, 2019 there were no material changes to the statutory tax rates in the taxing jurisdictions where the majority of the Company’s income for tax purposes was earned, or where its temporary differences or losses are expected to be realized or settled.

The Company continues to believe the amount of unrealized tax benefits appropriately reflects the uncertainty of items that are or may in the future be under discussion, audit, dispute or appeal with a tax authority or which otherwise result in uncertainty in the determination of income for tax purposes. If appropriate, an unrealized tax benefit will be realized in the reporting period in which the Company determines that realization is not in doubt. Where the final determined outcome is different from the Company’s estimate, such difference will impact the Company’s income taxes in the reporting period during which such determination is made.  

 

 

23.

Supplementary cash flow information

The changes in non-cash working capital items are as follows:

 

 

 

Three months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

 

 

 

 

 

 

 

 

Amounts receivable

 

$

13,506

 

 

$

(6,321

)

Prepaid expenses and other assets

 

 

(24,009

)

 

 

(11,667

)

Biological assets and inventory

 

 

(49,726

)

 

 

(22,160

)

Accounts payable and accrued liabilities

 

 

(12,582

)

 

 

1,791

 

Other liabilities

 

 

3,875

 

 

 

(133

)

Total

 

$

(68,936

)

 

$

(38,490

)

 

Non-cash transactions

Excluded from the condensed interim consolidated statements of cash flows for the three months ended June 30, 2019 was a total of $124,427 in accounts payable and accrued liabilities related to property, plant and equipment purchases. Included in the condensed interim consolidated statements of cash flows for the three months ended June 30, 2019 is a total of $96,875 in accounts payable and accrued liabilities related to property, plant and equipment purchases.

Excluded from the condensed interim consolidated statements of cash flows for the three months ended June 30, 2018 was a total of $84,864 in accounts payable and accrued liabilities as follows: $84,460 of property, plant and equipment purchases and $404 of share issue costs. Included in the condensed interim consolidated statements of cash flows for the three months ended June 30, 2018 is a total of $49,679 in accounts payable and accrued liabilities as follows: $49,627 of property, plant and equipment purchases and $52 of share issue costs.

 

 

 

Page 23

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

24.

acquisItions

Acquisitions completed in the three months ended June 30, 2019

The following table summarizes the consolidated statements of financial position impact on the acquisition date of the Company’s business combinations that occurred in the three months ended June 30, 2019

 

 

 

C3

 

 

This Works

 

 

 

 

 

 

 

 

 

 

 

(i)

 

 

(ii)

 

 

Other

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,818

 

 

$

1,588

 

 

$

31

 

 

$

4,437

 

Other current assets

 

 

13,328

 

 

 

6,271

 

 

 

223

 

 

 

19,822

 

Property, plant and equipment

 

 

8,344

 

 

 

486

 

 

 

796

 

 

 

9,626

 

Intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brands

 

 

10,229

 

 

 

219

 

 

 

-

 

 

 

10,448

 

Operating licenses

 

 

-

 

 

 

-

 

 

 

5,158

 

 

 

5,158

 

Software and domain names

 

 

8

 

 

 

-

 

 

 

-

 

 

 

8

 

Goodwill

 

 

330,130

 

 

 

70,677

 

 

 

-

 

 

 

400,807

 

Accounts payable and accrued liabilities

 

 

(4,414

)

 

 

(7,440

)

 

 

(120

)

 

 

(11,974

)

Debt and other liabilities

 

 

(2,814

)

 

 

-

 

 

 

-

 

 

 

(2,814

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net assets acquired

 

$

357,629

 

 

$

71,801

 

 

$

6,088

 

 

$

435,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration paid in cash

 

$

357,629

 

 

$

71,801

 

 

$

5,955

 

 

$

435,385

 

Other consideration

 

 

-

 

 

 

-

 

 

 

133

 

 

 

133

 

Total consideration

 

$

357,629

 

 

$

71,801

 

 

$

6,088

 

 

$

435,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration paid in cash

 

$

357,629

 

 

$

71,801

 

 

$

5,955

 

 

$

435,385

 

Less: Cash and cash equivalents acquired

 

 

(2,818

)

 

 

(1,588

)

 

 

(31

)

 

 

(4,437

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash outflow

 

$

354,811

 

 

$

70,213

 

 

$

5,924

 

 

$

430,948

 

 

 

 

Page 24

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

The table above summarizes the fair value of the consideration given and the fair values assigned to the assets acquired and liabilities assumed for each acquisition. Goodwill arose in these acquisitions because the cost of acquisition included a control premium. In addition, the consideration paid for the combination reflected the benefit of expected revenue growth and future market development. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. None of the goodwill arising on these acquisitions is expected to be deductible for tax purposes.

 

(i) C3

On April 30, 2019, the Company acquired 100% of the shares of C3 Cannabinoid Compound Company (“C3”) for total cash consideration of $357,629. C3 is a European based biopharmaceutical company that develops, manufactures and commercializes natural and synthetic cannabinoid based active ingredients.

Due to the timing of this acquisition, the purchase price allocation for the C3 acquisition is provisional. The fair value assigned to the consideration paid, intangible assets and net assets acquired is based on management’s best estimate using the information currently available and may be revised by the Company as additional information is received.

(ii) This Works

On May 21, 2019, the Company acquired 100% of the shares of TWP UK Holdings Limited (“This Works”) and its subsidiary companies, This Works Products Limited, TWP USA Inc. and TWP IP Limited for total cash consideration of $71,801 (GBP 42,144). Based in London, United Kingdom, This Works is a natural skincare and sleep solutions company.

Due to the timing of this acquisition, the purchase price allocation for the This Works acquisition is provisional. The fair value assigned to the consideration paid, intangible assets and net assets acquired is based on management’s best estimate using the information currently available and may be revised by the Company as additional information is received.

 

25.

Acreage transactions

(a) Acreage Call Option

On June 27, 2019 (the “Effective date”) Canopy Growth and Acreage Holdings, Inc. (“Acreage”) completed a Plan of Arrangement (the “Arrangement”). Pursuant to the terms of the Arrangement, shareholders of Acreage Shares and holders of certain securities convertible into Acreage shares as of June 26, 2019, received an immediate aggregate total payment of US$300 million ($395,190) in exchange for granting Canopy Growth an option (the “Call Option”) to acquire 100% of the shares of Acreage, with a requirement to do so at such time as the occurrence or waiver of changes in United States federal law to permit the general cultivation, distribution, and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States (the “Acreage Triggering Event”). If the Acreage Triggering Event is not satisfied or waived by December 27, 2026, the Arrangement will terminate.

Following the occurrence, or waiver by Canopy Growth, of the Acreage Triggering Event and the satisfaction or waiver of certain customary closing conditions to the completion of the acquisition, Canopy Growth will issue to the shareholders of Acreage 0.5818 of a common share of Canopy Growth (the “Acreage exchange ratio”) for each issued and outstanding subordinate voting share of Acreage held (following the automatic conversion of other classes of Acreage shares into subordinate voting shares in accordance with the Arrangement). In the event Acreage issues more than 188,235,587 subordinate voting shares on a fully diluted basis, and Canopy

 

 

Page 25

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

Growth has not provided written approval for the issuance of such additional securities, the Acreage exchange ratio shall be the fraction, calculated to six decimal places, determined by the formula of A x B/C where:

 

“A” equals 0.5818,

 

“B” equals 188,235,587, and

 

“C” equals the aggregate number of subordinate voting shares of Acreage on a fully diluted basis at the time of acquisition.

On the Effective date Canopy Growth also granted Acreage a non-exclusive, non-transferable, royalty-free license and right to use the intellectual property, systems and trademarks in the United States for a period of 90 months. Management has estimated the fair value of this license to be nominal.

The Call Option is a derivative financial instrument. On initial recognition, the Call Option has been recorded at its fair value of $395,190 and is included in Other financial assets (see Note 10). Any subsequent changes in fair value will be recognized in net income (loss).

(b) Amendment to the Constellation Investor Rights Agreement and warrants

On November 1, 2018 Canopy Growth issued 104,500,000 common shares from treasury and two tranches of warrants to a subsidiary of Constellation Brands, Inc. (“Constellation”) in exchange for proceeds of $5,072,500 and entered into an Amended and Restated Investor Rights Agreement. The first tranche warrants (“Tranche A Warrants”) allowed Constellation to acquire 88.5 million additional shares of Canopy Growth for a fixed price of $50.40 per share. The second tranche warrants (“Final Warrants”) allowed for the purchase of 51.3 million additional shares at a price equal to the 5-day volume-weighted average price immediately prior to exercise. The Final Warrants could only be exercised if the Tranche A Warrants had been exercised in full. Both the Tranche A Warrants and the Final Warrants expire on November 1, 2021. Canopy Growth accounted for the Tranche A Warrants as equity instruments with a value of $1,505,351 and the Final Warrants as derivative liabilities with a nominal value.

On June 27, 2019 Constellation and Canopy Growth entered into the Second Amended and Restated Investor Rights Agreement and Consent Agreement. In contemplation of these agreements, Canopy Growth also amended the terms of the Tranche A Warrants and Final Warrants as follows:

 

Extended the term of the Tranche A Warrants to November 1, 2023 and the term of the Final Warrants to November 1, 2026.

 

The Final Warrants were also replaced by two tranches of warrants (the “Tranche B Warrants” and “Tranche C Warrants”) with different terms:

 

o

Tranche B Warrants allow Constellation to acquire 38.5 million shares of Canopy Growth for a fixed price of $76.68 per share.

 

o

Tranche C Warrants allow Constellation to acquire 12.8 million shares of Canopy Growth at a price equal to the 5-day volume-weighted average price immediately prior to exercise.

 

In connection with the Tranche B Warrants and the Tranche C Warrants, Canopy Growth will provide Constellation with a share repurchase credit of up to $1.583 billion on the aggregate exercise price of the Tranche B Warrants and Tranche C Warrants in the event that Canopy Growth does not repurchase the lesser of (i) 27,378,866 common shares, and (ii) common shares with a value of $1.583 billion, during the period commencing on June 27, 2019 and ending on the date that is 24 months after the date that Constellation exercises all of the Tranche A Warrants.

The modifications to the Tranche A Warrants did not change their classification and they continue to be recorded at their initial carrying value, as equity instruments, under IAS 32, Financial Instruments: Presentation (“IAS 32”). The extension of the term of the Tranche A Warrants resulted in additional value being attributed to those warrants. On June 27, 2019 the fair value of the Tranche A Warrants was estimated to be $2,585,961 using a Black Scholes model and assuming a volatility of 67.69%.

The Tranche B Warrants meet the fixed-for-fixed criterion and, as a result, the Tranche B Warrants are classified as equity instruments in accordance with IAS 32. Since the amendment results in Canopy Growth issuing equity instruments to Constellation to extinguish derivative liabilities, under IFRIC Interpretation 19, Extinguishing Financial Liabilities with Equity Instruments, the fair value of an equity instrument is measured and compared to the carrying value of the liability that is extinguished with the difference recognized in net income (loss). On June 27, 2019 the fair value of the Tranche B Warrants was estimated to be $1,176,350 using a Black Scholes model

 

 

Page 26

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

and assuming a volatility of 65.18%, and the Company recorded a loss on extinguishment of the derivative liabilities of $1,176,350 in the consolidated statements of operations.

The Tranche C Warrants are accounted for as derivative liabilities. Therefore, 12.8 million of the Final Warrants were derecognized and 12.8 million Tranche C Warrants were recognized as new derivative liabilities. There is no impact to net income (loss) as the fair values of the Final Warrants and Tranche C Warrants are both $nil.

The share repurchase credit feature is a separate financial liability under IAS 32 and is measured on initial recognition at its fair value of $1,274,544. Management has estimated the fair value by discounting the expected cash outflows using a discount rate of 4.08%. As Constellation is the holder of Canopy Growth common shares and the share repurchase credit feature is not a derivative instrument, the effect of the transaction has been recognized directly in Shareholders’ equity. Subsequently, the financial liability is measured at amortized cost. If the Company revises its estimates of the timing of payments it shall adjust the carrying amount of the financial liability to reflect actual and revised estimated contractual cashflows with the corresponding adjustment being recognized in net income (loss).

 

26.

Segmented information

(a) Reportable segments

The Company operates in two segments. 1) Cannabis operations, which encompasses the production, distribution and sale of both medical and recreational cannabis and 2) Canopy Rivers, through which the Company provides growth capital and strategic support in the global cannabis sector, where federally lawful. Financial information for Canopy Rivers is included in Note 17 and 18.

 

(b) Entity-wide disclosures

All property, plant and equipment and intangible assets are located in Canada, except for $402,548 which is located outside of Canada at June 30, 2019 (March 31, 2019 - $350,125).

All revenues were generated in Canada during the three months ended June 30, 2019, except for $22,541 related to medical cannabis and cannabis related devices and merchandise generated outside of Canada (three months ended June 30, 2018 - $3,375).

For the three months ended June 30, 2019, one customer represented more than 10% of the Company’s net revenue (three months ended June 30, 2018 – none).

 

27.

Financial instruments and fair value disclosures

 

(a) Fair value of financial instrument assets and liabilities that are measured at fair value on a recurring basis

The following table summarizes the valuation techniques and key inputs used in the fair value measurement of significant level 2 financial instruments:

 

Financial asset / financial liability

 

Valuation techniques

 

Key inputs

 

AusCann Group Holdings options

 

Black-Scholes option pricing model

 

Quoted prices in active market

 

Convertible senior note

 

Convertible note pricing model

 

Quoted prices in over-the-counter broker market

 

 

 

 

Page 27

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

The following table summarizes the valuation techniques and significant unobservable inputs in the fair value measurement of significant level 3 financial instruments:

 

Financial asset / financial liability

 

Valuation techniques

 

Significant unobservable inputs

 

Relationship of unobservable inputs to fair value

 

Acreage options

 

Monte Carlo option pricing model

 

Intrinsic value of Acreage

 

Increase or decrease in intrinsic value will result in an increase or decrease in fair value

 

 

 

 

 

Probability and timing of US legalization

 

Increase or decrease in probability of US legalization will result in an increase or decrease in fair value

 

 

 

 

 

Differential growth rate of Acreage versus Canopy Growth

 

Increase or decrease in differential growth rate will result in an increase or decrease in fair value

 

TerrAscend exchangeable shares

 

Put option pricing model

 

Probability and timing of US legalization

 

Increase or decrease in probability of US legalization will result in an increase or decrease in fair value

 

HydRx Farms shares

 

Market approach

 

Share price

 

Increase or decrease in share price will result in an increase or decrease in fair value

 

ZeaKal shares

 

Market approach

 

Share price

 

Increase or decrease in share price will result in an increase or decrease in fair value

 

Greenhouse convertible debenture

 

FinCAD model

 

Share price

 

Increase or decrease in share price will result in an increase or decrease in fair value

 

Good Leaf shares

 

Market approach

 

Share price

 

Increase or decrease in share price will result in an increase or decrease in fair value

 

Agripharm royalty interest and repayable debenture

 

Discounted cash flow

 

Discount rate

 

Increase or decrease in discount rate will result in a decrease or increase in fair value

 

 

 

 

 

Future royalties

 

Increase in future royalties to be paid will result in an increase in fair value

 

SLANG Worldwide warrant

 

Black-Scholes option pricing model

 

Probability and timing of US legalization

 

Increase or decrease in probability of US legalization will result in an increase or decrease in fair value

 

Vert Mirabel put liability

 

Discounted cash flow

 

Discount rate

 

Increase or decrease in discount rate will result in a decrease or increase in fair value

 

 

 

 

 

Future wholesale price and production levels

 

Increase in future wholesale price and production levels will result in an increase in fair value

 

 

 

During the three months ended June 30, 2019 and June 30, 2018, there were no transfers of amounts between levels.

 

(b) Fair value of financial instrument assets and liabilities that are not measured at fair value but fair value disclosures are required

 

The carrying values of cash and cash equivalents, marketable securities, and accounts payable and accrued liabilities approximate their fair values due to their short-term to maturity.

 

 

 

 

 

 

 

Page 28

 


Canopy Growth Corporation

Notes to the CONDENSED INTERIM consolidated financial statements

for the THREE MONTHS ended JUNE 30, 2019 and 2018

(Expressed in CDN $000’s except share amounts)

 

28.

