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For some, the show is over

Originally posted December 4th, 2019 by Mollytime

 

Ah, it’s December already, and 2019 is winding down. For many, it’s been a tough year for longs in the cannabis sector.

What now?

There will be blood.

Many Canadian legal cannabis companies – with all their financings and business plans and press releases – will turn into vapour. Or at best, maybe become a bum in a chair (with an exchange listing), awaiting resurrection whenever the next round of RTO demand emerges chasing listings to get into the ‘next big thing’. 

What’s an investor to do? What’s some signals that might stave off that wolf at the door? Execs will say: “We just need another year and we’ll be profitable”. 

That last one you’ll hear a lot. Or perhaps: “If it wasn’t for reason ‘X’….we’d a made out alright”. Those lines will be plentiful as well. Unlike the exuberance in the sector of just a short 12 months ago – there are many companies who are either already in a death-spiral, or, will soon be. Press releases won’t say it outright, but it remains true.

What are the catalysts that could save your particular shiny pony from breaking a leg at the third post?

M&A

I’d heard a remark in early 2018 that many cannabis sector deals were “over-priced paper for over-priced paper”. Subjective then, eminently true now. What about companies with cash who are ready to pick up distressed assets on the cheap? That’s been a common fallback of the hopefuls.

They don’t exist.

Companies with a lot of cash either have their mouths full (eg: CGC), or are still full from dinner (eg: ACB). Some companies have cash, but it’s either earmarked or committed. Little chance of them going shopping when the credit cards are already maxed. And no, a 70% off sale on something that’s:

a) not in production, or,

b) not already generating cashflow…

isn’t ‘on sale’. It’s now a clearance – not a one-off to reduce inventory. The time to operationalize is past. 

An exception is the smaller players, the one’s that aren’t burning $6MM a quarter, and won’t ever need to. But those exceptions won’t apply to the folks with their heads barely above water, because there’s no immediate accretion. They need cash now.

Companies with unrestricted cash don’t have much for ops (there are very, very few), and poor performing ops in ones are *already* under duress for cash. Any M&A ‘to the rescue’ will either be vicious to existing shareholders – or – will be overpriced paper for overpriced paper, except in the inverse. A (.01 x .01) kind of deal.

White Knights will be few and far between.

Capital Raises

Most of what we’ve seen in the Canadian landscape for cash infusions these days are from the banks. Who, are lending to those who have run rates and revenues that are at least visible to the naked eye. For many, that’s not the case. Heading to capital markets right now – with what this economic landscape looks like – is like a straight person heading out for a night in a gay bar. Lots of dancing and fun, but not much action at the end of the night.

It’ll need to be a close and existing relationship between investors and management for any new capital infusions. And they’ll likely be extremely selective.

Revenues

As they say, sales fix most everything. Yet the sclerotic rollout of retail across the country, combined with State Monopoly greed, doesn’t offer much hope either. 

Yes, Ontario might actually get with the program at some point, but the future remains murky (at best), and subject to regulatory spasm. Nothing much business-wise is going to be lubricated by this hope, except for some already behind the turnstiles.

Calendar 2020 – particularly in Q2/Q3 – is where this war of attrition will take place. As a guess, I can see 20 companies not ending next year with operations.

If there is an actual ‘bottom’ in the sector, I suspect we’re finally near it for companies with a glimmer of hope. For many other outfits though, these levels have now become their new ‘top’.

The worst outcome for the retail investor is continual faint hopes…the ones that come from Ontario ‘opening another 50 stores’, or ‘vape bans being reversed’, or signals that ‘demand is increasing’, if even marginally. All this will do is prolong the inevitable, and see the zombies walking just a little farther. But be assured, it’s still a zombie.

Be prepared – there will be blood.

 The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative.