We’ll see the first major cannabis company fail in 2020. I’m calling it now.
The truth is, the panic around the Great Cannabis Armageddon is mostly justified. Over the past few years, there’s been a perspective, pervasive among investors, that cannabis stocks – any cannabis stock – would result in windfall returns. But investors are now seeing that this isn’t the case at all. Stocks have plummeted. We’ve already seen the first medium-sized company, Wayland Group Corp., go into receivership. This trend will continue in 2020, and I see three contributing factors for why that is.
First, the rollout of cannabis retail has been far too slow across Canada. These LPs have developed business models based on supply meeting demand, but in order for that to have worked, we’ve needed far more retail stores to open than we’ve seen, particularly in the British Columbia and Ontario markets. As a result, these LPs are burdened with oversupply, causing them to miss revenue projections, which in turn has caused a massive sell-off due to underperformance. Downward pressure, right there.
Second, these companies weren’t developed for profitable business models, but were rather capital intensive because capital was so easy to find. Rather than building revenues on their own, these companies acquired it by either merging with or acquiring other companies, or acquiring assets of other companies, at over-inflated values. Come financials time, they’ve needed to either write down or completely write off some of these acquisitions. As a result, their market caps are negatively affected because investors are viewing these assets as major liabilities. More downward pressure.
Finally, all of this has created an unsustainable model that’s relies on continual capital raises – but that capital has all but dried up. What’s still available is either very expensive or toxic or both. What we’re seeing across the industry are these rickety financial models and convertible debentures that will start to strain cashflow, if they haven’t already. Which means these companies will have trouble becoming cashflow positive because they can’t meet debt. These debts have to convert at some point, but because the market has gone down, the conversion prices are way too high. Investors are simply going to want their money back, but it’s likely that these companies will have trouble actually paying it back. Receivership is inevitable for some of them.
Like I said, this has already underway. Wayland filed for creditor protection in early December, which I think is really just the beginning of a wave of similar scenarios that will play out across the industry in 2020.
But there is some hope for investors in this scenario. Cannabis stocks have been oversold, so quite a few of the good companies are undervalued. This is creating an entry point for long-term investors, like family offices, which is who Wildflower is now talking and marketing to in the US, Europe and Asia. These family offices are the best type of investors because they’re long-term holders who are seeing real value in companies that have developed smart, sustainable business models.
The truth is, the shift in the markets for cannabis companies was inevitable. It’ll also be a net positive for the industry, particularly for the companies that have been built on sustainable, profitable business models. The market will sort itself out. The weak companies will either fail completely, or be absorbed by the stronger ones, and we’ll see more sustainable and innovative players survive and stake their claim. As they should.