COVID-19: Market Observations in North American Cannabis with Akerna CEO Jessica Billingsley

Insight by

Viven Azer, Cowen’s Beverages, Tobacco and Cannabis analyst speaks with Jessica Billingsley, CEO of Akerna. Akerna is a regulatory compliance company that services the cannabis industry in ~30 U.S. states and 14 countries. Working throughout the cannabis supply chain gives Akerna unique insight into the cannabis market. Ms. Azer and Ms. Billingsley discuss trends in North American cannabis amid recent escalation of COVID-19 social distancing measures.

Press play below to listen to their discussion.

Transcript

Speaker 1:                       Welcome to Cowen Insights, a special look at the Coronavirus and its effects on sectors across the economy, as well as the policy arena. You will hear the latest insights from leading experts about where things stand and what’s around the corner.

Speaker 3:                       Thank you, Jessica, [00:00:30] and good afternoon, everybody. This is again, [ESER 00:00:34] Callan, beverages, tobacco and cannabis analysts. Thank you so much for joining us on this call. We’re delighted to have as our featured speaker, Jessica Billingsley, the CEO of Akerna. Jessica thanks so much for taking the time to do this.

Jessica Billing…:              Thank you so much for having me.

Speaker 3:                       So we were just talking in the pre-conference that everyone is just starved for data in this incredibly dynamic and unprecedented backdrop, and so I definitely want to dive into that. [00:01:00] But just to level set for everybody, Jessica, maybe a little bit on your background and in the Akerna, please. Thanks.

Jessica Billing…:              Sure, sure. Akerna is the leading compliance and technology company, serving clients in the cannabis industry. We provide data-driven solutions worldwide across the entire supply chain. That means cultivation, manufacturing, distribution, retail, consumer, as well as regulatory oversight. I think the right way for you to think about us as through an investor [00:01:30] lens is as a software, as a service company that happens to be serving what is the fastest growing industry in the world. We build trust between product creators and consumers through our technology, creating one of the world’s most transparent and accountable consumer packaged goods, supply chain with global scale. Ultimately we believe that connected data and information will continue to modernize and propel consumer packaged goods industries [00:02:00] increasing the power of businesses, governments, patients, and consumers to make smart decisions.

Speaker 3:                       That’s terrific. Akerna is far from a new proposition that the company was established about 10 years ago. Is that right?

Jessica Billing…:              That’s correct. I founded MJ Freeway 10 years ago and invented the concept of seed to sale tracking. This idea of tracking something through its [00:02:30] inception cultivation cycle, all the way through manufacturing and finally through to the final patient or consumer. And today we serve hundreds of businesses and governments in every legal US state for cannabis. We’re also operating in 14 other countries. And in addition to that, we have a pretty rapidly growing client base of CBD hemp businesses as well, which are course [00:03:00] somewhat jurisdiction neutral.

Speaker 3:                       Got it. And in the decade history of the company, how much have you guys tracked in dollar transactions? I think it’s a pretty staggering number.

Jessica Billing…:              Yes. Thank you. We’ve tracked $18 billion in illegal cannabis sales transaction.

Speaker 3:                       That’s awesome. Can’t wait to dig into the insights. So Jessica, you guys put out a release on Friday highlighting some of the trends that you guys are seeing in Colorado. [00:03:30] Why don’t we start?

Jessica Billing…:              Sure. So I think overall, the takeaway from what we’re seeing through our data is that cannabis is a recession resilient industry. And of course, it has been declared essential in many jurisdictions now really setting the stage for continued growth. And in terms of the growth trends, our business intelligence indicates during the initial period of awareness that [00:04:00] the COVID-19 issue would lead to lifestyle changes. We’ve seen about a 20% increase in sales across the board. And in the last week, we also looked at things like online ordering and delivery. And we’ve seen that online orders have increased by over 300%. So about four X growth in the last few weeks as compared to the rest of the year.

                                         Also, in addition to the increased sales growth or the average order, total has [00:04:30] grown as well, has grown by 46%. And we’ve seen that grow from about $78 to about $114 on average order. And that’s online ordering and then delivery has also increased. It’s increased by 157% over the last few weeks compared to the rest of 2020. I think it’s important to take that one with a grain of salt because many jurisdictions actually prohibit delivery. So we’re seeing that higher uptick [00:05:00] in online orders across the whole of our client base. But we have to remember that in micro markets that allow delivery, we’re probably seeing an even higher uptick in delivery is. Really the cannabis industry is adapting to the crisis by shifting approaches to fulfillment.

