That’s according to Pierce Crosby, who follows stock market trends closely as general manager at investor social network TradingView.

This year’s rise of the retailer trader market, and the volatility that comes with it, is a new factor to consider when investing in cannabis. But because popular broker apps like Robinhood don’t offer trading of American multi-state operators, Crosby says the top U.S. pot stocks remain undervalued and are a less-risky bet related to potential federal legalization in the country this year.

After retail investors on r/WallStreetBets sent GameStop stock “to the moon” last month, the subreddit’s millions of users had a new target this week: weed stocks.

Most notably, shares of Tilray Inc. (Nasdaq: TLRY) fell 49.7 per cent Thursday and continued to slide Friday, after rallying 112 per cent during the first three days of the week.

Stocks for other Canadian licensed producers went on similar swings this week.

Aphria Inc. (TSX: APHA) (Nasdaq: APHA) is down 6.5 per cent on the week, after surging 34 per cent to an all-time-high of $39 Wednesday on the Toronto Stock Exchange.

Aurora Cannabis Inc. (TSX: ACB) (NYSE: ACB) stock rose 21 per cent Wednesday, fell 23.5 per cent Thursday, and is down about 1 per cent overall this week.

Canopy Growth Corp. (TSX: WEED) (Nasdaq: CGC) shares are down about 4 per cent on the week after climbing as high as 22 per cent on Wednesday.

The pot stock movement is related to high short-interest ratios, which measure how many of a company’s traded shares are being used in bets against that company.

GameStop shares surged from just below US$20 to over US$483 over a two-week stretch in January. The stock currently trades just above US$51.

An army of Reddit traders essentially pushed each other to buy its shares and squeeze hedge funds that put major bets on the price to fall. Traders who bet on stock prices to decline are called short sellers.

“Broadly speaking, what you have is a very large audience who wants the next GameStop,” Crosby says.

Read more: US pot stocks have room to run even after Geogia runoff surge, analyst says

When Sundial Growers Inc. launched its IPO in August 2019 on the Nasdaq, it garnered unicorn status with a US$1 billion market valuation. The company’s market capitalization fell to US$50 million by August 2020. Press photo

Reddit-fueled short squeeze favours Canadian pot stocks

Cannabis stocks are attractive to Reddit traders because of their smaller market caps, so the traders can actually make a major impact on the price. Reddit can’t move Apple or other billion-dollar companies because their market cap is too large.

According to a website that tracks stock ticker mentions on r/WallStreetBets, Calgary-based Sundial Growers Inc. (Nasdaq: SNDL) was the most popular stock Wednesday, overtaking GameStop.

That’s likely because of major short interest in Sundial, as well as its smaller market cap of less than US$1 billion at the start of the month, Crosby explains.

Short interest in the stock was equal to 17 per cent of the shares available for trading, according to Fintel.

Sundial shares surged 246 per cent in the first three days of the week up to US$3.95 from US$ 1.14 on the Nasdaq, but have since come crashing down to US$1.98.

When looking at Sundial’s earning potential, Crosby says the crash makes sense.

In its third-quarter financial results, the firm posted revenues of $12.9 million, a 36.3 per cent decline from the $20.2 million in revenues reported in the second quarter. The company posted a net loss of $71.4 million during the quarter.

“That’s the thing for a long-term play, you have to actually look deeper into the fundamentals of business,” Crosby says.

But because Canadian cannabis companies have largely been underperforming over the last two years, they have more short bets placed against them compared to U.S. operators. That’s partly why pot stocks north of the border have been bigger targets by Reddit traders.

Also, because weed is legal federally in Canada, pot stocks there can list on major U.S. exchanges and trade on most online brokers like Robinhood or Questrade.

Aphria and Tilray were the third and fourth most-mentioned tickers on r/WallStreetBets this week.

Part of the discussion on Reddit has centered around the pending merger between the two firms and their compelling surge in international deals.

“From a retail investor standpoint, they think: ‘Holy shit, this company is going to be the provider of the world for cannabis,'” Crosby says.

But he warns that Reddit-fueled stock surges are more like flashes in the pan. So, by the time a new investor tries to catch the trend, it’ll probably be over.

Fearless Girl statue located by Wall Street, New York City. Photo by Kristen Visbal via Flickr Commons

Poking establishment in the eye

The analyst expects retailer trader flash mobs to continue fueling more volatility in the sector. And because short interest data is publicly disclosed, shorted pot stocks will continue to be listed and targeted by Reddit users.

“It’s kind of taking the fight to the institutional guy’s playground,” Crosby says. “People are realizing that if they really want to poke a finger in the eye of the establishment, basically, doing these kind of targeted attacks are an easy way to do it.”

In terms of legality, the Reddit retail trading frenzy is completely legal even with big financiers on Wall Street calling for restrictions to end to the phenomenon, Crosby continues.

This week the Wall Street Journal reported that the U.S. Justice Department’s fraud section has subpoenaed information from Robinhood and other online brokers to investigate possible manipulation.

Proving market manipulation requires generally showing that traders colluded to create an artificial price and took action to accomplish it.

However, the only way to slow the frenzy is for online brokers to limit trading, Crosby explains. In a move that triggered widespread scrutiny, Robinhood limited trading on Jan. 28 for several speculative names, including GameStop and AMC Entertainment.

“Really the question around this volatility will basically be about limiting trading. That will likely be the core focus of regulators,” he says.

Crosby’s go-to pot stock choice over the past year has been Aphria. And while the firm’s strong logistics focus and international potential continues to surge with merger-partner Tilray, Crosby thinks the story has played itself out lately.

Green Thumb Industries reported US$157.1 million in net revenues and US$9.6 million in net income in its most recent quarter. Press photo

US pot stocks remain undervalued

For many on social media, possible decriminalization of the plant under the Biden administration has been commented on as a major positive catalyst.

The irony, though, is that U.S. firms have benefited less from the Reddit trading frenzy. Even though they already operate in the largest cannabis market in the world, they can’t trade on the big U.S. exchanges because weed is federally illegal.

Read more: US cannabis banking likely to come ahead of Senate legalization bill

And because of that, U.S. multi-state operators — which don’t trade at most online brokers — have a much larger long-term upside for investors, Crosby notes.

Piper Sandler analysts recently said cannabis could become a US$115 billion global market by 2030, if recreational use is legalized at the federal level. Even if that doesn’t happen, the industry potential is still big, reaching US$50 billion by 2030, the investment bank added. Adult-use has been legalized in 15 U.S. states.

Crosby’s go-to U.S. pot stock is Illinois-based Green Thumb Industries (CSE: GTII), which operates 13 grow facilities and 97 retail stores across 12 U.S. markets.

“As investors, you’re looking at narratives,” he says. “Basically, the shift in narratives and the longer-term stories.”

Because it is all about the consumer, I believe cannabis is the next great American growth story. It's wonderful that so many people still don't see it. That's what makes a market and what creates such a great opportunity. Buyer beware… #MSOgang https://t.co/8ExtdQx5qb

— Ben Kovler (@Bkov9) February 12, 2021

Top image via Deposit Photos

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As the pandemic constrained already struggling enforcement efforts, illicit operators have seized on the opportunity to ramp up cultivation and sales to the profitable, multistate black market.

And they’re not the mix of hippies and rednecks that popularized growing weed in Californian forests. Experts estimate that more than 95 per cent of the sites are run by Mexican cartels that care little about the environmental fallout of their methods.

The toxic carbofuran they use kills wildlife, taints waterways, spreads into the air as pressurized cylinders explode during wildfires, and travels in or on weed plants to consumers on the other side of the country.

