For many in the cannabis industry, seeing 2023 come to a close is a tremendous relief.
“The last year and a half has been hard, really hard,” said Andrew Kline at international law firm Perkins Coie LLP. “It’s been hard on entrepreneurs. It’s been hard on employees of companies. It’s been hard on ancillary companies. It’s been hard on professionals who service the industry.” And Kline is not the first nor the last person to share similar sentiments with Cannabis Business Times.
But as CBT dove in a little deeper with 10 professionals at plant-touching businesses and policy experts, a key takeaway of 2023 is that it was a mixed bag. It saw landmark progress with a review of cannabis’s schedule under the Controlled Substances Act and the potential to see cannabis moved to Schedule III (and a resultant end to 280E), plus SAFER Banking finally getting airtime in the Senate, sending waves of hope through an economically struggling industry. But it was also a “huge disappointment” in many ways, with those high hopes falling flat as no further progress on SAFER was made, and the North American cannabis industry continued to battle economic challenges as taxes and costs of legalization and compliance eat away at profit margins.
But as we turn the corner to 2024, glimmers of optimism seem to be lightening the darkness of the past year. After many turbulent years in the U.S. and Canada, some executives CBT spoke with say market stabilization is starting to happen. Americans’ support for cannabis legalization has reached an all-time high, which is no small accomplishment considering that “reefer madness” is still alive and well, especially among some lawmakers. John Fraser, senior attorney at Dykema posed the question: Could 2024 be the year that “we see those dominoes start to fall at the federal level”? If cannabis is rescheduled to Schedule III and 280E goes away, the impact on the industry would be swift and significant, and Kline told CBT, profitability could happen “nearly overnight.”
So take a deeper dive into these insightful conversations that give 2023 its proper due, and for the most part, look to 2024 to deliver some much needed positivity and relief in the cannabis industry.
1. Buck Dutton, Vice President of Marketing, Native Roots:
2023 takeaways: “Tomorrow is December first. We are hoping within the week that our 21st location comes online, and we have already started prepping in 2024 for our 22nd location. [Editor’s note: The newest Native Roots store opened in Grand Junction, Colo., Dec. 12.] We’ve already identified that and started working on it. So, expansion is definitely a key that we’re focused on in 2024. As most of your readers know, 2023, it was a rough year. There have been a lot of glimmers of hope toward the end of the year. We had really strong October, November sales. I think 2024, at least the first half, is going to continue to be hard, and then I am hoping to be putting the hard months behind us sometime in 2024.
We’ve been working on our overall business strategy that’s going to take us into the next three to five years. At one point, we were talking about a 10-year plan, and we thought, you know what? We’re only 10 years old. Maybe that’s a little too far in advance. We put together our vision for the next three to five years in tailoring our individual year goals to support that overarching mission. I’m really excited about it, and we’ve narrowed down our three areas of focus for the year. Native Roots does three things really well; we produce sales in the state of Colorado, we produce really good products in the state of Colorado. And the third thing we produce that gets overlooked a lot is we produce really good talent and people to work in the cannabis industry. We have our people poached from us left and right all the time, and it sucks to lose really good people, but that is a huge compliment to have our team members poached by other cannabis companies.
So, sales, making sure our sales are back on track and that’s moving in the right direction, making sure we have the best product offering, and that is moving in the right direction. Our products have always been top notch, and then making sure that we’re producing that people piece, producing people that are valued and coveted in the industry.”
The end of the year is feeling stronger than the beginning of the year. I think January kind of knocked the wind out of us. We had all this high hope for 2023 and in January, just to be frank, sucked. And we were like, what the heck is going on? I don’t think we were expecting it to hit us as bad as it did. It seemed like overnight. Bam. Because we had a really strong December last year and we were like, ‘Oh, we’re not going to be hit by all of the problems that everyone else in the industry is being hit with. And then January said, ‘Nope, you’re not that special.’”
2024 predictions: “The beverage market has not taken off in Colorado. It has across the country, but I’m starting to see a little bit of uptick in beverages. So I have a lot of high hopes that it is going to come online because it’s something that I’m interested in myself. Why? Just because I think in my mind, I think the mocktail or the drink, the beverage is probably going to be the future of cannabis consumption, at least in public. I feel like we’ve got to nail the regulations around the lounge and the consumption piece first. But I feel like beverages is going to be a huge win.
Flower is the No. 1 category by every generation except for Gen Z. That is actually vape cartridges. And the other piece that’s interesting about that is only about 35% of their generation are actually eligible to shop for cannabis. So there are a ton of young folks that are about to flood the market over the next 10 years, and their number one choice is not flower.”
