Item 1. Financial Statements
Item 1. Financial Statements.
CANOPY GROWTH CORPORATION
CONDENSED INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars, except number of shares and per share data, unaudited)
June 30,
2020
March 31,
2020
ASSETS
Current assets:
Cash and cash equivalents
$
975,870
$
1,303,176
Short-term investments
1,060,901
673,323
Restricted short-term investments
16,436
21,539
Amounts receivable, net
72,578
90,155
Inventory
389,800
391,086
Prepaid expenses and other assets
98,362
85,094
Total current assets
2,613,947
2,564,373
Equity method investments
58,654
65,843
Other financial assets
273,624
249,253
Property, plant and equipment
1,508,668
1,524,803
Intangible assets
444,199
476,366
Goodwill
1,929,418
1,954,471
Other assets
17,320
22,636
Total assets
$
6,845,830
$
6,857,745
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable
$
89,368
$
123,393
Other accrued expenses and liabilities
82,981
64,994
Current portion of long-term debt
22,570
16,393
Other liabilities
124,757
215,809
Total current liabilities
319,676
420,589
Long-term debt
477,836
449,022
Deferred income tax liabilities
45,816
47,113
Liability arising from Acreage Arrangement
285,000
250,000
Warrant derivative liability
287,122
322,491
Other liabilities
168,239
190,660
Total liabilities
1,583,689
1,679,875
Commitments and contingencies
Redeemable noncontrolling interest
81,600
69,750
Canopy Growth Corporation shareholders' equity:
Common shares - $nil par value; Authorized - unlimited number of shares;
Issued - 370,865,639 shares and 350,112,927 shares, respectively
6,724,245
6,373,544
Additional paid-in capital
2,520,371
2,615,155
Accumulated other comprehensive income
152,415
220,899
Deficit
( 4,431,737
)
( 4,323,236
)
Total Canopy Growth Corporation shareholders' equity
4,965,294
4,886,362
Noncontrolling interests
215,247
221,758
Total shareholders' equity
5,180,541
5,108,120
Total liabilities and shareholders' equity
$
6,845,830
$
6,857,745
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
1
CANOPY GROWTH CORPORATION
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands of Canadian dollars, except number of shares and per share data, unaudited)
Three months ended June 30,
2020
2019
Revenue
$
119,088
$
103,391
Excise taxes
8,672
12,909
Net revenue
110,416
90,482
Cost of goods sold
103,921
72,192
Gross margin
6,495
18,290
Operating expenses
Selling, general and administrative expenses
135,392
145,647
Share-based compensation
30,685
87,362
Asset impairment and restructuring costs
12,794
-
Total operating expenses
178,871
233,009
Operating loss
( 172,376
)
( 214,719
)
Loss from equity method investments
( 7,189
)
( 1,833
)
Other income (expense), net
48,205
32,768
Loss before income taxes
( 131,360
)
( 183,784
)
Income tax recovery (expense)
3,038
( 10,267
)
Net loss
( 128,322
)
( 194,051
)
Net loss attributable to noncontrolling interests and
redeemable noncontrolling interest
( 19,821
)
( 8,182
)
Net loss attributable to Canopy Growth Corporation
$
( 108,501
)
$
( 185,869
)
Basic and diluted loss per share
$
( 0.30
)
$
( 0.54
)
Basic and diluted weighted average common shares outstanding
363,763,347
346,779,156
Comprehensive loss:
Net loss
$
( 128,322
)
$
( 194,051
)
Other comprehensive (loss) income, net of income tax effect
Fair value changes of own credit risk of financial liabilities
( 15,360
)
14,610
Foreign currency translation
( 53,124
)
( 60,744
)
Total other comprehensive loss, net of income tax effect
( 68,484
)
( 46,134
)
Comprehensive loss
( 196,806
)
( 240,185
)
Comprehensive loss attributable to noncontrolling interests
and redeemable noncontrolling interest
( 19,821
)
( 8,182
)
Comprehensive loss attributable to Canopy Growth Corporation
$
( 176,985
)
$
( 232,003
)
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
2
CANOPY GROWTH CORPORATION
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands of Canadian dollars, unaudited)
Additional paid-in capital
Accumulated
Common shares
Share-based reserve
Warrants
Ownership changes
Redeemable noncontrolling interest
other comprehensive income (loss)
Deficit
Noncontrolling interests
Total
Balance at March 31, 2020
$
6,373,544
$
517,741
$
2,638,951
$
( 501,403
)
$
( 40,134
)
$
220,899
$
( 4,323,236
)
$
221,758
$
5,108,120
Other issuances of common shares
and warrants
26,214
( 26,798
)
-
-
-
-
-
-
( 584
)
Exercise of warrants
315,256
-
( 70,266
)
-
-
-
-
-
244,990
Exercise of Omnibus Plan stock
options
9,231
( 4,509
)
-
-
-
-
-
-
4,722
Share-based compensation
-
29,140
-
-
-
-
-
-
29,140
Changes in redeemable
noncontrolling interest
-
-
-
-
( 22,513
)
-
-
10,663
( 11,850
)
Ownership changes relating to
noncontrolling interests
-
-
-
162
-
-
-
2,647
2,809
Comprehensive loss
-
-
-
-
-
( 68,484
)
( 108,501
)
( 19,821
)
( 196,806
)
Balance at June 30, 2020
$
6,724,245
$
515,574
$
2,568,685
$
( 501,241
)
$
( 62,647
)
$
152,415
$
( 4,431,737
)
$
215,247
$
5,180,541
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
3
CANOPY GROWTH CORPORATION
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands of Canadian dollars, unaudited)
Additional paid-in capital
Accumulated
Common shares
Share-based reserve
Warrants
Ownership changes
Redeemable noncontrolling interest
other comprehensive income (loss)
Deficit
Noncontrolling interests
Total
Balance at March 31, 2019
$
6,029,222
$
505,172
$
1,589,925
$
( 500,963
)
$
( 2,110
)
$
( 5,905
)
$
( 835,118
)
$
285,485
$
7,065,708
Other issuances of common shares
and warrants
18,600
( 18,674
)
-
-
-
-
-
-
( 74
)
Exercise of warrants
897
-
( 470
)
-
-
-
-
-
427
Exercise of Omnibus Plan stock
options
28,671
( 12,594
)
-
-
-
-
-
-
16,077
Share-based compensation
-
84,769
-
-
-
-
-
-
84,769
Acreage warrant modification
-
-
1,049,153
-
-
-
( 2,166,792
)
-
( 1,117,639
)
Changes in redeemable
noncontrolling interest
-
-
-
-
615
-
-
( 2,715
)
( 2,100
)
Ownership changes relating to
noncontrolling interests
-
-
-
( 150
)
-
-
-
2,830
2,680
Comprehensive loss
-
-
-
-
-
( 46,134
)
( 185,869
)
( 8,182
)
( 240,185
)
Balance at June 30, 2019
$
6,077,390
$
558,673
$
2,638,608
$
( 501,113
)
$
( 1,495
)
$
( 52,039
)
$
( 3,187,779
)
$
277,418
$
5,809,663
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
4
CANOPY GROWTH CORPORATION
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars, unaudited)
Three months ended June 30,
2020
2019
Cash flows from operating activities:
Net loss
$
( 128,322
)
$
( 194,051
)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property, plant and equipment
17,415
13,587
Amortization of intangible assets
16,632
7,165
Share of loss on equity method investments
7,189
1,833
Share-based compensation
30,685
87,362
Asset impairment and restructuring costs
12,794
-
Income tax (recovery) expense
( 3,038
)
10,267
Non-cash foreign currency
8,688
2,834
Change in operating assets and liabilities, net of effects from purchases
of businesses:
Amounts receivable
17,577
13,506
Prepaid expenses and other assets
( 16,059
)
( 24,009
)
Inventory
( 10,772
)
( 50,716
)
Accounts payable and accrued liabilities
3,755
( 12,582
)
Other, including non-cash fair value adjustments
( 75,090
)
( 13,486
)
Net cash used in operating activities
( 118,546
)
( 158,290
)
Cash flows from investing activities:
Purchases of and deposits on property, plant and equipment
( 61,547
)
( 211,824
)
Purchases of intangible assets
( 3,088
)
( 7,692
)
Proceeds on sale of intangible assets
18,337
-
(Purchases) redemption of short-term investments
( 382,486
)
687,818
Investments in equity method investments
-
( 2,824
)
Investments in other financial assets
( 2,564
)
( 29,414
)
Investment in Acreage Arrangement
-
( 395,190
)
Recovery of amounts related to construction financing
10,000
-
Payment of acquisition related liabilities
( 4,511
)
( 21,447
)
Net cash outflow on acquisition of noncontrolling interests
( 125
)
-
Net cash outflow on acquisition of subsidiaries
