- Nine publicly traded Canadian pot companies have less than six months-worth of cash
- Market volatility has made investors wary of cannabis companies that still need to expand
- Recreational cannabis supply shortage likely to persist through 2020, Mackie says
A significant chunk of publicly traded Canadian cannabis companies do not have enough cash to last more than six months, according to an analysis of the most recent financial reports by Mackie Research Capital Corp.
Out of 50 such companies assessed by the Canadian investment dealer, nine of them have less than six months-worth of cash. Together these nine companies represent more than $700-million in market capitalization, Mackie Research said. The report did not mention specific company names.
The number of companies with less than six months-worth of cash, however, rises to 21 when cash flow burn and capital expenditures are included in the calculations, Mackie Research said.
The combined market capitalization of these 21 companies is more than $8 billion.
Though Canadian cannabis companies have raised billions of dollars in capital to build production capacity and retail operations, and to prepare for the launch of concentrated products in October, a supply shortage in the recreational market made it difficult for retailers to secure product to sell.
“Supply shortages are likely to persist through 2020; until (licensed producers) LPs can successfully ramp-up their operations,” Mackie Research said.
“Companies who adapt and learn to control all aspects of their growing operations will reduce their potential for incidence of crop failures, and this should result in lowering cash production costs per gram.”
Lower-than-expected production has hurt the financial performance of several “bell weather” cannabis companies, many of which have missed their projections.
“This has placed many companies in a precarious situation, as they are burning through cash, but have to continue to spend capital to efficiently scale up their operations,” Mackie Research said, adding that this fuelled share price volatility that is negatively impacting investor sentiment..
“Since much of the available funding from investors was snapped up last year amidst the excitement and optimistic valuations of the new industry, competition for capital is expected to intensify amongst LPs.”
Additionally, Canadian pot companies looking for cash are now competing with those that are positioning themselves in the United States in anticipation of cross-border legalization, which could jeopardize growth for some companies.
What all this means is that companies with limited cash resources will need to either pare back their capital expenditure and growth plans, or find a way to generate free cash flow, Mackie Research said.
Additionally, eight companies have convertible debentures due within the next 12 months, further exacerbating the problem, it said.