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Nov. 19, 2018, 7:14 a.m. EST

Canadian pot companies came up way short on sales expectations. So what happened?

Five major marijuana producers reported disappointing earnings last week, leading to questions about their huge market caps

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By Max A. Cherney


Bloomberg News/Landov
Bellwether cannabis companies reported earnings this week for the first time since Canada legalized pot Oct. 17

Within days of Canada’s legalization of adult recreational use of marijuana, the country’s largest pot producers had shipped far less than 1% of the pot the government has forecast Canadians will spend on cannabis in the quarter.

Amid a rush of earnings reports this week, the most notable result was the relative lack of profits, or even that much revenue, from recreational pot sales in Canada for a period that ended less than three weeks before the public was able to buy. With Statistics Canada estimates of sales hitting C$1 billion in the first quarter of availability, five major producers reported a total of C$1.7 million in recreational sales, and none gave revenue forecasts for the launch quarter.

“The expectations before the quarters were announced were for initial large shipments at the end of September heading into Oct. 17,” PI Financial analyst Jason Zandberg said. “It has been very disappointing to see. A lot of the companies have not disclosed what recreational sales in the quarter were — if it’s not a big number, you don’t want to highlight it.”

For executives at Canada’s largest licensed marijuana producers, who have bragged for months about the potential for recreational weed and their ability to take advantage, the slow start will leave room to doubt their swollen market capitalizations. The notable supply issues in sales across Canada and the dearth of early revenue led executives to point fingers at the government and retail systems, but many still are having trouble expanding their own operations.

A guide to pot stocks: What you need to know to invest in cannabis companies

Canopy Growth Corp. Chief Executive Bruce Linton blamed provincial buyers for lackluster sales. He said that none of the provinces placed big orders, preferring to make smaller purchases to test their supply infrastructure. Canopy said it had to destroy a number of pot crops during the September quarter because of delays acquiring processing licenses from Health Canada and slowness in building infrastructure, but in a written statement said it was not a material loss .

Indiva Inc. master grower Pete Young said that crop failures on that scale are likely the result of rapid expansion and not enough infrastructure or knowledge to go with it. “It’s not enough ability to handle their expansions,” he said. “We want to see the quality of the product, we want to see how good the product is.”

Several of the producers, including Tilray Inc. and CannTrust Holdings Inc., said they encountered production delays related to applying the federally mandated excise tax stamps onto the packages of pot as well. According to Tilray CEO Brendan Kennedy, there is only one company in Canada capable of applying the glue for the stamps properly.

Provinces and a private retailer offered a different assessment of the supply issues. James Burns, Chief Executive of Alcanna Inc. /zigman2/quotes/206385050/delayed CA:CLIQ +9.95% , which runs a chain of retail locations in Alberta, told MarketWatch last month that his stores had received about 40% of the pot they had ordered. Alcanna reported revenue of C$3.7 million from its five stores during the first 19 days of legalization. Burns said Alcanna had been declined to disclose which producer but said that one of the big names had a “gluing party” the weekend prior to Oct. 17 to apply stamps to packages.

Buyers for the Nova Scotia government-run cannabis store also said it had received about 40% of the product it ordered. The Ontario Cannabis Store, which is the only way Canadians in the country’s most populous province can buy pot, blamed cannabis companies for delivery delays, telling customers that products were not labeled correctly .

The tiny shipments of recreational weed were not a result of weak demand, as the major producers — and provincial governments across the country — said consumers wanted more product. Provincial websites selling pot ran out of numerous products and private bricks-and-mortar retailers have been desperate to acquire more inventory. In Quebec, the government-run stores have shut down for three days a week indefinitely because they cannot keep enough marijuana on the shelves.

Don’t miss: CannTrust makes its case as a major Canadian weed producer, stock explodes higher

Even though provinces are essentially buying cannabis from any licensed producer that has capacity, Aurora Cannabis Inc. Chief Corporate Officer Cam Battley said that the company wasn’t yet in a position to move in where other companies have failed to deliver. Aurora scaled production to nearly 5,000 kilograms by the end of the quarter, four times what it could grow a year ago, but Aurora’s medical patients in Canada and Europe required roughly 2,700 kilograms.

“Remember that the medical market and the European market fetch us more dough, full stop,” Aurora CEO Terry Booth said in the conference call.

Tilray’s Kennedy said that the company is “aggressively scaling capacity” of its recreational cannabis. But until early November, one of the company’s largest facilities didn’t have the required federal licensing for the entirety of its cultivation area, limiting output.

/zigman2/quotes/206385050/delayed
CA : Canada: Toronto
$ 2.43
+0.22 +9.95%
Volume: 37,406
April 9, 2020 10:00a
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$88.51 million
Rev. per Employee
N/A
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