Road to Profitability is Paved with Layoffs

Canada swung into the international lime light when it legalized Recreational Cannabis sales on October 2018, joining Uruguay which was the first country to do so.

Many investors were pumped about the sector since then and optimism was abundant, even though at times it was quite irrational. The hype in the sector was driven by licenced producers in order to raise the cash they needed to expand their production capacity to meet the incoming global demand.

Constant press releases from the days leading into and after legalization, and series of acquisitions certainly raised FOMO levels for most investors, and if you claimed to not own a pot stock on the “Weedstocks” Subreddit, you would have most likely been ridiculed for missing a trip to the moon.

However the slow roll-out of cannabis stores in Ontario grounded those expectations, and led to the scrutiny of most licenced producer’s valuations. The blowout demand for legal weed and the disintegration of the black market did not materialise as a result, causing many companies to reevaluate their business strategies and path to profitability.

Just months after October legalization, 2019 was the year the industry’s worst fears came to being. Valuations dropped drastically as stock prices tanked, some even to new 52 week lows due to being over levered. Although investors bore most of the brunt, employees in the sector were not so lucky either.

To make matters worse, the current pandemic has put a further dent on the sector’s ability to survive. Even though the initial days of the pandemic saw a surge in recreational sales in the sector allowing some cannabis producers to expand its staff, most others had to downscale its workforce to prevent the spread of the virus, resulting in reduced production and revenue.

The following breaks down the degree of layoffs and restructuring taken by some of the most prominent companies in the sector:

Canopy Growth Corporation: In early 2020, the company announced layoffs of 500 plus workers, closure of two greenhouses and its associated write offs.  The two greenhouses are located in British Columbia and comprised a total of 3 million square feet of licensed growing space. The company also stated that they would not pursue its plans to bring online a third greenhouse located in Niagara-on-the-Lake, Ontario.

In its latest restructuring announcement on April, the company stated that they laid off 200 more additional staff members while realigning its global ambitions by ceasing and scaling down activities in South Africa, Latin America, and the United States.

The company could also see more lay offs due to a new Covid-19 outbreak at its Smiths Falls facility announced on Sunday July 5th. One person has been tested positive while 8 others are currently undergoing testing as of Saturday July 4th.

Aurora Cannabis: Along with their co-founder and CEO Terry Booth’s departure on February, the company also let go of 500 employees too.  Aurora added 700 more employees to this list on June as the company doubled down on its path to profitability in hope of achieving positive EBITDA by the first quarter of fiscal 2021. The company also plans to fully deactivate 5 facilities across the nation and ramp up productions of its Denmark site instead to service the European medical cannabis demand by the end of second quarter 2021.

Organigram: Mid-tier licence producers like Organigram was also affected by the lower than expected cannabis revenue across the industry, and the recent pandemic added further problems to its already worrisome capital structure. This caused the company to lay off roughly 400 of its staff. The company later announced on July additional staff reductions by 200 employees, warning of decline in revenue as a result, and write downs on inventory.

Company CEO, Greg Engel stated that this was “to ensure that the company is appropriately sized relative to market conditions”.

Hexo Corp: Hexo is also in the list since they pretty much led the wave of layoffs when they cut 200 jobs back in October 2019.

Tilray: Tilray also laid off 144 staff members which comprised of 10 percent of its workforce, followed by shutting down its indoor cannabis greenhouse due to oversupply, and high production costs.

Harvest Health & Recreation: Layoffs were not only limited to Canadian LPs, this multistate operator based in Arizona, US announced $24 million cuts in expenditure which included undisclosed amounts of staff reduction in an effort to realign the company to be more efficient.

Given these issues related to slower roll out of Ontario cannabis dispensaries and virus fears, analysts have recently revised down the sector’s valuation. The latest sector downgrade came from analysts at CIBC who lowered their 2020 forecast for the Canadian Marijuana sector by a billion dollars totalling to  CAD $2.5 billion. This is lower than the previously projected valuation of CAD $3.4 billion.

Even though “pantry loading” due to the pandemic led to a rise in sales, analysts are doubtful that would not be sustainable once the economy begins to open up. However, advanced store growth in Ontario could always be the best outcome to restore optimism back into the sector and lead to hiring expansions followed by revisions of forecasts back to the upside.

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The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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