After a tough 2019, a majority of analysts that are focused on the cannabis industry expected to see the sector recover in 2020. So far this year, this expectation has not come to fruition and the sector continues to be under significant pressure.
A lot can change in the span of one year and the cannabis industry is the perfect example of this. Prior to the sector’s decline, cannabis companies had no issue with raising capital, with completing acquisitions, and with expanding. Fast forward to today and industry leaders like Canopy Growth Corporation (WEED.TO) (CGC) are closing facilities, cancelling future facility buildouts, and eliminating jobs to align supply and demand and to improve production efficiencies.
When thinking about the companies that recently reported substantial fundamental changes to the business, Canopy Growth is one of the first companies to come to mind. With that being said, Canopy Growth has approx. $2 billion of cash on hand and is well positioned to survive this tough period.
The vast majority of cannabis companies have not been as lucky as Canopy Growth and several high-profile operators are facing serious issues from a capital standpoint. Today, we have highlighted three well known cannabis businesses that we believe to be capital constrained and that could go bankrupt.
MedMen Enterprises: A Fall Far From Grace
MedMen Enterprises (MMEN.CN) (MMNNF) is one of the best known cannabis retailers in the US with significant leverage to some of the most attractive state markets. Although the US cannabis retailer has been reporting increasing revenues, expense have been rising much faster than anticipated and this has created a major problem for the business.
Last year, in an effort to shore up its balance sheet, MedMen accepted a massive loan from Gotham Green Partners and is now having trouble accessing the remaining capital on the loan. If the company cannot find a way to strengthen its balance sheet, we expect to see a leading US operator acquire non-core assets that are owned by MedMen for pennies on the dollar.
Earlier this year, MedMen came under fire after reports highlighted its inability to pay vendors and this development added fuel to the fire. The company tried to issue common stock to vendors in lieu of cash, but this strategy did not pay off. In an attempt to remedy the situation, the US cannabis retailer hired FTI Consulting to manage its outstanding balances to vendors and partners. MedMen has taken drastic measures to reduce costs, including the firing of hundreds of workers, the selling of stores and licenses, and the reworking of financing arrangements.
Although we are cautious with MedMen as a standalone operator, we do not expect to see the company go out of business. MedMen owns attractive assets and we expect to see another US cannabis retailer come in and acquire the business in the near future. The last twelve months have been brutal for the company and this is an opportunity that we will continue to cautiously monitor. We believe that MedMen is on a path to bankruptcy and only time will tell if the company is able to stay afloat.
Aurora Cannabis is Facing Substantial Headwinds
Earlier in the article, we briefly discussed the recent development that was announced by Canopy Growth as it relates to the closing of two of its production facilities in Canada. When it comes to the Canadian cannabis market, it is difficult to mention Canopy Growth without acknowledging the issues that Aurora Cannabis (ACB.TO) (ACB) is facing.
Like Canopy Growth, Aurora Cannabis invested hundreds of millions of dollars in the construction of massive cultivation facilities in Canada. Another similarity between the operators is related to the types of companies that were acquired by each business. With that being said, Aurora Cannabis completed these acquisitions when valuations were near all-time highs, Canopy Growth was somewhat ahead of the curve, though and completed acquisitions in 2015 and 2016 (valuations were not nearly as high at this time).
One of the most significant differences between Canopy Growth and Aurora Cannabis is related to the strength of their respective balance sheet. Unlike Canopy Growth, Aurora Cannabis did not receive a multi-billion-dollar investment and this has made things more challenging for the business. During the last year, Aurora Cannabis has sold off several previous investments, shut down facilities, and changed up the management team.
Going forward, Aurora Cannabis will need to find a way to fund the business and we would not be surprised if we saw it sell off additional assets. The company has significant leverage to the global cannabis opportunity which provides the business with an avenue to raise capital. The next twelve months are crucial for Aurora Cannabis and this is an opportunity that we will be closely following.
DionyMed Brands is what Companies Should Aim to Not Be Like
DionyMed Brands is the perfect example of a cannabis company that was unable to operate ethically and ended up going out of business because of it. In early 2019, DionyMed terminated its contract with Eaze after claiming that the processing procedure met California regulatory requirements. Following this decision, DionyMed said it was going to invest in its own delivery service and made up an excuse to terminate the Eaze contract for cause.
DionyMed’s mistake was cancelling a contract for services (payment processing to be specific) that were not even provided by Eaze. This decision did not sit well with Eaze which accused DionyMed of utilizing a series of schemes in an effort to destroy the company and take over its business.
The last few months have been more than challenging for DionyMed (and rightfully so) and this is an opportunity that we are cautious with. Following these deceptive actions, DionyMed has been de-listed from the Canadian and the US stock exchanges and it is unfortunate to see the impact that a few bad actors can have on a business.
Published at Fri, 13 Mar 2020 11:16:35 +0000