State of the Cannabis Market

From previous EDGE Briefings we reported the BDS Analytics finding that more cannabis than ever before was consumed in the U.S. in 2020 – a record $17.5 billion in legal sales. Spreading legalization has spawned a burgeoning industry.  36 states, the District of Columbia, Guam, Puerto Rico and the U.S. virgin Islands have all approved comprehensive, publicly available medical marijuana programs.  And, as reported in April by the National Conference of State legislatures (NCSL) 18 of those states, two territories and the District of Columbia have enacted legislation to regulate cannabis for adult use as well. Will Vape Smoke Cloud Cannabis Investments?

NCSL graphic as of April 2021

In an analysis provided by MJBizDaily in their annual Marijuana Business FactBook the economic impact from legal cannabis sales on the economy is projected to reach $92 billion this year. This projection is up 30% from 2020 and growing toward $169 billion in 2025. Their methodology for the projections was to take the standard practice of using a multiple of 3.5 on the projected of cannabis sales from agriculture to manufacturing to retail.  It was calculated that for every $1 spent by consumers and patients in the recreational and medical markets, an additional $2.50 flows into the economy. This has already had a far-reaching effect on key measures of the economy. Will Vape Smoke Cloud Cannabis Investments?

Taxes – From tax data analyzed by the Institute on Taxation and Economic Planning (ITEP) from the 10 states in 2020 where adult use as well as medical marijuana was legal, excise and sales taxes exceeded $3 billion in 2020 – over a $1billion increase over 2019.  And, that $3 billion total included $1 billion in California alone.

While Pitchbook is seeing dramatically rising median post valuations and deal sizes in privately owned cannabis companies backed by VC or PE investment as we progress into this very active year…

Economic Benefit Conundrum

However, also in a recent article in the EDGE Briefing we reported on the challenging and complicated issue of Greenhouse Gas (GHG) emissions.

States and Cities all across the county are counting on being revived by the taxes on the billions of dollars that are generated by cannabis legalization.  What they have not been willing to face, however, is that cannabis production generates a size extra-large carbon footprint.  These state and cities are sacrificing their goals of drastically reducing their GHG emissions.

Big Think harshly sums up the conundrum with the quip: “Hippies finally got their legal weed at a high cost to the environment.  How Faustian!”

The challenge facing the cannabis industry was brought out in a detailed research report issued by Colorado State University (CSU).  The study, first published in Nature Sustainability on March 8^th of this year, states that indoor cannabis cultivation is a major generator of GHG emissions.  In just the state of Colorado alone the researchers at the university estimated that indoor cannabis grows emitted 2.6 million tons of GHG emissions annually.  That is the equivalent of the annual tailpipe emissions of 520,000 motor vehicles. Another way to look at it is that cannabis indoor cultivation accounts for 1.3% of the state’s total GHG emissions.  For context coal mining in the state accounts for only 1.8%. Will Vape Smoke Cloud Cannabis Investments?

Vaping – After Recovery Another Looming Problem

There remain reasons for caution as our investors seek guidance from us regarding entering the cannabis industry.  After all, there was the Vape scare in 2019 that looked like a substantial industry setback.  The following provides insights on how the industry responded and what may still be another unforeseen challenge likely to test the versatility of the industry and affect the value of your investment in a cannabis entity. 

Keeping up with the trend of the cannabis industry’s hockey stick trajectory globally, vaporizers – battery powered devices for aerosolizing THC and CBD oils – exceeded $21 billon sales in 2020, are expecting to grow to nearly $50 billion by 2024, and may already be exceeding that record-setting pace this year.

According to TMCNet.com

Indeed, the vape industry’s growth has been so emphatic that by 2027 the global eCigarette industry is predicted to be worth an enormous $67 billion.  The impressive growth of the industry has been largely driven by the public’s enthusiasm for quite smoking, with around 54% of vapers being ex-smokers in 2019.  It’s expected that this figure will have risen since then.

Vaping is, of course, a consumer-inspired creation to the problems related to smoking combustibles.  Advocates promote vaping as an alternative to smoking because:

• Vaping involves no combustion, or burning.  Users exhale vape aerosol completely free of the carcinogens found in cigarette smoke.
• Vapes do not create the harmful tar that causes cigarettes to be so hazardous to public health.
• Vape liquids do not contain the wide range of dangerous chemicals present in traditional cigarettes.
  • In terms of pesticides, for instance, Raw Garden claims their vape cartridge is cleaner than organic strawberries.

