New York Reached A Deal to Legalize Adult-Use of Marijuana; Existing License Holder to Benefit

New York State lawmakers are on the brink to make the Empire State the fifteenth state to legalize adult-use cannabis, which will benefit the existing license holding companies.

Although the final drafting of the bill is underway, the proposal is expected to allow those aged 21 and over to grow their plants, and a 13% sales tax would be charged.

“We expanded our 2025 TAM from $31 bn to $40 bn to include adult-use revenues from New York (NY), with commercial sales commencing 1/1/2023. Given the high rates of disposable income in the state, and strong tourism historically, we believe that NY can become one of the largest cannabis markets in the U.S.,” noted Eric Assaraf, equity analyst at Cowen and Company.

“Currently, the industry operates under a limited license structure, with 10 license holders, including Green Thumb Industries, Curaleaf, Cresco Labs, Columbia Care, Acreage Holdings, MedMen, and Vireo. We would expect existing license holders to have a first-mover advantage given their existing approvals and cultivation infrastructure. Of note, to the extent legalization occurs one year after the legislation passes, that would present upside to our estimates, as we have modeled a 1/1/2023 start to adult-use sales in NY. Green Thumb Industries ($31.40) remains our Top Pick across our entire coverage universe; Maintain Outperform.”

Cannabis is an emerging industry and is subject to regulatory headwinds. Although the industry is still emerging, legal cannabis has gone through multiple iterations. The business started as a flower-based market aimed at catering to the needs of stoners and thereafter, blossomed to a more retail-centric market that experimented with multiple edibles, beverages and concentrates.

Most recently, the cannabis industry has further widened its reach to target a broad base of the audience whose main aim is not to get intoxicated but rather to be cured of some form of the diseases.

While over half of the population is in favour of new the legalization, only a few states have thus far legalized cannabis for recreational use and the product remains illegal at the federal level. Much work and changes are still required to occur for this industry to realize its full potential.

Cannabis Entrepreneurs, Celebrity Investors Light up as Legalization Blooms

By Paul Lienert and Jane Lanhee Lee

So far, 36 states and the District of Columbia have approved medical use of marijuana, according to the National Conference of State Legislatures. Of them,15 states and D.C. have approved recreational use of pot.

Cannabis technology startups, including those enabling home delivery of pot, got a big boost during the pandemic as more Americans partook, igniting investor interest in companies that provide everything from cultivation management tools to compliance and e-commerce software for an industry that still operates in a legal gray zone at the federal level.

Cannabis entrepreneurs say they have to move quickly and build their brands before full U.S. legalization levels the playing field – a process that many expect to gather steam this year.

“Why are you going to Weedmaps (for listings of cannabis retailers) if you can go to Yelp? Why do you order through this or that system if you can order through DoorDash or Uber Eats?” asks Steve Allan, chief executive of The Parent Company, which has Jay-Z as chief visionary officer and is looking to consolidate smaller players following its January listing through a special purpose acquisition company.

TPCO has built its own e-commerce technology that can handle everything from business management to retail sales, said Allan.

In one of the biggest venture capital deals in the sector to date, Oregon-based e-commerce platform Dutchie on Tuesday announced it raised $200 million in a funding round that values the company at $1.7 billion.

Dutchie’s investors include former Starbucks CEO Howard Schultz, NBA star Kevin Durant and DoorDash co-founder Stanley Tang. The company’s online marketplace connects cannabis dispensaries with consumers, who can order home delivery.

Reuters has identified more than 90 private and public cannabis tech companies in North America, with total private investment in the first quarter at the highest level in 18 months, according to data compiled by PitchBook and Crunchbase.

All told, investors have poured more than $2.5 billion into cannabis tech startups since 2018.

Public investors are piling in too. Special purpose acquisition companies, or SPACs, that target the broader cannabis industry raised at least $4.3 billion through early 2021, with $1.7 billion of that still waiting to be deployed, according to cannabis researcher BDSA.

That interest comes as shares of publicly-traded cannabis companies – many of which are listed in Canada because they are barred from U.S. exchanges – have begun to rebound after a brutal sell-off in 2019.

“We’re still in the very early innings” of investing, said Harrison Aaron, an investment analyst with Gotham Green Partners, a New York-based private equity firm with a cannabis-centric portfolio.

U.S. legal cannabis sales for both medicinal and recreational use last year jumped 45%, according to BDSA.

“We don’t necessarily want things to go (fully) legal today because there’s a lot of value in our companies, and we want more time to build,” said Lenore Kopko, managing partner at Gotham Green.

Others believe entry to the cannabis industry may not be quick or easy for many of the big outside players.

“Cannabis legislation, regulations and supply chain flows create complexity that is not built into software made for other industries,” said David Hua, founder and CEO of Meadow, which sells compliance and operating software for cannabis retailers.

CELEBRITIES GALORE

Cannabis startup funding in the sector has been led by a closely knit network of investors that often co-invest with one another. That network includes Liquid 2 Ventures, headed by former NFL quarterback Joe Montana, and Casa Verde Capital, founded by entertainer Snoop Dogg.