A sign in the famous weed cultivation hub of Humboldt County, California, encouraging growers to get licensed in August 2016. Photo by Tony Webster via Wikimedia Commons

Reclamation efforts have been underfunded and unorganized. Cartels are taking advantage

Twenty million acres of dense national forest conceal an unregulated industry on California’s public lands. Organizations like the Cannabis Removal on Public Lands Project (CROP) and the International Cannabis Farmers Association (ICFA) say California law enforcement need help.

“The law enforcement presence on those federal lands in California is extremely undermanned and outgunned,” explains Rich McIntyre, director of CROP.

There’s only one officer for every quarter-million acres of land, he says, and while growers have semi-automatic weapons, federal rangers are walking around with .38-caliber rifles.

California’s ‘Emerald Triangle,’ — encompassing Humboldt, Mendocino and Trinity counties — is one of the most famous regions for growing cannabis in the world. Growers there are credited with popularizing ‘sinsemilla’ which refers to the practice of removing all male plants from a site to eliminate seeds and increase resin production. Image by O’Dea via Wikimedia Commons

“Covid has emboldened them to increase the number of grows this year for the first time in 15 years,” he says. “Law enforcement is seeing trespass grow activity on federal lands at pre-legalization levels.”

And reclamation efforts have gotten harder as funds from the U.S. Forest Service budget have shifted towards fire abatement and suppression to deal with the increase in wildfires. But an uptick in wildfires is one of the symptoms of the trespass grows.

“It looks like the Dolan fire was set, at least in part, to try to draw attention away from the growing sites,” McIntyre says. “Someone sets a fire someplace else just trying to attract attention from you as you’re growing.”

That fire had devastating consequences including killing 11 endangered condors, and the debris contributed to the massive landslide that destroyed a section of Highway 1 earlier this month.

CROP’s goals are to get more state and federal resources for reclaiming trespass grow sites, expand forest service law enforcement in national forests and increase criminal penalties for bringing toxic chemicals onto public lands.

Toxic pesticides, including carbofuran, can be vaporized during wildfires, creating noxious fumes that are toxic to the nervous system — which can cause dizziness, nausea and sometimes seizures or cardiac arrest.

McIntyre says the presence of carbofuran has impeded firefighters’ efforts to douse wildfires.

The Dolan fire raged from September to December in 2020. A man originally said the fires were set to hide a series of murders, but doubts have been cast on the accuracy of his claims as well as his mental fitness. Public domain image

Increase enforcement or defund the police?

However, a movement asking for increased law enforcement is difficult in 2021, when many are calling to defund the police.

Specifically people involved in cannabis cultivation, which have long been the most vulnerable in the industry, are now being left behind as the marijuana movement is dominated by big capital interest.

California has created social equity programs to get people from minority and underprivileged groups involved in legal cannabis. The program provides help to break into the high-barrier industry, and even supplies the cultivation applications in Spanish.

Read more: Neglecting legacy cannabis operators is costing California billions a year

Read more: San Francisco dispensary CEO alleges foul play in High Times pot shop deal

But the programs have been rife with failure and corruption, and many aren’t at all interested in joining the licit industry.

“Typically, the reason why people continue to cultivate on private lands is because there’s no cost,” says Jackee Riccio, regional field director at CROP. “They can use water, they can use land, they don’t have a landlord, they don’t owe money. And they definitely don’t have money for the taxes.”

According to Riccio, the group most impacted by the trespass grows are tribal communities living on the lands. CROP has included Indigenous leaders from regional tribes into their program. Some of the growers are cultivating on tribal mounds, which affects the tribes’ cultural resources, harming their way of life both physically and spiritually.

The hope with legalization was the cartels would struggle to find a market, but the illicit sector is strong as ever. ICFA executive director Kristin Nevedal notes that cannabis on the unregulated market sells for about 60 per cent more.

“There’s zero overhead in the illicit market,” she says. “There’s zero testing expenses. There’s zero taxes. Those price points are factored in and everyone [on the legal side] has so much expense that they can’t afford to pay the farmer US$1,600–$1,700 a pound on cannabis.”

But illicit operators can. In contrast, the legal rate for harvested weed is around US$1,000 per pound.

CROP estimates that 80 per cent of the trespass cannabis is going to East Coast cities and upper Midwest cities, like Chicago, New York and Boston.

Known and unknown harms of toxic carbofuran

The trespass grows are harmful to the environment, wildlife and humans. Growers haul in huge amounts of trash, planting equipment and habitation infrastructure like stoves into the previously pristine natural landscape.

Most of the sites use carbofuran. One ingested teaspoon can kill a full-grown bear. Direct human exposure to the chemical is extremely toxic, and can be deadly.

Cannabis bioaccumulates materials from the soil, like pesticides, better than most food crops. Photo by Hung T. Vu via CROP

“Every site is responsible for five or 10 animal deaths,” says Greta Wengert, executive director of the Integral Ecology Research Center. Extrapolating that number across the 300–400 grow sites, she estimates that hundreds or thousands of animals die as a result each year.

While workers using carbofuran are vulnerable to exposure themselves, some experts are concerned the pesticide could be harming cannabis users. According to Riccio, weed is a very good bio-accumulator, meaning it can easily uptake chemicals from the soil.

While it’s possible that cannabis grown with carbofuran could negatively impact health when inhaled or ingested, little research has been done on the effects or how much of the pesticide is making its way to consumers.

Wengert has tested ready-for-sale product found on raided grow sites and found carbofuran in the buds.

The pesticide has been banned in the U.S., but the World Health Organization says carbofuran is generally not found in other treated crops, so the greatest risk is likely direct exposure either in the air, water or on the plant’s surface.

CROP is asking for US$25 million from Congress to curb trespass grows

To shutdown trespass grows and get carbofuran-tainted weed out of the unregulated market, organizations need money and resources.

CROP is presenting a bipartisan bill in Congress seeking US$25 million over five years. The bill proposes the money go toward increasing law enforcement and general funding to dismantle the sites.

One of the biggest challenges is removing all the grow-site infrastructure so it can’t be easily replanted the next season.

“With trespass cultivation you can eradicate, meaning cut down the plants and haul them out, but enforcement doesn’t remove the water dams that were put in, remove the miles of water line, take out the supplies that were brought in including the trash, nutrients, and pesticides, or take out the miles and miles of drip irrigation,” says Nevedal of the ICFA. “When that infrastructure remains in place, that location is a perfect target to be replanted.”

With the grow sites buried deep in national forests, there are no roads to easily remove the infrastructure and, according to Nevedal, dragging it out by hand is unrealistic. Usually, helicopters are required.

But for years the reclamation effort has been put solely on the back of law enforcement without funding or partnerships, so the logistics for coordinated reclamation efforts has been largely out of the picture.

‘May 26, 2020, deputies with the Humboldt County Sheriff’s Office Marijuana Enforcement Team (MET) served one search warrant … During the service of the warrant, deputies eradicated approximately 18,690 growing cannabis plants. Deputies seized and destroyed approximately 818 pounds of cannabis bud.’ From Humboldt County Sheriff’s Office press release. Public domain image

“People have a false sense that law enforcement should be responsible for the cleanup side of things,” Wengert says. “ I can’t express how far from the truth that is. If they had the support, funding, collaboration, and partnerships to spearhead they would do it.”

“I don’t think a finger can be pointed at any one entity or any group for not doing this. It’s a collective effort that, until recently, has really had no funding. And there’s really no one to blame specifically for that, except that people weren’t aware of this problem.”

Top image by Hung T. Vu via CROP 

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Journalist Jesse Klein’s website

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On Tuesday, the Canadian pot giant said improved operational execution drove record net revenue to $153 million in its fiscal third quarter ended Dec. 31.

Reflecting upon his first year as CEO, David Klein said he’s extremely proud despite the company’s difficult decisions to right size its production footprint and terminate employees. The top boss says Canopy is more agile to grapple with the Canadian recreational market that’s grown at a slower rate than first anticipated.

