If industry watchers were hoping for signs of life (or at least a bottom) out of 2024 earnings results of the U.S. cannabis sector’s 14 or so publicly traded companies, I am afraid they will be sorely disappointed. At the risk of painting all the public companies with the same (toilet) brush, an appropriate synopsis might read “low growth, margin compression, excessive balance sheet leverage” (please find detailed financial analysis of the publicly traded companies that we follow at: Q4 2024 Reports). In short, declining after-tax cash earnings (“ATCE”) paired with massive debt service obligations for the industry’s largest participants may portend the end for the industry……a classic “death spiral.”
Let’s speak truth. The 14 publics in the sector currently hold circa $4.0bn of third-party interest-bearing debt, and that figure does not include massive deferred and uncertain tax liabilities of $2.7bn and, oftentimes, extended trade liabilities. We estimate the 2024 ATCE of this same cohort at $800mm. Therefore, without growth, and assuming current levels of ATCE are sustainable – a tough assumption to make in light of all historical evidence suggesting otherwise – it will take approximately eight years for the industry to fully repay its debts and tax liabilities and then, and only then, begin to return monies to its shareholders. EIGHT YEARS! Obviously, this was not what lenders expected for repayment schedules when these loans were originated, and it seems highly unlikely that new loans will be available to refinance looming maturities - approximately $2.6bn coming due over the next 24 months for the publics.
These 14 companies accounted for $7.9bn of revenue in 2024, or roughly one-fourth of the total US market. Reasonably assuming similar metrics for the remaining two-thirds of the market controlled by private companies implies a whopping $14.4bn in debt, as much $9.5bn may be coming due through 2026. With no new capital flowing into the sector, industry participants are wise to ask “Can the industry be saved? And if so, how? And by whom?”
Clearly what the U.S. cannabis sector requires is a massive restructuring, accomplished through the execution of tens upon tens, if not hundreds, of individual corporate restructurings. Worse yet, because companies in our industry cannot avail themselves of the protections afforded to debtors by the federal bankruptcy laws, restructuring these companies will be extremely complex and will require all interested parties to act rationally and in the interests of the broader good. Unless and until SAFE Banking or some derivation thereof passes (seemingly a pipe dream) very little “new money” will flow into the sector to facilitate these necessary restructurings.
The industry's survival hinges on the collective efforts of all stakeholders to navigate these complexities and work towards a sustainable future. While re-scheduling, de-scheduling and/or the passage of SAFE Banking may provide much-needed lifelines, the reality remains that immediate and rational action is required to prevent a complete collapse of the sector. In many circumstances, equity holders need to accept that their investment is wiped out (i.e. a “goose egg”) and debtholders will need to write-down their positions and enter into debt-for-equity swaps to right-size balance sheets. Executives need to put forth reasonable and conservative business plans and stop trying to convince stakeholders that a rosier future might just present itself without pain. It will not. These restructurings will need to be completed through Companies Creditors Arrangement Act (“CCAA”) reorganizations in Canada and/or UCC foreclosure sales in the States. In either circumstance, the key word will be “consensual”. There is no longer time for the various stakeholders to fight amongst themselves to divvy up the remaining value or they just might find there to be no value left to fight over.