-
( 425,024
)
Net cash used in investing activities
( 425,984
)
( 405,597
)
Cash flows from financing activities:
Payment of share issue costs
( 595
)
( 74
)
Proceeds from issuance of shares by Canopy Rivers
92
86
Proceeds from exercise of stock options
4,722
16,077
Proceeds from exercise of warrants
244,990
427
Issuance of long-term debt
4,439
-
Repayment of long-term debt
( 6,345
)
( 98,207
)
Net cash provided by (used in) financing activities
247,303
( 81,691
)
Effect of exchange rate changes on cash and cash equivalents
( 30,079
)
( 18,620
)
Net decrease in cash and cash equivalents
( 327,306
)
( 664,198
)
Cash and cash equivalents, beginning of period
1,303,176
2,480,830
Cash and cash equivalents, end of period
$
975,870
$
1,816,632
Supplemental disclosure of cash flow information
Cash received during the period:
Income taxes
$
2,000
$
-
Cash paid during the period:
Income taxes
$
408
$
-
Noncash investing and financing activities
Additions to property, plant and equipment
$
17,337
$
124,427
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
5
CANOPY GROW TH CORPORATION
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Canadian dollars, unaudited)
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. References in these condensed interim consolidated financial statements to “Canopy Growth” or “the Company” refer to Canopy Growth Corporation and its 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, and Asia / Pacific. 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
These condensed interim consolidated financial statements have been presented in Canadian dollars and are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Canopy Growth has determined that the Canadian dollar is the most relevant and appropriate reporting currency as, despite continuing shifts in the relative size of our operations across multiple geographies, the majority of our operations are conducted in Canadian dollars and our financial results are prepared and reviewed internally by management in Canadian dollars. Our condensed interim consolidated financial statements, and the financial information contained herein, are reported in thousands of Canadian dollars, except share and per share amounts or as otherwise stated.
Certain information and footnote disclosures normally included in the audited annual consolidated financial statements prepared in accordance with U.S. GAAP have been omitted or condensed. These condensed interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended March 31, 2020 (the “Annual Report”), and have been prepared on a basis consistent with the accounting policies as described in the Annual Report.
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 U.S. GAAP.
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.
Principles of consolidation
The accompanying condensed interim consolidated financial statements include the accounts of the Company and all entities in which the Company either has a controlling voting interest or is the primary beneficiary of a variable interest entity. All intercompany accounts and transactions have been eliminated on consolidation. Information on the Company’s subsidiaries with noncontrolling interests is included in Note 21.
Variable interest entities
A variable interest entity (“VIE”) is an entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to control the entity’s activities or do not substantially participate in the gains and losses of the entity. Upon inception of a contractual agreement, and thereafter, if a reconsideration event occurs, the Company performs an assessment to determine whether the arrangement contains a variable interest in an entity and whether that entity is a VIE. The primary beneficiary of a VIE is the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Under Accounting Standards Codification (“ASC”) 810 – Consolidations , where the Company concludes that it is the primary beneficiary of a VIE, the Company consolidates the accounts of that VIE.
6
Equity method investments
Investments accounted for using the equity method include those investments where the Company (i) can exercise significant influence over the other entity and (ii) holds common stock and/or in-substance common stock of the other entity. Under the equity method, investments are carried at cost, and subsequently adjusted for the Company’s share of net income (loss), comprehensive income (loss) and distributions received from the investee. If the current fair value of an investment falls below its carrying amount, this may indicate that an impairment loss should be recorded. Any impairment losses recognized are not reversed in subsequent periods. Refer to Note 9 for additional information on the Company’s investments accounted for using the equity method.
Use of estimates
The preparation of these condensed interim consolidated financial statements and accompanying notes in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates.
New accounting policies
Recently Adopted Accounting Pronouncements
Measurement of Credit Losses on Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Adoption of ASU 2016-13 will require financial institutions and other organizations to use forward-looking information to better formulate their credit loss estimates. Canopy Growth adopted the new standard as of April 1, 2020. There was no impact of adopting ASU 2016-13 on the condensed interim consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820) (“ASU 2018-13”). ASU 2018-13 adds, modifies, and removes certain fair value measurement disclosure requirements. Canopy Growth adopted the new standard as of April 1, 2020. There was no impact of adopting ASU 2018-13 on the condensed interim consolidated financial statements.
Accounting Guidance not yet adopted
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which among other things, eliminates certain exceptions in the current rules regarding the approach for intraperiod tax allocations and the methodology for calculating income taxes in an interim period, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020. Early adoption is permitted. The Company is evaluating the impact on the consolidated financial statements and expects to implement the provisions of ASU 2019-12 effective April 1, 2021.
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) . ASU 2020-01 clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The guidance in ASU 2020-01 is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. The Company is evaluating the impact on the consolidated financial statements and expects to implement the provisions of ASU 2020-01 effective April 1, 2021.
7
3. ASSET IMPAIRMENT AND RESTRUCTURING COSTS
In the year ended March 31, 2020, the Company commenced an organizational and strategic review of its business which resulted in several restructuring actions designed to improve organizational focus, streamline operations and align the Company’s production capability with projected demand. In the three months ended June 30, 2020, the Company completed certain of the restructuring actions that had commenced in the previous fiscal year, and recorded final adjustments related to changes in certain estimates recorded at March 31, 2020. In addition, the Company incurred additional costs in the three months ended June 30, 2020, related primarily to the rationalization of our marketing organization in the current period. As a result, in the three months ended June 30, 2020, the Company recognized asset impairment and restructuring costs of $ 12,794 in relation to (i) costs associated with the closure of certain of the Company’s Canadian production facilities; (ii) completing the exit of the Company’s operations in South Africa and Lesotho; and (iii) employee-related costs associated with rationalizing certain marketing activities.
