Challenges in the Cannabis Business

Canada has been a tough market, and international sales are a factor for each of these companies. We think cannabis stocks in general are attractive currently. But there are a plenty risky on this front.

1. Insolvency

Arguably the most important consideration for any company is its cash flow. If a company has no available cash, it’ll struggle to keep its lights on and continue doing business.

That’s a reality faced by many pot stocks today. A recent analysis done by investment bank Ello Capital found that some cannabis companies are just months away from running into liquidity issues; Ello estimated in February that Harvest Health & Recreation (HRVSF) has about nine months of liquidity remaining, and that was among the highest listed.

In the company’s most recent quarterly results, which Harvest Health released in November, it had cash and cash equivalents totaling $18.3 million as of Sept. 30. That’s a sharp decline from the $191.9 million it had as of Dec. 31, 2018.

Also read: 8th Wonder Brewery and Bayou City Hemp Co to embark Cannabis brand and dispensary

2. Fraud

The seemingly unlimited potential to make money in the cannabis industry is enough to lure people into pulling a fast one over on optimistic investors. In February, the U.S. Securities and Exchange Commission (SEC) accused a cannabis farm in Seattle of taking $4.85 million from investors and spending $3.5 million of that on “extravagant luxuries,” according to an SEC complaint. The farm was eventually closed, and authorities say it was never profitable despite the farm owner promising significant profits for investors.

As exciting as it may be to invest in a start-up marijuana company that looks to have a lot of potential, there’s significant danger in doing so. Harvest Health and other pot stocks have their risks, but they’re still safer buys than pot farms that may not even offer investors any formal financial statements.

3. Hacking

Another danger for cannabis companies is the threat of people hacking into their systems. According to credit reporting company Experian, industries like cryptocurrency and cannabis that are still in their early growth stages are among the most vulnerable when it comes to hacking. Michael Bruemmer, who is a vice president at Experian and overlooks data breaches and consumer protection, says: “These controversial industries make great targets because they’re more focused on growing their business and starting up than they are necessarily putting the appropriate focus on cybersecurity.”

Without proper technologies in place, preventing hacks is a big challenge for these companies. And since much of the cannabis business involves healthcare, the information can be very sensitive. In January of this year, hackers breached THSuite, a point-of-sale provider in the cannabis industry. They were able to access the photo IDs, health information, and addresses of more than 30,000 people in the company’s system. With sensitive medical information on hand, cannabis companies face even more potential liability than other industries do.

4. Theft

One of the biggest risks for the cannabis industry today is theft. Since cannabis companies operate primarily in cash because many can’t obtain banking services, they’re a prime target for thieves. In 2019, Colorado dispensaries hit a three-year high for burglaries.

Lawmakers have attempted to solve these issues through the SAFE Banking Act, but that has unfortunately failed to gain enough traction. In the meantime, companies remain vulnerable to these risks, and for many, that means having to pay security personnel. This only adds to their expenses and puts their financials in an even worse position, making profitability even more elusive.

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