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 of the insight and analysis is behind the paywall and you can access a free trial by clicking below; thanks for your support.
The Buy Side
U.S. canna looks to make friends
Feb. 26th, 2024
Numerous leading veterans groups and a group of prominent US law enforcement leaders have become the latest to throw their weight behind rescheduling cannabis.
“We believe that reclassification under Schedule III would be an important step to help both federal and state law enforcement better prioritize limited public safety resources.”
Amish, Bud
The secretary of Pennsylvania’s Department of Agriculture says he’s “excited” about the possibility of his agency overseeing an adult-use marijuana market and he said the state is uniquely positioned to leverage the reform, in part because farmers there are “really good at growing things.”
“We think there’s an opportunity for investment in those farms and farm communities, so we’re excited about it, and I think it’s a really good moment.”
Weigh Station
After a long stretch of hurry-up-and-wait, we transition to hurry-up-and-weight this week as we’ll measure several fundamental updates. GTI reports on Wednesday and Verano + Trulieve will follow Thursday; all three companies have already guided the Street to low-to-mid single digit sequential revenue declines for Q423.
We don't think these companies were sandbagging analysts as much as level-setting expectations in a status quo world where CAPEX cuts created the oxygen necessary to survive. There will be a pivot back to growth (+ consolidation) on the other side of this.
^ when that happens, prices will continue to normalize lower, which will allow state-legal operators to better compete on price + capture TAM from an illicit market that is currently 2X the size of the legal framework.
Random Thought
Of the Tier-1 operators, Cresco has the most upside ketchup potential and it’s hard to argue the Traynor Ridge unwind didn't impact relative prices as the three stocks they were reportedly long (Cura + CBST are the others) are still below their Sept. highs.
Cannabis Podcast with Michael Gayed (recorded 2/14/24) 📻
Nights at a Round Table
Sharing the story one dinner at a time.
Feb. 27th, 2024
A Democratic congresswoman has implored the DEA to “reject any argument” that rescheduling cannabis under federal law would constitute a violation of international treaty obligations.
“Cannabis should be removed from the Controlled Substances Act entirely, however, I acknowledge that the rescheduling of cannabis is a historic first step to addressing the harms of the War on Drugs, which is why I want to ensure that U.S. Treaties are not considered as a potential reason against rescheduling or de-scheduling marijuana.”
Slumdog Millionaire
Amid pressure to clamp down on New York’s thriving illicit market, new rules were introduced last year allowing regulators to impose fines of $10K each day a cannabis business operated without a license, rising to $20K for a second or more offense.
Thus far, according to official records, regulators have collected a total sum of $22,500 from unlicensed cannabis shops, despite issuing more than $25 million in fines.
The Morning After
Last night’s NYC dinner didn't disappoint. We had a spirited discussion about the U.S. cannabis space with an eclectic crowd that included event-driven, biotech and consumer goods fund managers, a few generalists and an analyst or two. All told, I figure there was $40B+ of AUM in the room, alongside an abundance of fresh fish.
I scribbled a few notes below but the punchline is that everyone was there for a reason because cannabis was somehow touching their world. I’ll say this: it was a world away from when I nervously peed in a cup to gain entry into Morgan Stanley 34 years ago.
Key takeaways:
Companies that survived have done so with one hand tied behind their backs and are, for the most part, very good at what they do.
Very few companies in the space are generating FCF, but those that do are cheap.
They’re doing this despite a 75% effective tax rate, which is bananas.
Multiple shots on goal (intended federal catalysts):
First step: rescheduling (to SIII) removes insanely high effective tax rate.
Second step: Garland Memo (reverses Sessions-era revocation of the Cole Memo, elucidates how state-legal programs coexist with new Schedule (III).
Third step: SAFER banking, which is “down to the last few words.”
Bonus: State-level adoption: OH, FL?, VA?, PA?
If IRC 280E is repealed (75% effective tax rate), would immediately represent $80-100M flowing straight to the bottom line for biggest players (~$600M aggregate).
Not a right/left political issue; more of a demographic issue.
91% of US voters are supportive of some form of legalization.
Real money participation will likely be a fund-by-fund decision, dependent on the views of the CIOs/partners/compliance officers.
(for more notes + further color on the idea dinner, click here)
Verano-MSCI addition on HODL 😤
Talk to the Hand
Earnings arrive in Cannaland.
Feb. 28th, 2024
As we patiently await word from the DEA regarding the next steps in the scheduling review process—and as Congress continues to work on SAFER Banking despite the multitude of agendas competing for their wallet mindshare—several prominent U.S multinational companies and organizations have been trying to lead by example.
Recent disclosures indicate that companies such as Amazon, Uber, American Express and the American Bar Association have been actively engaged in lobbying Congress on cannabis-related issues, including the SAFER Banking Act.
Hoos the Boss?
The Virginia House of Delegates and Senate approved identical versions of legislation to legalize retail cannabis sales, putting the reform one procedural step away from the governor’s desk.
