Canopy to close the Hershey facility

Canopy Growth Corp is laying off 800 employees as part of a restructuring plan that includes the closure of Hershey’s legendary Smith Falls, Ontario facility.

The layoffs will affect over 50 percent of the workforce and will take place over the next few months.

Canopy Growth Chief Executive David Klein said in a statement to the press, “We are transitioning our Canadian business to an asset-light model and significantly reducing the overall size of our organization. These changes are difficult but necessary to guide our business to profitability and growth.”

“An asset-light model” is exactly what many of us have been predicting in this space. As I wrote five years ago, Canopy would eventually exit for the same reasons as Hershey Chocolate.

The Rise and Fall of Canopy and its Hershey Building

On Thursday, Canopy reported a net loss of $266.7 million, or 54 cents per diluted share, for the most recent quarter of 2022. Net revenue for the Company’s third fiscal quarter was $101.2 million compared to $141.0 million a year earlier.

And of course, as has been the case since its inception — Canopy is cash flow negative.

Canopy blamed its more significant losses on non-cash changes in fair value and increased impairment and restructuring charges. But the truth is Accounting tricks that worked in the 2010s no longer work.

With a recession looming, investors are looking to hard data. Namely free cash flow. As I mentioned four years ago, Canopy’s cash flow from operations is, and always has been, negative.

In other words, shareholders have been subsidizing the company’s customers, which explains Canopy’s chief financial officer’s statement to the press.

“Properly sizing our Canadian business is expected to significantly reduce our cash costs. Canopy is firmly on track to achieve at least quarterly adjusted Adjusted EBITDA in fiscal 2024 in our Canadian cannabis business, even at the current rate of revenue.”

EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. It is a financial metric that measures a company’s operating performance by excluding the impact of certain expenses such as interest, taxes, depreciation and amortization. Calculating EBITDA provides a more accurate picture of a company’s operating cash flow.

But Smith Falls is the pot capital of Canada!

Once upon a time, the corporate press pounded the drum that Canada’s legal cannabis producers would be world-renowned. That Smith Falls of all people would become the pot capital of Canada.

Canopy acquired Hershey’s old chocolate factory in late 2016. They paid $6.6 million for the 42-acre property.

“Increasing our cannabis production capacity is critical to our business,” said former CEO Bruce Linton.

Even the mayor of Smith Falls drank the Kool-Aid. He once said, “We believe Smiths Falls is the first community in Canada to develop a cannabis tourism strategy. This is an important step in consolidating our leadership role.”

“It has always been our dream to bring tourists back to Smiths Falls and pay homage to the city’s history and heritage,” said Mark Zekulin, another former Canopy CEO.

But then reality collapsed. And for those of us who don’t buy the propaganda, none of this came as a surprise. There is no global cannabis economy at the moment. For now, Canopy will source from cultivation facilities in Kelowna, British Columbia.

But what incentive do they have to stay in BC? Imagine a North American legal cannabis market that is part of NAFTA.

This means that Mexico, with its ideal climate, tax incentives, lower labor costs, and operating costs, would become the source of cannabis cultivation.

Smith Falls would never become the pot capital of Canada.

Nowhere where daily average temperatures reach -15°C will a center for cannabis cultivation ever arise.