It may seem like the cannabis industry is continuously plagued by one disaster after the other, but in fact, there's plenty of reason to feel bullish on cannabis stocks this year.
For one, both states and nations are getting serious about liberalizing their cannabis laws. What's more, a bipartisan coalition of congressional representatives has filed a bill that would require the FDA to treat hemp-derived CBD as a dietary supplement. This would make the American CBD sector an even bigger deal than it already is.
But unfortunately, cannabis is not out of the slump quite yet. The latest burden on the back of this embattled industry is the so-called cash crunch.
Why is the Cannabis Sector So Broke?
Essentially, any cannabis stock that isn't at the top of the sector is having a difficult time obtaining basic credit facilities. Many of Canada’s largest financial institutions, it seems, are backing away from the industry.
TD Canada Trust (TSX:TD), for example, refuses to grant interviews on the topic. Other banks, like Canadian Imperial Bank of Commerce (TSX:CM), claim to review cannabis operations "on a case-by-case basis."
In effect, this leaves the smaller, riskier cannabis stocks in the lurch when it comes to funding. Retailers, in particular, are struggling with an inability to borrow from the major banks.
Fire & Flower Holdings Corp (TSX:FAF) (OTCPK:FFLWF), for example, plans to open at least 15 new stores in Ontario this year. Unfortunately, the company faces a “pretty definitive issue” obtaining loans from major banks to stock up on cannabis inventory.
Nadia Vattovaz, CFO of Fire & Flower, told the Financial Post:
“Banks [aren't friendly] towards lending for store build-outs and inventory. When you’re adding multiple locations, you need to buy inventory and that’s not an insubstantial amount of money. The challenge for lenders is they are unclear on the remedy potential available to them in the event of an insolvency."
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Which Cannabis Stocks are Struggling?
In October, MedMen Enterprises Inc. (CSE:MMEN) (OTCQX:MMNFF) terminated its acquisition of PharmaCann in an effort to conserve cash. While the acquisition would've doubled MedMen's reach from 6 states to 12, these would have been "non-core" markets.
Ultimately, MMEN turned to private equity firm Gotham Green Partners for up to $280 million in financing. This funding was just to keep the ship afloat.
Even some of the higher-tier cannabis stocks, like Aurora Cannabis Inc. (TSX:ACB) (NYSE:ACB) are feeling the pinch. On January 6, news broke that Aurora is selling a greenhouse in Ontario to raise $17 million.
In an email to the Financial Post, ACB spokeswoman Michelle Lefler explained that the greenhouse would have required “retrofit and significant capital investment in order to meet Aurora’s production standards.”
According to MKM Partners analyst Bill Kirk, the listing signals major write-downs ahead, as much as $2 billion worth.
“We believe more divestitures are likely, as Aurora has a major cash problem, and this listing only covers about two weeks of cash burn,” Kirk explained.
So What Does This Mean for Investors?
Greg Engel, CEO of OrganiGram Holdings Inc. (TSX:OGI) (NASDAQ:OGI), says that investors should prepare for a market disruption as a result of the cash crunch.
“We are definitely going to see some companies struggle. We’ve already seen two companies file for bankruptcy protection, and they certainly won’t be the last. Companies that don’t have a good cost structure will be in a really difficult position. It’s not about growing cannabis anymore, it’s about how efficient you are as a consumer packaged goods producer."
While shareholders shouldn't feel pressured to dump any cannabis stock that's struggling for funds, this should be a wake-up call that the industry needs to start making plans for long-term finances and profitability.
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