Written By: Stephen L Kanaval
As we enter 2020, here are a few pressing cannabis questions to consider in a year when the sector has been largely sapped of its momentum. Now, the reality of the public markets pervade as conservative investors want to see profits and more movement on Capitol Hill.
What companies will survive the cash crunch?
The cannabis market is obviously facing mounting concerns. A slow regulatory process by Health Canada has ground the gears across the Great White North and federal prohibition in the United States makes funding and banking extremely tricky- Secretary of the Treasury Steve Mnuchin even said the U.S. Treasury has “cash rooms” for cannabis company taxes – just think about that for a minute.
Canadian LPs, once thought to be the next Coco-Colas of the world, are losing out to the illicit market for sales. As an aside, it does not get much news coverage, but marketing in the cannabis sector is extremely tricky. Facebook ads often go unpublished and Instagram posts can be flagged and accounts can be removed or banned for 30-day periods, even when content is filled with disclaimers.
So, with a looming over-supply and bankers’ hands tied (not to mention, a global economic slowdown always looming), who will be able to stay afloat during the cash crunch? Many smaller companies in the space have already begun laying people off and selling licenses like you saw with Medicine Man in Arizona just recently.
All that said, there are still a few companies sitting on plenty of cash. Canopy Growth has more than $2 billion in cash due to the November 2018 deal with Constellation Brands. The company is spending this money very fast. Cash and cash equivalents have fallen more than $1.5 billion over the last three quarters due to operating losses of CA$269.4 million. Constellation Brands has installed a new cash-conscious CEO, David Klein, who will hopefully preserve the company’s bottom line through more rocky straits ahead. Cronos Group is not far behind with $1.53 billion thanks to a similar equity investment from Altria Group for $1.8 billion. Cronos group bought the Lord Jones CBD company last year for $300 million in cash, but still has plenty of runway to work with as their operating losses look mild compared to Canopy Growth.
How will consolidation play out?
Due to the cash crunch discussed above, many smaller companies and stocks will likely look to move under the umbrella of large entities and corporations to still make something of the infrastructure and product.
As New Frontier Data showcases, overall sales in the U.S. cannabis industry, when all is totaled up, are expected to reach $13.6 billion in 2019. The current 33 states with legal medical programs and 11 states with legal adult-use will see a CAGR of 14% to reach $30 billion by 2025, while the illicit market is expected to reduce nationwide sales by 11% by 2025.
My point in citing that data is that money is going to continue to flow into this market, and strong, well-organized companies will capitalize. The thinning of the herd is already happening, and we soon might see another acquisition spree with dispensaries and small operators folding into larger players.
Transparency is going to be key
The story of CannTrust is a cautionary tale for cannabis companies and cannabis investors. Remember: the product is highly regulated and scrutinized, even in Canada, and if you break the law, your company can evaporate.
If readers are not familiar, CannTrust was found to be growing cannabis in five unlicensed grow rooms and Health Canada punished them by suspending their license and burning large amounts of their inventory.
There are other companies who stoked the ire of investors with less than above-board transactions like Namaste Technologies, whose CEO had to leave, and even Aphria who had a short-seller report force out the company CEO after a special committee was created to investigate claims made therein.
Bottom line, with financial headwinds looking less than gusty, cannabis companies will need the public markets and many will spend much of 2020 repairing the trust of shareholders.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer. The author of this article, or a firm that employs the author, is a holder of the following securities mentioned in this article : None
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