Canopy Growth’s (NASDAQ:CGC) (TSE: WEED) recently-announced plan to conquer the US cannabis market via consolidation of its U.S. assets into a new holding company, Canopy USA is facing serious hurdles.
According to the company’s new regulatory filing with the SEC, the Nasdaq stock exchange disapproves of Canopy’s plan to consolidate the financial results of Canopy USA at one point.
As such, Canopy’s listing on Nasdaq is in question, if it chooses to continue with its plan and speed up its entry into the U.S. cannabis market.
The Game Plan
The Canadian cannabis giant revealed its plans on Tuesday to launch Canopy USA, which would acquire three American marijuana businesses the company had previously agreed to buy once adult-use cannabis becomes federally legal.
This would enable Canopy to acquire Acreage Holdings, Inc (OTCQX:ACRDF) (100%), Wana Brands (100%) and Jetty (100%). In addition, Canopy also controls a conditional ownership position of approximately 13.7% in TerrAscend Corp. (OTCQX:TRSSF), assuming conversion of its exchangeable shares and the exercise of its option though excluding the exercise of its warrants.
Under the reorganization plan, Canopy would own non-voting, exchangeable shares in Canopy USA, establishing “a ringed-fence structure” between the two companies (Canopy Growth and Canopy USA).
“Nasdaq has objected to Canopy consolidating the financial results of Canopy USA in the event that Canopy USA closes on the acquisition of Wana, Jetty or the Fixed Shares of Acreage,” the filing reads. “Nasdaq has proposed that such consolidation is impermissible under Nasdaq’s general policies.”
Canopy spokesperson told MJBizDaily that the company didn’t include that the Toronto Stock Exchange had issues with the plan in the filing.
“However, as we disclosed, Nasdaq has raised concerns specifically regarding our intention to consolidate the financials of Canopy USA and we have had ongoing communication with them and will continue to work to support compliance with their rules and regulations,” the spokesperson said.
“We understand that we have an obligation to consolidate these results under U.S. GAAP rules and we believe there is time to continue this dialogue with Nasdaq, as Canopy’s results would not be consolidated until after the closing of the proposed transactions next year and we will continue to work with Nasdaq in an effort to resolve their concerns.”
Canopy noted it disagrees with Nasdaq’s objection.
“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,” per Canopy's filing. “While we are in regular dialogue with our auditors, regulatory bodies and the stock exchanges, there is no assurance that Nasdaq will harmonize their general policies with the SEC accounting guidance.”
The company further highlighted the scope of the issue, raising questions about its listing status.
“As such, there can be no assurance that we will remain listed on the stock exchanges we are currently listed on, which could have a material adverse effect on our business, financial condition and results of operations,” the company said. “In the event of a delisting from a stock exchange, there is no assurance that we will be able to satisfy the conditions required to list on an alternative stock exchange.”
Jefferies Group analyst Owen Bennett said that, based on this filing, the company’s continued Nasdaq and TSX listing is jeopardized. In his recent analyst note, Bennet said that many “might have assumed” the new reorganization had the approval of the exchanges, “it appears this is not the case.”
“This is why SAFE (the Secure and Fair Enforcement Banking Act) passing could also be important, as this, alongside the recent Biden orders around a scheduling review, could help sway the exchanges' decision, while it is also possible one exchange may OK – likely the TSX – and another still says no – likely Nasdaq,” according to Jefferies.