Mr. David Klein reports

CANOPY GROWTH REPORTS FIRST QUARTER FISCAL YEAR 2024 FINANCIAL RESULTS

Canopy Growth Corp. has released its financial results for the first quarter ended June 30, 2023. All financial information in this news release is reported in Canadian dollars, unless otherwise indicated.

Highlights:

• All business segments of the company delivered sequential revenue growth in Q1 FY (fiscal year) 2024, compared with Q4 FY 2023;
• Achieved cost reduction of $47-million in Q1 FY 2024, bringing total cost reductions to $172-million since the beginning of FY 2023;
• Consistent supply and strong demand for high-quality flower elevated the Tweed brand to the No. 8 rank within the total flower segment of the Canadian adult-use cannabis market in Q1 FY 2024 (1), moving up 19 places year over year;
• Canadian cannabis business continued its transformation to simplified, asset-light model in Q1 FY 2024, building on the divestiture of national retail operations, closure of eight cultivation facilities to focus on two purpose-built cultivation sites, and outsourcing of vape, beverage and edible production to independent, third party contract manufacturing organizations (CMO);
• The company continues to focus on simplifying its businesses and reducing cash burn, currently reviewing strategic options for BioSteel Sports Nutrition Inc., including a potential sale of the business, in order to remove the cash burden to Canopy Growth as quickly as possible;
• Entities that are expected to be acquired by Canopy USA LLC (CUSA) continue to demonstrate momentum and Canopy Growth continues to work with regulators to advance its novel structure.

"Our performance in the first quarter of fiscal 2024 validates the difficult but transformative changes we made over the last 12 months. Canopy Growth's businesses demonstrated stability, consistency and signs of positive momentum, while realizing a substantial reduction in expenses across the enterprise. Our asset-light approach is enabling the agile execution of business initiatives, allowing us to move faster and to be more responsive to consumers," said David Klein, chief executive officer.

"With sustained momentum in our core businesses and our cost reduction program, we believe we are on a path to achieving positive adjusted EBITDA across all our businesses, except BioSteel, exiting fiscal 2024. The decisive actions we took over the past year are driving significant reduction to ongoing costs across our operations. We also remain focused on opportunities to strengthen our financial position through further reducing cash burn, monetizing non-core assets and reducing debt," said Judy Hong, chief financial officer.

(1) Unless otherwise indicated, market share data disclosed in this news release are calculated using the company's internal proprietary market share tool, which utilizes point-of-sale data supplied by third party data providers and government agencies.

Revenues

Net revenue of $109-million in Q1 FY 2024 increased 3 per cent versus Q1 FY 2023. Adjusting for the divestiture of the company's Canadian national cannabis retail operations, which closed in Q3 FY 2023, net revenue increased 16 per cent year over year in Q1 FY 2024. This increase is driven by higher net revenue at BioSteel, growth in Storz & Bickel, and growth in the company's Canadian medical cannabis segment, partially offset by lower international medical cannabis sales due in part to a high level of opportunistic bulk sales to Israel in Q1 FY 2023 and decreased Canadian adult-use business-to-business revenue.

Gross margin

Gross margin in Q1 FY 2024 was 5 per cent as compared with (5 per cent) in Q1 FY 2023. The year-over-year increase in gross margin was due primarily to: (1) improvement in the Canada cannabis segment from realizing expected cost savings and reduced excess inventory writedowns; and improvement in the Storz & Bickel segment due to the revenue increase and the associated improvement of operating leverage.

These increases were partially offset by: (1) a decrease in the amount of payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program; and a decline in the BioSteel segment primarily resulting from aging inventory writedowns, higher warehousing costs and higher production costs associated with the BioSteel manufacturing facility located in Verona, Va. Excluding BioSteel, gross margin in Q1 FY 2024 was 18 per cent compared with negative 4 per cent in Q1 FY 2023.

