(This story was updated at 2:14 p.m. ET with comments and additional details.)
Canadian cannabis producer Canopy Growth said Thursday it is closing its flagship cultivation facility in Smiths Falls, Ontario, and cutting more than a third of its workforce as part of a shift to an “asset-light model” in Canada.
Canopy disclosed the new strategy as it reported a net loss of 267 million Canadian dollars ($200 million) for its fiscal third quarter, bringing the struggling company’s red ink in the first three quarters of the year to CA$2.6 billion.
Canopy said it is cutting its workforce by approximately 35%, including 800 positions impacted by Thursday’s announcement.
Forty percent of those, or roughly 300 positions, were terminated effective immediately, a spokesperson told MJBizDaily via email.
The layoffs come as cannabis companies across North America have been shedding hundreds of jobs and closing facilities because of failing business plans, falling wholesale prices and recession worries.
Last month, U.S. multistate operator Curaleaf Holdings said it would shutter the majority of its operations in three Western U.S. states – California, Colorado and Oregon – and reduce its payroll by 10% in the latest sign of the ongoing difficulties for the cannabis market as a whole.
Canopy’s head count reduction represents 60% of the company’s “operational footprint,” or the facilities it owns, the spokesperson said, “as we consolidate cultivation in Kelowna and Kincardine – our purpose-built for cannabis facilities.”
Canopy’s plan to close its facility at 1 Hershey Drive in Smiths Falls raises the question of where its executive offices would be located.
The Canopy spokesperson told MJBizDaily that “we’ll still be in 1 Hershey Dr while we wind down the facility over the next approximately six months, so that remains our HQ.”
Canopy promises profit
Canopy’s management, which expects the cost-reduction initiatives to save the company CA$140 million to CA$160 million over the next year, reiterated its commitment to achieve positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) by March 2024.
“Canopy must reach profitability to achieve our ambition of long-term North American cannabis market leadership,” CEO David Klein said in a statement.
“We are transforming our Canadian business to an asset-light model and significantly reducing the overall size of our organization.
“These changes are difficult but necessary to drive our business to profitability and growth.”
Canopy has been closing facilities across Canada for years after overbuilding production capacity – part of a yearslong building spree largely fueled by stock market exuberance.
In November 2021, Canopy shuttered its sprawling 23-acre property in Niagara-on-the-Lake, Ontario.
Earlier that year, Canopy sold two facilities in British Columbia that it once touted as the largest cannabis greenhouse in the world.
The assets were sold for major losses.
As part of the new “transformation” strategy announced by the company Thursday, Canopy also said it is moving to a third-party sourcing model for cannabis beverages, edibles and vapes as well as “ceasing the sourcing” of marijuana flower from its Mirabel, Quebec, facility.
Another poor quarter
Canopy Growth’s sales fell almost across the board in the third quarter ended Dec. 31, 2022.
Net revenue for the October-December period came in at CA$101.2 million, down 28% from the CA$141 million in sales recorded over the same three months a year earlier.
By revenue channel, Canopy continues to experience declining business-to-business sales of recreational cannabis in Canada.
Such sales fell 35% compared year-over-year to CA$21.5 million.
That’s also 50% lower than the CA$43.1 million the company recorded in wholesale cannabis sales in the October-December period of 2020.
In Canopy’s other revenue channels, sales of:
- Storz & Bickel, the company’s popular vaporizer line, fell 20% year-over-year to CA$20.2 million.
- BioSteel, a non-THC beverage, dipped 4% to CA$16.4 million.
- International cannabis dropped 54% to CA$5.8 million.
Canopy said international sales fell because of declines in the American CBD business and sales to Israel. But that was partially offset by strong growth in Australia.
In a conference call with analysts Thursday, Chief Financial Officer Judy Hong said international sales are expected to further decline in the company’s fiscal fourth quarter, “as we no longer expect to see sales to Israel going forward.”
The lone bright spot was Canopy’s Canadian medical cannabis revenue, which grew 9% in the third quarter year-over-year to CA$14.1 million, driven primarily by growth in insured patient registrations and more product offerings, the company said.
Meanwhile, Canopy’s share of the Canadian recreational market has been waning for years.
In December 2022, Canopy held roughly 4.3% of the overall market, down from almost 6% in June 2022 and roughly 15% in early 2021, according to digital retail platform Hifyre.
‘Regulatory failures’
Jonathan Sherman, partner at Cassels and co-chair of the Toronto-based law firm’s Cannabis Group, said strict federal regulations have been the root cause of the industry’s struggles in recent years.
“I think this is squarely focused on regulatory failures of the Canadian government to give cannabis companies the right opportunities to thrive,” he said in a phone interview with MJBizDaily.
“We’ve been sitting around waiting for a refresh of the Cannabis Act that was supposed to happen already,” added Sherman, who also is Canopy’s corporate M&A securities counsel.
“There’s a lot of hurdles the government is not helping these companies with right now, whether it’s the biggest ones or the smaller ones.”
Sherman argued that “it’s unfortunate to see the government created an industry and turned its back on it.”
The federal government’s legally mandated legislative review began one year late.
Industry group Cannabis Council of Canada has been pushing the federal government for meaningful regulatory reform for years.
Scott Reid, the member of Parliament whose position includes Smiths Falls, put the blame at the feet of the federal government.
“While there are many reasons that this industry is retrenching, the overwhelming factors are the direct responsibility of the incumbent federal government: unreasonably high taxation and a high-cost regulatory burden that drives up the compliance costs of licensed cannabis producers without a commensurate benefit for public safety,” he said in a statement.
“Until today, Canopy was the largest single private-sector employer in the constituency that I represent, and it continues to be a leader in the industry.
“What a shame that our government has destroyed the potential that it had, to bring prosperity to this corner of small-town Ontario, and to the Canadian economy as a whole.”
Canopy shares trade as WEED on the Toronto Stock Exchange and CGC on the Nasdaq.
Matt Lamers can be reached at matt.lamers@mjbizdaily.com.
