Business
Cannabis Industry Faces Sobering 2023
There are reasons for hope, though. New and emerging adult-use markets in the Northeast region, as well as the Florida medical market, should show considerable growth next year.
Without much meaningful development concerning legalization efforts in 2022, many sobering themes likely will carry over into 2023.
Layoffs will persist, and continued price compression and competition from the illicit channels will drive brand share consolidation in mature markets. West Coast legacy operators will continue to be bogged down by legislative limbo, a lack of access to banking services, and an incredibly competitive gray market unbound by onerous tax regulations — which, in turn, will lead to more operators fleeing the troubled market.
Additionally, companies will shift toward tighter capital management and budgeting as cash becomes more expensive and harder to grab.
“Painfully, we will see more cannabis businesses fail,” said Poseidon Asset Management managing director Patrick Rea. “This culling will thin the competitive herd and hand more power to the established incumbents — increasingly MSOs — with their lower cost of capital and growing footprint of assets and operations.”
There are reasons for hope, though.
New and emerging adult-use markets in the Northeast region, as well as the Florida medical market, should show considerable growth next year.
That’s bolstered by increasing market access. Half of the U.S. population over the age of 21 now have access or live in a state that has adult-use legal, with more than half recorded as past six-month consumers, according to BDSA analyst Brendan Mitchel-Chesebro.
“Even though there’s still these problems with price compression, even though there’re still regulatory issues — people waiting for SAFE Act to pass, people waiting for 280E reform – there’s still a lot of reasons why we think that there’s going to be huge growth in a lot of these markets,” he said.
Likely Winners
Many in the industry remain bullish on Florida, especially as it gears up for a well-funded adult-use ballot initiative push for 2024. BDSA believes Florida will be the biggest contributor to sales growth nationally through 2026, with $2.7 billion in projected medical sales next year.
New York could also emerge as one of the biggest growth opportunities in 2023, though the state’s ability to get more adult-use retail stores up and running will be the greatest indicator of progress — as looming sticker shock awaits legal enterprises.
“In our opinion, that’s the thing that would effectively cut into the illicit market the most, and that’s why some markets that have been up and running for a few years are still having problems with (the gray market),” Mitchel-Chesebro said.
In the Midwest, Missouri shows promise for MSOs and big vertical out-of-state operators. Friendly state taxes, good product split backed by a maturing retail footprint, and a smooth compliance process could make the difference in the Show-Me State.
Additionally, cross-border traffic from Arkansas and Kansas, which have fallen short on their own legalization efforts, should beef up sales in the new market, which is expected to launch in February.
Cy Scott, CEO of cannabis data firm Headset, expects Missouri’s adult-use rollout to put additional pressure on the Illinois market to accelerate license grants, given the number of already-licensed medical dispensaries converting to adult-use locations.
If the rollout is successful, BDSA predicts around $270 million-$280 million in adult-use sales in 2023. Factoring in the maturing medical market, Missouri could very well reach $730 million in total legal sales.
More Normalization
The New Year also could see additional normalization from consumption lounges and bigger retail shifts to raise foot traffic and basket size, Mitchel-Chesebro said.
Dispensaries could begin to move away from the “deli layout” in favor of a more open retail floorplan similar to Apple stores. The BDSA analyst pointed to places like Planet 13, where employees are on the floor to assist shoppers, yet customers can move and browse around and check out display cases on their own.
“I think that that’s going to be a big shift when we’re talking about storefront retail,” Mitchel-Chesebro said. “I think that a lot of people recognize that it is more approachable, especially for newer consumers.”
Still, convenience is king in the industry, which should see a stronger push toward direct consumer sales utilizing delivery and curbside pickup services.
‘The Missing Component is Capital’
Morgan Paxhia, co-founder and managing partner of Poseidon Asset Management, said this year is poised to be “the most bifurcated trajectories we have seen in the legal cannabis industry.”
Paxhia predicts a year full of the most defaults, wind downs, and state-level bankruptcies the legal cannabis industry has ever seen — especially with the sobering lull in meaningful federal banking legislation.
“We see this cycle finally coming to a head as the tight capital markets have persisted for so long combined with onerous cannabis taxes, deflationary cannabis prices and inflationary costs,” he said. “This cycle was well on its way and COVID interrupted it, like many other industries. We think most of this stress is within smaller companies.”
However, Paxhia also sees a healthy return of M&A for many areas of cannabis, too, such as operators, ancillary technologies, and hydroponics. “We see this driven by companies continuing to seek operating efficiencies, scale, and stronger competitive footprints.
“We see that inward, digestion period running its course and companies getting back on offense,” he said. “We also wouldn’t rule out activity, not likely M&A activity per se, with mainstream strategies, like alcohol, tobacco, CPG.”
A meaningful return of equity capital flows after a long protracted bear market is also possible, likely benefiting the largest companies first due to lower perceived risk.
“Big picture, we know more now than ever about how to run a successful legal cannabis company. There are more experienced operators than ever. There are more legal states than ever,” Rea noted.
“The missing component is capital.”
Source: https://thefreshtoast.com/cannabusiness/cannabis-industry-faces-sobering-2023/
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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