4. CASH AND CASH EQUIVALENTS
The components of cash and cash equivalents are as follows:
June 30,
March 31,
2020
2020
Cash
$
508,047
$
679,581
Cash equivalents
467,823
623,595
$
975,870
$
1,303,176
5. SHORT-TERM INVESTMENTS
The components of short-term investments are as follows:
June 30,
March 31,
2020
2020
Term deposits
$
626,470
$
374,000
Government securities
195,789
226,087
Commercial paper and other
238,642
73,236
$
1,060,901
$
673,323
The amortized cost of short-term investments at June 30, 2020 is $ 1,060,890 (March 31, 2020 – $ 673,022 ).
6. AMOUNTS RECEIVABLE, NET
The components of amounts receivable, net are as follows:
June 30,
March 31,
2020
2020
Accounts receivable, net
$
42,222
$
51,166
Interest receivable
14,215
10,303
Indirect taxes receivable
5,348
22,982
Other receivables
10,793
5,704
$
72,578
$
90,155
Included in the accounts receivable, net balance at June 30, 2020 is an allowance for doubtful accounts of $ 917 (March 31, 2020 – $ 655 ) .
7. INVENTORY
The components of inventory are as follows:
June 30,
March 31,
2020
2020
Raw materials, packaging supplies and consumables
$
49,581
$
75,507
Work in progress
260,028
255,934
Finished goods
80,191
59,645
$
389,800
$
391,086
In the three months ended June 30, 2020, the Company recorded write-downs related to inventory of $ 19,386 (three months ended June 30, 2019 – $ 4,789 ) in cost of goods sold.
8
8. PREPAID EXPENSES AND OTHER ASSETS
The components of prepaid expenses and other assets are as follows:
June 30,
March 31,
2020
2020
Prepaid expenses
$
51,202
$
41,423
Deposits
18,752
7,773
Prepaid inventory
17,160
21,217
Other assets
11,248
14,681
$
98,362
$
85,094
9. EQUITY METHOD INVESTMENTS
The following table presents changes in the Company’s investments in associates that are accounted for using the equity method in the three months ended June 30, 2020:
Balance at
Share of
Balance at
Ownership
March 31,
net (loss)
June 30,
Entity
Instrument
percentage
2020
income
2020
PharmHouse
Shares
49 %
$
37,025
$
( 4,656
)
$
32,369
More Life
Shares
40 %
10,300
-
10,300
CanapaR
Shares
49 %
8,500
( 329
)
8,171
Agripharm
Shares
40 %
5,000
( 2,937
)
2,063
Other
Shares
18%-27%
5,018
733
5,751
$
65,843
$
( 7,189
)
$
58,654
Where the Company does not have the same reporting date as its investees, the Company will account for its investment one quarter in arrears. Accordingly, certain of the figures in the above table, including the Company’s share of the investee’s net income (loss), are based on the investees’ results for the three months ended March 31, 2020 (with respect to June 30, 2020) with adjustments for any signficant transactions.
The following tables present current and non-current assets, current and non-current liabilities as well as revenues and net loss of the Company’s equity method investments as at and for the three months ended March 31, 2020:
Current
Non-current
Current
Non-current
Entity
assets
assets
liabilities
liabilities
Revenue
Net loss
PharmHouse
$
9,193
$
167,022
$
85,463
$
80,176
$
-
$
( 9,019
)
CanapaR
14,006
11,328
2,126
-
110
( 669
)
Agripharm
6,992
25,034
25,153
1,719
2,468
( 7,342
)
Other
10,317
22,360
3,996
11,462
1,928
( 2,588
)
$
40,508
$
225,744
$
116,738
$
93,357
$
4,506
$
( 19,618
)
9
10. OTHER FINANCIAL ASSETS
The following table outlines changes in other financial assets. Additional details on how the fair value of significant investments are calculated are included in Note 22.
Exercise of
Balance at
options /
Balance at
March 31,
Fair value
disposal
June 30,
Entity
Instrument
2020
Additions
changes
of shares
2020
TerrAscend Canada
Term loan / debenture
$
53,820
$
-
$
10,960
$
-
$
64,780
TerrAscend
Exchangeable shares
47,000
-
6,000
-
53,000
TerrAscend
Warrants
25,004
-
10,306
-
35,310
PharmHouse
Loan receivable
40,000
-
-
-
40,000
ZeaKal
Shares
14,186
-
( 586
)
-
13,600
Agripharm
Royalty interest
12,600
-
900
-
13,500
Greenhouse
Convertible debenture
10,517
-
( 17
)
-
10,500
Other - classified as fair value through net income (loss)
Various
22,495
481
( 4,628
)
-
18,348
Other - elected as fair value through net income (loss)
Various
9,483
1,519
( 1,128
)
-
9,874
Other - classified as held for investment
Loan receivable
14,148
600
-
( 36
)
14,712
$
249,253
$
2,600
$
21,807
$
( 36
)
$
273,624
10
11. PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment are as follows:
June 30,
March 31,
2020
2020
Buildings and greenhouses
$
880,329
$
876,732
Production and warehouse equipment
287,002
300,666
Leasehold improvements
76,862
75,964
Land
71,355
65,003
Office and lab equipment
28,538
29,978
Computer equipment
31,844
30,744
Right-of-use-assets
Buildings and greenhouses
148,743
169,754
Production and warehouse equipment
666
927
Assets in process
371,626
365,644
1,896,965
1,915,412
Less: Accumulated depreciation
( 388,297
)
( 390,609
)
$
1,508,668
$
1,524,803
Depreciation expense included in cost of goods sold for the three months ended June 30, 2020 is $ 14,786 (three months ended June 30, 2019 – $ 9,316 ). Depreciation expense included in selling, general and administrative expenses for the three months ended June 30, 2020 is $ 2,629 (three months ended June 30, 2019 – $ 4,271 ).
12. INTANGIBLE ASSETS
The components of intangible assets are as follows:
June 30, 2020
March 31, 2020
Gross
Net
Gross
Net
Carrying
Carrying
Carrying
Carrying
Amount
Amount
Amount
Amount
Finite lived intangible assets
Licensed brands
$
65,826
$
49,218
$
66,227
$
53,797
Distribution channel
73,721
43,622
74,768
47,117
Health Canada and operating licenses
56,200
49,132
63,631
57,250
Intellectual property
220,142
190,843
240,386
215,044
Software and domain names
24,238
17,966
16,056
10,013
Amortizable intangibles in process
4,083
4,083
9,590
9,590
Total
444,210
354,864
470,658
392,811
Indefinite lived intangible assets
Operating licenses
$
8,000
$
7,000
Acquired brands
81,335
76,555
Total intangible assets
$
444,199
$
476,366
Amortization expense included in cost of goods sold for the three months ended June 30, 2020 is $ 702 (three months ended June 30, 2019 – $ 12 ). Amortization expense included in selling, general and administrative expenses for the three months ended June 30, 2020 is $ 15,930 (three months ended June 30, 2019 – $ 7,153 ).
