Market Date:27 May, 2020

Pot companies ' grim fact: Cash crunch, no U.S. bankruptcy accessibility

It had been just a year past that exuberance enveloped the marijuana market. Legalization was dispersing and the growth potential appeared boundless.

However, that bubble has burst because the fact of a tough regulatory landscape sunk in. Since March, stocks are down by roughly two-thirds. Capital markets have mostly frozen for all but the strongest businesses. And currently a money crunch is leaving a few on the point of going bust. Only, as a result of its illegal status of cannabis beneath U.S. national laws, companies that there are obstructed by seeking protection in bankruptcy court.

The business’s problems have gotten so dire that a senior executive in a huge cannabis provider forecasts that as many as a dozen smaller businesses may neglect by the second quarter of 2020. The executive, who asked to not be identified and declined to mention certain companies, stated that in the previous 3 months businesses have been calling frequently with pressing, last-ditch efforts to be obtained.

A number of the businesses, that are both private and public, are just two to four weeks from lost payroll and not one of them is an attractive takeover target, ” the executive said.

For U.S. companies, this introduces an insurmountable difficulty: Bankruptcy is regulated by national law, which considers marijuana an illegal material. This means that they can not get Chapter 11 protection against creditors or a centralized purchase procedure. Without that, the outcome might be a state-by-state scramble by lenders for resources.

The U.S. bankruptcy procedure, that functions as a watchdog over the courtroom procedure, “has taken a hard-line position on this,” stated Sean Gordon, partner at Thompson Hine LLP. “It is incredibly difficult for a marijuana-related business to file and not get their case dismissed.”

Back in Canada, bankruptcy filings have begun. Wayland Group Corp., one of the very first Canadian cannabis firms to be granted a cultivation license in 2014, filed for protection from creditors before this month. DionyMed Brands Inc. filed for receivership in October when a creditor demanded immediate payment of a $25-million loan, also Ascent Industries Corp. was reorganizing under court oversight since March.

While the tiniest players are at risk, better-known businesses are also running low on money. Los Angeles-based MedMen Enterprises Inc. said last week it decreased corporate employees by over 40 percent. Additionally, it issued US$27 million of stocks 43 cents US per year, 14 percent under the stock’s Dec. 10 final cost.

In Canada, Green Organic Dutchman Holdings Ltd. said Friday it has obtained a 13 percent first-lien credit facility from personal creditor Maynbridge Capital, backed by each the organization’s assets. TGOD, as it is understood, had stated it had been not able to secure conventional sources of funding on acceptable terms, although its money stack dwindled to $24 million as of Sept. 30down from $214 million in the start of the year.

Limited Options

“Forget being able to cover capital expenditure plans; some companies need to raise capital just to cover accounts payable,” MKM Partners analyst Bill Kirk stated in a December note.

wealthier debt is slowly becoming more accessible to pot companies, but it is mostly flowing to people which are turning a profit.

For U.S. businesses, choices for funding are restricted from the beginning since conventional U.S. banks — hamstrung by national law — will seldom conduct business together. At precisely the exact same time, the national tax code pubs cannabis businesses from accepting tax deductions out of regular business operations.

In countries like California and Oregon, in which legislation permit for unlimited licences, employers face certain risk of distress due to increased competition, said Josh Horn, legislation spouse at Fox Rothschild LLP in Philadelphia.

“Thousands are competing for smaller pieces of the pie,” he explained. “You have flooded markets and price depression.”

Instead of seek relief through conventional bankruptcy, distressed cannabis companies working from the U.S. might need to follow state-specific receivership or end down event, Horn explained.

When California and Oregon legalized marijuana, they included unique provisions that provide cannabis creditors leeway to take over company operations or sell off stock. Other countries like Pennsylvania did not contain such terms in their marijuana legislation, Horn explained, making it more difficult for lenders to take possession of resources.

Canadian Course

Cannabis businesses with operations in a number of nations, meanwhile, could need to follow independent wind-down proceedings in each state where they have assets.

An option could be available for U.S. cannabis businesses which trade on Canadian stock exchanges.

“We’re actively exploring the use of Canada as a jurisdiction for U.S. operators who have businesses in Canada,” stated Michael Smith, a New York-based spouse in the Greenspoon Marder LLP law firm. He is meeting with Canadian lawyers and accounting firms to talk about the chance of U.S. firms filing for bankruptcy in Canadian courts.

Finally, the distress may be helpful for the business, said Vivien Azer, analyst at Cowen & Co.

“Over time, having a shakeout and seeing some companies go bankrupt is going to be very helpful to the industry,” Azer explained. “We need to see the marketplace get cleaned up.”