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Q3 Earnings Reports Show Slower Growth, But Plenty of Momentum Alongside Reform Proposals

In the third quarter of 2021, major U.S. cannabis multi-state operators (MSO) and several top Canadian licensed producers (LP) enjoyed healthy revenue and continued expansion. 

Cannabis Business Times and Cannabis Dispensary reviewed quarterly earnings statements and talked to industry executives to analyze how things went in the 2021’s penultimate quarter while preparing for another landmark year in 2022.

Growth Rates Settling In

While cannabis sales are still growing at a healthy clip overall, signs of a maturing market are starting to emerge: many U.S. companies saw a drop in revenue growth compared to earlier quarters. Illinois-based Green Thumb Industries (GTI) pulled in $233.7 million for the quarter, an increase of 5.3% on Q2 – quite a bit lower than its 14.1% increase from Q1 to Q2. Curaleaf, another major American MSO headquartered in Massachusetts, saw sequential growth drop 10x in Q3 compared to Q2. Cresco Labs, a top American cannabis wholesaler, reported 2.6% quarter-over-quarter growth compared to almost 18% in Q2.

In Canada’s smaller and more mature market the problem appeared to be worse. The Ontario giant Canopy Growth reported a 3.5% decline in net revenue compared to Q1 2022 (the Canadian equivalent to the U.S. Q2 2021). Aurora, another major Canadian cannabis player, experienced an 11% year-over-year decline in revenue for the quarter.

It’s true that some of these slowdowns are simply the result of seasonal shifts. It’s also possible that last year’s sales figures were inflated by widespread lockdowns due to the COVID-19 pandemic, a trend that has since eased.

“We saw some growth pulled forward in Q2 due to seasonality, stimulus spending and lifted COVID restrictions,” said Charlie Bachtell, CEO and co-founder of Cresco Labs, via email. “But if you look at the longer trendline, you see 40%-plus growth year-over-year across the industry.”

Long-term industry growth in the U.S. remains torrid – earlier this year, an updated projection by New Frontier Data predicted the market would bring in $43 billion in total revenue by 2025, an increase of 24% from 2020 sales numbers. Smaller firms in particular are still finding plenty of room for growth.

“Over the last two quarters we’ve experienced 220% year-over-year growth in the second quarter, and 117% growth in the third quarter,” said Michael Perlman, EVP of Investor Relations and Treasury at Jushi, who spoke to Cannabis Business Times and Cannabis Dispensary in a phone interview. Jushi, a retail-driven cannabis company based in Florida that’s grown rapidly the last few years, reported $54 million in revenue for the third quarter of 2021 – a 1500% increase from the same period just two years ago.

Legislation on the Horizon

Major states like Virginia and New York continue to pass laws that expand the country’s medical and adult-use sectors. However, many believe federal reform is necessary for the cannabis market to fulfill its potential.

Since Democrats won control of the House, Senate and White House in 2020, many in the industry have been optimistic about legislative reform. So far, that optimism remains unrewarded, but there are still two major opportunities to pass impactful cannabis laws.

The first is the States Reform Act (SRA), an unexpected proposal in the House from an even more unexpected source: South Carolina Republican Nancy Mace, a first-year congresswoman representing the east coast of her state. The SRA, which would allow states to set up their own systems to regulate cannabis and levy a 3% federal tax, has drawn mixed feedback from the industry.

The other is the National Defense Authorization Act (NDAA), which sets the annual budget for the U.S. military. The House passed a version of the NDAA with cannabis banking protections similar to the Secure and Fair Enforcement (SAFE) Banking Act. The bill still needs to be approved by the Senate – something unlikely to happen until December – where the provisions could be removed. If passed and signed into law, banking reform alone would be a significant step for the industry.

“More affordable access to capital, the ability to use credit cards, normalized banking...these are essential steps for an equitable industry,” added Bachtell.

Perlman agreed, saying he believes banking protections will benefit the industry as a whole by providing companies of all sizes with access to traditional services like business loans.

“SAFE Banking won’t only positively impact the larger companies in the industry,” he said. “We [larger cannabis corporations] have access to capital – it’s the smaller guys, the social equity operators, that are not going to have access to capital. … [Without banking access] they’re ultimately going to sell and flip these licenses to the more well-capitalized guys.”

But advocates for change in the industry know that legislative potential doesn’t mean much until it’s realized. Including its most recent passing of the NDAA, the House has passed the SAFE Banking Act five times since 2019.

Looking to 2022

Regardless of federal movement, 2022 is set to be another big year for cannabis. Major states like Connecticut and New Jersey are projected to begin adult-use sales. New York was also set to start sales in 2022 but recently announced a delay to licensing until 2023. These three states alone represent a potential cannabis market of over $5 billion. 

A few other prominent states may pass legalization next year, including Maryland, Pennsylvania, Florida and Ohio. With midterms in November, an economy still regaining its post-pandemic footing, and reform bills now coming from both sides of the aisle, the next few quarters could be a pivotal chapter in the story of North American cannabis. 

 

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