You’re reading a copy of this week’s edition of the New Cannabis Ventures weekly newsletter, which we have been publishing since October 2015. The newsletter includes unique insight to help our readers stay ahead of the curve as well as links to the week’s most important news.
Friends,
A lot went wrong for stocks this year, but cannabis stocks suffered far worse than they should have. This terrible year for cannabis stocks got worse this past week as we experienced dramatically lower prices. The New Cannabis Ventures Global Cannabis Stock Index is now down more than 70% in 2022 after losing 26% in 2021.
This most recent drop seemed related to the failure of SAFE Banking, but, as we recently shared, we think SAFE Banking isn’t really an issue. The valuations are very low, and we expect the fundamentals to look attractive next year. Today, we want to discuss what we expect to happen on key issues.
Federal Legalization
The market made a big mistake in late 2020 after the Democrats, traditionally a friend to cannabis legalization, took both houses of Congress and the Presidency. The optimism for federal regulatory improvement took prices much higher in early February 2021, but we are now down almost 90% since February 10, 2021. This is too much in our view.
Legalization could happen, but we don’t think that it will happen quickly. We also have concern that it could leave the FDA in charge of the industry, which could be detrimental to existing operators. We wouldn’t be surprised, though, to see some regulatory improvement. Investors should not bet on legalization soon, but it would be very nice to see some regulatory reform, including the elimination of 280E taxation.
The Illicit Market Pulling Back
The illicit market has been very strong. With increasing competition in the legal cannabis industry due to scaling, this has compounded the price pressure in certain markets, like California. Over time, the biggest source of growth for the legal cannabis industry is conversion of existing illicit markets as new states legalize for adult-use and as the operators scale. Investors should keep an eye on regulators in key states and hope for more effective control over illicit operators.
New State Legalizations
New York is a big market on the verge of launching adult-use sales, but this market is questionably regulated. There are 10 existing medical providers, most of which are publicly-traded, but their ability to own stores has been dampened from the original outlook. Hanging over the market is the presence of unlicensed retailers, and we hope that the state deals effectively with this challenge.
Connecticut, a small state, will also launch soon, and Virginia will introduce adult-use sales by 2024. In addition to new states, which include Maryland and Missouri, which both had voters in November approve legalization, several states will see improvements, including Illinois, which is adding more stores, and New Jersey, which launched this year but has very few stores for now. We think that the built-in growth will be helpful and hope some other states, like Ohio and Pennsylvania, will join the growing list of states with adult-use legalization.
More Investors
One of the biggest challenges this year has been the curtailing of capital available to the companies. The problem has been the difficulty for larger investors to participate. As a reminder, all of the multi-state operators trade on the OTC, which creates a barrier for most institutional investors.
American operators have taken on some debt over the past year, and we don’t see any near-term challenges with these obligations. Ultimately, though, the industry will need to raise equity capital, and this will be easier if the companies begin trading on higher exchanges. Canopy Growth is perhaps laying the path to do so as it attempts to retain its NASDAQ listing through its process of a new structure that will allow it to close the acquisition of several American cannabis companies.
In our view, uplisting could be a powerful driver for the industry.
Conclusion
We are optimistic that 2023 will be a good year for cannabis investors, even if none of these wishes comes true. Cannabis stocks are priced like the growth will be negative, but we think this is very wrong. If the overall stock market doesn’t dive more, we think that existing investors will be more optimistic and new investors could try to take advantage of the current pricing.
We want to wish our readers a fantastic holiday season and a great 2023.
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New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:
Exclusives
California, Michigan, Pennsylvania, New Jersey and Maryland are the five states where TerrAscend has concentrated its efforts, rather than stretching itself too thin. Like many other cannabis companies, TerrAscend has seen some challenging times, but it’s been able to access capital and convert some of its debt to equity. In an exclusive interview, Chairman Jason Wild discusses how the company fared in its key markets and how they will go about navigating in the coming year. Shortly after the interview, the company announced that its subsidiary, WDB Holding PA, Inc., completed an amendment to its existing $115 million senior secured term loan in Pennsylvania. Combined with recently announced debt retirement of $125 million, the company said its debt will be reduced by $160 million and will result in total annual interest savings of $15 million.
In May, Treez, an enterprise cloud commerce platform built to serve cannabis retailers, raised $51 million and was operating in six markets. Today, it operates in 14 states, focusing most of its efforts on the East Coast. In an exclusive interview, CEO John Yang said while Treez could pursue more funding for future opportunities, the company is treating its new capital raise as its last raise for now. It has enough for three years and it is putting that funding into R&D and launching into new markets. A public markets strategy remains years out for the company, according to Yang.
What does the future hold for the cannabis industry? Tim Seymour, co-host of CNBC’s “Fast Money,” the portfolio manager of the Amplify Seymour Cannabis ETF (NYSE ARCA: CNBS) and CIO of Seymour Asset Management, said in an exclusive interview that numerous factors have played a role in the many challenges the industry has faced over the past year. Among them: pricing pressures, federal regulation, the cost of capital, less institutional support, along with inflation and a recession. Seymour expects that capital and balance sheets will play a big role in who survives in 2023 and who doesn’t.
Sales
Retail cannabis sales in Canada slowed slightly in October to C$389.2 million. However, sales were up 9.5% from a year ago. Total sales for the year increased 18.4% compared to the first ten months of 2021 to C$3.72 billion. More stores, along with a drop in flower pricing, helped to boost sales. Sales in Ontario were down 1.2% from September and up 12% from a year ago. Alberta recorded a 2.7% gain from September and rose 12% from a year ago. Quebec was up 0.1% from September, but down 5% from a year ago, while sales in British Columbia fell 6.7% from September, but rose 14% from a year ago. Look for November sales data in January.
Deals
SNDL and Nova Cannabis have entered into a multifaceted agreement to create a cannabis retail platform in Canada under a vertical integration model. As part of the deal, SNDL will give Nova 26 cannabis retail stores operating under the Spirtleaf and Superette banners in Alberta and Ontario. SNDL will keep its management and administrative services deal with Nova, but amend it so that Nova pays no fee for three years and a C$2 million annual fee after that. SNDL will eliminate a CA$15 million revolving credit facility after Nova draws the remaining CA$5.5 million. It will be replaced by a new CA$15 million credit facility, with a $10 million accordion “available under certain conditions.” SNDL will also return about 14.3 million Nova shares worth about CA$7.5 million to Nova for cancellation. And, SNDL will cut its ownership of Nova to less than 20% through a capital distribution of Nova shares owned by SNDL to SNDL shareholders. “With this strategic partnership, Nova will be well positioned to thrive and focus on growth and profitability in the coming years,” said CEO Zach George.
Financing
Trulieve Cannabis Corp. closed on a commercial loan secured by a cultivation and manufacturing site in Florida for $71.5 million. Trulieve will pay interest at a fixed rate of 7.53% for the duration of the five-year loan. The money will be used for general corporate purposes. “This loan provides Trulieve greater flexibility as we focus on improving cash flow in 2023,” said CEO Kim Rivers. Valley National Bank served as lead agent. On the following day, the company announced the closing of a second commercial loan secured by a cultivation and manufacturing facility located in West Virginia for aggregate gross proceeds of $18.9 million. Trulieve will pay interest at a fixed rate of 7.3% for the first five years of the ten-year loan.
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Sincerely,
Alan & Joel
