We are almost at the third anniversary of legalized recreational cannabis in Canada. The 2.0 formats have been out for almost two years. Outdoor is on its third harvest cycle.  Ontario has opened stores, with Quebec being the only really laggard of the top four provinces by population. 

Just about every Canadian cannabis catalyst has been unleashed.

So, how are the top Canadian LP’s faring operationally?

What I have done below is take Gross Margin $’s (before IFRS where applicable), generously added back any cost-based inventory impairment, and then subtracted only Selling, General and Administrative expenses. I did not subtract any other cash expenses like interest, transaction costs, R&D, restructuring expenses… just SGA.

The purpose is to give a very quick and dirty look at “progress” (and I use that term generously) of Canadian LP’s at the simple operational nuts and bolts of a company. It ain’t pretty.

In improving order of efficiency at latest Q end:

Canopy: Caveat – they bury COVID subsidies in both CoGS and SGA which impacts the figures to their benefit. Range -$110 million to -$78 million. They have improved over the five quarters presented but remain almost twice as bad as their next closest competitor.

Cronos: USD – Consistent downward action over the 5 Qs.  Ranging from -USD 25 million descending to -USD 39 million in the latest Q.  Once they flip the fermenter on for biosynthesis this could drill more.

Aurora: Improvement year over year from -$34 million to -$27 million, but stubbornly stuck over the last three Qs in a tight -$24 to -$27 million range. With a 7% GM on adult use cannabis and without sales increases in adult use to absorb production overhead at Sky (25% capacity) they are stuck.

Organigram: This once EBITDA positive LP has been drilling in the wrong direction.  The delta is greater YoY and increased over the last three Qs. This would look worse if I did not reverse out inventory impairments, as they have had same every Q for the past seven quarters (that still shocks me).

Hexo: Made reasonable progress until last Q’s drop in sales (-$10 million) killed GM$ (-$7 million) while SGA increase (but only by $3 million) wiped out all progress in the period under review.

Auxly: Mostly focused on 2.0 products, Auxly has was stuck in a 3Q rut at the -$6-7 million mark, before cutting the delta in half last Q driven by sales growth of 100% QoQ and improved GM%.

Tilray (and Aphria pre Q0-2): USD in last two Qs. The only LP to even broach positive territory, recording positives in 3 Q’s, nil in one Q and -USD $2 million in the latest Q. SGA last Q had USD 6.2 million reserve for closing Nanaimo.  They indicate GM$ would have been USD 5 million higher IF the inventory produced at legacy Tilray was instead produced at legacy Aphria. But keep in mind a chunk of GM is owned by Double Diamond and smaller slice of SGA (as they do not have any selling expenses at Aphria Diamond JV).

The above is a very depressing graph.  Out of 7 LPs

• One (TLRY) broached a positive delta in last five Qs but couldn’t maintain it. They also have USD 10 million in quarterly interest expense to cover.
• Four (TLRY, OGI, HEXO, CRON) regressed YoY, and
• Three (CGC, ACB and CRON) are in a territory that will take more than a year to get to a positive figure.
• Auxly is the only one to make meaningful progress and that was all in the last Q.

The reason I am focusing on GM$ is that sales growth in adult use is waning for all but Auxly, and Auxly would need a 50% increase in sales (at present GM% and SGA$s) to get to a positive.

Without sales increase it is a tractor pull to improve GM% (as cannot achieve scale on GM or cover unabsorbed overhead), which stalls GM$’s.  GM$’s (when production side depreciation is added back) is what pays for those pesky cash expenses.

Hexo’s purchase/integration of Redecan or Tilray’s costs cutting of SGA and improving GM by shuttering London and Nanaimo might help them respectively. But without organic sales increases from adult use Canadian LP’s are facing a bleak operational future. Sure, you can purchase a competitor but that leads to dilution and integration period in order to right size.

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. The author does not have a position in any of the above companies and will not start one in the next five days.