Canopy Growth (CGC -23.12%) has continually been burning through cash and incurring losses over several years. Although it has been slashing costs, it still has a long way to go to break even, assuming it can ever get to that point. And in the company's most recent earnings report (for the period ended March 31), it made a startling admission: It might struggle to pay its debts.
Warning investors of a going-concern risk
On Canopy Growth's most recent earnings report, which it released on June 22, the company reported that its cash and short-term investments totaled roughly 783 million Canadian dollars ($589 million). And with negative operating cash flow and the need to make CA$468 million in principal debt repayments over the next 12 months, the company stated that there is "substantial doubt about our ability to continue as a going concern for at least twelve months from the issuance of the financial statements."
"Going concern" refers to the company's ability to survive and pay its obligations and debts as they become due. While the company does appear to have ample cash on its books right now, the problem is that it has continually burned through cash. For the year ended March 31, Canopy's operating cash burn totaled CA$557.5 million, comparable to the CA$545.8 million it used up in the previous fiscal year.
Canopy Growth has been draining its resources
The brewer Constellation Brands invested CA$5 billion into the Canadian pot producer in 2018, and that provided stability. But over the years, the company has been burning through that cash, and its current assets have been declining sharply.
CGC total current assets (quarterly) data by YCharts.
What exacerbates the issue is the company's focus on trying to enter a U.S. pot market that remains off-limits due to the federal ban on marijuana. Legalization isn't imminent, nor is there a reason to expect it in the near future.
Canopy Growth has instead focused on ways to get around that, including the setup of a special purpose vehicle -- Canopy USA -- which will house its U.S.-based cannabis investments. But this is arguably a waste of resources, especially as its core Canadian operations continue to struggle.
Is it really at risk of going out of business?
Canopy Growth has been shutting down facilities and cutting costs in an effort to improve its balance sheet. This month, the company said that it has made additional moves to improve its balance sheet, including refinancing and paying down debt.
It believes it's on track to save between CA$240 million and CA$310 million by March 2024 and that it is "well positioned to achieve improved profitability, enhance financial flexibility, and support long-term value creation."
At first glance, this appears to be at odds with the warning the company issued on its earnings report. But if investors have ever looked through a complete earnings report, they know it's filled with generic warnings that companies recycle and mention, even if they aren't significant risks or likely to happen.
A going-concern risk isn't one that comes up often, however, and so that definitely attracts a lot of attention; in the past month, Canopy Growth's stock has fallen by 30%.
I don't expect the company to go out of business within the next year. It has refinanced debt and is paying it down. Plus, it can always resort to issuing more shares. While that isn't great for investors, it can offer the business a much-needed lifeline.
Should you invest in Canopy Growth?
Canopy Growth can still end up going out of business. I just wouldn't expect it to be soon. But the risk is there, especially with the company still focusing on the U.S. market, where a payoff from those efforts doesn't appear to be likely anytime soon.
Cannabis investments in general are risky right now, and Canopy Growth is certainly no exception. Its sales have been declining, and there's still a lot of work to do for the business to be cash-flow-positive and profitable. Its net loss totaled CA$647.6 million last quarter, which was 10% higher than in the prior-year period. Investors are better off staying away from what remains an ultra-risky investment.
