By Matt Lamers
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Canadian cannabis producer Canopy Growth Corp. appears to be facing another hurdle in its plan to “fast track” the company’s entry into the $34 billion U.S. marijuana market.
The U.S. Securities and Exchange Commission earlier this month notified the Smiths Falls, Ontario-headquartered company that the agency’s staff is opposed to the “deconsolidation” of a new U.S.-based holding company, Canopy USA, that would own three well-known American marijuana companies that Canopy Growth has agreed to purchase.
“Deconsolidation” refers to Canopy Growth presenting its own financial results in the same disclosure as the pro forma financial results of Canopy USA’s U.S.-based assets.
Canopy Growth disclosed the SEC’s objection in a Nov. 9 news release announcing the company’s second-quarter results for fiscal 2024.
The disclosure suggests the SEC’s objection is significant enough that it could take Canopy more time than anticipated to finalize the structure.
The three U.S. companies are New York-headquartered multistate operator Acreage Holdings, California-based extractor Jetty Extracts and Colorado-headquartered edibles maker Wana Brands.
Initial 2024 timetable
Canopy initially had hoped to complete its overall plan early next year.
Moreover, the SEC’s objection comes a little more than a year after the Nasdaq stock exchange voiced its own objection to Canopy’s then-plan to consolidate the financial results of Canopy USA with those of Canopy Growth.
The deconsolidation plan, which the SEC opposes, is a key feature of Canopy’s effort to overcome the Nasdaq’s opposition to the company’s original financial consolidation plan.
At the time, the Nasdaq’s challenge raised questions about whether Canopy could maintain its listing on the exchange if it proceeded with its initial plan to consolidate the financial results of Canopy USA with those of Canopy Growth.
Canopy CEO David Klein addressed the SEC’s objection in a conference call with analysts last week.
“As we continue to work closely with the SEC to advance this novel structure, we have been in active discussions with the most recent communication, indicating that there is more work to be done to enable us to deconsolidate the financials of Canopy USA,” Klein said.
In the meantime, Canopy said its plan to speed its entry in the U.S. market isn’t hampering Acreage, Jetty and Wana’s operations, which involve focusing on states that offer the most potential for growth.
String of deals
Over the past several years, Canopy agreed to spend hundreds of millions of dollars to buy Acreage, Jetty and Wanna – provided the United States legalizes adult-use marijuana at the federal level.
But rather than wait for a change in federal drug laws – which is taking longer than some cannabis executives expected – Canopy unveiled its plan on Oct. 25, 2022, for Canopy USA to own the three U.S. companies.
Under that plan, Canopy Growth would hold nonvoting, exchangeable shares in Canopy USA, creating a “ringed-fence structure” between it and Canopy USA.
In the same SEC filing in October 2022, Canopy Growth acknowledged the Nasdaq had raised a red flag about the company’s intention to consolidate Canopy USA’s financials with those of its parent company.
“Nasdaq has proposed that such (financial) consolidation is impermissible under Nasdaq’s general policies,” according to the filing.
To remain in compliance with the requirements of the Nasdaq – after the stock exchange’s objection a year ago – Canopy Growth and Canopy USA implemented changes on May 19, 2023, to the initial structure of Canopy Growth’s interest in Canopy USA.
The change meant that “Canopy Growth does not expect to consolidate the financial results of Canopy USA within our financial statements,” the company said in a filing.
SEC weighs in
In its Nov. 9 earnings release, Canopy Growth said it had received a letter on Nov. 3 in which the SEC essentially said it opposed Canopy’s solution to the Nasdaq issue.
“The staff indicated that, despite the Reorganization Amendments, it would object to the deconsolidation of Canopy USA once Canopy USA acquires Wana, Jetty or the Fixed Shares of Acreage,” Canopy Growth said in a regulatory filing last week.
In the filing, Canopy Growth said it’s currently assessing additional structural amendments to Canopy USA that would facilitate the “deconsolidation” of Canopy USA from the financial results of the parent company.
A Canopy spokesperson couldn’t share a specific update on the timeline with MJBizDaily.