Cannabis Weekly Round-Up: Canopy Growth Updates US Strategy

Canopy pushes forward with US market plans

Canopy Growth (NASDAQ:CGC,TSX:WEED) no longer plans to delay its entrance to the US until after the country's cannabis regulations change. Instead, the firm is moving full steam ahead to its desired destination.

The firm plans to create Canopy USA, a new US-based holding company, to carry out its US market strategy. The new firm will incorporate Canopy’s previous US acquisitions: Acreage Holdings (CSE:ACRG.A.U,OTCQX:ACRHF), Wana Brands and Jetty Extracts.

“This strategy and positioning are true differentiators, which we expect to enable our investors and brands to realize value in the near term while positioning Canopy for profitable growth and a fast start upon US federal permissibility," CEO David Klein said.

The plan was well received in the open market, bringing a significant uptick for struggling cannabis stock.

In an interview segment with BNN Bloomberg, TMX Group (TSX:X,OTC Pink:TMXXF) CEO John McKenzie said the exchange worked with Canopy to be able to give the green light on this announcement.

TMX Group has a strict stance that its issuers cannot hold material US cannabis assets; although the country is home to thriving state cannabis markets, the drug is banned federally. The ruling has caused Canadian cannabis firms to find alternate ways to invest and gain exposure to the booming US cannabis market.

While TMX Group is behind Canopy’s current plan, the cannabis firm said the NASDAQ may not be.

“Nasdaq has proposed that such consolidation is impermissible under Nasdaq’s general policies. The Company intends to comply with the SEC’s guidance on the application of U.S. GAAP for financial reporting purposes. The Company disagrees with Nasdaq’s potential application of its general policies as the basis for its objection since it contradicts the Company’s financial reporting requirements under U.S. GAAP including its application to THC plant touching businesses,” Canopy said in a proxy statement.

The decision from the Canadian cannabis firm may mean an upcoming change in the status of its US-based shares. Earlier this week, Constellation Brands (NYSE:STZ) confirmed it will convert all of its common stock held in Canopy Growth.

According to Bill Newlands, Constellation’s president and CEO, the move represents a way for the alcohol maker to realize the potential upside of its investment in the cannabis firm.

“At the same time, this Transaction and the surrender of our warrants are expected to eliminate the impact to our equity in earnings, mitigate risk to our organization, and further reinforce our intent to not deploy additional investment in Canopy aligned with Constellation’s previously stated capital allocation priorities,” he said.

Former Cronos exec responsible for previous accounting errors

Cannabis grower Cronos Group was found guilty of erroneous financial reporting by the US Securities and Exchange Commission (SEC) and the Ontario Securities Commision (OSC) during 2019's Q1, Q2 and Q3 periods.

The regulators said the firm improperly recognized C$7.6 million in revenue in those periods. Additionally, the OSC found Cronos to have “overstated virtually all of its U.S. goodwill and a significant portion of its U.S. intangible assets” by C$234.9 million.

In separate statements, the SEC and the OSC confirmed the role of Cronos' former CFO and chief commercial officer, William Hilson, in accounting errors.

Jeff Kehoe, director of enforcement at the OSC, said investors need to “receive accurate information about the financial performance of public cannabis companies to support informed investment decisions in this nascent sector.”

The settlement holds both the company and Hilson accountable, according to the Canadian securities regulator.

Hilson has agreed to pay C$70,000 back to the OSC, which the SEC has determined is a significant enough financial penalty. Hilson has also agreed to a three year suspension as an accountant before the SEC.

While Cronos was able to avoid financial penalties from the SEC, the company confirmed it had to pay C$1.34 million to the Ontario regulator, and has committed to retaining a qualified independent consultant for accounting reporting.

"While today’s order finds that Cronos’s controls were not up to standards when it began filing financial statements with the SEC, Cronos avoided penalties by promptly self-reporting its accounting misconduct as it came to light within the company," Mark Cave, associate director for the SEC’s enforcement division, said in a statement. He added that the company was cooperative with the investigation and was quick to take effective remedial steps.

Cronos CEO, President and Chairman Mike Gorenstein said the firm is pleased to have resolved these cases. “Important steps have been taken to strengthen our internal controls, and we are committed to continuing this work,” he said.

Cronos said that as a result of the settlements, it will miss out on “private offering exemptions provided by Regulations A and D under the Securities Act” for five years. It has also been penalized by losing its status as a “well-known seasoned issuer” for the next three years. Lastly, it will miss out on some provisions of the US Private Securities Litigation Reform Act of 1995.

Cannabis company news

• Verano Holdings (CSE:VRNO,OTCQX:VRNOF)agreed to refinance its existing US$350 million credit facility and extend its maturity date to October 30, 2026.

• Bhang (CSE:BHNG,OTCQB:BHNGF)announced the resignation of Jessica Billingsley and Andrea L. Johnston as directors of its board. In their stead, the firm has appointed Sara Lee Irwin and Paul Pellegrini.

• Halo Collective (NEO:HALO,OTCQB:HCANF)confirmed that the proposed consolidation of all its issued and outstanding common shares would come into effect on Friday (October 28).

• Greenway Greenhouse Cannabis (CSE:GWAY)completed the construction of a processing expansion for its existing facility. "We know as growers that the processes that occur after the harvest are as important as all the other steps," Jamie D'Alimonte, CEO of Greenway, said. "With this new space we are able to continue to hang dry, cure and hand finish all of our product.”