Subsequent events

 

On August 9, 2019 the Company announced that it had entered into an agreement to acquire all of the remaining unowned shares in Beckley Canopy Therapeutics (“BCT”), a global cannabinoid-based medical researcher, for GBP 34,692, of which GBP 26,025 will be payable on closing. The closing of the transaction is subject to regulatory approval and certain other closing conditions. In addition, the Company will issue options to purchase common shares of the Company in exchange for options previously issued by BCT based on an exchange ratio to be determined at the time of closing.

 

 

Page 29

 

EX-99.2 3 cgc-ex992_29.htm EX-99.2 cgc-ex992_29.htm

Exhibit 99.2

 

canopy growth corporation

 

 

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

For the three months ENDED june 30, 2019

august 14, 2019

 


 

MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE THREE MONTHS ENDED JUNE 30, 2019

 

This Management’s Discussion and Analysis (“MD&A”) for the three months ended June 30, 2019 is provided as of August 14, 2019. Unless the context indicates or requires otherwise, the terms “Canopy Growth”, “the Company”, “we”, “us” and “our” means Canopy Growth Corporation and its controlled entities. Canopy Growth is a publicly traded corporation, incorporated in Canada, with its head office located at 1 Hershey Drive, Smiths Falls, Ontario K7A 0A8. The 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 MD&A was prepared with reference to National Instrument 51-102 – Continuous Disclosure Obligations of the Canadian Securities Administrators. Under the United States/Canada Multijurisdictional Disclosure System, we are permitted to prepare this MD&A in accordance with Canadian disclosure requirements which may differ from United States disclosure requirements. This MD&A provides information as at, and for the three months ended June 30, 2019 and up to and including August 14, 2019.

This MD&A should be read in conjunction with Canopy Growth’s unaudited condensed interim consolidated financial statements and the notes thereto for the three months ended June 30, 2019 (the “Interim Financial Statements”), which have been prepared in accordance with International Accounting Standard 34, Interim Financial Reporting (“IAS 34”) of the International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. The Interim Financial Statements include the accounts of Canopy Growth and its subsidiaries and its interests in affiliated companies, and all intercompany balances and transactions have been eliminated on consolidation. The Interim Financial Statements and this MD&A have been reviewed by Canopy Growth’s Audit Committee and were approved by Canopy Growth’s Board of Directors on August 14, 2019.

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

This MD&A contains forward-looking information within the meaning of Canadian securities laws, and the use of non-IFRS measures. Refer to “Cautionary Note Regarding Forward-Looking Statements” for cautionary statements regarding forward-looking statements.

Additional information filed by us with the Canadian Securities Administrators, including this MD&A, the Interim Financial Statements, audited annual consolidated financial statements, interim reports, annual reports and annual information forms have been filed electronically through the System for Electronic Document Analysis and Retrieval (“SEDAR”) and are available under the Company’s profile at www.sedar.com, on the Securities and Exchange Commission website (www.sec.gov/edgar) and also on our website at www.canopygrowth.com.

This MD&A provides additional information on our performance in the last fiscal year, and our financial condition and future prospects. It is organized as follows:

 

Part 1 – Business Overview

 

 

Part 2 – Strategy

 

 

Part 3 – Results of Operations

 

 

Part 4 – Financial Liquidity and Capital Resources

 

 

Part 5 – Critical Accounting Estimates and Judgments

 

 

Part 6 – Controls and Procedures

 

 

Part 7 – Risks and Uncertainties

Canopy Growth is not considered a U.S. Marijuana Issuer (as defined in the Canadian Securities Administrators Staff Notice 51-352 – Issuers with U.S. Marijuana-Related Activities (the “Staff Notice”)) nor does the Company have material ancillary involvement in the United States cannabis industry in accordance with the Staff Notice. While the Company has several partnerships with United States-based companies that may themselves participate in the United States 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 unlawful United States activities respecting

2


 

cannabis. Where a non-controlled affiliate has expressed an intent to enter the United States cannabis market, we have taken steps to insulate the Company from all economic and voting interests until such time that United States federal permissibility changes in favour of cannabis related activities.

3


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This MD&A contains certain “forward-looking statements” within the meaning of section 27A of the United States Securities Act of 1933, section 21E of the United States Securities Exchange Act of 1934, the United States Private Securities Litigation Reform Act of 1995 or in releases made by the United States Securities and Exchange Commission (“SEC”) all as may be amended from time to time, 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 adoption and impact of certain accounting pronouncements;

the legislation, regulations and licensing related to the cultivation, production and sale of cannabis and hemp products by the Company’s subsidiaries and other business interests;

the potential time frame for the implementation of regulations with respect to the second phase of recreational cannabis products in Canada, including the regulatory framework for ingestible cannabis, cannabis extracts and cannabis topical products;

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

the 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 and regulate medical or recreational cannabis or hemp (and the consumer products derived from each of the foregoing) in Canada and internationally, and the potential form the legislation and regulations will take, including the method of delivery and framework adopted or to be adopted by Canada and various international jurisdictions;

the ability to enter and participate in international market opportunities;

the Company’s future financial and operating performance;

future performance, results and terms of strategic initiatives, strategic agreements and supply agreements;

the success of the entities the Company acquires and the Company’s collaborations;

the market for the Company’s current and proposed product offerings, as well as the Company’s ability to capture market share;

the benefits and applications of the Company’s product offering and expected sales thereof;

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

anticipated investment in and results of research and development;

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

the Company’s exercise of its option to acquire Acreage (as defined below) and the eventual closing of the acquisition of Acreage upon the occurrence or waiver of the Triggering Event (as defined below);

future expenditures, strategic investments and capital activities;

statements about expected use of proceeds from fund raising activities;

the competitive landscape in which the Company operates and the Company’s market expertise;

the Company’s ability to achieve profitability; and

the Company’s ability to secure further equity or debt financing.

 

The words “plans”, “expects”, “is expected”, “budget”, “scheduled”, “estimates” “forecasts”, “intends”, “anticipates”, or “believes” or variations (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

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materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Some of the risks and other factors which could cause actual results to differ materially from those expressed in the forward-looking statements contained in this MD&A include, but are not limited to, the factors included under “Part 7 - Risks and Uncertainties” in this MD&A, the factors included under “Part 7 – Risks and Uncertainties” in the Company’s MD&A for the three months and year ended March 31, 2019 and in the Company’s annual information form dated June 24, 2019 (the “AIF”). 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 this 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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PART 1 – BUSINESS OVERVIEW

Canopy Growth is a world-leading diversified cannabis and hemp company, offering distinct brands and curated cannabis varieties in dried flower, oil and softgel capsule forms for sale in Canada pursuant to the Cannabis Act and around the world pursuant to applicable domestic permits and international legislation. On October 17, 2018 the Cannabis Act came into effect in Canada, which regulates the medical and recreational cannabis markets in Canada and which provides provincial, territorial and municipal governments the authority to prescribe regulations regarding the distribution and sale of recreational cannabis. As such, the distribution model for recreational cannabis differs across the country. All of the Company’s recreational sales are conducted according to the applicable provincial and territorial legislation and through applicable local agencies. In the period leading up to the legalization of recreational cannabis in Canada we began transitioning our Canadian business model from “business-to-consumer” in the context of the existing medical cannabis market to a largely “business-to-business” wholesale model and entered into supply agreements with the responsible government agencies in 10 Canadian provinces and territories, pursuant to which large quantities of cannabis are ordered by the agencies for distribution to brick-and-mortar and online retail stores, as applicable. Further, we opened Tweed and Tokyo Smoke cannabis retail stores across Canada, where permitted, to create brand awareness and consumer demand. See “Retail Strategy and Brands” below for further details. By executing effectively on the transition of our business model, we believe that we have established a leadership position at the onset of the Canadian recreational cannabis market.

Our investments in research and development, with a focus on product innovation related to value-added, high-margin cannabis and hemp-based consumer products and the optimization of our cultivation and extraction capability, position us well for the opening of the market in Canada for recreational products such as higher-concentrated oils, beverages and edibles, when legal and permissible to do so. Based on the regulations released by the government of Canada on June 13, 2019, which the federal government has indicated will come into force on October 17, 2019, we expect these consumer products to be available for sale no earlier than mid-December 2019, beginning the second phase of recreational cannabis products in Canada.

Our Spectrum Therapeutics medical division is a global leader in medical cannabis with approximately 70,900 patients in Canada and an established footprint in 14 other countries across 5 continents. In addition to producing and distributing full-spectrum and single-cannabinoid medical cannabis products to our patients in countries where it is federally permissible to do so, we offer industry-leading education, resource, and support programs for patients and healthcare practitioners. And, through our research and development initiatives, we continue to build a robust portfolio of intellectual property and pre-clinical and clinical evidence to support cannabinoid-based medicines, including clinically-proven drug formulations and dosage formats, that deliver therapeutic value in areas of unmet medical needs. Finally, with the integration of the recently-acquired C3 Cannabinoid Compound Company (“C3”) we have added to our European cannabinoid portfolio with the introduction of dronabinol, a registered active pharmaceutical ingredient in Germany, Austria, Switzerland and Denmark. This allows Spectrum Therapeutics to present an expanded, medically-validated suite of cannabinoid therapies to the benefit of healthcare professionals and patients.

With the licensing of the Company’s recently completed expansion projects and the completion of projects currently underway, we expect to have approximately 5.6 million square feet of licensed capacity in operation in Canada, including indoor and greenhouse cultivation, post-harvest processing, oil extraction, encapsulation, advanced manufacturing, vape manufacturing and beverage bottling capability. These investments will allow us to supply domestic and international cannabis markets, while supporting market leadership in the second phase of recreational cannabis products in Canada, which is expected to begin in December 2019. We recently expanded and diversified our Canadian footprint when we received a licence to cultivate cannabis at a 160 acre (approximately 7 million square feet) outdoor site in Saskatchewan, adding to our existing 5,500 acre outdoor hemp production platform. This will allow us to produce a complimentary balance of low-cost, high-yield raw material input for value-added products while at the same time ensuring more sophisticated growing capability for in-demand flower products. Internationally, we hold licences for over 35 million square feet of cultivation and production space in Denmark, Colombia and Lesotho, with other expansion projects currently underway to continue building-out our global infrastructure footprint.

In November 2018, we closed the $5 billion strategic investment from global beverage leader Constellation Brands Inc. (“Constellation”). In addition to Constellation providing us with their expertise in the areas of operations, product distribution and marketing, the funds will allow us to accelerate our global growth strategy, including entering the United States market when federally permissible to do so; investing in the recently-legalized hemp market in the United States; expanding into new markets; investing in intellectual property development; advancing clinical research programs; and completing strategic acquisitions to continue establishing long-term competitive advantages.

We believe it will take some time for Canadian licensed producers and provincial and territorial agencies to develop an understanding of the demand profile for recreational products, including the type/strain and quantity of products.

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Evidence of these early challenges has been observable since the launch of recreational cannabis and we believe these challenges throughout the industry supply chain will continue in the months to come before stabilizing. Preliminary data has allowed us to glean preference for preferred formats (oils, gelcaps, dry bud), package sizes and potency profiles. As we continue to develop our understanding of the consumer demand profile, we have made supply chain adjustments to address early trends and will continue to do so as further trends emerge. The Company also continues to adapt its facilities and supply chain structure to serve international markets, which often have differing and more demanding requirements governing product supply.

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PART 2 – STRATEGY

Our strategy is to position Canopy Growth as the dominant, global leader in cannabis- and hemp-based products and to establish long-term competitive advantages in order to generate industry-leading growth and shareholder returns. The Company is consistently evolving to balance our path to profitability, top-line revenue growth, and our investment in the foundation for long-term success over the years to come. To achieve this, we will focus on (1) completing our infrastructure build-out and executing on our path to profitability at our operating businesses in Canada and Europe; and (2) strategically investing in expanding into new geographies and developing intellectual property.

Operating Businesses

 

Canadian Recreational and Medical Markets – Canada, with its federally-regulated recreational and medical cannabis markets, continues to represent the majority of our revenue. Our investment phase in Canada is nearing completion. This includes the construction and build-out of the production and post-production facilities required to support a diversified portfolio of products across multiple formats, including high-margin products such as beverages, edibles and vape pens that are being developed in preparation for the second phase of recreational cannabis in Canada which is expected to begin in December 2019, and a balanced portfolio of outdoor, greenhouse, and indoor production facilities to meet the diverse cannabis market needs from cost-effective input material to high-quality, finished product cannabis flowers across both the recreational and medical markets.

 

 

European Medical Market – In Europe, we have acquired or constructed the infrastructure and obtained the necessary regulatory approvals to expand our cannabis growing and cultivation capacity and strengthen our continental supply chain, which will support our strategy of increasing medical cannabis access for patients in countries where it is federally legal and/or permissible to do so. We have recently expanded our product offerings in order to access a larger network of physicians and pharmacies with a full portfolio of medically-validated cannabinoid therapies. With the integration of the recent acquisitions of Storz & Bickel and This Works, we are also now offering consumers advanced, medically-approved vaporizers and other delivery devices, and are introducing new CBD-infused products and brands to the global beauty, wellness, and sleep solution spaces. Through Spectrum Therapeutics, we are advancing clinical research programs and advancing best-in-class patient and healthcare practitioner programs in order to position ourselves as a trusted market leader in countries where medical cannabis is permissible.

 

 

Our BrandsStrengthening and differentiating our brand portfolio starts with driving awareness and consideration against distinct needs, occasions, price points and age cohorts. This, along with our commitment to drive innovation that expands the market and usage occasions through innovative new formats, inviting new consumers, and converting more occasions from the illicit market are key areas of focus. Our diverse portfolio of brands allows us to effectively deploy the following brands that are targeted towards specific customer demographics, use occasions and product form factors:

 

 


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Strategic Investments and Business Development

 

United States Market DevelopmentExecuting on our United States market development strategy by (1) immediately entering the United States’ hemp and cannabidiol (“CBD”) market subsequent to the passage of the Farm Bill (as defined below), including conducting research and development into hemp cultivation, and investing in hemp cultivation, processing, extraction and production facilities with an objective of bringing consumer CBD products to market in the United States by the end of the fourth quarter of fiscal 2020. We have invested in large-scale hemp extraction, processing and production facilities in New York and Illinois. In addition, we have identified proven contract manufacturing partners in the United States in order to augment our hemp supply chain; and (2) in accordance with the terms of the arrangement agreement entered into between Canopy Growth and Acreage on April 18, 2019 (the “Acreage Arrangement Agreement”), exercising the Company’s option (“Call Option”) to acquire all of the issued and outstanding securities of Acreage Holdings, Inc. (“Acreage”), contingent on the occurrence or waiver of changes in United States federal law to permit the general cultivation, distribution, and possession of marijuana or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”). Acreage is a leading United States multi-state cannabis operator, and the Company anticipates that if the acquisition of Acreage is completed, it will accelerate our pathway into cannabis markets in the United States, once federally-permissible. Through an existing licensing structure, our intellectual property and brand portfolio are available to Acreage to deploy in the United States immediately.  

 

 

Global ExpansionAccelerating our global expansion and increasing our total addressable market by pursuing strategic business opportunities in countries where it is federally legal and/or permissible to do so, including (1) building, acquiring, or entering into partnerships with third parties to expand our cannabis growing and cultivation capacity, value-added cannabis- and hemp-based production capability, and sales operations; (2) advancing clinical research and best-in-class patient and healthcare practitioner education programs through Spectrum Therapeutics; and (3) the introduction, and export of cannabis, cannabis-based medicines, and consumer CBD products to countries outside of Canada and the United States. Further, we believe we have an opportunity to leverage and deploy the business model we developed in Canada over the past 5 years that has resulted in significant growth, and which has been highly successful in both the Canadian medical and recreational cannabis markets, to establish ourselves as the early leader in countries where forms of cannabis are already legal and permissible or where governments are actively moving towards legalization. Having established the necessary local teams and partnerships, the Company is now squarely focused on execution of commercial sales.

 

 

Innovation and Product DevelopmentConducting research and development and acquiring businesses focused on developing intellectual property related to (1) new product development and introduction, including value-added, high-margin cannabis and hemp-based consumer products that are being developed in preparation for the second phase of recreational cannabis in Canada. These products include beverages that span multiple categories and occasions, including recreational and athletic drinks; pain and anxiety relief therapies; sleep aids; other health and wellness products; animal health products; and advanced consumer products such as vaporizers and other medically-approved cannabis-delivery devices. We believe this will increase our total addressable market, allow us to position our products as premium offerings at the onset of the second phase of recreational cannabis products in Canada, and capture higher gross margins through the sale of value-added products; (2) creating research-driven, protectable medical product formulations and driving these products through robust clinical studies to create new cannabis-based medicines; and (3) innovation focused on optimizing our cannabis growing and manufacturing capability, including developing higher-yielding plant genetics and continuing to scale and enhance our extraction capability.

