Canopy Growth Corp. shares slid 3% Thursday to end a two-day winning streak, after the company said the Nasdaq exchange is not fully on board with its plan to consolidate its U.S. assets into a new holding company.
That news, which was announced on Tuesday, sparked a rally in the stock and the broader sector among investors hopeful the move would allow Canopy CGC, -3.63% WEED, -2.56% to access the U.S. market and take advantage of far greater opportunities than are available in its native Canada, where it continues to post heavy losses.
The holding company called Canopy USA was to house three U.S. cannabis companies, Acreage Holdings Inc. ACRHF, -2.54%, Jetty Extracts and Wana Brands, in which Canopy held options that would give it full control should cannabis be legalized at the federal level. The idea was to fast track that goal, instead of waiting for legalization which appears some way off.
“Our goal is to be the leading North American cannabis company,” Canopy Growth CEO David Klein told MarketWatch on Tuesday. The creation of Canopy USA marks a “logical next step” toward that goal, he said.
Klein also said the company had held talks with the Nasdaq and Toronto Stock Exchange and that they were “aware of the structure” of the deal. The idea was for a hands-off setup, in which Canopy USA would have its own board and for Canopy Growth and majority shareholder Constellation Brands Inc. STZ, +0.66% to surrender voting rights by converting their stock to exchangeable shares.
But a proxy filing late Wednesday revealed that the Nasdaq “has objected to Canopy Growth 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.
“Nasdaq has proposed that such consolidation is impermissible under Nasdaq’s general policies,” the company said in the filing.
Jefferies analyst Owen Bennett said Klein’s comment, and the fact he did not flag any regulatory pushback, meant ” many may have assumed that the exchanges had given their informal blessing to the new structure.”
Canopy said it disagrees with the Nasdaq’s objection and that it must consolidate the U.S. company earnings into its financials to comply with U.S. Generally Accepted Accounting Principles.
“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 US GAAP including its application to THC plant touching businesses,” said the filing.
Canopy is working with Nasdaq to attain compliance, a spokesperson told MarketWatch.
“This is a novel structure, and there isn’t always immediate comfort with innovation,” he said. “But we believe in this market opportunity and the need to start capitalizing on it, and this is the structure to make that happen. And it’s our job to show the value and the rationale here, and we will continue our ongoing dialogue with Nasdaq to support our compliance with their rules and regulations as we pursue this groundbreaking strategy.“
The filing acknowledged that there’s no assurance that “Nasdaq will harmonize their general policies with the SEC accounting guidance.
“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. 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.”
Bennett said the outcome of the disagreement is critical for the broader industry and for both licensed producers in Canada and multi-state operators in the U.S. The former could potentially follow Canopy in acquiring U.S. assets, while the latter could use it as a way to uplist.
Because of the federal ban on cannabis, the big U.S. players trade on illiquid over-the-counter markets, limiting their access to capital. That’s unlikely to change without a change in how cannabis is classified or the passage of legislation that would allow companies in states that have legalized gain access to the federally insured banking sector.
“This is why SAFE 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 it (likely TSX) and another still says no (likely Nasdaq). This would still be a positive in our view,” Bennett wrote.
The SAFE Act, or Secure and Fair Enforcement Act, would allow companies have bank accounts without risking an enforcement action. It has been passed in the House but not in the Senate.