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)

CBD Prices Weighed Down by Rising Supply in 2020; Industry has Huge Growth Potential

According to Leafreport, over two-thirds of brands slashed their prices this year to some degree. The report also said CBD prices plunged 17% in 2020 from last year, except prices for pet edibles which surged 44%.

Moreover, the decline in prices for hemp biomass, falling production costs and firms’ aim to reach low-income household amid rising jobless rate due to the ongoing COVID-19 pandemic have also contributed to this year’s drop.

Indeed, owner of CBD company Kind Lab, Angela Arena in an interview with Leafreport, said that one of the most significant reasons for CBD’s steady price decline in 2020 is that more hemp suppliers have entered the market since the passage of the 2018 Farm Bill legalized hemp cultivation. With the increased access to hemp, more and more CBD brands were able to enter the market.

Kind Lab’s Arena further stated that “prices were so high because the supply was so low, but we’re starting to see that drop, especially as people get creative and find ways to produce lower-cost products and introduce those into the market, it’s going to become a lot more price competitive,” noted Leafreport.

According to Hemp Benchmarks, an overall price of hemp CBD biomass plunged about 80% from April last year to April 2020 – dropped to $8.1 per pound from $38.0 per pound.

There are other factors that influence the pricing decision of a CBD product – the underlying costs associated with certain certifications, quality testing with third-party and merchant fees that factor into the sale of the product at clinics and online.

“A good way to make sure a CBD product is worth the money is to check how it is advertised. It’s always worth checking if the label says USDA Organic certified and if the brand publishes their certificates of third-party analysis (COAs) on their website. Also, as Terwilliger notes, look for a little orange stamp that says U.S. Hemp Authority Certified. This third-party organization evaluates the transparency of a brand’s testing protocol, quality manual, marketing, and more,” Leafreport added.

Investment in Emerging Cannabis Industry

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.

“If you are considering investing in a U.S. company that is connected to the cannabis industry, be aware that cannabis-related companies may be at risk of federal and/or state criminal prosecution. The Department of Treasury has issued guidance that The Controlled Substances Act (“CSA”) makes it illegal under U.S. federal law to manufacture, distribute, or dispense cannabis and cannabis-related products. Many states impose and enforce similar prohibitions. Notwithstanding the federal ban, however, many U.S. states and the District of Columbia have legalized certain cannabis-related activities,” said Eric Assaraf of Cowen and Company.

Based on Jefferies Virtual Cannabis Summit, which hosted over 200 investors on Oct 7-8, the first point of the panel discussion was the Cannabidiol market size in the United States. There was a range of different estimates but the panellists were largely consistent about their growth predictions for the industry post-COVID-19, expecting it to grow at CAGR of 20%-25% over the next five years on a conservative basis and 30%-40%, when speaking optimistically.

The panellists were also on the same page when discussing the end uses of Cannabidiol which are quite profuse and span across personal use goods, medical products and CPG products. The CBD penetration right now is only 15% of households and therefore there is a big untapped opportunity for the industry to capitalize on, Jefferies added.

Three Stocks To Buy As The Cannabis Industry Makes A Comeback

Empirical evidence pertaining to many disruptive developments such as the invention of the World Wide Web, the growth of social media platforms, and the over-the-top content streaming industry, reveals that identifying and investing in these developing trends early could lead to multi-bagger returns.

Recent market developments, the improving regulatory outlook, and the latest transparency data released by Leafreport confirm the CBD industry has what it takes to become the next disruptive force in the global business world and grow into a multi-billion dollar industry in just a few years. Growth investors, therefore, should pay close attention to this space.

The Industry Outlook Is Promising

Two tailwinds are driving the CBD industry forward.

First, the many use cases of cannabidiol are taking the industry mainstream. Data from CBI Insights reveal that CBD products are used in the following business sectors.

  • Health and wellness
  • Food and beverages
  • Cosmetics
  • Haircare
  • Sports
  • Pet industry

The wide variety of use cases available for cannabidiol will help the industry grow as consumer awareness grows toward these products.

