Cannabis producers in Canada with fewer than six months of cash on hand may have to rethink planned facility expansions if revenues continue to come in lower than expected, according to an analyst.
Greg McLeish of Mackie Research reviewed financial statements of 50 publicly traded cannabis companies.
He found that 21 have fewer than six months of cash when capital expenditures and cash flow burn are taken into account.
The results are mixed, he wrote, noting that cash levels vary greatly from company to company – and larger ones are generally in much better shape financially, as they will increasingly see access to nondilutive capital like bank debt.
Most of the 21 companies are smaller, with market capitalizations under CA$200 million.
Lower-than-expected revenues are partly to blame.
“A lot of them thought they’d have more production online. A lot of them didn’t factor in that maybe cannabis is harder to grow on an industrial scale, and we’ve seen several of the larger companies have massive crop failures,” McLeish said in an interview.
The bungled rollout of physical retail stores in Canada’s largest provinces have taken a bite out of expected industrywide revenue.
“The retail rollout in Canada has been an unmitigated disaster,” he said. “That is exacerbating a problem, where (companies) who do want to get their product out are having trouble, because the brick and mortar is not built out yet.”
Access to capital markets isn’t the slam dunk it was in 2018, and competition for capital is intensifying.
That could be a problem for companies burning through their reserves.
Disappointing earnings from Canopy Growth and Aurora Cannabis are causing investors to take “a step back and watching what’s happening right now,” he said.
As coffers run low, another option is to pare back spending.
That means reevaluating phased build-out plans.
“What a lot of companies are going to have to do is take a look at those plans – if they’ve got 100,000 kilograms of production coming online – do they really need to build out another 50,000 kilograms?”
“At the end of the day, are the expansionary plans for some of these LPs necessary in order to continue to be viable?” he said of licensed producers.
Low coffers mean companies are less able to deal with market shocks, like unexpected regulatory delays.
Some may have to reexamine general and administrative (G&A) expenses, meaning layoffs could be considered.
“A lot of companies are already cutting back people, like Green Growth Brands. We’re going to continue to see that in the industry until the financial results show meaningful growth and companies can have the big G&A and cover it with better margins.”