Dec 10, 2021
Cannabis Canada Weekly: Outlook for 2022, CSE plans new tier to boost trading volumes
U.S. continues to kick legalization can down the road for another year
2021 began with the hope that the U.S. government would pass a bill that would, in some shape or form, legalize cannabis. The year will soon end with another failed attempt by pro-cannabis U.S. legislators to make marijuana legal in the world's biggest consumer market. The latest try comes after the U.S. House of Representatives withdrew an amendment that borrows heavily from the SAFE Banking Act - a new law that would allow federally-regulated financial institutions to provide banking services to pot companies - in a defense spending bill. While the next U.S. mid-term election next year could see cannabis measures appear on the ballot, it's becoming increasingly likely that any legalization efforts will gather further traction following the 2024 U.S. Presidential election.
CSE to set up new tier for bigger issuers amid hope of boosting trade volumes for U.S. pot cos
The Canadian Securities Exchange, home to many publicly-traded U.S. cannabis companies, plans to establish a new tier for companies that adhere to stronger disclosure and governance standards that could help boost trading volume on the junior exchange. To qualify under the CSE's new senior tier, companies will have a smaller window of time to report quarterly financial information and audited statements and will face stricter oversight of disclosed materials and improved governance procedures such as larger boards, CSE Chief Executive Officer Richard Carleton told BNN Bloomberg. The changes now head to a 60-day public consultation process but it will likely be cheered by many U.S. pot companies who have seen far lower trading volumes than their Canadian counterparts on other exchanges.
Tilray adds U.S. distillery for US$102.9M in latest brand-buying move
Tilray is buying a Colorado-based bourbon whiskey and craft spirits maker, Breckenridge Distillery, for $102.9 million in stock, the company announced Wednesday. Upon closing the deal, Breckenridge will now join Tilray's Sweetwater Brewing as its main U.S. alcohol brands that the company hopes it can leverage as marijuana brands once the U.S. triggers cannabis legalization. Jefferies Analyst Owen Bennett said in a report that Breckenridge's estimated annual sales are around US$20 million, with EBITDA believed to be at around US$5 million. Bennett added that investors may be disappointed that Tilray has invested in a non-cannabis company but that it is likely waiting for better timing to buy up cheaper THC-related assets once the probability of entering the U.S. market improves.
Fire & Flower expands digital, delivery offerings with Pineapple Express deal
Canadian cannabis retailer Fire & Flower struck a deal to buy Pineapple Express Delivery, the company announced on Thursday. Fire & Flower will takeover the cannabis logistics and delivery firm by paying back $5.3 million of debt that Pineapple Express owes and issue roughly 1.1 million shares for a total of about $12 million. Pineapple Express made about $10 million in trailing 12-month revenue in the year-ended in October, according to a release. Stifel-GMP Analyst Justin Keywood said in a report that Fire & Flower's deal for Pineapple Express falls in line with its strategy of "boosting its technology offering in providing a 'bricks and clicks' platform and to gain data insights."
ANALYST NOTE OF THE WEEK - DESJARDINS OUTLOOK FOR 2022
Desjardins Capital Markets Analyst John Chu published a broad-ranging report this week providing an outlook over the next year for the U.S. and Canadian cannabis industry. Among Chu's highlights is a forecast of cannabis sales climbing by roughly 10 per cent to $4.3 billion next year, while profitability - measured as reaching positive adjusted EBITDA - will continue to remain elusive for many Canadian licensed producers. Chu notes that cannabis retailers and smaller producers are "best bets" for 2022 as the latter is focused on less competitive premium segments of the consumer market while operating with a more manageable cost structure.
Digging in the weeds (pardon the pun) in Chu's report finds that cannabis sales will continue to be an in-demand consumer product as people turn to cannabis as a vice to cope with pandemic-related stress and anxiety, while more people will leave the illicit market and the number of habitual buyers is seen to be increasing. Canadian sales will likely follow Colorado's sales trajectory over the next year and when you extrapolate even further, would see annual sales reach $4.8 billion in 2023 and $7.1 billion in 2025. "The main drivers of continued strong industry sales include more retail stores and the continued improvement in the quality and/or potency of cannabis, more competitive prices and increased adoption of cannabis 2.0 products," Chu said. Interestingly, cannabis sales in Canada are poised to surpass domestic industry sales for both domestically-produced spirits and wine, according to Statistics Canada, although imports of those beverages still outnumber pot retail activity.
Canadian cannabis retail openings will likely slow down in 2022 from the 2,775-odd stores currently open across the country, Chu notes. Again, comparing Canadian retail data to Colorado on a per-capita basis, Chu expects to see just 12 per cent more stores to open their doors next year with most provinces now approaching an "optimal number of stores" and the impact of new outlets on industry sales should start to wane.
BONUS ANALYST NOTE: Cannabis Benchmarks on household spending data
Cannabis Benchmarks Managing Director Het Shah looked at quarterly household expenditure data from Statistics Canada that highlights how the shift to legal cannabis sales from the illicit market have been faring. In the third quarter of this year, StatsCan data showed that household spending on legal cannabis was nearly 70 per cent higher than their illicit retail counterparts. That means that more Canadians are choosing to purchase cannabis through regulated legal channels as awareness and accessibility continue to evolve, Shah said in a report. That difference should continue to widen given that legal cannabis products continue to get cheaper and new supplies from legal indoor and outdoor cultivation operations became available.
CANNABIS SPOT PRICE: $4.97 per gram -- This week's price is down 0.8 per cent from the prior week, according to the Cannabis Benchmark’s Canada Cannabis Spot Index. This equates to US$1,771 per pound at current exchange rates.
- The weight of a cannabis-infused brownie - believed to be the world's biggest - according to U.S. multi-state operator MariMed.