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article imageCanada's marijuana companies may be facing bleak year

By Karen Graham     Jan 21, 2020 in Business
Ontario - Some of Canada's biggest cannabis producers are facing proposed class-action lawsuits in the United States, while two other cannabis companies had to seek creditor protection last month. What's going on?
On January 19, CBC Canada reported that three major Canadian cannabis companies were facing multiple lawsuits in the United States.
There are at least nine U.S. law firms pursuing cases against Aurora Cannabis, Canopy Growth, and Hexo Corp. after investors were hit with big financial losses in the stock market. There is a whole list of allegations, ranging from misleading investors to failing to disclose problems with their businesses.
Today, CBC Canada is reporting the year 2020 is looking bleak for the cannabis industry, according to analysts who are forecasting "many bankruptcies" by the end of this year.
Two Canadian pot producers, AgMedica and Wayland, were granted creditor protection just last month. And this is discouraging to many investors, especially seeing that when recreational marijuana was legalized in October 2018, pot stocks took off, soaring to all-time highs.
Canopy Growth grow facility in Saint Lucien  Québec.
Canopy Growth grow facility in Saint Lucien, Québec.
Canopy Growth
Now, uncertainty is plaguing producers as cannabis companies try to get a hold on an industry still suffering from supply problems, a slow rollout of some brick-and-mortar stores, falling orders, and the burgeoning black market - which legalized cannabis was supposed to stop.
"There's a lot of trepidation, understandably, and I think it's going to be some time before the capital markets come back," said Rishi Malkani, a cannabis industry expert, and partner at Deloitte Canada.
Selling assets at a discount
Some cannabis companies are going to the extreme of either allowing themselves to be bought out by their competitors, or they are trying to add to their cash reserves by selling off equipment and greenhouses - at a discount.
"But in most cases, those are assets you don't want to take on. They're not efficient," said Greg Engel, chief executive officer of Organigram, a cannabis producer in Moncton, N.B. "Certainly, there's going to be additional insolvencies."
Canada is the second country to fully legalize recreational marijuana use.
Canada is the second country to fully legalize recreational marijuana use.
Lars Hagberg, AFP/File
And there very well might be more business failures in the coming year. Malkani said he expects more than a dozen businesses to face "significant cash crunches."
"We are now seeing the separation between real operators and companies that based their value on hype," said Engel. Engel's company continues to operate at a loss, even though the company doubled its revenues in the first quarter of 2020, according to financial statements released last week.
And this can be reflected back to the three companies facing lawsuits in the U.S. All three businesses reported revenue losses, delayed expansion plans, or laid off employees in the last year. Hexo Corp. was reported to have allegedly "misstated its inventory."
Then we have Canopy, who is alleged to have overestimated its potential market, while Aurora is accused of inflating the demand for its products, leading to oversupply. There are currently over 200 cannabis businesses in Canada. How many will still be viable at the end of 2020?
More about Casnada, cannabis companies, five lawsuits, Bankruptcy, Black market
 
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