Good morning. My name is Michele. And I will be your conference operator today. I would like to welcome you to the Canopy Growth Second Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. I would now turn the call over to Tyler Burns, Director of Investor Relations. Tyler, you may begin your conference call.

Good morning. Thank you all for joining us. On our call today, we have Canopy's Chief Executive Officer, David Klein; and Chief Financial Officer, Judy Hong. Before financial markets opened today, Canopy issued a news release announcing our financial results for our second quarter ended September 30, 2022. This news release is available on our website under the Investors tab and will be filed on EDGAR and SEDAR. We have also posted a supplemental earnings presentation on our website. Before we begin, I would like to remind you that our discussion during this call will include forward-looking statements that are based on management's current views and assumptions, and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of this morning's news release. Please review today's earnings release and Canopy's reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars, unless otherwise noted. Following remarks by David and Judy, we will conduct a question-and-answer session, we will first address questions uploaded by verified shareholders. Following that, we will take questions from analysts. To ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question. With that, I will turn the call over to David. David, please go ahead.

Good morning and thank you for joining our call. Before I get underway, I'd like to acknowledge the results from the mid-term election yesterday. With two additional states voting to legalize cannabis last night, we're seeing continued momentum for reform. And while the overall results of last night are not yet fully clear, what is abundantly clear is that Americans continue to demand access to legalized cannabis. The bipartisan appeal of cannabis cannot be overstated. And I hope the results of these mid-terms will further push the Senate to act swiftly on cannabis reform during the lame duck period, and fully unlock this once-in-a-generation opportunity across the nation. Moving back to our earnings. Today, I'll speak to Canopy's progress against our strategic priorities and discuss the transformational strategy we recently announced to fast-track entry into the US cannabis market through Canopy USA. Following my remarks, Judy will review our Q2 results, provide an update on our path to profitability and comment on our short-term outlook. Our second quarter marked an inflection point for Canopy, demonstrating momentum across our key businesses and accelerating our entry into the US cannabis market as we seek to seize the generational opportunity ahead of us. Q2 highlights included in Canada, we stabilized business revenues, improved cash margins and continued to make progress on our path to profitability. This has been achieved amidst persistent industry-wide challenges as well as an increasingly difficult macroeconomic backdrop. In our CPG business, BioSteel delivered another record quarter with very strong sequential growth. And we continue to pursue cost savings while driving focus in our business as evidenced by the announcement that we are divesting our Canadian retail operations. Now to provide more detail. In Canada, our efforts to premiumize our portfolio delivered a positive mix shift despite continued market fragmentation. During the second quarter, our Canadian adult-use B2B premium and mainstream sales accounted for a combined 58% of sales, up from 56% last year. This showcases our resiliency in a market challenged by labor and supply chain disruptions in three of the largest provinces, Quebec, Ontario and British Columbia. I'd like to take a moment to highlight our performance in the very competitive premium flower and pre-roll joint or PRJ segment. Supported by the recent launch of Doja OG Deluxe flower and PRJs, our Doja brand increased market share by two basis points versus Q1 FY 2023 to 2.4%. We're also encouraged by the demand for our new 7ACRES flower and infused PRJs that have recently entered the market. Next, in the mainstream flower and PRJ segment, our Tweed brand increased share during the quarter helped by strong demand for new Tweed branded Kush Mints and Wedding Cake flower. We're looking forward to introducing additional exciting new products in the second half of our fiscal year. We continue to focus on operational changes in our cultivation, as well as post-harvest processes and genetics that are driving higher THC percentages and improved quality. We're selling products into the market that allow for additional consumer choice like enhanced colors and distinct terpene profiles. This is a result of listening to our consumer feedback. Prime examples are the recently launched Tweed Lemon Kush, which is garnering positive comments for its flavor and the vibrant purple color of our new 7ACRES Purple Pancakes that has received high praise. In the current quarter, we pushed the envelope with the launch of our Ace Valley sex gummies, Lust and Thrust. We're encouraged by the initial market response to these gummies, which represent the capabilities of Canopy's insights, product development and marketing functions. There was a clear gap in the market and a natural fit for our focus on cannabis products tailored to specific needs as proof these new gummies sold out at ocs.ca in the first week of sales, leading to an immediate reorder with expedited