“We’re at the end of that transition year and our team has made great progress,” Klein said in a conference call with analysts. “We are firmly on a path to profitability.”

Canopy stock rose nearly 12 per cent Tuesday to $62.35 on the Toronto Stock Exchange. The company’s share price has nearly doubled since the start of the year.

But the Ontario-based company booked a net loss of $829.3 million in the third quarter, which it said was largely driven by a number of impairment and restructuring charges related to late-year cuts. Last December, Canopy shut down five of its Canadian facilities and laid off 220 workers in order to save up to $200 million a year.

Klein said the trend of reporting massive losses will eventually come to end as the firm executes its new strategy across core markets.

Canopy’s sales climbed 13 per cent quarter-over-quarter, driven by revenue increases in Canadian recreational and international medical markets, as well as its BioSteel beverage business and U.S. CBD unit.

Canopy hinges profit hopes on US legalization

Canopy sells Martha Stewart CBD product in 580 U.S. Vitamin Shoppe locations. Press photo

Accelerating its U.S. growth strategy is key to reaching profitability in the second half of its fiscal 2022, Canopy says.

Cowen analyst Vivien Azer asked Klein if he’s confident that Canopy will reach its stated financial targets considering the volatility of the cannabis sector compared to alcohol.

The chief executive pointed to continued growth in the German medical and Canadian recreational markets. But he emphasized how Canopy is already making ground in the U.S. CBD market and is in a unique position to capitalize on THC sales if and when they’re federally legalized.

“So a lot of moving parts, Vivien,” Klein said. “But we feel that we’ve got our arms around enough of the detail to have a high degree of comfort in being able to put these numbers out.”

With Democrats holding power in the White House and Congress, the firm expects significant cannabis reform in America this year. To ensure progress, Canopy and a new coalition of top North American operators, advocacy groups and trade organizations formed the U.S. Cannabis Council to work with federal lawmakers on Captiol Hill.

Read more: Canopy, Curaleaf, advocacy groups join forces to advance US cannabis reform

Hopes are high. Shares in Canopy and the broader cannabis sector have rallied since three top Democratic lawmakers said last week they plan to remove weed from America’s list of Schedule 1 drugs this year.

Senators Cory Booker, Ron Wyden and Majority Leader Chuck Schumer stated a plan to introduce a draft legalization bill early this year with a focus on restorative justice and public health, as well as responsible taxes and regulations.

Canopy is the only Canadian firm with an immediate stateside opportunity when federal legalization arrives. The firm would be able to close its deal to buy Acreage Holdings (CSE: ACRG.A.U) and possibly buy a bigger stake in TerrAscend (CSE: TER), which are both sizable multi-state operators.

“We believe that this legislative package or a combination of reform measures could allow Canopy to enter the U.S. THC market during calendar 2021,” Klein said.

Canopy is already focused on building its U.S. cannabidiol brands, which it expanded in the third quarter with celebrity chef Martha Stewart.

The company released Stewart-branded CBD gummies and tinctures last September, which are sold online and in hundreds of U.S. nutrition stores.

“In just four months since launch, Martha Stewart CBD products have already exceeded the annual sales of over 94 per cent of all CBD brands sold in the U.S,” Klein noted. “And based upon the current run rate, Martha would rank among the top 3 per cent of all CBD brand.”

Canopy expanded the Stewart product line to include pet CBD products this month, which its says has already received record press coverage earning over 1 billion media impressions.

Read more: Martha Stewart and Canopy Growth release CBD dog treats — but are they safe?

Canopy’s Houseplant Grapefruit THC-infused beverage is sold across Canada. Press photo

Steady, not significant, growth expected in Canadian adult-use market

North of the border, Canopy’s third-quarter Canadian recreational market share ticked up to 15.7 per cent, compared to 15.5 per cent in the previous quarter.

The firm’s beverages reportedly captured 34 per cent market share, even as new beverage brands have entered the marketplace.

Canopy CFO Mike Lee said beverage sales will remain muted in the country until larger quantity purchases and consumption lounges are permitted.

He added that Canopy’s 80 per cent of sales will continue to be driven by dried flower and pre-rolled joints over the next 12–18 months.

The company expects the Canadian adult-use market to grow 40 per cent this year, relative to a projected $2.6 billion in 2020. In 2023 and 2024, the firm estimates growth of 25–30 per cent.

Canopy booked an adjusted earnings before interest, taxes, depreciation, and amortization loss of $68 million in the third quarter, compared to an EBITDA loss of $85.7 million in the second quarter. The firm expects to hit positive adjusted EBITDA during the second half of 2022.

Cash and short-term investments were a reported $1.59 billion as of Dec. 31, down from $1.72 billion Sept. 30.

Top image via Canopy

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That’s according to Marijuana Policy Project director of government relations Chris Lindsey, who’s more bullish on federal legalization this year than in his nearly two decades of advocacy.

With Democrats clinching a Senate majority last month, the party now has control of both Congress and the White House. And there’s been a fantastic amount of unity the last few weeks among lawmakers, lobbyists and advocates in Washington D.C. to move forward on cannabis legalization, Lindsey says.

On Monday, Democratic Senators Cory Booker, Ron Wyden and Majority Leader Chuck Schumer said this year they’ll push to pass sweeping legislation that would end the federal prohibition of weed.

“In the early part of this year, we will release a unified discussion draft on comprehensive reform to ensure restorative justice, protect public health and implement responsible taxes and regulations,” they wrote.

Read more: US pot stocks have room to run even after Georgia runoff surge, analyst says

Federal cannabis reform still requires bipartisan support

Although the news has injected excitement into the industry, it’s just the beginning of what will likely be a long process of passing major cannabis legislation.

Issues open for debate include record expungement, social justice, descheduling, state-level powers, taxes and legalizing medical cannabis.

“The devil’s in the details,” Lindsey said in a phone interview. “And while it’s exciting to hear about these prospects, we don’t yet know what measures they’re going to include, or exclude.”

And if Democrats come up with a form of legalization without bipartisan support, it could create near- and long-term roadblocks.

Major bills typically require support that’s filibuster proof, meaning 60 votes out of 100 to pass the Senate, Lindsey explains. Meanwhile, Democrats only control 50 seats with the tiebreaker held by Vice President Kamala Harris.

If Republicans gain control of either the U.S. House of Representatives or the Senate next year, they could potentially start winding back reforms they didn’t support.

Former Senate majority leader McConnell shut down all attempts at cannabis reform, even those proposed by fellow Republicans, except research legislation. Photo by Gage Skidmore via Wikimedia Commons

Lindsey predicts Democrats will likely borrow certain provisions from the STATES and MORE acts.

Last December, the House passed the Marijuana Opportunity, Reinvestment, and Expungement Act, which would remove weed from the list of federally controlled substances.

The bill, however, got shot down by former Senate majority leader Mitch McConnell.

But because the MORE Act has a heavy focus on restorative justice, it will likely serve as a template for the three Democratic senators.  Measures include expunging convictions and setting up funding for communities hit hardest by the war on drugs.

“The War on Drugs has been a war on people — particularly people of color,” Schumer, Booker and Wyden said in their joint statement.

“Ending the federal marijuana prohibition is necessary to right the wrongs of this failed war and end decades of harm inflicted on communities of color across the country,” they said.

Social equity is one issue that could benefit from a stronger overlap in thinking among both Democrats and Republicans, Lindsey says.

Other aspects like allocation of tax dollars will require more information and debate to be hammered out.

State-legal cannabis operators, which have primarily been working on a cash-only basis, may finally have access to banking services this year. Photo via Curaleaf

Cannabis banking reforms have bigger chance of passing first

Because a major bill could take months to put forward and advance, Lindsey predicts smaller banking provisions will pass first.

