Mr. David Klein reports

CANOPY GROWTH CORPORATION REPORTS SECOND QUARTER FISCAL YEAR 2023 FINANCIAL RESULTS

Canopy Growth Corp. has released its financial results for the second quarter ended Sept. 30, 2022.

Highlights:

• Announced comprehensive plan to fast-track entry into the United States cannabis market through the creation of a new U.S.-domiciled holding company, Canopy USA LLC, which is expected to accelerate growth and market expansion;
• In respect of the acquisition of Acreage Holdings Inc., the 30-day HSR waiting period has expired;
• Delivered net revenue growth of 7 per cent in Q2 fiscal year (FY) 2023 relative to Q1 FY 2023, despite the continued impacts of macroeconomic headwinds and evolving Canadian cannabis market dynamics;
• Achieved 299-per-cent net revenue increase for BioSteel as compared with the prior year, driven by increased investment. Acquired manufacturing facility subsequent to quarter-end, which is expected to support continuing rapid U.S. expansion for the brand and drive gross margin improvement;
• Increased Canadian medical cannabis revenues by 8 per cent versus Q2 FY 2022 through continued focus on expansion of product offerings. Stabilized revenues in Canadian adult-use and saw market share growth across key brands, including Doja, Tweed and Deep Space, compared with the prior quarter;
• Announced divestiture of Canadian retail operations, ensuring cost reduction program remains on track to deliver $70-million to $100-million in selling, general and administrative (SG&A) savings. In addition, the company continues to assess opportunities to focus the company's Canadian cannabis operations.

"Our second quarter marks a key inflection point for Canopy, demonstrating momentum across our key businesses and accelerating our entry into the U.S. cannabis market through the creation of Canopy USA. Canopy is ideally positioned to capitalize on this once-in-a-generation opportunity and accelerate our path to North American cannabis market leadership," said David Klein, chief executive officer.

"We delivered solid sequential quarterly net revenue growth and improved margins, led by another record quarter for BioSteel, the stabilization of our Canadian cannabis business and continued actions to reduce overall costs. We are pressing forward on our path to profitability in Canada and expect Canopy USA will meaningfully enhance our growth and profitability over time once it closes the announced acquisitions of Acreage, Jetty and Wana," said Judy Hong, chief financial officer.

Revenues

Net revenue of $118-million in Q2 FY 2023 declined 10 per cent versus Q2 FY 2022. The decrease is primarily attributable to increased competition in the Canadian adult-use cannabis market, the divestiture of C3 Cannabinoid Compound Company GmbH and softer performance from This Works, offset by revenue growth at BioSteel. Excluding the impact from the divestiture of C3, net revenue declined 1 per cent versus Q2 FY 2022. When adjusting for both the impact of C3 and the continuing divestiture of its Canadian retail business, revenues for the period increased 2 per cent versus Q2 FY 2022. Net revenue increased 7 per cent in Q2 FY 2023 relative to Q1 FY 2023, despite the continued impacts of macroeconomic headwinds and evolving Canadian cannabis market dynamics.

Gross margin

Reported gross margin in Q2 FY 2023 was 3 per cent as compared with (54 per cent) in Q2 FY 2022. Excluding non-cash restructuring costs recorded in cost of goods sold of $8-million, adjusted gross margin was 10 per cent. Gross margin in Q2 FY 2023 was impacted by lower production output and price compression in the Canadian adult-use cannabis business, the divesture of C3, and a decrease in the amount of payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program.

Operating expenses

Total SG&A expenses in Q2 FY 2023 were flat versus Q2 FY 2022, driven by year-over-year reductions in general and administrative (G&A) and research and development (R&D) expenses, offset by increases in acquisition-related costs and sales and marketing expenses. The increase in sales and marketing expenses was primarily driven by the investment in the BioSteel NHL partnership announced in July, 2022.

Net loss

Net loss in Q2 FY 2023 was $232-million, which is a $216-million increase in the net loss versus Q2 FY 2022, driven primarily by non-cash fair value changes and an increase in asset impairment and restructuring costs, partially offset by improved margins.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization)

Adjusted EBITDA loss in Q2 FY 2023 was $78-million, an $85-million improvement in adjusted EBITDA loss versus Q2 FY 2022 due to the improvement in gross margin and reductions in G&A and R&D expenses.