 

 

Production Capability and CapacityExpanding our licensed production, processing, oil extraction, advanced manufacturing and bottling infrastructure in order to establish the commercial scale required to supply the domestic Canadian recreational and medical markets, including preparing for the second phase of recreational cannabis products in Canada, and permissible international markets. We are diversifying our licensed production capacity in Canada by investing in indoor, greenhouse and outdoor cannabis cultivation capacity, as well as outdoor hemp production capacity. Additionally, we continue to invest in developing intellectual property in the areas of the manufacturing of device and delivery technologies, large-scale cannabis processing, production and packaging, and cannabis plant genetics. Internationally, we hold licences for large-scale cultivation and production space in 3 continents and the expertise we have gained in developing our production capability in Canada will be leveraged as we continue building-out our international supply chains.  

 

 

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United States Market Development

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 permissible to do so. Canopy Growth is not considered a U.S. Marijuana Issuer nor does the Company have material ancillary involvement in the United States cannabis industry in accordance with the Staff Notice.

While we have several partnerships with United States-based companies that may themselves participate in the United States 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 activities in the United States respecting cannabis. As discussed below, certain entities in which the Company holds securities may operate in the United States cannabis industry, however, our investment in such entities has been structured such that we hold non-participating, non-voting securities that are only exercisable or exchangeable upon cannabis becoming legal or permissible in the United States under federal law. Further, we have developed specific plans related to establishing business operations in the United States in the event cannabis becomes federally permissible which are discussed below.

 

Passage of the Farm Bill, Potential Future Permissibility of Cannabis in the United States and Our Related Investments in Hemp and CBD

 

On December 20, 2018, the Agricultural Improvement Act of 2018 (the “Farm Bill”) was signed into law in the United States. The Farm Bill, among other things, defines industrial hemp, removes industrial hemp and its cannabidiols, including CBD derived from industrial hemp but excluding tetrahydrocannabinol (“THC”), from the United States Controlled Substances Act (the “CSA”) and allows for industrial hemp production and sale in the United States. The United States Department of Agriculture, which has been tasked with promulgating regulations for the industrial hemp industry, is required to review and approve any state-promulgated regulations relating to industrial hemp and until such time as the Department of Agriculture approves a state’s industrial hemp regulations, commercial sale of industrial hemp may not be permissible. Further, the United States Food and Drug Administration (the “FDA”) has retained authority over the addition of CBD to products that fall within the Food, Drug, and Cosmetic Act (the “FDCA”). There can be no assurance that the FDA will approve CBD as an additive to products under the FDCA. Additionally, the 2018 Farm Bill does not legalize CBD derived from “marihuana” (as such term is defined in the CSA), which is and will remain a Schedule I controlled substance under the CSA. The FDA has expressed a willingness to take a flexible regulatory approach to foster the development of hemp-derived products such as CBD; however, the FDA has indicated that those actions will have to fit under the confines of current law and further legislation will likely be required. Furthermore, multiple legislative reforms related to cannabis are currently being considered by the federal government in the United States. Examples include the Strengthening the Tenth Amendment Through Entrusting States Act and the Secure and Fair Enforcement Banking Act. There can be no assurance that any of these pieces of legislation will become law in the United States.

 

Leading up to and following passage of the Farm Bill, we have positioned ourselves to advance our hemp interests in the United States. In January 2019, we were granted a hemp processing and production licence by New York State in order to establish commercial hemp operations in the United States and we are committed to investing in New York in order to establish large-scale production capabilities focused on hemp extraction and product manufacturing with the hemp industrial park. We intend to invest between $100 million USD and $150 million USD in our New York operations and in April 2019, we secured a 308,000 square foot facility on a 48-acre property in Kirkwood, New York with the renovation of the facility having commenced in July 2019. We plan to build the infrastructure necessary to support hemp-derived cannabinoid extraction and related manufacturing on this property, while providing an opportunity for participation by other businesses in the hemp industry.

Additionally, we own an industrial-scale facility in Batavia, Illinois through our recent acquisition of bio-product extractor KeyLeaf Life Sciences (“KeyLeaf”) (see “CBD Products” below for further details). This facility has been certified by the FDA and licensed by the state of Illinois for hemp processing and specializes in ensuring that extraction output is free of impurities in products intended for consumption. Furthermore, we have identified proven contract extraction and manufacturing partners to strengthen our supply chain for the cultivation, extraction, processing and production of hemp-derived products. Our facilities in Kirkwood, New York and Batavia, Illinois, together with our partnerships with third-party contract manufacturers, will be critical in processing the extract required to supply and sustain our program to bring CBD products to the United States market, which management expects to introduce by the end of the fourth quarter of fiscal 2020.  

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We have also entered into strategic partnerships in order to build our brand awareness around hemp and CBD-based products, including engaging Martha Stewart in an advisory role to assist with developing and positioning a new line of CBD-based product offerings across multiple categories such as animal health and wellness.

Finally, in October 2018, we completed a legal transfer of cannabis products to a research partner in the United States which, to our knowledge, 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.

Acreage Transaction

In late June 2019, subsequent to receiving all necessary approvals from the shareholders of Acreage and Canopy Growth and obtaining the final order from the Supreme Court of British Columbia, Canopy Growth and Acreage implemented the previously-announced plan of arrangement (the “Acreage Plan of Arrangement”) which grants Canopy Growth the Call Option to acquire all of the issued and outstanding securities of Acreage upon the occurrence or waiver of the Triggering Event. Upon the implementation of the Acreage Plan of Arrangement, shareholders of Acreage and certain other holders of securities convertible into shares of Acreage received an upfront payment of US$300 million. Following the occurrence or waiver of the Triggering Event and completion of the acquisition of Acreage, shareholders of Acreage will receive 0.5818 of a Canopy Growth common share for each Acreage share held at the effective time, subject to adjustment in certain circumstances in accordance with the terms of the Acreage Arrangement Agreement (the “Exchange Ratio”). The value of the consideration to Acreage shareholders may change up until the Call Option is exercised as the value is based on the Exchange Ratio. Canopy Growth is permitted to waive the Triggering Event.

Acreage is headquartered in New York City and is a leading vertically-integrated, multi-state operator in United States cannabis. Acreage owns licences to operate in (or has management services agreements with licence holders to assist with operations in) 20 U.S. states with an estimated 2022 total addressable market of more than $17 billion in legal cannabis sales, and operates approximately 90 dispensaries and over 20 cultivation and processing sites. Canopy Growth and Acreage will operate as independent companies until Canopy Growth exercises its Call Option, at which time the combined operations of Canopy Growth and Acreage are expected to create a leader in the United States cannabis market. In connection with the Acreage Arrangement Agreement, the Company and Acreage executed a licensing agreement granting Acreage access to Canopy Growth’s award-winning line-up of brands such as Tweed and Tokyo Smoke, along with other intellectual property. 

Pursuant to the Acreage Arrangement Agreement, Acreage may issue up to 58 million additional subordinate voting shares of Acreage in respect of potential acquisitions. Further information regarding the Acreage Plan of Arrangement is described in Canopy Growth’s Management Information Circular dated May 17, 2019, which is available under the Company’s profile on SEDAR at www.sedar.com.

Other United States Holdings

While TerrAscend Corp. (“TerrAscend”) and Slang Worldwide Inc. (“Slang”) have interests in cannabis-related business in the United States, we have undertaken steps to structure our security holdings in these entities to insulate Canopy Growth from engaging in any unlawful United States cannabis-related activities. Canopy Growth has no voting rights nor economic interests in these entities.

Canopy Growth holds conditionally exchangeable shares in the capital of TerrAscend. These shares are not entitled to voting rights, dividends or other rights upon dissolution of TerrAscend but are convertible into common shares of TerrAscend upon receipt of the approval of the stock exchanges upon which the Company’s securities are listed and following either changes in United States federal laws regarding the cultivation, distribution or possession of cannabis or changes in the policies of the stock exchanges upon which the Company’s securities are listed with respect to such activities. The exchangeable shares do not provide (and there are no related contractual rights that would otherwise provide) us with any right to dividends, entitlements upon dissolution of TerrAscend, cash flow or other current economic entitlements, voting rights or any form of control over the business, affairs, operation or financial condition of TerrAscend.

Similarly, Canopy Growth holds conditionally exercisable warrants in the capital of Slang. Canopy Growth is not permitted to exercise the warrants without, among other things, receipt of the approval of the stock exchanges upon which the Company’s securities are listed and following the date that the growth, cultivation, production, sale, use and consumption of cannabis and cannabis-related products are permitted in the United States for any and all purposes (including medical, therapeutic and recreational) under all applicable federal laws of the United States, including the CSA.

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We monitor the activities of TerrAscend, Slang and other entities which we are invested in for compliance with United States cannabis laws, and would make similar arrangements, if necessary, to ensure our ongoing compliance with United States federal laws.

See “Risk and Uncertainties – Stock Exchange Restrictions, Cannabis is a Controlled Substance in the United States, 2018 Farm Bill Risks, Entry Bans into the United States, Banking Risks and Enforceability of Contracts” below.

Global Expansion

Canada has designed and implemented federal regulatory models for both medical and recreational cannabis. Canopy Growth has established itself as a leader in both markets in Canada and achieved significant growth by successfully executing on our business model, which includes our investments in cannabis production capability and distribution, developing intellectual property, industry and regulatory knowledge and expertise, and industry-leading physician, pharmacist and patient education in order to build market share and customer loyalty at the outset. Accordingly, we believe that a significant opportunity exists today to leverage and deploy our Canadian “playbook” and our financial strength to establish ourselves as the first-mover and market leader in countries which have legalized or are exploring the legalization of medical cannabis.

In recent years, the actions of governments around the world have signaled a significant change in attitudes towards cannabis, and federal governments in over 40 countries have either formally legalized medical cannabis access or established government efforts to explore the legalization of medical cannabis access. Therefore, future opportunities are likely to exist for Canopy Growth in jurisdictions where governments are actively moving towards a legal framework.

To date, Canopy Growth has secured the necessary regulatory approvals to export cannabis or cannabis materials (such as clones or tissue cultures) to Australia, Brazil, Chile, Colombia, Czech Republic, Denmark, Germany, Jamaica, Lesotho, Poland, Spain, South Africa, the United Kingdom, and the United States.

To date, we have announced subsidiaries, partnerships or business activities in several countries as described below.  

Figure 1: International subsidiaries, partnerships or business activities

 

Europe

In the first quarter of fiscal 2020 we have continued to expand our product offerings in order to access a larger network of physicians and pharmacies with an expanded, medically-validated suite of cannabinoid therapies. With the integration of the recent acquisitions of Storz & Bickel and This Works, we are also now offering consumers a full suite of advanced,

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medically-approved vaporizers and other delivery devices, and are introducing new CBD-infused products and brands to the global beauty, wellness, and sleep solution spaces.

Our facility in Denmark is expected to supply the growing demand for Spectrum Therapeutics products across the continent and support our ultimate goal of increasing access for patients across Europe, offering a greater range of products, and allowing for an early-mover advantage as new countries open their doors to medical cannabis. In addition, following the acquisition of Cáñamo y Fibras Naturales, S.L. (“Cafina”), a Spanish licensed cannabis producer, in March 2019, we began actively planning the development of our second production site in Europe to further strengthen our supply chain across the continent.

Germany – Spectrum Therapeutics operates as a pharmaceutical distributor with the necessary approvals in Canada and Germany to export/import medical cannabis for sale to German patients. In May 2019 we acquired Germany’s C3, Europe’s largest cannabinoid-based pharmaceuticals company. C3 is a leading manufacturer and distributor of dronabinol, a registered active pharmaceutical ingredient in Germany, Austria, Switzerland and Denmark. In 2018, C3 supplied approximately 19,500 patients in Germany, a year-over-year increase of 85%. C3 operates two state-of-the-art manufacturing facilities specializing in natural extraction and synthetic cannabinoid production, which are scheduled for further expansion this year to accommodate forecasted rapid growth in the business. The acquisition of C3 enhances our European infrastructure, including a robust sales and marketing organization which already serves pharmacies and healthcare practitioners. In addition, C3 holds several patents related to cannabis including extraction technology and the synthetic production process and has several clinical trials underway.

Additionally, we acquired Storz & Bickel GmbH & Co., KG (“Storz & Bickel”) and its related intellectual property in December 2018. Storz & Bickel is widely recognized as a global leader in the design and manufacture of medically-approved vaporizers and other delivery devices at its certified, automated factory, and exports its devices to 50 markets around the world.

Denmark – We retrofitted a building in Odense, Denmark which now includes approximately 300,000 square feet of greenhouse cultivation and post-harvest processing capability, and Spectrum Therapeutics received the necessary licensing which allows us to cultivate, harvest, export and sell medical cannabis in dried flower form. To our knowledge, Spectrum Therapeutics is the first Canadian company to receive a federal production licence in Denmark. We expect the cannabis production from the Danish greenhouse to begin serving European markets in the second half of calendar 2019, once we obtain the necessary regulatory approvals.

Poland – After completing a rigorous regulatory approval process, we completed our first import of medical cannabis into Poland in the fourth quarter of fiscal 2019. 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 and as the only producer that imports product in this country, we expect that our first-mover advantage will allow us to maintain dominant market share.

Spain We completed the all-cash acquisition of Cafina in March 2019, with Cafina being one of three companies in Spain authorized to cultivate, distribute and export cannabis containing more than 0.2% THC for medical and research purposes. Cafina is also licensed to cultivate hemp. This acquisition allows us to expand our European production footprint and improve our long-term positioning to address demand across Europe for medical cannabis and CBD products. Additionally, we entered into a supply licence agreement with Spain’s Alcaliber S.A. (“Alcaliber”) in fiscal 2018 pursuant to which we will grant Alcaliber a licence to use certain strains and seeds to be grown and cultivated at Alcaliber’s facilities for sale worldwide. We completed a transfer of 1,500 cannabis clones to Alcaliber, and in early fiscal 2019 Alcaliber shipped the first group of clones to Denmark.

United Kingdom – We began operating in the United Kingdom in the fourth quarter of fiscal 2019 with a focus on providing patients with reliable access to cannabis-based medical products. We expect to complete our first fulfillment in the second quarter of fiscal 2020. Our focus in the United Kingdom so far has been in educating pharmacists and patients. Further, we acquired London, England-based TWP UK Holdings Limited (“This Works”) in May 2019, a global leader in natural skincare and sleep solutions with a customer base spanning 35 countries.

Czech Republic – We acquired Annabis Medical s.r.o., a leader in the Czech Republic’s medical cannabis industry, in the first quarter of fiscal 2019. We currently import and distribute cannabis products pursuant to federal Czech licences, with products sold through pharmacy channels across the Czech Republic.

 

 

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Latin America and the Caribbean

Our Latin America and Caribbean business will focus on advancing medical cannabis through the region, home to more than 650 million people. As individual nations modernize their medical cannabis legislation, we will coordinate all regional activities through our in-market operations in Colombia, Brazil, Chile, Peru, and Jamaica. We will advance our Spectrum Therapeutics brand in this region through the education of physicians and pharmacists.

Colombia Colombia is a regional production and processing hub where we own a farm that is fully licensed for 126 hectares (13.6 million square feet) of THC- or CBD-dominant production capacity. The farm is well-positioned and suitable for growing through its steady supply of fresh water and favourable electricity rates, with our first commercial harvest expected in early 2020. Our expectation is that once this farm is operational, it will be able to supply all of Latin America during the initial years of legislative roll-out. Further, we entered into a multi-year agreement with Procaps S.A.S. (“Procaps”), a global company that develops, manufactures and markets over-the-counter medications and nutritional supplements for a number of international pharmaceutical companies. Procaps exports to more than 50 international markets, including the United States. Canopy Growth will leverage Procaps’ industry-leading formulation and encapsulation capacity, which is especially critical in Latin American markets where there is a regulatory preference for oil-based products, such as softgels.  

