2020: Cannabis Winds Shift Again…

…And 2021 holds great promise

By Michael Boniello, Managing Director at Poseidon

In late 2019, Poseidon wrote a white paper called the Cannabis Alpha Wave which is a sector specific consideration of the Gartner Hype Cycle. In this paper, we suggested 2020 would be the “Darwin Phase” of the cannabis market’s cycles. A phase of the industry where the survival of the fittest would be defined by the operators who had identified and focused on their core business, expanded prudently and within the limitations of their balance sheet, were not over-leveraged, and didn’t have astronomical pro forma projections supporting a grossly inflated valuation.

We knew we would see a wave of company failures, divesting of assets, and consolidation due to the lack of profitability and the inability to access capital. We also knew that we would see the long-term industry leaders emerge from the ashes of this cannabis capital crunch like they have in so many other industries during dire times.

Poseidon knew 2020 would be a defining year for cannabis.

As investors, we continuously assess a variety of disaster scenarios that can impact the timelines and horizons of investment strategies. In our line of site going into this fund and in developing the cycles, we had evaluated the following scenarios:

  • Likelihood of a near term economic downturn → HIGH
  • Likelihood of an environmental catastrophe (fires, hurricanes, earthquakes, etc.) → High
  • Likelihood of a war or geopolitical situation → Medium-High

All of these situations differ vastly from the global impact and certain societal shifts that have occurred as a result of the COVID-19 global pandemic.

What we didn’t know was that a global pandemic would validate the industry, drive vast growth, and extend/distort the Darwin Phase completion with many weak companies getting another chance for survival. We expect the remaining phase will trickle through 2021 with much less impact as institutional capital will likely dwarf any remaining clearing of the market.

2020: Exceeding All Expectations

While the main focus of this paper is around cannabis in 2021 and beyond, let’s recap how the industry reached this current inflection point.

When COVID-19 (C19) broke out, every state that had legal cannabis, whether medical or adult use ultimately deemed it essential or similar, allowing operations to continue. The exception was Massachusetts, which closed adult use for a short time, but allowed medical to remain open. The fact cannabis was deemed ‘essential’ isn’t by chance, what we’re seeing play out are years of policy work and a consumer sentiment that has shifted to the point where people have integrated cannabis and hemp in their daily activities. Consumers’ reliance on cannabis was shown first hand by the real-time sales data collected by Headset data steadily through this pandemic, revealing how consumer buying habits were shifting. Regular consumers were buying more cannabis and new consumers entered into the market. Consumers in non-legal states accessed cannabis through legal state border towns. The compounding pandemic mental and physical effects and general lack of wellness drove the market. Cannabis has become an essential household item.

A massive shift in the sentiment of the industry began and greatly accelerated what we knew would play out over the next few years. An economic downturn would drive cannabis legislation with or without a pandemic via job creation and tax revenue. A 32% drop in quarterly GDP started bringing the long-time naysayers on board. One thing we’ve known for a long time is that money can shift a moral compasses as quickly as anything and the state tax revenues have seen a steep decline. Cannabis companies have been hiring and the cannabis tax spigot is loosening, offering some support to state coffers.

If all of this didn’t break through to people, the November election results did. Every cannabis measure passed, even in deep red states like Mississippi, South Dakota, and Montana. Arizona and New Jersey joined them and we now have four new adult use states and two new medical use states (SD & MS).

The Separation of Strong Operators

We say here at Poseidon that “cannabis may be recession proof, but cannabis companies are not”. The mistakes and miscalculations of so many operators were finally going to catch up with them and the operators that had executed and were prudent with capital were going to separate from the pack. We’re seeing this play out live.

In looking at the Multi State Operators (MSOs), there has been a distinct separation year to date. MSOs like GTI, TerrAscend, Ascend Wellness Holdings, Cresco, and Trulieve have proven their strategy with strong balance sheets and EBITDA positive quarters. One common thread here is the pace and scale of expansion each implemented. It was a prudent approach — identifying and focusing on the core business in key states, protecting capital with a focus on being cash flow positive, and not making overly aggressive bets on state by state regulation.