Currently, advocates are lobbying to have elements of the SAFE Banking Act included in a major Covid-19 relief package that’s currently being debated on in Congress.

The amendments would create stopgap protections for financial institutions to legally service state-licensed operators without federal interference until cannabis is descheduled. It would also open up credit card and electronic transactions for weed businesses who currently operate on a cash-only basis, which makes them more susceptible to theft.

If cannabis banking isn’t including in the Covid relief bill, Lindsey sees the reforms coming via a standalone piece of legislation, or potentially part of some other bigger package.

Democratic Rep. Ed Perlmutter said this week he is confident SAFE Banking will pass this year, after introducing the measure during every Congress since 2013.

And because banking lobbyists are behind the initiative that’s gained support from Republicans, Lindsey sees it passing in the next few months.

I look forward to seeing progress on cannabis issues this Congress whether it's #SAFEBanking, research or maybe even the rescheduling of cannabis.

We need to do better for these businesses and their employees, to help them stay safe and boost the economy. https://t.co/8TtFkSHs6E

— Rep. Ed Perlmutter (@RepPerlmutter) February 4, 2021

Promises of major reform come as public support continues to grow, transcending bipartisan politics. A Gallup poll in November showed that a record 68 per cent of Americans favoured legalization.

Lindsey and the MPP were behind red states Montana and South Dakota passing legalization ballots last November. The fact that 15 states have legalized recreational cannabis puts more pressure on Republicans in Congress to join the national movement.

Read more: Bi-partisan cannabis ballot sweep could trigger green wave in neighbour states

On Friday, the Virginia Legislature voted to advance legislation that would legalize adult-use sales. A final bill still needs to be ratified, but Lindsey thinks it has a good chance to pass as Gov. Ralph Northam has signaled strong support.

As for a federal legalization bill emerging out of the Senate, Lindsey says it’s a matter of when, not if.

“You watch when that bill comes out, people are gonna freak out because it’ll suddenly start to get real. It’s pretty exciting.”

Top image: U.S. Senate Majority Leader Chuck Schumer promises to legalize weed in 2021. Photo by Dan Nguyen/ProPublica via Flickr Commons

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Since launching in 1993, Desert Harvest Inc. has funded research around the world with the goal of finding new and effective plant-based pain treatments. The private firm’s patented aloe vera extract products continue to be studied by scientists in a number of global medical sectors including urology, women’s health, radiation oncology and dermatology.

Image via Desert Harvest

And as the opioid crisis intensifies during the pandemic, the U.S. firm is now teaming up with McGill’s Research Centre for Cannabis in Montreal to study CBD as an alternative treatment for pain.

A growing body of evidence suggests cannabinoids are beneficial for a range of clinical conditions, including chronic pain and inflammation. Relatedly, the development of novel cannabinoid treatments is progressing rapidly. One new formulation, produced by Desert Harvest, combines cannabidiol with aloe vera to increase its bioavailability.

The company hopes funding new CBD research will help the U.S. Food and Drug Administration finally come up with regulations for cannabidiol products after a two-year wait.  The goal is to make the CBD-aloe vera formula available to a wider population, especially veterans who suffer from chronic pain, at an affordable price.

Read more: Global CBD report underscores need for low-dose trials

In the new McGill pre-clinical study, the company’s product is currently being tested to see if it can help people suffering from interstitial cystitis, a chronic bladder condition still affects nearly 12 million Americans. Later this year, the researchers aim to launch a Phase 2 trial using human donor tissue from the spine to test how pain receptors respond to the CBD-aloe formula.

“This project is extremely important,” lead researcher Reza Sharif-Naeini says. “We are now witnessing the ravages of the opioid epidemic. Pain scientists have advocated for years that we cannot solely rely on opioid therapies, and that we need more funding for research into novel therapeutics.”

‘Here’s your Percocet, have a nice life’

Desert Harvest CEO Heather Folio

For Desert Harvest CEO Heather Florio, finding new and effective pain treatments is personal.

In 2003, her husband suffered severe spine damage while serving in the U.S. military, leaving him unable to walk.

The couple felt left behind by the federal government after the injury, so they started searching for alternative treatments instead of relying on opioids to handle the crippling pain.

“When my husband got injured, the government offered no treatment options — we had to find our own,” Florio said in a phone interview. “It was like: ‘Here’s your wheelchair, here’s your pain drugs, your Percocet, whatever. Have a nice life.'”

Florio said they wanted to come up with something new to target his pain, and he effectively became her guinea pig.

After undergoing an experimental spinal surgery, she gave him Desert Harvest’s aloe extract.

In 1995, a study out of the Urology Wellness Center in Rockville, Maryland showed the aloe vera supplements helped relieve pain symptoms in 87.5 per cent of patients suffering interstitial cystitis, with no side effects.

While the aloe vera product hasn’t been tested specifically on treating spinal injuries, Florio said it helped control the pain after the surgery, and he was able to walk.

But her husband continues to suffer from pain today, so Florio has been wanting to see if adding cannabinoids to his health routine can help.

Last year, Desert Harvest launched its new CBD-aloe vera product, a combination that the firm owns patents for in the U.S., Canada and Europe.

Aloe vera has been proven to increase the body’s absorption of vitamins and nutrients. So, the company funded a recent University of Colorado study that found their CBD capsules facilitated a 25-per-cent-higher level of absorption into the bloodstream than other CBD products on the market.

And early research at McGill has shown that CBD may target the pathway of pain receptors found in the body. When pain signals are triggered by neurons in the bladder, they send signals to spinal cord neurons that process the information, and then neurons in the brain interpret the signal as being painful.

Reza Sharif-Naeini, a professor in McGill University’s Department of Physiology & Cell Information Systems Group

“We believe all three sites can be targeted by the CBD compound,” says researcher Sharif-Naeini. “This can form a synergistic action to relieve pain.”

To examine pain that begins in the bladder, his team has already been working with doctors at Montreal hospitals, as well as Transplant Quebec, for over two years. The McGill scientists received international praise last year as being the first to find the membrane in human sensory neurons that are involved in our capacity to feel mechanical pain.

The goal now is to determine whether patients’ pain sensitivity can be reduced by exposure to the CBD formulation. The researchers are awaiting final approval from Health Canada to begin testing Desert Harvest’s CBD, Sharif-Naeini said.

Florio says Desert Harvest received special permission from the Canadian government to bring its across the border. The company is currently working on finding hemp farmers north of the boarder to develop and manufacture the same CBD-aloe formulation to sell in Canada.

Canadian research may propel U.S. CBD regulations

Florio says Desert Harvest will submit its CBD research to the U.S. FDA, which has been seeking evidence to regulate the touted wellness extract since early 2019.

Currently, the agency has approved only one CBD product called Epidiolex, a prescription drug used to treat two rare forms of epilepsy. While it remains illegal to market cannabidiol in food, drinks and supplements in America, there are over 3,000 CBD brands sold in the country.

Desert Harvest wants to see the agency regulate CBD as a supplement so it could be sold at substantially lower prices than other pharmaceuticals.

While the FDA said it would be speeding up CBD drug research approvals last July, Florio says the department has been very slow in issuing licences during the pandemic. Human trials are still not allowed in America.

Even if Desert Harvest could get a research licence, it could cost millions of dollars for the small firm to get their CBD product registered as a drug in the U.S.

“For us, the ability to be able to still help people and not have to raise prices to a crazy amount is super important,” Florio says.

Read more: FDA issues cannabis research guidelines as CBD industry still hangs in limbo

With Democrats in control of the White House and Congress, she believes federal lawmakers may veto the FDA and issue rules for CBD as a natural health supplement.

But for now, Florio is grateful to get research moving forward in Canada, a country that’s helping open new doors to cannabinoid research.

