Despite a seemingly positive move forward, Canopy Growth (NASDAQ:CGC) shares are experiencing significant volatility today. Part of that may stem from dilution risks tied to its business decision, which involves creating a separate U.S.-focused enterprise. This development assumes that the federal government will fully legalize cannabis, which makes CGC stock a bold wager.
Last Friday, shareholders voted on a proposition centered on the creation of Canopy USA. At the time, management proposed the issuance of a special type of security called exchange shares. These shares would represent ownership in the new entity, which would hold all of Canopy Growth’s investments that are geared toward the U.S. market. Some of these investments include companies like Acreage Holdings and Mountain High Products.
According to the company’s press release, a total of 32.25 million common shares — which represent 35.4% of issued and outstanding shares — voted on the proposal. At the special meeting, shareholders passed the special resolution, voting 95.5% in favor of the plan.
The new share structure will allow Canopy to issue “an unlimited number of a new class of non-voting and non-participating exchangeable shares” without voting or dividend rights. These can be converted into common CGC stock shares, presenting possible dilution risk.
CGC Stock is a Bet on Full Legalization
Still, management frames the move as a positive development because Canopy USA can then exercise options to acquire Canopy Growth’s existing U.S. cannabis assets. “Canopy Growth is expected to deconsolidate the financial results of Canopy USA and have a non-controlling interest in Canopy USA,” the company remarked in a statement.
Further, the move aims to cement an important potential milestone in the cannabis industry. “With this successful shareholder vote complete, our Canopy USA strategy is advancing and is poised to make Canopy the first and only U.S. listed cannabis company offering shareholders unique exposure to the rapid growth of the U.S. cannabis market,” Canopy CEO David Klein said in a statement.
Notably, Klein added that Canopy is “cautiously optimistic” that the federal government will reclassify cannabis from Schedule 1 to Schedule 3. If so, the move could boost cash flow for Canopy’s U.S. assets, Wana Brands, Jetty Extracts and Acreage. Plus, having these assets under the Canopy USA umbrella “is expected to generate revenue and cost synergies.”
Under the Agriculture Improvement Act of 2018 (colloquially known as the Farm Bill), the government removed hemp from its schedule of controlled substances. Industrial hemp contains less than 1% tetrahydrocannabinol (THC) content. However, marijuana contains 3% to 15% THC on a dry-weight basis.
Why It Matters
Although CGC stock features an arguably compelling narrative, analysts are less optimistic about its prospects. Currently, shares suffer from a moderate sell consensus view. On average, experts anticipate fiscal 2024 revenue to fall 20.6% year-over-year to $236.41 million.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