delivery as the OCS anticipates high demand. We also continue to support our quality products with investments in our commercial ground game in Canada. I've previously highlighted the investments we're making in our budtender engagement program, higher education, which in its first year has facilitated over 10,000 interactions focused on education and product knowledge. Additionally, our commercial team continues to engage with retailers across the country, which led to strong distribution gains for our top new flower, PRJ, vape and edible products hitting the market in the current quarter. As a result of the divestiture of our retail operations, we've reduced channel conflict, which has created an opportunity to work with over 100 additional stores. It's our expectation that our Canadian adult-use B2B cannabis business will continue to show improvement in the second half of fiscal 2023 due to ongoing innovation and distribution drives. Closing out our Canadian cannabis business, in Q2, our Canadian medical revenue grew 8% year-over-year, driven by expanded product offerings. Next, I'll speak to progress in our CPG portfolio. First, BioSteel delivered another record quarter in Q2, helped by strategic investments that have driven distribution and velocity gains. This resulted in nearly $30 million in revenue in the quarter, which represents sequential quarterly and year-over-year growth of 67% and 299%, respectively. In the first half of fiscal 2023, BioSteel secured distribution with major retailers, including Walmart, Rite Aid and Winn-Dixie. This has helped increase ACV to 34% in the US, which represents a sequential increase of 520 basis points according to IRI data for the 13 weeks ended on October 2. Now moving to Canada. BioSteel is seeing strong market share growth. According to Nielsen data covering the convenience and gas channel for the four-week period ended October 8, BioSteel share of isotonic beverage sales in Ontario reached 11.2%, representing an increase of 630 basis points versus the prior year. BioSteel's share nationally was 7.4%, which is 450 basis points higher than the prior year period. A homegrown Canadian brand, BioSteel was born in an NHL locker room and resonates with athletes from across the country. This is a blueprint for the growth that we're starting to see in the United States, with a multi-year partnership that names BioSteel as the official hydration partner of the National Hockey League and the National Hockey League Players Association. The partnership provides BioSteel with ringside marketing, product supply and retail activation rights as well as community engagement platforms. If you watch hockey, the brand is highly visible on and off the ice and we've secured several distribution agreements in the US as a result. We anticipate additional growth for the brand as the hockey season continues and athletes, both professional and aspiring, enjoy the benefits of clean, healthy hydration, courtesy of BioSteel. Earlier this morning, BioSteel completed the acquisition of a manufacturing facility in Verona, Virginia. The acquisition of this facility from the brand's existing contract manufacturer will support the rapid growth strategy and expansion of US footprint for BioSteel. This is a natural next step for the brand and creates additional business value as BioSteel continues its ascent to the top of the sports hydration category. Looking to Storz & Bickel, sales were flat when excluding foreign exchange effects, which is an improvement versus the trend established in the first quarter of fiscal 2023. With this said, we are steadfast in our view that S&B has a strong platform for growth given the brand's global reputation and highly premium positioning. As recreational and medical consumers continue to look for the highest quality vaporizers available, we look forward to bringing additional Storz & Bickel innovation to market in the future. As you can see, the momentum is building in our Canadian cannabis and CPG businesses, and I believe we're at an inflection point as we look toward our next phase with Canopy USA. Firstly, or frankly, I think Canopy USA represents a pivotal moment in the history of Canopy Growth as we expect to fast track our entry into the US cannabis market by bringing together Acreage Holdings, Jetty Extracts and Wana Brands under the umbrella that is Canopy USA. We expect the closing of the acquisitions by Canopy USA will meaningfully enhance Canopy's growth and profitability over time once Canopy USA closes the announced acquisitions of Acreage, Jetty and Wana. In terms of next steps, we are appreciative that the CEO of TMX Group, the owner of the TSX, has publicly indicated support for our plans, and we remain committed to continuing dialogue with our partners at NASDAQ. Additionally, we anticipate receiving comments from the SEC on our preliminary proxy statement. However, we expect to be on track to hold our shareholder vote in early calendar 2023. In summary, Canopy USA is expected to accelerate growth and market expansion through the creation of a leading house of brands, capitalizing on a once-in-a-generation opportunity as we fast-track our entry into the US cannabis market. Q2 marked a key inflection point for Canopy. As we continue to drive innovation, distribution, focus, and efficiency in our Canadian business as BioSteel blazes a path forward in the sports hydration category. And as our Canopy USA strategy progresses, we've taken destiny into our own hands to rapidly achieve profitable growth. With that, I'll turn it over to Judy.

Thank you very much, David, and good morning, everyone. My comments will focus on: one, a brief summary of our second quarter results; two, a review of new segment reporting that we have introduced this quarter and the performance of those segments; three, an update on our path to achieve profitability; and four, some perspectives on the balance of our fiscal 2023 outlook. Let's start with a review of our second quarter fiscal 2023 financial results. In Q2, we generated net revenue of $118 million, representing a 10% decline over the prior year period. When adjusting for both the impact of C3 and the impact of our Canadian retail business, which we're divesting, revenues increased 2%. Sequentially, net revenues increased 7% compared to Q1. Revenue highlights include BioSteel delivering another record quarter, nearly quadrupling its revenue versus the prior year period, and our Australian cannabis business having its sixth quarter in a row of record revenues, and our Canadian cannabis business delivered a second consecutive quarter of stable revenue, despite the impact of labor disruptions in Quebec and British Columbia, as well as the supply chain disruptions at the OCS in Ontario. Gross margins and adjusted EBITDA have improved significantly year-over-year, driven by lower inventory charges in the current period as compared to the prior year, as well as the impact of our cost savings initiatives announced in April. Our SG&A expenses, excluding acquisition costs, declined by 10% year-over-year, even as we significantly increased our investments in BioSteel with new initiatives like the NHL partnership. Free cash flow improved modestly on a sequential basis as compared to Q1. Now following the completion of certain restructuring actions tied to our cost savings initiatives announced in April, which were aligned with our strategic review of our business, we have changed the structure of our internal management reporting. Accordingly, in the second quarter, we're reporting our financial results for the following five reportable segments: one, Canada cannabis; two, Rest of World's cannabis, which includes the US CBD business; three, Storz & Bickel; four, BioSteel; and five, This Works. These segments reflect how our operations are managed with the performance of these segments evaluated with a focus on segment net revenue and segment gross margin. Accordingly, we're now including these metrics in our financial reporting for the first time this quarter. Canada cannabis revenues declined 27% compared to the prior year period, yet were stable sequentially compared to Q1 and Q4. We grew our Canadian medical revenue by 8% versus Q2 of last year. Our adult-use B2B revenue declined 40% year-over-year and declined 5% compared to the prior quarter. We estimate that the labor strike in British Columbia and Quebec as well as the cyber attack impact in DOCS negatively impacted our Canadian adult-use revenue by approximately CAD 2 million during Q2. Canada cannabis adjusted gross margin was a negative 15% in Q2 as margins continued to be negatively impacted by under absorption of fixed cost and price compression offsetting improved product mix and cost savings initiatives. Excluding depreciation and certain non-cash inventory charges, and the impact of Canada employment wage subsidy program, which was zero during Q2 of this year, normalized cash gross margin for Canada cannabis improved to 16% from 7% in the prior year period. In our Rest of World Cannabis segment revenues, excluding C3 experienced a modest decline year-over-year as strong growth in Australia was offset by a decline in the US CBD business and the impact of shipments to Israel. We have previously referred to bulk sales to Israel as opportunistic and the current quarter did not have any shipments to Israel. Adjusted gross margin, adjusting for inventory charges related to US CBD, was 23% in the current period, down from 46%, in part driven by the C3 divestiture. BioSteel delivered its second quarter in a row of record revenues, increasing 299% as compared to the prior year period and 67% compared to Q1. Gross margins for BioSteel improved from a negative 5% in the prior year period to 15% in the current period, with the improvement due to higher revenue increasing operating leverage and improvements to supply chain operations. Adjusted gross margin was 26% after adjusting for certain non-recurring contract manufacturing costs. Storz & Bickel revenues decreased 7% compared to the prior year period, due in part to the impact of the weakening euro in relation to the Canadian dollar. On a constant currency basis, Storz & Bickel revenue would have been approximately CAD 1 million higher or stable versus the prior year period. We are seeing cautious consumer spending in an uncertain inflationary environment in select European markets, and we also continue to see headwinds from distributor and ongoing supply chain challenges. That being said, we are seeing strong growth in markets like Australia and our direct-to-consumer sales in the US remains resilient. Gross margins for Storz & Bickel also increased to 44% from 37% in the prior year period. This Works revenue decreased 24% in the current period compared to the prior year due to foreign exchange headwinds with the pound weakening significantly relative to the Canadian dollar and slower consumer spending impacting demand for discretionary items. On a constant currency basis, this works revenue declined 12% versus the prior year. Adjusted gross margin in the current period is 49%, an improvement over the prior year due to product mix and less discounting activity. Adjusted EBITDA in Q2 on a consolidated basis amounted to a loss of CAD 78 million. This was an CAD 85 million improvement in adjusted EBITDA loss versus Q2 of fiscal '22, primarily driven by the improvement in gross margin. We note that last year's adjusted EBITDA included CAD 87 million in inventory write-offs. Now, normalizing for the disposition of C3, the impact of the Canada employment wage subsidy program and the inventory write-off, adjusted EBITDA in Q2 FY '23 would have improved by CAD 20 million on a year-over-year basis. Relative to Q1, the adjusted EBITDA loss widened by CAD 3 million, which was entirely driven by increased marketing investments behind BioSteel. I'd like to now provide an update on the efforts underway to improve our profitability. On a consolidated basis, gross margin improved in Q2 versus the prior year and sequentially versus Q1, as we continue to improve our product mix in the Canada cannabis segment and execute on our cost savings programs, where we have committed to delivering savings of CAD 30 million to CAD 50 million in cost of goods sold. While the majority of these savings are expected to be recognized in the second half of fiscal '23 and into the first half of fiscal '24, we did achieve CAD 8 million of