Mr. David Klein reports

CANOPY GROWTH REPORTS SECOND QUARTER FISCAL 2022 FINANCIAL RESULTS

Canopy Growth Corp. today announces its financial results for the second quarter fiscal 2022 ended Sept. 30, 2021. All financial information in this press release is reported in Canadian dollars, unless otherwise indicated.

Highlights:

• Announced plan to acquire the No. 1 edibles company in North America, Wana Brands, upon United States THC (tetrahydrocannabinol) permissibility further strengthening U.S. ecosystem;
• Delivered a robust innovative new product pipeline with over 40 new stock-keeping units launching globally during Q2 FY2022;
• Launched whisl, an innovative CBD (cannabidiol) vape designed for mood management, through an exclusive partnership with Circle K in the U.S.;
• Net revenue declined by 3 per cent in Q2 FY2022 versus Q2 FY2021. Maintained market leadership position in premium flower category and increased market share in vapes and edibles during Q2 FY2022 across tracked Canadian recreational cannabis market;
• Pushing out positive adjusted earnings before interest, taxes, depreciation and amortization target due to Canada supply challenges and a delayed revenue ramp in the U.S.; taking a number of actions to improve Canadian performance and remain optimistic about the mid- to long-term outlook.

"In new industries where the potential is immense, progress is rarely a straight line. With a focused strategy, a foundation for growth and our burgeoning U.S. ecosystem, Canopy is uniquely positioned to win as the industry matures," stated David Klein, chief executive officer, Canopy Growth.

"Achieving profitability remains a top priority. We are focused on increasing market share in Canada, premiumizing our product mix and delivering on our cost savings commitment," stated Mike Lee, chief financial officer, Canopy Growth.

Second quarter fiscal 2022 financial summary

Revenues

Net revenue of $131-million in Q2 FY2022 was a decline of 3 per cent versus Q2 FY2021. Total net cannabis revenue of $95-million in Q2 FY2022, represented an increase of 1 per cent over Q2 FY2021. Excluding the impact from acquired businesses, net revenue declined 13 per cent and cannabis revenue declined 14 per cent versus Q2 FY2021.

Gross margin

Reported gross margin in Q2 FY2022 was (54 per cent) as compared with 19 per cent in Q2 FY2021. Excluding non-cash charges related to inventory write-downs and inventory step-up charges from acquisitions, as well as certain other non-recurring items including Canadian government payroll subsidies pursuant to a COVID-19 relief program, gross margin would have been approximately 12 per cent. Inventory write-downs in Q2 FY22 amounted to $87-million and primarily relate to excess Canadian cannabis inventory resulting from lower sales relative to forecast as well as declines in expected near-term demand. Gross margin in Q2 FY2022 was further impacted by lower production output and price compression in the Canadian recreational business as well as higher third party shipping, distribution and warehousing costs across North America.

Operating expenses

Total selling, general and administrative (SG&A) expenses in Q2 FY2022 declined by 15 per cent versus Q2 FY2021, driven by year-over-year reductions in general and administrative (G&A) and research and development (R&D) expenses partially offset by an increase in sales and marketing (S&M) expenses G&A expenses declined 49 per cent year-over-year primarily due to reductions in staffing and professional fees and benefit from payroll subsidies received from the Canadian government in Q2 FY2022, pursuant to a COVID-19 relief program. R&D expenses declined 38 per cent year-over-year principally due to project timing. S&M expenses increased 49 per cent year-over-year primarily due a return to more normal advertising and promotions spending in Q2 FY2022, compared with the prior year, higher sponsorship fees associated with BioSteel's partnership deals and increased advertising expenses associated with new product launches.

Net earnings

Net earnings in Q2 FY2022 amounted to a loss of $16-million, which is an $80-million improvement versus Q2 FY2021, driven primarily by other income totalling $196-million during Q2 FY2022 mostly attributable to non-cash fair value changes of $233-million.

Adjusted EBITDA

Adjusted EBITDA loss in Q2 FY2022 was $163-million, a $77-million wider loss versus Q2 FY2021 driven by lower sales, a decline in gross margins, partially offset by the reduction in our total selling, general and administrative expense. Adjusted EBITDA loss in Q2 FY2022, excluding non-cash inventory write-downs would have been a loss of $76-million.

Free cash flow

Free cash flow in q2 fy2022 was an outflow of $101-million, a 47-per-cent decrease in outflow versus Q2 FY2021. Relative to Q2 FY2021, the free cash flow outflow reduction reflects the decrease in cash used for operating activities and the lower purchases of property, plant and equipment.

Cash position

Cash and short-term investments amounted to $2-billion at Sept. 30, 2021, representing a decrease of $300-million from $2.3-billion at March 31, 2021, reflecting EBITDA losses and capital investments.