Under the proposed legislation, retail sales could begin as of May 1, 2025, adults can score up to 2.5 oz. of marijuana at any one time and a state tax of 11.625% would apply to the retail sale of any cannabis product.
“This bill may not be perfect, but it’s pretty good; it’s a very, very good framework that I think the governor should consider.” -Sen. Barbara Favola (D)
Mr. Spicoli?
The California cannabis industry has a serious tax problem on our time.
The cash-strapped industry’s state tax bill has ballooned almost 15% from Dec. 2022, when the industry owed California tax authorities just over a quarter-billion dollars, to almost $300 million as of mid-February.
“The California cannabis industry has an outstanding balance of nearly $287 million.”
ATB on the proposed Canadian Changes:
Op-Ed: Going ‘Cali Sober’ May Be Bad for Your Heart
me: smoking anything is no bueno for cardiovascular but there are a multitude of form factors and mounting evidence cannabinoid wellness has efficacious agility.
Green Thumb Earnings + Call Notes
Feb. 28th, 2024
$278M Revs; est. $270M
$91M AEBITDA; est. $79M
$143M GP; est. $131M
$50M OI; est. $44M
51.3% GM; est. 48.4%
$0.01 EPS; est. $0.05
*ADDITIONAL $50M SHARE REPURCHASE
Trulieve Earnings + Call Notes
Feb. 29, 2024
$287M Revs; est. $267.9M
$88M AEBITDA; est. $72M
$154M GP; est. $136M
$29M OI; est. $22.M
54% GM; est. 51%
$ (35M) NI: est. (30M)
$ (.19) EPS; est. ($0.16)
Verano Earnings + Call Notes
$237M Revs; est. $234M
$74M AEBITDA: est. $74M
$118M GP; est. $120M
$(11M) OI; est. $35M
50% GM; est. 51%
($72M NI; est. ($12M)
Leap Year Luggage
U.S. canna wastes solid earnings.
Marijuana is illegal under federal law, but most Americans now live in a state that has legalized the drug—and most also have at least one canna dispensary in their county, according to a new Pew Research Center analysis.
Put this in your pipe and smoke it:
54% of Americans live in a state where adult-use cannabis is legal.
74% of Americans live in a state where adult-use or medical cannabis is legal.
79% of Americans live in a county with at least one legal cannabis dispensary.
There are nearly 15,000 cannabis dispensaries in the United States.
Northwest Star
A Democratic senator announced that she’s joined the list of bipartisan cosponsors of a marijuana banking bill, stressing the need for the reform amid a spate of robberies targeting state-licensed cannabis businesses in her home state.
“Last year there were more than 50 robbery attempts at marijuana dispensaries in the State of Washington,” -Sen. Maria Cantwell (D), on becoming the 35th SAFE co-sponsor.
ABC’s of CBD at the FDA
The Food and Drug Administration (FDA) is actively exploring a potential regulatory framework for CBD, with plans to prioritize the issue in the next year, per an official.
“In almost every neighborhood you go to, you can see stores on the corners that are marketing CBD and one of the things we have been thinking through here at the FDA is, ‘what does the regulatory framework for those products look like?’”
The Impact of 280E: How Schedule III Affects The Bottom Line
Sammy J is creating a thread on the specific impacts of 280E for U.S. canna operators in an attempt to illustrate the 80E tax overage for U.S. canna operators vs. standard corporate tax treatment.
Applied is a hypothetical lens on the past three years to demonstrate the impact on the profitability Green Thumb, which will be the first of several examples.
Waiting to Exhale
U.S. canna awaits it's fate.
March 1, 2024
The U.S. cannabis industry is set for a hiring boom in 2024 after a long and painful contraction that was driven in part by normalized post-COVID consumer behavior as investment capital dried up and the industry waited in vain for federal reform.
Vangst predicts that up to 100,000 new jobs could emerge if cannabis is reclassified to Schedule III. Such a move would reduce tax burdens + immediately drive valuations and investor interest higher, according to an analysis by Viridian Capital Advisors.
The World According to AARP
Approximately one in six middle-aged adults consumed cannabis within the past year, according to survey data. These findings are consistent with other studies that found that cannabis use among older Americans continues to outpace all other age groups.
“We expect cannabis use among late middle age and older Americans will at least double in the decade ahead. As many as one of every five persons over 50 may be using cannabis in the year 2030, and mostly for a medical condition.”
Garden Sparty
Michigan officials announced they are distributing a new batch of more than $290M in marijuana tax revenue to localities, public schools and a transportation fund. 269 municipalities will be receiving $87M, while education + transportation efforts will each get $102M.
“This week, many Michigan municipalities and counties will begin seeing their share of adult-use marijuana payments appear in their banking accounts.”
Quaker State
California’s legal canna market continues to descend into financial turmoil, according to the latest annual tax figures released this week. The total market has skunk shrunk in size, according to state data, and additional tax information shows hundreds of pot stores are at risk of going out of business.
What Is Taking The DEA So Long To Rescheduling Marijuana?
Enjoy your weekend, stay safe 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.