- US cannabis companies posted strong earnings as the coronavirus pandemic boosted sales in the second quarter.
- Business Insider spoke with executives at 7 of the biggest US cannabis companies to understand what's in store for the industry after a disappointing 2019 and a challenging start to 2020.
- They predicted that a Biden win — and Democrat control of the Senate — would pour 'jet fuel' on the industry.
- On top of that, they predicted lots of M&A activity in the next year.
- Visit Business Insider's cannabis page for more stories like this.
The CEOs of the biggest US cannabis companies say the recent quarter of strong earnings points to a rebound in the formerly troubled sector.
In recent weeks, US cannabis companies — known in industry parlance as multi-state operators, or MSOs — have posted strong earnings as the COVID-19 pandemic boosted sales in states with legal and medical pot.
Business Insider spoke to CEOs and other key executives at 7 of the top US cannabis companies after they reported earnings. They said that the strong financial results, coupled with a number of states weighing cannabis reform, signals that the industry is set for a big boost in the coming months.
"A parade of US operators has beat expectations, in the height of the coronavirus pandemic," Curaleaf CEO Joe Lusardi said in an interview. "It goes to show how strong demand is, coast-to-coast, for the product. It's a strong signal."
The executives also told us they're keeping a close eye on politics. They said a coming US House of Representatives vote on federally decriminalizing marijuana could be a positive sign that the federal government is ready to take up cannabis reform, and that a potential Joe Biden victory in November would also bolster the industry.
And, as more states look for economic stimulus as the pandemic continues to hinder the economy, legalizing cannabis, which creates jobs and a new source of tax revenue, is increasingly on the table. In the US, cannabis is illegal on the federal level, but legal for recreational use in 11 states and for medical use in more than 30 states.
Cannabis investors 'shaken' by the last nine months, but things are turning around
Charles Bachtell, the CEO of Chicago-based cannabis cultivator Cresco Labs, told Business Insider that investor confidence in cannabis had been "shaken," as one index of cannabis stocks dropped over 90% in 2019 and that the past nine months have been difficult for the industry to say the least.
"But I think that this recent earnings season for the top tier US guys has shown that this is a real industry, with real businesses that are real operators that are posting real revenue, that are concerned about real earnings and profitability," Bachtell said.
And, because cannabis is federally illegal in the US, Bachtell says companies are working with "one hand to one-and-a-half hands tied behind our backs."
Read more: The CEO of Canopy Growth lays out 3 reasons he's 'never been more bullish' on the cannabis industry
Compared to some of their Canadian counterparts, US cannabis companies finally have market values justified by "actual performance," said Kim Rivers, the CEO of Florida-based cannabis dispensary chain Trulieve.
"When investors take a step back and look at what's actually going on from an operations perspective, they find a good story," Rivers said.
In her view, cannabis is entering a new phase where US cannabis companies' share prices reflect their financial underpinnings, rather than hype about a new industry in a "hyper-growth" period.
"We need to have sector strength across the board to offer institutional investors," Rivers said, especially if, and when, cannabis companies are able to uplist to marquee US exchanges like the NYSE or Nasdaq.
A Biden victory or a Democratic win in the Senate could be a boon for cannabis reform
For cannabis companies to uplist and access institutional capital, Congress would need to pass legislation that allows cannabis companies to access banking and the broader capital markets like any other legal business.
Democratic nominee Joe Biden supports decriminalizing cannabis but has stopped short of calling for legalization. His VP pick, Kamala Harris, has supported legalization legislation in the Senate. And the House is set to vote on the MORE Act, a bill that would decriminalize cannabis and expunge the records of those convicted under cannabis laws, in September.
That gets to the heart of an issue that Jushi Holdings President Erich Mauff called a "paradox." If the federal government decriminalizes cannabis but doesn't allow the legal cultivation and sale of a product — then who are consumers supposed to buy product from? Who would oversee whether the products were actually safe to use?
"I don't understand how you decriminalize a product that you have to purchase from a criminal," Mauff said in an interview. "No one, not even most Republicans, wants to stand in the way of decriminalization. But you need a legitimate market to purchase, the ability to track supply, as well as proper safety controls"
Jushi Holdings is a cannabis and hemp company that owns both medical and recreational dispensaries in 7 states.
Still, Mauff and many other cannabis CEOs say a Biden win — along with the Senate flipping toward the Democrats, — would be "jet fuel" for the industry.
Curaleaf's Lusardi says the continued conflict between state and federal law is "almost ridiculous," now that 11 states have legalized marijuana for adults, and Arizona and New Jersey are voting on legalization in November. Pennsylvania's governor, Tom Wolf, has called on the state's legislature to legalize cannabis.
Read more: Top Wall Street analysts say these are the 7 cannabis stocks to bet on now that will benefit investors if Biden defeats Trump in November
Lusardi highlights abolishing Section 280E in particular, a provision of the IRS code that prevents cannabis operators from deducting regular business expenses from their taxes, as something that cannabis companies will advocate for.
Curaleaf is the largest US cannabis company, with operations in 23 states and a market value well over $4 billion.
And it's not just access to nuts-and-bolts banking like opening checking accounts that cannabis companies say will help. It's about a "much broader concept of banking," Bachtell, of Cresco Labs, said, including the ability to use debt to leverage deals, tap into large investment banks' networks to raise capital, and solicit investment from large institutions by listing on US exchanges.
"I think you'll get banks to get there without it being explicitly laid out in the language," of the legislation, Bachtell said. "Every bank is figuring out where their comfort level lies."
As it stands, institutions and most major banks are only able to work with Canadian cannabis companies as firms based in Canada are able to list on US exchanges.
Return of cannabis M&A
As investors return to the US cannabis industry, some execs say there will be a boom in mergers and acquisitions in the industry over the next few months and into next year.
Already, two of the top-performing cannabis companies, Trulieve and Green Thumb Industries, are rumored to have engaged in merger talks, Barron's reported.
Ben Kovler, the CEO of Chicago-based Green Thumb, said his focus will be on buying "accretive" businesses that expand the company's presence in different states.
"We don't want to buy broken business to fix them," Kovler said in an interview. While Kovler didn't specify which assets he'd go after, he noted that New Jersey — a populous state near the urban centers of New York and Philadelphia — is likely to legalize cannabis on the ballot in November.
Mauff, of Jushi Holdings, said he expects 2021 will be the "year of consolidation."
"I think we'll see a range of things, from business-to-business M&A, bolt-on deals, or even a situation where investors pick off assets of a larger company," Mauff said.
Those companies, like MedMen for example, may decide to part with dispensaries and cultivation facilities in some states in order to refocus their operations, Mauff said.
For his part, TerrAscend CEO Jason Wild says he doesn't want full-scale legalization to happen yet. TerrAscend is a Canopy Growth-backed CBD and cannabis company with over 500 employees. It has dispensaries in California, Pennsylvania, and New Jersey, and cultivation facilities in Canada.
Federal legalization in the US could end up creating an opportunity for cannabis companies to sell themselves, as Wild predicts companies from more established industries will look to acquire cannabis companies with attractive scale and revenue.
"That'll drive valuations way up, and huge consumer companies will come in," Wild said. "I won't be having too much fun anymore."
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