While smoking is still the dominant method of cannabis consumption, now the old standard, cannabis flower, is giving way to products made from distillate and oils – all designed, by the way, to avoid smoking.  Green Tank compared the popularity of the 3 alternatives on a path to eventually overtake smoking cannabis flower – vapor pens, edibles, and cannabis-infused beverages.  Of those three vapes are the fastest growing trend in cannabis, exhibiting the qualities of control and consistency, portability, and perhaps the major factor, effects that are felt most quickly.  The oxygen exchange in the lungs is much faster than ingesting. Will Vape Smoke Cloud Cannabis Investments?

Statistics from BDSA show that sales of THC vape cartridges peaked in the summer of 2019.  Then, however, the VAPI crisis hit and sales plummeted, while public and regulator outrage sky rocketed.  During that summer 68 users were reported killed as a direct result of the lung damage from vaping and over 2,800 others were severely injured.  The CDC intervened and labeled the problem an epidemic.  VAPI, though, turned out to be non-infectious. And, after a thorough investigation by the cannabis industry information resource, Leafly, it was substantiated that toxic cutting agents in vape cartridges sold on the illicit THC market were to blame.  THC oil had been diluted with high amounts of cosmetics creams, vitamin E oil and squalene.  Testing vapes manufactured in legal states proved them to be ten times safer than those available from illegal sources. Will Vape Smoke Cloud Cannabis Investments?

Once the vapes from the illicit markets were identified as the root of the problem, the legal industry responded to the consumer demand that no additives or cutting agents be used in the manufacturing process.  This has calmed the fears of established vape customers and does not appear to be a deterrent to the new customers coming into cannabis use.

Will Vape Sales Stumble Again?

Beginning in the ‘70’s, Big Tobacco ignored warning signs that a crisis of far-reaching proportions would shake their industry to its foundation.  That crisis, the specter of secondhand smoke.  The tobacco industry has paid a high price for not addressing the issue effectively. Now, consumer advocates are beginning to put vapes under the same microscope – to determine any potentially harmful effects of secondhand smoke from the use of vaporizer devices.

There are, of course, major differences between vape “smoke” and cigarette smoke.  Primarily, vape “smoke” is not smoke, since there is no combustion.  More properly, vape smoke can technically be classified as an “aerosol.” Vaping devices produce clouds of vapor, which is generated by heating the e-liquid with an atomizer. The atomizer has a small metal coil which turns it into vapor.  Cannabis vapes contain none of the tars, nicotine, carcinogens emitted by cigarettes; none of the nicotine contained in eCigarettes.  Consumer studies have found, nonetheless that vape aerosol may contain harmful particulates.

AA Pain Management clarifies that:

The vapor you see comes from the lungs and mouth of the vaper. To produce smoke, the individual has to inhale to release it. When they release into the air, the least amount of particles are present since the individual itself absorbs the majority of the substances. Secondhand vaping isn’t as dangerous as second-hand smoking because the bystanders get exposed to a minimal amount. Studies revealed that secondhand vaping had shown the levels of the chemicals much less than the exposure limits.

Nevertheless, with public sensitivity aroused, the stigma of secondhand smoke, makes many vape users feel uncomfortable in public settings.  And non-smoker advocacy groups, led by the American Non-Smokers’ Rights Foundation, (ANRF) are amassing evidence relating to the harmful potential of secondhand smoke from cannabis vape pen devices.

The ANRF states in their marijuana secondhand smoke policy:Be prepared! Nobody should have to breathe secondhand marijuana smoke at work or where they live, learn, shop, or play. Smoke is smoke and marijuana smoke is a form of indoor air pollution. Therefore, it is important to strengthen all smokefree laws – both existing and new – to include marijuana in the definitions of smoking and vaping.

Several peer-reviewed and published studies indicate that exposure to secondhand marijuana smoke can have health and safety risks for the non-smokers, especially due to its similar composition to secondhand tobacco smoke. Among their findings are:

• In 2009, the California Office of Environmental Health Hazard Assessment added marijuana smoke to the list of carcinogens and reproductive toxins cited as dangerous in the Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65. It reported that at least 33 individual constituents present in both marijuana smoke and tobacco smoke are Proposition 65 carcinogens.

• Secondhand smoke from marijuana has many of the same chemicals as smoke from tobacco, including those linked to lung cancer.

• Secondhand marijuana smoke exposure impairs blood vessel function.
  