Speaker 3:                       Certainly we heard that pretty consistently last week with earnings from Cura leaf and GTI where jurisdictions like Nevada are mandating a delivery [00:05:30] now. That’s the only way that you can get cannabis. The 20% growth that you referenced, Jessica, that’s across your entire system, or is that state specific?

Jessica Billing…:              So we’ve looked at it on a state specific basis, but that is the entire system. And what’s interesting is states that have have locked down to have had a little bit higher at percentage growth, states that had not that straight yet. [00:06:00] So for instance, Oklahoma is an example of a state where we’ve seen, I think it’s greater than 5%, but less than 10% growth where they have not yet instituted a full statewide lockdown. So seeing steady growth across the system, but a little bit of variations from state to states. And certainly one might presume either a little bit of stocking up or a little bit of, Hey, we’re all at home now and.

Speaker 3:                       [00:06:30] maybe we should stock up on this as well. Yeah, absolutely. Certainly that seems to be consistent, at least the pantry reload with some of the preliminary indications that we’ve gotten for the purchase of alcohol, too. You know, it’s interesting when we look at alcoholic beverages, there does seem to have been some divergence by category beer, wine and spirits. Are you guys seeing that same thing hold true on the cannabis side are some form factors like [00:07:00] edibles proving to be more popular with consumers as they engaged in this pantry loading behavior.

Jessica Billing…:              That’s an interesting question. And yes, we are. Interestingly, flower’s the big winner here. So the raw cannabis flower is up the most followed by edibles and then vapes. And medical has a little bit higher percentage uptick then recreational [00:07:30] as well.

Speaker 3:                       So interesting that baits are picking up shares. You think that’s off of a depressed base as the industry was kind of working through all of the vapor concerns in the fourth quarter of 2019 around base gate.

Jessica Billing…:              I love that you brought this up. It really is an interesting point of discussion. And from my perspective, the vape issue could have been avoided if we [00:08:00] had mandatory data-driven transparency and visibility from seed to sale in place. Truly this whole issue could be avoided by having some technology in place, some data-driven transparency and visibility from seed to sale, to safeguard customers and keep the industry from being maligned. And what’s interesting as you know, from the CDC data and other informal sources, it’s really the unregulated dealers, the illicit market that are at the root of the [00:08:30] issue and our business intelligence actually shows that vape sales across the legal industry, vape sales in August at the height of the issue had 31% of market share based on total sales. And today they pass 34% of the market share based on total sales, which is part of what we see as a much, much longer term trend over years of consumers, [00:09:00] patients moving toward more manufactured products and away from raw flour or from cannabis in its raw form.

                                         So in September, we actually see vape sales declined by 7%, but interestingly in September, for whatever reason, sales across the industry depth and by October vape sales were up over 9% and then have sustained steady growth. [crosstalk 00:09:31] [00:09:30] It’s really interesting data. #.

Speaker 3:                       Well, it really is. And your point is well-taken. The unfortunate reality was for the CDP and the FDA. It took them weeks to finally come to the conclusion that it was illicit THC vapes, but encouraging to see that the consumers are coming back to the category and perhaps even migrating away from the illicit market, if they share today is 34% relative to the prior peak [00:10:00] of 31%.

Jessica Billing…:              Well, anecdotally, that’s certainly what we’re hearing from our clients. Our clients are the operator clients. They say that the number one question they’re getting is, is this stay safe? Can you tell me what is in this? I think it certainly has prompted a savvy or consumer, and of course, our folks who have been having to compete at times with an illicit industry are more likely to say, Hey, [00:10:30] you’re buying from a legal and regulated dispensary, what do you think? There’s a process here and we have a high level of compliance and they can be a bit sassy on the front lines.

Speaker 3:                       Yeah. Since you mentioned your operator partners, let’s stick on that point. I’m curious to hear what you’re hearing from the supply chain as they’re trying to adjust to this new COVID-19 reality.

Jessica Billing…:              [00:11:00] Sure. Well, I think it’s important to note that we’re still seeing consistent demand. So although we’ve seen a couple days or sporadic bursts of what might be termed as, as pantry loading, and I think you mentioned the phrase panic buying, we are seeing now habits begin to normalize in the wake of cannabis, being recognized as essential in almost every jurisdiction. [00:11:30] So, for example, we reported that surge in sales, by medical patients in Colorado over a very brief period of time of 57%. But once it became clear that people would have access to cannabis, we saw it at least in the last week, sales have returned to slightly elevated than normal rates.

