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.
Rug Pull 👈
Late day noise trips U.S. canna.
May 6, 2024
Many U.S. cannabis businesses would become profitable for the first time once the Biden administration follows through on their plan to reclassify marijuana as a less dangerous drug.
The change would lift IRC Section 280E, which currently bars U.S. cannabis businesses from claiming deductions on basic business expenses and creates an effective tax rate of more than 70%, wiping out most licensed marijuana retailers’ earnings.
“It’s an absolute game-changer. It’s something we’ve been waiting for, for the better part of 10 years.” Boris Jordan, Curaleaf Chairman
Veteran Move
Following an effort to attract more military veteran supporters of canna legalization, the campaign behind the Florida ballot measure to legalize adult-use marijuana is beginning to feature more veterans in their media outreach.
“Our goal is to raise awareness among voters about the importance of cannabis as a safer alternative to synthetic opioids for treating PTSD and related conditions among veterans” and we are “looking to engage with veterans across the state of Florida to support our cause.”
CGF on U.S. cannabis valuations:
The average MSO reached 17x to 18x NTM EV/EBITDA in early part of 2021. Since then, fundamental performance has been relatively strong (even if slowed of late) w MSOs still only trading at 8x to 9x 2024 EV/EBITDA (or ~50% below sector peaks).
Verbal Can't 👈
DEA Admin clams up on rescheduling.
May 7, 2024
The head of the Drug Enforcement Administration told lawmakers today that it would be “inappropriate” for her to comment on the agency’s recent marijuana rescheduling determination because the rulemaking process is “ongoing.”
Notably, she did respond to a question about past precedent and said that “stepping out of marijuana,” she’s unaware of a single instance where a DEA administrator hasn’t signed a scheduling order.
What’s at Stake
The shift to Schedule III would unlock substantial financial benefits for U.S. cannabis operators, strengthening their balance sheets to increase financial flexibility.
Analysts project near-term benefits could include approximately $1.1 billion in cash flow improvements across the sector due to the removal of tax burdens under IRC 280e, which prohibits the industry from deducting normal business expenses.
“On the US market alone, we could justify valuations of >$110B… right now, the two largest companies have EVs barely above $3B and all this is without factoring in the sizeable international opportunity."
Wowatility
The phrases, “slow motion capitulation,” and “trappy action” were floating around my crowded keppe as I reminded myself that these pops, drops and opps have not only been par for our course, they’ve been our course coming up on a year now.
Village Farms Earnings + Call Notes 👈
Canadian standout with a global reach.
May 8, 2024
Verano Earnings + Call Notes 👈
U.S. cannabis leader shares Q124 results
May 8, 2024
Engine Room, More Steam!
Canna earnings kick into full gear.
At least 44 Democrats and 15 Republicans in the U.S. Senate likely support legislation to provide safe harbor to financial institutions servicing state-legal canna businesses, while the stances of another nine senators remain somewhat uncertain.
Schumer appears gung-ho on pushing through the incremental reform, which he co-sponsors with 35 other senators, and the positions of those nine senators are pivotal for passage: The bill needs one more vote/ co-sponsor to squash a filibuster.
Craig Hallum on Village Farms:
Exceptional revenue growth in CAD cannabis and impressive margin expansion in produce; we think our numbers are set conservatively. CAD Canna retail revs grew ~5x the market rate on a purely organic basis, significantly expanding market share.
Capex investments in technology (AI) and disease-resistant strains combined with VFF's "secret sauce" of world-class master growers with decades of experience and decades of site-specific weather data to drive material margin expansion— a welcome improvement following the painful COVID-era inflation headwinds.
Meanwhile, excise tax reform continues to represent the greatest single potential catalyst for VFF, in our view, given its ability to increase nearly all headline financial metrics, including increasing VFF's EBITDA several-fold.
The Don of D.C. on SAFE Banking:
“With each passing day, getting SAFE passed by the August recess gets more difficult but politics will start to play a greater role in moving it BEFORE November's election. That still means before August because there are only a few weeks in September and early voting is underway.
There are two dates that matter if #SAFEBanking is to have any political value before the November election, August 2nd (the last day before the 5 week Summer recess) and September 27th (the last day before the 6 week election recess).
Green Thumb Earnings + Call Notes 👈
U.S. cannabis leader reports Q124
May 8, 2024
Trulieve Earnings + Call Notes 👈
U.S. cannabis leader shares Q124 results.
May 9, 2024
Forgive and Forget 👈
Look forward, not back.
May 9, 2024
States carried out “great experiments” with marijuana legalization that gave Americans “more freedoms,” including in conservative jurisdictions, said Senate Majority Leader Chuck Schumer (D-NY) as he continues to push for cannabis banking legislation and a legalization bill he recently unveiled.
“Crime hasn’t gone up. Drug addiction hasn’t gone up. People have more freedoms, and I think overwhelmingly the American people support decriminalization. Even in conservative states, it’s on the ballot—look at Ohio—and it wins overwhelmingly.”
Schumer, of course, has been talking a big game for years but as the Senate Majority Leader of the 118th Congress, he’s scewed the pooch done little to further the cause.
Quaker State
A Pennsylvania GOP senator who filed a legalization bill last year says the state is “getting close” to legalizing cannabis—but the job will only get done if House and Senate leaders sit down with the governor and “work it out.”