Second, the maturing nature of the industry which is evident from the latest data released by Leafreport gives reason to believe that consumer engagement will increase in the future as products are now becoming trustworthy. The chief executive officer of Clever Leaves, a company that produces medical cannabis, believes that transparency is one of the key considerations of CBD buyers. In an interview with Forbes, he said:

“Consumers are getting more savvy on the benefits of CBD and they will begin to insist on knowing exactly what they are paying for and what they are getting when they purchase CBD products.”

Leafreport revealed in a report that out of the 36 CBD products tested in its study, 26, or 72% of products, had CBD levels within 10% of what was stated in the label of these products, which is considered as a sign by many industry experts that the manufacturer is delivering the promised goods. The industry, in fact, has come a long way to overcome the transparency issues faced as recently as 2018.

The Improving Regulatory Outlook

The legalization of cannabis is critical to the continued growth of the industry. Canada became the first G20 nation to legalize the use of cannabis products in 2018, and this led to a monumental shift in the market sentiment toward the CBD industry. Since then, the United States has made some noteworthy moves to approve the use of cannabis products for medical purposes.

According to data from the National Conference of State Legislatures, a total of 33 states in the U.S. and the District of Columbia, Guam, Puerto Rico, and U.S. Virgin Islands have approved publicly available cannabis programs. The U.S. Food and Drug Administration, on the other hand, is currently working in unison with the leading companies in this space to fast-track the approval process of cannabis drug products.

Elsewhere in Europe, Luxembourg is set to become the first country in this region to legalize the use of cannabis. This could mark the beginning of a new wave of optimism regarding the regulatory outlook for CBD products in the all-important European region.

As the industry matures, the transparency and accuracy of CBD products are bound to improve. This, in return, will be leveraged by industry participants to push regulators to speed-up the approval process of cannabis products around the world.

Best CBD Stocks To Buy

It’s always a prudent idea to invest in the leading companies of a young industry as these first movers often build economic moats that bring in sustainable earnings in the long run. Here are three such stocks to consider.

Aurora Cannabis Inc. (ACB)

Aurora Cannabis (ACB) is one of the first players to enter the CBD industry and is among the leading companies in this sector as well. The primary business activity of the company is producing and distributing medical cannabis products. However, the company has diversified its business operations to sell vaporizers and herb mills as well, in a bid to boost its market dominance. Aurora’s recent investment in Reliva, a U.S. CBD company, is an indication of its plans to grow inorganically as well, which might prove to be rewarding in the long run.

Shares have remained under pressure in the last 12 months primarily as a result of macro-economic headwinds facing the cannabis industry, including the oversupply of legal cannabis in Canada and the black market that sells the same products at fraction of the cost. To counter these threats, Aurora launched a budget-friendly product line in February with prices as low as $5/gram with high THC potency.

This move will help the company face it off with illegal products, and consumers now have little incentive to purchase cannabis products from the black market. The company management has emphasized its commitment to bringing low-cost products to the market in the coming months as well, which should help Aurora establish itself as a top contender for the market share in the cannabis industry.

New store openings in Canada were delayed as a result of the spread of Covid-19, and this was a direct hit to Aurora’s strategy of expanding its scale to establish its presence in important regions such as Ontario. However, as the country reopens for business in the coming weeks, the regulators expect to authorize up to 20 new store openings per month. These new physical locations will boost the revenue of the company.

Aurora Cannabis has reported stellar growth in the last three years, supported by favorable macro-economic conditions. The company reported just $1.1 million in revenue in 2016 but in the last 12 months, Aurora brought in more than $217 million in revenue. This goes on to reveal the high-growth nature of its business operations.

Even though Aurora has a long way to go to become a profitable company, this can easily be achieved if revenue growth remains at elevated levels for a few years, which is likely to happen. The new store openings, low-cost products, and its acquisition of Reliva that allows them to enter the American market will act as catalysts for Aurora to become profitable in the next few years, and shares will follow earnings and trend higher in this period.

Canopy Growth Corporation (CGC)

Canopy Growth is another leading player in the industry that was hit hard in recent months. The company remains focused on optimizing its cost structure to improve margins and its focus is on introducing novel products such as cannabis-infused chocolates and beverages into the market. This strategy will likely help the company generate attractive revenue growth from its stores in Canada.

Canopy Growth is the largest cannabis player in Canada, and the company is capitalizing on its scale to reach new customers. Even though the company has grown its revenue from $1 million in 2014 to $283 million in 2019, the first calendar quarter of this year was disastrous as the company could not keep its stores open as Covid-19 continued to wreak havoc.

Similar to many other companies operating in this sector, Canopy Growth failed to gain momentum in recreational cannabis sales and reported a decline of 28% on a year-over-year basis in the first quarter. In addition to Covid-19, the strong black market in Canada played a major role in this decline. To overcome this threat and the oversupply in the market, Canopy Growth has decided to reduce production capacity by 40%, which seems to be the right decision to stabilize prices and reduce operating costs.

In other measures aimed at improving operating margins, the company is reducing its headcount by 200 employees in Canada, the United States, and the United Kingdom. These bold measures are required to ensure the sustainability of the business and the company was criticized by many analysts in the past for not taking these steps. The company decided to shut down its hemp farming operations in New York as well. Because of the uncertain regulatory condition in the U.S., the company is now focusing more on its core markets such as Canada, which is a positive sign.

The company will unlock many growth opportunities through the novel products introduced into the market. Canopy Growth is aggressively pursuing opportunities in the cannabis-infused food and beverage market and the cosmetics industry, and this will set them apart from the competition in the coming years.

As business activities return to normalcy in Canada, Canopy Growth’s increased focus on this region will start paying off, and that would be the catalyst to drive the company forward in the coming years. Concentrating on its top market is a good strategy rather than to invest millions of dollars in all of its target markets when there’s a significant level of uncertainty surrounding the regulatory approval of its products.

A quick look at the liquidity position of the company reveals that Canopy Growth will not be exposed to any liquidity traps at least until the end of this year as the company had more than $1.4 billion in cash as of March 31. This strong financial position will play a key role in helping Canopy Growth survive these difficult times and this is a luxury many new cannabis companies do not enjoy.

As many investors continue to look at the short-term woes, a contrarian investor might find Canopy Growth shares an attractive investment as the company is finally making important changes to its business structure that could help consolidate its leading position in Canada.

Aphria Inc. (APHA)

Aphria is another cannabis company with a strong liquidity position. The company is betting on its store openings across Canada to bring in meaningful revenue in the coming quarters and is one of the few companies that have continued to emphasize the importance of a strong omnichannel presence, which might play to the advantage of the company in the future. Aphria is investing to improve its e-commerce platforms, which is the right thing to do to address dynamically changing consumer habits.

The online presence of the company, in fact, helped report better-than-expected numbers for the fiscal third quarter that ended in February. While many cannabis companies struggled in this period, Aphria reported a 64% increase in net cannabis sales for fiscal Q3, which was driven by the sale of recreational cannabis products. This sets Aphria apart from other cannabis companies as its dependency on medical cannabis products is below the industry average.

Even though the majority of cannabis companies operating in Canada suffered from the oversupply in the market, things were different for Aphria in the previous quarter as the demand for its products far exceeded supply, which was confirmed by the management by highlighting the fact that the company had to buy cannabis from the wholesale market to cater to the additional demand. This is a very positive sign for investors and is proof that Aphria is slowly but surely grabbing market share in this billion-dollar industry.

Aphria is in good shape from a liquidity perspective as well. There are no debt maturities scheduled for this year and the company has a cash balance of over $500 million.

Aphria’s business strategy is to price its products low to gain market share in this competitive industry and to improve its online presence. Going by the recently reported financial results, this strategy seems to be working. The expected increase in its market share will drive future earnings of the company. This, coupled with the expected revival of the Canadian cannabis industry in the latter part of this year, makes Aphria a good investment at the current price levels.

Conclusion

The CBD industry is benefiting from various macro-economic tailwinds and many companies representing this industry are increasingly focused on developing high-quality products that meet agreed-upon standards in testing and manufacturing. As the transparency of CBD products increases, so will the market value of the industry. The industry is on pace to mature in the next couple of years, which makes now the best time to be betting on the shares of companies that are driving the CBD industry forward.