Cannabis microcaps may be poised to outperform this year depending on the course that marijuana measures take at the federal level, which will be largely decided by the Democratically controlled Senate.
Congress failed last year to pass the SAFE Banking Act – a bill to improve cannabis companies’ access to financial products such as credit card processing. Signs for 2023 point to factors creating different market conditions across the industry. Cannabis companies could be defined by a tale of two industries in 2023, as mature markets reset after ongoing issues with a supply glut and new markets face limitations imposed by state regulators, such as in New York.
Despite bipartisan support, The Safe Banking Act failed to clear the US Senate in December after being excluded from the $1.7 trillion government funding bill.
“The failure to pass my bipartisan ‘SAFE Banking Act’ means communities in Montana and across our country will remain vulnerable to crime where legal businesses are forced to operate in all-cash,” Sen. Steve Daines, R-MT, said in a statement at the time.
The SAFE Banking Act and Cannabis Microcaps
The SAFE Banking Act has passed in the House seven times but has consistently met opposition in the Senate, where even co-sponsors of the legislation have decried attaching it to other measures. So far, the Act has yet to be reintroduced this year. The measure continues to face opposition from Senate Minority Leader Mitch McConnell, R-KY, who claims it would make “our financial system more sympathetic to illegal drugs.”
The bill would have provided basic banking needs for smaller and ancillary cannabis businesses, many of them public microcaps.
Without banking reform and further federal protections to aid cannabis companies, angel investors and strategic acquirers have remained on the sidelines. Capital has become more difficult to come by.
Yet analysts say cannabis operators will persevere and investors may be the prime beneficiaries – if they can stick it out. The global cannabis market is widely expected to triple to some $56 billion by 2026 – with or without The SAFE Banking Act. Based on market performance over the last three years, dabbling in cannabis microcaps is clearly a long game.
Of course, on a company by company basis, it also helps to make the right moves in a hugely competitive market. Economic pressures related to the looming recession continue to manifest and cannabis operators in many states are grappling with oversupply issues. Those are key reasons why it’s essential, when studying cannabis microcaps, to get deep in the weeds, pun intended.
A burgeoning success story
Consider the case of Flora Growth (FLGC). The stock popped 17% last week after the all-outdoor cultivator, manufacturer and distributor of cannabis products disclosed it expects $90 million to $105 million in 2023 revenue, narrowing losses from the previous year. Analysts project $95.6 million in revenue for the company this year, with Flora Growth achieving profitability in 2024 after five years of operation.
Flora Growth is including its new German-based business acquired from Franchise Global Health in the revenue projections. The company had a market cap of $35 million as of Jan 27.
“We are pleased to announce that we will meet our guidance for 2022 and are issuing revenue guidance of $90 million – $105 million for the year 2023,” Flora Chairman and CEO Luis Merchan said Jan. 30. “Our 2023 forecasted revenue range represents anticipated growth in excess of 100% over last year and highlights our continued momentum, despite a challenging macroeconomic backdrop that has disproportionately impacted the cannabis industry.”
Flora Growth engages in the production of organic cannabis and pharmaceutical-grade medical products. It operates through the following segments: Cultivation, Processing, and Supplying of Natural, Medicinal-Grade Cannabis Oil and High Quality Cannabis; Over-the-Counter Medical Products and Medical Cannabis Products; Wellbeing Products; and Food and Beverage Products. The company was founded in March 2019 and is headquartered in Toronto, Canada.
“In our view, Flora Growth is well positioned to participate in a global cannabis market that BDS Analytics projects will reach $56 billion by 2026, up from $21 billion in 2020,” Argus Research analysts said in a note.
The company’s outdoor cultivation operation in Colombia — along the equator and at an altitude of 1,500 meters above sea level — benefits from favorable weather that allows for year-round organic growing. Flora’s production costs are also significantly lower than those of its Colombian peers, at less than 6 cents per gram.
Flora recently raised gross proceeds of $5 million through a registered direct offering, further bolstering its liquidity.
The company has also brought on a deep bench of talent.
Flora appointed former Amazon executive Tim Leslie and former JP Morgan executive Brandon Konigsberg to its board, named CEO Luis Merchan as chairman, appointed former Amazon executive Elshad Garayev as Chief Financial Officer, and hired cannabis regulatory veteran Holly Bell as Vice President of Regulatory Affairs.
“Consensus from four of the American Personal Products analysts is that Flora Growth is on the verge of breakeven,” notes Simply Wall Street. “They anticipate the company to incur a final loss in 2023, before generating positive profits of $2.6 million in 2024. Therefore, the company is expected to breakeven just over a year from now.”
Analysts say the company has managed its capital prudently, with debt making up 0.2% of equity. This means that operations have primarily been funded with equity capital, and its low debt obligation may reduce the risk around betting on a loss-making company.
Waiting for Congress to pass The Safe Banking Act may be on par with waiting for Godot. Cannabis microcaps maneuvering successfully without the Act might just be the ones to watch.