Desert Harvest plans to work on other studies in the future with McGill to see if CBD could help treat PTSD in veterans.

“McGill has been amazing, and so if we are able to go further into a double-blind placebo type controlled study, we’ll definitely stick with McGill on that.”

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After voters in four U.S. states passed recreational ballots in November, Arizona surprised medical store operators this week by being the first state to green light adult-use sales.

Early approvals could quickly pave the way for an additional US$1 billion in annual cannabis sales with much-needed novel tax revenues, amid ongoing economic damage caused by the pandemic.

The Arizona Department of Health Services said it approved 86 cannabis licences Friday after  it began accepting online applications Tuesday. The first stores eligible for adult-use licences are the state’s 131 existing medical dispensaries.

“We’ve communicated to the industry that we have the systems and processes necessary to approve properly completed applications expeditiously,” ADHS spokesman Steve Elliott said in an email.

Photo via Hana Meds

Cannabis production to expand to meet new demand

Hana Meds, one of Arizona’s first operators when medical cannabis sales started in 2010, says the state’s accelerated approach is a welcoming sign for the industry. Shop owners were originally expecting the adult-use market to come online by April.

“For us who have already had an operating dispensary and are in good standing, the state’s showing us they’re trying not to get in the way. So, that’s really exciting,” says Delano Phillips, general counsel and head of business development at Hana Meds.

Delano Phillips, general counsel and head of business development at Arizona cannabis operator Hana Meds. Submitted

But there’s been a few bumps along the road for the Phoenix-based company, which expects to apply for two adult-use licences by next week.

The biggest hurdle is getting workers approved by the state to work in a recreational facility.

Phillips, who is also head of compliance, says Hana Meds has been working frantically overnight to get fingerprints of all staff and management at the firm’s two stores.

The ADHS requires the fingerprints along with $300 per staff to convert old dispensary-agent cards into new facility-agent cards. Medical shops have to pay an additional US$25,000 fee per licence by credit card.

It’s a small price to pay as sales are expected to surge in the coming weeks, Phillips says.

Proposition 207 legalizes sale and possession of one ounce or less for non-medical purposes for people ages 21 and up.

Hana Meds has been preparing for adult-use legalization since 2019 by expanding its two cultivation sites in the state.

The company expects to have a third site up and running by February and grow its cultivation footprint from 20,000 to 60,000 square feet by the summer to meet increased demand. The firm is retrofitting its two existing greenhouses with new automation and irrigation technology, planning to expand to 110,000 square feet of grow space by the end of the year.

Phillips predicts there will be some shortages for dried flower products in the first weeks as there currently isn’t enough production to satisfy demand.

“Our intention and our goal is to be a large distributor within the state,” he says. “And we get requests all the time for our premium dried flower, so we’ll have to grow more of it. That’s just the bottom line.”

Hana Meds sells one of the most popular premium pre-roll products in Arizona. Submitted

Operators jockey for position in US$1B Arizona market

Since 2020, Arizona has increased its testing requirements for contaminants in legal product.

Because there’s only six testing labs in the state, there are already bottlenecks in getting product out, and delays could worsen as sales increase, Phillips explains.

The company’s premium Dutchie brand is a top seller in the pre-roll category and it recently re-branded its edible line.

Hana Meds will have to compete with the likes of Harvest Health & Recreation (CSE: HARV), the largest publicly-traded operator in Arizona. The Tempe-based company currently has 15 stores, as well as 175,000 square feet of cultivation space.

With an estimated 1.2 million cannabis consumers in the state, New Frontier Data estimates annual revenues for adult-use cannabis will top US$1 billion in 2025.

Data firm BDSA estimated in December that medical sales in Arizona were on pace to reach US$1 billion in 2020.

As in other mature legal markets like in Colorado, Phillips suspects recreational sales will cannibalize a large portion of medical revenues.

But patients will have the incentive to keep their medical card because it allows them to avoid paying the new 16 per cent excise tax that will be slapped on top of local and state sales taxes for recreational weed.

It costs between US$250–300 every two years to review a medical cannabis card with the ADHS and an approved physician.

Read more: Five state cannabis ballots could add US$9B to American market

Hana Meds operates dispensaries in two small Arizona cities. Submitted

Banking reforms and tourism revival could further lift state sales

Cannabis tourism opportunities will likely be muted for now due to the pandemic, as well as other nearby options for travellers like California and Colorado with established markets. But curious adults could pop over from New Mexico to by legal weed as that state only permits medical use.

Hana Meds operates one dispensary in Kingman, which is close to the Nevada boarder. Another location is in Green Valley, close to the Mexican boarder in the south.

The company is in the process of either acquiring or getting a license to move a dispensary or to have a dispensary in the Phoenix Valley area, which has 4 million of Arizona’s population of 7.3 million.

Hana Meds is one of the rare U.S. cannabis companies that’s receiving some banking services but the company’s two dispensaries still have to deal exclusively in cash.

With Democrats now in control of the White House and Congress, Phillips hopes the party will fulfill its promise to reform cannabis laws.

He expects the SAFE Banking Act will get passed first.

“We’ve been called essential in 33 states now, yet it just makes it more difficult and it makes it more dangerous to have people dealing in cash. So I think banking reforms will be the first quick federal action that happens.”

Read more: US pot stocks have room to run even after Georgia runoff surge, analyst says

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It’s a stark change in tone for the state with the most expensive and bureaucratic recreational cannabis regulations in the U.S. In a statement, the bureau’s Cannabis Advisory Committee (CAC) said they recommended changes to give legal businesses a leg up because of the “additional pressures the cannabis industry faces during this challenging time.”

But for many in the industry, life in the weed business has been challenging since the state legalized adult-use in 2016, especially for those with less or no access to the tools needed to break into the heavily red-taped sector.

Experts on the state’s weed industry advisory committee say California’s recreational regulations weren’t designed to have all operators succeed. While high barriers to entry favour big players, compliance costs and requirements that force potential operators to pay significant rent before getting licensed are keeping swathes of legacy folks on the fringe.

And that’s losing the state a ton of cash. For one of the world’s longest running regulated weed economies, data firms estimate that less than a third of California’s US$11.5 billion in annual cannabis sales comes from legal sources.

The state could be distancing itself from more than US$7.5 billion in revenue a year.

While a notorious 2020 exposed overcapitalization in the state’s industry and legal weed at large, more resources and education are required if California wants to include the knowledge and untapped economic opportunity stuck in the shadows. It will also need to chip away at overwrought state-level regulatory processes that hamper applications.

Recent statements from the BCC indicate the state intends to make progress on the cannabis file, but fall far short of addressing a host of issues weighing on the department’s record thus far.

California’s adult-use legislation wasn’t written for everyone to succeed

In 1996, California became the first U.S. state to pass legislation for medical cannabis with Proposition 215. But when California voters passed Proposition 64 in 2016, legalizing recreational cannabis, many businesses operating concurrent with the original medical regime shut down.

But those operators weren’t state-sanctioned to begin with. Proposition 215 only permitted the use of medical cannabis. Cannabis businesses at the time operated in a legal grey area, running dispensaries, farms and delivery services. When the adult-use market came online, many couldn’t afford to continue operating.

California is the only state where legalizing recreational sales shrunk the market, falling from US$3 billion in 2017 consumer spending to US$2.5 billion in 2018 according to BDS Analytics and Arcview Market Research. In their report, analysts attribute the downturn to the bureaucratic nature and high cost of Proposition 64 compliance.

Figures in US$ billions. Projected share of America’s total cannabis market by BDSA and Arcview Market Research. Data visualization by Mugglehead

In September 2019, the United Cannabis Business Association reported non-compliant outnumbered licensed operators three-to-one. BDS Analytics estimates 70–75 per cent of California’s US$11.5 billion 2020 weed market came from illicit activity, and expects the sector to be evenly split by 2025.