Brazil – Core activities in Brazil, Latin America’s most populous country, include supporting regional clinical trials, delivering product sales to patients through the compassionate patient stream, and educating and training for physicians. We recently completed a compassionate sale of Spectrum Therapeutics product, therefore validating the potential of serving Brazilian patients through an import model while our Latin American operations scale and regional regulations advance to support greater market access.

Chile – We have secured all required Chilean permits to import Spectrum Therapeutics product for the advancement of our ongoing clinical trial in Chile. Leveraging the uniquely advantageous climate for clinical trials in the country, Chile will serve as the research and development hub for Latin America, fully aligned with our global strategy for developing registered medical cannabis products for commercialization. Further, we recently completed a compassionate sale of Spectrum Therapeutics product similar to that completed in Brazil.

Peru – In the first quarter of fiscal 2019, we launched our operations in Peru and will actively pursue the soon-to-open Peruvian medical and CBD markets by leveraging our global expertise in patient and physician education, as well as in medical cannabis production. We have secured an exclusive distribution agreement with Peru’s largest pharmaceutical distributors, thus creating access to approximately 80% of pharmaceutical shelves in the country.

Jamaica – We own 49% of Tweed Limited JA, a Jamaican company that recently received its cultivation licence after completing construction of the greenhouse.

Asia/Pacific

Australia – Canopy Growth and the Victoria state government launched our Australian operations early in fiscal 2019. The first shipment of medical cannabis oil was received in Australia in April 2019, and Spectrum Therapeutics began selling to medical cannabis patients in May 2019. The Victoria-based greenhouse and processing facility is currently under construction and, when completed, will enable domestic cultivation and production of high-quality medical cannabis for patients while serving as a planned distribution hub for other jurisdictions in Asia/Pacific. Spectrum Therapeutics will continue supporting Australian patients through imports until the facility is operational. The Victoria-based facility will also operate as our Asia/Pacific Research and Development Center, supporting the ongoing research collaboration between Canopy Growth and Victoria state government on furthering innovations in medical cannabis.

Africa

Lesotho – We hold a licence to cultivate, manufacture, supply, hold, import, export and transport cannabis and its resin in the Kingdom of Lesotho. We have recently been granted a medical hemp production license for 200 hectares (21.5 million square feet), of outdoor grow space, with our first commercial hemp harvest expected in the first quarter of fiscal 2021. We have also commenced cultivation at our 322,000 square foot facility which includes an indoor propagation room, vegetation greenhouse, and an outdoor growing area. CBD-dominant and CBD-THC balanced varieties can both be cultivated at this facility.

Innovation and Product Development

Our intellectual property portfolio has increased to 111 issued patents and over 270 patent applications as of August 14, 2019, with more applications under development. Our patents cover cannabis-based beverage production and medical

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treatments, device and delivery technologies, large-scale cannabis processing, and plant genetics. We believe significant opportunity exists to improve our profit margins by vertically integrating up the value chain towards products that treat cannabis and cannabinoids as ingredients, a view which applies to both the medical and regulated recreational cannabis/cannabinoid markets. Therefore, we are investing in research and development and acquiring businesses focused on developing intellectual property related to new product innovation, including the development of cannabis-based consumer recreational products and cannabis-based medical therapies, CBD products, and device and delivery technology.

Product Innovation

Consumer Recreational Products

Our value-added, cannabis-based consumer recreational products, which we anticipate will be available for sale in Canada in December 2019, are expected to include higher concentrated vaping oils (along with related device hardware), edibles and beverages. In preparation for this launch, we invested in the constructing of extraction facilities, including KeyLeaf, and advanced manufacturing, edible and beverage production facilities in Smiths Falls, Ontario. We continue to invest in new product development through research and development and the acquisition of new technologies, while ensuring the protection of our intellectual property.

We believe cannabis-based beverages can be tailored to meet specific outcomes across a variety of consumption occasions, while avoiding such things as weight gain, “hangover” effects, and interactions with traditional pharmaceutical medications. Given this, cannabis-based beverages could serve as a disruptive alternative to traditional alcohol beverages while also expanding the total addressable market for all cannabis-based products. We have invested in researching and developing technologies, processes and applications 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 with a rapid on-set and shorter duration.

Medical Therapies – Spectrum Therapeutics

Our Spectrum Therapeutics medical division acts as a cannabis research incubator focusing on researching and developing clinically-ready cannabis drug formulations and dose delivery systems. This division serves as our pre-clinical and clinical research arm, which includes elements of product design and ingredient selection, formulation, safety and efficacy testing for a range of products, which we anticipate developing as the regulatory framework and market evolve. We are also testing and developing cannabis-derived products for applications in veterinary medicine, such as treating anxiety in animals.

To date, we have filed 38 United States provisional patent applications (which are included in the 270 total patent applications described above), across a range of cannabis and CBD uses, compositions, formulations, indications, methods of delivery, and dosing regimens.

We expect approximately 1,000 patients to participate in 60 human health clinical trials that are currently in the planning phase, ongoing, or completed. These trials include Phase IIB trials for sleep, pain and anxiety treatment, and Phase III trials for spasticity/multiple sclerosis. Additionally, affiliate and partner research programs are underway in the areas of opioid-sparing, smoking cessation and concussion treatment, and clinical trials are currently in the planning phase, ongoing or completed for companion animal anxiety, and pharmacokinetics, dosage and safety.    

 

Hemp and CBD Products

We have taken steps to diversify our 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. We believe 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 our consumer facing brands in the future.

We believe that we are positioned as a leader in low-cost, high-yield CBD production. We have expertise in large-scale cannabinoid extraction processes with our unique whole-plant hemp harvesting knowledge, and we continue investing in extraction capability to support our innovation in the value-added, consumer recreational products market. We first established a relationship with KeyLeaf, the owner of a bio-processing and large-scale extraction facility in Saskatchewan, in fiscal 2019 and controlled and consolidated KeyLeaf from that point and subsequently acquired the entity in June 2019. KeyLeaf adds over 45 years of experience in bio-product industries and significant intellectual

15


 

property in the area of plant-based extraction to our capabilities. Also, KeyLeaf has been partnering with Canopy Growth over the past year to retrofit their facility in Saskatchewan in order to scale-up its ability to process hemp and cannabis biomass and refine its pre- and post-extraction processes. This facility, along with other owned and partner extraction capability, will be leveraged to process our outdoor hemp and cannabis output, as well as other raw materials from our indoor and greenhouse cultivation facilities.  

Further, we have integrated the intellectual property of ebbu, Inc. (“ebbu”), a Colorado-based hemp research leader with over 40 cannabis-related patent applications representing over 1,500 inventions, into our broader portfolio of capabilities. Research and development and intellectual property advancements achieved by ebbu’s team apply directly to our hemp and THC-rich cannabis genetic breeding program and its cannabis-infused beverage capabilities, with the potential to reduce the cost of CBD production. In addition, ebbu’s intellectual property portfolio will contribute to the clinical formulations program being executed by Spectrum Therapeutics.

Our investments in CBD production capability, extraction processes and genetic breeding will allow us to produce a complimentary balance of low-cost, high-yield raw material input for the higher-margin, value-added products which we expect will be available for sale beginning in December 2019, as well as input for the CBD applications and products being developed by Spectrum Therapeutics.

Devices and Delivery Technology

We are focused on expanding our product development, manufacturing capacity and sales capability in the cannabis consumer products market. Our research and development group has been actively developing safety-approved smart vaporizer devices for use with cannabis concentrates. These devices, powered by Canopy Growth-owned intellectual property, are Bluetooth-enabled and communicate with a proprietary application to give users much more payload transparency while enabling safe and responsible usage. In addition, through Storz & Bickel we have entered the market for the manufacturing and sale of medical cannabis delivery devices. Storz & Bickel has developed an automated factory that is certified internationally for the production of medical devices, and exports medically-approved vaporizers and other similar devices to 50 markets around the world. We plan to build out the capacity of Storz & Bickel’s manufacturing facilities to support its continued growth through new product development and market expansion, while at the same continuing to integrate the product development expertise and capability of Storz & Bickel’s research and development and engineering teams with that of Canopy Growth.                       

 

Our Brands

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

 

 

 

 

 

 

16


 

 

Core Brands

Tweed – Tweed’s high-quality, highly-curated cannabis products, places and spaces are tailored to help people reconnect with one another. Our authentic local presence and desire for shared prosperity help us to be a good neighbor to those communities that invite us in.

Tokyo Smoke – Tokyo Smoke is an award-winning cannabis brand delivering immersive, innovative experiences to consumers through cannabis products, accessories, and best-in-class retail stores. From our thoughtfully-crafted intent-based classification system to our iconic red lantern logo, Tokyo Smoke pushes creative boundaries, unlocking new ways to explore cannabis.

Van der Pop – With a focus on education, empowerment and community building, Van der Pop is Canopy Growth’s female-focused cannabis brand. Van der Pop provides products and platforms for women to explore using cannabinoids for self-care in a way that is nuanced and respects stigma-free living.

Spectrum Therapeutics – Our international medical brand that serves as our physician and patient-facing identity across all federally-permissible jurisdictions where Canopy Growth operates. “Spectrum” in the name refers to the trademarked colour-coded cannabis strain classification system.

DOJA – DOJA is based in British Columbia's Okanagan Valley, where DOJA grows premium, hand-crafted flower. DOJA represents celebrating the freedom from convention and a respect for the West Coast community and land from which it came from.

TWD – TWD is our basic line of safe and affordable cannabis products from Tweed.

This Works – Founded in 2004, London, England-based This Works offers a range of high-quality natural skincare and sleep solution products that have rewarded the company with a loyal following of customers spanning 35 countries. Through their unique approach of formulating solutions that work in harmony with the 24-hour body clock, This Works has evolved its product lines beyond a traditional viewpoint to a more complete regiment.

Affiliated Brands

Houseplant – An elevated Canadian cannabis company founded by Seth Rogen and Evan Goldberg and launched in 2019, Houseplant is rooted in commitment, authenticity and education. Their love affair with cannabis has spanned a lifetime, and they believe it should be treated with the reverence it deserves. Each element of their suite of products, and every part of their identity has been thoughtfully designed and considered.

DNA Genetics – DNA Genetics has won awards in every category in the Cannabis Cup, the world’s preeminent cannabis competition. Working with DNA Genetics, Canopy Growth breeds new strains for customers that simply are not available anywhere else in the world, bringing the best of existing DNA Genetics to Canopy Growth customers, bred and grown to DNA standards.

LBS – LBS is a premier cannabis brand by entertainment icon Snoop Dogg available in the United States and licensed by Canopy Growth in Canada. LBS embodies the “California Vibe”.

Green House Brands – Through Canopy Growth, Green House Brands is expected to bring the recognized and award-winning cannabis brand 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 market exclusive cannabis strains. 

Organa Brands – Organa Brands is home to some of the world's largest consumer cannabis brands, including O.penVAPE, Bakked, Magic Buzz and District Edibles. Organa Brands is expected to launch in the Canadian recreational market, through Canopy Growth, in the second half of calendar 2019. 

Technology Brands

Storz & Bickel – Based in Tuttlingen, Germany, Storz & Bickel are designers and manufacturers of medically approved vaporizers, most notably the Volcano Medic and the Mighty Medic. Exported to 50 markets around the world and with a 23-year track record of breakthrough innovations, Storz & Bickel is widely recognized as a global leader in vaporizer design and manufacturing.

17


 

Retail Strategy and Brands

The Cannabis Act provides provincial, territorial and municipal governments with the authority to prescribe regulations regarding retail and distribution of recreational cannabis. As such, the distribution model for recreational cannabis is prescribed by provincial regulations and differs from province to province. Some provinces have government-run retailers, while others have government-licensed retailers, and some have a combination of the two. All of the Company’s recreational sales are conducted according to the applicable provincial and territorial legislation and through applicable local agencies. The Company continues to monitor the developing legislation to identify opportunities for its brands.

We finalized the acquisition of Hiku Brands Company Ltd. (“Hiku”) during the second quarter of fiscal 2019, adding the Tokyo Smoke retail network to our network of Tweed stores. We are pursuing a cannabis retail presence in provinces, where permitted, to capture retail gross margin, higher market share, educate consumers, build brand recognition, and establish direct connections with customers. Offering two distinct customer experiences will allow us to appeal to various consumer demographics without saturating any single segment.

In the first quarter of fiscal 2020, we opened 9 additional cannabis retail stores operating under the Tweed or Tokyo Smoke banner, of which 6 are corporate owned and 3 are operated by partners; we also launched the Tweed e-commerce platform for cannabis sales in Saskatchewan.

As of August 14, 2019, we have 26 cannabis retail stores operating under the Tweed or Tokyo Smoke banner, of which 21 are corporate-owned stores and the balance are operated by our partners. Tweed retail has 16 corporate-owned locations selling cannabis across Newfoundland & Labrador, Manitoba and Saskatchewan and has a branded e-commerce presence in Newfoundland & Labrador, Manitoba, Saskatchewan and Nunavut. Tokyo Smoke operates 5 corporate-owned retail cannabis stores and an e-commerce platform in Manitoba.  

Further, we have received licences, rights to licences or permits to apply for licences to operate cannabis retail stores in 4 provinces:

 

Newfoundland & Labrador - licences for up to 7 stores;

 

Manitoba - licences for up to 15 stores;

 

Saskatchewan - licences for up to 6 stores; and

 

Alberta – development permits for 19 cannabis retail store locations.

In Ontario, we have entered into multi-year licensing agreements to enable our partners to open two Tokyo Smoke-branded stores and one Tweed-branded cannabis store. We are continuing to explore additional opportunities to expand the Tokyo Smoke and Tweed retail banners across the province. We are also pursuing cannabis retail licences in British Columbia through the provincial retail licensing processes.

Positioning of Canopy Growth’s Brands in the United States

As part of the implementation of the Acreage Plan of Arrangement, Canopy Growth and Acreage executed a licensing agreement granting Acreage access to Canopy Growth’s diversified portfolio of brands, including Tweed, Spectrum Therapeutics, CraftGrow and Tokyo Smoke, across the United States. These licences, along with select retail locations under the Tweed and Tokyo Smoke brands, will build our brand awareness in the United States. See United States Market Development – Conducting Business in the United States above.

Production Capability and Capacity

Domestic Cannabis Production

We operate numerous state-of-the-art production facilities with approximately 5.2 million square feet of licensed greenhouse and indoor cultivation and post-harvest processing capacity. We have committed to major ongoing investments, including the construction of indoor production capacity in St. John’s, Newfoundland and Labrador and Edmonton, Alberta, the expansion of our Smiths Falls facilities to develop a 125,000 square foot beverage production facility, and the construction of a high-capacity extraction facility in Aldergrove, British Columbia. With the licensing of recently-completed expansion projects and the above-noted projects currently underway, we expect to have approximately 5.6 million square feet of licensed capacity in Canada for indoor and greenhouse cultivation, post-harvest processing, oil extraction, encapsulation, advanced manufacturing, vape manufacturing and beverage bottling capability.

18


 

In addition, we recently expanded our Canadian outdoor footprint with a licence to cultivate cannabis at a 160 acre (approximately 7 million square feet) outdoor site in Saskatchewan, adding to our existing 5,500 acre outdoor hemp production platform.

Partner Capacity Offtake

We have established several programs designed to help partners, including licence applicants and licensed producers, 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 our customers.

CraftGrow – Recognizing that every patient is different and every condition requires a unique approach, CraftGrow provides customers options when it comes to finding medical cannabis products that best address their needs. By building a program that gathers passionate and skilled producers together in one place, Spectrum Therapeutics is able to bring its patients the best variety cannabis from some of the most innovative producers in the country. While medical patients benefit from additional innovation and variety, partner producers gain access to a vast market for their product lines. Our three partners can be found at www.spectrumtherapeutics.com.

Agripharm Corporation (“Agripharm”) – 40% owned by Canopy Growth, we have 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 bricks-and-mortar retail locations.

PharmHouse Inc. (“PharmHouse”) – In May 2019 we signed a second offtake agreement with PharmHouse, a 49%-owned joint venture of Canopy Rivers Inc. (“Canopy Rivers”). In July 2019 PharmHouse received a cultivation licence from Health Canada. Under the terms of the agreement, PharmHouse has agreed to allocate to Canopy Growth high-quality cannabis flower from an additional 20% of the flowering space available at its Leamington, Ontario facility over the next three years, bringing the total flowering space committed to Canopy Growth to 30%.