savings in Q2, primarily relating to headcount reductions, more efficient procurement activities, and supply chain improvements. To date, the cost savings programs have realized over CAD 11 million of the expected $30 million to $50 million in cost savings. In addition, as David mentioned, BioSteel acquired a manufacturing facility in Verona, Virginia, which will enable BioSteel to bring production of its ready-to-drink beverages in-house. This is expected to improve BioSteel's gross margins closer to that of similar premium beverages over time. The other key initiative is that reducing our SG&A expenses, where in April, we announced that we have undertaken actions that we expect will reduce our SG&A expenses by $70 million to $100 million over the next 12 to 18 months. Selling, general and administrative expenses in the second quarter were flat versus prior year, which includes $12 million a year-over-year increase in acquisition costs. Adjusting for the impact of the acquisition cost, the disposition of C3, which contributed CAD 3 million to SG&A in Q2 of fiscal '22, and the impact of the payroll subsidy benefit, which positively impacted SG&A by $11 million in Q2 fiscal '22 and zero in Q2 of fiscal '23, SG&A expenses in the second quarter decreased by 15% or CAD 20 million year-over-year. This CAD 20 million savings is a net of the impact of wage inflation, as well as incremental sales and marketing investments in BioSteel, including the activation of the NHL partnerships, which took effect in Q2 fiscal '23. To date, the cost savings program has reduced SG&A expenses by approximately $36 million, even as we have increased our investments in key growth initiatives. At the end of Q2 of fiscal 2023, we announced the divestiture of our retail operations in Canada. The operational savings from this step were expected to result in projected SG&A cost savings being closer to the high end of the annualized CAD 70 million to CAD 100 million target range. Pressing forward on our path to profitability, we continue to evaluate opportunities to bring additional focus to our Canadian cannabis operations, including portfolio optimization, with a focus on streamlining our SKU count as we continue to premiumize our portfolio and further tighten our focus, capturing additional efficiencies across our operations, and reducing costs, and applying focus and discipline to our overall SG&A costs with an eye towards variable spending where feasible to match spending with business levels. Let me now spend a few minutes on our cash flow and balance sheet. Our free cash flow in Q2 was an outflow of CAD 135 million. This comprised of cash outflow of operation of CAD 133 million, which includes CAD 41 million in interest payments in the quarter. Q2 CapEx came in at CAD 2 million, significantly lower compared to the prior year period. For the full year 2023, we now estimate CapEx to be in the range of CAD 10 million to CAD 20 million. In conjunction with our Canopy USA announcement, we announced two major steps we're taking to improve our balance sheet and reduce our cash interest expenses. First, we have entered into an agreement with certain of our lenders under which Canopy will tender approximately CAD 187.5 million of the outstanding term loan at a discounted price of CAD 930 per thousand. The first half of the paydown will occur during this quarter. In addition, no earlier than the following the creation of the Canopy Growth exchangeable shares, we intend to negotiate an exchange agreement with affiliates of Constellation Brands to purchase for cancellation up to CAD 100 million principal amount of our unsecured senior notes due July 23 in exchange for additional Canopy shares. These actions plus the partial exchange transaction of our unsecured senior notes that took place in July are expected to reduce our overall debt position by nearly CAD 60 million. We remain committed to further enhancing the strength and financial flexibility of our balance sheet and improve our cash burn, while continuing to pursue growth investments and other strategic initiatives. Our balance sheet remains strong with CAD 1.1 billion of cash at hand at the end of Q2 and CAD 2 billion of base shelf available. Let me now provide some perspective on our balance of fiscal 2023 outlook. First, we expect continued year-over-year growth from BioSteel in the second half as the team builds on the growth in the first half with increased marketing investments driving gains in sales velocity and new distribution. On a sequential basis, we expect Q3 to be slightly down versus Q2 with a stronger Q4 based on the timing of shipments. Canadian adult B2B business is expected to show continued improvement as it benefits from our premiumization strategy and new product launches. However, we expect some choppiness in the near-term as we work through our portfolio optimization strategy. Our rest-of-the-world Cannabis segment is expected to show year-over-year growth in medical sales in Germany, Australia, and other international markets, while sales for Israel are expected to be minimal in the back half of the year. While the distributor challenges and economic conditions in the first half created some headwinds for Storz & Bickel, we are seeing improved US distribution in the third quarter, which we expect will drive sequential growth in the second half of the year, though prior year comparisons will be challenging to repeat. I'd also note that with the disposition of the Canada retail operation has already seen 10 locations closed, which will begin to impact the Canada retail revenues starting in Q3. Second, we expect the balance of fiscal 2023 to show continued progress in our profitability with expectation of this year being a transition year as we work towards profitability, building on the cost structure improvement as we've seen in the first half, while also making strategic investments in key growth areas of our business. Lastly, assuming a successful shareholder vote in favor of the upcoming proposal, Canopy USA is expected to exercise the rights to acquire Acreage, Jetty and Wana. And once these transactions close, we expect to consolidate Canopy USA's financial performance into Canopy's financial statements. And as we continue to improve our focus on our Canadian business and once Canopy USA closes the acquisition of Acreage, Jetty and Wana, we expect Canopy's global cannabis business to be profitable on a consolidated adjusted EBITDA basis. In conclusion, we are focused on executing our path to profitability in Canada. We continue to invest in high-potential opportunities, particularly in the BioSteel business, which is seeing strong results and we expect Canopy USA to meaningfully improve Canopy's growth and profitability over time. This concludes my prepared comments. We'll now take questions. To begin our Q&A session. Sorry, go ahead, operator.