Another of those firms, Beverly Hills-based Arcadian Capital, has invested in more than a dozen cannabis tech startups. Boca Raton-based Phyto Partners has funded 10, many of them as a co-investor with Arcadian.

The network occasionally is joined by other high-profile individual investors. DoorDash’s Tang and Twitch co-founder Justin Kan were among those backing Oakland-based Nabis, a cannabis online marketplace for dispensaries that also has a warehouse, delivery service and online financing for retailers.

There is another draw for investors beyond the immediate business opportunity: data on a brand-new industry.

For Arcadian, the torrent of data that is being generated by cannabis tech startups provides “a great mechanism to learn more about the industry,” said Matthew Nordgren, the company’s founder and managing partner.

Industry boosters say technology developed and incubated by the cannabis industry could open new pathways for retail trade in other sectors.

Socrates Rosenfeld, co-founder and CEO of Jane Technologies, the Santa Cruz creator of an e-commerce platform that has been funded by Arcadian and Gotham Green, called it “a once-in-a-lifetime opportunity for a tech company to work in partnership with the operators in this space to build and redefine how tech and analog retail work together.”

(Reporting by Paul Lienert and Jane Lanhee Lee; Editing by Jonathan Weber and Dan Grebler)

Curaleaf Holdings to Report Relatively Strong Q4 in Terms of Revenue Growth: ROTH

Curaleaf Holdings is expected to post Q4 revenues of $239.5 million leading to EBITDA of $55 million as the market cap/revenue leader in U.S. cannabis industry is coming off a strong third quarter which showed the potential of the consolidated business the Massachusetts-based company has built through licensing wins and aggressive mergers and acquisitions, according to analysts at ROTH Capital Partners.

The leading U.S. provider of consumer products in cannabis will report its financial and operating results for the fourth quarter and fiscal year ended December 31, 2020 after market close on March 9, 2021.

Roth Capital Partners forecasts EPS loss of 2 cents in the fourth quarter, worse compared to a cent loss in the third quarter. For the full-year 2021, Newport Beach, California-based privately held investment banking company forecasts EPS of 14 cents on revenue of $1.25 billion, up 96.8%.

“We believe the results will indicate the direction for the rest of the industry and are expecting a relatively strong quarter in terms of revenue growth, with integration still weighing on profits. Additionally, we are adjusting our estimates to reflect ‘As Reported’ revenue to align our estimates with consensus and company guidance. Maintain Buy,” said Scott Fortune, equity analyst at ROTH Capital Partners.

“We believe 2021 will be the transformational year for CURA with revenue estimates above $1.2 billion and full integration of all its acquisitions provides the true leverage/scale of its footprint. We are expecting a conservative guidance for the 2021 year without factoring in new legalized states or acquisitions being layered on. We believe CURA will continue to lead the industry through its 100+ store footprint and sizable distribution network.”

Curaleaf Holdings Stock Price Forecast

The U.S.-listed Curaleaf Holdings shares, which surged about 90% in 2020 and added another 23% so far this year, closed nearly 2% lower at $14.75 on Friday.

Six analysts who offered stock ratings for Curaleaf Holdings in the last three months forecast the average price in 12 months of $20.34 with a high forecast of $25.41 and a low forecast of $15.76. The average price target represents a 37.90% increase from the last price of $14.75. All of those six analysts rated “Buy”, according to Tipranks.

Curaleaf had its price objective hoisted by Stifel Nicolaus to $32.25 from $23. The firm currently has a buy rating on the stock. Roth Capital lifted their price target to $20 from $14 and gave the stock a buy rating. Craig Hallum began coverage and issued a buy rating and a $19 price target.

Several other analysts have also updated their stock outlook. Needham & Company LLC raised their price target to $18.50 from $14 and gave the stock a buy rating. Canaccord Genuity boosted their price objective to $29.00 and gave the company a buy rating. Cantor Fitzgerald raised their target price to $23.50 from $20 and gave the stock an overweight rating.

“Our $20 price target is derived using a 22x multiple on our 2022 EV/EBITDA estimate of $632.6 billion, discounted back 15%. Our target price deserves a premium to the MSO peers due to its leading national scale. We set valuation using a multiple we thought appropriate for the growth rate while discounting for risks,” ROTH Capital Partners’ Fortune added.

Check out FX Empire’s earnings calendar

Hemp and CBD Prices Are Tied to Policy Developments

Hemp markets are swiftly evolving following the passage of the 2018 Farm Bill, which legalized hemp in the US.  CBD, one of many cannabinoids found in hemp, makes up the most active segment of the hemp sector but has endured significant price erosion since hemp acreage ballooned in 2019.  Hemp prices fell by over 80% in the period between July and October of 2019, according to The Jacobsen.

The perception of oversupply led a decline in hemp biomass prices and precipitated an industry-wide inability to perform on contracts.  This was compounded by significant inventories of shelf-stable hemp derivatives like crude CBD extract and CBD isolate. Crude CBD prices, and also CBD isolate prices, all plummeted in Q4 of 2019.

