Canopy to Close Hershey Facility

Canopy Growth Corp will lay off 800 employees as part of a restructuring plan that includes closing the iconic Hershey Facility in Smith Falls, Ontario.

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

David Klein, Canopy Growth’s chief executive, said in a statement to the press: “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.”

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

The Rise and Fall of Canopy & Its Hershey Building

Canopy to close Hershey Facility

On Thursday, Canopy reported a net loss of $266.7 million or 54 cents per diluted share for the last quarter of 2022. Net revenue for the third quarter of the company’s financial year totalled $101.2 million, down from $141.0 million a year earlier.

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

Canopy blamed non-cash fair value changes and increased asset impairment and restructuring costs for its more considerable losses. But the truth is, accounting gimmicks that worked in the 2010s are no longer working.

With a recession looming, investors are looking at hard data. Namely, free cash flow. As I pointed out four years ago, Canopy’s cash flow from operating activities is negative and always has been.

In other words, shareholders have been subsidizing the company’s customers, which explains Canopy’s Chief Financial Officer’s statement to the press. 

“The right-sizing of our Canadian business is expected to significantly reduce our cash costs. Canopy is firmly on the path to deliver at least quarterly breakeven adjusted EBITDA in our Canadian cannabis business in Fiscal 2024, even at current revenue run-rate.”

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!

Canopy to Close Hershey Facility

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

Canopy acquired the old Hershey Chocolate facility in late 2016. They paid $6.6 million for the 42-acre property.

“Increasing the scale of our cannabis production capacity is vitally important to our operations,” 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 solidifying our role as a leader.”

“It was always our dream to bring tourists back to Smiths Falls, and to pay homage to the history and heritage of the town,” said another former Canopy CEO, Mark Zekulin.

But then reality came crashing down. And for those of us not buying the propaganda, none of this has been a surprise. Right now, there is no global cannabis economy. For the time being, Canopy will source from grow facilities in Kelowna, British Columbia.

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

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

Smith Falls was never going to be the pot capital of Canada.

Nowhere where the daily average temperatures hit −15 °C will ever become a centre of cannabis cultivation.