I'm sorry.

Operator, we will take – operator, this is A - Tyler Burns. We'll take a couple of questions first that we have in the queue from our Say Technologies platform.

Okay. Thank you.

Okay. That first question is – what is the plan for entering the US market? And what is the projected time frame for this happening?

So there are a number of steps related to entering the US market under the Canopy USA structure that we announced a few weeks ago. So the steps are: first, where Canopy shareholders will vote to approve the creation of exchangeable shares. We expect that to happen in early calendar 2023. And then Canopy will create those exchangeable – that exchangeable share class immediately upon a successful vote. We then would expect Constellation Brands to elect to convert their common shares into those exchangeable shares. Acreage shareholders also have to have a vote to approve the acquisition of the floating shares, and we expect that to happen in early calendar 2023 as well. And then Canopy USA will exercise the options to acquire Acreage, Jetty, and Wana. We expect Jetty and Wana to close in the first half of calendar 2023. And we expect that the Acreage closing will take longer, it could take as long as nine to 12 months in order to get all the necessary regulatory approvals. But as we said, once we get through all of that work as well as driving continued focus on our Canadian business, we expect that our business will be growing and profitable.

Yeah. Second question is, what is your plan if NASDAQ denies the pending acquisition?

I'll respond to that question. First, Canopy shares are traded on the TSX, which is a significant exchange. We are glad that the TSX supports our structure and strategy for Canopy USA. Regarding NASDAQ, they have raised concerns about the financial consolidation of Canopy USA with Canopy Growth's results. They are not objecting to our structure, strategy, or plan at this time. It's also important to note that NASDAQ is not a regulatory body, so we do not need their approval for the transaction itself. There is no immediate risk to our NASDAQ listing, and we are actively holding productive discussions with NASDAQ to ensure compliance with their rules and policies. Even if NASDAQ maintains its objection to the consolidation, there are several potential options available, including the possibility of NASDAQ accepting a higher level of disclosure for our USA assets. We could also appeal if NASDAQ decides to delist our shares. It’s essential to remember that many developments will occur in the coming months, and we will provide more updates as they arise.

Operator, Judy and David will now be happy to take questions from the analysts.

Thank you. The first question comes from Vivien Azer of Cowen & Company. Please go ahead.

Hi. Good morning. This is Victor Ma on for Vivien Azer. And thank you for taking the question. So I just want to touch on BioSteel. Sales in 2Q were helped by the higher Walmart load in versus 1Q 2023? And BioSteel continued strong velocities we see in scanner data. As you look to move some of that RTD manufacturing in-house, what is your strategy on in-house versus contract manufacturing? And is there a target mix and a target gross margin you have in mind? Thank you.

Yeah. Hey, Victor, I'll take that question. So from the acquisition that we announced on the Verona facility, this is really about two things. One is it really ensures the supply of Tetra Pak packaging in the US and even in Canada because as you may know, there is limited supply and capacity of Tetra Pak packaging just across the industry. So it really ensures that we have supply that we can leverage internally and really ensure that we can continue to capitalize on the rapid growth that we're seeing for BioSteel across both the US and the Canadian market. Secondly, this is really also about margin improvement. As you probably saw in our segmented margin disclosure BioSteel’s margin this quarter was around 26%. We think as we bring production in-house through this acquisition, gross margin certainly will see significant improvement as we reduce or, obviously, eliminate all the co-packing costs, there are additional savings that we would garner from owning the production facility. So, all in all, it ensures supply and, obviously, its margin improvement efforts as well.

Thank you. The next question comes from Chris Carey of Wells Fargo. Please, go ahead.

Hi. Good morning.

Good morning, Chris.

I think your prior expectation, correct me if I'm wrong, was for the Canopy USA vote to happen perhaps in January. And now it sounds like early calendar 2023. Can you just help us understand your expectation for what appears to be a bit deeper of an SEC review here? And maybe explain to the extent you can, where you think they're taking a deeper look. Clearly, other cannabis companies based in the US have filings with the SEC. I'm wondering why your case would be different. So I'd love any perspective there. And how you think this impacts your timeline? Thank you.