2. David Goubert, President & CEO, Ayr Wellness:
2023 takeaways: “2023 posed a challenge to the broader cannabis industry from the standpoint of capital availability, industry-wide pricing dynamics, and lack of progress on federal reform. But cannabis operators have proven resilient, and as companies such as AYR have channeled their energy into streamlining operations and refining their core offering. Looking ahead, these companies are now entering 2024 with optimism as leaner and more efficient businesses.”
2024 predictions: “MSOs will be focusing on the financial health of their companies, prioritizing cash flow generation and fostering leaner, more efficient operations.
If rescheduling and 280E relief occurs as anticipated, annual tax expenses would decrease, allowing companies to pay down debt and reduce annual interest expense. This coupled with the prospect of adult use in Ohio, Pennsylvania and Florida has the potential to result in significant de-leveraging by 2025.
For additional perspective, AYR has 88 retail stores across our footprint today. Of those 88 stores, only 15 of them are adult-use stores. With legislative catalysts in Florida, Ohio, Pennsylvania, we estimate our adult-use retail footprint to increase nearly six times by 2025.
You all may see certain multistate operators become a bit more aggressive in their expansion once again … but not until the end of 2024 or beginning of 2025. As these leaner, more efficient companies will be in a better position to expand once again.
Companies with larger brand portfolios will start slimming down and condensing their brands to allow for a more meaningful resonance with consumers in the markets where they are sold.”
3 David Bow, Founder & CEO, Origine Nature:
2023 takeaways: “The market is getting much more competitive as companies that have no business being in this space have either been acquired or have gone bankrupt, thus the remaining companies are a lot stronger and more competitive in the space.
We see that the international markets are really starting to enter the cannabis space making these opportunities much more accessible for many companies.
The stigma around cannabis remains very strong in the vast majority of jurisdictions, which in my opinion shows the importance of educating the general population and not only the consumers.”
“I think January kind of knocked the wind out of us.” – Buck Dutton, Native Roots
2024 predictions: “The continued stability of the industry (especially in Canada) as this has been a very turbulent market since day 1 and we are finally starting to see some stability.
The more legalization we see happening for medical and eventually recreational cannabis in different countries will help fight the stigma against cannabis. Like all things, the more normalized cannabis becomes the less people are against it for no good reason other than what we have been told in the past, that cannabis is a drug versus a natural medication.”
4. Paul Weiss, CEO, PaperPlanes:
2023 takeaways: “I think the most significant takeaway for 2023 for the California cannabis industry was how the overall lack of financial liquidity fundamentally changed the way operators are managing their businesses. Investors pulled way back, vendors delayed payments, orders were reduced, and the overall cost of the small pockets of available capital became generally cost prohibitive. This was caused by the overall underperformance of the larger players in the space that raised easy funds several years ago and, through some poor decision making and unrealistic expectations, squandered that precious capital, ultimately entered distress situations, all of which served to sour the field for all the other players–funders and operators alike. This impacted every aspect of the supply chain and led to this illiquid situation that characterized this past year.”
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5. Ed Schmults, CEO, StateHouse Holdings:
2023 takeaways: “California continues to be a challenging environment to operate within. We are seeing some submarkets begin the licensing process to allow cannabis operators a path to licensure. This should provide some nominal level of market growth for the state over the coming year. The more mature markets, however, are continuing to deal with added pressures to issue additional licenses within their jurisdictions, effectively splitting market share between a larger number of operators and bringing revenues down to potentially unsustainable levels. The mature markets are expected to continue to become more saturated for the foreseeable future.
Taxation is still a disaster in California. A material number of operators are flat out not paying taxes while others are taking advantage of theoretical tax loopholes as the California Department of Tax and Fee Administration (CDTFA) works to close them. With only a small segment of the market participants current on taxes, it begs the question of when the state will act.”
2024 predictions: “Beginning Jan. 1, 2024, employers in California will be restricted from taking adverse action against employees or job applicants based on off duty cannabis use. This new law is much needed protection for cannabis consumers, and we hope that more states begin to follow suit.
The HHS recommendation to reschedule cannabis to Schedule III was some welcome news, although about a decade late, unfortunately. We are hopeful that the federal government takes the steps necessary in the short term to see this change through, but we are realistic in our expectations on timing for implementation. We see an implementation of 12 to 18 months as being a bit more reasonable than the six-month timeline mentioned by some. I’d expect to see some value accrue to top-tier California operators who are publicly listed as an easy bet for retail investors who are keen on the industry. California is, and has been, the biggest brand in cannabis, and this regulatory change could be the tipping point for investors who are sitting on the sidelines. Schedule III will be a big step in the right direction, though outright de-scheduling is a far cleaner path for the cannabis industry.”
6. Ben Kovler, Founder, CEO and Chairman, Green Thumb Industries:
2023 takeaways: “As I reflect on Green Thumb’s performance over the last year, I am optimistic about the opportunities that lie ahead in 2024. Our long-term strategy of creating brands and products that resonate with the consumer, remaining disciplined with our capital allocation and driving growth that generates cash flow positions us to continue investing in the business in 2024.”
