Shares of Canopy Growth (CGC -6.04%) are down 13% this week as of Thursday’s close, according to data provided by S&P Global Market Intelligence, after the cannabis producer completed a reverse-stock split and completed the divestment of a small subsidiary business.
Canopy Growth’s share consolidation just took effect
Recall Canopy Growth stock also plunged more than 35% last week when the company unveiled the structure of the then-pending 1-for-10 “share consolidation,” otherwise known as a reverse-stock split. Canopy Growth’s consolidation officially took effect before the market opened yesterday (Dec. 20), reducing the number of outstanding shares by a factor of 10 while increasing the per-share price of its new common shares by the same multiple.
But why did Canopy Growth need to make this move in the first place? According to the rules of the Nasdaq exchange on which Canopy Growth stock trades, any stock that closes below $1 per share for 30 consecutive business days risks being delisted, though stocks in violation of the rule can also regain compliance by closing at or above $1 per share for 10 consecutive trading days. Canopy Growth shares had plunged more than 70% year to date at the time of last week’s announcement and had hovered below the $1 mark since the middle of September 2023.
Canopy closed today at $4.51 per share following the consolidation. So, barring a nearly 80% drop from these levels, Canopy Growth should have little trouble regaining compliance with the Nasdaq exchange by remaining above $1 per share for the next eight trading days.
Why Canopy Growth needs to show progress
It’s worth revisiting, of course, why Canopy Growth investors were upset by this particular share consolidation. Reverse splits are typically a zero-sum game, with the value of investors’ stakes remaining the same through the process. But Canopy Growth’s share consolidation deviated from the norm in that the company decided not to compensate investors for any fractional shares arising from the consolidation.
For example, in a typical 1-for-10 reverse split, an investor who held 19 shares of a stock trading at $0.52 per share would be given a single share worth $5.20, as well as $4.68 in cash for their remaining nine shares at $0.52 apiece. But with Canopy Growth’s consolidation structure, the same investor would have exchanged 10 original shares for a single new share worth $5.20 and received nothing for their other nine original shares.
Canopy Growth must also show sustained progress in its underlying business in order to avoid once again falling below the $1 per-share level in the future.
To that end, on Monday Canopy Growth announced that it has completed the roughly $12 million sale of its “This Works” skincare and wellness brand. The move should help Canopy Growth hone its focus on its core North American cannabis market, while transforming it into what CEO David Klein describes as “a simplified, asset-light, cannabis focused business.”
In the meantime, however, given the risk that its transformation won’t unfold as planned, and as the market digests the shareholder-unfriendly nature of its reverse split, it’s no surprise to see Canopy Growth continuing to pull back this week.
