Cautious Optimism Warranted for Next Phase of Canadian Cannabis Legalization

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After a disappointing beginning to federally legal adult-use in Canada, the cannabis market there is about to get better. Already, retail stores are becoming more abundant in Alberta, and we are likely to see more progress in other provinces this year, especially in Ontario. Of course, another big change is the introduction of new types of products that are already quite common on the illicit market, like vape pens and edibles. For the first year, the main products available were dried flower and pre-rolls, but this has now changed.

While we think the new products are going to help improve industry revenue, we are cautious for a number of reasons. The biggest disappointment is that vape pens won’t be available in Alberta and Quebec as well as in the smaller Newfoundland & Labrador. In U.S. markets and presumably in the illicit market in Canada, this is one of the largest categories, and its absence will hinder near-term success. Hopefully the provinces reconsider the restriction later this year.

We think edibles are another important category, but we are concerned that packaging limitations are going to stunt the early success. In the U.S. markets with state-legal cannabis, packages tend to be capped at 100mg, with Oregon, at just 50mg, an exception. The Canadian market restricts THC to 10mg per package, which is terribly uneconomical in our view. Early indications are that edibles will cost C$7-8 (or US$6), making the per mg serving about 2-3X the cost typically in the U.S. Adding to our concern is that Quebec has effectively banned edibles, with no chocolates or candies.

The final concern is that several companies are counting on cannabis beverages to be a hit, and we think that this category is likely to disappoint. First, in the U.S., beverages have never been a popular product in any market. Better products, including features like taste-masking and predictable onset, could help, but we think the cost will be too prohibitive. Until cannabis beverages can be enjoyed in restaurants and lounges, we expect they won’t be too popular with consumers, even with the product improvements.

While we are cautious on the pace of adoption of new products, we do expect a lot of novelty buyers at the outset. Hopefully, provinces are quick to permit sale of vape pens and will remove some of the other restrictions on the types of products that can be sold. Additionally, we think it’s important for the 10mg per package cap to be removed, a step that would likely lead to a more robust market for edibles. Concern about its near-term potential, in our view, is warranted, but the good news as 2.0 launches is that expectations seem quite muted.

With no direct involvement with the cannabis plant, KushCo Holdings has positioned itself as a leading producer of ancillary products and services for the legal cannabis and CBD industries. The company will report their financials this week and has scheduled a conference call for January 8th after the market closes to discuss the results from its fiscal year 2020 Q1.

Get up to speed by visiting the KushCo Holdings Investor Dashboard that we maintain on their behalf as a client of New Cannabis Ventures. Click the blue Follow Company button in order to stay up to date with their progress.

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email

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