Operating expenses

Total selling, general and administrative (SG&A) expenses in Q1 FY 2024 declined by 12 per cent versus Q1 FY 2023, primarily driven by the restructuring actions and cost reduction programs initiated by the company in Q4 FY 2022 and Q4 FY 2023. This improvement was partially offset by a year-over-year decrease in the amount of payroll subsidies received from the Canadian government pursuant to a COVID-19 relief program. These decreases were partially offset by increased investments in BioSteel of approximately $12-million, including costs related to the National Hockey League (NHL) sponsorship, which began in Q2 FY2023. Additionally, acquisition, divestiture and other costs included approximately $5-million in legal and audit costs related to the restatement work on BioSteel. Excluding the incremental investments in BioSteel, acquisition, divestiture and other expenses, and the COVID-19 relief program, total SG&A expenses decreased 31 per cent in Q1 FY 2024 compared with the prior year.

Net loss

Net loss in Q1 FY 2024 was $42-million, which is a $2.05-billion decrease in the net loss versus Q1 FY 2023, primarily attributable to the year-over-year decrease in asset impairment and restructuring costs, and non-cash fair value changes on other financial assets.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) (6)

Adjusted EBITDA loss in Q1 FY 2024 was $58-million, a $21-million or 27-per-cent improvement in adjusted EBITDA loss versus Q1 FY 2023, primarily attributable to the year-over-year increase in the company's gross margin and the year-over-year decrease in its SG&A expenses.

Free cash flow (7)

Free cash flow in Q1 FY 2024 was an outflow of $151-million, a 6-per-cent increase in outflow versus Q1 FY 2023. The year-over-year increase in the free cash outflow primarily reflects the increase in cash used in operating activities, partly driven by increased investments in BioSteel, certain non-recurring payments, including cash restructuring costs and litigation settlement costs, as well as timing of cash receipts and payments. Of the $36-million increase in the amount of receivables in Q1 FY 2024, compared with Q4 FY 2023, approximately: $16-million was attributable to amounts due related to a facility sale; and approximately $16-million was due to an increase in accounts receivable at BioSteel driven in part by higher revenue in Q1 FY 2024. Additionally, the company made a cash payment of approximately $17-million during Q1 FY 2024 to settle a dispute arising from a previous termination of a certain service agreement.

Cash position

Cash and short-term investments amounted to $571-million at June 30, 2023, representing a decrease of $212-million from $783-million at March 31, 2023, reflecting the impact of cash used in operating activities as well as the second tranche repayment of the term loan pursuant to the company's senior secured credit agreement of approximately $118-million, partially offset by proceeds from asset dispositions of approximately $83-million. Gross debt amounted to $1,045-million at June 30, 2023, representing a decline of $262-million from $1,307-million at March 31, 2023.

(6) Adjusted EBITDA is a non-GAAP (generally accepted accounting principles) measure.

Business highlights

Transformation to simplified, asset-light model is working, delivering significant cost reductions:

• Combined SG&A expenses and cost of goods sold (COGS) reduced by $47-million in Q1 FY 2024, and, when combined with the reduction of $125-million in FY 2023, bringing the cumulative cost reduction total to $172-million;
• Management continues to expect restructuring initiatives announced in FY 2023 to deliver combined SG&A and COGS reduction of $240-million to $310-million by the end of FY 2024;
• As a result of the company's Canadian cannabis business transformation initiatives executed to date, Canada cannabis gross margins improved by $12-million in Q1 FY 2024, compared with Q1 FY 2023, notwithstanding a $14-million reduction in net revenue;
• The company continues to review and consider its options with respect to the monetization of non-cannabis and non-core assets, including BioSteel, and remains focused on improving profitability, balance sheet strength and liquidity.

Enhanced commercial execution driving growth in Canada cannabis businesses:

• The company's Tweed brand captured a 3.1-per-cent share of the total flower segment in the Canada adult-use cannabis market in Q1 FY 2024, representing a 202-basis-point (bps) improvement year over year. The company continues to see growing demand for high-quality Tweed strains, including Tiger Cake and Kush Mints. In Q1 FY 2024, Tweed Kush Mints, 28 grams, was the fourth-best-performing flower SKU (stock-keeping unit) in Canada.
• Canadian medical cannabis revenue increased 7 per cent year over year primarily due to an increase in the average size of medical orders placed and a larger assortment of cannabis product choices offered to registered medical patients.
• In Q1 FY 2024, Canopy Growth entered into certain agreements to control and execute the distribution, marketing and sales of industry-leading Wana-branded cannabis edible products in Canada. Subsequent to the end of the quarter, the company announced that Wana-branded gummies are now available to its registered medical cannabis patients through Spectrum Therapeutics. The company expects the addition of Wana products to the company's product offering in the Canadian cannabis market to be immediately accretive to its Canadian cannabis revenue and profitability.

