When compared to other industries, we believe that development in the legal cannabis industry is occuring at a much faster pace. For several years, this was one of the most attractive aspects of the industry and it played a key role when it came to enticing banks to become active in the space.
A lot can change in the course of twelve months with the cannabis industry having been negatively impacted by a change in sentiment. During this time, the amount of capital being raised for cannabis companies by leading broker-dealers plummeted and a majority of operators became unable to meet previously announced revenues estimates and have lowered guidance.
One of the best metrics that we have used to understand the degradation of the cannabis industry is layoffs. During the last quarter, several high-profile companies have filed for bankruptcy and we have seen a substantial increase in the volume of layoffs at these operators. The companies that are cutting jobs are doing so in an effort to be profitable and to lower expenses.
By lowering headcount, companies are able to improve margins, and this is expected to help the operators in the near-term. Unfortunately, a company cannot continue to use layoffs as a way to enhance profitability and the benefits associated with the strategy are only short-term. We began to cover the cannabis sector more than five years ago and are closely following the recent trend. Today, we have highlighted 3 cannabis companies that recently announced large layoffs and we believe that our readers should be aware of this trend.
Tilray: A Fall from Grace
Last week, Tilray Inc. (TLRY) joined the list of companies to announce large layoffs and reported to have cut 10% of its 1,443 person workforce. In late 2018, the Canadian cannabis producer completed an initial public offering on the Nasdaq and the market responded very favorably to it. A few months after the IPO, Tilray was the hottest cannabis stock and at one point the shares traded as high as $300.
Tilray is the perfect example of a company to move too far, too fast. One of the reasons the market was excited about the opportunity when it went public is related to the people that were involved with the deal. Tilray was originally incubated and financed by Privateer Holdings as one of its wholly owned operating subsidiaries before closing a Series A funding round in early 2018. A few years ago, Privateer received a lot of attention from the cannabis sector after a fund in which Peter Thiel was a partner of made a large investment in the company.
The Canadian cannabis producer has fallen from grace and the shares are currently trading below the $20 level. The announced layoffs are part of a global restructuring effort to cut costs and to achieve profitability. By reducing headcount and costs, Tilray said it will be better positioned to achieve profitability and we will monitor how the management is able to drive the story forward.
When it comes to Tilray, we are most excited about the international markets that it is levered to. We believe that these markets represent the next growth cycle for Tilray as well as the entire cannabis industry. We expect the layoffs to make it slightly more challenging for the business to expand its reach and to deliver a quality product. This is an opportunity that recently popped up on our radar and one that we will continue to monitor closely.
Sundial is Going Up in Smoke
Sundial Growers Inc. (SNDL) is the latest billion-dollar cannabis IPO to come crashing down and this is an opportunity that we have been cautiously monitoring. The market had high expectations for the Canadian cannabis producer, and we are not surprised by its response to the recent developments.
When Sundial went public, it had a valuation that was north of the $1 billion market. At current levels, the company is worth less than $200 million and has since lost more than 80% of its value since the IPO. Last week, Sundial’s core management team resigned, and this comes around six months after the listing.
Last month, Sundial announced that it was laying off roughly 10% of its workers, the latest negative development for a company that had such high expectations. The recent departures mark the latest twist for a company that has seen a reversal of fortune and we continue to monitor the opportunity from the sidelines.
If the layoffs were not bad enough, the information being spread by old employees have made the market even more cautious with the opportunity. According to former employees, Sundial has downplayed the issues at its flagship facility and we find this to be significant. In 2018, the management team said the facility would produce a premium product that could be sold at four times the going rate, something that it never came close to accomplishing.
Sundial has disclosed two fires at the facility, one of which resulted in the destruction of hundreds of thousands of dollars worth of cannabis. Former employees also described issues with moisture, mold and fungus. In a market where safety is of the utmost importance, these are major negatives for the story that leave us cautious with the long-term opportunity.
HEXO: Negatively Impacted by the Acquisition of Newstrike
HEXO Corp. (HEXO.TO) (HEXO) is one of the first names to come to mind when we think about the Canadian cannabis producers that have been the biggest underperformers. We are surprised by the reversal of fortune with HEXO and expected the relationship with Molson Coors to evolve into something.
Last year, the Canadian cannabis producer announced plans to shut down several facilities it operates near Niagara Falls. This development was reported after HEXO announced that it was laying off 200 people. The facilities that are being shut down were a part of the acquisition of Newstrike Brands, a transaction that we had previously noted was a mistake.
HEXO was a major beneficiary of the increased interest in Canadian cannabis producers and it raised more than $100 million in 2018. During the last year, there has been a major shift in the amount of interest as well as the type of interest in the operation. Last year, we noticed a significant decrease in the amount of interest in HEXO as well as a change from raising equity capital to raising debt capital.
The facility shutdown disclosed by HEXO, it was reported the day after the company announced a $70 million private placement of convertible debentures. We are cautious with HEXO over the near term and want to see how the management team is able to execute with a smaller footprint.