Canopy Growth Corp. faced a significant setback as it reported a more extensive loss amid its plans to expand in the U.S. markets. Buried in the company’s quarterly update was a line about its “ability to continue as a going concern,” which has raised concerns among investors.
Constellation Brands, having invested a total of $4 billion in Canopy Growth since 2018, currently retains an ownership stake in the company. However, Constellation Brands has decided not to provide any additional capital to Canopy Growth, which now has a market cap of about $300 million.
Canopy Growth Corp. strives to add its U.S. businesses to Nasdaq’s listings, which include Acreage cannabis, Wana Brands edibles, and Jetty Extracts. The “going concern” language employed by Canopy Growth Corp. indicates that the company needs to focus on maintaining its liquidity and managing expenses.
Over the past year, the company took several cost-cutting measures, including slashing its workforce by 1,200 jobs. Presently, Canopy Growth Corp. employs a total of 1,621 individuals, comprising 1,185 full-time workers based in Canada.
Also Read: Canopy Growth’s Stock Surges After Latest U.S. Market Expansion Announcement
Canopy Growth’s Uncertain Future
In Canopy Growth’s Q4 filings, the auditor’s report raised concerns about the company’s future. With material debt obligations looming and recurring losses, it’s unclear if the company can continue as a going concern.
In addition, Canopy Growth reported a net loss of C$648 million for Q4, with the Securities and Exchange Commission investigating a misstated revenue for its sports-drink, BioSteel.
Jefferies analyst Owen Bennett expressed skepticism about Canopy’s core operations, calling them “very poor.” As a result, he lowered his price target on the stock from C$2.68 a share to C$0.46, though he maintained his hold rating.
Bennett acknowledged that Canopy’s U.S. assets offered the most significant potential for value but lowered his projected enterprise value for the U.S. business from $2.4 billion to $880 million.
The American cannabis market has experienced a downturn, and California has struggled with oversupply and price competition from illicit sources. Canopy Growth will need to pursue a new strategy to overcome these obstacles and secure its future.
Canopy Growth taking steps to reduce cash burn and stabilize in Canadian market
Despite a rough year for the Canadian cannabis market, Canopy Growth is making efforts to move in the right direction and stabilize its operations. The company ended fiscal 2020 with $783 million in cash and short-term investments, and is exploring options to monetize its non-core assets and reduce debt in an accretive manner.
Canopy Growth CFO Judy Hong stated that the company has “a number of options that are executable over the next several months that will ensure we have sufficient capital to fund our ongoing operations and meet our financial covenants.” As part of its “asset light” approach, the company is also implementing cost reductions at BioSteel and closing and selling facilities.
Canopy Growth’s stock has taken a major hit, down by 77% in 2020, in comparison to the AXS Cannabis ETF THCX’s more modest loss of 4.8%. However, the company is hopeful that by reducing its operating cash burn and exploring new avenues for growth, it can turn things around in the Canadian market.
While the Canadian market has underperformed expectations since legalization in 2018, Canopy Growth remains committed to improving its financial standing and meeting its obligations. With a significant cash reserve and a number of options for additional funding, the company is taking steps towards achieving long-term stability and success.