Consumer products businesses delivered strong performance in Q1 FY 2024, with BioSteel and Storz & Bickel delivering significant revenue growth; Storz & Bickel is preparing to launch new vaporizer line in the fall of 2023:

• BioSteel delivered fourth consecutive quarter of growth, with Q1 FY 2024 net revenues increasing 137 per cent year over year and 68 per cent sequentially.
• Strong consumer demand has increased BioSteel's market share of the convenience and gas channel in Canada to 11.3 per cent, up 690 basis points year over year, and increased market share in Ontario to 13.1 per cent, representing a year-over-year increase of 620 basis points (8).
• Distribution gains in the United States has helped increase Storz & Bickel revenues 16 per cent year over year to $18-million in Q1 FY 2024.
• The innovative, new line of Storz & Bickel vaporizers being prepared and anticipated to launch in the fall of 2023 is expected to drive revenue growth.

U.S. THC (tetrahydrocannabinol) companies continue to strengthen and expand their businesses:

• In June, 2023, Wana9 re-entered the state of Florida, marking the 15th active U.S. state or territory for the brand. Through its collaboration with Surterra Wellness in Florida, Wana brand's premium cannabis-infused gummies lineup is available to Florida patients across 45 medical cannabis treatment centres in the state.
• In July, 2023, Jetty10 introduced its award-winning vape products into the state of Colorado, its third U.S. state after more than a decade of leadership in California. Earlier in August, 2023, Jetty expanded its product offering in California with the launch of the market's first OCal-certified (California cannabis comparable-with-organic certification) solventless vapes in a variety of sativa and indica strains (11).

(8) Nielsen data 13 weeks ended June 30, 2023.

(9) Until such time as CUSA elects to exercise its rights to acquire Mountain High Products LLC, Wana Wellness LLC and The Cima Group LLC (collectively, Wana), CUSA will have no direct or indirect economic or voting interests in Wana, CUSA will not directly or indirectly control Wana, and CUSA, on the one hand, and Wana, on the other hand, will continue to operate independently of one another. The company holds non-voting and non-participating shares in CUSA that are exchangeable into common shares of CUSA.

(10) Until such time as CUSA elects to exercise its rights to acquire Lemurian Inc. (Jetty), CUSA will have no direct or indirect economic or voting interests in Jetty, CUSA will not directly or indirectly control Jetty, and CUSA, on the one hand, and Jetty, on the other hand, will continue to operate independently of one another. The company holds non-voting and non-participating shares in CUSA that are exchangeable into common shares of CUSA.

(11) See the Jetty news release dated Nov. 1, 2022.

Balance sheet and liquidity

The company ended Q1 FY 2024 with cash, cash equivalents and short-term investments of $571-million. Total debt at the end of Q1 FY 2024 was $1,045-million, down $262-million compared with Q4 FY 2023, driven by the conversion of the $100-million (U.S.) senior unsecured convertible debentures of the company into common shares of Canopy Growth, the paydown of approximately $118-million of the company's senior secured credit agreement at 93 cents per dollar of debt and the equitization of $12.5-million of the company's unsecured senior notes due 2023.

Subsequent to the end of Q1 FY 2024, on July 14, 2023, the company announced that it had entered into a series of agreements with certain of its secured and unsecured lenders, which is expected to further reduce total debt by approximately $437-million by the end of Q3 FY 2024 and reduce annualized interest costs by approximately $20-million to $30-million.

Canada cannabis:

• Adult-use business-to-business net revenue in Q1 FY 2024 decreased 9 per cent over the prior-year period, driven primarily by lower sales volumes across the company's premium- and value-priced product categories, which, for the value-priced category, is largely the result of a strategy shift to move away from low-margin value-priced products. This decrease was partially offset by increased sales of the company's mainstream brands, primarily resulting from improved product attributes. Adult-use business-to-business net revenue in Q1 FY 2024 increased 12 per cent sequentially compared with Q4 FY 2023.
• Following the previously announced divestiture of the company's Canadian retail business in Q3 FY 2023, the adult-use business-to-consumer (retail) net revenue in Q1 FY 2024 was nil.
• Medical net revenue in Q1 FY 2024 increased 7 per cent from Q1 FY 2023, primarily attributable to an increase in the average size of medical orders placed and a larger assortment of cannabis product choices offered to the company's customers, partially offset by a lower number of medical orders.