Free cash flow

Free cash flow in Q2 FY 2023 was an outflow of $135-million, a 34-per-cent increase in outflow versus Q2 FY 2022. Relative to Q2 FY 2022, the outflow increase is due to the timing of certain payments in each period. Year-to-date free cash flow in FY 2023 is in line with the prior year period.

Cash position

Cash and short-term investments amounted to $1,143-million at Sept. 30, 2022, representing a decrease of $229-million from $1,372-million at March 31, 2022, reflecting primarily adjusted EBITDA losses and interest costs.

Business highlights

Canadian cannabis business proved resilient with stabilized revenue in adult-use cannabis, benefiting from mainstream and premium flower innovation and growth in medical cannabis:

• Canadian medical cannabis net revenue increased 8 per cent versus Q2 FY 2022, driven by growth in patient registrations and continued expansion of product offerings.
• Doja, premium flower and prerolled joint brand, increased market share by two basis points (bps) versus Q1 FY 2023 to 2.4 per cent. Mainstream brands Tweed and Vert increased market share by 10 bps and 13 bps, respectively, versus Q1 FY2023. Deep Space beverages increased market share by 67 bps versus Q1 FY 2023 to 11.5 per cent.
• High'er Education, the company's budtender engagement program, has facilitated over 10,000 budtender interactions in its first year. The programming focuses primarily on education and product knowledge to drive budtender recommendations.

Gains in distribution and sales velocity of BioSteel RTD (ready to drink) drove record revenue in Q2 FY 2023:

• BioSteel revenue in Q2 FY 2023 increased 299 per cent versus Q2 FY 2022 with BioSteel RTD beverages, achieving 34-per-cent all commodity volume (ACV) in the United States, up from 6.5 per cent in Q2 FY 2022. Year to date in FY 2023, BioSteel has secured distribution with, among others, Walmart, Rite Aid and Winn Dixie.
• BioSteel signed a multiyear partnership with the National Hockey League and the National Hockey League Players Association as the official hydration partner. This partnership provides BioSteel with league-wide rink side marketing and product supply rights, retail activation rights, and a community engagement platform.
• On Nov. 8, 2022, the company acquired a manufacturing facility, which is expected to support continuing rapid U.S. expansion for the brand and drive gross margin improvement.

Canopy USA is expected to fast-track entry into the U.S. cannabis market and create a truly North American cannabis brand powerhouse while accelerating Canopy Growth's path to profitability:

• Canopy Growth has established Canopy USA, a new U.S.-domiciled holding company, which now holds the company's U.S. cannabis investments. This structure will enable Canopy USA to acquire each of Acreage, Jetty and Wana and capitalize on the market opportunity presented by the U.S. cannabis market. The strategy and positioning of Canopy USA are true differentiators and will unlock potential expansion opportunities presented by the scalable and ideally positioned U.S. cannabis ecosystem, positioning Canopy for profitable growth.
• Acreage continued to make strong progress in the third quarter of calendar 2022 with revenue increasing 28 per cent year over year and delivering its seventh consecutive quarter of positive adjusted EBITDA (as calculated by Acreage and set forth in Acreage's third quarter 2022 financial results press release available under Acreage's profile on SEDAR and through EDGAR). Acreage's Superflux Margalope live resin vape cartridge was awarded the best vape pens category at the High Times Cannabis Cup in Illinois. Subsequent to the end of the quarter, Acreage's social equity joint venture in Connecticut was approved for both a disproportionately impacted area cultivation licence and adult-use cannabis retail licence.
• During the third quarter of calendar 2022, Jetty strengthened its product portfolio with the launch of half-gram solventless vape cartridges and the company's solventless extraction process received certification under California's OCal program, which certifies that the cannabis products have been grown and manufactured under comparable-to-organic standards. From July to August, 2022, Jetty solventless vape retail sales increased by 30 per cent. Jetty also received multiple High Times SoCal awards in July, 2022, including second-place concentrates for its super lemon haze live and third place vape for its banana punch solventless vape cartridge.
• Wana has continued to grow its North American footprint, launching products in Montana and onboarding in additional states. Continuing its portfolio expansion, Wana introduced a range of new SKUs in the states where it operates, including launching Wana's Optimals Fast Asleep in Nevada and Michigan. Wana's chief executive officer, Nancy Whiteman, also received the Benzinga Lifetime Achievement Award for her contributions to developing the cannabis industry in the U.S.
• In order to execute on its announced plan with Canopy USA, Canopy Growth requires shareholder approval for the creation and issuance of a new class of exchangeable shares in the capital of the company. In connection with the proposal to amend the company's articles in order to create the exchangeable shares, Canopy Growth filed a preliminary proxy statement with the Securities and Exchange Commission on Oct. 25, 2022. Once the SEC completes its review of the preliminary proxy statement, a definitive proxy statement and a form of proxy will be filed with the SEC and mailed or otherwise furnished to Canopy Growth shareholders.

