Potential Cannabis Legalization Curve Balls

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As we prepare to exit what has been a remarkable Q2 financial reporting season for American cannabis operators, with substantial revenue growth that generally exceeded expectations and visible signs of improved profitability, it’s easy to be optimistic about the future for many of the MSOs. As we have been discussing for several months, the pandemic has boosted demand for cannabis and particularly for state-legal cannabis. The ability to serve customers the way retailers in other industries serve theirs has been a game-changer, with the convenience of ordering online and receiving cannabis by delivery or curbside pickup where this had not been permissible previously helping the legal market rapidly expand. These changes are likely permanent and bode well for continued strong growth under the new status quo.

We have also been pointing to the likelihood that more states will move to adopt legalization for adult-use, and we believe this certainly to be the case, especially in the Northeast. This week, an announcement by Pennsylvania Governor Tom Wolf received a lot of attention, but we think many skipped reading the story and focused only on the headline. On Tuesday, as part of his fall legislative agenda, Governor Wolf pushed for legalization, which is not a new policy position. He and Lieutenant Governor John Fetterman have been strong advocates but have not yet been able to bring aboard Republican Senators. While his official news release made no mention, Governor Wolf is proposing that state-run alcohol stores sell adult-use cannabis. Talk about a curve ball! Typically, existing medical operators are able to sell into the adult-use market as well when it opens, and we expect that this would ultimately be the case in Pennsylvania as well. When New York was contemplating legalization, there was initial discussion that medical providers would be locked out of the adult-use market, but this was quickly dropped. Pennsylvania’s pro-cannabis governor’s suggestion, though, highlights how changes that are perceived positively can actually be negative.

The prospects for federal legalization are low in our view. Instead, we hope that several policy changes that would improve the status quo, such as reforms that make it easier for companies to process transactions with traditional credit cards, access banks for mortgages or loans or list on higher exchanges, play out in the near-term. We think this is more likely with a Democrat-controlled Senate. We warn that legalization, should that play out against our expectations, could offer up some curve balls as well. For example, Joe Biden’s platform calls for federal legalization of medical cannabis, without detailing exactly what that might mean. We fear it could mean FDA involvement (think CBD) and could also change distribution from dispensaries to pharmacies potentially. We don’t anticipate Biden’s vision to play out. Instead, we believe any initial move by Congress would be to assert the rights of states to oversee their own programs and legislation similar to SAFE Banking, hopefully enhanced, that would make it safer and saner to conduct business. We would also expect to see barriers to research removed.

Many investors believe an investment in the sector is a bet on near-term federal legalization, but we think it’s really a bet on the status quo: robust state markets with no federal interference. Federal legalization will be quite complex, as it must address some tough issues, like interstate commerce. Just as social equity initiatives slowed the process in other states, we think that this could be an important area of discussion that could slow the process. We point to Canada, where it took three years from the time that Justin Trudeau assumed leadership after including cannabis legalization as part of his campaign platform to the time the first gram was sold, and Canada already had a federal medical cannabis program. The good news on the slow path to any potential federal legalization that we anticipate is that we expect many cannabis operators are positioned to thrive ahead of the ultimate legislation, especially if some of the reforms we envision take place in the near-term.

Fire & Flower, a leading independent adult-use cannabis retailer that guides consumers through the complex world of cannabis through education and technology focused retailing, has continued to benefit from the support of its strategic investor, Couche-Tard, a multinational retail conglomerate.

In addition to recently agreeing to accelerate its financial backing, Couche-Tard launched a pilot in Alberta, where it has co-located two Circle K and Fire & Flower stores. With over 16,000 Circle K stores worldwide, this co-location strategy has significant upside for Fire & Flower to corner prime retail locations overtime. Fire and Flower recently announced a premier Toronto location, which will be its third in Ontario, where it expects to open another seven stores, and it also received Approval in Principle for its first two stores in Vancouver.

Get up to speed by visiting the Fire & Flower 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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