On the other side are the MSOs who have reached the end of the rope in terms of capital and have few outlets to turn. The Darwin Phase did, in fact, play out. We’ve seen MSOs like iAnthus, MedMen, Harvest, Acreage and others divesting assets and, in many cases, fully withdrawing from certain states including some states with 2020 and 2021 adult use initiatives. They just couldn’t hold on anymore after betting on these states years ago and in many cases paying a premium (sometimes in cash) for assets with the expectation of quick legalization. Some of these names had operations in over 10 states at one point and find themselves overextended having not reached profitability with limited access to capital. While we’re not claiming any of these names are going out of business, they are all recalibrating, will find themselves moving forward at fraction of their market caps at their highs and with significantly diluted equity. We question whether some can overcome their debt burden and other liabilities and compete with the 2020 market leaders. We see it is more likely that most “turn around” stories will be plagued with years of subpar growth, dwindling market share, and trade at great discounts to their better positioned counterparts.


More States Legalizing

The November election put many states in a reactionary place. Montana, Arizona, New Jersey, and South Dakota just made it very difficult for neighboring states not to take action in 2021 or to begin planting the seed for adult use legislation. After the election, government leaders in New York, Rhode Island, Connecticut, Pennsylvania, and Virginia commented around full legalization in their respective states by the end of 2021. The governor of Connecticut acknowledged that his constituents would be driving to New Jersey at the first opportunity and Governor Cuomo feels the same way.

On top of this, most states face massive budget deficits and see cannabis as a tax revenue driver. GOP officials in Pennsylvania recently jumped on the bandwagon noting that it was eventually coming, that border states were legalizing, and that state needs to tax revenue and job creation.

Banking (Bi-Partisan)

We believe the SAFE banking act would have been passed by the Senate in 2020 had it not been an election year. The bill passed the House in September 2019 with 45% of Republicans voting for it. This is the best shot at meaningful cannabis legislation at the federal level in 2021. With 3 red states (MI, SD, MT) and a purple state (AZ) passing ballot initiatives in November, the pressure on the GOP from constituents will be even more ramped up. Cannabis banking has the support from both sides of the isle as well as every major national banking, credit union, real estate, and insurance association.

A Roadmap to US Capital Markets & Institutional Capital

Though the US capital markets won’t likely be open to plant touching companies in 2021, the groundwork will be laid for the opening of the NYSE and Nasdaq. SAFE banking will be the first step to the capital markets, and we are hearing of groups from both sides of the isle pushing for this. With Canada and now Mexico fully legal, US based operators will be the only ones in North America not being able to join their Canadian and Mexican peers on US exchanges.

The technology sector in cannabis has seen more adoption of traditional VC and Private Equity funds in 2020 and we anticipate this trend will continue. The cannabis industry is growing at an exponential rate and is now at a size that these firms are not looking to ignore. It is still early days, so their potential to see fantastic returns out of these companies is high.

Failed SPACs

Billions have been raised into cannabis-focused SPACs and frankly too much to allocate without grossly overvaluing the underlying companies. One major issue for SPACs on US exchanges is that they cannot hold plant-touching US operators. Raising a $250M SPAC and finding non-plant-touching companies to allocate to has been a great challenge. We have begun to see cannabis SPACs de-list from US exchanges and re-list in Canada to access plant-touching operators. Others kept the SPAC but gave up on cannabis to focus on other industries.

Source: Needham, Matt McGinley (12/17/2020)

Forgotten Canadian Operators and the Continued Meteoric Rise of US Multi-State Operators

Going into the US elections and immediately after the elections the Canadian stock popped for no good reason. Emily was on CNBC shortly after the election and was quick to point out that based on the election we shouldn’t focus on Canadian operators, but rather the US operators who are primed to benefit from the new US markets. The growth story is challenged in Canada and most Canadian operators don’t have near term exposure to the US, despite their best efforts to say otherwise. Their prospects for growth will be exporting to other markets or establishing operations elsewhere. Many are not capitalized enough to make a move into the US and many US operators are now better capitalized by not repeating the mistakes made by Canadian operators. Names like Tilray and Aurora have seen their near term growth days pass rendering millions of invested capital in excess capacity. The recent announcement of the merger of Tilray & Aphria seems to be yet another attempt to extend runway until these operators can truly try to participate in the US. Time will tell if the US MSOs will have run far enough ahead to stave off the competition. Any discussion of the European focus should be tempered by the market size, which is in totality smaller than California alone and is nowhere near adult use legalization.