I would say, Chris, that our expectation on timeline really hasn't changed all that much. We filed our proxy on October 25. There is a period in which the SEC can provide comments. And so, maybe, just the change in tone into the first half of the calendar year is just more being conservative than anything else, because our internal expectations really haven't changed.

Thank you. The next question comes from Tamy Chen of BMO Capital Markets. Please, go ahead.

Hi. Good morning. Thanks for the question. I wanted to ask about your Canadian cannabis business, specifically the production side and the cost of goods sold so far. A couple of quarters ago, there were some challenges in improving the quality of your mainstream and premium flower production. Could you provide an update on that progress? Have you overcome the previous challenges? Is your Canadian footprint still in a position where you need significantly more volume of mainstream and premium flower sales to achieve positive gross profit in that segment? Thank you.

Yes. Good question, Tamy. So, as it relates to performance from our production facilities in Canada, we've made tremendous progress in terms of our ability to deliver high-quality flower, in particular, to our consumer base. And we see that with some market share growth and distribution growth in new products that we've launched. We've continued to improve our grow processes. We've continued to look for ways to improve our post-harvest processing. We've introduced new genetics, and we now have a very robust pipeline of genetics that we can bring into the market. So we're feeling really good about our ability to supply that super high-quality flower into the Canadian market, right? So I think I wouldn't say we're over all of the hurdles because we're growing a plant. And at the end of the day, the agricultural cycle can create its own issues from individual lots of grow to the next lot. But I would say that we're really pleased with where we are and feel pretty confident in our path forward. From a footprint standpoint, we need a footprint that is capable of delivering our aspiration to be a leader in the premium and mainstream categories, and we'll continue to do take actions necessary as we always have to improve our ability to grow and grow profitable. So again, I would say that we're on track with where we'd like to be from a production standpoint.

The only thing I would add, Tamy, is obviously, we are seeing sequential improvements from a cash gross margin standpoint. And this is happening amidst rising costs, as you know, across the industry. And unlike other industries, Canada CPI is actually still down, right? So we're facing rising costs, but pricing compression is not helpful in the industry. And there's still a lot of evolving dynamics happening in the Canadian market, too, right? So – and just to give you one of the examples of what we're facing with. And I think it's – I can speak for a lot of the producers, I think the market really needs a more equitable distribution of profit pool. So we can adjust the footprint, we can adjust a lot of the cost structures but the market really needs to move forward to being – having a more equitable distribution of the profit pool. What I mean by that is, as you probably have seen, many of the producers are basically getting 30% of sales of revenue and that support in terms of the value chain is just not sustainable, I think for the industry, and are not healthy for the industry as a whole, too.

Thank you. The next question comes from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.

Good morning, Judy, I guess, and David, it's a two-part question. But so Judy, maybe you can explain by what you mean by heightened level of disclosure that NASDAQ would perhaps accept? And David, for you, I guess the question is, here we are trying to balance what the auditors want and maybe SEC, and what NASDAQ wants, right? So that could be a scenario that we would come to August, right, nine months from now, Acreage transaction is closed. And you would mainly stay in NASDAQ and I guess, persuade your auditors not to consolidate, because NASDAQ is still pending and just provide pro forma numbers, right? So we can all see what the company would look like on a quasi-consolidated basis pro forma with the US assets. So that could be a possible scenario, and please tell me if I'm wrong? And I guess the last one, David, as part of the same subject, Acreage yesterday said that the vote is taking place January 23rd. So if I'm a floating shareholder of Acreage, and I get my shares, if I vote yes on the 23rd, in theory, I would get my CGC shares in August, nine months after the transaction closes. And then maybe you'll still listed in NASDAQ, because there's still this paradigm that I just spoke about. If you can just touch on that first. Maybe if you can start Judy on the heightened level of disclosure and what I said about pro forma, not consolidating, and pleasing NASDAQ that way. And I guess convincing your auditors that can be done.

Thank you for your question, Pablo. In general, there has been extensive discussion regarding the structure of the transaction. We will continue to collaborate with NASDAQ, our auditors, the TSX, and all our partners to maximize value for all our shareholders. I remain optimistic that we will reach a resolution that satisfies everyone. We need to go through this process, and as pioneers in this sector, some complexities arise in how we present it. I am confident we will arrive at a beneficial outcome for all our investors. As we discuss the structure, I want to emphasize that we are integrating Acreage, Wana, and Jetty, along with their exceptional brands and unique market capabilities, into a single entity to create value, drive profitable growth, and generate cash flow for our shareholders. While the structural discussions are crucial for executing our business model, it's important to remember that we are combining strong businesses to enhance their value. I am confident we will address all issues related to listings, disclosures, audits, and more.

Thank you. The next question comes from Andrew Carter of Stifel. Please go ahead.

