The cannabis industry in Canada has been facing growing pains since the legalization of non-medical cannabis in 2019. Many companies have struggled to survive in a competitive and regulated market, and some have resorted to bankruptcy, insolvency, or restructuring to stay afloat. In this article, we will explore some of the reasons behind these financial troubles, the options available for distressed companies, and the outlook for the future of the industry.
The Causes of Cannabis Companies’ Financial Woes
One of the main factors that contributed to the financial difficulties of many cannabis companies was the oversupply of cannabis on the market. According to Statistics Canada, the total inventory of finished and unfinished cannabis products in Canada was 1,098,829 kilograms as of November 2023, while the total sales of cannabis products in the same month were only 19,434 kilograms. This means that there was enough cannabis in stock to supply the market for more than four years.
The oversupply of cannabis led to a decline in prices and revenues for cannabis producers, who also had to deal with high operating costs, taxes, and regulatory fees. Many of them also invested heavily in expansion projects, acquisitions, and research and development, hoping to gain a competitive edge in the market. However, these investments did not pay off as expected, and some companies ended up with high debt levels and negative cash flows.
Another factor that affected the profitability of cannabis companies was the slow rollout of retail stores in some provinces, especially Ontario and Quebec, which are the largest markets for cannabis in Canada. According to the Cannabis Council of Canada, there were only 1,087 licensed cannabis stores in Canada as of December 2023, while the industry estimated that the optimal number of stores should be around 3,000. The lack of retail access limited the consumer demand and sales of legal cannabis products and also gave an advantage to the illicit market, which still accounted for about 40% of the total cannabis consumption in Canada in 2023.
The Options for Cannabis Companies Facing Financial Distress
When a cannabis company is facing financial challenges and cannot meet its obligations to its creditors, suppliers, or employees, it has several options to try to restructure its business and finances. One of the most common options is to file for protection under the Companies Creditors Arrangement Act (CCAA), which allows insolvent companies to restructure their businesses and finances with the supervision of a court-appointed monitor. Under the CCAA, the company can negotiate with its creditors to reduce its debt, sell or liquidate some of its assets, or find new investors or partners to inject capital into the business. The CCAA also provides a stay of proceedings, which prevents the creditors from taking any legal action against the company while the restructuring process is underway.
Another option for a cannabis company is to file a notice of intention to propose (NOI) under the Bankruptcy and Insolvency Act (BIA), which is similar to the CCAA but less complex and costly. An NOI is a declaration that the company intends to propose to its creditors to settle its debts, and it also grants a stay of proceedings for up to six months. The company must work with a licensed insolvency trustee, who will help the company prepare and file the proposal and act as the administrator of the proposal. The proposal must be approved by the majority of the creditors and the court, and it can involve various terms, such as extending the repayment period, reducing the interest rate, or forgiving part of the debt.
A third option for a cannabis company is to file for bankruptcy under the BIA, which is the last resort when the company cannot restructure its business or make a proposal to its creditors. Bankruptcy is a legal process that involves the liquidation of the company’s assets and the distribution of the proceeds to the creditors, according to a priority order established by the law. The company must also work with a licensed insolvency trustee, who will act as the bankruptcy trustee and administer the bankruptcy estate. Bankruptcy terminates the company’s existence and releases it from its debts, but it also has negative consequences, such as damaging the company’s reputation, losing its licenses, and affecting its shareholders and employees.
The Outlook for the Cannabis Industry in Canada
Despite the challenges and uncertainties that the cannabis industry in Canada has faced in the past few years, there are also signs of hope and opportunity for the future. The industry is expected to grow and mature as market demand increases, retail access improves, product innovation continues, and international opportunities expand. According to a report by Deloitte, the legal cannabis market in Canada could reach $11.2 billion in sales by 2025, up from $2.9 billion in 20204. The report also projected that the cannabis industry could create 117,500 new jobs and contribute $3.3 billion to the GDP by 20254.
The cannabis industry in Canada is also likely to see more consolidation and collaboration as companies seek to achieve economies of scale, diversify their portfolios, and enhance their competitive advantages. Some of the recent examples of mergers and acquisitions in the industry include the $8.2 billion deal between Aphria and Tilray, the $925 million deal between Canopy Growth and Supreme Cannabis, and the $235 million deal between HEXO and Zenabis. These deals are expected to create synergies, efficiencies, and cost savings for the combined companies, as well as increase their market share, product offerings, and international presence.
The cannabis industry in Canada is also poised to benefit from the legalization of cannabis in other countries, especially the United States, which is the largest and most lucrative market for cannabis in the world. The U.S. federal government still prohibits cannabis, but 18 states and the District of Columbia have legalized recreational cannabis, and 36 states have legalized medical cannabis as of February 2024. The U.S. cannabis market is estimated to be worth $24.3 billion in 2021 and could grow to $41.5 billion by 2025. Canadian cannabis companies are eager to enter the U.S. market, and some of them have already established partnerships, investments, or subsidiaries in the U.S., such as Canopy Growth, Cronos Group, and Tilray. However, they are also facing legal and regulatory barriers, as well as competition from U.S. cannabis companies, which have more access to capital, talent, and consumers.
The cannabis industry in Canada is a dynamic and evolving sector that has experienced both highs and lows since its inception. The industry has witnessed many successes and failures and has learned many lessons along the way. The industry is still facing many challenges and risks, but it is also showing resilience and adaptability and is looking forward to a brighter and more prosperous future.