The biggest of Canada’s new brand of marijuana producers will join forces with Toronto-born rap star Drake to launch a fully licensed joint venture in the city to produce and distribute cannabis, the two sides said on Thursday.
Under the deal, the multi-Grammy award winner will take a 60 per cent stake in a subsidiary of stock-market listed Canopy Growth, which produces cannabis in Scarborough, Ont.
Canopy and Drake said the venture, called More Life Growth Co., would be “centred around wellness, discovery and overall personal growth.” Canopy will own the remaining 40 per cent of the subsidiary.
“Drake’s perspective as a culture leader and entrepreneur combined with Canopy Growth’s breadth of cannabis knowledge will allow our new company to bring an unmatched cannabis experience to global markets,” CEO Mark Zekulin said in a statement.
Drake teased the announcement earlier this week with an Instagram post and Toronto-based public relations campaign.
U.S.-listed shares of Canopy, which last year drew a major investment from Corona brewer Constellation Brands, rose around three per cent in early trading.
More Life Growth, in a trademark application from Dream Crew IP based out of West Hollywood, Calif., plans to sell cannabis, dried plants, herb teas and clothing products.
Drake is just the latest in a list of celebrities who have partnered with Canadian cannabis companies since the country approved the use of recreational marijuana.
Canopy Growth has previously announced assorted partnerships with Martha Stewart, Seth Rogen and Snoop Dogg.
Canopy Growth Corp.’s share price hit a 2019 low Thursday after the Canadian cannabis producer posted a $374.6-million quarterly loss, missed analyst revenue estimates and warned that a key revenue target may not be achieved.
Canopy stock hit an intra-day low of $20.15 at the Toronto Stock Exchange during the morning, and continued to trade down about 16 per cent from the previous close later in the morning.
Earlier, the company announced that second-quarter net revenue totalled $76.6 million, which was down 15 per cent from the prior quarter and below an average estimate of $107 million compiled by financial markets data firm Refinitiv.
Interim chief executive Mark Zekulin also told analysts during a conference call that his previous projection of $250 million in revenue for the company’s fourth quarter, ending in March, “is increasingly unlikely.”
While Zekulin insisted that Canopy has the resources to take advantage of the long-term potential for legal products derived from cannabis and hemp, he also said Canada’s market opportunity “is simply not living up to expectations.”
Need for more licensed retail stores
“At the risk of oversimplifying, the inability of the Ontario government to license retail stores, right off the bat, has resulted in half of the expected market in Canada simply not existing,” Zekulin said.
He added that the company is pleased to see Ontario’s recently announced commitment to move toward an open allocation of retail licenses where the number of stores will only be limited by market demand.
“This is a big deal but it cannot come soon enough.”
The cannabis producer says the loss amounted to $1.08 per share for the quarter ended Sept. 30 compared with a loss of $330.6 million or $1.52 per share a year ago when it had fewer shares outstanding.
That compared with $23.3 million in the same quarter last year before the legalization of recreational cannabis in Canada, but down from $90.5 million in its first quarter.
The company says the second-quarter results included a restructuring charge of $32.7 million for returns, return provisions, and pricing allowances primarily related to changes to its softgel and oil portfolio.
Canopy also took a $15.9-million inventory charge related to the change in strategy which includes new retail pricing, a rationalized package assortment and a focused marketing and educational plan.
Around this time in 2019, the cannabis sector was booming. Investors wanted in and stock prices were skyrocketing.
Today, share prices have tumbled and analysts are forecasting “many” bankruptcies by the end of the year. Just last month, two Canadian companies, AgMedica and Wayland, were granted creditor protection.
Some producers are looking for an exit, even if it means being bought by their competitors. Others looking to beef up their cash reserves are offering to sell off equipment and greenhouses — at a discount.
“But in most cases, those are assets you don’t want to take on. They’re not efficient,” said Greg Engel, chief executive officer of Organigram, a cannabis producer in Moncton, N.B.
“Certainly, there’s going to be additional insolvencies.”
A miserable 2019
The pot industry has been plagued with supply problems, stiff competition from the black market and a resulting loss of enthusiasm from investors.
“There’s a lot of trepidation, understandably, and I think it’s going to be some time before the capital markets come back,” said Rishi Malkani, a cannabis industry expert and partner at Deloitte Canada.
Oversupply, falling prices and the slow rollout of brick-and-mortar stores, particularly in Ontario, has contributed to low revenues for most licensed cannabis producers in the past year.
Malkani said he expects more than a dozen businesses to face “significant cash crunches” in the next six to 12 months, without naming specific companies.
“We are now seeing the separation between real operators and companies that based their value on hype,” said Engel.
His company continues to operate at a loss but more than doubled its revenues in the first quarter of 2020, according to financial statements released last week (Organigram’s Q1 2020 actually ended Nov. 30, 2019).
There are currently about 200 cannabis companies in the Canadian market with annual sales around $1 billion.
Even the biggest producers such as Canopy Growth and Hexo are in the red, with losses deepening into the last quarter of 2019.
“What it takes is more stores to meet demand,” said Sébastien St-Louis, co-founder and CEO of Hexo, which has facilities in Gatineau and the Ottawa region.
Despite its plummeting stock price and a larger-than-expected fourth-quarter loss, Hexo is aiming to become profitable this year, although its chief executive recognizes some elements — like store rollouts and provincial regulation – are beyond the company’s control.
“The capital markets took a breath, retail investors pulled back from the industry and that has really created a situation where companies are not profitable and there’s also no cash coming in for most companies on an investment basis,” St-Louis said.
Ontario open for business?
Jordan Sinclair, vice-president of communications for Canopy Growth in Smiths Falls, Ont., has high hopes after the Ford government’s decision to open the province’s retail market.
“We’re starting 2020 on a good note. The Ontario government is opening up its retail system to allow more of a free-market approach, rather than a lottery system,” Sinclair said.
The entire industry breathed a sigh of relief after the announcement, he said.
Even though three provinces delayed the sale of edibles, several producers hope these new products will be a lifeline for the legal market.
Another hurdle to profitability for some Canadian cannabis companies is a wave of class-action lawsuits launched in U.S. courts. At least nine are targeting Canopy Growth, Hexo and Edmonton-based Aurora Cannabis.
The lawsuits claim the companies misled investors and, if approved, could drag on for years.