While accounting for unregulated sales remains educated guesswork, in two years Canada’s legal market accounts for at least a third of gross revenue. Hurdles are still in place north of the border, but regulators and governments have been more agile when it comes to opening the market and encouraging new entrants.

Read more: Illicit likely still outpaces legal Canadian weed by at least 2-to-1

Keith Stephenson, CEO of Purple Heart Patient Center and an industry representative on the CAC, says there’s more to the story. Because most cannabis crimes are now considered misdemeanors, many operators have decided to break the law, he says.

But according to Stephenson, California’s adult-use regulations make it so only operators running a “fiscally balanced business” can comply.

“[Proposition] 64 was definitely not written with the intent for everyone to succeed,” he says.

When the legislation was proposed, many cannabis advocates encouraged people to vote “no” based on concerns that the bill would overregulate the industry and make it difficult to compete without large sums of capital and corporate experience.

A lack of consultation at the root of today’s problems

Advocates knew the bill would also force a culture shift. The industry would quickly develop a bigger focus on profit than it ever had. So-called legacy operators, those who started their businesses before Proposition 64 and closer-tied to California’s weed history, would get pushed out as a result.

This is why many believe The Golden State’s illicit market is still so large: Thousands of entrepreneurs, unable to compete in the regulated space, work in the shadows instead.

Another group, made up of former legacy businesses that have gone legal, is trying to help others transition to the regulated space.

Co-founders and siblings Allen Hackett (left) and Marie Montmarquet of MD Numbers. Through first-hand entrepreneurship, activism and consulting, the pair have worked to make California’s cannabis industry more welcoming to legacy entrants. Photo by Jennifer Skog

“We’re not necessarily part of the new cannabis world — we’re part of the old cannabis world, and they’re two completely different lands,” says Marie Montmarquet, co-founder of MD Numbers, a family of weed brands from cultivation to retail that previously operated a delivery business in the pre-recreational space. “One is done on a handshake and a lot of loyalty, and one is done in court.”

Now, in addition to running her delivery company and farm with business partner Allen Hackett, Montmarquet advises legacy operators trying to get Proposition-64 compliant. At the San Francisco non-profit Success Centers, she works pro-bono under Angela White, who heads an educational training program for cannabis entrepreneurs impacted by the war on drugs. And through her cannabis advisory firm Legacy Coterie, Montmarquet consults with legacy operators to build out their delivery, cultivation and sales strategies.

To her, the root cause of California’s cannabis problems is a lack of consultation.

“[State officials] never reached out to all the people who were participating in this industry first and foremost and said ‘Hey, do you want to participate legally?’” she says.

As a result, legacy players have been excluded, and industry profiteers aren’t producing cannabis products that meet the California legacy standard.

Progress stifled by state- and local-level regulation

When the adult-use bill passed, local governments were allowed to zone specific areas for cultivation, distribution, retail and other types of weed operations, while excluding them from other zones. By the end of 2020, only a minority of California counties and cities permit cannabis businesses to operate in any capacity.

To comply with Proposition 64, existing businesses had to move to a select set of jurisdictions, where rent and operational expenses increased due to the high demand. Many continued to operate illegally against local regulations, while others simply went out of business.

Not every Californian city has welcomed legal weed like San Francisco, where this dude smoked a joint in 2016. Photo by Tobias Kleinlercher via Wikimedia Commons

“We voted for a law, and we are blocked at the local level,” says Andrew DeAngelo, a long-time California cannabis activist, industry consultant, and co-founder of legacy dispensary chain Harborside. “There are big counties that are known for growing weed where it’s banned,” he adds.

Second, Montmarquet says the high cost of compliance created huge barriers. California taxes cannabis businesses and sales than any other state, resulting in an additional 18–30 per cent in taxes being passed down to consumers depending on local regulations.

But the largest expense for most cannabis businesses is rent. Proposition 64 requires potential operators to secure a facility or storefront and pay rent on that space prior to licensing. Many spend close to US$100,000 on rent before receiving a licence.

“It is common for the licensing process to extend 12–18 months or more,” Montmarquet says. “Throughout this time, the applicant is normally paying rent on a space that is not bringing in any income.”

Founder and executive director of the International Cannabis Farmers Association (ICFA) Kristin Nevedal notes that many of these issues are part of entering any regulated market in California.

The California Environmental Quality Act (CEQA), for example, “requires state and local governments to inform decision makers and the public about potential environmental impacts of proposed projects” according to an internal ICFA document shared with Mugglehead. Nevedal says Going through the CEQA process is often long and bureaucratic, and is tailored to the environment of region and its local government’s specific rules.

“I think there’s a lot of confusion about what has been implemented today and the source of those statutes: Are those statutes truly in relationship to Prop. 64, or do they predate Prop. 64?” she encourages critics to ask.

Nevedal looks to streamlining the CEQA process as one definitive way to improve legacy operators’ plights. She also thinks extending provisional licences — which are offered as a stopgap measure while businesses wait for their full annual business permits — can help legacy operators struggling to keep up.

Regulated industry ‘unwelcoming at best’ to old-school operators

Additionally, Proposition 64 relies heavily on legal jargon and the help of law enforcement, which can be another deterrent for legacy businesses built on hustle, and often some degree of secrecy, rather than formalized education. And with the high costs, many legacy operators partner with white-collar investors and attorneys to start or keep their businesses afloat. But monied interests often take advantage of a lack of business knowledge.

Read more: San Francisco dispensary CEO alleges foul play in High Times pot shop deal

Hanka Gabrielová of international weed advocacy think tank FAAAT presents a discussion paper titled “Cannabis & Sustainable Development” during California’s Emerald Cup in December 2018. Photo by FAAAT think & do tank via Wikimedia Commons

“I’ve had to educate myself tremendously just to make sure I can speak the language that these people are speaking,” Montmarquet explains. “So, if I’m in a meeting and they’re talking about 1031 Real Estate transfers, I know what 1031 Real Estate transfers are.”

Nevedal, however, says the bill wasn’t written to be confusing.

“Prop. 64 looked at the Medical Marijuana Regulation and Safety Act passed by legislators in 2015 and just put the vast majority of that framework into this bill,” she says.

Nonetheless, legislative jargon combined with regular contact with state and local governments makes the regulated industry is unwelcoming at best to old-school operators — many of whom, like DeAngelo, have been impacted by the war on drugs. For doing business with a now-legal substance, people faced jail time, raids and other harassment from law enforcement.

“In San Jose, you have to go to the police station for crying out loud — I get PTSD when I go to San Jose and get my little badge for Harborside,” he says with a dark sense of humour. The San Jose Police Department, who is in charge of the city’s cannabis regulations and enforcement, did not respond to requests for comment about how to improve the system.

The Bureau of Cannabis Control, the agency tasked with regulating California’s industry at the state level, has declined to comment.

California’s overcapitalized weed market due for further reckoning

When governments don’t account for legacy operators, they lose out on some of the best cannabis talent around, Montmarquet says. She compares legacy operators to computer hackers hired for their invaluable underground knowledge.

“These hackers are extremely knowledgeable and valuable to the white market,” she says. “What legacy operators have is extremely undervalued knowledge right now.”

Ron Gershoni, CEO and co-founder of Oakland-based Jetty Extracts, agrees.

Cannabis delivery company Eaze cut its projected sales in half last year, from US$1 billion to US$500 million. Photo by Bri via Wikimedia Commons

“All of the innovation that I see is coming from legacy operators, and it’s precisely because there’s that really deep understanding of the product and the consumer,” he says. “Our focus used to be only those two things because that was the only way you were getting products into the market and sold.”

