The coronavirus pandemic has forced the closure of pot shops, as governments across the world shutter non-essential services. Canopy Growth was one of the first to act, temporarily closing its corporate-owned retail locations across Canada. Ontario removed cannabis dispensaries from its list of essential businesses at the start of April, forcing them to close.
Social-distancing rules, travel bans, and the requirement that people stay at home for all but essential activities is weighing heavily on legal cannabis sales.
These events will apply considerable pressure to legal marijuana cultivators and sellers in an industry already struggling with profitability. Leading Canadian cultivator Canopy Growth posted a massive $1.8 billion loss for the nine months ending December 31, 2019.
Worse still, most institutions have significantly restricted their lending activities. They are doing this to bulk up their balance sheets, as they prepare for an avalanche of loan defaults, spike in impaired loans, significantly higher lending loss provisions, and deluge of borrowers seeking to restructure existing facilities. That will essentially inflame an already tight funding environment.
The coronavirus credit crunch will prevent legal cannabis companies from accessing urgently needed capital to keep their operations afloat in an environment where sales are expected to decline sharply, placing pressure on cash flow and earnings.
While that was a substantial amount in the current difficult operating environment, HEXO this week completed a $46 million public offering. That has allowed HEXO to comply with its debt covenants and fund working capital requirements. The offering was dilutive for existing shareholders and didn’t raise enough funding to prevent HEXO from having to go to the markets for further capital.
The cultivator is experiencing regulatory issues with its Niagara growing facility. HEXO reported $266 million of writedowns and impairment charges for the fiscal second quarter. The issues responsible for those charges have yet to be fully resolved. HEXO’s precarious financial position will be impacted by additional impairment charges during 2020, making it vulnerable to bankruptcy.
Cannabis stocks are under considerable pressure. The coronavirus pandemic has magnified the issues already afflicting the legal cannabis industry. A key hazard is that capital is drying up, as financial institutions prepare for the inevitable recession and influx of loan defaults. For these reasons, bankruptcies will continue to grow during 2020. Many cannabis stocks, particularly those like HEXO that are managing a precarious financial situation, are highly unappealing investments.
The post Bankruptcies Ahead for Troubled Cannabis Stocks: Is HEXO (TSX:HEXO) Next? appeared first on The Motley Fool Canada.
Matt Smith has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. and HEXO.” data-reactid=”53″>Fool contributor Matt Smith has no position in any of the stocks mentioned. The Motley Fool recommends HEXO. and HEXO.
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