Canopy Rivers

Canopy Rivers (TSXV:RIV) works collaboratively with Canopy Growth to identify strategic counterparties seeking financial and/or operating support and affiliation. 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 amongst themselves, which we believe results in an ideal environment for innovation, synergy, and value creation for Canopy Rivers, Canopy Growth, and across the entire Canopy Rivers ecosystem. As a result of a dual-class share structure, Canopy Growth owns approximately 27.6% of the issued and outstanding shares in the capital of Canopy Rivers and approximately 84.6% of the voting power attached to all of the outstanding shares.

To date, in collaboration with Canopy Growth, Canopy Rivers has established a diversified portfolio of cannabis industry investments that includes large-scale greenhouse cannabis cultivators, small-scale premium cannabis cultivators, licence applicants, international hemp processors, pharmaceutical formulators, brand developers and distributors, retail distribution licence operators, technology and media platforms, beverage companies, beauty brands, and agriculture-technology companies.

Subsequent Events

July 2019

On July 2, 2019 Mark Zekulin was appointed as sole Chief Executive Officer and Rade Kovacevic was appointed President of the Company upon the termination of Bruce Linton as Co-Chief Executive Officer of the Company. A search has commenced to identify Mr. Zekulin’s replacement as the Company’s Chief Executive Officer.

August 2019

On August 9, 2019 the Company announced that it had entered into an agreement to acquire all of the remaining unowned shares in Beckley Canopy Therapeutics (“BCT”), a global cannabinoid-based medical researcher, for GBP 34,692, of which GBP 26,025 will be payable on closing. The closing of the transaction subject to regulatory approval and certain other closing conditions. In addition, the Company will issue options to purchase common shares of the Company in exchange for options previously issued by BCT based on an exchange ratio to be determined at the time of closing.

19


 

PART 3 – RESULTS OF OPERATIONS

First Quarter of Fiscal 2020 Operational and Financial Highlights

The following table presents selected operational and financial information for the three months ended June 30, 2019 and 2018:

FIRST QUARTER FISCAL 2020 HIGHLIGHTS

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2018

 

 

Change

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operational information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kilogram and kilogram equivalents sold1

 

 

10,549

 

 

 

2,695

 

 

 

7,854

 

 

 

291

%

Average selling price per gram - Recreational

 

$

6.35

 

 

$

-

 

 

 

-

 

 

 

-

 

Average selling price per gram - Canadian Medical

 

$

8.87

 

 

$

8.73

 

 

$

0.14

 

 

 

2

%

Average selling price per gram - International medical

 

$

61.38

 

 

$

13.62

 

 

$

47.76

 

 

 

351

%

Average selling price per gram - Total

 

$

7.56

 

 

$

8.94

 

 

$

(1.38

)

 

 

-15

%

Kilograms harvested

 

 

40,960

 

 

 

9,685

 

 

 

31,275

 

 

 

323

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(CDN $000's, except share amounts and where otherwise indicated)

 

 

 

 

 

 

 

 

 

Selected financial information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

90,482

 

 

$

25,916

 

 

$

64,566

 

 

 

249

%

Gross margin percentage, before fair value impacts

   in cost of sales2

 

 

15

%

 

 

43

%

 

$

-

 

 

 

-28

%

Adjusted EBITDA3

 

$

(92,060

)

 

$

(22,479

)

 

$

(69,581

)

 

 

310

%

     Attributed as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        - Operations and corporate overhead

 

$

(57,819

)

 

$

(11,598

)

 

$

(46,221

)

 

 

399

%

        - Strategic investments and business development

 

$

(18,005

)

 

$

(1,905

)

 

$

(16,100

)

 

 

845

%

        - Non-operating or under-utilized facilities

 

$

(16,236

)

 

$

(8,976

)

 

$

(7,260

)

 

 

81

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(1,281,168

)

 

$

(90,978

)

 

$

(1,190,190

)

 

 

1308

%

Net loss attributable to Canopy Growth Corporation

 

$

(1,283,055

)

 

$

(80,277

)

 

$

(1,202,778

)

 

 

1498

%

Net loss per share - basic and diluted4

 

$

(3.70

)

 

$

(0.40

)

 

$

(3.30

)

 

 

825

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Kilogram equivalents refers to cannabis oils, where 8 ml is the equivalent of approximately 1 gram of dried cannabis, and softgels, where one bottle is the equivalent of approximately 5 grams of dried cannabis.

 

2 Gross margin percentage, before fair value impacts in cost of sales, a non-IFRS measure, is net revenue less inventory production costs expensed to cost of sales, divided by net revenue. See "Gross Margin Before Fair Value Impacts in Cost of Sales (Non-IFRS Measure)"

 

3 Adjusted EBITDA is a non-IFRS measure, and is calculated as earnings before interest, tax, depreciation and amortization, share-based compensation expense, fair value changes and other non-cash items, and further adjusted to remove acquisition-related costs. The Company attributes Adjusted EBITDA to its operations and corporate overhead, strategic investments and business development, and non-operating or under-utilized facilities. See "Adjusted EBITDA (Non-IFRS Measure)".

 

4 For the three months ended June 30, 2019, the weighted average number of outstanding common shares, basic, totaled 346,779,156 (three months ended June 30, 2018 - 200,160,740)

 

The total quantity of cannabis sold during the first quarter of fiscal 2020 was 10,549 kilograms and kilogram equivalents at an overall average price of $7.56 per gram, up from 2,695 kilograms and kilogram equivalents in the first quarter of fiscal 2019 but down from an average price of $8.94 per gram in the first quarter of fiscal 2019.

Recreational cannabis accounted for 9,060 kilogram and kilogram equivalents sold in the first quarter of fiscal 2020 (86% of total cannabis sold), of which 83% was sold directly to the Canadian provinces and the remainder through our direct retail and on-line consumer channels. Medical cannabis accounted for 1,489 kilogram and kilogram equivalents in the first quarter of fiscal 2020 (14% of total cannabis sold), representing a decrease of 45% from the 2,695 kilogram and kilogram equivalents sold in the first quarter of fiscal 2019 due primarily to repositioning to more medical-focused Spectrum brand offerings and product availability for the on-line store.

The average selling price per gram, net of excise tax, was $7.56 in the first quarter of fiscal 2020, a decrease from $8.94 in the first quarter of fiscal 2019 due primarily to the wholesale pricing which we realized when selling to the provincial and territorial crown corporations in the recreational market. The increase in the average selling price per gram for our international medical business is attributable to our acquisition of C3 in May 2019, which generated revenue of $8,783 in the first quarter of fiscal 2020.

We harvested 40,960 kilograms of cannabis in the first quarter of fiscal 2020, as compared to 9,685 kilograms in the first quarter of fiscal 2019, reflecting the growth of our production capacity during fiscal 2019 and into fiscal 2020.


20


 

Discussion of the First Quarter of Fiscal 2020 Results of Operations

Revenue

 

The following tables presents revenue for the three months ended June 30, 2019 and 2018:

 

Revenue by Channel

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

(CDN $000's)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

Recreational revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business to business1

 

$

50,425

 

 

$

-

 

 

$

50,425

 

 

 

-

 

Business to consumer

 

 

10,638

 

 

 

-

 

 

 

10,638

 

 

 

-

 

 

 

 

61,063

 

 

 

-

 

 

 

61,063

 

 

 

-

 

Medical revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Canadian

 

 

13,051

 

 

 

21,364

 

 

 

(8,313

)

 

 

-39

%

International

 

 

10,496

 

 

 

3,370

 

 

 

7,126

 

 

 

211

%

 

 

 

23,547

 

 

 

24,734

 

 

 

(1,187

)

 

 

-5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenue

 

 

18,781

 

 

 

1,182

 

 

 

17,599

 

 

 

1489

%

Gross revenue

 

 

103,391

 

 

 

25,916

 

 

 

77,475

 

 

 

299

%

Excise taxes2

 

 

12,909

 

 

 

-

 

 

 

12,909

 

 

 

-

 

Net revenue

 

$

90,482

 

 

$

25,916

 

 

$

64,566

 

 

 

249

%

1 Includes other revenue adjustments which represent the Company's estimate of variable consideration that may result from rights of return, and which primarily relate to oils and gelcaps.

 

2 Excise taxes is presented net of the impact from other revenue adjustments.

 

 

Revenue by Form

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

Kilograms

 

 

 

 

 

 

 

 

 

 

Kilograms

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

As a % of

 

 

kilogram

 

 

 

 

 

 

As a % of

 

 

kilogram

 

 

 

June 30,

 

 

gross

 

 

equivalents

 

 

June 30,

 

 

gross

 

 

equivalents

 

(CDN $000's)

 

2019

 

 

revenue

 

 

sold

 

 

2018

 

 

revenue

 

 

sold

 

 

 

(CDN $000's)

 

 

 

 

 

 

 

 

 

 

(CDN $000's)

 

 

 

 

 

 

 

 

 

Recreational revenue by form

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry bud

 

$

60,854

 

 

 

59

%

 

 

7,673

 

 

$

-

 

 

 

-

 

 

 

-

 

Oil (Includes oils and gelcaps)

 

 

8,209

 

 

 

8

%

 

 

1,387

 

 

 

-

 

 

 

-

 

 

 

-

 

Other revenue adjustments1

 

 

(8,000

)

 

 

-8

%

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61,063

 

 

 

59

%

 

 

9,060

 

 

 

-

 

 

 

-

 

 

 

-

 

Medical revenue by form

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dry bud

 

 

7,210

 

 

 

7

%

 

 

807

 

 

 

18,426

 

 

 

71

%

 

 

2,244

 

Oil (Includes oils, gelcaps)2

 

 

16,337

 

 

 

16

%

 

 

682

 

 

 

6,308

 

 

 

24

%

 

 

451

 

 

 

 

23,547

 

 

 

23

%

 

 

1,489

 

 

 

24,734

 

 

 

95

%

 

 

2,695

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other revenue

 

 

18,781

 

 

 

18

%

 

 

-

 

 

 

1,182

 

 

 

5

%

 

 

-

 

Gross revenue

 

 

103,391

 

 

 

100

%

 

 

10,549

 

 

 

25,916

 

 

 

100

%

 

 

2,695

 

Excise taxes3

 

 

12,909

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

Net revenue

 

$

90,482

 

 

 

 

 

 

 

 

 

 

$

25,916

 

 

 

 

 

 

 

 

 

1 Other revenue adjustments represent the Company's estimate of variable consideration that may result from rights of return, and which primarily relate to oils and gelcaps.

 

2 Includes $8,783 of revenue related to C3 for the first quarter of fiscal 2020.

 

3 Excise taxes is presented net of the impact from other revenue adjustments.

 

 

 

 

 

 

 

 

 

Net revenue in the first quarter of fiscal 2020 was $90,482, as compared to $25,916 in the first quarter of fiscal 2019. The year-over-year increase is attributable to the launch of the Canadian recreational cannabis market in October 2018.  

Recreational

Recreational revenue in the first quarter of fiscal 2020 was $61,063, with the increase from the first quarter of fiscal 2019 entirely due to the launch of the Canadian recreational cannabis market in October 2018. In the first quarter of fiscal 2020, we generated revenue of $60,854 from the sale of our dry bud format products, an increase of 88% from dry bud sales of $32,399 in the fourth quarter of fiscal 2019. We sold 1.4 million higher-margin pre-rolled cannabis products in the first quarter of fiscal 2020, which represented $9,768, or 16% of our total recreational cannabis revenue.

As noted under “Part I – Business Overview” above we, and the provincial and territorial agencies, continue to develop a better understanding of the consumer demand profile for recreational cannabis products. As part of this learning process, we and our provincial and territorial partners undertake a regular review of inventory and demand levels. During

21


 

the first quarter of fiscal 2020, we evaluated the form, type/strain, and estimated on-hand provincial and territorial inventory levels against the recent demand and sales trends that have been observed in the recreational market to ensure we make adjustments to our supply chain based on the purchasing preferences of recreational consumers. As a result of this evaluation we believe that the risk of over-supply of certain oil and gelcap formats may exist in certain markets due, in part, to incomplete retail platforms in most provinces. Based on this assessment, we have estimated variable consideration that may result from rights of return in the amount of $6,356, net of excise tax, and the net estimated return amount has been reflected in net revenue.

We continue to develop our understanding of market demand and are undertaking changes to our production levels to address trends such as this.

Medical

Medical cannabis revenue for the first quarter of fiscal 2020 was $23,547, as compared to $24,734 in the first quarter of fiscal 2019.

Canadian medical revenue in the first quarter of fiscal 2020 was $13,051, a decrease of $8,313 from the first quarter of fiscal 2019. The decrease is largely attributable to the transition of our medical customers to our new Spectrum Therapeutics online store in anticipation of the launch of the recreational market in October 2018. The Spectrum Therapeutics online store offered a more medical-focused range of cannabis products and several of our established brands and product offerings, including Tweed, LBS and DNA Genetics, were transitioned to the recreational channel. In recent months, however, we have responded to the demand profile of our Canadian medical patients and begun increasing our brands and product offerings on the Spectrum Therapeutics online store. This, together with addressing the supply constraints that we experienced in the fourth quarter of fiscal 2019, resulted in a sequential improvement in medical revenues in the first quarter of fiscal 2020. As at June 30, 2019 there were approximately 70,900 registered Canadian patients with Spectrum Therapeutics, down from approximately 73,600 patients at March 31, 2019 which reflects the factors noted above. However, we have seen stabilization in the number of registered patients subsequent to quarter-end.  

International medical revenue in the first quarter of fiscal 2020 was $10,496, an increase of $7,126 from the first quarter of fiscal 2019 primarily due to the acquisition of C3 in May 2019. C3, which is based in Germany, is Europe’s largest cannabinoid-based pharmaceuticals company and is a leading manufacturer and distributor of multiple cannabinoid therapies including dronabinol, a registered active pharmaceutical ingredient in certain European countries. In addition, subsequent to quarter-end we have seen a notable increase in the amount of product shipped to Germany, demonstrating the resolution of the supply constraints that impacted our International medical business in the fourth quarter of fiscal 2019.

Other

Other revenue for the first quarter of fiscal 2020 was $18,781, as compared to $1,182 in the first quarter of fiscal 2019. The year-over-year increase is primarily attributable to revenues related to Storz & Bickel, which we acquired in the third quarter of fiscal 2019, and This Works, which we acquired in May 2019. The remainder of the increase is attributable to revenue from other strategic sources including extraction services and clinic partners. Other revenue for the first quarter of fiscal 2019 consisted predominantly of revenue from our clinic partners.

Net revenue is determined by deducting excise taxes which are included in gross revenue and subsequently remitted to the tax authorities.

 


22


 

Cost of sales and gross margin

 

The following table presents cost of sales and gross margin for the three months ended June 30, 2019 and 2018:

 

Cost of Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

(CDN $000's)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Inventory production costs expensed to

   cost of sales

 

$

77,313

 

 

$

14,832

 

 

$

62,481

 

 

 

421

%

Fair value changes in biological assets

   included in inventory sold and other

   charges

 

 

46,130

 

 

 

26,388

 

 

 

19,742

 

 

 

75

%

Unrealized gain on changes in fair value

   of biological assets

 

 

(139,019

)

 

 

(57,289

)

 

 

(81,730

)

 

 

143

%

Total cost of sales

 

$

(15,576

)

 

$

(16,069

)

 

$

493

 

 

 

-3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin before fair value impacts in

     cost of sales1

 

$

13,169

 

 

$

11,084

 

 

$

2,085

 

 

 

19

%

Gross margin before fair value impacts in

     cost of sales - %1

 

 

15

%

 

 

43

%

 

 

-

 

 

 

-28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin - IFRS

 

$

106,058

 

 

$

41,985

 

 

$

64,073

 

 

 

153

%

Gross margin - %

 

 

117

%

 

 

162

%

 

 

-

 

 

 

-45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1 Gross margin before fair value impacts in cost of sales, a non-IFRS measure, is net revenue less inventory production costs expensed to cost of sales. Gross margin percentage before fair value impacts in cost of sales, a non-IFRS measure, is net revenue less inventory production costs expensed to cost of sales, divided by net revenue. See "Gross Margin Before Fair Value Impacts in Cost of Sales (Non-IFRS Measure)"

 

Cost of sales

Cost of sales is comprised of:

 

-

Inventory production costs expensed to cost of sales, which includes the cost of inventories expensed in the year and the direct and indirect costs of shipping and fulfillment including labour related costs, materials, shipping costs, customs and duties, royalties, utilities, facilities costs, and shipping and fulfillment related depreciation;

 

-

Fair value changes in biological assets included in inventory sold and other charges, which includes net realizable value adjustments and net write-offs of biological assets; and

 

-

Unrealized gain on changes in fair value of biological assets.

