Weekend Update Unlocked
Reviewing the cannabis landscape.
The following is a sampling of Cannabis Confidential content—random paragraph grabs, charts and notes, interesting happenings and other stuff— from last week.
You can click the title to access any article; most stock stuff and analysis is behind the paywall and you can access a free trial by clicking below; thanks for your support.
US MSOs: If not now, when? 👈
Chris Ingrassia shares his U.S. canna thesis.
(unlocked)
June 17, 2024
Swing State Cometh 👈
PA readies to join OH + FL in canna push.
June 17, 2024
Bipartisan Pennsylvania lawmakers announced their intention to file a bill to legalize adult-use marijuana as they actively solicit support from colleagues amid a push for reform as neighboring states move forward to open legal cannabis markets.
“Ohio is primed to open their market with the lion’s share of their licenses perched on our border as they seek to take capture Pennsylvania dollars. Accordingly, we believe now is the time for Pennsylvania to move in a similar direction.”
Terrapin Justice
Maryland Gov. Wes Moore is expected to sign an executive order pardoning more than 175,000 cannabis-related convictions, following a nationwide trend to loosen restrictions on the drug.
The order, which covers misdemeanor convictions for cannabis possession and possession with intent to use drug paraphernalia, comes on the heels of Maryland legalizing recreational cannabis use last year.
Rocky Mountain highs
Rates of youth marijuana use in Colorado declined in 2023 and remain significantly lower than before it became one of the first states to legalize cannabis, contradicting prohibitionist arguments that reform would lead to increased underage consumption.
In fact, since the first retail cannabis shops opened in Colorado in 2014, youth canna use has gradually declined. It’s fallen nearly 7 percentage points since 2013, when past-30-day use among high schoolers was at almost 20%.
California Screaming
An investigation by The Los Angeles Times found alarming levels of pesticides in canna products available on dispensary shelves across California, including some of the most popular brands of vapes and pre-rolled weed.
Twenty-five of 42 legal cannabis products that The Times and WeedWeek purchased from retail stores and had tested at private labs showed concentrations of pesticides above levels the state allows or at levels that exceed federal standards for tobacco.
Pablo Zuanic on U.S. cannabis rescheduling:
We hosted a call on 6/10/24 with Kelly Fair (Partner at Dentons), David Culver (SVP Public Affairs at the US Cannabis Council), and John Sullivan (EVP Public Affairs at Cresco Labs), to discuss the latest on the rescheduling process and timeline.
The three speakers believe the Final Rule will be completed and published in the Federal Register before Nov. Even though timing and length of the hearings (likely to take place) of the Administrative Law Judge report, and time the DEA/DOJ take to write the Final Rule report, are not set as per statute, they are confident the process will be completed before the election (the Final Rule being published).
Supposedly, the DEA’s concerns (DEA had not signed the draft rule) will be assuaged with new evidence coming through in the public comment period. But given the OLC Opinion gave deference to the DOJ over DEA in the rescheduling process, speakers said DEA signature is not necessary (this would have no bearing on a hypothetical judicial review, which would take place 30 days after the Final Rule).
Our speakers expect that together with rescheduling, DOJ will issue some form of memorandum that’ll provide safe harbor from enforcement to financial institutions and various federal agencies. While this is separate and not required as part of the administrative process of rescheduling, our speakers believe the DOJ will act. The timing is unclear to us, but we assume it is done before Inauguration Day.
Regarding the Trump factor (will he opine on the subject before the election? or the 6/27 debate?), in case he wins election, a) a Congressional Review could be triggered after 1/20/25, if a member of Congress calls for a “resolution of disapproval”, but it is unlikely both chambers would agree via majority vote to reverse the rule, according to our speakers; b) if he wants to reverse rescheduling, then his AG would have to begin an entire rescheduling review process all over again (would be unlikely to succeed based on scientific and legal grounds).
With the MSOS closing at 6.99 on Friday 6/14 (down 38% from the 11.26 peak of 4/30, when AP reported the DOJ had started the rulemaking process), markets seem to be saying nothing will happen this year. We disagree and see this as a buying opportunity. But technical factors (short term traders, liquidity, limited institutional capital) and lack of very near-term catalysts probably cap the “30-day” upside.
Key catalysts: a) time to request hearings ends 6/20 (are there “valid” requests”?), b) DEA decision to grant hearings and appoint an ALJ (we assume post 7/22, when the public comment period ends); c) tone of hearings (Aug?) and when ALJ send report to DOJ/DEA; d) publication of Final Rule in the Federal Register (Sep/Oct?)
ATB on the Verano Buyback 👀
Verano Announces $50M Buyback (here) to buy back up to 17.3M shares (5% of outstanding). Exiting Q124, Verano had $194M of cash, $445M of debt. They repaid $50M debt subsequent to Qend and can repay another $50M early with no penalty.
We have Verano generating ~$100mm FCF in 2024 (v. $73mm in 2023), indicating it’s in a position to return capital to shareholders via debt repayments and buybacks.
The Company has engaged legal and tax advisors to evaluate tax refunds. Estimated benefit of ~$80mm annually (based on 2023 numbers) if stop paying 280E.
One of the top picks in our MSO coverage together with GTI. We like the cash flow generation, top-tier margins, footprint diversification, and exposure to catalyst-states (Ohio, Florida, Pennsylvania).