To bring these people into the legal fold, state regulators will have to shape future legislation with them in mind. Bureaucratic hurdles could be lowered and simplified to increase accessibility, and state-funded financial assistance is needed to help legacy operators meet the cost of compliance.

Gershoni suggests giving the black market businesses local government turn a blind eye to, like the many unlicensed dispensaries in Los Angeles, a fast track to licensing.

Montmarquet — who reviews equity contracts at the Success Centers for entrepreneurs impacted by the war on drugs — says 2020 has given her some hope.

Three years after the start of California’s green rush, many corporate companies found their business models upended by a pandemic that increased demand on delivery, generated staffing conundrums and imposed unpredicted costs for things like PPE. Many of them were already failing at the start of the year, due to public relations problems and inflated IPOs.

These market shifts have only re-solidified why legacy operators are so vital, Montmarquet says.

“Now that so many overcapitalized, corporatized companies have failed, a new tone is set for respecting legacy operators, and respecting those of us who have been here doing this. We told you so.”

Top image: Marie Montmarquet of MD Numbers. Photo by Jennifer Skog

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And there’s a ton more room to run for the strongest multi-state operators, who are growing at a faster rate than tech darlings in Silicon Valley, says Pierce Crosby, general manager at investor social network TradingView.

After the Democrat-controlled U.S. House passed a bill in December to decriminalize and tax cannabis at the federal level, Senate Republicans blocked the measure. But now with Raphael Warnock and Jon Ossoff winning their races in Georgia, Democrats have a slim majority in the Senate, complete control over Congress and power to act on their promise to legalize weed.

“Pot is going to continue to be a story irrespective of who is in power in Washington D.C.,” Crosby says. “But this has opened up to a much larger growth potential for the sector than was previously factored in even two days ago.”

Read more: Why the Georgia Senate runoff could reshape North America’s cannabis sector

Curaleaf is the biggest U.S. operator with 96 dispensaries and 23 cultivation sites, according to the company. Photo via Curaleaf

Cannabis stocks have rallied since Joe Biden won the U.S. presidential election in November, and in the wake of surging sales during pandemic-related lockdowns throughout most of 2020.

Democrats are now poised to advance any number of more substantial cannabis bills such as the MORE, SAFE Banking and STATES acts. Those reforms would remove weed from the federal Controlled Substances Act and major U.S. operators will have access to basic banking services for the first time, as well as the option to up-list to major U.S. stock exchanges.

If those bill pass over the next two years, cannabis will be catapulted to the same status as other major industries like tobacco, alcohol or beer, Crosby says. While top U.S. weed firm Curaleaf (CSE: CURA) is currently worth US$11 billion, it could be on the path to mirror a beverage giant Anheuser-Busch InBev (NYSE: BUD), a $280 billion company.

But reform isn’t a guarantee.

Major legislation like the MORE Act require 60 votes in the Senate, so will need backing from some Republicans to pass, notes analyst Chris Damas of BCMI Research.

Despite that hurdle, Damas believes Democrats will find a way to use their new power to deschedule cannabis in the next two years.

If that’s the case, companies will be able to import weed across state and international borders, which is why Canada’s biggest pot stocks have also rallied following Wednesday’s Georgia runoffs.

But the increases in valuation don’t make sense for companies like Organigram (TSX: OGI), Aurora Cannabis (TSX: ACB) and Hexo Corp. (TSX: HEXO), which have little exposure to the U.S. market, Damas said in an email.

Photo via Curaleaf

He points out that Canopy Growth (TSX: WEED) is in a position to benefit. That’s because the major producer would be able to close its deal to purchase Acreage Holdings (CSE: ACRG.A.U) and possibly buy a bigger stake in TerrAscend (CSE: TER), which are both sizable multi-state operators.

For Crosby, the Canadian firm with the best cross-border potential is Aphria (TSX: APHA), which recently said it’s merging with Tilray (Nasdaq: TLRY).

The combined enterprise will be able to leverage Aphria’s distribution, logistics and operations prowess south of the border. Additionally, their Sweetwater craft beer and Manitoba Harvest hemp brands are sold in multiple states.

While investors should be looking for firms best positioned to hop across the boarder, Crosby expects some Canadian companies may try to enter the market via merger and acquisition deals.

Investors take aim at surging US weed giants

Both Crosby and Damas agree that U.S. legalization will mainly strengthen the hands of leading U.S. operators, reducing opportunities for Canadian producers to enter.

The biggest American firms will be able to exploit their first-mover advantages, especially local logistics and licences that takes years to develop.

New investors wanting to play the U.S. legalization opportunity should be looking at revenue growth rates of top American firms, Crosby says.

In the major growth industries of today, like big tech’s open source segment, top companies like Mongo DB see annual sales growth of about 50 per cent. And they trade at roughly 30 times their sales because investors believe their potential value will be sky high in the next five years.

However, because cannabis isn’t federally legal in the states, investors consider pot stocks more risky and volatile despite many major firms seeing year-over-year sales growth well over 100 per cent.

Green Thumb has 13 manufacturing facilities, licenses for 96 retail locations and operations across 12 U.S. markets. Photo via Green Thumb

A major U.S. cannabis company like Green Thumb Industries (CSE: GTII) would benefit from federal legalization in a big way, Crosby predicts. In November, the firm reported third-quarter revenue of US$157.1 million, a 131 per cent year-over-year increase. It trades at about 13 times its sales.

Damas’s pick is Cresco Labs (CSE: CL), which recorded US$153.3 million in third-quarter sales, up 423 per cent from the last fiscal year.

“That’s really the story is that with these kind of growth rates,” Crosby says. “You could see a much larger revenue multiple being applied to these big cannabis companies in the U.S.”

If the reform measures pass, top companies like Green Thumb and Curaleaf will uplist to major U.S. exchanges. That will open the door to major institutional investors that haven’t yet touched cannabis stocks, because most are still considered small-cap companies.

And retail investor interest will continue to grow as legal sales increase.

Data firm BDSA projected last year that America will represent 72 per cent of the US$47 billion in global cannabis sales by 2025.

But the Coca-Cola of weed is yet to be determined, Crosby says, and many stocks will remain in small-cap territory even if the county legalizes.

“It’s really just comes down to who win in the space. And not all these companies are going to win. Safe to say, there’s going to be losers, too.”

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Before Illinois legalized recreational weed at the start of 2020, Governor JB Pritzker initially estimated it would take four years to start expunging 770,000 cannabis records. But his administration already granted 11,017 pardons by legalization day, and last week said the Lincoln State reached a milestone of 492,129 charges cleared.

Read more: Illinois becomes 11th state to legalize cannabis, grants 11,000 pardons

Meanwhile, over two years into federal legalization in Canada, only 368 record suspensions have been granted out of an estimated 10,000 citizens who are eligible for the national program. The issue isn’t a new one. Legal experts and advocates have been decrying the program’s embarrassingly low figures for over a year.

This article has been updated with response from the department of Public Safety Canada, which said Jan. 12 that record suspensions have increased to 368, from 265 reported in August 2020.

Toronto cannabis lawyer Jack Lloyd is also the president of advocacy group NORML Canada. Submitted photo

And while Illinois doesn’t have the authority to clear records relating to federal cannabis offences, the state is showing Canada a very clear and logical example of how expungement could work, Lloyd says.

“This isn’t federal reform in the United States, so it doesn’t set a legal precedent and it’s not binding on us in Canada,” he said in a phone interview. “But I think Illinois’ move here is still very laudable and persuasive — and it’s going to provide a bit of a framework for politicians here.”

Lloyd, who is also president of NORML Canada, says a core part of his group’s advocacy involves fighting for complete expungement of cannabis-related records in the country.

For thousands Canadians that still have criminal records for minor cannabis offenses, it’s difficult to get jobs, travel and have access to housing, education programs. And a disproportionate number of Canadians harmed by prohibition are Indigenous or people of colour.