Inventory production costs expensed to cost of sales for the first quarter of fiscal 2020 were $77,313, as compared to $14,832 in the first quarter of fiscal 2019. These costs were primarily comprised of the costs of the inventory sold in the period, distribution charges, and the operating costs relating to facilities that were not yet cultivating or processing cannabis, not yet producing cannabis-related products, or having under-utilized capacity.

The impact of changes in the fair value of biological assets in the first quarter of fiscal 2020 was due in large part to the commencement of growing at our greenhouse in Mirabel, and increased utilization at our greenhouses in Aldergrove and Delta. On average, at June 30, 2019 the average stage of growth for our biological assets was 48%, compared to a 42% average stage of growth at March 31, 2019.

Gross margin before fair value impacts in cost of sales (non-IFRS measure)

 

The Company’s “Gross margin before fair value impacts in cost of sales” and “Gross margin percentage before fair value impacts in cost of sales” are non-IFRS measures used by management that do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Management defines Gross margin before fair value impacts in cost of sales as net revenue less inventory production costs expensed to cost of sales. Management defines gross margin percentage before fair value impacts in cost of sales as net revenue less inventory production costs expensed to cost of sales, divided by net revenue. Management believes Gross margin before fair value impacts in cost of sales, and Gross margin percentage before fair value impacts in cost of sales, to be useful financial measures to assess its operating performance on an adjusted basis as described above.

23


 

Gross margin before fair value impacts in cost of sales in the first quarter of fiscal 2020 was $13,169, or 15% of net revenue. Comparatively, in the first quarter of fiscal 2019 gross margin before fair value impacts in cost of sales was $11,084 or 43% of net revenue. The lower gross margin percentage in the first quarter of fiscal 2020 was primarily attributable to:

 

-

The impact of operating costs of $16,236 relating to facilities not yet cultivating or processing cannabis, not yet producing cannabis-related products or having under-utilized capacity, and adjustments related to the net realizable value of inventory; and

 

-

A shift in the product mix in the first quarter of 2020 towards a lower percentage of higher-margin, advanced manufactured products as compared to the comparable period.

We continued to invest in the first quarter of fiscal 2020 in the expansion of our Canadian cultivation facilities, our hemp-based CBD business, and our advanced manufacturing capabilities in Smiths Falls, Ontario in preparation for the second phase of Canadian recreational cannabis. Accordingly, as several of our production facilities were not yet cultivating cannabis or had under-utilized capacity, we incurred higher inventory production costs as we increased our cannabis harvest to over 40,000 kilograms. At our greenhouse facilities in Aldergrove and Delta, British Columbia and Mirabel, Quebec, we have the ability to plant in a manner that allows for ongoing harvests, rather than one large harvest; this will allow for the increased utilization of assets for post-harvest processes and provide for a steady supply of product going forward. Accordingly, we expect our gross margins to improve in the coming quarters when all of its cultivation facilities reach, and are utilized at, full production capacity.

Gross margin - IFRS

The IFRS reported gross margin for the first quarter of fiscal 2020 was $106,058 or 117% of net revenue, as compared to $41,985 or 162% of net revenue in the first quarter of fiscal 2019. In the first quarter of fiscal 2020, the IFRS reported gross margin was primarily impacted by the continued ramp-up of our facilities in Mirabel, Quebec and Aldergrove and Delta, British Columbia. Together, production from these facilities represented approximately 70% of the total harvest in the first quarter of fiscal 2020. Comparatively, in the first quarter of fiscal 2019 these facilities were only partially utilized and did not contribute significantly to our harvest.


24


 

Operating expenses

 

The following table presents operating expenses for the three months ended June 30, 2019 and 2018:

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

June 30,

 

 

 

 

 

 

 

 

 

(CDN $000's)

 

2019

 

 

2018

 

 

$ Change

 

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales and marketing

 

$

45,096

 

 

$

17,266

 

 

$

27,830

 

 

 

161

%

Research and development

 

 

8,474

 

 

 

756

 

 

 

7,718

 

 

 

1021

%

General and administration

 

 

62,271

 

 

 

19,588

 

 

 

42,683

 

 

 

218

%

Acquisition-related costs

 

 

13,182

 

 

 

1,884

 

 

 

11,298

 

 

 

600

%

Share-based compensation expense

 

 

77,081

 

 

 

23,072

 

 

 

54,009

 

 

 

234

%

Share-based compensation expense

     related to acquisition milestones

 

 

10,281

 

 

 

7,095

 

 

 

3,186

 

 

 

45

%

Depreciation and amortization

 

 

12,779

 

 

 

3,030

 

 

 

9,749

 

 

 

322

%

Total operating expenses

 

$

229,164

 

 

$

72,691

 

 

$

156,473

 

 

 

215

%

 

Sales and marketing

Sales and marketing expense in the first quarter of fiscal 2020 was $45,096, as compared to $17,266 in the first quarter of fiscal 2019. The increase of $27,830 is attributable to the following areas:

 

-

Product marketing campaigns associated with our preparation for the launch of the second phase of recreational cannabis consumer products in December 2019,

 

-

Driving brand awareness and educating consumers through marketing and promotional campaigns focused on concept creation and placing advertising at key venues and events and in key media channels in support of our Tweed and Tokyo Smoke brands;

 

-

Increased staffing as we build-out our network of Tweed- and Tokyo Smoke-branded retail stores in Canada, along with an increase in the number of employees in our marketing and sales functions servicing our Canadian and international markets; and

 

-

Our medical outreach program, including costs associated with our Apollo and Bodystream clinics.

Included in sales and marketing expense for the first quarter of fiscal 2020 are strategic investments of $2,206 related to sales and marketing staff, product marketing campaigns, and brand awareness and consumer education initiatives related to our continued commercial expansion into new markets, most notably the planned launch of CBD products in the United States which we anticipate to occur by the end of the fourth quarter of fiscal 2020 (for the first quarter of fiscal 2019 - $77).

Research and development

Research and development expense in the first quarter of fiscal 2020 was $8,474, as compared to $756 in the first quarter of fiscal 2019. The increase of $7,718 is attributable to increased compensation costs associated with an increase in the number of employees conducting research into several intellectual property opportunities, costs associated with conducting external laboratory testing and clinical trials for CBD-based human and animal health products, and other strategic investments including developing patent-pending technology in the following areas:  

 

-

New cannabis-based product form factors that will enter the market when permitted, which we expect to be in mid-December 2019;

 

-

Device and delivery technology, including vaporizers; and

 

-

Growth patterns under different environmental scenarios and the genetics of various strains.

25


 

 

General and administration

General and administration expense in the first quarter of fiscal 2020 was $62,271, as compared to $19,588 in the first quarter of fiscal 2019. The increase of $42,683 is attributable to:

 

-

Costs associated with enhancing our finance and information technology capabilities;

 

-

Increased public company compliance and regulatory requirements; and

 

-

Compliance costs related to meeting Health Canada requirements.

Included in general and administration expense for the first quarter of fiscal 2020 are strategic investments of $7,325 attributable to administrative staffing and facilities, insurance, information technology, regulatory and other administrative costs incurred as we execute on our strategy of global expansion (for the first quarter of fiscal 2019 - $1,072).

Acquisition-related costs

Acquisition-related costs were $13,182 in the first quarter of fiscal 2020, as compared to $1,884 in the first quarter of fiscal 2019. The year-over-year increase of $11,298 is attributable to mergers and acquisitions activity in the first quarter of 2020, most notably entering into and implementing the plan of arrangement with Acreage and closing the acquisitions of C3 and This Works.

Share-based compensation expense

Share-based compensation expense was $77,081 in the first quarter of fiscal 2020, as compared to $23,072 in the first quarter of fiscal 2019. The increase of $54,009 is primarily attributable to the continued increase in the number of stock options granted to employees, which is primarily related to the increase in the number of employees of the Company from approximately 1,400 at June 30, 2018 to approximately 3,850 at June 30, 2019. The number of outstanding stock options increased from 19.0 million at June 30, 2018 to 30.7 million at June 30, 2019. Additionally, the grant date fair value of the stock options has increased over the past year, which is primarily attributable to the Company’s higher stock price.

Share-based compensation expense related to acquisition milestones was $10,281 in the first quarter of fiscal 2020, as compared to $7,095 in the first quarter of fiscal 2019. The increase of $3,186 is predominantly attributable to the acquisitions of Spectrum Cannabis Colombia S.A.S. (“Spectrum Colombia”) and Canindica Capital Ltd. (“Canindica”) in July 2018, as consideration for these transactions included the issuance of share-based compensation upon the achievement of specified cultivation and sales milestones. Partially offsetting these increases was lower share-based compensation expense associated with the achievement of certain milestones associated with the acquisitions of Spectrum Cannabis Denmark Aps and the Apollo and Bodystream clinics in previous fiscal years.

Depreciation and amortization expense

Depreciation and amortization expense was $12,779 in the first quarter of fiscal 2020, as compared to $3,030 in the first quarter of fiscal 2019. The increase of $9,749 is attributable to property, plant and equipment being put into operation during fiscal 2019 and the first quarter of fiscal 2020 as we continue to build our infrastructure across Canada and internationally, and the adoption of IFRS 16, Leases, in the first quarter of fiscal 2020 which resulted in depreciation expense being recorded on right-of-use assets. Refer to “Adoption of IFRS 16, Leases (“IFRS 16”) and resulting changes to lease accounting policy” below.  

Adjusted EBITDA (Non-IFRS Measure)

 

The Company’s “Adjusted EBITDA” is a non-IFRS measure used by management that does not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other companies. Management defines the Adjusted EBITDA as the income (loss) from operations, as reported, before interest and tax, adjusted for removing share-based compensation expense, depreciation and amortization, and the fair value effects of accounting for biological assets and inventories, and further adjusted to remove acquisition related costs.

 

The Company has provided further disclosure around Adjusted EBITDA by attributing Adjusted EBITDA to its (1) operations and corporate overhead, (2) strategic investments and business development, and (3) non-operating or under-utilized facilities. As discussed under “Part 2 – Strategy” above, the Company has made, and will continue to make, significant strategic investments and incur significant business development costs to expand our business into attractive new geographies in Latin America and the Caribbean, Asia / Pacific, and Africa. These investments include

26


 

developing our administrative infrastructure, along with early sales and marketing initiatives focused on patient and healthcare professional education. As part of its business development, the Company has also invested in research and development, particularly in relation to new product innovation, conducting clinical trials supporting new cannabis-based medicines, and optimizing our operations. The expenses associated with the aforementioned strategic investments have been included in General and administration, Sales and marketing, and Research and development in our condensed interim consolidated statements of operations. In addition, we have incurred significant costs related to facilities which are not yet cultivating or processing cannabis, not yet producing cannabis-related products, or had under-utilized capacity. These costs have been included in Inventory production costs expensed to cost of sales in our condensed interim consolidated statements of operations. These investments are not consistent with the financial results from our businesses in Canada and Europe, for which our infrastructure build-out is nearly complete and revenue-generating operations have commenced.

 

Accordingly, management believes that Adjusted EBITDA, and the attribution of Adjusted EBITDA in the manner described above, provides meaningful and useful financial information as these measures demonstrate the performance of our operating businesses, and the level of investment that we continue to incur in research and development and the expansion of our global business.

 

The following table presents Adjusted EBITDA for the three months ended June 30, 2019 and 2018:

 

 

 

Three months ended

 

 

(In CDN$000's)

 

June 30,

2019

 

 

June 30,

2018

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA1 Reconciliation

 

 

 

 

 

 

 

 

 

Loss from operations - as reported

 

$

(123,106

)

 

$

(30,706

)

 

 

 

 

 

 

 

 

 

 

 

IFRS fair value accounting related to biological assets and inventory

Fair value changes in biological assets included

     in inventory sold and other charges

 

 

46,130

 

 

 

26,388

 

 

Unrealized gain on changes in fair value of

     biological assets

 

 

(139,019

)

 

 

(57,289

)

 

 

 

 

(92,889

)

 

 

(30,901

)

 

Share-based compensation expense

 

 

87,362

 

 

 

30,951

 

 

Acquisition-related costs

 

 

13,182

 

 

 

1,884

 

 

Depreciation and amortization (per statements of cash flows)

 

 

23,391

 

 

 

6,293

 

 

 

 

 

123,935

 

 

 

39,128

 

 

Adjusted EBITDA

 

$

(92,060

)

 

$

(22,479

)

 

 

 

 

 

 

 

 

 

 

 

1 Adjusted EBITDA is earnings before interest, tax, depreciation and amortization, share-based compensation expense, fair value changes and other non-cash items, and further adjusted to remove acquisition-related costs.

 

The Adjusted EBITDA loss for the first quarter of fiscal 2020 was $92,060, as compared to an Adjusted EBITDA loss of $22,479 for the first quarter of fiscal 2019. Of the Adjusted EBITDA loss for the current quarter, $57,819 is attributed to our operations and corporate overhead, and is reflective of:

 

-

Sales and marketing costs related to product marketing in preparation for the launch of the second phase of recreational cannabis consumer products in December 2019, brand awareness and consumer education initiatives for our recreational cannabis brands, and employee compensation costs related to the build-out of our Tweed and Tokyo Smoke retail store network and sales and marketing functions; and

 

-

General and administrative costs associated with our public company and Health Canada compliance and regulatory requirements, and with enhancing our finance and information technology capabilities.

 

The Adjusted EBITDA loss attributed to strategic investments and business development of $18,005 predominantly relates to general and administrative costs associated with the build-out of our administrative infrastructure in support of our global expansion strategy, strategic marketing initiatives including the commencement of product marketing, branding and educational campaigns in advance of our planned launch of CBD products in the United States for the fourth quarter of fiscal 2020, and research and development initiatives related to new product innovation for the recreational markets,

27


 

conducting clinical trials to support new cannabis-based human and animal medicines, and innovation focused on optimizing our growing and manufacturing capability.

 

The Adjusted EBITDA loss attributed to non-operating or under-utilized facilities of $16,236 relates to inventory production costs expensed to cost of sales and is discussed further above under “Cost of sales and gross margin”.

As further described below under “Changes to lease accounting policy”, we adopted IFRS 16, Leases (“IFRS 16”) using the modified retrospective approach on April 1, 2019 and, accordingly, comparative figures were not restated. Our accounting policy for leases under IFRS 16 results in depreciation expense on right-of-use assets and interest expense on lease liabilities, as compared to the recognition of operating expense under our previous accounting policy for leases. Therefore, the change in the classification of depreciation and interest expenses under IFRS 16 impacted our Adjusted EBITDA for the three months ended June 30, 2019 and affected the comparability to Adjusted EBITDA for the three months ended June 30, 2018:

 

-

Depreciation and amortization expense on right-of-use assets of $3,511 has been classified as Depreciation and amortization for the three months ended June 30, 2019, and included in the Adjusted EBITDA reconciliation above;

 

-

Interest expense on lease liabilities of $1,279 has been classified as Other income (expense), net for the three months ended June 30, 2019.

 

Total other (expense) income, net

Total other expense, net was $1,143,729 in the first quarter of fiscal 2020, as compared to $62,995 in the first quarter of fiscal 2019. The increase of $1,080,734 is primarily attributable to a non-cash loss of $1,176,350 on the extinguishment of warrants held by Constellation upon the amendment of the Investor Rights Agreement between Canopy Growth and Constellation, partially offset by the following changes which have resulted in a decrease in total other expense, net:

 

-

Decrease of $34,266 in the non-cash fair value changes related to our senior convertible notes, which is due to the decrease in Canopy Growth’s stock price from March 31, 2019 to June 30, 2019;

 

-

Incremental interest income of $21,712 attributable to the higher cash and cash equivalents and marketable securities balances in the first quarter of fiscal 2020 resulting from the investment by Constellation;

 

-

Convertible debt issuance costs of $16,045 that were incurred in the first quarter of fiscal 2019;

 

-

Decrease of $16,000 related to the non-cash fair value changes on the Vert Mirabel Put Liability; and

 

-

Decrease of $8,948 related to the non-cash fair value changes on our other financial assets.

Further information is disclosed in Notes 21 and 25 of the Interim Financial Statements.

