Cannabis Carnage

Cannabis carnage continues as shares of Canopy Growth fell 40% the other morning on the Toronto Stock Exchange. This came after the company announced it was issuing new shares to reduce its debt load.

Meanwhile, Organigram posted a net loss of $213.5 million for its third quarter. The CEO, Beena Goldenberg, blamed “THC inflation.” That is, companies that exaggerate their THC levels to boost higher sales.

Organigram’s total net revenue for the quarter declined by 14%, after a 17% decline from the previous quarter.

Yet, the CEO thinks the solution is to complain to Health Canada about “THC inflation.” She thinks flower products showing 28% and 32% THC are impossible.

“This is not something that even the most advanced cultivation techniques could make happen,” Goldenberg said in a press release.

As we’ve been saying for years – Canadian cannabis legalization was a lesson in crony capitalism.

The original homesteaders – “B.C. Bud” – were labelled “organized crime” and ignored during the legalization process. “Stakeholders” and public health busybodies wrote the rules.

Canadian consumers may love the novelty and convenience of legal weed, but underneath the surface, it’s cannabis carnage.

Cannabis Carnage – Canopy 

Just one day before a vital debt maturity date, Canopy announced they were diluting their shares. The cannabis carnage began by gutting the WEED-T stock by 40 percent.

The idea is to shave $ 437 million in debt from the company’s balance sheet. But some analysts have suggested that Canopy cannot claw its way out of debt. That the company’s true stock value is zero.

Canopy’s last earnings report showed a $1.4 billion debt hole and less than $ 800 million in cash. A far cry from the hyped-up nonsense in 2018 and 2019, when legal cannabis first hit the market.

The fact is: Canopy has never been profitable. Like the other large-scale licensed producers, they’ve never been cash-flow positive. Canopy’s latest fiscal year ended in March with a net loss of $ 3.3 billion.

To stem the cannabis carnage, Canopy is paying $ 225 million in convertible senior notes. With lenders holding nearly $ 200 million in debt agreeing to a swap deal.

Canopy will pay the debt holders $ 101 million in cash, 90.4 million common shares, and $40.4 million in new convertible debt that lenders can convert to common spares at 55 cents a share.

Analysts say Canopy may need to issue 73 million new shares at this price. Currently, the company has 558 million outstanding shares. The value of these shares has been steadily declining since early 2021.

In other words – Canopy is addressing its debt issues by significantly diluting existing investors. The stock is down over 99 percent compared to all-high times in the months leading up to legalization.

Cannabis carnage, indeed.

Cannabis Carnage – Organigram

The cannabis carnage at Organigram is different from Canopy’s problems.

Both stem from the fact that these highly-leveraged, capital-intensive, politically-connected cannabis companies aren’t as popular as your small-time “illicit” grower or mom-and-pop micro licence holder.

But where Canopy is trying to do the right thing by clawing out of a financial sinkhole, Organigram runs to the authorities.

They’re complaining they’ve been “disproportionately negatively impacted by THC-inflation.” Their evidence for THC inflation is

a) Lack of standard testing for cannabis potency via Health Canada

b) The number of cannabis flower products labelled 30%+ THC has increased ten-fold in one year

It’s almost like new players are entering the field and learning how to grow quality cannabis. But according to the lacklustre minds on the board at Organigram, these high THC levels are “not something that even the most advanced cultivation techniques could make happen.”

In response to competition, Organigram’s CEO said they had to cut pricing “so we could address the value equation to consumers.”

The cannabis carnage at Organigram is a result of dealing with market competition. Something these large producers aren’t accustomed to. First, as one of Harper’s medical producers, then as one of Justin’s front-in-line recreational producers, Organigram has enjoyed a sizeable market share.

Alongside pot giants like Canopy, Tilray, or Aurora, Organigram enjoyed the benefits of being one of the few market players.

But now, there are hundreds of licensed cannabis growers in Canada. And consumer preference suggests small-scale (potent) craft strains are superior to the sea-of-green value bud these large producers specialize in.

But the issue must be with consumers. 

“We’ve been sending in comments to Health Canada, we’ve been talking to the (provincial cannabis wholesale) boards, and we’ve been talking to other labs and really looking at finding solutions to address this issue,” said the Organigram CEO.

What’s Next for Cannabis in Canada?

From excessive taxes, zero tolerance on marketing, and government monopoly distributors, to other regulations driving up the costs of doing business – cannabis carnage in Canada stems from a botched legalization scheme.

Even Organigram’s concern over “THC inflation” isn’t entirely out to lunch. Canadian cannabis regulations allow for a 15% discrepancy in either direction. So a flower product labelled 30% THC may only be 15%.

And when it comes to Organigram’s legal battle with Health Canada concerning potent extracts, we 100% side with the cannabis producer.

But it’s hard to feel sympathy for these Leviathan cannabis producers.

Producers who were more concerned with selling equity than quality weed. Producers who didn’t step up to fund medical cannabis lawsuits. Cannabis producers who didn’t challenge the narrative that B.C. Bud (their market competition) wasn’t a bunch of violent, criminal gangsters.

The chickens are coming home to roost. Are these large producers ready to reap what they sowed? The cannabis carnage was foreseeable. And it’s far from over.