Companies Call for De-Scheduling and Regulating Cannabis after Vape Health Crisis

Bottom Line: This is a smart strategy by cannabis lobbyists in our opinion. They have a valid case that a thriving black market in cannabis is a direct result of the patchwork of U.S. legalization. Legalizing and regulating cannabis nationwide will both protect the public and benefit all the leading multi-state operators. mj - weed vaporizer

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Tracking the Fall in Vape Sales

Bottom Line: Though sales of cannabis vapes are down significantly since the news of vaping hospitalizations went public, sales are rebounding slightly as of two weeks ago. Question marks remain if additional regulation could hit vape sales further (i.e. possible vaping ban in Los Angeles, months long ban in Massachusetts).

Source: Headset, Marijuana Business Daily

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Edibles Roll-Out Could be Delayed

Bottom Line: An official delay has not been announced but when we look at the regulatory timeline, it will be a sprint for all parties to have a full edibles menu available to the public by mid-December. LPs need an amendment to a processing license to sell edibles and with a 60-day notice period starting Oct. 17 before new products can legally be sold, the absolute earliest rollout will be Dec. 17.

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First Legal Cannabis Cafe Opens in North America

Bottom Line: Lowell Farms Cafe in L.A. provides a look into the future of cannabis consumption. Legal consumption of cannabis at restaurants and bars will go a long way to closing the gap between alcohol and cannabis consumption trends. While 70% of adult consumers drink alcohol, only 12% use cannabis.

Source: Lowell Farms Instagram

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Square Will Expand Processing of CBD Transactions

Bottom Line: Payment processor Square will allow even more retailers to use its services to process sales of CBD-infused products. Lack of access to the traditional banking system continues to hamper the growth of the cannabis industry. This is a very positive first step for CBD businesses and will likely drive increased sales.


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Large Custody Bank will Stop Clearing CSE Cannabis Trades

Bottom Line: Pershing’s decision to disallow trading in CSE-listed U.S. cannabis operators is a setback for U.S. MSOs like Curaleaf, Harvest, Trulieve, Cresco Labs, and others. This move by Pershing is negative on the margin but shouldn’t matter much unless many other institutions follow their lead. CSE stocks still have a long road ahead to get in front of U.S. retail investors, but once they do it will be big.


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Is Colorado About to See a Dealmaking Frenzy?

Bottom Line: On Nov. 1, non-residents and publicly traded businesses can now own cannabis licenses in Colorado. Bill H.B.19-1090 opens the door to large multi-state operators if they want to move into the Colorado market. Colorado companies now have five-plus years of experience operating in the legal cannabis market and likely have some pearls of wisdom and useful market data to offer to newer entrants.

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Don’t Expect CSE Pot Stocks to List on the TSX Venture Anytime Soon

Bottom Line: An excellent article laying out why the TSX Venture exchange is still out of bounds for U.S. operators who trade on the CSE. No companies that directly touch cannabis or provide ancillary services can list on the TSX or TSX Venture exchange for now.

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Altria Timing Couldn’t be Better with Release of Tobacco Flower Vaporizer 

Bottom Line: Public fears about vaping of concentrates will push some consumers back to vaping only pure cannabis and tobacco flower. Altria got lucky with the timing as they roll out what is effectively an FDA-approved tobacco vaporizer. Watch vape sales in legal states closely to see if this is a long-term shift or just a transitory reaction from consumers.

Source: Altria


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Weekly Marijuana Stock Performance

The cannabis sector continued to slide this week with the global index down 1.6%. A late-week rally kept the stocks from putting in another absolutely terrible weekly performance. The U.S. MSOs were the one bright spot up 0.6% for the week, while Canadian producers were down 5%.

The global cannabis index is now down 15% for the year, while the U.S. stocks are down 32%. U.S. stocks have outperformed Canadian stocks in two out of the last three weeks but its still too early to tell if the tides have shifted. We still think U.S. stocks will outperform Canada going forward as there are better growth prospects down south and more catalysts to look forward to.

A catalyst to watch is a UN meeting in March 2020 to potentially deschedule cannabis as a schedule 1 drug. If this goes through with America’s blessing it could set the wheels in motion for federal legalization sooner than later. The recent vaping crisis will also turn out to be positive for the legal industry as it will scare consumers away from black market vaping products.

The overall marijuana index underperformed the S&P and TSX by 1.2% and 0.1% this week and has underperformed by 19.3% and 16.4% YTD.

Market Outlook

We still think a stabilization in the global economy and the coming legalization of edibles in Canada could buoy the sector leading into first sales in December.

With the sector down 50% since March and underperforming the broader market by 50%, we think there is a good chance the sector rebounds into the end of the year as long as global economic data does not take a turn for the worse.

Canadian LPs are still stuck in a legal market growing slower than investors expected, making it hard to show the revenue growth embedded in their trading multiples. LPs are showing slow growth in 2019 and even with the 2020 rollout of edibles, vapes, and topicals growth is unlikely to exceed 150% in 2020. U.S. operators in comparison are growing revenue 150%-300% in 2019 and at similar rates or better in 2020.

Longer-term, with the Canadian market legalized, we expect retail and wholesale price compression or unsold inventory from a legal oversupply by the end of 2019. Falling cannabis prices or an inability to sell all of what is grown will pressure producer stocks in 2020. After a shakeout, the remaining stocks will be better positioned as long-term buying opportunities.

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