Managing Director, Emily Paxhia on CNBC

Social Equity Revolution

The word is out that many social equity programs are untenable. The regulations were written in such a way that it is almost an impossible situation. These constructs attract predatory investors looking to fleece vulnerable equity license holders and applicants. Applicants have to put their life savings on the line just to get through the licensing process with no guarantee they will be awarded a license. There is no access to banking or SBA loans, private investors are passing on investments due to the disincentivized regulations, and there are instances of bribery amongst city officials. The applicants, license holders, cannabis associations, social equity associations, and cannabis industry as a whole has had enough and will be demanding action. Social equity will hit a boiling point in 2021.

Lawsuits have begun in places like LA County and there are many more to come. Equity applicants or programs are suing municipalities over the regulations or their lack of enforcement and non-equity applicants are suing municipalities for putting moratoriums on non-equity licenses. These aren’t just cannabis industry cases; these are constitutional law cases (on a state level). The Biden-Harris team will likely be announcing decriminalization and record expungement in 2021, but it is not on the first 100 day agenda. There is such a political fight brewing that we don’t feel these initiatives take effect until at least 2022 but will take effect in the coming calendar year.

In the meantime, Poseidon continues to consider how we can bring solutions and capital to this very important part of our industry. It is a complex solve and we have been assessing strategies with portfolio companies, regulators, and potential partners. We hope to kick off some initial strategies early in 2021.

Domestic Medical and Scientific Research

The House passed the Medical Marijuana Research Act in December which has no chance for a vote in the GOP controlled Senate. It attracted strong bipartisan support and is an issue that is close to becoming political suicide to oppose. Due to the Controlled Substance Act (CSA), cannabis cannot be studied for medical or scientific purposes as the CSA blindly defines cannabis as having no medical value based on a 50 year old political agenda. Look for continued bipartisan support to get this done in 2021.

Mexican Legalization

Mexico has seen its share of setbacks in 2020, along with many global governments that have struggled to function through the pandemic. The adult use law passed the Senate in November 2020, which is impressive, given the margin of support. However, it requires another step through the lower house, which has been held up by activists and misguided steps to steer this out of the hands of big business. Federal legalization is complicated and is never a straight line and Mexico will be the largest legal market in the world. Canada delayed a few times throughout their process, but this is progress. The medical program is technically legal, but awaits the confirmation of the Reglamentos, which will give the clear structure of the regulations around the supply chain. Mexico will be a significant player in the global supply chain around medical cannabis. They have an advantageous cost of labor and EU GMP facilities in place to pivot into cannabis quickly. This should happen early in 2021, as Mexico, like the US is experiencing a surge of COVID as the year comes to an end.


Federal Legalization

Biden is not for federal legalization and the process is greatly misunderstood. When thinking about a timeline for federal legalization, one must consider the same on a single state level. On a state level, an agreement must first be made on the terms of the legislation which is then either enacted in the legislature or becomes a ballot initiative. Once this is passed the complex laws and regulations must be hammered out and, in many cases, we don’t see the first cannabis sale for 1–3 years from the original approval.

Federal legalization will be exponentially more complex. Once full federal legalization is announced, the battle around the laws and regulations begin at a level no single state has seen. Things like interstate commerce, import/export, social justice, and taxation just to name a few have to be ironed which will take years. We can assume a state by state cannabis economy continuing for the foreseeable future. There will also likely be many stakeholders bringing their very well-paid lobbyists to the table around this issue, such as pharma, tobacco, wine & spirits.

Interstate Commerce

Regional border states have discussed interstate commerce and Oregon even went as far as legalizing interstate commerce. It makes sense from a business standpoint, but this isn’t a call that any state can make. Cannabis is still a Schedule 1 drug on the federal level and all interstate commerce falls under the purview of the federal government. Interstate commerce could open up the industry to Federal Trade Commission (FTC) antitrust investigations as a few major players are dominating more and more new markets. The cannabis industry is considered low hanging fruit to politicians needing a win and Attorney General Barr has already launched antitrust investigations. Interstate commerce is much more complex and is likely years away.

