Don't Forget the Motor City: Corporate Cannabis on Sidelines for Michigan

Large multi-state operators have largely ignored the Michigan legal cannabis market. The state has slow-walked its cannabis program since medical marijuana was legalized in 2008. It wasn't until 2016 that a system was established for taxing, licensing and regulating medical cannabis. The first fully licensed medical cannabis dispensary, officially labeled a "provisioning center," did not open until October 2018.

"Some MSOs have been hesitant to move into Michigan due to there not being a "major" metro area, a la Chicago in Illinois being open to adult-use cannabis," said Brian Lauvray Head of Development and Strategy at cannabis consulting firm MMLG.

These years of stagnation gave rise to a cobbled together approach of caregivers, cultivators and distributors. The system closely resembled California's early medical marijuana days. Regulated stores are now competing with unregulated stores which are operating under a system called forbearance. In addition to that, numerous municipalities have opted out with Detroit being the largest. Some in the cannabis industry have suggested that until Detroit says yes, it isn't worth making the investment.

Lauvray added, "While open to medical, Detroit and its city council have held back on recreational legalization as they determine the best course, all of which was compounded by Covid. Critically, Detroit's city council has been keenly focused on developing sound regulations that would benefit Detroiters and social equity applicants from the city."

This messy situation hangs over a state that could rival Colorado or Illinois for sales. Legal adult-use sales began this year. The state generated an estimated $3.1 million in adult-use spending during the first two weeks of sales and just under $7 million during December. In the first quarter of 2020, the adult-use market produced $46.5 million in sales.

According to the ArcView State of Legal Marijuana Markets report, "Regulated medical sales make up $282 million of the estimated $633 million in 2019 medical spending. The remaining spending is an estimate of the sales in the unlicensed dispensaries that are still operating." The report went on to say that adult-use sales are expected to bring in $306 million in 2020 and climb to more than $1 billion in 2025.

Where's Corporate Cannabis?

A review of the active licenses in Michigan, as compiled by CannaBiz Media shows that the top license holders in the state are mostly private, local companies.

Cresco Labs Michigan has two licenses in the state. Cresco Labs (CRLBF) went hard for Illinois and has barely made a dent in Michigan.

Harvest Health & Recreation (HRVSF) has one agreement with Harvest of Battle Creek, which has one license. Acreage Holdings (ACRGF) was said to have acquired Michigan's Blue Tire Holdings in 2018, but there doesn't appear to be a license under that name or The Botanist.

Jamie Cooper, Managing Director for Sensi Connect, Michigan, said that the state had a two-year residency requirement and that drops off at the end of the year. "The big players are waiting on the sidelines. They have been quiet but active behind the scenes. All the action will happen in Michigan over the next year." She fully expects the big corporate companies to come in as soon as they can.

The Top Five

The companies that hold the top five positions for licenses in the state according to Cannabiz Media are as follows:

These companies could be ripe for an acquisition from a bigger player or even attract the attention of the new SPACs that have been formed like Bruce Linton's Collective Growth Corporation (CGROU) .

Green Peak Industries and Green Peak Innovations seem to be the same company. In 2018 Innovative Industrial Properties (IIPR) acquired a property from Green Peak Industries in a deal valued at $13 million. The company also signed a long-term lease. It closed on a $30 million round of financing in 2019. It opened its first adult store in Ann Arbor and is expanding into other states.

Lume Cannabis is the local DIY cannabis company. It builds its own facilities, grows its own cannabis, packages its own products, and sells only from its own stores. The company says, "We control the entire process from start to finish, so we can ensure it's exceptionally executed every single time - no cut corners, no easy-ways-out, no compromises and no other-guys."

Common Citizen offers investors a chance to reach out to the company on its website. It has three locations open and last year received funding in the form of convertible debt from one of its largest and earliest investors, Gotham Green Partners. Founded by childhood friends, the company's mission is to put the patients first. The company has stated, "In this spirit of putting people before product, the brand's common states of unplug, daily dose, time to shine and sweet relief inform the company's entire operations, including its social responsibility"

Fluresh's flagship is its Grand Rapids store which serves medical patients only. Its licenses are mostly in Lenawee County. According to a story in MIBiz, "Fluresh plans to invest up to $40 million in the facility that's expected to employ more than 80 people, plus another $37 million on a similar facility in Adrian, about 30 miles southwest of Ann Arbor. Investments in the two projects combined could reach nearly $100 million, including $20 million for operating capital."

2020 Recreational

The ArcView report said, "Growth over the next year is expected to be tempered by product shortages due to the lack of licensed cultivators. State regulators estimate it could take up to 18 months before supply increases to adequately meet demand. Total sales are expected to grow by 29% to reach $825 million in 2020 and $1.4 billion in 2025-rising at a CAGR of 13.3% from $640 million in 2019."

Arcview also suggested that medical sales will decline as patients transition to the adult market, a trend experienced in other states. Those sales could drop to $305 million in 2025.

The report went on to say, that as of March 2020, there were 228 active provisioning center licenses in the medical market and 82 active retailer licenses in the adult-use channel. In addition, there were another 353 active licenses for other types of cannabis businesses.

Lauvray said, "One market that is open however is Grand Rapids. It is a relatively low-cost market for entry with an affluent and educated consumer base. I think Grand Rapids offers a lot for a little and would imagine some significant players applying for Grand Rapids' adult-use window, which is open right now."

At the time of publication, Borchardt had no positions in any of the securities mentioned.