Cannabis 2020 Review
The following Cannabis Corner article this week has been developed from recent published sources by PorterPartners, and is deemed to be of prime current interest to FON members who have cannabis-related investments in their portfolios, or are considering such investments
2020 has been an exceptional year for cannabis. Sales are up beyond expectations. Companies are thriving. Legalization is marching forward in the U.S. and globally. And cannabis investment opportunities are ripe for experienced investors with an understanding of where, when, and how to invest.
In March, COVID-19 disrupted cannabis sales and growth. Within a month or so, sales rebounded and never looked back. In fact, three quarters of sales in 2020 exceeded the amount recorded in all of 2019.
Nearly every state has surpassed projections with Arizona up 48%, Oregon up 37%, and even Colorado’s mature market growing an impressive 24% in 2020, according to BDSA.
Midwest and Eastern states are growing, disrupting the established Western dominance. Florida is now the 3rd largest U.S. market, Illinois #6, Michigan #8 and Massachusetts #9.
The Rise of MSOs(Multi State Operators)
The stock prices of publicly traded U.S. cannabis companies have rebounded, driven in large part by explosive Q2 and Q3 growth. Year-over-year revenue for Trulieve is up 93%, GTI is up 131%, and Curaleaf up 325%.
Though still federally illegal, licensed cannabis operators are refining their tactics and strategies to generate hundreds of millions of dollars in quarterly revenues, with a few acquiring clear sight to $1B in annual sales.
By tracking the success and failure of licensed U.S. and Canadian operators, we are able to understand how dominant MSOs are impacting the industry, and disrupting previously assumed norms.
Federal legalization is a reflection of state by state action and the fact that 68% of Americans now support it, according to Gallup.
This momentum is reflected through recent history. Despite failing to pass MMJ in a 2014 midterm election, Florida eventually succeeded, joining 8 other states in legalizing cannabis during the 2016 General election. And by 2018, momentum had shifted so much that Oklahoma successfully legalized via a primary election.
So when every one of the 5 states with cannabis on the ballot in the 2020 election voted to affirm legalization, Americans confirmed the expectations of advocates, industry leaders, policymakers and politicians.
Fortunately, this is not limited to the United States. The United Nations recently reclassified cannabis, recognizing its medicinal and therapeutic potential and signaling to the rest of the world that it is time to change. As well this year, the U.K. decided NOT to classify CBD as a narcotic, Mexico inched closer to adult use legalization, and Chinese provinces issued nearly 15 vertical licenses for legal hemp domestically.
While the Biden-Harris administration indicated a “commitment to decriminalizing marijuana” during the 2020 Presidential campaign, actions of Congress are likely needed to drive legalization on the federal level. Two bills at the center of the legalization discussion that appear promising are the MORE Act, which recently passed in the House of Representatives, and the SAFE Banking Act. However, a divided Congress may limit progress and only time will tell if the House and Senate will align and pass these bills.
A retreat of investors drove a capital crunch for the cannabis industry in 2020. COVID-19 and the associated lack of confidence around cannabis’s recession resistant nature gave many an investor pause in early 2020.
According to Viridian Capital Advisors Cannabis Deal Tracker, equity and debt raises were down nearly 200% through Thanksgiving. Less capital flowed into fewer companies in 2020 than in 2019. COVID-19 allowed investors to receive more favorable terms from companies with strong revenue growth and a clear path to profitability. Less able cannabis firms experienced a shakeout of sorts, while the most capital efficient continue to thrive.
With a vaccine in sight, investment and entrepreneurial interest returning to the cannabis industry, and more reasonable valuations, capital is beginning to flow back into the industry, albeit at discounts on the order of 30-70% to previous levels.
2020 was a transition year for hemp. Much like the THC sector of the industry, hemp investments were off from a record 2019 – both in total number of deals and total dollars raised.
Riding a wave of excitement following the passing of the Farm Bill at the end of 2018, hemp and CBD brands proliferated in 2019. In anticipation of CBD entering mainstream retailers with the help of mainstream CPGs, farmers aggressively planted large crops, spurred by encouragement from large processors. A slow moving FDA delayed consumer growth through mainstream retailers, resulting in a glut of supply, falling prices and ultimately bankruptcies and defaults. Investors previously bullish on the hemp industry took pause in 2020.
Consumer interest for hemp and CBD continues to grow and industrial applications are expanding. Yet in an emerging market dependent upon regulatory approvals, fits and starts should be expected. These dynamics create opportunities for entrepreneurs and investors alike. Many expect progress in 2021 as the Biden-Harris administration is expected to push for final FDA rules. Evidence of the return of capital and investor sentiment is seen in recent hemp-related SPAC activity.
If 2021 can be anything like 2020 from a sales and growth standpoint, then we are all in for a great year. We know success in cannabis does not come easy, but a rising tide of consumer demand, entrepreneurial activity, and legalization progress shows little indication that it will slow down anytime soon. Challenges certainly lie ahead, but the cannabis industry’s long term prospects remain strong.
If any FON member would like more information on this article, or to discuss this or any other aspect of the cannabis industry, please contact Dean Porter at (843) 849-3191, or by e-mail at [email protected]. PorterPartners is a free resource and member benefit available to all FON members providing insight and information relating to the cannabis industry.