11
13. GOODWILL
The changes in the carrying amount of goodwill are as follows:
Balance, March 31, 2019
$
1,489,859
Purchase accounting allocations
443,724
Finalization of S&B purchase price allocation
( 24,990
)
Foreign currency translation adjustments
45,878
Balance, March 31, 2020
1,954,471
Foreign currency translation adjustments
( 25,053
)
Balance, June 30, 2020
$
1,929,418
14. OTHER ACCRUED EXPENSES AND LIABILITIES
The components of other accrued expenses and liabilities are as follows:
June 30,
March 31,
2020
2020
Property, plant and equipment
$
2,576
$
1,173
Professional fees
15,725
7,677
Employee compensation
41,036
33,415
Other
23,644
22,729
$
82,981
$
64,994
15. DEBT
The components of debt are as follows:
Convertible senior notes
June 30,
March 31,
Maturity Date
2020
2020
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
( 13,230
)
( 27,120
)
Credit risk fair value adjustment
( 112,770
)
( 128,130
)
485,898
450,204
Transferred receivables, bearing interest rate of
EURIBOR plus 0.850 %
4,439
4,678
Other revolving debt facility, loan, and financings
10,069
10,533
500,406
465,415
Less: current portion
( 22,570
)
( 16,393
)
Long-term portion
$
477,836
$
449,022
On June 20, 2018, the Company 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, payable semi-annually on January 15th and July 15th of each year commencing from January 15, 2019 . The notes will mature on July 15, 2023 . 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. The notes are effectively junior to any secured indebtedness and the notes are structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.
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 (equal to an initial conversion price of approximately $ 48.18 per common share), 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 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
12
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”). A Fundamental Change occurred upon completion of the investment by Constellation Brands, Inc. (“CBI”) in November 2018, and no note holders surrendered any portion of their notes as at the repurchase date of December 5, 2018 .
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. Under the terms of the indenture if a Fundamental Change occurs and a holder elects to convert its notes from and including on the date of the Fundamental Change up to, and including, the business day immediately prior to the Fundamental Change repurchase date, the Company may be required to increase the conversion rate for the notes so surrendered for conversion by a number of additional common shares.
The Company cannot redeem the notes prior to July 20, 2021, except in the event of certain changes in Canadian tax law. On or after July 20, 2021 , the Company could redeem for cash, subject to certain conditions, any or all of the notes, at its option, if the last reported sales price of the Company’s common shares for at least 20 trading days during any 30 consecutive trading day period ending within 5 trading days immediately preceding the date on which the Company provides notice of redemption exceeds 130 % of the conversion price on each applicable trading day. 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 notes in either case shall be at a redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
For accounting purposes, the equity conversion feature did not meet the equity classification guidance, therefore the Company elected the fair value option under ASC 825 – Fair Value Measurements . The notes were initially recognized at fair value on the balance sheet. All subsequent changes in fair value, excluding the impact of the change in fair value related to Company’s own credit risk are recorded in other income (expenses), net. The changes in fair value related to the Company’s own credit risk are recorded through other comprehensive income (loss).
The overall change in fair value of the notes during the three months ended June 30, 2020, was an increase of $ 35,694 (three months ended June 30, 2019 a decrease of $ 46,056 ), which included contractual interest of $ 6,444 (three months ended June 30, 2019, interest of $ 6,444 ). Refer to Note 22 for additional details on how the fair value of the notes is calculated.
Transferred receivables
The carrying amount of the transferred receivables include receivables which are subject to a factoring arrangement. Under this agreement, C 3 Cannabinoid Compound Company (“C 3 ”) has transferred the relevant receivables to PB Factoring GmbH in exchange for cash. The transferred receivables to PB Factoring GmbH are $ 4,342 and the associated secured borrowing is $ 4,439 .
Other revolving debt facility, loans, and financings
On August 13, 2019, the Company, through its wholly owned subsidiary, Tweed Farms Inc., entered into a $ 40,000 revolving debt facility with Farm Credit Canada (“FCC”). The new facility replaces the previous loans with FCC and is secured by the Company’s property in Niagara-on-the-Lake. The extinguishment of $ 4,912 in previous FCC debt resulted in no gain or loss.
The current outstanding balance of the FCC debt facility is $ 5,268 with an interest rate of 3.45 %, or FCC prime rate plus 1.0 % , and matures on September 3, 2024 .
The revolving debt facility with FCC is secured by a first charge on the properties in Niagara-on-the-Lake, Ontario, a corporate guarantee from the Company, and a general corporate security agreement .
16. OTHER LIABILITIES
The components of other liabilities are as follows:
As at June 30, 2020
As at March 31, 2020
Current
Long-term
Total
Current
Long-term
Total
Acquisition consideration
related liabilities
$
52,318
$
13,749
$
66,067
$
104,028
$
9,791
$
113,819
Lease liabilities
38,308
97,010
135,318
40,356
120,047
160,403
Minimum royalty obligations
11,437
49,043
60,480
9,368
50,445
59,813
Refund liability
8,433
-
8,433
17,586
-
17,586
Settlement liability
1,411
6,636
8,047
33,162
7,932
41,094
Other
12,850
1,801
14,651
11,309
2,445
13,754
$
124,757
$
168,239
$
292,996
$
215,809
$
190,660
$
406,469
13
17. REDEEMABLE NONCONTROLLING INTEREST
The net changes in the redeemable noncontrolling interests are as follows:
Vert
Mirabel
BioSteel
Total
As at March 31, 2020
$
20,250
$
49,500
$
69,750
Loss attributable to noncontrolling interest
( 9,253
)
( 1,410
)
( 10,663
)
Adjustments to redemption amount
18,803
3,710
22,513
As at June 30, 2020
$
29,800
$
51,800
$
81,600
Vert
Mirabel
As at March 31, 2019
$
6,400
Income attributable to noncontrolling interest
2,715
Adjustments to redemption amount
( 615
)
As at June 30, 2019
$
8,500
18. SHARE CAPITAL
CANOPY GROWTH
Authorized
An unlimited number of common shares.
(i) Equity financings
There were no equity financings during the three months ended June 30, 2020 (June 30, 2019 - no ne).
(ii) Other issuances of common shares
During the three months ended June 30, 2020, the Company issued the following shares, net of share issuance costs, as a result of business combinations, milestones being met, and other equity-settled transactions:
Number of shares
Share
capital
Share
based
reserve
Completion of acquisition milestones
751,922
$
12,079
$
( 12,079
)
Other issuances
412,417
14,135
( 14,719
)
Total
1,164,339
$
26,214
$
( 26,798
)
During the three months ended June 30, 2019, the Company issued the following shares, net of share issuance costs, as a result of business combinations, milestones being met, and other equity-settled transactions:
Number of shares
Share
capital
Share
based
reserve
Completion of acquisition milestones
482,321
$
18,674
$
( 18,674
)
Other issuances
-
( 74
)
-
Total
482,321
$
18,600
$
( 18,674
)
(iii) Warrants
Number of
whole
warrants
Average
exercise
price
Warrant
value
Balance outstanding at March 31, 2020 1
146,299,443
$
52.44
$
2,638,951
Exercise of warrants
( 18,876,901
)
12.98
( 70,266
)
Balance outstanding at June 30, 2020 1
127,422,542
$
58.29
$
2,568,685
1 This balance excludes the Tranche C Warrants, which represent a derivative liability and have nominal value, see note 26.
