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Why Restructuring Efforts Don't Necessarily Signal The End Of A Cannabis Company's Downturn

March 12, 2020 7:45 am
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In light of the cannabis industry's ongoing bear market, restructuring has been framed as a necessary option for companies looking to stay afloat.

Perhaps most devastating are the job losses affecting thousands of staffers throughout the cannabis industry.

Companies that have conducted layoffs recently include Tilray Inc (NASDAQ:TLRY) and Aurora Cannabis Inc (NYSE:ACB), both of which reducing their workforces 10% in a bid to stanch losses.

Delivery service Eaze refocused, announcing plans to shift from its delivery-centric service to a cannabis operator model.

In January, Eaze acquired DionyMed Brands' retail license rights to two Hometown Heart depots in California's Bay Area. DionyMed failed to restructure its debt during the fall 2019 industry downturn.

See Also: Tilray, Aurora Cannabis Layoffs May Signal Industrywide Problem

Restructuring Efforts Won't Necessarily Succeed

The efforts undertaken by the companies in the cannabis space are far from a sure thing. And as highlighted by names like DionyMed Brands, not all live to tell the tale.

MedMen Enterprises Inc (OTC:MMNFF) is one of the more notable examples. To get back on a profitable course, the retailer sold facilities in Illinois for $17 million and reduced its administrative, selling and general expenses by 11%.

Despite the efforts, the company has reported growing losses as it continues to restructure. During the second quarter, MedMen reported a net loss of $40.6 million.

The cannabis retailer laid off 128 people in February, Business Insider reported Wednesday.

Why Restructuring Efforts Can Fail

Businesses attempting to restructure their venture face a myriad of pitfalls along the way.

Scot C. Crow, a member of Dickinson Wright's Cannabis Practice Group, which has taken part in various restructuring efforts in the space, said a company's structure during its initial capital raise is a primary pitfall. Such an error can end up boxing a business in, he said.

"While many are fixable, if they fail to recognize the structure as the issue, the results can be devastating," Crow said.

Common restructuring mistakes range from the challenge of obtaining third-party approvals to inadequate governing documents and lacking proper legal paperwpork, said Julie Herzog, the managing partner and co-founder of Fortis Law Partners.

Herzog also co-founded Full Velocity Consulting, which works with the cannabis space.

"Time is often critical when restructurings are needed," she said. "So any delay can prevent a righting of the ship in time, and instead, the ship sinks leaving behind vendors, creditors and employees."

See Also: Canopy Growth Analysts Back Closures, Layoffs: 'A Bold Move'

Avoiding Restructuring Failure

Both Herzog and Crow suggested proactive measures for companies to stay ahead.

"We encourage companies to shore up their legal documents, structure and business model while they have time so they are best positioned to weather any future economic downfalls or other storms," Herzog said.

Crow emphasized the importance of a solid corporate structure as well, adding that backing up a pivot in a business with supporting paperwork can endear a company to investors. 

"Investors are getting more sophisticated and expect to see structures and underlying documents that meet their expectations."

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