Rest-of-world cannabis:

• Rest-of-world cannabis revenue in Q1 FY 2024 decreased 26 per cent over Q1 FY 2023, due primarily to declines in opportunistic sales to Israel and the company's U.S. CBD (cannabidiol) business, partially offset by strong growth in Australia.

Storz & Bickel:

• Storz & Bickel vaporizer revenue in Q1 FY 2024 increased 16 per cent over Q1 FY 2023, due primarily to the expansion of distribution and retail channels in the United States.

BioSteel:

• BioSteel sales in Q1 FY 2024 increased 137 per cent over Q1 FY 2023. The year-over-year increase is primarily attributable to: (1) the expansion of the company's distribution in Canada within the grocery, convenience and gas station channel, and into the large-format club channel; and stronger sales velocity in existing points of distribution ahead of the summer season resulting from increased brand awareness of BioSteel from the company's NHL sponsorship.

This Works:

• This Works sales in Q1 FY 2024 increased 9 per cent over Q1 FY 2023. The year-over-year increase is primarily attributable to an expanded product portfolio in the Bodycare line and continued success and strengthening sales velocity of the In Transit skincare product lineup.

The Q1 FY 2024 and Q1 FY 2023 financial results presented in this news release have been prepared in accordance with U.S. GAAP (generally accepted accounting principles).

Webcast and conference call information

The company will host a conference call and audio webcast with Mr. Klein and Ms. Hong at 5:30 p.m. Eastern Time on Aug. 9, 2023.

Webcast information

A live audio webcast will be available.

Replay information

A replay will be accessible by webcast until 11:59 p.m. Eastern Time on Nov. 7, 2023.

Non-GAAP measures

Adjusted EBITDA is a non-GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable with similar measures presented by other companies. Adjusted EBITDA is calculated as the reported net income (loss), adjusted to exclude income tax recovery (expense), other income (expense), net, loss on equity method investments, share-based compensation expense, depreciation and amortization expense, asset impairment and restructuring costs, restructuring costs recorded in cost of goods sold, and charges related to the flow-through of inventory step-up on business combinations, and further adjusted to remove acquisition, divestiture and other costs. Asset impairments related to periodic changes to the company's supply chain processes are not excluded from adjusted EBITDA given their occurrence through the normal course of core operational activities. The adjusted EBITDA reconciliation is presented within this news release and explained in the company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2023 (the Form 10-Q), to be filed with the U.S. Securities and Exchange Commission (SEC).

Free cash flow is a non-GAAP measure used by management that is not defined by U.S. GAAP and may not be comparable with similar measures presented by other companies. This measure is calculated as net cash provided by (used in) operating activities less purchases of and deposits on property, plant and equipment. The free cash flow reconciliation is presented within this news release and explained in the Form 10-Q to be filed with the SEC.

Adjusted gross margin and adjusted gross margin percentage are non-GAAP measures used by management that are not defined by U.S. GAAP and may not be comparable with similar measures presented by other companies. Adjusted gross margin is calculated as gross margin excluding restructuring and other charges recorded in cost of goods sold, and charges related to the flow-through of inventory step-up on business combinations. Adjusted gross margin percentage is calculated as adjusted gross margin divided by net revenue. The adjusted gross margin and adjusted gross margin percentage reconciliation is presented within this news release and explained in the Form 10-Q to be filed with the SEC.

About Canopy Growth Corp.

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

Through an unwavering commitment to its consumers, Canopy Growth delivers innovative products with a focus on premium and mainstream cannabis brands, including Doja, 7Acres, Tweed and Deep Space. Canopy Growth's CPG portfolio features sugar-free sports hydration brand BioSteel, targeted 24-hour skincare 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 Growth has also established a comprehensive ecosystem to realize the opportunities presented by the U.S. THC market through its rights to Acreage, 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 Growth 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.