14
Number of
whole
warrants
Average
exercise
price
Warrant
value
Balance outstanding at March 31, 2019
107,848,322
$
43.80
$
1,589,925
Tranche A warrant modification
-
-
1,049,153
Issuance of Tranche B warrants
38,454,444
76.68
-
Exercise of warrants
( 12,060
)
35.36
( 470
)
Balance outstanding at June 30, 2019 1
146,290,706
$
52.44
$
2,638,608
1 This balance excludes the Tranche C Warrants, which represent a derivative liability and have nominal value, see note 26.
CANOPY RIVERS
Authorized capital
Canopy Rivers Inc. (“Canopy Rivers”) is authorized to issue an unlimited number of Class A common shares designated as subordinated voting shares (the “Subordinated Voting Shares”) and unlimited number of Class B common shares designated as multiple voting shares (the “Multiple Voting Shares”). Each Subordinated Voting Share carries the right to one vote per share and each Multiple Voting Share carries the right to 20 votes per share at all meetings of the shareholders of Canopy Rivers. 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 Canopy Rivers.
Issued and outstanding
As at June 30, 2020, Canopy Rivers had 36,468,318 Multiple Voting Shares (March 31, 2020 – 36,468,318 ) and 153,500,256 Subordinated Voting Shares (March 31, 2020 – 152,837,131 ) issued and outstanding. As at June 30, 2020, the Company held 36,468,318 Multiple Voting Shares (March 31, 2020 – 36,468,318 ) and 15,223,938 Subordinated Voting shares (March 31, 2020 – 15,223,938 ) which represented a 27.2 % ownership interest in Canopy Rivers and 84.3 % of the voting rights (March 31, 2020 – 27.3 % and 84.4 % 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.
Financings
There were no financings during the three months ended June 30, 2020, other than the release of shares related to share purchase financing as noted below.
Initial financing
10,066,668 Subordinated Voting Shares were acquired by certain employees of the Company and another individual by way of share purchase loans, whereby funds were advanced to Canopy Rivers by the Company on behalf of such individuals. These Subordinated Voting Shares 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, 2020, share purchase loans in the amount of $ 32 (three months ended June 30, 2019 – $ 19 ) 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 638,891 Subordinated Voting Shares (three months ended June 30, 2019 – 377,775 ). As at June 30, 2020, there were 2,166,669 seed capital options outstanding (March 31, 2020 – 2,805,560 ). Please refer to Note 19 for additional details on the seed capital options
Share buyback
On April 2, 2020, Canopy Rivers received approval from the Toronto Stock Exchange (“TSX”) to commence a normal course issuer bid (“NCIB”) to purchase up to 10,409,961 Subordinated Voting Shares, representing 10 % of Canopy Rivers’ issued and outstanding Subordinated Voting Shares, in the open market or as otherwise permitted by the TSX, subject to the normal terms and limitations of such bids. The NCIB will expire on April 1, 2021 .
Daily purchases are limited to 70,653 Subordinating Voting Shares, representing 25 % of the average daily trading volume on the TSX over a specified period. The NCIB may be utilized at the sole discretion of Canopy Rivers, with no contractual obligation to purchase any specified number of shares. All Subordinated Voting Share purchases made by Canopy Rivers under the NCIB will be funded out of Canopy Rivers’ working capital and will be cancelled immediately.
During the three months ended June 30, 2020, Canopy Rivers repurchased and cancelled a total of 109,100 Subordinated Voting Shares under the NCIB program for $ 125 , at a weighted average acquisition price of $ 1.14 per share (three months ended June 30, 2019 – not applicable).
15
19. SHARE-BASED COMPENSATION
CANOPY GROWTH CORPORATION SHARE-BASED COMPENSATION PLAN
Canopy Growth's eligible employees participate in a share-based compensation plan as noted below.
On September 15, 2017, shareholders approved an Omnibus Incentive Plan (as amended and restated, the “Omnibus Plan”) pursuant to which the Company can issue share-based long-term incentives. On July 30, 2018, shareholders of the Company approved certain amendments to the Omnibus Plan in order to increase the maximum number of shares issuable under the Omnibus Plan. All directors, officers, employees and independent contractors of the Company are eligible to receive awards of common share purchase options (“Options”), restricted share units (“RSUs”), performance share units (“PSUs”), deferred share units, stock appreciation rights (“Stock Appreciation Rights”), performance awards (“Performance Awards”) or other stock based awards (collectively, the “Awards”) under the Omnibus Plan. In addition, shareholders also approved the 2017 Employee Stock Purchase Plan of the Company (the “Purchase Plan”).
Under the Omnibus Plan, the maximum number of shares issuable from treasury pursuant to 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 Awards is 55,629,846 at June 30, 2020. As of June 30, 2020, the only Awards issued have been Options, RSUs and PSUs under the Omnibus Plan.
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 become exercisable in increments with 1/3 being exercisable on each of the first, second and third anniversaries from the date of grant, with expiry dates set at six years from issuance. The Board of Directors of the Company has the discretion to amend general vesting provisions and the term of any award, subject to limits contained in the Omnibus Plan.
Under the 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 . As of June 30, 2020, no common shares have been issued under the Purchase Plan.
The following is a summary of the changes in the Options outstanding under the Omnibus Plan during the three months ended June 30, 2020:
Options
issued
Weighted
average
exercise price
Balance outstanding at March 31, 2020
32,508,395
$
34.89
Options granted
155,800
22.20
Options exercised
( 711,472
)
6.64
Options forfeited/cancelled
( 3,060,675
)
39.37
Balance outstanding at June 30, 2020
28,892,048
$
35.04
The following is a summary of the Options as at June 30, 2020:
Options Outstanding
Options Exercisable
Range of Exercise Prices
Outstanding at
June 30, 2020
Weighted Average
Remaining
Contractual Life
(years)
Exercisable at
June 30, 2020
Weighted Average
Remaining
Contractual Life
(years)
$0.06 - $24.62
5,494,833
3.37
3,415,917
2.74
$24.63 - $35.00
5,944,019
4.65
1,618,363
3.65
$35.01 - $36.80
5,941,004
4.33
2,589,127
4.12
$36.81 - $42.84
5,224,455
4.22
2,424,909
4.00
$42.85 - $67.64
6,287,737
4.65
1,511,022
4.44
28,892,048
4.26
11,559,338
3.67
At June 30, 2020, the weighted average exercise price of Options outstanding and Options exercisable was $ 35.04 and $ 31.60 , respectively (March 31, 2020 – $ 34.89 and $ 31.84 , respectively).
The Company recorded $ 22,328 in share-based compensation expense related to Options issued to employees and contractors for the three months ended June 30, 2020 (three months ended June 30, 2019 – $ 73,093 ). The share-based compensation expense for the three months ended June 30, 2020 includes an amount related to 2,060,068 Options being provided in exchange for services which are subject to performance conditions (for the three months ended June 30, 2019 – 595,000 ).
16
The Company uses the Black-Scholes option pricing model to establish the fair value of Options granted during the three months ended June 30, 2020 and 2019, on their measurement date by applying the following assumptions:
June 30,
June 30,
2020
2019
Risk-free interest rate
0.33 %
1.41 %
Expected life of options (years)
3 - 5
3 - 5
Expected volatility
76 %
73 %
Expected forfeiture rate
16 %
11 %
Expected dividend yield
nil
nil
Black-Scholes value of each option
$ 12.31
$ 28.58
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 zero coupon Canada government bonds with a remaining term equal to the expected life of the Options.
