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Is 2020 the Year of Cannabis Stock Bankruptcies?

By Sean Williams - Jan 30, 2020 at 7:21AM

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Could some of the most popular pot stocks go belly-up?

The table appeared set in 2019 for cannabis stocks to deliver significant sales growth and push toward recurring profitability. It was supposed to be the year when pot stocks proved to doubters that the cannabis industry wasn't a fad, and that the pricey valuations bestowed on marijuana stocks were backed up by real potential.

But that's not how things shook out. When the curtains closed on 2019, cannabis stocks were mired in a steep, nine-month downtrend that was precipitated by persistent supply problems in Canada, exorbitant tax rates in a number of recreationally legal U.S. states, and a resilient black market.

While most Wall Street analysts and investors expect a better year for pot stocks in 2020, this may not be the case for all cannabis stocks. There are a handful of marijuana companies that may not survive the year, meaning 2020 could be remembered less for growth in the pot industry and more for cannabis stock bankruptcies.

A judge's gavel next to a petition to file for bankruptcy

Image source: Getty Images.

MedMen might be the poster child for marijuana bankruptcies

Though it was inevitable that not all marijuana stocks were going to be winners, the idea that bankruptcy is a real possibility has been brought to light by the struggles of vertically integrated multistate operator MedMen Enterprises (MMNFF 8.32%).

In Oct. 2018, MedMen made headlines when it announced the largest acquisition in U.S. cannabis history. The dispensary operator announced plans to acquire privately held PharmaCann in an all-stock deal that was, at the time, valued at $682 million. The expectation is that this deal would double MedMen's presence from six states to 12, as well as bolster its retail license portfolio, giving it the ability to open even more retail locations.

However, the so-called "Apple of cannabis" (named for its impressive sales per square foot in its dispensaries that rivaled Apple stores) has struggled mightily since announcing this deal. In fact, just three days prior to the one-year anniversary of announcing its purchase of PharmaCann, MedMen called the deal off. Though MedMen cited its desire not to get pulled into non-core markets as one of the reasons for cancelling the acquisition, the reality looks to be that MedMen lacked the capital to take on PharmaCann's existing dispensaries and expansion plans.

You see, MedMen has been losing money at a breakneck pace for the past couple of years, which isn't good news considering that access to traditional forms of financing remain difficult to come by for U.S. pot stocks. Despite the company's efforts to reduce general and administrative costs by 30% in fiscal 2019, MedMen still produced a mammoth loss of $231.7 million on an operating basis.

A one hundred dollar bill on fire atop a lit stove burner

Image source: Getty Images.

Though MedMen's cash concerns appeared to be resolved by gaining access to up to $280 million from private equity firm Gotham Green Partners, the company noted in December that the final $115 million from this pledge is no longer accessible. In short, MedMen is facing a potentially serious cash crunch.

How do we know this? MedMen's management recently confirmed that, as part of its restructuring plan, it's been attempting to pay off its vendors with its common stock, or in some cases, settling its debts for half of their value if utilizing cash. To me, this sounds like a desperate measure from a company that may be on its last legs. 

But wait -- there's more

Unfortunately, MedMen may not be alone. There are at least two other brand-name cannabis stocks that aren't guaranteed to make it through 2020.

In Dec. 2019, CEO Gordon Johnson of Chicago-based investment firm GLJ Research issued a price target of $0 on Aurora Cannabis (ACB 2.27%), the most popular pot stock in the world. According to Johnson's note to clients, Aurora is facing a cash crunch to which it has no answers. Despite having access to $400 million in at-the-market financing (i.e., a fancy way of saying that Aurora Cannabis can sell up to $400 million worth of its stock to raise cash), Johnson expects a number of restrictions on the company's credit facility with the Bank of Montreal to kick in.

One could certainly make the argument that Aurora Cannabis is in deep trouble. The company completely halted construction on Aurora Nordic 2 in Denmark and Aurora Sun in Alberta (its two largest projects) to conserve capital, and it announced plans to sell the Exeter facility for a hopeful asking price of 17 million Canadian dollars. These moves more than halve Aurora's peak production capacity. When added to the company's hefty overseas investments, which are a long way off from paying dividends, Johnson's thesis of bankruptcy isn't out of the question.

A cannabis leaf laid atop a one hundred dollar bill

Image source: Getty Images.

The same might be true for CannTrust Holdings (CNTTQ -54.55%), which is certainly not guaranteed to avoid bankruptcy in 2020. For those readers who may not know, CannTrust was caught growing marijuana illegally in five unlicensed rooms between Oct. 2018 and March 2019 at its flagship Niagara campus. As punishment, regulatory agency Health Canada suspended the company's cultivation and sales licenses, as well as gave CannTrust a laundry list of deficiencies it would have to fix in order to regain these licenses. Among those resolutions, CannTrust was forced to destroy $58 million in inventory grown from its illicit operation.

We don't know if or when CannTrust will regain its licenses, which means it'll continue burning capital until such time as it does have the ability to grow and sell pot. Also, CannTrust hasn't reported its operating results since May of last year. Thus, it's been at least 10 months (since the end of March 2019) since we've had a real look at CannTrust's cash situation.

While nothing is written in stone, it's not out of the question that 2020 is remembered as an even darker year for cannabis stocks than 2019.

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Stocks Mentioned

Aurora Cannabis Stock Quote
Aurora Cannabis
$1.35 (2.27%) $0.03
CannTrust Holdings Inc. Stock Quote
CannTrust Holdings Inc.
$0.01 (-54.55%) $0.01
MedMen Enterprises Stock Quote
MedMen Enterprises
$0.06 (8.32%) $0.00

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