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Staff work in a marijuana grow room at Canopy Growth's Tweed facility in Smiths Falls, Ont., on Aug. 23, 2018.Sean Kilpatrick/The Canadian Press

As Canopy Growth WEED-T bleeds cash, assets, employees and investors, analysts are questioning how much longer it can survive.

The cannabis company reported a larger-than-expected net loss in its latest quarterly results last week amid declining revenue and “material misstatements” from its BioSteel sports drink division, which forced it to remove tens of millions of dollars in sales from prior quarters. Aggressive cost cutting and the dismissal of hundreds of employees have thus far failed to bolster Canopy’s bottom line, pushing the company’s shares to all-time lows.

Canopy, based in Smiths Fall, Ont., also revealed in a regulatory filing that the U.S. Securities and Exchange Commission has launched an investigation after the company identified “material weaknesses in our internal control over financial reporting.”

Despite all those challenges, the largest albatross around Canopy’s neck – the one that has it facing a truly existential crisis – is its debt. Management has “raised substantial doubt as to the company’s ability to continue as a going concern due to certain material debt obligations coming due in the short term,” it disclosed last week.

“If we are unable to obtain additional capital, our financial results, financial condition and our ability to continue as a going concern will be adversely affected.”

As of June 30, Canopy will have $600-million in cash and cash-equivalents, and a total debt of roughly $1.2-billion, according to CIBC analyst John Zamparo, who covers Canopy stock with the equivalent of a sell rating and a price target of 45 cents a share. By March 31, 2024, he calculates that Canopy will have $275-million in remaining cash and $900-million in debt, and forecasts that the company will burn another $300-million in negative free cash flow over the following 12-month period.

That means Canopy “seems likely to breach its US$100M minimum liquidity covenant” by early 2025. A minimum liquidity covenant refers to the amount of money a company needs to run its business and meet its debt-servicing obligations.

Canaccord Genuity analyst Matt Bottomley also raised concerns about Canopy’s debt in a June 23 note to clients, in which he cut his rating on the company’s stock from hold to sell and drastically reduced his price target from $3 a share to 50 cents a share.

Canopy shares have lost nearly half their value over the past month, falling from $1.20 a share on May 26 to 68 cents a share as of Monday’s market close, barely above its all-time low of 66 cents a share. At the company’s peak in late 2019, shares were worth more than $67 each.

“We believe Canopy’s ability to service its lofty debt obligations now represent a material risk to the entity’s ability to continue as a going concern,” Mr. Bottomley said.

The company’s plans to reach profitability in early 2024 are “implausible,” Mr. Zamparo said, especially as BioSteel “acts as the biggest drag on Canopy’s profitability.” Selling BioSteel “seems preferable to us,” he said, “but the material revenue restatement probably puts that on hold for at least a year.”

Canopy paid $50.7-million for a 72-per-cent stake in BioSteel in October, 2019, back when the cannabis company boasted a market value of roughly $18-billion. Last month, Canopy said it had discovered errors in BioSteel’s sales figures from the first-quarter, second-quarter and third-quarter filings of 2022 after a review by independent external counsel and forensic accountants.

As a result, Canopy’s net sales for its 2022 fiscal year were $10-million lower than originally reported, and sales for the nine-month period from April, 2022, until the end of the calendar year were $14-million lower. Those figures represent 2 per cent and 4 per cent of total revenue.

Regulatory authorities in both Canada and the United States were investigating whether the revelations violated securities laws, the company said, and Canopy is “considering all legal remedies available to us including litigation to recover damages and costs associated with … the BioSteel review.”

Meanwhile, the company itself is already facing multiple potential legal challenges on behalf of shareholders over its handling of the BioSteel review. Toronto-based Siskinds LLP launched an investigation on May 17, and last week, New York-based Pomerantz LLP filed a class-action lawsuit against Canopy in the U.S. District Court in central California.

The latest troubles for Canopy occurred barely four months after the company announced a dramatic shift to an “asset-light” model in Canada. That plan involved a 35-per-cent headcount reduction, translating to roughly 800 people losing their jobs, and the closure of Canopy’s flagship production facility, which was housed alongside its headquarters in a former Hershey chocolate factory in Smiths Falls.

Those cuts are expected to generate between $140-million and $160-million in savings, the company said at the time, though Mr. Zamparo is skeptical given previous cost-cutting efforts have proven unsuccessful.

“The lack of net savings over the past 2+ years is why we are reluctant to believe the remaining will drop to the bottom line,” he said of the cuts. And even if Canopy does manage to execute cuts of that level, Mr. Zamporo said that would still imply an annual net loss of roughly $220-million.

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