Cannabis Industry Headwinds made Worse by COVID-19

April 3, 2020
  •  What We Are Seeing: this post is part of Stikeman Elliott’s series on evolving market insights emerging during the COVID-19 pandemic

Going into the outbreak of the COVID-19 pandemic, many public issuers in the cannabis industry were already experiencing significant challenges, including liquidity issues and depressed stock prices. The outbreak of the pandemic and the related economic fall-out has resulted in further challenges for publicly listed cannabis companies and extreme volatility continues to be the norm.

Industry Faces Additional Challenges

Amid the financial concerns brought forth from the COVID-19 pandemic, many cannabis companies are pausing, rationalizing their businesses and pulling back operations, including laying off staff, shutting down non-profitable business segments, postponing production and pausing construction and expansion plans. Numerous issuers have also shuffled senior management. The prevailing industry headwinds, made worse by the COVID-19 pandemic, are expected to endure over the near term with growth hampered by inadequate retail infrastructure. Bankruptcies are expected to continue in the sector, as evident by Toronto-based Pure Global Cannabis’ recent filing for creditor protection following a downturn in the sector, joining Wayland Group, Invictus and AgMedica.

Potential Opportunities

Some good news for the industry is that cannabis retail revenues pre-COVID-19 saw month over month sales increases, a trend that is expected to continue once we get through the current COVID-19 crisis and the number of retail stores, particularly in Ontario, continue to grow. There is also some respite given Cannabis issuers have been deemed to be “essential” business in a number of jurisdictions, and there are also early reports that consumers in many regions are maintaining or increasing their consumption, despite challenges brought on by social-distancing and related measures that have impacted retail industries generally. However, the medium and longer-term impacts remain uncertain given rising unemployment and disruption to supply chain and distribution infrastructure.

Despite these challenges, attractive valuations and liquidity issues also continue to give rise to M&A opportunities, particularly for strategic purchasers able to take advantage of depressed stock prices and asset rationalization by cash-strapped issuers.

DISCLAIMER: This publication is intended to convey general information about legal issues and developments as of the indicated date. It does not constitute legal advice and must not be treated or relied on as such. Please read our full disclaimer at www.stikeman.com/legal-notice.

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