Income tax (expense) recovery

Income tax expense was $14,333 in the first quarter of fiscal 2020, consisting of deferred income tax expense of $12,303 (compared to a recovery of $2,723 in the first quarter of fiscal 2019) and current income tax expense of $2,030 ($nil in the first quarter of fiscal 2019). The increase of $15,026 in the deferred income tax balance is primarily a result of recording deferred tax liabilities, in excess of applicable deferred tax assets, that arose in connection with the required revaluation of the accounting carrying value, but not the tax basis, of other financial assets and biological assets. The group continues to claim a valuation allowance in connection with certain deferred tax assets in respect of losses for tax purposes, where the accounting criteria for recognition of these losses as an asset has yet to be satisfied. The increase of $2,030 in the balance of current income tax expense arose primarily in connection with acquired businesses that generated taxable income, which income could not be offset against the group’s tax attributes.

Net loss

Net loss was $1,281,168 in the first quarter of fiscal 2020, as compared to $90,978 in the first quarter of fiscal 2019. The increase in net loss is primarily attributable to the non-cash loss of $1,176,350 on the extinguishment of warrants held by Constellation, as described above.

Segmented Analysis

The Company operates in two segments: 1) Cannabis operations, which encompasses the production, distribution and sale of both medical and recreational cannabis; and 2) Canopy Rivers, through which the Company provides growth capital and strategic support in the global cannabis sector, where federally lawful.

 

In the first quarters of both fiscal 2020 and fiscal 2019, all of the Company’s revenue was earned by the Cannabis operations segment. Canopy Rivers contributed a net loss of $3,261 in the first quarter of 2020, of which $899 was

28


 

attributable to Canopy Growth. In the first quarter of fiscal 2019, Canopy Rivers contributed a net loss of $13,414, of which $4,037 was attributable to Canopy Growth. The decrease reflects the year-over-year decrease in the fair value changes on Canopy Rivers’ strategic equity investments, along with an increase in share-based compensation expense due to the stock options which have been granted in fiscal 2019. Refer to Note 18 of the Interim Financial Statements for further information on the non-controlling interests in Canopy Rivers.  

 


29


 

Summary of quarterly financial information

 

The following table presents a summary of unaudited quarterly financial information for the last eight consecutive quarters:

 

SELECTED QUARTERLY INFORMATION

 

(CDN $000's, except share amounts)

 

Q1 2020

 

 

Q4 2019

 

 

Q3 2019

 

 

Q2 2019

 

Net revenue - Recreational

 

$

49,519

 

 

$

58,087

 

 

$

57,686

 

 

$

-

 

Net revenue - Medical & Other

 

$

40,963

 

 

$

35,963

 

 

$

25,362

 

 

$

23,327

 

Net income (loss) attributable to Canopy

   Growth Corporation

 

$

(1,283,055

)

 

$

(335,607

)

 

$

67,582

 

 

$

(337,136

)

Net income (loss) per share - basic

 

$

(3.70

)

 

$

(0.98

)

 

$

0.22

 

 

$

(1.52

)

Weighted average shares - basic

 

 

346,779,156

 

 

 

343,877,591

 

 

 

303,281,549

 

 

 

221,725,511

 

Net income (loss) per share - diluted

 

$

(3.70

)

 

$

(0.98

)

 

$

(0.38

)

 

$

(1.52

)

Weighted average shares - diluted

 

 

346,779,156

 

 

 

343,877,591

 

 

 

315,974,639

 

 

 

221,725,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Q1 2019

 

 

Q4 2018

 

 

Q3 2018

 

 

Q2 2018

 

Net revenue - Recreational

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Net revenue - Medical and other

 

$

25,916

 

 

$

22,806

 

 

$

21,700

 

 

$

17,569

 

Net income (loss) attributable to Canopy

   Growth Corporation

 

$

(80,277

)

 

$

(61,544

)

 

$

1,583

 

 

$

(1,338

)

Net income (loss) per share - basic

 

$

(0.40

)

 

$

(0.31

)

 

$

0.01

 

 

$

(0.01

)

Weighted average shares - basic

 

 

200,160,740

 

 

 

196,571,715

 

 

 

182,029,481

 

 

 

167,226,218

 

Net income (loss) per share - diluted

 

$

(0.40

)

 

$

(0.31

)

 

$

0.01

 

 

$

(0.01

)

Weighted average shares - diluted

 

 

200,160,740

 

 

 

196,571,715

 

 

 

194,739,044

 

 

 

167,226,218

 

 

Additional IFRS Measure

The Company uses “Loss from operations” as an additional IFRS financial measure within the Interim Financial Statements and this MD&A, but it is not a defined term under IFRS to assess performance. Management believes that this measure provides useful supplemental information to investors and is computed on a consistent basis for each reporting period. Loss from operations is calculated as net revenue less cost of sales (which includes inventory production costs expensed to cost of sales, fair value changes in biological assets included in inventory sold and other inventory charges, and unrealized gain on changes in fair value of biological assets), and less total operating expenses, all of which are derived from the consolidated statements of operations. It is used by management to analyze operating performance, but it is not intended to represent an alternative to net loss or other measures of financial performance in accordance with IFRS.

 


30


 

PART 4 – FINANCIAL liquidity and capital resources

The following table presents selected statement of financial position information as at June 30, 2019, March 31, 2019 and March 31, 2018:

(CDN $000's)

 

June 30,

2019

 

 

March 31,

2019

 

March 31,

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

 

$

1,816,632

 

 

$

2,480,830

 

$

322,560

 

Marketable securities

 

 

1,324,255

 

 

 

2,034,133

 

 

-

 

Total assets

 

 

8,645,551

 

 

 

8,731,805

 

 

1,436,817

 

Current and long-term debt

 

 

805,796

 

 

 

945,975

 

 

8,422

 

Deferred tax liability

 

 

104,118

 

 

 

96,031

 

 

33,536

 

Other long-term liabilities

 

 

212,989

 

 

 

140,404

 

 

61,150

 

Shareholders' equity attributable to Canopy Growth

 

 

5,608,747

 

 

 

6,951,633

 

 

1,158,773

 

Available liquidity and liquidity risk

As at June 30, 2019 the Company had cash and cash equivalents of $1,816,632 and marketable securities of $1,324,255 which, when combined, represent a decrease of $1,374,076 from March 31, 2019. This decrease was due to cash used in the first quarter of fiscal 2020 to fund operations of $158,290, and cash used totaling $405,597 for investments in facility enhancements, the acquisition of subsidiaries, strategic investments including the Acreage Call Option, and the repayment of debt in the amount of $98,207. The Company’s excess cash resources are predominantly invested in liquid securities issued by the United States and Canadian governments.

The Company manages liquidity risk by reviewing, on an ongoing basis, its capital requirements. As at June 30, 2019 the Company believes it has adequate available liquidity, in the form of cash and cash equivalents, and marketable securities, to enable it to meet working capital and other operating requirements, fund growth initiatives and capital expenditures, settle its liabilities, and repay scheduled principal and interest payments on debt. In addition, the Company’s objective is to generate sufficient cash to fund the Company’s operating requirements and expansion plans. While the Company has incurred losses to date, with an accumulated deficit of $3,334,686 at June 30, 2019 (March 31, 2019 - $777,087), management anticipates the success and eventual profitability of the business. The Company also ensures that it has access to public capital markets. However, there can be no assurance that the Company will gain adequate market acceptance for its products or be able to generate sufficient positive cash flow to achieve its business plans. Therefore, the Company is subject to risks including, but not limited to, its inability to raise additional funds through debt and/or equity financing to support the Company’s continued development and operations and to meet the Company’s liabilities and commitments as they come due. See “Part 7 - Risks and Uncertainties”.

Statements of cash flows

 

The table below presents the Company’s cash flows for the three months ended June 30, 2019 and 2018:

 

(CDN $000's)

 

Three months ended

 

Net cash provided by (used in)

 

June 30,

2019

 

 

June 30,

2018

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(158,290

)

 

$

(67,641

)

Investing activities

 

 

(405,597

)

 

 

(182,981

)

Financing activities

 

 

(81,691

)

 

 

585,958

 

Effect of exchange rate changes on cash and cash

   equivalents

 

 

(18,620

)

 

 

-

 

Cash and cash equivalents, beginning of year

 

 

2,480,830

 

 

 

322,560

 

Cash and cash equivalents, end of period

 

$

1,816,632

 

 

$

657,896

 

 

Operating activities

Cash used in operating activities in the first quarter of fiscal 2020 totaled $158,290, as compared to cash used of $67,641 in the first quarter of fiscal 2019. The increase in the cash used during the first quarter of fiscal 2020 was primarily due to the year-over-year increases in the net loss and our investments in working capital, partially offset by an increase in non-cash expense items impacting the net loss including the loss on the extinguishment of warrants and share-based compensation expense.

 

Investing activities

The cash used in investing activities totaled $405,597 in the first quarter of fiscal 2020, as compared to cash used of $182,981 in the first quarter of fiscal 2019. In the first quarter of fiscal 2020, we invested $211,824 in expanding our

31


 

growing capacity, and in the construction of advanced manufacturing capability and a bottling plant at our Smiths Falls location. The cash used for acquisitions was $430,948, with the most notable cash outflows relating to our acquisitions of C3 and This Works. We also completed strategic investments totaling $424,604 in the equity instruments of certain entities, most notably the Acreage Call Option. Partially offsetting these outflows of cash was the redemption of marketable securities in the amount of $687,818, with the cash proceeds used for the purposes described above.

Financing activities

The cash used in financing activities totaled $81,691 in the first quarter of fiscal 2020, as compared to cash provided of $585,958 in the first quarter of fiscal 2019. The increase was primarily due to the repayment of the Alberta Treasury Board financing in the amount of $95,180.

Debt

The Company manages its capital with the objective of maximizing shareholder value and sustaining future development of the business. The Company defines capital as the Company’s equity and any debt it may issue. The Company manages its capital structure and adjusts it, based on the funds available to the Company, in order to support the Company’s activities. The Company, upon approval from its Board of Directors, will undertake to balance its overall capital structure through new share issuances, the issue of debt or by undertaking other activities as deemed appropriate under the specific circumstances.

The Company’s principal capital needs are for funds to execute its strategy, as described in “Part 2 – Strategy” above, and general working capital requirements to fund operations. Since its formation, the Company has financed its cash requirements primarily through the issuance of capital stock, including the $5,072,500 investment by Constellation in the third quarter of fiscal 2019, with the following exceptions:

Convertible senior notes

In June 2018, we issued convertible senior notes (“the notes”) with an aggregate principal amount of $600,000. The notes bear interest at a rate of 4.25% per annum and are payable semi-annually on January 15th and July 15th of each year commencing from January 15, 2019. The notes mature on July 15, 2023. Holders of the notes may convert the notes at their option at any time from January 15, 2023 to the maturity date. The notes will be convertible, at the holder’s option, at a conversion rate of 20.7577 common shares for every $1 principal amount of notes, subject to adjustments in certain events. In addition, the holder has the right to exercise the conversion option from September 30, 2018 to January 15, 2023, if (i) the market price of the Company’s common shares for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day, (ii) during the 5 business day period after any consecutive 5 trading day period (the “measurement period”) in which the trading price per $1 principal amount of the notes for each trading day in the measurement period was less than 98% of the product of the last reported sales price of the Company’s common shares and the conversion rate on each such trading day, (iii) the notes are called for redemption or (iv) upon occurrence of certain corporate events (a “fundamental change”). The Company may, upon conversion by the holder, elect to settle in either cash, common shares, or a combination of cash and common shares, subject to certain circumstances.

Additional information regarding the conversion rights of the notes is included in Note 14 of the Interim Financial Statements.

Other

On June 14, 2019 the Company settled the outstanding loan amount with Alberta Treasury Board, along with accrued interest, with cash payment of $95,180. The Company has revolving lines of credit for up to $6,018 with Farm Credit Canada, which were undrawn as at June 30, 2019.  

Contractual obligations and commitments

The Company leases production and retail space under operating leases which range in expiration from April 2019 to November 2046 and which include minimum lease payments. The Company also has royalty, capital equipment, and

32


 

other purchase commitments with varying terms. All production and retail operating leases have optional renewal terms that the Company may exercise at its option.

Discussion of market risk and credit risk

The Company’s activities expose it to a variety of financial risks, including market risk (i.e., foreign currency risk and interest rate risk) and credit risk.

Market risk

Market risk is defined as the risk that the fair value or future cash flows of a financial instrument held by the Company will fluctuate because of changes in market prices. The Company faces market risk from the impact of changes in foreign currency exchange rates, changes in interest rates, and changes in market prices due to other factors including changes in equity prices. Financial instruments held by the Company that are subject to market risk include cash and cash equivalents and marketable securities denominated in currencies other than the Canadian dollar, investments in other financial assets, and variable-rate debt. The categories of financial instruments that can give rise to significant variability are described below:

Foreign currency risk

Foreign currency risk is defined for these purposes as the risk that the fair value of a financial instrument held by the Company will fluctuate because of changes in foreign currency rates. The Company has exposure to the U.S. dollar, Euro, Danish Krone and certain other currencies through its investments in foreign operations. Consequently, fluctuations in the Canadian dollar exchange rate against these currencies increase the volatility of net income (loss) and other comprehensive income (loss). At June 30, 2019, the Company has not entered into any hedging agreements or purchased any financial instruments to hedge its foreign currency risk.

Interest rate risk

Interest rate risk is defined for these purposes as the risk that the fair value or future cash flows of a financial instrument held by the Company will fluctuate because of changes in interest rates. The Company’s financial liabilities consist primarily of long-term fixed-rate debt or floating-rate debt. Fluctuations in interest rates could impact the Company’s cash flows, primarily with respect to the interest payable on the Company’s variable-rate debt, which consists of certain borrowings with a total principal value of $4,272 at June 30, 2019 (March 31, 2019 - $97,471). The Company may invest surplus cash in highly liquid investments with short terms to maturity that would accumulate interest at prevailing rates for such investments. As at June 30, 2019, the Company’s cash and cash equivalents, and marketable securities, consist of $2,081,632 (March 31, 2019 - $2,821,512) in interest rate-sensitive instruments.

Other market risk

The Company holds other financial assets and liabilities in the form of investments in shares, warrants, options and put liabilities that are measured at fair value and recorded through either net income (loss) or other comprehensive income (loss). The Company is exposed to price risk on these financial assets, which is the risk of variability in fair value due to movements in equity or market prices. Information regarding the fair value of financial instrument assets and liabilities that are measured at fair value on a recurring basis, and the relationship between the unobservable inputs used in the valuation of these financial assets and their fair value is presented in Note 31 of the annual consolidated financial statements.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s accounts receivable. The Company is exposed to credit-related losses in the event of non-performance by the counterparties.

The Company provides credit to its customers in the normal course of business and has established credit evaluation and monitoring processes to mitigate credit risk. The Company has limited risk due to the fact that the majority of recreational cannabis sales are transacted with Canadian provincial/territorial agencies, and the majority of medical cannabis and other sales are transacted with credit cards.

The carrying amount of cash and cash equivalents, marketable securities, short-term restricted investments and amounts receivable represent the maximum exposure to credit risk and as at June 30, 2019, this amounted to $3,263,186 (March

33


 

31, 2019 - $4,643,357). Since the inception of the Company, no losses have been suffered in relation to cash held by its banking institutions.

As at June 30, 2019, 75% of the Company’s accounts receivable are considered current (March 31, 2019 – 89%). The Company’s accounts receivable are primarily driven by sales to government agencies which represented 58% of trade accounts receivable as at June 30, 2019 (March 31, 2019 – 72%)

Shareholders’ equity

The Company’s authorized share capital is an unlimited number of common shares of which 347,865,673 common shares were issued and outstanding as at August 14, 2019 (June 19, 2019 - 345,878,755 common shares after including 6,940,531 escrowed shares to be released after meeting certain conditions).

The Company has 29,099,010 stock options outstanding at August 14, 2019 under the Company’s Omnibus Incentive Plan at prices between $1.32 and $67.64 per share (June 19, 2019 - 31,374,828 stock options outstanding at prices between $0.22 and $67.64 per share).

At August 14, 2019, the Company had 159,108,391 outstanding warrants for common shares, after including 12,818,148 warrants for common shares treated as a derivative liability with a nominal value, at prices between $12.98 and $76.68, which expire between January 31, 2020 and November 1, 2021 (June 19, 2019 - 159,106,116 outstanding warrants).