• Particle concentrations from dabbing and vaporizing cannabis can create levels of indoor air pollution similar as those seen in extreme air pollution events like wildfires and severe industrial pollution. Exposure at these concentrations can cause cardiovascular and respiratory disease.

The Foundation is seeking to ensure that more smokefree legislation is passed by the state and local governments defines “smoking” as including cannabis and electronic smoking devices.  This so that:

Nonsmokers should not have to breathe other people’s secondhand marijuana smoke or vaped aerosol in smokefree spaces like workplaces, public places, and apartment buildings.

Does Science Have A Cannabis Industry Solution?

If whatever you put into a vape pen is, indeed, converted to a gas that could have a harsh aroma and contain potentially harmful particulates, what does the industry have to offer to protect their customers.  Primarily, the products being offered are either air purifiers or ventilation systems.

The ANRF, however, has this policy about ventilation being the answer to the problem:

The science is clear. Ventilation systems or air cleaning technologies may reduce odor, but they do not address the serious health risks caused by secondhand smoke exposure. Research is showing that negative health impacts, especially to the cardiovascular system, occur quickly even at extremely low levels of exposure to secondhand marijuana smoke.

Filtration Technology Provides a Solution 

A potential solution for vape users are a variety of filter devices that are designed to reduce the amount of aerosol emitted.  While these devices vary in size and ability to reduce the amount of the cloud of aerosol, one company claims to contain all smoke, odor, and any potential particulate completely. Phlter Labs offers a series of vape filters that are compact, fit any vape pen and are said to reduce exposure of others to vape aerosol by up to 97%.

The vapor is filtered as the user inhales it. Users also exhale into the device, which is what cuts down on the odor and exposure to secondhand vapor. The company has created several filtering devices for vapes (which applies, by the way, to both nicotine and cannabis vapes). All the filters use nanofiltration technology to cut down the particulate matter that may be contained in vape clouds.

According to Co-founder/CEO Christos Nicolaidis, “as a catalyst for necessary and impactful social and environmental change, Philter offers viable, adaptive products that encourage conscientious, universally acceptable vaping practices to honor those who choose not to participate while simultaneously respecting the rights of those who do.”

While the cigarette industry in the ‘70’s chose to downgrade the issue, science is advancing in vape segment of the cannabis industry as a competitive advantage for those manufacturers that choose to effectively address an issue now that is every bit as threatening as the crisis encountered in 2019. Will Vape Smoke Cloud Cannabis Investments?

Investor Takeaway

While COVID-19 devastated many traditional businesses in 2020, more cannabis than ever before was consumed in the U.S. – a record $17.5B in legal sales.  The economic impact from legal cannabis sales on the economy is projected to reach $92 billion this year. This projection from data compiled by MJBizDaily shows that for every $1 spent by consumers and patients in the recreational and medical markets, an additional $2.50 flows into the economy. The is even emerging data to show that the rate of opioid addiction has declined where cannabis is legalized (See Cannabis Reducing Opioid Use article below). While all indicators point toward a record year in capital flowing into this formerly cash-restrained industry clouds are looming on the horizon that the industry must address. Primary among those is the issue of secondhand smoke. Even though vaping is the fastest growing product segment of the cannabis industry, critical to the due diligence for a cannabis investment is for a cannabis company to have a plan to take the initiative on this critical issue – an issue previously ignored for too long by the tobacco industry. The vape segment of the industry is challenged to lead the self-regulating shift in the way new products are manufactured and marketed.

How We Can Help

The critical factors in assessing the potential of the array of opportunities in the industry still require careful execution of the basics of investment analysis:

• Due diligence for understanding the full scope of the business in the industry segment being targeted.
• Analyzing the preemptive nature of the target’s business model.
• Determining the soundness of the financial statements, particularly in cases where they are yet to be audited.
• And assessing the zeal of the team charged with the task of growing a company into a multimillion-dollar operation.

At Highway 33 Capital Advisory we excel at structuring deals to meet client investment strategies in emerging 2021 opportunities with our core expertise in Cannabis and other highly regulated markets in the fields of Phrma, Biotech, Healthcare, Agtech, Clean/ClimateTech, and CBD/hemp companies. We specialize in thoroughly vetted companies looking to drive growth and enterprise valuations through M&A, non-dilutive debt financing and/or capital investments.   We stand ready 24/7 to provide the guidance our clients seek.

Let’s talk about putting the power of this expertise to work for you as a Sell-side or Buy-side client.