                                         And certainly, it’s too early to tell. We’ll continue to track data. We’ll continue to share our numbers, but it appears that what we’re seeing more is the recession [00:12:00] resilience of the industry. And in certainly cannabis like you mentioned alcohol earlier and personal care products, maybe one of those industries that we see perform counter-cyclically in a recession type of period of time.

Speaker 3:                       Yeah. It’s interesting that mix shift to flower that you noted, because I would think for that average consumer from affordability standpoint, [00:12:30] that might be driving some of that mix to flower. If you get kind of the best buzz for your buck with that form factor though, I totally agree. Long-term, I think flowers, the share donor. Have you heard of any business or supply chain disruptions coming from COVID either due to employee illness or disruption out of the supply chain from China?

Jessica Billing…:              What’s interesting about this is that we’re certainly [00:13:00] not hearing anything there. I saw the article that came out with the supposition that perhaps there could be an issue with supply of vaporizer cartridges from China. We have not seen or heard any evidence of that in our client base. And overall, our clients like any business during this challenging time are working to meet the needs of their customers. [00:13:30] And as a hyper-local supply chain, if you think about it, cannabis is operating in a very limited geographic jurisdiction in terms of cultivating manufacturing, distributing, and retail compared to most other consumer packaged goods, supply chains. So we don’t expect to see any impact and certainly our clients has not reported any [00:14:00] impact. And as we noted, vape sales are up. They’re up almost 10% during this period of time.

                                         And one of the things that we are working with our clients to leverage is business intelligence to make smarter decisions. So that inventory management looking at their current mix and helping them understand what they have, what they can promote, where things may be limited run rates to provide a better understanding of sales velocity, trends, [00:14:30] spikes. And certainly, especially with this push toward online ordering and delivery in markets where it’s allowed, understanding how to look at their ordering trends and know what to order, not just on demand, but also historical.

Speaker 3:                       Yeah, I would imagine that’s probably a highly value added proposition for your customers, given that many of them are basically standing up like delivery in a market like Nevada for the very first time.

Jessica Billing…:              [00:15:00] Absolutely. And you know, I’m not aware of any of our clients having to close due to what’s going on. I do anticipate that we’ll continue to see in cannabis as with any other industry, we’re going to continue to see consolidation and operational maturation that may lead to some smaller players exiting the market. But that’s what makes our opportunity specially unique. Current as well, positioned to take advantage of the current environment. [00:15:30] During times like this, our M&A pipeline continues to grow and target valuations are pretty attractive.

Speaker 3:                       Understood. You mentioned the regulatory backdrop. So maybe let’s stay on that topic. You know, given that you are a compliance platform, you have, I think, strong and consistent dialogue with local regulators. It seems the far, with cannabis broadly being designated [00:16:00] as essential, that that is a pretty accommodative landscape, but are you hearing any concerns from local regulators as it relates to keeping cannabis businesses operational?

Jessica Billing…:              Well, having been a very early pioneer in this industry, and I say that acknowledging that there are certainly folks who were in the industry far earlier than me, although 11 years makes me practically a dinosaur across most of the industry, [00:16:30] the essential nature of cannabis has been a interesting point of discussion. And it’s been a really wonderful thing to see across so many regulatory environments. I actually saw a tweet yesterday that grocery stores, hospitals and cannabis dispensaries are going to be the only things operating. Welcome to 2020, where a cop can ask you why you’re out of your house. And one of the only acceptable answers is to buy cannabis, sir. This was [00:17:00] thinkable 10 years ago. So it’s really nice to see how far we’ve come and to borrow a long-standing industry quotes, to see the cannabis industry move out of the shadows and into the light or into the mainstream.

                                         I think another way to think about it is from this perspective, medical marijuana is a $5 billion industry. That’s just medical, not including recreational with more than 2000 [00:17:30] retailers serving more than two million patients nationwide. And among them are those fighting cancer using cannabis to manage their symptoms, veterans, working to manage their PTSD and others being treated for epilepsy, autism, MS. There’s real research, real studies. There’s our partnering with the state of Pennsylvania, which was the first state to [00:18:00] medically allow cannabis for the treatment of opioid addiction. And for patients like these, the cannabis industry is an integral part of the overall health infrastructure.

                                         And I really think we’re going to see some larger push towards legalization resulting from this period of time and this acknowledgement of cannabis being essential.

