Given the relatively BIG NEWS this week of Aphria taking out Tilray, you may not have noticed an announcement from Aurora Cannabis ($ACB) regarding their ‘SKY’ facility. TheCannalysts toured it almost 2 years ago – and it was quite the sight.
The press release confirms that the greenhouse will be reduced to 25% capacity:
This sword is sharp on every edge.
You’ll recall GoBlue’s mentioning ‘unabsorbed overhead‘ recently, and its’ implications for companies. Throttling a grow-op will lead to its’ existence (ask Canopy or Aphria…..or a dozen others). In $ACB’s case, SKY is an integrated system, that’s been engineered and economically designed around full operation. That’s why the initial models work. The system is modular (natch), but this is analogous to running an 8-cylinder vehicle on only 2 cylinders. Sure, it’ll run, and it’ll move. But speed is an unknown, and it puts stress on the rest of the vehicle’s parts.
At any rate – in terms of $ACB’s travails – this one is a gut punch.
A sexy, strategically sited purpose built $100MM facility is largely being laid fallow – operations now having taken second place in priority to the needs of capital.
To me, this is no place an investor wants a company to be in.
From a high level, a company going to public markets and becoming successful will follow a trajectory something like this:
- Pitch creation
- Capital formation
- Initial operations
- Re-finance on proof of concept
- Growth and stabilization
- Achieve ‘going concern’ status
$ACB has been iterating between numbers 6 & 7 above for far more than a year now. Their EBITDA flag plants began in December 2018(!) no less. The decision to utilize 25% capacity puts them right back to #5, and having to prove that it should continue to exist in the first place.
Of all that $ACB has been and done; of all the promises and cultivation and product development and global ambition; of all the ‘Coke’ ‘Pepsi’ comparisons in the early days between them and Canopy Growth ($WEED)….not much has borne out. $ACB’s done much, but they needed to have done much more.
To me, the throttling of SKY and attendant layoffs is more than symbolic. To me, SKY is the spine of this company. I suspect we’ll see a continued trend towards aggregation/branding services, and organizations keeping fulfillment and processing for uplift while dumping cultivation.
<An overly optimistic aside: If mid-grade cultivation is being shuttered, mid-tiers capable of producing high quality will have opportunity. ‘Who’ is capable is the question. $WMD comes to mind. So does $FIRE. As does $TRST (hey, don’t snicker). Their pot was know to be ok, and with branding evolving as it is – and wholesale transactions undisclosed – $TRST could have batches out under several strain and brand names. Only a handful of people would know origin>
The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. Of the companies mentioned, the author holds position only in $APHA