Staff work in a marijuana grow room that can be viewed by at the new visitors centre at Canopy Growth's Tweed facility in Smiths Falls, Ont. on Thursday, Aug. 23, 2018.Sean Kilpatrick/The Canadian Press
Shares of Canopy Growth Corp. WEED-T dropped by 40 per cent Friday after the company announced it was issuing new shares to reduce its debt load, just one day before a key debt maturity.
Canopy said the agreements with its lenders cover $325-million in obligations. Coupled with planned asset sales, the company will shave a total of $437-million in debt from its balance sheet in the next two quarters, it said Friday.
In the past month, several analysts have cut their predictions for the company’s stock to zero, reflecting the view that Canopy cannot claw its way out of debt.
As of March 31, Canopy’s last earnings report, the company had $1.4-billion in debt and less than $800-million in cash. Four years ago, its cash hoard stood at more than $4.5-billion, according to S&P Global Market Intelligence.
Canopy has never been profitable, and its losses are widening: It posted a net loss of nearly $3.3-billion on $403-million in revenue in its most recent fiscal year, ended in March.
The company said in a media release Friday morning it was paying off $225-million in convertible senior notes, with lenders holding $193-million of the debt agreeing to a special swap deal.
As part of the deal, Canopy will pay the holders of the debt $101-million in cash; 90.4 million common shares; and $40.4-million in a new issue of convertible debt that’s convertible to Canopy common shares at a price of 55 cents a share. At the conversion price, Canopy may need to issue an additional 73 million shares.
The company currently has 558 million outstanding shares, whose value has been on a steep decline since rallying during February of 2021.
“Canopy’s deal addresses near-term maturities at the cost of significant dilution to existing investors,” said Kristoffer Inton, an analyst with investment research firm Morningstar, Inc. Between the new shares and convertible debentures, he said, “that just increased the share count by a massive one-third.”
The company will need to obtain shareholder approval for the share issuance at its September annual meeting.
The company also said Friday it would pay off $100-million of its credit facility with $93-million in cash. Over $600-million remains on the line of credit, due in March of 2026. The company pays the London Interbank Offered Rate (LIBOR) plus 8.5 per cent on the debt.
Canopy said it expects the agreements with lenders will result in annualized interest savings of $20-million to $30-million.
The stock closed at $0.51, down 34 cents in trading Friday on the Toronto Stock Exchange, is now down by over 99 per cent since reaching its all-time high in the months leading up to the legalization of recreational cannabis in 2018.
In recent months, the company has laid off at least 800 employees, closed its flagship production facility in Smiths Falls, Ont., and has begun selling off its other cultivation facilities in an effort to shift into an “asset light” model.
The company also said Friday morning that it had received a notice from Nasdaq that its closing bid price had been below the minimum US$1 for 30 consecutive days. If the company does not raise its share price, it could eventually be delisted from that exchange.
After years struggling to turn a profit, the company issued a going concern warning last month, an accounting notice used when companies may not be able to survive the year.
Also in June, the company parted ways with its long-time auditor, KPMG LLP. The accounting firm resigned on June 22, and was replaced by PKF O’Connor Davies LLP. In a statement, Canopy said the change has been “under way for some time” and “did not result from any disagreements between the company and KPMG.”
However, according to forms filed by Canopy with the U.S. Securities and Exchange Commission on that day, KPMG had expressed an “adverse opinion” over Canopy’s control over its financial reporting, and had expressed concerns over a lack of “trained operational and IT personnel” related to “operating effectiveness of internal control over financial reporting.”