Speaker 3:                       Yeah. That’s an interesting take for sure. Jessica, in the spirit of trying to keep this call to 30 minutes, I’m going to turn into the questions that [00:18:30] I already have in my inbox. So the first one is a good one, just from a level setting standpoint. Can you walk everyone through your day and methodology? Like how many points of sale are you picking up? Like what informs the growth rates that you were kind enough to share with us?

Jessica Billing…:              Sure. So this is across our database, a client set of, and we also, in terms of methodology, we only include [00:19:00] markets where we have statistical relevance for us. I believe that we count that as more than 13% market share in any given market. And then we normalize for other factors. And then we double check that also against any state published data. So we’ve pulled all POS sales data for all of our production sites where the sales data [00:19:30] excluding refunds and the order source was online or over the phone and the fulfillment method was pickup or delivery. And then we look at that data and compare the last two weeks to the rest of the year to get our trends.

Speaker 3:                       Got it. And how many states does that cover in the US?

Jessica Billing…:              So this particular data, it depends. We’ve got presence in roughly 30 states. This particular data would include information from [00:20:00] nearly all of them.

Speaker 3:                       Got it.

Jessica Billing…:              But with delivery, for instance, we looked at 13 states where delivery is allowed.

Speaker 3:                       Understood. Okay. That is helpful. Got another question here asking whether you can offer any insights in the Canadian marketplace.

Jessica Billing…:              Sure. So in Canada, we are in. Canada is included in some of the data that we shared. In Canada, we are also seeing an uptick, both in [00:20:30] person, as well as a much larger uptick in the e-commerce as option. So it’s not, not delivery in the same way that we see here in the US. It’s e-commerce delivered through the Canadian postal service.

Speaker 3:                       And I certainly live the press reports that we were hearing would suggest that there was some pantry loading in those markets as well. Have you seen anything that’s been consistent with that?

Jessica Billing…:              We [00:21:00] have. We were just comparing notes with last call analytics, which is the data arm of Ample Organics. So, which we announced as an acquisition a couple months ago. And they are absolutely seeing some similar trends, both in this uptick in sales overall, as well as cannabis being declared essential. [00:21:30] And also this challenge in delivery, moving to curbside in some cases moving and folks moving back to more of a mix of that e-commerce and ordering to have their medicine or their product delivered and ample organics does serve over. It does serve the majority of the Canadian market. So certainly, we have a great set of data [00:22:00] to pull from there.

                                         And last, alcohol analytics also [inaudible 00:22:06] see the alcohol beverage industry. We’re starting to look at what are some correlations we might be able to see between the uptick and between cannabis and alcohol. And if we find some really interesting insights there, we’ll certainly publish that as well.

Speaker 3:                       I think that’d be terrific. I think there’d be a lot of interest in that, for sure. I have two [00:22:30] more questions in my inbox. So next one is, do you have data around demand for first-time users, non frequent consumers? In other words, has the COVID outbreak caused infrequent or first time consumers to purchase in rec state? And do you see the outbreaks driving trial?

Jessica Billing…:              That’s such a great question. Where we’re actually diving into our data and looking at that this week. So we’ll certainly be sharing our results.

Speaker 3:                       Excellent. I think [00:23:00] everyone will look forward to that as well. The last question I’ve got here in my inbox is whether you can share any recent trends on CBD and hemp.

Jessica Billing…:              Sure. So we are seeing a uptick in CBD hemp. I don’t have the exact figures on that right here in front of me, but we are seeing an uptick on that. And that’s another area that we’re going to be looking to share some more details with the public. [00:23:30] So certainly, subscribe at Akerna.com. Sign up and subscribe to receive our press releases and our flash reports where we put out this data. And I also annual predictions so this is a big one for me. Particularly, that hemp we’re going to see an increase in hemp this year.

Speaker 3:                       Okay, well, we will keep our eyes on that. And I would certainly encourage all of our listeners to [00:24:00] go to Akerna.com and sign up for those press releases. Being able to get these real time market insights from your business intelligence is highly, highly valuable. And we really appreciate it. All of us. I’m sure Jessica.In the spirit of keeping us on track at the half hour mark, I’m going to stop there and to thank everyone for being on the line. Jessica, thank you so much for being so generous with your time. We hope that everyone is staying safe and healthy and sheltering at home and [00:24:30] continue to be well and support our first-line medical responders. Thanks everybody. Have a great afternoon.


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