Cannabis Market Update: Q1 2023 in Review

For cannabis investments it’s new year, same problems

Any investor following the cannabis space knows it's a sector thathas struggled mightily.

“It's been a tough couple of years for cannabis, and it all sort of comes down to — all these promises have amounted to nothing,” Nawan Butt, portfolio manager with Purpose Investments, said. From his perspective, the first few months of 2023 have not shown new conversation points, but instead have brought a continuation of past trends.

“I don't think anything really changed,” Rami El-Cheikh, EY Americas Cannabis Centre of Excellence Leader, told INN. “It's still unfortunately bad news for the industry.”

However, El-Cheikh has noticed one significant change from last year to this year — a total sense of disappointment has taken over any discussions of the Secure and Fair Enforcement (SAFE) Banking Act, or indeed any type of US cannabis reform.

Another cannabis expert told INN companies in both the US and Canada are struggling, but for different reasons.

Charles Taerk, president and CEO of Faircourt Asset Management, explained that the issues in Canada remain the same, with operators struggling to adjust to the reality of a smaller-than-expected adult-use sales market, and also dealing with intense product competition and the pressure to stand out against the unregulated market.

These challenges have pushed Canadian operators to diversify their growth operations in search of any kind of financial upside.

Meanwhile, Taerk said that although the best operators in the US are profitable, the capital markets remain closed to them.

“With capital markets basically closed for many sectors, the cash flow of the business needs to support operations, and needs to support whether there's capital expenditure or capital maintenance, or hiring or marketing,” Taerk said.

The financial expert said now is the time to separate multi-state operators (MSOs) into "haves" and "have nots."

Butt of Purpose Investments agreed with Taerk's vision of the limitations attached to cannabis investments. "Growth is limited, because there is lack of financing that is available to these companies," he said.

Despite the ongoing gloominess, El-Cheikh told INN he’s seen some positive signals in the latest financial results from Canadian operators, which have significantly cut down on gluts. However, the general consensus is that most companies are “continuing to underperform, either from the top or bottom line.”

Are MSO listings in Canada imminent?

Cannabis MSOs based in the US face a distinct challenge when attempting to engage with large investors: the location of their securities listings. It's long been discussed how the appetites of deeper-pocketed investors have been curbed by the availability of US-based firms that have significant upside and are listed on senior exchanges.

Due to listing restrictions attached to the federal status of plant-touching businesses, MSOs have been prevented from listing on the NASDAQ and NYSE, as their Canadian counterparts can, and they also can't list on Canada's TSX.

Could some restrictions be on their way out? On March 14, TerrAscend (CSE:TER,OTCQX:TRSSF) made clear its intentions to list on the TSX after completing an internal reorganization.

“We look forward to the opportunity to list on the TSX in the near future,” Jason Wild, executive chairman of TerrAscend, said. He praised those at the helm of the Canadian exchange for "(providing) issuers with sensible oversight and regulation in a complex sector to ensure investor protection and capital markets integrity.”

Wild later told investors the company may be able to uplist to the TSX sometime after its annual shareholders meeting in June. The company credited its status as a Canadian domiciled operation as a benefit to its cause.

Taerk told INN he was surprised the market wasn’t more receptive to the announcement from TerrAscend.

“I think people are numb to any discussion when there's a catalyst,” he said. “They want to see it, and then they'll believe it.”

The financial expert believes this is a critical event for investors to monitor. “By listing on the TSX, there is a backdoor opportunity for institutions to begin to enter the US MSO space,” Taerk said. "That's a serious catalyst."

BAT's small investment reaffirms CBD potential

One investment deal that flew under the radar could hint at a different kind of cannabis investment storyline in the future.

British American Tobacco (BAT) (LSE:BATS,NYSE:BTI) recently invested US$10 million in a new joint venture between AJNA BioSciences and Charlotte's Web Holdings (TSX:CWEB,OTCQX:CWBHF) to kickstart a hemp-based CBD drug.

This drug would be developed with the intention of seeking approval from the US Food and Drug Administration, although the appetite for this research hasn’t panned out too strongly in the past.

“The BAT investment is a drop in the bucket for them,” Taerk said. “But they see the long-term opportunity.”

Whether or not this has a significant impact in the space remains to be seen. However, it reaffirms the long-term potential attached to cannabinoid-based medicine.

“There are a select few companies that are still out there doing that work, but they take time,” he said.

Investor takeaway

The first quarter of the year has not brought seismic changes in the cannabis industry, but instead a continuation of trends established in the past. Challenges continue for cannabis stocks, although the leaders are making progress.

It’s clear the current cannabis investment landscape still leaves much to be desired, and comments from experts show those waiting for a turnaround in the space may have to wait just a bit longer.