During the three months ended June 30, 2020, 711,472 Options were exercised ranging in price from $ 1.32 to $ 27.99 for gross proceeds of $ 4,722 (for the three months ended June 30, 2019 – 1,713,592 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, 2020, the Company recorded $ 3,842 in share-based compensation expense related to these RSUs (for the three months ended June 30, 2019 – $ 1,394 ). The following is a summary of the changes in the Company’s RSUs during the three months ended June 30, 2020:
Number of RSUs
Balance outstanding at March 31, 2020
883,009
RSUs cancelled and forfeited
( 50,871
)
Balance outstanding at June 30, 2020
832,138
Share-based compensation expense related to acquisition milestones is comprised of:
Three months ended
June 30,
June 30,
2020
2019
Canindica
$
598
$
4,010
Spectrum Colombia
-
2,259
Other
2,372
4,012
$
2,970
$
10,281
During the three months ended June 30, 2020, 751,922 common shares (during the three months ended June 30, 2019 – 482,321 ) were released on completion of acquisition milestones. At June 30, 2020, there were up to 4,090,709 common shares to be issued on the completion of acquisition and asset purchase milestones. In certain cases, the number of common shares to be issued is based on the volume weighted average share price at the time the milestones are met. The number of common shares has been estimated assuming the milestones were met at June 30, 2020. The number of common shares excludes common shares that are to be issued on July 4, 2023 to the previous shareholders of Spectrum 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.
BioSteel share-based payments
On October 1, 2019, the Company purchased 72 % of the outstanding shares of BioSteel Sports Nutrition Inc. (“BioSteel”). BioSteel has a stock option plan under which non-transferable options to purchase common shares of BioSteel may be granted to directors, officers, employees, or independent contractors of the BioSteel. As at June 30, 2020, BioSteel had 1,014,000 (March 31, 2020 – 1,008,000 ) options outstanding which vest in equal tranches over a 5 -year period. In determining the amount of share-based compensation related to these options, BioSteel used the Black-Scholes option pricing model to establish the fair value of options on their measurement date. The Company recorded $ 244 (three months ended June 30, 2019 – $nil) of share-based compensation expense related to the BioSteel options during the three months ended June 30, 2020 with a corresponding increase in noncontrolling interest.
17
CANOPY RIVERS SHARE-BASED COMPENSATION PLAN
Seed Capital Options
On May 12, 2017, seed capital options were issued. These seed capital options consisted of 10,066,668 shares that were issued by way of share purchase loans. Since they were issued through loans, they are not considered issued for accounting purposes until the loan is repaid. The seed capital options were measured at fair value on May 12, 2017, using a Black-Scholes option pricing model and will be expensed over their vesting period. Where there are performance conditions in addition to service requirements Canopy Rivers has estimated the number of shares it expects to vest and is amortizing the expense over the expected vesting period.
Seed capital options issued
Seed capital loan balance
Balance outstanding at March 31, 2020
2,805,560
$
140
Options exercised
( 638,891
)
$
( 32
)
Balance outstanding at June 30, 2020
2,166,669
$
108
Canopy Rivers has a stock option plan (the “Option 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 Canopy Rivers. Pursuant to the Option 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 and Multiple Voting Shares, on an aggregate basis. The Option Plan is administered by the Board of Directors of Canopy Rivers who establishes exercise prices, at not less than the market price at the date of the grant, and expiry dates. Options under the Option Plan generally become 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 of Directors of Canopy Rivers has the discretion to amend general vesting provisions and the term of any option grant, subject to limits contained in the Option Plan. The seed capital options are not within the scope of the Option 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, 2020:
Options
issued
Weighted
average
exercise price
Balance outstanding at March 31, 2020
13,066,004
$
2.31
Options granted
-
-
Options exercised
( 100,000
)
0.60
Options expired
( 30,000
)
3.50
Options forfeited/cancelled
( 218,334
)
2.26
Balance outstanding at June 30, 2020
12,717,670
$
2.32
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, 2020 and 2019, on their measurement date by applying the following assumptions:
June 30,
June 30,
2020
2019
Risk-free interest rate
-
1.35 %
Expected life of options (years)
-
3 - 4
Expected volatility
-
70 %
Expected forfeiture rate
-
nil
Expected dividend yield
-
nil
Black-Scholes value of each option
-
$ 1.93
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, 2020, the Company recorded $ 1,184 (three months ended June 30, 2019 – $ 2,594 ) in share-based compensation expense related to these options and the seed capital options with a corresponding increase to noncontrolling interests.
18
In the three months ended June 30, 2020, Canopy Rivers granted $ 225 (three months ended June 30, 2019 – $nil) worth of RSUs which vest over a one-year period. For the three months ended June 30, 2020, the Company recorded $ 117 (three months ended June 30, 2019 – $nil) of share-based compensation expense related to these RSUs.
20. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income includes the following components:
Foreign currency translation adjustments
Changes of own credit risk of financial liabilities
Accumulated other comprehensive income (loss)
As at March 31, 2020
$
126,723
$
94,176
$
220,899
Other comprehensive loss
( 53,124
)
( 15,360
)
( 68,484
)
As at June 30, 2020
$
73,599
$
78,816
$
152,415
Foreign currency translation adjustments
Changes of own credit risk of financial liabilities
Accumulated other comprehensive income (loss)
As at March 31, 2019
$
41,225
$
( 47,130
)
$
( 5,905
)
Other comprehensive (loss) income
( 60,744
)
14,610
( 46,134
)
As at June 30, 2019
$
( 19,519
)
$
( 32,520
)
$
( 52,039
)
21. NONCONTROLLING INTERESTS
The net change in the noncontrolling interests is as follows:
Canopy
Rivers
Vert
Mirabel
BioSteel
Other non-
material
interests
Total
As at March 31, 2020
$
211,086
$
7,132
$
489
$
3,051
$
221,758
Comprehensive loss
( 3,883
)
( 14,528
)
( 1,410
)
-
( 19,821
)
Net loss attributable to redeemable
noncontrolling interest
-
9,253
1,410
-
10,663
Share-based compensation
1,301
-
244
-
1,545
Ownership changes
852
-
-
-
852
Warrants
250
-
-
-
250
As at June 30, 2020
$
209,606
$
1,857
$
733
$
3,051
$
215,247
Canopy
Rivers
Vert
Mirabel
Other non-
material
interests
Total
As at March 31, 2019
$
280,012
$
2,422
$
3,051
$
285,485
Comprehensive (loss) income
( 12,431
)
4,249
-
( 8,182
)
Net income attributable to redeemable
noncontrolling interest
-
( 2,715
)
-
( 2,715
)
Share-based compensation
2,594
-
-
2,594
Ownership changes
236
-
-
236
As at June 30, 2019
$
270,411
$
3,956
$
3,051
$
277,418
19
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value measurements are made using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value:
•
Level 1 – defined as observable inputs such as quoted prices in active markets;
•
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
•
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The fair value measurement is categorized in its entirety by reference to its lowest level of significant input.
The Company records cash, accounts receivable, interest receivable and, accounts payable, and other accrued expenses and liabilities at cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis may include items such as property, plant and equipment, goodwill and other intangible assets, equity and other investments and other assets. We determine the fair value of these items using Level 3 inputs, as described in the related sections below.
