Canopy’s collapse comes as the Canadian legal cannabis market is floundering, hurt by oversupply, overspending and government missteps that have prevented any company from making a profit.
The town of Smiths Falls, Ont., cheered when Canopy Growth Corp. and its Tweed brand closed a purchase in 2017 of a famed Hershey chocolate plant that had sat vacant for years.
Just six years later, things have gone awry. Canopy Growth is shutting down the Smiths Falls facility at 1 Hershey Drive and moving about 400 jobs to its new corporate headquarters across the street. High taxes have ensured that the illicit cannabis market has continued to thrive. A ban on advertising has made it nearly impossible for the new industry to promote itself. And a shortage of retail outlets at the start left companies with nowhere to sell their wares. For now, there’s no sign of a turnaround, and investors are turning their backs.
All told, Canopy Growth had lost about $19.35 billion in market value as of Wednesday from its height of $19.68 billion on Feb. 10, 2021, according to Dow Jones Market Data . Still one of the most visible cannabis companies in Canada, Canopy Growth has a market cap that now ranks near the bottom of the six at $324 million, well below the $1.2 billion for Tilray and the $588 million for TerrAscend, but ahead of the $209 million for Aurora Cannabis.
Now these companies are dealing with an oversized infrastructure with excessive overhead that is preventing them from achieving profitability. Also read: Canopy Growth cuts 1,200 jobs in past year and issues going-concern warning as analyst eyes solvency of cannabis company Julius Ivancsits, former CFO of Canopy rival Hexo, told MarketWatch that the going-concern language was more than likely triggered not by a lack of liquidity but by internal control issues stemming in part from a probe by the Securities and Exchange Commission into revenue recognition at the company’s BioSteel drink line.“As a company, you do not want to disclose this, as it hurts the stock and ability to raise capital,” Ivancsits said.
The company is taking steps to reduce its operating cash burn, including cost reductions at BioSteel and closing and selling facilities as part of its “asset-light” approach. All gone to look for America Meanwhile, Canopy continues to pursue its plan, aired in October, to separate its U.S. businesses — including Acreage Holdings, Jetty Extracts and Wana Brands — and list the company on the Nasdaq under the name Canopy USA and with an independent board of directors.
After an initial $190 million investment in 2017, Constellation Brands paid $4 billion to raise its stake in Canopy Growth to 39% in 2018. The deal included warrants that effectively gave Constellation control of Canopy Growth. A few months later, Canopy Growth named David Klein as CEO. Klein is a 15-year veteran of Constellation Brands and spent time as its chief financial officer.
Overall, Linton said Constellation has not been able to translate its past success in beer and liquor into the Canadian cannabis market. Another once-mighty Canadian company, BlackBerry Ltd. BB, -2.27% BB, -3.56%, is still operating partly because it issued stock when the company shares were trading at much higher levels and then held onto its cash for a rainy day — a path that Canopy Growth should have pursued, Linton said.
EY partner El-Cheikh said Canada’s flat excise tax remains problematic because it contributes to making legal products more expensive than illegal cannabis products. There are other issues to resolve as well, along with marketing and promotion restrictions such as potency limits.
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