Features

Toronto cannabis HQs may not survive

Published on March 26, 2020 by Special to the oz.

How COVID-19 could persuade cannabis companies to permanently close their second Toronto headquarters

By Corinne Doan

What do Tilray, Valens, Flowr, and Aurora have in common?  They are publicly trading cannabis licensed producers (LP) with operations based in western Canada. And all have a second set of corporate headquarters or executive offices in Toronto.

The tradition of having a second corporate headquarters is as old as the existence of stock exchanges. Historically, where there have been stock exchanges, there also has been a central financial district. Financial districts have investors searching for potential investment opportunities. Also, they have representatives from companies who are hoping to raise awareness and build capital by selling stock in their business. The combination of these two mindsets created a need for stock exchanges.

Consequently, it has been a long-established practice for sellers and buyers to meet in a financial district surrounding stock exchanges. However, stock exchanges were created before the times of telephones, fax machines, home computers, internet, Skype and, to complete this circle, cellphones.

The recent COVID-19 crisis has demonstrated it is possible for stock exchanges to maintain operations while the entire world works from their homes. It follows that, the tradition of being in the financial district to connect sellers and buyers has lost value.

Since Vancouver and Calgary both closed their stock exchanges decades ago, Toronto has become the central financial district for all of Canada. Currently, Toronto is home to Canada’s largest stock exchange. Hence, there has been a trend for publicly trading companies to set up second headquarters in Toronto. The second headquarters are used by the top of a company’s executive pyramid. These are the founders, senior VPs, equity analysts, investor relations, lawyers, marketing gurus – generally the C-suite.

Many positions are redundant and duplicated with hometown or base operations. There could be two sets of lawyers, finance officers, human resources, operations, marketing, communication, sales, and tech teams for both the Toronto and home base operations. A second cohort of administration staff for organizing the executives would also be necessary. In addition, quite often executives divide their time to live in both locations. Executives living in both Toronto and western Canada must be compensated for transportation as well as two sets of homes, cars, gym memberships – their personal infrastructure. More, there is the rent for two sets of offices, utilities plus equipment (desks, chairs, computers, phones, photocopy machines, staplers, coffee machines.) And there is the discrepancy between the costs of Toronto and those in the rest of Canada. The cost for a parking space in Toronto can be the same rent as an entire building in the west (maybe an exaggeration, but not much.) And then there is a ‘divisive organic authenticity.’ How can someone living and working in Toronto fairly or accurately represent and market a product, brand or service created in the west? And more, in Canada, there is an east versus west alienation. For example, positions like marketing and communication are often based in Toronto even if representing a western company. The east does not own a monopoly on these services. The west has abundant resources for such services.  So why not resource locally? And to dismay, investor relations personnel for all the aforementioned companies are based in Toronto. People in the west have money too, and prefer to listen to local representation when choosing local investments. Having an eastern representative selling a western product to westerners is discombobulated and lacks genuine credibility. When taking all this in consideration, one has to ask, is a second headquarters in Toronto necessary or is it an elaborate expense?

I learned a valuable lesson when I was a stockbroker in Calgary some 25 years ago. I was tasked with organizing financial ‘dog and pony’ shows. ‘Dog and pony’ was a term used in a time when sellers of actual dogs or ponies would show their animals to potential buyers. For stockbrokers, it means a free lunch while a company presents their business’s positive attributes in hopes of enticing brokers to buy stock in their company. I arranged speakers, mailed invitations, photocopied handouts, ordered food, greeted guests and poured coffee. Although not glamourous, I was learning. One day, while I was organizing a show for a junior oil and gas company visiting from Houston, Texas, a senior broker whispered in my ear, “pay attention to the companies that fly in representatives to stay in a hotel for a week to do their dog and ponies, and those who set up second headquarters in order to be closer to the financial markets.” I took note; those that set up second headquarters inevitably were always the first to run out of capital and close operations. The lesson was a second corporate headquarters is no longer as much of a necessity as it is a prestigious luxury.

Of the over 300 LPs open for business today, fewer than 50 are publicly trading. That means 250 cannabis companies are not hindered with costs of a second corporate office.

Let’s compare two LPs in BC of relative equal size. As mentioned, Flowr is a publicly trading company with a second corporate headquarters in Toronto. It trades on the venture exchange (FLWR:TSXV) and has announced intentions to someday trade on NASDAQ. Flowr is based in the Okanagan’s Kelowna area. Their marketing, branding, sales and investor relations teams are exclusively based in Toronto. To date, they do not have a single sales or marketing representative in the west. In contrast, Tantalus Labs is based in the Lower Mainland’s Fraser Valley. It is privately owned by a few select strategic investors. Both LPs have similar size operations with approximately 80,000 square feet. Although both companies are aggressively marketing their products, Tantalus is doing this from a single headquarters in Vancouver. Has Tantalus increased its brand value any better, worse or equal to Flowr? Can Flowr’s Toronto teams effectively represent their company’s western products? Will it hurt Flowr because they are not marketing in the west where they are based? Does Flowr’s second Toronto office gain them any real value or is it a drain on capital? Time will tell which of these companies will win the race.

Currently, all cannabis producers are financially struggling and desperately seeking ways to survive. A viable solution could be shutting the second corporate headquarters in Toronto to cut costs.

Warren Buffett is arguably the most successful self-made billionaire on the planet. He is an American who made his fortune as an investor in the stock market. When he opened a corporate office for his company Berkshire Hathaway, it was not located in New York City or near any American stock exchange. Instead he chose Omaha, Nebraska. When asked why he didn’t choose New York City his answer was “There are newspapers in Omaha, Nebraska.” He went on to explain with telephones, faxes and computers, there was nothing he couldn’t do from Nebraska. Buffett has a long-established history as a prosperous businessman. Perhaps the brand-new cannabis industry can learn from his example.

About the author

Corinne Doan, MBA, BA, is Canada’s first published author with a book regarding Canadian cannabis investments. The book is titled Canadian Cannabis Stocks Simplified: A How-To Guide for the Budding Investor.  Previously, she was a licensed investment advisor with a focus on venture capital markets in Calgary, Alberta. Presently, she resides in Kelowna.