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Cannabis Reform Slogs Through Congress as Corporate Revenues Continue to Tumble 

Revenue slows and stocks crash despite continued industry growth. Can legislation save small cannabis businesses?

The North American corporate cannabis sector has seen better days. Pandemic-galvanized sales surges are now mostly in the rearview mirror, and markets in large U.S. states and Canada have matured at a rapid clip. Despite the introduction of a new decriminalization bill, a lack of meaningful federal movement makes it feel like the industry is stuck at a crossroads.

As we move into the second half of the year, let’s look at how things have gone for major U.S. and Canadian cannabis companies in 2022 and what we can expect going forward. For expert insight, Cannabis Business Times spoke to senior cannabis banking executives and advocacy groups.  

Revenue & Profits Slow, Stocks Get Slaughtered

Quarterly earnings reports and press releases showed a consistent theme: While revenues remain healthy and new markets continue to expand, growth is slowing down. Some companies are even experiencing downward trends in sales and revenue.

Canopy Growth, one of Canada’s biggest producers, reported net revenue of $112 million in fiscal Q4 2022, a 25% decrease compared to Q4 2021’s $148.4 million. For the 2022 fiscal year, Canopy’s revenue dropped 5% compared to 2021. Its recreational and medical sales numbers are both down double-digit percentages from last year. In investor presentations released earlier this year, Canopy blamed these dips on factors like “lower production output, price compression in the Canadian recreational business” and “higher third-party shipping, distribution and warehouse costs.”

American cannabis companies haven’t been spared from slowdowns. Massachusetts-based MSO Curaleaf drew more than $1 billion in revenue for the first time in 2021, good for 93% growth year-over-year. But in Q1 2022, the company reported quarter-over-quarter losses in revenue, profit and EBITDA. 

Curaleaf raised $425 million in a December 2021 private placement of senior secured notes, but as of March 31, 2022 had $243 million in cash against $584 million in debt. Both figures are regressions from 2021’s $315 million in cash against $340 million in debt.

If revenues have taken a beating in 2022, stock prices suffered a knockout blow. On the NYSE, Canopy Growth’s stock price has tumbled from around $20 in July 2021 to less than $3 this month. The MJ ETF, which includes top cannabis producers like Tilray, Canopy and Aurora, plus auxiliary cannabis businesses like GrowGen, reported a 47% loss in value year to date.

For the most part, banking experts believe these slowdowns are part of the natural maturation cycle for an industry still in its infancy.

“There’s been a softening in sales growth,” said Jason Wilson, Cannabis Research and Banking Expert at ETF Managers Group (ETFMG), the issuer of the MJ ETF which focuses on investing in global cannabis companies, via phone. “Canada is several years into legalization. … The U.S. isn’t an emerging legal market anymore. So many states have legalized or have [medical] programs in place.” He pointed out that many North American markets were getting more competitive while growing rapidly in the last few years, including states awarding new licenses of different varieties.

Morgan Paxhia, co-founder and managing partner of cannabis investment fund Poseidon, pointed out that stocks in many other sectors have been beaten down by 2022’s bear market.

“If you think about when our market peaked in February of 2021, a lot of other sectors peaked at that time—a lot of growth technology, Chinese tech. All of that went on a painful 18-month slide,” said Paxhia. “We thought we were not as overvalued as other companies, but that turned out not to be true.” He blamed downward movement partially on excessively high expectations, adding that many U.S. operators neglected to factor growth slowdowns into their forecasts.

“We had been talking about this since Q3, Q4 of last year, that estimates were too high. … There were definitely some that guided lower, but most of them wouldn’t—they just wanted to kick the can a bit at the time, or they were just not aware of the market implications,” Paxhia said.

Executive Pay and Job Growth Remains Strong

Through fluctuations in stock prices and revenue growth, one thing has remained steady: high pay at the top of the corporate cannabis ladder. 

In February, The Globe and Mail named David Klein of Canopy Growth as the highest paid CEO in the entire country. Klein reportedly earned over $45 million in total compensation in 2020. Miguel Martin at Aurora Cannabis in Edmonton earned over $4.3 million in total compensation in the fiscal year ending June 2021, though Aurora lost $700 million in the same period. 

U.S. cannabis operators were no different. MarketWatch reported that CFO and COO salaries both increased 10% in 2020. When major American MSO Cresco Labs announced its intention to acquire the smaller Columbia Care earlier this year, documents showed Columbia Care CEO and co-founder Nicolas Vita was in line to earn almost $100 million in personal cash and stock compensation.

And despite slowdowns in revenue growth, the cannabis industry as a whole is still growing rapidly. A new report shows that cannabis is now a $25-billion industry in America, with four straight years of over 25% job growth. Based on data from the Bureau of Labor Statistics, cannabis employs more Americans than industries like veterinary services, furniture manufacturing and dry cleaning.

In a statement emailed to Cannabis Business Times, Kaliko Castille, board president of the Minority Cannabis Business Association, highlighted the massive gulf in compensation between the C-suite and the rest of the industry.

“In tough times, it’s the small Black and brown entrepreneurs and craft growers in California, Illinois, New Jersey and elsewhere who are barely making their bills that have the most to lose,” said Castille. “They usually don’t get the luxury of making bets with other people’s money.”

What Happens Next?

With corporate cannabis growth in North America slowing but nowhere near stopping, industry professionals and investors believe federal legislation could be the key to a brighter future. Early signs are encouraging: Just this month, an amendment adding the SAFE Banking Act to a major defense spending package and an appropriations bill loosening advertising restrictions both passed the House. In the Senate, Majority Leader Schumer recently introduced his long-awaited comprehensive legalization bill, the Cannabis Administration and Opportunity Act.

And while experts had mixed thoughts on how much the various pieces of legislation would help and to what degree, the sentiment was generally positive.

“[SAFE Banking] would be helpful, although it doesn’t change too much on a macro level–it doesn’t result in every state suddenly saying they’re going to legalize, but it would help businesses of all sizes in the cannabis space,” said Wilson. He predicted meaningful cannabis reform would pass in the next year, regardless of which party controls Congress after the upcoming midterm elections.

Paxhia expressed concern that banking reform might arrive too late for many smaller businesses, which to date have had much more difficulty acquiring capital compared to even mid-sized MSOs.

“The concern is that by the time SAFE actually happens, most of the small businesses in our industry are already going out of business. We’re hearing it every day. It’s very sad–because capital has been so constrained, these businesses are just going away. Taxes are too onerous, regulations are too onerous. They’re toast,” he said.

Castille agreed that small, minority-owned businesses in particular would be hit hardest by a dearth of legislation.

“As we likely continue to see Senatorial inaction on cannabis and face the threat of a looming recession, many minority-owned cannabis companies will go out of business–potentially cementing an already inequitable cannabis industry,” he said.

While major corporations experience uneven growth in a maturing sector and shareholders wait for the market to turn, it’s clear Congress will need to act to prevent small, authentic businesses from being squeezed out of an industry they created.

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