At August 14, 2019, there were up to 5,175,843 shares to be issued on the completion of acquisition and asset purchase milestones (June 19, 2019 - 5,371,154 shares). In certain cases, the number of shares to be issued is based on the volume-weighted average share price at the time the milestones are met. The number of shares has been estimated assuming the milestones were met at August 14, 2019. The number of shares excludes shares to be issued on July 4, 2023 to the previous shareholders of Spectrum Colombia and Canindica based on the fair market value of the Company’s Latin American business on that date.

At August 14, 2019, there were up to 12,454,620 shares issuable on the conversion of the senior convertible notes.

Off-statement of financial position arrangements

The Company has no off-statement of financial position arrangements that have, or are reasonably likely to have, a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors other than those as stated below in the section titled “Transactions with related parties”.

Transactions with related parties

The Company has entered into cannabis offtake agreements with certain of its equity method investees and entities in which it holds equity or other financial instruments. These agreements are in the normal course of operations and will be measured at the exchange amounts agreed to by the parties.

PART 5 – CRITICAL ESTIMATES, CRITICAL JUDGMENTS AND SIGNIFICANT ACCOUNTING POLICIES

Critical judgments in applying accounting policies

The following are the critical judgments, apart from those involving estimations (refer to discussion below), that have the most significant effect on the amounts recognized in the Interim Financial Statements.

Business combinations

Judgment is used in determining whether an acquisition is a business combination or an asset acquisition. Judgement is also required to assess whether the amounts paid on achievement of milestones represents contingent consideration or compensation for post-acquisition services. Judgment is also required to assess whether contingent consideration should be classified as equity or a liability. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as a liability is remeasured at fair value at each reporting date and subsequent changes in the fair value of the contingent consideration are recognized in net income (loss).

 

34


 

Control, joint control or level of influence

When determining the appropriate basis of accounting for the Company’s interests in affiliates, the Company makes judgments about the degree of influence that it exerts directly or through an arrangement over the investees’ relevant activities. Information about these judgments is included in Notes 9, 10 and 24 of the Interim Financial Statements.  

Critical accounting estimates

The preparation of the Interim Financial Statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the year in which the estimates are revised and in any future years affected.

Biological assets and inventory

In calculating the value of the biological assets and inventory, management is required to make a number of estimates, including estimating the stage of growth of the cannabis up to the point of harvest, harvesting costs, selling costs, average or expected selling prices and list prices, expected yields for the cannabis plants, and oil conversion factors. In calculating final inventory values, management compares the inventory cost to estimated net realizable value. Further information on estimates used in determining the fair value of biological assets is contained in Note 6 of the Interim Financial Statements.

Estimated useful lives and depreciation and amortization of property, plant and equipment and intangible assets

Depreciation and amortization of property, plant and equipment and intangible assets are dependent upon estimates of useful lives, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

Share-based compensation

In calculating the share-based compensation expense, key estimates such as the rate of forfeiture of options granted, the expected life of the option, the volatility of the Company’s stock price and the risk-free interest rate are used. To calculate the share-based compensation expense related to key employee performance milestones associated with the terms of an acquisition, the Company must estimate the number of shares that will be earned if and when they will be issued based on estimated discounted probabilities.

Fair value measurements

Certain of the Company’s assets and liabilities are measured at fair value. In estimating fair value, the Company uses market-observable data to the extent it is available. In certain cases where Level 1 inputs are not available, the Company will engage third party qualified valuers to perform the valuation.

Information about the valuation techniques and inputs used in determining the fair value is disclosed in the notes to our Interim Financial Statements: biological assets is disclosed in Note 6; the acquired intangible assets in Note 24; and financial instruments in Note 27.

35


 

Adoption of IFRS 16, Leases (“IFRS 16”) and resulting changes to lease accounting policy

On April 1, 2019 the Company adopted IFRS 16 using the modified retrospective approach. Therefore, the comparative information has not been restated and continues to be reported under IAS 17, Leases (“IAS 17”) and IFRIC 4, Determining Whether an Arrangement Contains a Lease (“IFRIC 4”).

Lease accounting policy applicable from April 1, 2019

Definition of a lease

At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys this right the Company assesses whether:

 

The contract involves the use of an identified asset – this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset;

 

The Company has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and

 

The Company has the right to direct the use of the asset. The Company has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. This policy is applied to contracts entered into, or changed, on or after April 1, 2019.

At inception or reassessment of a contract that contains lease and non-lease components, the Company allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.

Accounting as a lessee under IFRS 16

The Company recognizes a right-of-use asset and lease liability on the consolidated statements of financial position at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful lives of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate.

Lease payments included in the measurement of the lease liability comprise (a) fixed payments, including in-substance fixed payments; (b) variable lease payments that depend on an index or a rate, initially measured using the index or rate as at the commencement date; (c) amounts expected to be payable under a residual value guarantee; and (d) the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for early termination of a lease unless the Company is reasonably certain not to terminate early.

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in the consolidated statements of operations if the carrying amount of the right-of-use asset has been reduced to $nil.

 

 

 

36


 

Transition to IFRS 16

Practical expedients

On transition to IFRS 16, the Company elected to apply the practical expedient to grandfather the assessment of which transactions represent leases. The Company applied IFRS 16 only to contracts that were previously identified as leases under IAS 17 and IFRIC 4. Therefore, the definition of a lease under IFRS 16 was applied only to contracts entered into, or changed, on or after April 1, 2019.

The Company used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:

 

Applied a single discount rate to a portfolio of leases with similar characteristics;

 

Adjusted the right-of-use assets by the amount of any onerous contract provision recognized under IAS 37, Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application, as an alternative to an impairment review;

 

Applied the exemption not to recognize right-of-use assets and liabilities for short-term leases with terms less than 12 months and leases of low-value assets. The Company recognizes the lease payments associated with these leases as an expense on a straight-line or other systematic basis over the lease term;

 

Excluded initial direct costs from the measurement of the right-of-use asset at the date of initial application; and

 

Used hindsight when determining the lease term if the contract contains options to extend of terminate the lease.

Leases classified as finance leases under IAS 17

For leases that were classified as finance leases under IAS 17, the carrying amount of the right-of-use asset and the lease liability at April 1, 2019 are determined at the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.

Impacts on the Interim Financial Statements

On transition to IFRS 16, the Company elected to measure the right-of-use assets at the amount equal to the lease liabilities, adjusted by the amount of any prepaid or accrued lease payments. As at April 1, 2019, the Company recognized $99,880 of right-of-use assets, net of onerous lease provisions of $10,703, and $110,583 of lease liabilities, with a $nil impact on deficit. The transition to IFRS 16 did not have a material impact on the Company’s results of operations or liquidity.

When measuring lease liabilities, the Company used its incremental borrowing rate at April 1, 2019. The weighted-average rate applied was 4.5%. Right-of-use assets are recognized in Property, plant and equipment (see Note 11 of the Interim Financial Statements), and lease liabilities are recognized in Other current liabilities and Other long-term liabilities (see Note 15).

 


37


 

PART 6 – CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be publicly disclosed is recorded, processed, summarized and reported on a timely basis. An evaluation of the design of disclosure controls was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based upon this evaluation, our CEO and CFO concluded that, because of the material weakness in our internal control over financial reporting described below, our disclosure controls were not effective as at June 30, 2019.

Internal Control Over Financial Reporting

National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings requires the CEO and CFO to certify that they are responsible for establishing and maintaining internal control over financial reporting (“ICFR”) for the Company and that those internal controls have been designed and are effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with IFRS. The CEO and CFO are also responsible for disclosing any changes to the Company’s internal controls during the most recent period that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

The Company’s management, under the supervision and with the participation of its CEO and CFO, conducted an evaluation of the effectiveness of the Company´s internal control over financial reporting as of March 31, 2019, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013 (the “COSO 2013 Framework”). Based on this evaluation management concluded that a material weakness existed as of March 31, 2019, as described below.

Previously Identified Material Weakness Not Fully Remediated – End User Computer (“EUC”)

As of March 31, 2019, management concluded that the internal controls over Company-wide EUC spreadsheets are not fully remediated and constituted a material weakness. This material weakness was initially identified as of March 31, 2017. The accounting complexities encountered in financial reporting rely on complex spreadsheets, most significantly around the valuation of inventory and biological assets and the related classification of line items on the consolidated statements of operations. Spreadsheets are inherently prone to error due to their manual nature. The Company’s controls related to spreadsheets did not address all risks associated with access security, data entry and evidence of review of completed spreadsheets.

Management is making progress on the implementation of EUC spreadsheet controls. However, management has determined that the material weakness related to EUC was not fully remediated as of June 30, 2019 and further progress in strengthening controls is necessary. Material weaknesses cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management is able to conclude, through testing, that these controls are operating effectively.

Remediation Plan and Activities

Management continues to strengthen and improve controls related to the remaining material weaknesses related to EUC in the following ways:

 

Additional resources, including the continued engagement of third party resources as needed, have been added to support and assist in implementing applicable EUC spreadsheet control infrastructure for expected ongoing reliance to a degree on EUC spreadsheets;

 

Continue to reduce the use of EUC spreadsheets where possible through relevant systems. For example, the ERP implementation in process is reducing the use and reliance on EUC spreadsheets.

38


 

Remediation is expected to be completed within fiscal 2020.

There have been no changes in the Company’s ICFR during the three months ended June 30, 2019 that have materially affected, or are likely to materially affect, the Company's ICFR.

No assurance can be provided at this time that the actions and remediation efforts will effectively remediate the material weakness described above or prevent the incidence of other material weaknesses in the Company’s ICFR in the future. Management, including the CEO and CFO, does not expect that disclosure controls and procedures or ICFR will prevent all errors, even as the remediation measures are implemented and further improved to address the material weaknesses. A control system is subject to inherent limitations and even those systems determined to be effective can provide only reasonable, but not absolute, assurance that control objectives will be met with respect to financial statement preparation and presentation.

The Company’s management, with the participation of its CEO and CFO, has limited the scope of the design of the Company’s disclosure controls and procedures and internal controls over financial reporting to exclude controls, policies and procedures and internal controls over financial reporting of the recently acquired operations of:

 

Spectrum Colombia (acquired on July 5, 2018);

 

Canopy Health Innovations Inc. (“CHI”) (acquired on August 3, 2018);

 

Hiku (acquired on September 5, 2018);

 

ebbu (acquired 100% interest on November 23, 2018);

 

POS Holdings Inc. (“POS”, and now referred to as KeyLeaf) (acquired 100% control on November 23, 2018);

 

Storz & Bickel (acquired 100% interest on December 6, 2018);

 

Cafina (acquired on March 25, 2019);

 

C3 (acquired on April 30, 2019); and

 

This Works (acquired on May 21, 2019).

The operations of Spectrum Colombia, CHI, Hiku, ebbu, POS, Storz & Bickel, Cafina, C3 and This Works, combined, represent approximately 25% of the Company’s assets (approximately 3% of current assets and 54% of non-current assets); they also represent approximately 30% of current liabilities and 3% of long-term liabilities, 27% of the Company’s gross revenues and 12% of operating expenses for the three months ended June 30, 2019.

 


39


 

PART 7 - RISKS AND UNCERTAINTIES

 

There are a number of risk factors that could cause future results to differ materially from those described herein or implied by forward-looking statements and forward-looking information, including without limitation, the following risk factors, which are discussed in greater detail under the heading “Risk Factors” in the AIF, which is available under the Company’s profile on SEDAR at www.sedar.com. The risks and uncertainties in the AIF and described below are not the only ones that the Company faces. Such risk factors include, but are not limited to, risks related to changes in laws, regulations and guidelines; compliance with laws; international laws; operational, regulatory and other risks; Constellation as a significant shareholder; limited operating history; execution of business strategy; management of growth; difficulty to forecast; conflicts of interest; litigation; competition; reputational risks; stock exchange restrictions; risks associated with divestment and restructuring; operational structure; reliance on licences; reliance on facilities; dependence upon key personnel; reliance on key inputs; vulnerability to rising energy costs; dependence on suppliers and skilled labour; risks inherent in an agricultural business; transportation risks; wholesale price volatility; insurance risks; environmental and employee health and safety regulations; product liability; product recalls; customer acquisitions; contracts with provincial and territorial governments; constraints on marketing products; risks inherent in acquisitions and investments; unknown defects and impairments; expansion into foreign jurisdictions; governmental regulations; cannabis is a controlled substance in the united states; Farm Bill risks; entry bans into the United States; banking risks; enforceability of contracts; operations in emerging markets; corruption and fraud; inflation; restrictions on the acquisition or use of properties by foreign investors; reliance on international advisors and consultants; anti-money laundering laws and regulation risks; anti-bribery law violations; future sales or issuances of securities; liquidity and additional financing; market price of securities; increased volatility for dual listed common shares; liquidity of the common shares; market for securities; sales of common shares by Constellation; dividend policy; TSX and NYSE listings; foreign private issuer status; obligations as a public company; cybersecurity and privacy risks; intellectual property; challenging global financial conditions; credit and liquidity risk; and hedging risk. Additional risks and uncertainties, including those that the Company does not know about now or that it currently deems immaterial, may also adversely affect the Company’s business. If any of these risks actually occur, the Company’s business may be harmed, and its financial condition and results of operations may suffer significantly.

 

40

EX-99.3 4 cgc-ex993_7.htm EX-99.3 cgc-ex993_7.htm

Exhibit 99.3

 

Form 52-109F2

Certification of Interim Filings

Full Certificate

 

I, Mark Zekulin, Chief Executive Officer, Canopy Growth Corporation, certify the following:

 

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Canopy Growth Corporation (the “issuer”) for the interim period ended June 30, 2019.

 

2.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

 

3.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

 

4.

Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

 

5.

Design:  Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer and I have, as at the end of the period covered by the interim filings

 

 

(a)

designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

 

 

(i)

material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

 

 

(ii)

information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

 

 

(b)

designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

 


 

 

5.1

Control framework:  The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

5.2

ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period

 

 

(a)

a description of the material weakness;

 

(b)

the impact of the material weakness on the issuer’s financial reporting and its ICFR; and

 

 

(c)

the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.

 

5.3

Limitation on scope of design:  The issuer has disclosed in its interim MD&A

 

 

(a)

the fact that the issuer’s other certifying officer and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of

 

 

(i)

N/A;

 

 

 

(ii)

N/A; or

 

 

(iii)

a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and

 

 

(b)

summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.

 

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2019 and ended on June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: August 14, 2019

 

 

/s/ Mark Zekulin

Mark Zekulin

Chief Executive Officer

 

 

2

 

EX-99.4 5 cgc-ex994_6.htm EX-99.4 cgc-ex994_6.htm

Exhibit 99.4

Form 52-109F2

Certification of Interim Filings

Full Certificate

 

I, Mike Lee, Chief Financial Officer, Canopy Growth Corporation, certify the following:

 

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Canopy Growth Corporation (the “issuer”) for the interim period ended June 30, 2019.

 

2.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

 

3.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

 

4.

Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

 

5.

Design:  Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer and I have, as at the end of the period covered by the interim filings

 

 

(a)

designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

 

 

(i)

material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

 

 

(ii)

information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

 

 

(b)

designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

 

5.1

Control framework:  The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework

 


 

(COSO Framework 2013) published by The Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

5.2

ICFR – material weakness relating to design: The issuer has disclosed in its interim MD&A for each material weakness relating to design existing at the end of the interim period

 

 

(a)

a description of the material weakness;

 

(b)

the impact of the material weakness on the issuer’s financial reporting and its ICFR; and

 

 

(c)

the issuer’s current plans, if any, or any actions already undertaken, for remediating the material weakness.

 

5.3

Limitation on scope of design:  The issuer has disclosed in its interim MD&A

 

 

(a)

the fact that the issuer’s other certifying officer and I have limited the scope of our design of DC&P and ICFR to exclude controls, policies and procedures of

 

 

(i)

N/A;

 

 

 

(ii)

N/A; or

 

 

(iii)

a business that the issuer acquired not more than 365 days before the last day of the period covered by the interim filings; and

 

 

(b)

summary financial information about the proportionately consolidated entity, special purpose entity or business that the issuer acquired that has been proportionately consolidated or consolidated in the issuer’s financial statements.

 

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on April 1, 2019 and ended on June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: August 14, 2019

 

 

/s/ Mike Lee

Mike Lee

Chief Financial Officer

 

 

2

 

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