Poetic Justice
DOJ shines as Jury Duty grinds.
Daily Recap
President Joe Biden today announced that his administration is officially moving to reschedule cannabis under federal law, applauding the “monumental” action that follows an extensive administrative review that was directed on his behalf.
“Today my administration took a major step to reclassify marijuana from a Schedule I to a Schedule III drug, an important move towards reversing longstanding inequities.”
The particulars are more nuanced and involved, but we’ll get into that below.
Billions
U.S states with cannabis legalization policies generated more than $20 billion in canna tax revenues since Colorado + Washington launched the country’s first legal adult-use markets in 2014, and 2023 was the biggest year yet with $4.2B in adult-use tax revs.
Among individual states, California earned the most last year at $1.08 billion, followed by Illinois ($552M) Washington ($533M) and Michigan ($473m).
Mr. Tax Man
Publicly traded cannabis companies are looking to their tax returns to save tens of million of dollars this year—and possibly recoup taxes paid in previous years (!).
U.S. multistate operators have begun to amend their federal tax returns given the ongoing cannabis rescheduling process, as well as the pending legal case headed by uber-attorney David Boies, where oral arguments set to begin May. 22.
About, Face
Cannabis testing will no longer be required as a condition for enlisting in the armed forces or for becoming a newly-commissioned military officer, according to language added to the House's version of the National Defense Authorization Act.
"The Secretary of the military department concerned may not require an individual to submit to a test for cannabis as a condition of enlistment of such individual as a member, or the commission of such individual as an officer, of an Armed Force.”
Stocks & Stuff
Today’s DOJ news triggered all sorts of volatility as the specter of Schedule III getting finalized by the election increased in kind. A closer read of the fine print introduced other questions which, combined with tomorrow’s expiration, made for a wild ride.
U.S cannabis ETF MSOS, up as much as 9% midday, finished the session 2% higher, while their Canadian brethren joined the pot party with some gains of their own.
Below, we’ll top-line today’s price action, explore why the breakout try failed, check ATB’s earnings preview, sniff at price target increases, and talk next steps.
All that and more, just scroll down.
SPY 0.00%↑ QQQ 0.00%↑ IWM 0.00%↑ MSOS 0.00%↑ PT Notional: $390M/$267M
Top Stories
Justice Department moves forward with easing federal restrictions on cannabis
Total U.S. Adult-Use Cannabis Taxes Have Surpassed $20 Billion
House NDAA removes cannabis from armed services drug testing requirements
With cover of rescheduling, MSOs already trying to seize 280E tax savings
Michigan’s Adult-Use Cannabis Sales Up 21% Year-over-Year
Canna companies are spending millions in Ohio for the recreational sales launch
Average THC potency of illicit marijuana flower is 16%, DEA says
$61M in illegal cannabis seized by California officials in 4 months
Beer Sellers Use a Loophole to Break Into Weed Drinks Market 👇
Industry Headlines
Rubicon Organics Reports Q1 2024 Results
Introducing Kush God: the next big strain from Pure Sunfarms
Pregame (written at 7:00 AM) 👈
It's Thursday morning May 16th and for the first time this week, my jury number was selected, which means I'll be at the Nassau County Supreme Court at 8:45 AM.
I’ll be there on time too, stacked with every screen I can carry, with two new portable chargers alongside two regular chargers with long cords. It says online there is WiFi there, so that part is in God's hands.
Insofar as we discussed the current construct—from charts to catalysts to earnings, oh my—and in the off-chance I'm unable to connect to the interweb today, I timed canna posts on X throughout the day and will leave you with this 5yr weekly chart.
Zooming out and stepping away from the babysitter prolly isn’t the worst idea the day after (the meat of) earnings and ahead of expected catalysts but you try telling that to an obsessed person running full speed on a hamster wheel.
Truth is, I’ve been dreading Jury Duty since I first postponed it in March and I knew it was circling back so while they'll drag me kicking and screaming, sorta, it's prolly not the worst thing in the world from a mental health standpoint.
Good luck today, and if we get good news, I'll see you on Monday. 👀
A Room With No View
Before I left home this morning , I sent the following to X-subs, which, while factually true, was also somewhat tongue-in-cheek.
I arrived early bc as a creature of habit I felt the need to situate + get my bearings. It wasn’t the highest tech set-up but I had WiFi and a brown paper bag lunch from my wife, which was a nice blue-collar touch.
“This won’t be so bad,” I thought to myself as the market opened, “easy peasy.”
