Waiting in Vain | The Bengal Bite 🐯

The twists and turns of the cannabis industry are enough to give an observer whiplash.   While all the news of late is about what’s going on in DC - let’s take a walk down memory lane and put things in perspective.  

Cannabis businesses have always seemed to be valued on some “new metric” that the industry adopts as the end all barometer of progress. Here are some prior examples:

2016-2018

Metric: as the Canadian players tried to differentiate themselves, it was all about “funded capacity.”

Consequence: How fast can you say overcapacity and disappointment...

2016-2018

Metric: In the early years of the large-scale legal cannabis industry the market valued potential TAM and license acquisition at all costs was the name of the game. 

Consequence: Companies grew at all costs but couldn’t get the capital to finance their plans.  Efficiencies of scale were very tough to obtain given the patchwork nature of the regulatory environment. Some companies basically gamed the system by buying a small asset in a large state to be able to raise its TAM - as if one dispensary in California now allowed you to claim an additional 40 million people in your addressable market. 

TAM was too theoretical though, which leads us to....

2018-2020

Metric:  Revenue growth of a platform was the new name of the game.  Showing you had the assets and the ability to turn them on was what mattered.

Consequence: Slower than predicted state program rollouts (Massachusetts, California, etc.) dinged projections as investors were disappointed with companies not reaching their numbers as quickly as had been promised. When companies did show revenues it was often low quality and at terrible margins. Again, some companies saw what the public markets were valuing and gave it to them by doing M&A with the express goal of raising their revenues - margins be damned.  

Predictably, a cash crunch ensued and investors demanded EBITDA...
 

2020-2021

Metric: Growth with operating leverage and EBITDA are... the new name of the game.

Consequence: Positive EBITDA and growth have been achieved by the bigger MSOs (record setting quarters by all the big boys as well as a strong vision into growth into 2022).   

So, the largest US cannabis companies are largely doing exactly what they said they would do: accelerating growth and profitability in their markets. But, suddenly that is no longer enough. The market is now saying it wants federal legislation and nothing else matters. The group of investors that take positions in US cannabis has not grown all that much in the last few years - so the same people demanding federal legalization as the lynchpin of “real” value in cannabis companies are largely the same investors who just a short time ago would have been satisfied politically with just the Cole Memo being reinstated.

So now federal legislation is finally proposed...and depending on who you ask it's either “too nebulous” (what happens with interstate commerce, FDA participation, etc.) or “too specific” (proposed tax rates). Again, take stock of where we are just a few short years from the Cole Memo being rescinded: the senate majority leader has proposed legalizing cannabis in at least some form.

There is no silver bullet that will solve the myriad of complexity with the cannabis markets overnight. However, iterative changes need to be viewed as positive even if they don’t get us “all the way.” Perfect cannot be the enemy of good. Throughout the drama that has ensued from all the storylines above - the following bullet points are the foundation of why we remain unabashedly bullish on the sector: 

• True leadership from several high nine-figure a year revenue businesses that have the financial (and likely political) heft to fight the incumbent powers that have battled against cannabis

• Proven business models and much more accurate revenue forecasting than in the past - the differences in financial performance between early Canadian companies and large US MSOs is impossible to ignore at this point

• An ever-increasing number of states launching medical and adult-use programs

• Proven tax base that we think will be impossible to simply “take away” from cash-starved states

Progress will not be denied. We believe in staying the course, selectively, because, despite the noise on the surface, the underlying industry is as strong as it’s ever been. Our views are summed up by this little meme that we made:

This Week's Bite:

• Is It Ever OK to Get Stoned With a Client? And Other Questions as Pot Comes to Work (Wall Street Journal) | Marijuana is a common, if sometimes covert, element of American life. Nearly half of U.S. adults said in 2021 that they have tried it, up from about 34% in 1999, according to a long-running Gallup poll. With the widening legalization of pot in the U.S.—19 states and Washington, D.C., have legalized it for recreational use and more than a dozen others have cleared it for medical purposes—workplaces and co-workers are adjusting to greater openness about the drug, grappling with issues from referencing cannabis in job interviews to deciding whether it is ever acceptable to get stoned with a client.
   

• Trulieve Completes Acquisition of Harvest Health & Recreation Inc. Creating the Largest and Most Profitable U.S. Cannabis Operator (New Cannabis Ventures) | With a robust retail network of 149 dispensaries across 11 states and 3 strategic regional hubs, with market-leading positions in Arizona, Florida, and Pennsylvania; the new Trulieve is the largest U.S. cannabis operator.
   

• Recapping Hall of Flowers Santa Rosa 2021 (Highly Objective) | For anyone interested in seeing how brands have developed over the past three years and new products launching in the California market, Hall of Flowers is the trade show to attend. While the audience for Hall of Flowers is mainly Retailers (buyers) and Exhibitors (around 300 brands), it’s overall a great place to meet with other people in the ecosystem and see what new products/innovation is happening in the industry. It provides a good idea of how brands are trying to differentiate in a crowded market.
   

• BDSA Data Indicates Cannabis Sales Weakened in Western States in August (New Cannabis Ventures) | Following two months of softening sales trends, most of the markets that cannabis data analytics firm BDSA covers experienced continued weakness during August. Tough comparisons from a year ago, when sales surged during the pandemic, resulted in relatively weak annual growth in most markets, with several even declining. Weak sales of flower compared to a year ago was the underlying theme. BDSA provides coverage for Arizona, California, Colorado, Nevada and Oregon. In August, growth ranged from -7% in California to 26% in Arizona compared to a year ago.