2024 predictions: “The recent Gallup poll revealing a record 70% of Americans support cannabis legalization shows more than ever that Americans are choosing cannabis for well-being. In 2024, Green Thumb will continue to connect people to the cannabis experience in innovative ways. We are excited to build on the momentum from the recent adult-use sales launch in Maryland as we prepare for transitions in Ohio, Minnesota and hopefully other states that may have adult-use on the ballot in 2024.
Green Thumb is honored to play a role in ending Prohibition 2.0 in America as we continue our mission of promoting well-being through the power of cannabis.”
“Certainly, there’s opportunity for bipartisan action on this topic, but I suspect the parties will just kind of hold firm and use this as leverage for campaigning promises in 2024 as to why folks ought to vote for them and hope everybody has amnesia from the promises that were made during the 2020 campaign.” -John Fraser, Senior Attorney, Dykema
7. Jason Wild, Executive Chairman, TerrAscend:
2023 takeaways: “All of the hard work and discipline of our TerrAscend colleagues is paying off in 2023. Becoming the first U.S. plant-touching operator to list on the TSX, attaining the No. 2 market share position in New Jersey, and going from zero retail in Maryland at the start of the year to acquiring and now operating four thriving retail locations in the state, are some top highlights. I’m also proud of how TerrAscend significantly reduced our debt and interest expense while becoming fully free cash flow positive for the second half of 2023, all while driving industry-leading growth. Those accomplishments set us up for a great start to 2024.”
8. John Fraser, Senior Attorney, Dykema, and Michigan Team Leader, Dykema’s Cannabis Practice:
2023 takeaways: “I think the biggest takeaways from 2023 are we’ve added three new adult use recreational states, right, so Delaware, Minnesota and Ohio, and Ohio being the most recent as of their election [in November]. And so, again, we continue to see the cannabis landscape continuing to play out on this state-by-state basis, the state’s functioning as laboratories of democracy.
And what I think is interesting is we’re now up to 24 states that have legalized adult use, plus the District of Columbia, and we haven’t seen any state backpedal on that approach, right? I think that the theme is pretty consistently clear. The naysayers, the opposition groups to these legalization efforts continue to point to the same general themes in terms of … all the same kind of policy points that we’ve seen repeated and get rejected by the voters, such as, ‘Oh well, you know, people are going to be stoned in the workforce or, you know, kids are going to get their hands on it.’ And I think we’re seeing just kind of on a national level through these various states and their decision making a uniform rejection of all those kind of arguments against prohibition.
And I think that’s a real acknowledgement that prohibition has not worked in any material shape or form. And all of the arguments that folks make on the opposition side aren’t remedied by prohibition. The concern that all people are going to be stoned in the workforce, well, prohibition doesn’t solve that. … And the same thing with kids having access to marijuana. In my opinion, prohibition makes it easier to get access to it because when it’s completely unregulated, the bad actors in the marketplace aren’t going to follow imaginary laws that don’t exist.”
2024 predictions: “So I’d be curious to see what happens in 2024. It’s been like clockwork every year now since Colorado and Washington state and Oregon were the pioneers back in 2014 that we’ll see more states in 2024. And I’ll be curious to see if we start to break into some of those states in the Deep South. I think most folks are probably in agreement that those Deep South states and Texas are probably going to be the last dominoes to fall on this issue.
But the fact that Missouri wasn’t too long ago, and we’re seeing medical pick up in a lot of those states without ill effects, it would make logical sense that we get one of these states in the Deep South and the really traditionally conservative part of the country to start kicking it around. And I know it’s been on the radar in Florida in particular.
But I wonder if 2024 isn’t the year that we see those dominoes start to fall at the federal level. I think most folks would agree 2023 is a huge disappointment. … And the fact that SAFE banking had passed the House so many times and you had the Dems take control of the Senate, it took until September for the Dems to put together the SAFER Banking Act and promised to move that into committee hearings.
And now, who knows what happens in the House with Mike Johnson as speaker. I think anybody who says they know what’s going to happen there is lying, and I don’t think anybody can have a a good read on what would be a priority for him.
So even if the Senate passes SAFER Banking, it would be very, very ironic and very typical that it would stall out in the House after passing in the House previously–I can’t remember how many times, I think it’s seven.
So that would be so typical of how all the efforts have been on that front. I don’t know anybody who could say they feel good about where we’re at at the federal level. It’s incredibly disappointing, and given the current state of politics, I don’t know that I feel particularly optimistic for 2024.
I think the attention that most folks will have at the federal level is going to be on the presidential campaign. And we’re not seeing a lot of significant policy on any front move through the Congress . So I don’t have high expectations for 2024.