Thank you very much. Good morning. I wanted to ask, thinking through Canada, we're multiple years in, as you said, Judy, the profit pool is still under pressure and the category is decelerating. So I guess I'd ask with CAD 200 million of costs supporting that business are backed into the retail, why continue down that road, especially when Canopy USA is probably going to be your top use of capital? I guess I want to add to that, if you were to take some more significant steps, what flexibility do you have under your term debt agreement to do that? And I guess the final thing is when you close Canopy USA, will your lenders have any recourse on the Canopy USA assets? Thanks.

I appreciate that question. First, Andrew, I believe we are making strides towards achieving profitability in Canada. We are committed to improving our operations beyond our current announcements to ensure profitability in Canada. As David pointed out, our focus is on our footprint, which supports both our premium and mainstream businesses. We are reviewing additional strategies, including optimizing our portfolio and closely examining our variable and overall operating costs. It is essential for us to establish a self-sustaining business in Canada while we continue to scale growth in the US. Regarding your inquiries about any limitations on the term loan concerning our Canadian operations, there are no constraints to mention. From the perspective of Canopy USA, the process now involves their ownership of Canopy Growth exchangeable shares as part of the lender package. This gives them a valuable asset that could enhance their credit position, considering the ownership structure between Canopy Growth and Canopy USA.

Thank you. The next question comes from John Zamparo of CIBC. Please go ahead.

Good morning. I wanted to ask about your path to achieving positive EBITDA in FY '24. So two parts to this. First, just to clarify, that guide now includes your US assets? And second, if so, given the remaining cost cuts you're planning, seem to only get you about 40% of the way there to positive EBITDA just on the existing business. Should we interpret that as you do not expect the existing business as is to achieve positive EBITDA in FY 24? Thanks.

Yes, I'll address that. The comment we made regarding adjusted EBITDA being positive in FY 2024 applies to all of our businesses, not including the investments we're making in BioSteel. To clarify, our adjusted EBITDA losses thus far are primarily driven by Canada and BioSteel. We are strategically choosing to invest in BioSteel, which is positively impacting our top-line results, and we anticipate continued strong performance from BioSteel leveraging these investments in the future. Regarding Canada, I’ve previously mentioned our commitment to ensuring that our Canadian business becomes profitable. As we implement cost-saving measures, focus on premiumizing our product mix, and seek additional opportunities, we believe we can achieve positive profitability in Canada moving forward. Furthermore, if we consider the potential positive adjusted EBITDA that Canopy USA could contribute, we see an attractive business in terms of both growth and profitability. However, this is likely to materialize once Canopy USA finalizes transactions with Acreage, Jetty, and Wana, which could take several months to complete.

And John, as you use your question, maybe to build on some comments that both Judy and I made during our scripts, right? If you think about our business, and it aligns to our new segments that we're reporting in, we have our Canadian business that we're going to continue to drive innovation. We're going to drive distribution, and we're going to really work towards a focus and efficiency in our Canadian business that gets us the results that we want. A proof-point in that is the divestiture that we've announced of our retail assets. We then talk about BioSteel, which is a brand that we're investing in, but showed almost 300% year-over-year growth. And we really love the trajectory we're seeing in markets like Ontario, where the brand is maybe a little more well known and established but is really starting to hit an inflection point. So that gives us reasons to be excited about that. We've talked a lot about our Canopy USA strategy, but that's really about growing our businesses that are profitable in really strong markets in the US so that we can take a share of the CAD 50 billion total market. But then I also want to layer in our Storz & Bickel business, which is coming off of 20 years of consecutive growth. We are continuing to look at driving distribution in that business and working through some exciting innovation in that business as well. And that's a business that is a standalone profitable, and again, resonates well with our consumers. And then lastly, we really have our Rest of World businesses, which includes our US CBD. We're going to continue to function in those markets in an asset-light fashion and be opportunistic as the regulatory environment evolves. And so I think putting our business kind of in that perspective using our new reporting segments, I think is a helpful way to think about it because then you can get under the components of profitability that as Judy described, where we have some work to do in Canada, and we're investing in BioSteel.

Thank you. The next question comes from Nadine Sarwat of Bernstein. Please go ahead.

Hi. Thank you for taking my question. I appreciate you saying that including Canopy USA will get Canopy Growth globally profitable on a consolidated basis, but my understanding is you actually won't get access to any of those cash flows. So beyond the cost synergies, which those US assets would enjoy by being under the same umbrella, could you explain the benefits to Canopy Growth shareholders today from the creation of Canopy USA? Thanks.

