The cannabis industry in Canada is at an inflection point. After a prolonged period of cost cutting, many operators have turned a corner so they can run their operations efficiently. But at the end of the day, many operators are struggling to keep pace on growth and remain cash-strapped. Some operators preserved their liquidity by deferring their excise tax payments. But the Canada Revenue Agency is now cracking down on outstanding payments, adding to complexities for the industry.   

The industry could be headed for another period of consolidation before we start seeing producers generate meaningful cash flows. Surviving this period of instability will require a mix of collaboration, innovation, and communication.  

The excise tax crackdown has highlighted the need to revisit how it’s applied to the cannabis industry. The structure currently implemented was based on the assumption that cannabis prices would remain around CA$10 per gram, though prices are currently about $3 per gram. Faced with the industry’s new economic realities, there’s hope that some type of reform is on the horizon.  

There’s also the hope for a change in the legal position of cannabis in the U.S., although it seems evermore on the longer-term horizon for federal change to occur.  While 24 states have legalized recreational use of cannabis, it remains illegal at the federal level. The Biden administration took some steps toward changing federal law, including a proposal by the Department of Justice to reclassify marijuana from a Schedule 1 controlled substance to Schedule 3, which would recognize potential medical uses and potentially pave the way to development of a regulated industry. That proposal has now bogged down in litigation focusing on the role of the Drug Enforcement Administration, and it is not clear when it will proceed. It is also unclear what the approach of the new Trump administration will be. 

A fully legalized system could open the U.S. market to Canadian cannabis companies. We believe leading Canadian operators would do very well in the U.S. because they’ve reached the stage where they can cultivate cannabis at scale.  

However, these are issues that will be resolved in the long term (if at all), and they don’t address the immediate concerns of cannabis operators. To survive this latest period of uncertainty, operators will have to be proactive.  

We’ve found that some of the top performers in the industry are exploring strategic merger and acquisition opportunities. In the early stages of the legalized market, many operators wanted to be one-stop-shops—cultivating and producing alternative products. They soon realized they couldn’t do everything at a high quality and in a cost-effective way. Now, operators are looking for opportunities with other companies that can provide capabilities they're lacking, whether it’s in product categories like pre-rolls, vapes or oils, or in developing new cultivation techniques.  

A great example of this is Organigram’s CA$90 million acquisition of Motif Labs. BMO Capital Markets was Organigram’s exclusive financial advisor on the deal. The combination not only makes Organigram Canada’s largest recreational cannabis company by market share, it also boosts its position in the vape and infused pre-roll segments—categories in which Motif excelled—while expanding its geographic reach.  

Leading operators are also focused on innovation. Recent examples include infused pre-rolls with higher THC levels, improved cannabis 2.0 products such as beverages with more improved flavors, and using nanotechnology to create faster and more consistent duration of effects. Such innovations are driven by consumer demand, but they also help operators produce products with higher margins.  

Innovation, of course, requires capital and research capabilities. That’s why we’ve seen large beverage companies create joint ventures with cannabis operators to research and develop cannabis 2.0 products. Going forward, the operators that can identify other possible product use cases—especially ones that target specific cannabinoid components—can put themselves in a position to forge partnerships with companies outside the industry to jointly fund R&D. Operators planning to introduce new and innovative products will also want to ensure that the products comply with all applicable regulatory requirements and consider consulting with Health Canada before proceeding. 

Overseas medical markets outside of North America may also be a draw for some sector participants. The potential for higher margins and diversified revenue streams make it an attractive prospect for companies with the resources – at least in the near term. An important caveat is that sales predictability is difficult as orders can be lumpy. 

As always, establishing a liquidity cushion (cash and credit) is an important tactic for withstanding shocks. 

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  Know your customer demand profiles:  

For the more established players in the industry, the most pressing issue is cash flow management. The lifecycle from idea to cash generation is six to eight months, and making the wrong initial decision could be fatal to your operation. Understanding the current players in the market, which products resonate with consumers, and why those products perform well can go a long way toward helping you make better decisions. Much of this data is available for cultivators to purchase through various provincial boards and some of the larger retailers.  

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  Strengthen banking relationships: 

While it’s clear that the established producers have done a better job at managing their costs, it’s also important for them to strengthen their relationships with their banking partners. While some banks have continued to be a source of capital for the industry, they’ve been highly selective in their lending decisions. In the last few years, a significant portion of CCAA creditor protection filings have involved the cannabis industry, and operators often don’t provide bankers with enough information about their operations.  

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  Proactive communication on business plans: 

Communicating where your business is today, your growth plans and your partnership opportunities will help your banker understand what your needs are and put you in a better position to obtain the funds you need when you need them. Along with sharing their own expert insights in helping companies in emerging industries, a good banking partner will be able to relate the experiences of your peers to provide a more complete picture of where you stand in the industry.  

As the industry faces more uncertainty, it pays to understand the concrete steps you can take today to help solidify your operation’s future.