Certainly, there’s opportunity for bipartisan action on this topic, but I suspect the parties will just kind of hold firm and use this as leverage for campaigning promises in 2024 as to why folks ought to vote for them and hope everybody has amnesia from the promises that were made during the 2020 campaign.”
9. Seth A. Goldberg, Partner, Co-Lead, Cannabis Industry Group, Duane Morris:
2023 takeaways: “In my view, the biggest development in the cannabis industry in 2023, and the thing the cannabis industry is most looking forward to in 2024, is the possibility of cannabis being categorized, or ‘rescheduled,’ as a Schedule III drug under the Controlled Substances Act, which is anticipated to happen before the 2024 Election. The reason being that such rescheduling could have a direct and immediate effect on the bottom line of cannabis companies that have been suffering under IRS tax code section 280E, which prohibits them from deducting normal business expenses. While not the panacea of de-scheduling, removing the burden of 280E would be a huge relief for companies that would likely be profitable but for 280E.”
“Looking ahead, generally, I just think [rescheduling] is going to put wind in our sails. The last year and a half has been hard, really hard. It’s been hard on entrepreneurs. it’s been hard on employees of companies. It’s been hard on ancillary companies. It’s been hard on professionals who service the industry. And I feel very optimistic that our sails are going to be full very soon, and I’m just only seeing positive for 2024.” – Andrew J. Kline, Firmwide co-chair, cannabis industry group Denver, Colo., Perkins Coie LLP
2024 predictions: “The compounding effect of 280E and restricted cannabis banking has resulted in a capital-starved industry, and that could change with rescheduling in 2024.”
10. Andrew J. Kline, Firmwide Co-Chair, Cannabis Industry Group Denver, Colo., Perkins Coie LLP:
2023 takeaway: “I guess my biggest takeaway from 2023 is that, somewhat surprisingly, it’s the president of the United States that’s about to save this industry. I don’t know that any of us would’ve expected that. I think over the years there’s been a lot of activity on the hill, some extremely positive—Rohrabacher-Farr [Amendment] for eight years running, SAFE banking passing in the house multiple times, the MORE Act passing, CAOA [Cannabis Administration and Opportunity Act] being circulated in the Senate. All good, but it’s really rescheduling that’s going to transform this industry.
2024 predictions: “And I suspect that we’re going to see a DEA [Drug Enforcement Administration] draft rule soon, probably before the end of the year, if not very soon in 2024.
And I think that draft rule is going to mirror what the Department of Health and Human Services recommended, which is Schedule III. And I think it’s going to be quite defensible. My guess is that there’ll be ALJ [administrative law judges] hearings and litigation from people like Smart Approaches to Marijuana and others. But on the two main issues, abuse potential and medicinal use in the United States, I think the decision to get to Schedule III is going to be quite defensible. Marijuana does not have abuse potential that even compares remotely to anything in Schedules I or II. And we’ve got 38 state medical markets clearly defining that there is medical use in the United States.
So I’m feeling really optimistic about rescheduling and getting rid of 280E.
… All indications have been for the last 10 years that the water’s warm … and it’s only getting better with Schedule III and with public opinion. I mean, we just saw a Gallup poll last week or the week before–70% of the United States thinks marijuana should be legalized. I mean, it’s pretty astounding. The American public doesn’t agree on things at that level. Usually when you see polling, it’s 48% to 52%; 70% of the country thinks this should happen. It’s pretty incredible. And I do think that Schedule III will be transformative for the industry. I think it will start giving people comfort to get in, and I think we’re going to see more M&A.
I think we’re going to see profitability nearly overnight.
But I do think that it’s important for us to keep fighting for two things in the short term.
One is SAFE Banking … to provide ready access to banking and payment processing. I don’t mean to imply that Schedule III isn’t going to open the door for companies like banks and insurance companies and payment processors. I just think that some companies want more protection because technically in Schedule III there’s still a violation of the CSA. And so I just think some of the bigger companies are going to want that protection from SAFE. I do think SAFE Banking would be helpful.
And I think that we should be looking at our criminal penalties. Criminal penalties are tied to weight, not schedule. And so those are not going to change unless we do something about it. And so I do think that there’s work to be done to convince Congress to take a hard look at those criminal penalties. Certainly, penalties for cartels and such should be very high, people using weapons, people selling Fentanyl and other drugs while they’re selling marijuana. But for people who are just technically violating the Controlled Substances Act, those penalties need to go away.
Looking ahead, generally, I just think [rescheduling] is going to put wind in our sails. The last year and a half has been hard, really hard. It’s been hard on entrepreneurs. it’s been hard on employees of companies. It’s been hard on ancillary companies. It’s been hard on professionals who service the industry. And I feel very optimistic that our sails are going to be full very soon, and I’m just only seeing positive for 2024.”
H/T: www.cannabisbusinesstimes.com