The senator said it’s “ridiculous” that canna is legally accessible in the state’s existing MMJ program but criminalized apart from that, especially as neighbors Delaware, New Jersey, Maryland, New York and Ohio have already flipped the cannabinoid switch.
Rush, More
South Dakota activists are “extremely confident” they’ve collected more than enough signatures to qualify a marijuana legalization initiative for the state’s November ballot.
It was unclear if the grassroots efforts would be able to reach the signatures needed for the ballot placement as national industry support has been lacking this cycle but the campaign pushed forward and, its leaders are predicting, prevailed.
Shot Clock
We fired up our systems this morning to digest the latest round of earnings, which included GTI last nite and Trulieve this morning, both of whom put up solid quarters in a difficult operating environment; CBST wasn't in the same league, but we knew that.
Our space was fragile yesterday, meandering near the $9 handle for most of the day on light volume. It wasn't very convincing given the severity of the recent pullback but as MSOS held the primary trendline, it was net-net on-the-margin constructive.
I spoke with a source last night to communicate the trepidation in the marketplace re: the potential for the rescheduling process to drag on for years, as several paid content providers have warned, but he doesn't share those concerns.
With regard to the inevitable lawsuits, he noted that the opposition will struggle with a lack of standing and while expectations are anathema for this space, his best sense is a proposed rule will move from OMB to the Federal Register in the next week or so.
Once that proposed rule is published, the comment period clock will get punched…
…as this painfully slow process lurches forward. We then expect to hear an abundance of noise, see multiple lawsuits and come across all sorts of things that could go wrong to derail the overall timing—unless of course the fix is in.
As discussed, one would think incremental visibility on the timeline of the process will help shapeshift the lost narrative back to 'SIII is on track prior to the election,’ which we hope will serve as a backdrop as the other state and federal caatalysts manifest.
^ these include a Garland Memo (Cole + language for financial institutions), Florida in Nov, PA (this Fall for next year), OH launch (next month) and perhaps SAFE too.
Jason Vedadi on U.S. cannabis:
“These tier 1 mso’s are so undervalued. I anticipate these companies doing very well the next 7 quarters with no new supply hitting the market and scarcity of capital.”
Jesse Redmond on U.S. cannabis:
“I spoke with a former top small-cap manager who is currently managing his own money. He said, "It's all about free cash flow. Once 280E goes away, I'm calling all my institutional relationships and saying it's time. This goes from a trade, to a 3-5 year hold and there's an opportunity to clean up. But, I'm not making those calls until 280E removal is certain."
TerrAscend Earnings + Call Notes 👈
U.S. cannabis leader reports Q124 results.
May 9, 2024
Curaleaf Earnings + Call Notes 👈
Global cannabis leader reports Q124 results.
May 9, 2024
See Ya! 👈
NY canna chief gets the boot.
May 10, 2024
The DEA proposal to reclassify cannabis as a less dangerous substance is the “biggest thing to happen in cannabis policy at the federal level in 50 years,” said Brian Vicente, founding partner of Vicente LLC.
The “large and meaningful impact on large and small cannabis operators really can't be understated,” he said, “It's an incredibly important business change, but also is an incredibly important policy shift that could really accelerate descheduling altogether.”
Poll Position
The CEO of a top cannabis company is pushing back against recent surveys that show insufficient support to pass the Florida legalization initiative in November.
“We wouldn’t put our stock in those polls,” she said, adding more “legitimate polls” show the legalization measure “well over” the 60% threshold needed to pass. “Our internal numbers are incredibly strong, closer to 70%, with strong bipartisan support.”
Welcome to Dumpsville 🫵
Chris Alexander, the executive director of the state Office of Cannabis Management, was asked by Gov. Kathy Hochul’s administration to step down following a review of his handling of the troubled rollout of New York’s retail marijuana industry.
Separately, the Cannabis Control Board green-lit 104 adult-use canna licenses, among a series of other actions, during today’s meeting.
Perspective
While we can rank the quarters—I've got tier-one results as GTI TRUL VRNO CURA, in that order—we would be wise to remember that earnings look back and the market is a forward-looking discounting mechanism.
For instance, Cura has the biggest bang-for-the-280e tax benefit (and is the only MSO with EU exposure) and, while not technically a tier-one, anyone who knows JW knows to pay attention to what he's saying as he’s not prone to superfluous vernacular.
“In discussions with multiple parties across multiple states… any acquisition would provide immediate cash flow… exploring larger, more transformational deals…previously focused on best, not biggest…now see a path to not only one of the best, but also one of the biggest.” TerrAscend Chairman Jason G. Wild 👀
Viridian on U.S. canna valuations:
Valuations are up significantly but not nearly as much as we thought they would be with a DEA agreement to S3. We believe causes include: realization this could take a while; deeprooted wariness from investors who’ve been fooled many times; getting done in this administration; and how it will dovetail with existing state programs.
Nonetheless, it’s hard to imagine a time when so many shots on goal are available, and valuations have not reflected it. We also note that the first earnings reports are in and as we expected, generally better than analysts’ expectations.
Most Americans Who Have Tried Canna or Psychedelics Had Positive Experiences
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.