Stock is down 30% this year (impacted by lagging Q4/23 and Q1/24 results, notably due to NJ retail pressure) and trades at 5x EBITDA vs large-cap peers at 7x.
Green Acres 👈
Fertile midwest markets await.
June 18, 2024
When the Midwest market reaches its full potential, sales could eclipse $1 billion in 2025 and rise to $1.5B-$2B by the end of 2027, per MJBizDaily. Ohio is the seventh-most-populous state with 12M residents and, of the five other states that it borders, only Michigan has a regulated adult-use market.
Minnesota regulators are currently drafting regulations in anticipation of issuing adult-use canna licenses next year, Indiana and Wisconsin remain cannabis holdouts, and it might take federal reform to push Iowa from medical to adult use, Ray.
Forecast: Sunny in Philadelphia
Pennsylvania seems to have momentum to become one of the next states to legalize cannabis for adult use. After a bipartisan bill was introduced in the commonwealth’s Senate last year, the House now has submitted an identical bill.
There is optimism from lawmakers as neighboring NJ and NY have implemented adult-use cannabis laws and created jobs and tax revenue that PA legislators don’t want to permanently cede to their neighbors. Accordingly, it appears to be a matter of when, not if, adult use will be legalized.
Retail Therapy
The New York City retail market is facing a big change as illegal smoke shops across the city are being padlocked by law enforcement. In just four weeks, officers sealed 311 stores, prompting many more cannabis retailers to voluntarily close their doors.
The closure of illegal smoke shops has left landlords with approximately 3,000 vacant storefronts across the city.
Eurovision
The European Monitoring Centre for Drugs released its annual European Drug Report this week, which noted that cannabis "remains, by far, the most commonly consumed illicit drug in Europe."
National surveys suggest that an estimated 8% of EU adults (23 million aged 15 to 64) have used cannabis in the last year." The report highlighted that 1.3% of adults in the EU (3.7 million people) consume marijuana daily or almost daily.
Cannabis Rules Get Green Light in Brainerd, MN
Sammy the Bull 👈
C21 continues to execute.
(unlocked)
June 20, 2024
Rubik's Cube 👈
Former DEA asks DEA to stop the DEA.
June 20, 2024
As Pennsylvania lawmakers step up their push for marijuana legalization, a new report projects that the state would see up to $2.8 billion in adult-use sales in the first year of implementation, generate as much as $720 million in tax revenue and create upwards of 45,000 jobs.
Bipartisan lawmakers state-wide have said they have the votes to pass a cannabis bill as soon as this year and say that it would be super-helpful if the federal government could implement its proposed cannabis rescheduling rule sooner, rather than later.
"I think there'll be adult-use sales by July 2025." - Sen. Sharif Street (D-PA)
SAM, I Am
A group of former DEA leaders asked the Drug Enforcement Agency to hold a hearing on the proposal to reschedule cannabis, saying that it is “likely the most consequential rulemaking the DEA has ever attempted.”
Six former DEA administrators, three former acting administrators and their mascot, a fragile furry named SAM, submitted the request just hours before today’s deadline.
If the Nug don’t fit…
Verano Holdings, in response to a request for summary judgement in their ongoing lawsuit with Goodness Growth, filed a court response rejecting their damages claim and asking for a full trial.
Verano considers Goodness’ application to be “an effort to sway public opinion by putting forward a baseless and irresponsible damages calculation in an attempt to create false hope for its investors.”
Sunshine’s State
The cannabis industry will be watching Florida on Election Day this November, as the state’s voters will decide on adult-use cannabis via a constitutional amendment that’ll need a 60% supermajority to pave Route 420 straight through the Sunshine State.
“We think given the trajectory of the market and how strong consumer participation growth and patient growth has been, it’s a really big opportunity and we we’re very confident that it's going to be the second-biggest market by 2028.”
Viridian on U.S. cannabis buybacks
On June 17, 2024, Verano Holdings announced that its Board had authorized it to repurchase up to $50M of its common shares over the next year. Verano had $193M of cash as of its March Q-end and a market cap of ~$1.1B so the repurchase program is expected to have negligible impact on its balance sheet or credit metrics.
The buyback makes abundant sense. Despite achieving a #4 credit ranking on the Viridian Credit Tracker model, Verano’s stock has received little love. It is down nearly 40% over the last month and is only up 8% since the HHS resched announcement on August 30, 2023.
Trulieve and Cresco Labs both look like good candidates for share repurchases. Both have 1) EV/2024 EBITDA multiples, 2) generally good liquidity, and 3) solid credit quality according to the Viridian credit model.
Pablo Zuanic on Village Farms
We are taking our numbers up on the back of strong double-digit growth in the CDN adult-use business and likely increased bulk sales for reexport. Improving GMs and flat SGA, combined with operating leverage from sales ramp, all bode well.
The stock trades at 0.3x EV/Sales and 5x EBITDA at the consolidated level, which is attractive. If we strip out the non-cannabis assets, we calculate the cannabis unit is valued at only $7M.
The stock is down 23% in the last month (in line with group). We consider VFF a blue chip in the CDN group, with a sustainable business model. We see a buying opp here.
Ohio cannabis festival hiring joint-rolling judges at high hourly rate
Have a safe weekend and please enjoy responsibly.
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CB1 has positions in / advises some of the companies mentioned and nothing contained herein should be considered advice