Outlook

Pushing out positive adjusted EBITDA target due to market share challenges in the Canadian recreational business and a slower-than-expected ramp-up of U.S. distribution for BioSteel:

• The company continues to expect revenue acceleration in the second half of FY2022 but the magnitude and pace of improvement is expected to be more modest than previously anticipated. The company is focused on stabilizing its market share of the Canadian recreational cannabis in the second half of FY2022. Distribution expansion of BioSteel is expected to accelerate in the second half of FY2022 but shipments may depend on timing of chain authorizations and associated shelf resets;
• The company is taking steps to improve its Canadian recreational business, with increased supply of in-demand high THC flower products and new product launches across flower, preroll joints, vapes, edibles and beverages expected to improve market share. Additionally, the company recently implemented a portfolio optimization strategy that is designed to improve distribution of high-velocity and high-margin products while reducing supply chain complexity and improving service levels on priority SKUs. The portfolio optimization work, along with increased sales, is expected to lead to improved gross margin in the Canadian operations;
• The company remains optimistic about its growth opportunities in the U.S. for both its BioSteel ready-to-drink (RTD) beverages and its portfolio of CBD brands. Brand awareness continues to rise, velocity is tracking in line with expectations and feedback from distributors and retailers has been positive. BioSteel is expected to see its distribution ramp up over the balance of FY2022 and into FY2023 driven by increased listings with national and regional chain accounts;
• Implementation of the previously announced cost savings program is well under way, with the company having realized $70-million, including $32-million in Q2 FY2022, of the $150-million to $200-million in cost savings expected by the end of the first half of FY2023. The company is taking steps to reduce/delay discretionary spending and further tighten G&A expenses, an effort that is also expected to contribute to the company achieving positive adjusted EBITDA;
• Further mitigating impact to free cash flow through a reduced capex (capital expenditure) plan, with FY2022 capex now expected to be in the range of $100-million to $150-million.

Second quarter fiscal 2022 business highlights

Amid a highly competitive Canadian recreational market, increased market share in vapes and edibles and maintained market leadership in premium flower category:

• In Q2 FY2022, increased vape market share by 20 basis points (bps) to 8.5 per cent and increased edibles market share by 50 bps to 8.7 per cent, from Q1 FY2022;
• Maintained No. 1 market share in premium flower category in Q2 FY2022 with 13.2 per cent, down 310 bps quarter-over-quarter, No. 2 market share in the value flower category in Q2 FY2022 with 18.1 per cent, down 540 bps sequentially;
• Market share softness across flower categories was driven by insufficient supply of flower with in-demand attributes, including higher THC, in the premium and mainstream categories as well as heightened competition focused on single strain offerings in the value flower category;
• Flower products with in-demand attributes, including higher THC, have begun coming to market, with supply expected to build over 2H FY2022.

U.S. business continues to gain momentum, distribution expected to ramp into spring CY2022:

• BioSteel RTD beverages continued to build distribution throughout Q2 FY2022, with all commodity volume (ACV) increasing to 6.5 per cent in the latest 13-weeks ending Oct. 3, 2021, in IRI. BioSteel has recently secured new distribution with a number of key retailers, and active discussions under way with additional national and regional chain retailers;
• Martha Stewart CBD remains one of the fastest growing CBD brand across all formats and is now the No. 3 brand among all CBD gummies in the food, drug and convenience-store channel with 12.4 per cent market share, according to IRI data for the four weeks ended Oct. 3, 2021. A range of new Martha Stewart CBD confectionary products has shipped in the current quarter;
• Subsequent to quarter end, Canopy announced an agreement to acquire, upon federal permissibility of THC, Wana Brands, the No. 1 cannabis edibles brand in North America. Wana's leadership position and continuing expansion across the U.S. bolsters Canopy Growth's product, brand and geographic exposure to the U.S. cannabis market upon federal permissibility;

Over 40 new SKUs shipped in Q2 FY2022 including new innovative cannabis-based mood management vape

In flower:

• Launched a range of premium flower SKUs in Q2 FY2022 including new Doja Okanagan Grown Ultra Sour and Cold Creek Kush, as well as Doja Craft limited time offerings including Cali Kush Cake and GMO Garlic Breath;
• Launched small format prerolled joints in Q2 FY2022 -- Tweed Quickies, in Green Kush and Afghan Kush, and Ace Valley Pinners, in Kosher Kush, OG Mellon and Great White Shark -- the first CBD-dominant preroll in the category;
• The company expects to bring additional flower and preroll products to market over the coming months including new strains across all categories with Doja 91K, Tweed Powdered Donuts, Twd. Garlic Jelly flower shipped in the current quarter.

