What happened
Shares of Canopy Growth (CGC 15.03%) tanked on Thursday morning, and were trading 19.7% lower as of 11:04 a.m. ET. That decline was driven by its announcement after the market close on Wednesday that it will exchange $198 million in convertible notes for a combination of stock and cash.
This deal was struck with some holders of the Canadian cannabis producer's senior convertible notes, notably including Greenstar Canada Investment Limited Partnership, a subsidiary of Constellation Brands (STZ 0.74%). Canopy will provide $2.35 million in cash and offer stock to the noteholders at a price between $2.50 per share and $3.50 per share.
So what
The main reason that Canopy Growth is down so far on Thursday is that the company plans to issue more than 34 million new shares as part of the exchange. This will dilute the value of the marijuana stock.
There is some good news for Canopy Growth, though. The transaction will reduce the company's debt and interest payments, which should free up some cash to fund operations.
As a result of the exchange, Constellation Brands will hold an even larger stake in Canopy Growth. The adult beverage company already ranks as its biggest shareholder.
Now what
The most significant challenge Canopy Growth faces is achieving profitability. The company posted a net loss of 579 million Canadian dollars for its fiscal 2022 fourth quarter, which ended March 31.
Canopy Growth maintains that it expects to generate positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in its fiscal 2024 (which will end on March 31, 2024). However, the company has a long way to go to achieve that goal. It reported an adjusted EBITDA loss of CA$122 million in its fiscal Q4.
