THE STATE OF “THE BIG THREE” CANADIAN CANNABIS LPs
Canopy Growth, Hexo Corp. and Aurora Cannabis, each of these companies have, to varying degrees:
- invested too heavily in real-estate and cultivation assets – believing that all you had to do was grow cannabis and it would sell itself;
- tried to buy market-share through acquisition, but not truly understood the trajectory of the companies that they acquired;
- within their own companies and within their acquisitions, failed to define the consumer market and desires; and,
- consequently failed to produce a defined offering that increasing numbers of consumers have been willing to purchase repeatedly – the historic cannabis user was never going to transition from their “usual” supply-chain in sufficient numbers and so it was always necessary for new consumer to be attracted to new product forms.
CANOPY GROWTH
We see Canopy as just a dead man walking – they simply can’t and won’t ever be profitable and so the money from Constellation will just be logs thrown onto an ever burning fire. At some point it will run out and go out.
As we expected, Aurora Cannabis had a terrible, but better financial release than Canopy Growth (each published last week) and, as we expected, it was the medical side that showed a glimmer of promise for Aurora.
While Canopy does still have a portion of their sugar daddy money on the balance sheet, the truth is, they are bleeding out cash and unless Constellation decides to buy in more on Canopy, they will just sit on death row longer – it is not apparent that they have a compelling value proposition which consumers want to buy into (or an experienced management team that could define, develop and deliver one).
HEXO Corp.
Hexo is probably in the worst position of all three. They aren’t profitable, will never be profitable, and owe lots of money that’s coming due.
Buying Zenabis and 48 North, neither of which made any strategic sense, given how poorly those businesses were performing, required more money to be borrowed or raised through more share issuance. Then overpaying for Redecan just dug the hole even deeper. And given the Hexo business itself was always unprofitable, the business simply could not generate any profits to help pay for them.
So now the business sits in, what we consider to be huge financial peril. They are slashing costs everywhere, closing facilities and firing employees, spending very little time on innovation or consumer research or value proposition generation – because they simply can’t, they don’t have the time and they don’t have the money.
We have always predicted that Aurora was our number one choice for first large Canadian cannabis producer to go insolvent, but with the rash decisions over the last year and the need now for a share consolidation (because their share price has dropped below $1 and is in breach of their listing requirements), Hexo is doing everything in their power to take over that position.
AURORA
Despite what we have always said about Aurora’s position, and while all three are in really dire straits, we actually think that Aurora might have the greatest potential to survive, but that is akin to choosing the least worst business and stems from the fact that they have a toe in the medical market, rather than being purely recreational.
Aurora could be saved by the medical side of their business: is there any way to unlock its potential? is there any way to separate it from the anvil that is their recreational business? is there any way to sell off or spin off that recreational side and allow them to focus single-mindedly on medical?
It would certainly be a much smaller business, but could it actually be profitable which, at the end of the day, is required for any business to be sustainable. We do not believe that their current business model of operating within both simply will never be profitable.
Our assessment would be for them to bite the bullet and spin or sell off the recreational cannabis side – it’s a loser for them and they simply cannot grow the top line nor make any money doing it. They are far better off to reset their asset base, become smaller and focus solely on the medical side.
OVERVIEW
Calculators don’t have enough digits on them to display the aggregate losses which have been posted by these three “leading cannabis companies” and their multitude of subsidiaries – it is truly multiple billions of dollars.
It is starting to seem that all of the “mug punters” who were willing to invest on the promises of the original (and subsequent) CEOs are starting to dry-up and so now Canopy is entirely reliant on Constellation’s desire not to admit that it took a huge bath on its investment (and the inevitable write-down on its own balance sheet that would follow) and Hexo is begging the shareholders who have already lost their shirts to invest more to prevent it being ejected from the Nasdaq exchange (which upon which it listed with such fanfare less than 12 months ago), which itself was a transfer from the NYSE.
And so, those investors who were early adopters into the market place and who happened to plum for Aurora might find themselves in the “best” position of the three – although it is not a ringing endorsement when, as we said earlier, it is actually the “least worst” and, even if it survives, it will not be the business that they actually invested into (recreational cannabis), but a medical cannabis company.
THE FUTURE
The days of “grow it and it will sell” never existed other than in the minds of the certain executives who had never delivered a consumer-focused proposition before and who never had a plan when that turned out not to be the way of the world. Their foolhardy approach of simply buying more and more brands managed by individuals as inexperienced in the consumer market as they themselves were simply dug them into a deeper and deeper hole from which they are unlikely to escape.
What we believe that this demonstrates is not that the THC or CBD market cannot sustain large investment or large demand cannot be engendered, however, what it shows is that for this to take place it requires CPG companies, who know how to identify, develop and deliver products that the consumer wants (even when the consumer doesn’t know what that is yet). What is required is experience of the consumer, not experience of cannabis.