In vapes:

• The company launched the new nicotine-free, whisl CBD vaporizer in the U.S. in Q2 FY2022. whisl brings cannabis-based mood management to vapes, offering three uniquely formulated options to help consumers dial in to their desired effect -- focus, calm or winding down. whisl is available on the Canopy on-line store and in over 3,500 Circle K stores across the U.S. currently. whisl is already the No. 3 CBD vape in the U.S. per IRI data for the four weeks ended Oct. 3, 2021;
• Storz & Bickel released three new vaporizer updates in Q2 FY2022 including the limited-edition Volcano Onyx and the Mighty+ vaporizer featuring a fast-charging USB-C socket, preset Superbooster temperature and 60-second rapid heat up time. The company is scheduled to ship premium 7Acres live-resin dab-friendly concentrates in the coming months.

In beverages:

• The company further expanded its beverage portfolio with Tweed Iced Tea (available in lemon and raspberry flavours, both with five milligrams THC) entering the market in Q1 FY2022 and new Tweed Fizz seltzers (available in watermelon and mango flavours, both with five mg THC) entering the market in Q2 FY2022;
• The company has expanded the popular Deep Space brand having shipped Deep Space Limon Splashdown in the current quarter.

In edibles:

• In Q2 FY2022, the company launched Ace Valley Dream CBN (cannabinol) gummies containing the minor cannabinoid CBN which lends itself to sleep. The company also launched Ace Valley Super CBD gummies in Q2 FY2022;
• The company has extended the popular Deep Space brand into the edibles category with shipments of its new Deep Space XPress gummies beginning in Q3 FY2022. The Deep Space XPress gummy contains the maximum allowable 10 mg THC per gummy and are available in the original Deep Space Cola and new Limon Splashdown flavours. In addition, new Tweed XPress gummies will begin to ship in Q3 FY2022;
• Also in Q3 FY2022, the company has begun shipping new Martha Stewart Harvest Medley CBD Wellness Gummies, mini CBD peppermint ribbons and the Snowflake CBD gummy sampler.

Second quarter fiscal 2022 revenue review

Canadian cannabis:

• Recreational business-to-business net sales in Q2 FY2022 decreased 1 per cent over prior year period primarily due to insufficient supply of flower products with in-demand attributes and continued price compression, particularly in the value-priced dried flower category. These factors were largely offset by contribution from the acquisitions of Ace Valley and Supreme Cannabis;
• Recreational business-to-consumer net sales in Q2 FY2022 decreased 11 per cent versus Q2 FY2021 largely driven by the rapid increase in third party retail locations across provinces;
• Medical net revenue in Q2 FY2022 decreased 6 per cent from Q2 FY2021 driven primarily by higher average order sizes offset by a fewer number of orders.

International cannabis:

• C3 revenue in Q2 FY2022 decreased 13 per cent year-over-year as a result of increased competition as well as the negative impact of the exchange rate, as the Canadian dollar has strengthened against the Euro compared with a year ago;
• Other revenue in Q2 FY2022 increased 98 per cent over the prior year period primarily due to growth in U.S. CBD sales.

Other consumer products:

• S&B vaporizer revenue in Q2 FY2022 decreased 34 per cent over Q2 FY2021 in part due to a strong comparison during the year-ago period, as well as shipping restrictions and production shortages caused by global supply chain difficulties;
• This Works sales in Q2 FY2022 increased 17 per cent over Q2 FY2021, driven by Amazon and third party e-commerce sales;
• BioSteel sales in Q2 FY2022 increased 47 per cent over Q2 FY2021 driven by the launch of RTD beverages and expanded distribution in the U.S. market.

The second quarter fiscal 2022 and second quarter fiscal 2021 financial results presented in this press release have been prepared in accordance with U.S. generally accepted accounting principles.

Webcast and conference call information

The company will host a conference call and audio webcast with Mr. Klein, CEO, and Mr. Lee, CFO, at 10 a.m. Eastern Time on Nov. 5, 2021.

Webcast information

A live audio webcast will be available on-line.

Replay information

A replay will be accessible by webcast until 11:59 p.m. ET on Feb. 3, 2022.

About Canopy Growth Corp.

Canopy Growth is a world-leading diversified cannabis and cannabinoid-based consumer product company, driven by a passion to improve lives, end prohibition and strengthen communities by unleashing the full potential of cannabis. Leveraging consumer insights and innovation, the company offers product varieties in high-quality dried flower, oil, softgel capsule, infused beverage, edible and topical formats, as well as vaporizer devices by Canopy Growth and industry-leader Storz & Bickel. Its global medical brand, Spectrum Therapeutics, sells a range of full-spectrum products using its colour-coded classification system and is a market leader in both Canada and Germany. Through its award-winning Tweed and Tokyo Smoke banners, it reaches its adult-use consumers and has built a loyal following by focusing on top-quality products and meaningful customer relationships. Canopy Growth has entered into the health and wellness consumer space in key markets including Canada, the United States and Europe through BioSteel sports nutrition, and This Works skin and sleep solutions; and has introduced additional federally permissible CBD products to the United States through its First & Free and Martha Stewart CBD brands. Canopy Growth has an established partnership with Fortune 500 alcohol leader Constellation Brands.

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