Yes, I'll take that, Nadine. So I'd say from a Canopy Growth shareholder standpoint, obviously having some visibility to the performance of the Canopy USA business that Canopy Growth has already paid for in owning a majority of those assets is not showing up on their P&L. Just having that visibility, we think is beneficial to Canopy Growth. The second benefit would be when you think about some of the resources, both management time and cash uses that we are making at Canopy Growth level to really advance our US THC strategy. And we've talked about this before that there is not insignificant amount of money and time that's being spent by Canopy Growth to really advance our US THC strategy. So by having this Canopy USA structure, we can really streamline the management and the resources that Canopy Growth is also spending on Canopy USA, while Canopy USA also then takes advantage of the consolidation of their businesses and really generates revenue and cost synergies over time. And ultimately, we do expect regulatory progress to happen at some point, right, maybe not in the next year, but we do think that that will happen. And all of the benefits that Canopy USA would be generating both from a profitability standpoint and the cash generation standpoint, all of that at that point will accrue to Canopy Growth shareholders.

And it gives us a head start into that market so that we don't wait until we have a permissibility event and then put the assets together. So, I think the head start is important, and it is a legitimate economic asset that's available to our shareholders. And clearly, cash flow is available to our shareholders upon permissibility.

Thank you. The next question comes from Doug Miehm of RBC Capital Markets. Please go ahead.

Thank you. My question just relates to BioSteel, given the growth and it looks like the opportunity for this product relative to the Canadian cannabis business, number one, within the next year to 18 months, do you expect BioSteel to be a larger business than the Canadian cannabis business? And then number two, as you think about other opportunities and what's going on the Canadian cannabis side, when you think about M&A, are other products that are similar let's say, the BioSteel would they come to the top of the list on a return on invested capital basis now seeing what you've seen over the last while?

So look, we're going to continue to drive BioSteel because we think that we have something really special in the brand proposition and the way it resonates with professional athletes and aspiring athletes and then the common consumer. So, we're going to continue to drive BioSteel as hard as we can. From an M&A standpoint, as a company, we're going to remain focused on delivering against the business opportunities that we have in front of us as we talked about incremental focus and efficiency in our Canadian cannabis business and really stay focused on what we have with the potential on a very small scale to be opportunistic in building our portfolio so that we can go to market ultimately in the US.

Great. Thanks.

Thank you for the question. So, I think as part of the deal with Flow, you'll be co-packing for them at the Virginia facility for a bit. So I guess how much revenue would that co-packing arrangement generate? And what is the duration of that agreement? And then on Storz & Bickel, Judy, I think you said you expected it to sequentially grow, is that just normal holiday seasonality, or is there something improving sequentially with discretionary purchases? Thank you.

Yes. From the S&B perspective, the encouraging aspect is that while Q2 performance showed a 7% decline, it was flat when excluding currency effects. This reflects an improvement compared to Q1. Many of the issues we faced with some US distributors have been addressed, and we are now receiving reorders from those distributors after having to pause some shipments. Consequently, we are noticing some positive changes. A significant part of this improvement stems from overcoming distribution challenges. We also encountered supply chain issues in Q2, but those are getting better as well. It's important to note that the European market continues to face challenges due to inflation and the conflict in Ukraine. Nonetheless, we are seeing improved trends from resolving some internal challenges faced by S&B. Regarding Flow, you are correct that there will be a time when BioSteel will handle contract manufacturing for Flow production. This is primarily to optimize capacity usage, which also aids in improving margins. Therefore, it's more about efficiently utilizing the facility's capacity rather than focusing on revenue.

Thank you. Our last question comes from Michael Lavery of Piper Sandler. Please go ahead.

Thank you. Good morning.

Good morning.

I want to revisit the NASDAQ listing. I understand that it will take some time before we gain clearer insight into the situation. You've also mentioned the possibility of an appeal. If they decide to delist and then reject an appeal, could you clarify your strategy regarding the Canopy USA deal and whether you would choose to delist or maintain the NASDAQ listing? How would you make that decision?

So Michael, I would just go back to what David said. The decision to announce Canopy USA is to optimize the value of our US PEC investments. Right? So when you think about what we wanted to do and what our priority is, is really the structure allows us to optimize the value of our investments in the US. And really generate revenue and cost synergies for that entity over time. So we will continue to work with NASDAQ. We'll continue to have dialogues with them to make sure that we can come to a constructive decision, but if you think about our primary motivation for Canopy USA, it is really about value creation. And so that's really where we have our eyes set on.

Thank you again for joining us today. I mentioned that we feel that we're at an inflection point at Canopy, and we're really excited about where we sit today in the future in front of us. If you're in Canada, I encourage you to try one of our new premium flower and PRJ innovations or a great-tasting Tweed Iced Tea Guava or Deep Space Ginger Ale Galaxy. If you're in the US, I encourage you to hydrate with BioSteel, RTD beverages or try Wana gummy or a Jetty vape. Investor Relations will be available to answer additional questions. Have a great day.

This concludes the Canopy Growth's second quarter fiscal 2023 financial results conference call. A replay of this conference will be available until February 7, 2023. It can be accessed following the instructions provided in the company's press release issued earlier today. Thank you for attending today's call and enjoy the rest of your day. Goodbye.