Cannabis companies could go bust in 2020, industry insiders predict

What a difference a year makes.

Around this time in 2019, the cannabis sector was booming. Investors wanted in and stock prices were skyrocketing.

Today, share prices have tumbled and analysts are forecasting "many" bankruptcies by the end of the year. Just last month, two Canadian companies, AgMedica and Wayland, were granted creditor protection. 

Some producers are looking for an exit, even if it means being bought by their competitors. Others looking to beef up their cash reserves are offering to sell off equipment and greenhouses — at a discount.

"But in most cases, those are assets you don't want to take on. They're not efficient," said Greg Engel, chief executive officer of Organigram, a cannabis producer in Moncton, N.B.

"Certainly, there's going to be additional insolvencies."

A miserable 2019

The pot industry has been plagued with supply problems, stiff competition from the black market and a resulting loss of enthusiasm from investors.

"There's a lot of trepidation, understandably, and I think it's going to be some time before the capital markets come back," said Rishi Malkani, a cannabis industry expert and partner at Deloitte Canada.

Oversupply, falling prices and the slow rollout of brick-and-mortar stores, particularly in Ontario, has contributed to low revenues for most licensed cannabis producers in the past year.

Malkani said he expects more than a dozen businesses to face "significant cash crunches" in the next six to 12 months, without naming specific companies.

"We are now seeing the separation between real operators and companies that based their value on hype," said Engel.

His company continues to operate at a loss but more than doubled its revenues in the first quarter of 2020, according to financial statements released last week (Organigram's Q1 2020 actually ended Nov. 30, 2019).

There are currently about 200 cannabis companies in the Canadian market with annual sales around $1 billion.

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Even the biggest producers such as Canopy Growth and Hexo are in the red, with losses deepening into the last quarter of 2019.

"What it takes is more stores to meet demand," said Sébastien St-Louis, co-founder and CEO of Hexo, which has facilities in Gatineau and the Ottawa region.

Despite its plummeting stock price and a larger-than-expected fourth-quarter loss, Hexo is aiming to become profitable this year, although its chief executive recognizes some elements  — like store rollouts and provincial regulation – are beyond the company's control.

"The capital markets took a breath, retail investors pulled back from the industry and that has really created a situation where companies are not profitable and there's also no cash coming in for most companies on an investment basis," St-Louis said.

Ontario open for business?

Jordan Sinclair, vice-president of communications for Canopy Growth in Smiths Falls, Ont., has high hopes after the Ford government's decision to open the province's retail market.

"We're starting 2020 on a good note. The Ontario government is opening up its retail system to allow more of a free-market approach, rather than a lottery system," Sinclair said.

The entire industry breathed a sigh of relief after the announcement, he said. 

Even though three provinces delayed the sale of edibles, several producers hope these new products will be a lifeline for the legal market.

Another hurdle to profitability for some Canadian cannabis companies is a wave of class-action lawsuits launched in U.S. courts. At least nine are targeting Canopy Growth, Hexo and Edmonton-based Aurora Cannabis.

The lawsuits claim the companies misled investors and, if approved, could drag on for years.