The following table represents our financial assets and liabilities measured at estimated fair value on a recurring basis:
Fair value measurement using
Quoted prices
Significant
prices in
other
Significant
active
observable
unobservable
markets
inputs
inputs
(Level 1)
(Level 2)
(Level 3)
Total
June 30, 2020
Assets:
Short-term investments
$
1,060,901
$
-
$
-
$
1,060,901
Restricted short-term investments
16,436
-
-
16,436
Other financial assets
1,602
55
217,257
218,914
Liabilities:
Convertible senior notes
-
485,898
-
485,898
Liability arising from Acreage Arrangement
-
-
285,000
285,000
Warrant derivative liability
-
-
287,122
287,122
March 31, 2020
Assets:
Short-term investments
$
673,323
$
-
$
-
$
673,323
Restricted short-term investments
21,539
-
-
21,539
Other financial assets
2,596
36
192,473
195,105
Liabilities:
Convertible senior notes
-
450,204
-
450,204
Liability arising from Acreage Arrangement
-
-
250,000
250,000
Warrant derivative liability
-
-
322,491
322,491
The following table summarizes the valuation techniques and significant unobservable inputs in the fair value measurement of significant level 2 financial instruments:
Financial asset / financial liability
Valuation techniques
Key inputs
Convertible senior note
Convertible note pricing model
Quoted prices in over-the-counter broker market
20
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 financial instrument
Probability weighted expected return model
Probability of each scenario
Change in probability of occurrence in each scenario will result in a change in fair value
Value and number of common shares to be issued
Increase or decrease in value and number of common shares will result in a decrease or increase 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
Estimated premium on US legalization
Increase or decrease in estimated premium on US legalization will result in an increase or decrease in fair value
Control premium
Increase or decrease in estimated control premium will result in an increase or decrease in fair value
Synergy value to Canopy Growth
Increase or decrease in estimated synergy value to Canopy Growth 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
TerrAscend warrants
Monte Carlo simulation 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
TerrAscend Canada term loan
Discounted cash flow
Probability and timing of US legalization
Increase or decrease in probability of US legalization 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
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 or decrease in future royalties to be paid will result in an increase or decrease in fair value
Warrant derivative liability
Monte Carlo simulation model
Volatility of common share price
Increase or decrease in volatility will result in an increase or decrease in fair value
Expected life
Increase or decrease in expected life will result in an increase or decrease in fair value
BioSteel redeemable noncontrolling interest
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 or decrease in future wholesale price and production levels will result in an increase or decrease in fair value
Vert Mirabel redeemable noncontrolling interest
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 or decrease in future wholesale price and production levels will result in an increase or decrease in fair value
21
During the three months ended June 30, 2020 and June 30, 2019, there were no transfers of amounts between levels .
23. REVENUE
Revenue is dissaggregated as follows:
Three months ended
June 30,
June 30,
2020
2019
Recreational cannabis revenue
Business to business
$
42,180
$
50,425
Business to consumer
9,330
10,638
Medical cannabis revenue
Canadian
15,336
13,051
International
20,191
10,496
Other revenue
32,051
18,781
Gross revenue
119,088
103,391
Excise taxes
8,672
12,909
Net revenue
$
110,416
$
90,482
The Company recognizes variable consideration related to estimated future product returns and price adjustments as a reduction of the transaction price at the time revenue for the corresponding product sale is recognized. Net revenue reflects actual returns and variable consideration related to estimated returns and price adjustments in the amount of $ 3,400 for the three months ended June 30, 2020 (three months ended June 30, 2019 – $ 8,000 ). As of June 30, 2020, the liability for estimated returns and price adjustments was $ 8,433 (March 31, 2020 – $ 17,586 ).
24. OTHER INCOME (EXPENSE), NET
Other income (expense), net is dissaggregated as follows:
Three months ended
June 30,
June 30,
2020
2019
Fair value changes on other financial assets
$
21,807
$
( 41,087
)
Fair value changes on liability arising from Acreage Arrangement
( 35,000
)
-
Fair value changes on convertible senior notes
( 20,334
)
31,446
Fair value change on warrant derivative liability
35,369
24,892
Fair value changes on acquisition related contingent consideration
39,983
( 1,570
)
Interest income
8,993
22,718
Interest expense
( 1,155
)
( 1,206
)
Foreign currency loss
( 5,959
)
( 2,856
)
Other income, net
4,501
431
$
48,205
$
32,768
25. 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, 2020.
The Company is subject to income tax in numerous jurisdictions with varying income tax rates. During the most recent period ended and the fiscal year to date, there were no material changes to the statutory income 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. Although statutory income tax rates remain stable, the Company’s effective income tax rate may fluctuate, arising as a result of the Company’s evolving footprint, discrete transactions and other factors that, to the extent material, are disclosed in these financial statements.
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.
22
26. ACREAGE ARRANGEMENT AND AMENDMENTS TO CBI INVESTOR RIGHTS AGREEMENT AND WARRANTS
Acreage Arrangement
On June 24, 2020 the Company and Acreage Holdings, Inc. (“Acreage”) entered into a proposal agreement (the “Proposal Agreement”) to amend the terms of the arrangement (the “Existing Arrangement”) made pursuant to an arrangement agreement (the “Arrangement Agreement”) between the Company and Acreage dated April 18, 2019, as amended on May 15, 2019. Pursuant to the terms of the Existing Arrangement, shareholders of Acreage and holders of certain securities convertible into Existing SVS (as defined below) as of June 26, 2019, received an immediate aggregate total payment of US$ 300,000 ($ 395,190 ) in exchange for granting Canopy Growth both the right and the obligation (the “Acreage financial instrument”) to acquire all of the issued and outstanding shares of Acreage following the occurrence or waiver of changes in U.S. 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”) and subject to the satisfaction or waiver of the conditions set out in the Arrangement Agreement.