Hempseed is primarily grown for oil extraction, but some portion of production is marketed as raw, shelled, hemp hearts.  Think sunflower seed kernels.  Hemp fiber production has yet to gain traction in the US, though there is enormous support for the segment conceptually.  Considerable investment activity is laying the groundwork for a diverse fiber segment, which is projected to eclipse the cannabinoid segment, with applications ranging from bioplastics to disposable wipes.

Hemp fiber prices, and hempseed prices, are among the most stable as far as hemp pricing goes.  Ongoing efforts to allow for the inclusion of hempseed meal – the byproduct of crushing the oilseed – in livestock feeds, will buoy that segment considerably.  Hempseed meal prices will need to compete with other readily available protein sources, but even at $200/ton, hempseed operators stand to increase profits dramatically.

Producers in states like Kentucky and Colorado have a head start in market and infrastructure development, with some of the most CBD extraction capacity historically.  Market development in the US has been primarily dictated by state hemp policy, enabling operators in Colorado and Kentucky to capture trade flows and leap out ahead of competitors in some cases.

Other states have mobilized agencies to various degrees.  State governments that are allocating sufficient resources to problem-solving in the upstart industry will create advantages for producers.  Likewise, regional, state, and national industry groups are helping to overcome barriers that are prevalent now, and collaborations are beginning to flourish.

Hemp markets and hemp prices are entirely subject to policy developments on the horizon.  Among these policies is the USDA’s Interim Final Rule (IFR) that governs the actual production of hemp.  This is largely overseen by state or tribal agencies, but the USDA will also directly license producers in states like New York and Virginia, where state governments have decided to let the USDA handle the administrative and financial burden of oversite. USDA regulations for hemp, which were originally slated for implementation this fall, were delayed until September of 2021, allowing select states to continue on with the laxer elements of the 2014 Pilot Program.

Some 26 States and 38 tribes with approved USDA plans are subject to rules that are viewed as onerous, and a threat to the nascent industry.  THC is the key issue, dictating harvest timing, sampling methods, and what to do with non-compliant crops. This could be the driving force behind the upward momentum in cannabis stocks like Curaleaf (CURLF)

The DEA has also weighed in directly, issuing their own IFR, to align the new crop with the long-standing Controlled Substances Act (CSA).  This has not been well received by the hemp industry, and even key stakeholders like US Agriculture Secretary Sonny Perdue have noted that the DEA has not been an easy bedfellow throughout the process.  Hemp and overall cannabis policy are an existential threat to the agency, an agency that is self-driven in this respect, and out of step with the electorate.  The DEA has long viewed hemp as subterfuge, saying as much to the Colorado legislature in 1995, when the state made an early false-start into hemp.

The most pivotal regulatory issue for hemp is the FDA’s position on CBD for various applications. The FDA approved the CBD-based prescription drug Epidiolex in 2019, making the addition of that ingredient to food and beverages problematic, at best.   The agency has yet to provide any meaningful guidance to operators in the CBD segment.

This has deterred large corporations, particularly ones like beermakers Constellation Brands and AB InBev that have high-risk exposure compared to emerging microbrands. Some states have rushed to fill the regulatory vacuum, offering consumer protections that the FDA has yet to deliver. Florida’s department of agriculture commenced safety testing of ingestible CBD products this year only to discover elevated lead content at the outset.  Others, like Virginia and New York, have explicitly made CBD legal in their states.

On aggregate, beverages were anticipated to result in vast demand for hemp derivatives like CBD isolate. Beverage makers operating in states where it is permissible to add CBD will have a market advantage should the FDA create a federal regulatory path forward. Demand is expected to spike considerably in this scenario, with major beverage makers poised to jump in forthwith.

Stakeholders in hemp are hopeful that a new White House administration will help to iron out some of the major wrinkles that have emerged over the last two years.  Whether a new administration will directly impact rulemaking at FDA is unknown. the agency has been able to avoid the appearance of politicization over the years to some degree, but not entirely.  Political pressure on the FDA to develop CBD policy has been palpable, with bipartisan directives compelling them to report to Congress, and a bill in the House meant to circumvent the FDA with CBD legislation.

Hemp is ultimately tied to overall cannabis policy, both being defined by an arbitrary metric for THC content that has no real foundation in empirical science. The White House Office of Management and Budget (OMB) is a key agency for federal regulatory activities, and Biden’s ostensible choice, Neera Tanden has become a political lightning rod for the administration.  This agency could have considerable influence on CBD policy.

Positive policy developments in hemp and CBD will have outsized impacts on-demand, and hemp prices will follow suit.  Biden and Harris campaigned on a decriminalization platform, which may not create the results hemp stakeholders are looking for.  It has the potential of clearing hurdles for access to financial services, which are out of reach for many organic hemps or CBD operators because of cannabis and THC’s legacy.

68% of adults in the US support legalization, and lawmakers are increasingly open to policy changes, driven by COVID budget shortfalls, and the spectacle of states like Illinois raking in $100 million tax revenues over the course of 10 months.   The hemp sector is well-positioned politically, with plenty to be hopeful for in 2021, as far as hemp policy development and the resulting impact on hemp prices.