US Import/Export Market

Similar to interstate commerce, the Feds hold all of the cards here. Though there was import/export language in the recent MORE Act, we believe it to be an uninformed, tone def move by Democrats who don’t understand the long term ramifications of such language. An import/export market is great for struggling non-US operators who’s only hope for growth is importing to a new cannabis economy as the Canadians are doing in Europe. Those nations will eventually build out their own cannabis economy thus limiting imports. Also, the ability to import cannabis into the US will negatively impact US cultivators who can’t compete with the low cost structures in LATAM. Similar to Europe, US states will want to keep the jobs and tax revenue within and build out their own cannabis economies. Plus, what American wants lower quality Canadian weed when they would much prefer legal access to the best cannabis available in the world (US cannabis).

From a non-cannabis specific perspective, a near term cannabis import/export market is:

a) A job killer during hard economic times — every stimulus plan has been about job creation

b) A further attack on US farmers — how does sending farm jobs overseas fit into Biden’s America First Policy and his Plan for Rural America?

c) Unnecessary globalization of a massive US based emerging industry at a time when Americans believe there should not be such a reliance on foreign production

This could ultimately end the vast majority of cultivation and processing in the United States before we get a chance to build a cannabis economy here.

280e Tax Reform

Social justice reform, banking reform, and tax reform are the three things the industry has been most focused on. Tax reform will happen, and it has to happen for this industry to be viable, just not in 2021. Where COVID accelerated other industry initiatives, it has slowed tax reform. A recession is the most difficult time to initiate tax reductions and we believe the compromise between parties will be on banking first. Tax reduction is historically led by Republican initiatives and they will not be in a rush to alleviate the tax burden on cannabis when the government is in need of the revenue. We believe the compromise will be banking in 2021 and meaningful 280e legislation in 2022. Similar to access to the capital markets, perhaps we end 2021 with a roadmap to tax reform.


As an industry, we should acknowledge the extraordinary growth during a time when many other sectors have suffered terribly at the hands of this pandemic. 2020 has not been kind to countless established and emerging industries, but cannabis has been a beacon.

“There is peace, even in the storm.”~ Vincent van Gogh

At this point, the largest unknown currently faced by cannabis is the outcome of the US Senate elections. This race will have a profound impact on how 2021 and the next four years will play out. Regardless of the outcome, it cannot be expected that cannabis legislation moves quickly as we have experienced for many years now. What we can expect, no matter the Senate outcome, is that 2021 will be the beginning of a monumental shift in federal cannabis policy and will begin to establish the foundation for the industry to come.


Poseidon has a history of sharing ideas around the trends we are seeing in the cannabis industry. We have communicated about predictions and things to watch for each year. In looking back, the perspectives have been pretty dialed in and we will continue to leverage our time in the market and the patterns we have observed to guide our investment process. Looking back can be a productive and informative process:

Original Poseidon Cannabis Alpha Wave White Paper — December 2019

Pitchbook Poseidon-Ello Cannabis Private Investment Paper — Spring 2019

January 2020 Poseidon Predictions & Message to Portfolio Cos

January 2019 Poseidon Predictions & Message to Portfolio Cos

What is your prediction for Cannabis in 2021?


Poseidon Asset Management (the “Company”) has prepared this presentation solely for the purpose of providing an opinion to assist interested parties in evaluating whether to proceed with an in-depth investigation in connection with a potential investment in the Company, its related Partnerships, or the cannabis markets. The information contained in this presentation is not to be used for any other purpose. This presentation does not constitute an offer to sell or a solicitation of an offer to buy any securities. This presentation does not purport to summarize all of the conditions, risks and other attributes of an investment in the Company or its related Partnerships. The Company makes no representations or warranties about the completeness or accuracy of the information contained in this presentation, and the Company expressly disclaims any and all liability for any such incompleteness or inaccuracy. Certain of the information contained herein includes forecasts, predictions, projections and other such forward-looking statements, which involve particular risks and uncertainties since they depend on assumptions that may not prove to be accurate and could cause the actual results to differ materially from the predicted results.

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