Pursuant to the terms of the Proposal Agreement, the Existing Arrangement will be amended (the “Amended Arrangement”) to provide for, among other things, the following:
•
a capital reorganization of Acreage (the “Capital Reorganization”), pursuant to which Acreage will amend its Notice of Articles and Articles to, among other things, create the Fixed Shares (as defined below), the Floating Shares (as defined below) and the Fixed Multiple Shares (as defined below) and remove the existing Acreage subordinated voting shares (the “Existing SVS”), the existing Acreage proportionate voting shares (the “Existing PVS”) and the existing Acreage multiple voting shares (the “Existing MVS”). Pursuant to the Capital Reorganization (i) each outstanding Existing SVS will be exchanged for 0.7 of a Fixed Share and 0.3 of a Floating Share; (ii) each outstanding Existing PVS will be exchanged for 28 Fixed Shares and 12 Floating Shares; and (iii) each outstanding Existing MVS will be exchanged for 0.7 of a Fixed Multiple Share and 0.3 of a Floating Share;
•
The new Class E subordinated voting shares (the “Fixed Shares”) will have the same attributes as the Existing SVS and will be listed on the Canadian Securities Exchange (the “CSE”). Following the occurrence or waiver (at the discretion of Canopy Growth) of the Triggering Event and subject to the satisfaction or waiver of the conditions set out in the Arrangement Agreement (as modified in connection with the Amended Arrangement), Canopy Growth will acquire all of the issued and outstanding Fixed Shares based on an amended exchange ratio equal to 0.3048 of a common share to be received for each Fixed Share held (reduced from 0.5818 per Existing SVS pursuant to the Existing Agreement). The foregoing exchange ratio for the Fixed Shares is subject to adjustment in accordance with the Amended Arrangement if, among other things, Acreage issues greater than the permitted number of Fixed Shares;
•
The new Class D subordinated voting shares (the “Floating Shares”) will be listed on the CSE. Upon the occurrence or waiver (at the discretion of Canopy Growth) of the Triggering Event, Canopy Growth will have the right exercisable for a period of 30 days, to acquire all of the issued and outstanding Floating Shares for cash or common shares or a combination thereof, in Canopy Growth’s sole discretion at a price equal to the 30-day volume weighted average trading price of the Floating Shares on the CSE, subject to a minimum call price of US$ 6.41 per Floating Share. The foregoing exchange ratio for the Floating Shares is subject to adjustment in accordance with the Amended Arrangement if Acreage issues greater than the permitted number of Floating Shares. The acquisition of the Floating Shares, if acquired, will take place concurrently with the closing of the acquisition of the Fixed Shares;
•
The new Class F multiple voting shares (the “Fixed Multiple Shares”) will have the same attributes as the Existing MVS, provided that each Fixed Multiple Share will entitle the holder thereof to 4,300 votes per share at shareholder meetings of Acreage. Immediately prior to the acquisition of the Fixed Shares, each issued and outstanding Fixed Multiple Share will automatically be exchanges for one Fixed Share and thereafter be acquired by Canopy Growth upon the same terms and conditions as the acquisition of the Fixed Shares;
•
If the occurrence or waiver of the Triggering Event does not occur within 10 years from the date the Amended Arrangement is implemented, Canopy Growth’s rights to acquire both the Fixed Shares and the Floating Shares will terminate;
•
Upon implementation of the Amended Arrangement, Canopy Growth will make a cash payment to the shareholders of Acreage and holders of certain securities convertible into Existing SVS in the aggregate amount of US$ 37,500 ; and
•
Acreage is only permitted to issue an aggregate of up to 32,700,000 Fixed Shares and Floating Shares following the implementation of the Amended Arrangement .
Canopy Growth has also agreed to loan a wholly-owned subsidiary of Acreage (“Acreage Hempco”) up to US$ 100,000 pursuant to a secured debenture, of which US$ 50,000 will be subject to the satisfaction of certain conditions by Acreage Hempco. The secured debenture will bear interest at a rate of 6.1 % per annum, and mature 10 years from the date the Amended Arrangement is implemented or such earlier date in accordance with the terms of the secured debenture. As at June 30, 2020, no amounts have been loaned to Acreage Hempco.
23
Implementation of the Amended Arrangement is contingent upon obtaining the requisite prior approvals of the shareholders of Acreage and the Supreme Court of British Columbia and certain other closing conditions.
At June 30, 2020, the Acreage financial instrument represents a financial liability of $ 285,000 (March 31, 2020 – $ 250,000 ), as the estimated fair value of the Acreage business is less than the estimated fair value of the consideration to be provided upon the exercise of the Acreage financial instrument. Fair value changes of $ 35,000 (three months ended June 30, 2019 – $nil) were recognized in other income (expense), net in the three months ended June 30, 2020 (see Note 24). The fair value determination includes a high degree of subjectivity and judgment, which results in significant estimation uncertainty. See Note 22 for additional details on how the fair value of the Acreage financial instrument is calculated on a recurring basis. From a measurement perspective, Canopy Growth has elected the fair value option under ASC 825 – Financial Instruments .
Amendment to the CBI Investor Rights Agreement and warrants
On April 18, 2019, certain wholly-owned subsidiaries of CBI and Canopy Growth entered into a second amended and restated investor rights agreement and a consent agreement. In connection with these agreements, on June 27, 2019 Canopy Growth (i) extended the term of the first tranche of warrants, which allow CBI to acquire 88.5 million additional shares of Canopy Growth for a fixed price of $ 50.40 per share (the “Tranche A Warrants”), to November 1, 2023 ; and (ii) replaced the second tranche of warrants with two new tranches of warrants (the “Tranche B Warrants” and the “Tranche C Warrants”) as follows:
•
the Tranche B Warrants are exercisable to acquire 38.5 million common shares at a price of C$ 76.68 per common share; and
•
the Tranche C Warrants are exercisable to acquire 12.8 million common shares at a price equal to the 5-day volume-weighted average price of the common shares immediately prior to exercise.
In connection with the Tranche B Warrants and the Tranche C Warrants, Canopy Growth will provide CBI 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 purchase for cancellation 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 April 18, 2019 and ending on the date that is 24 months after the date that CBI exercises all of the Tranche A Warrants. The share repurchase credit feature is accounted for as a derivative liability, with the fair value continuing to be $nil at June 30, 2020.
The modifications to the Tranche A Warrants resulted in them meeting the definition of a derivative instrument under ASC 815 - Derivatives and Hedging (“ASC 815”). They continue to be classified in equity as the number of shares and exercise price were both fixed at inception.
The Tranche B Warrants are accounted for as derivative instruments measured at fair value in accordance with ASC 815. At June 30, 2020, the fair value of the warrant derivative liability is $ 287,122 , and a gain of $ 35,369 (three months ended June 30, 2019 – gain of $ 24,892 ) has been recognized in other income (expense), net in the three months ended June 30, 2020 (see Note 24). The fair value determination includes a high degree of subjectivity and judgment, which results in significant estimation uncertainty. See Note 22 for additional details on how the fair value of the warrant derivative liability is calculated on a recurring basis.
The Tranche C Warrants are accounted for as derivative instruments, with the fair value continuing to be $nil at June 30, 2020.
27. SEGMENT INFORMATION
Reportable segments
The Company operates in two segments: 1) Cannabis, Hemp and Other Consumer Products, which encompasses the production, distribution and sale of a diverse range of cannabis, hemp-based, and other consumer products in Canada and internationally pursuant to applicable international and domestic legislation, regulations and permits; and 2) Canopy Rivers, a publicly-traded company in Canada, 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 the table below, and in Note 21.
June 30,
2020
March 31,
2020
Ownership interest
27
%
27
%
Cash and cash equivalents
$
43,915
$
46,724
Prepaid expenses and other current assets
11,815
11,598
Investments in associates
46,291
50,543
Other financial assets
150,134
146,812
Other long-term assets
22,776
22,058
Other liabilities
( 2,737
)
( 2,771
)
Noncontrolling interests
( 209,606
)
( 211,086
)
Equity attributable to Canopy Growth
$
62,588
$
63,878
24
Entity-wide disclosures
All property, plant and equipment are located in Canada, except for $ 487,834 which is located outside of Canada as at June 30, 2020 (March 31, 2020 – $ 499,059 ).
All revenues were principally generated in Canada during the three months ended June 30, 2020, except for $ 44,699 related to exported medical cannabis and cannabis related merchandise generated outside of Canada (three months ended June 30, 2019 – $ 22,541 ).
For the three months ended June 30, 2020, one customer represented more than 10% of the Company’s net revenue (three months ended June 30, 2019 – one ).
25
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.