Canada cannabis:

• Recreational B2B (business to business) net revenue in Q2 FY 2023 decreased 40 per cent over the prior year period, driven primarily by lower sales volumes, particularly in value-priced dried flower, resulting from both the strategic shift in the company's product portfolio and increased competition. These factors were partially offset by a more favourable product mix.
• Recreational B2C (business to consumer) net revenue in Q2 FY 2023 decreased 23 per cent versus Q2 FY 2022 largely, driven by increased competition from the rapid growth in third party retail locations across provinces.
• Medical net revenue in Q2 FY 2023 increased 8 per cent from Q2 FY 2022, driven by larger average order sizes.

Rest-of-world cannabis:

• Rest-of-world cannabis revenue in Q2 FY 2023 decreased 55 per cent over Q2 FY 2022 due primarily to the divestiture of C3 and a decline in the company's U.S. CBD (cannabidiol) business.
• Excluding the impact of the divestiture of C3, rest-of-world cannabis net revenue decreased 9 per cent as compared with Q2 FY 2022.

Storz & Bickel:

• Storz & Bickel vaporizer revenue in Q2 FY 2023 decreased 7 per cent over Q2 FY 2022 due primarily to continued slowdown in consumer spending, temporary disruptions with certain distributors and the impact of foreign exchange rates.

BioSteel:

• BioSteel sales in Q2 FY 2023 increased 299 per cent over Q2 FY 2022 due to continued growth in its distribution channels and sales velocities across North America and higher international sales.

This Works:

• This Works sales in Q2 FY 2023 decreased 24 per cent over Q2 FY 2022 due in part to softer performance of certain product lines and the impact of foreign exchange rates.

The Q2 FY 2023 and Q2 FY 2022 financial results presented in this press release have been prepared in accordance with United States GAAP (generally accepted accounting principles).

Webcast and conference call information

The company will host a conference call and audio webcast with Mr. Klein, CEO, and Ms. Hong, CFO, at 10 a.m. ET on Nov. 9, 2022.

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. 7, 2023.

About Canopy Growth Corp.

Canopy Growth is a leading North American cannabis and CPG (consumer packaged goods) company dedicated to unleashing the power of cannabis to improve lives.

Through an unwavering commitment to its consumers, Canopy delivers innovative products with a focus on premium and mainstream cannabis brands, including Doja, 7Acres, Tweed and Deep Space. Its CPG portfolio features sugar-free sports hydration brand BioSteel, targeted 24-hour skin care and wellness solutions from This Works, gourmet wellness products by Martha Stewart CBD, and category-defining vaporizer technology made in Germany by Storz & Bickel.

Canopy has also established a comprehensive ecosystem to realize the opportunities presented by the U.S. THC (tetrahydrocannabinol) market through its rights to Acreage Holdings, a vertically integrated multistate cannabis operator with principal operations in densely populated states across the Northeast, as well as Wana Brands, a leading cannabis edible brand in North America, and Jetty Extracts, a California-based producer of high-quality cannabis extracts and pioneer of clean vape technology.

Beyond its world-class products, Canopy is leading the industry forward through a commitment to social equity, responsible use and community reinvestment -- pioneering a future where cannabis is understood and welcomed for its potential to help achieve greater well-being and life enhancement.

We seek Safe Harbor.