At 10:05AM, I got called, so I packed up my portable turret and filed into Room 4 with the rest of the cattle. Just then, I got this slack…
…and knowing tomorrow is May expiration, I figured the fix pin fix was in as I listened to the judge detail proper civic duty decorum. You know what happened next.
At 12:41 PM Politico scooped that the DOJ was about to publish their proposed rule, followed by POTUS proclaiming same (he even pinned it to his X profile) and to top it off, the DOJ released a memo from the OLC that answered questions related to S3.
I’ll admit to not being entirely focused when we were summoned to return to the courtroom at 2PM— but can you blame me? This was big stuff. Still, before I got up to walk back in, with the MSOS flying high ($10.50, +9%), I paused to share:
BIG money will try to whack-a-mole $10 into expiration.
It wasn’t long before we learned that the case we were called for got dismissed, which triggered an audible response of pleasure relief before I realized what that meant:
The cannabis rally faded hard, wiping out most of the gains, but narcissism aside, the timing was coincidental. Today’s news was spectacular but there was also a rub: the Attorney General seemingly came over the top.
Per ATB:
1 - This is a move directed by the Attorney General. The "DEA has not yet made a determination as to its views of the appropriate schedule for marijuana."
"DEA believes that additional information arising from this rulemaking will further inform the findings regarding the appropriate schedule for marijuana."
"DEA believes that factual evidence (including scientific data) and expert opinions, including additional data regarding different forms, formulations, and delivery methods for marijuana, as well as evidence regarding the effects of marijuana at various dosages or concentrations, may be relevant."
At this point, HHS recommendations are not more binding from a "scientific and medical" standpoint, but they are accorded "significant deference" through the rest of the rulemaking process. This adds uncertainty, since DEA has not made a decision yet.
2 - This re-scheduling process is a different process from others. The AG had to reach out to the OLC for legal opinion re: the way HHS supported its recommendation for Currently Accepted Medical Use (not the 5-step framework determined by DEA).
The OLC legal opinion was:
"The approach that the DEA currently uses to determine whether a drug has a “currently accepted medical use in treatment in the United States” under the CSA is impermissibly narrow. An alternative, two-part inquiry proposed by HHS is sufficient to establish that a drug has a “currently accepted medical use” even if the drug would not satisfy DEA’s current approach."
3 - OLC found that "DEA may satisfy the United States’ Single Convention obligations by placing marijuana in Schedule III while imposing additional restrictions pursuant to the CSA’s regulatory authorities". What will those additional restrictions look like?
"Concurrent with this rulemaking, DEA will consider the marijuana-specific controls that would be necessary to comply with relevant treaty obligations in the event that, after the hearing, a final order reschedules marijuana and to the extent such controls are needed, will seek to finalize any such regulations as soon as possible."
Next steps:
As expected, they are opening up for a 60-day comment period. Within those 60 days, during the first 30 days interested persons can also request hearings.
Here’s the punchline:
“The CSA vests the Attorney General with the authority to schedule, reschedule, or decontrol drugs. 21 U.S.C. 811(a). The Attorney General has delegated that authority to the DEA Administrator, see 28 CFR 0.100, but also retains the authority to schedule drugs under the CSA in the first instance, see 28 U.S.C. 509, 510.
The HHS Assistant Secretary for Health has provided a recommendation for transferring marijuana to schedule III. In light of that recommendation, the Attorney General is exercising the Attorney General’s authority under 21 U.S.C. 811(a) to initiate a rulemaking that proposes the placement of marijuana in schedule III.”
ATB Earnings Scorecard
MSOs reported generally positive results in Q1/24, especially on the margin and cash flow sides. Trulieve was the highlight of the quarter, with the strongest beat.
Our top picks are Green Thumb, Verano, and Trulieve. A name that looks particularly attractive on valuation is Ascend.
CGF on Glass House:
GLASF posted a healthy beat to Q1 expectations and offered a solid guide for Q2 revenue, gross margins, and EBITDA. While the 2024 view was largely unchanged, Canaccord believes with Greenhouse 5 fully operational, full year estimates could be bested through continual improvement on cultivation metrics. PT raised from $9 to $12, maintains Spec Buy @ Canaccord
Stems & Seeds
New Study Finds Weight Loss With THCV And CBD
Tomorrow is our daughter’s 13th birthday, followed by her bat mitvah on Saturday. As such, I plan to cover 4Front’s earnings + call tomorrow morning and spend the rest of the day (and weekend) celebrating Ruby doobie.
Enjoy your night, stay safe and please enjoy responsibly.
If you’d like to help Mission [Green] change federal cannabis policies, please click here.
CB1 has positions in / advises some of the companies mentioned and nothing contained herein should be considered advice.