“That simply shouldn’t exist any longer because cannabis is legal and the government has introduced a system for possessing and sharing and producing and selling it,” Lloyd said.

Advocates have been critical towards the federal government’s no-cost, expedited cannabis record suspension program because it has seen low adoption since it was introduced in 2019 under Bill C-93.

Read more: 80% of Canadians unaware of pot pardon program: survey

Read more: Only 265 of estimated 500K possession charges cleared in 1st year of government program

They say Ottawa hasn’t done a good enough job informing the public about the program, which isn’t even restoring justice because it only seals previous records for possession. If a Canadian who gets the so-called pot pardon later is charged with a different minor offence, the previous cannabis charge could be unsealed and put back on their record, Lloyd explains.

“It’s the smallest of possible steps,” he says. “And the Trudeau government put it out to the public, like they’re saving the world.”

From an administrative standpoint, Lloyd argues full expungement would significantly be less work than paying the Parole Board of Canada to run the program.

Pre-legalization statistics via the Centre for Addiction and Mental Health indicate that 500,000 Canadians have a criminal record for possession. Photo by Jared Gnam

And because Canada has a patchy framework of systems for filing criminal records that involves dated paper records, the vast majority of the 500,000 people across the country with cannabis records can’t even track down their actual convictions. Lloyd says some of those people are his clients, who are frustrated they can’t even apply to the government system.

“Even if the conviction doesn’t show up on any database, it still has a traumatic effect on people’s psyche nationally, particularly when you’re talking half a million people,” he says.

Last August, when Public Safety Canada said only 265 record suspensions have been ordered, it noted the low number may be due to the fact that people with other criminal convictions are ineligible for the program. Also, the the Covid-19 pandemic has slowed record suspension applications. 

Last year the department said record suspension was chosen over expungement because the latter is intended for “extraordinary circumstances” where the crime was later considered historically unjust and the old law violated the Canadian Charter of Rights and Freedoms.

“This is not the case for convictions for simple possession of cannabis,” the federal agency said.

But Lloyd says the department’s argument is incorrect, pointing to how the prohibition of pot possession was most recently struck down by the Supreme Court of Canada in 2015 in the R. v. Smith case.

Mugglehead asked Public Safety Canada if it’s satisfied with the low level of record suspensions, and for a response to criticism why it hasn’t adopted an expungement program.

The department repeated that it believes record suspensions are the appropriate recourse for these convictions “as expungement is intended for circumstances where the criminalization of an activity was historically unjust.”

As far as making real change on the issue, Canadians are going to have to vote for it, Lloyd says.

Because criminal justice reform has been on people’s minds since the police killing of George Floyd last May, the cannabis lawyer hopes it will stay that way during the next federal election.

“We’re gonna have to let politicians know that this paltry record suspension program that they’ve offered — that nobody uses, and quite frankly, most people don’t even understand how to use — is unacceptable,” he said.

Top image at a Vancouver 4/20 cannabis rally in April 2013 by Jared Gnam

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While 2020 will be defined by the Covid-19 pandemic, it also ushered in a new era where regions deemed weed an essential item alongside groceries and toilet paper.

Legal sales soared in the U.S. — and to some extent in Canada — despite operators having to adjust to a new normal of online purchases, delivery and curbside pick-up.

Legalization spread into new jurisdictions, creating major financial opportunities in the years ahead.

Of course, the global health crisis also accelerated a capital crunch in the cannabis sector that picked off the weakest firms.

In Canada, companies big and small have shuttered greenhouses, laying off thousands amid an ongoing domestic supply glut. Well over a dozen companies filed for bankruptcy protection.

Read more: Canopy shutters 5 Canadian facilities, beverage boss walks

Read more: Aurora shares slump on latest round of job cuts

Aurora Cannabis shut down 75 per cent of production at its flagship facility in Edmonton, Alberta, in December — a move that cost 214 workers their jobs. Press photo

Canadian legal recreational sales are on pace to reach $2.6 billion this year, up from $908 million in 2019.

While the pandemic hampered supply chains, shipments and product rollouts, several polls show that Canadians have been consuming more weed to help cope with a stressful year. Provinces like Biritsh Columbia deeming cannabis businesses essential, and permitting online sales, helped mitigate some of the economic damage.

But to further increase legal market share at a faster rate, retailers have been calling on provincial regulators for better transparency on pricing and to open up online sales and delivery for all stores, pandemic or not.

Read more: Remove OCS advantages to increase Ontario’s legal market share, pot shops say

For producers, they want to see the federal government and Health Canada peel back some its strictest rules to help lure more consumers over from a nimbler, still-thriving illicit market.

The country’s weed regulator is currently taking public feedback until Jan. 11 on proposed amendments for regulations on product labelling, micro-cultivation licensing, possession equivalency limits and a host of other areas.

Read more: Health Canada requests public feedback on amending various strict pot rules

Read more: Health Canada doesn’t understand cannabis: industry-led review session II

Despite Covid-19 complications, California is on pace to reach US$5 billion in legal weed sales in 2020. Photo via Cova Software

South of the border, state-legal cannabis programs saw unprecedented growth in more laissez-faire markets. The fact that weed was declared essential by lawmakers in nearly every state with a legal program helped sales skyrocket since the pandemic began in March.

In Illinois, people lined up in droves to buy the first legal recreational cannabis at the start of the year. Total sales climbed almost every month since then and are on pace to reach US$1 billion this year — despite only 80 stores serving a population of 12.7 million. The market is expected to generate US$3 billion in annual sales as it matures in coming years.

Growth in the Lincoln State illustrates why investors have been flocking to U.S. operators. An index of 20 American weed firms shot up 45.7 per cent, as sales in more mature markets like Colorado, California, Oregon and Washington State will hit new revenue records.

However, an ever-expanding legalization effort in the country will mean more sustained growth. That’s why data firm BDSA projected this year that the U.S. will represent 72 per cent of the US$47 billion in global cannabis sales by 2025.

Shares in most U.S. operators have shot up since Joe Biden was declared winner of the U.S. presidential election, as a Democrat in the White House means major federal reform is more likely to pass in the next four years. A recent Gallup poll showed 68 per cent of Americans support legalization.

In December, the Democrat-controlled U.S. House of Representatives passed the MORE Act, which would essentially decriminalize cannabis in the country. But the bill isn’t likely to become law next year, unless the U.S. Senate flips blue in Georgia’s runoff election on Jan. 5. If Democrats hold power in all legislative and executive branches, major cannabis bills are expected to finally pass, sparking major growth in America as companies will be able to access banks and major stock exchanges for the first time.

Read more: Why the Georgia Senate runoff could reshape North America’s cannabis sector

Illinois became the 11th state to legalize recreational cannabis on Jan. 1. Photo via Cresco Labs

But even if Republicans hold the Senate, the country’s regulated market is still set to expand rapidly.

Five states passed cannabis ballots in the 2020 election, bringing up the total of states with legal adult-use cannabis to 15, and legal medical pot to 36.

The bi-partisan cannabis ballot sweep is expected to trigger a green wave in neighbouring states — especially in the northeast region. With New Jersey close to launching its regulated recreational market, New York and Connecticut are expected to soon follow with their own legislation, proceeded by Pennsylvania and Maryland.

Legal reform wasn’t just confined to America.

This year, conservative countries Lebanon and Pakistan legalized medical weed and hemp-derived CBD, respectively.

Meanwhile, Mexico and Israel are slated to legalize all uses of the plant by early next year.

Earlier this month, the United Nations voted to remove cannabis from a list that categorized it as one of the most dangerous drugs, setting the stage for further reform around the globe in the years ahead.

Top image via The Neighbourhood Joint in Toronto, Ontario

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