We See This Sector as a Big Opportunity for Cannabis Investors

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,

The Global Cannabis Stock Index, which has 26 members this quarter, has companies in four different sub-sectors: 40.1% Ancillary, 9.2% Biotech, 22.0% Canadian LP and 29.1% Multi-state operators. The Canadian retailers, CBD companies and international cannabis companies have no members currently. Many investors incorrectly believe that cannabis stocks move in line with one another, but this is not the case. We have seen largely different returns between securities within a sub-sector and certainly between sub-sectors themselves.

In 2022, for example, with the Global Cannabis Stock Index (GCSI) down 52.6%, the NCV Canadian Cannabis LP Index is down 47% year-to-date. Are Canadian LPs doing better than other stocks? To answer this, we believe that it’s important to focus on our Tier 1 index of leading revenue generators or Tier 2, as these are the companies that tend to be in the GCSI. The year-to-date return for Tier 1 is -54.5%, and the Tier 2 index has declined 42.8%. What is wrong with Tier 1? Look at the returns of the current members. 3 of the 5 members are all down more than 62%:

The NCV Ancillary Cannabis Index is down deeply this year at -58.5%. The 11 names currently include 3 REITs. While Innovative Industrial Properties has dropped a lot this year at -62.6%, the other two REITs, AFC Gamma and Chicago Atlantic Real Estate Finance, are down less than 20%. Looking at the 8 ancillary companies that aren’t REITs, they have declined a lot, with 5 down more than 52%:

We think that the ancillary stocks represent an attractive option for cannabis investors. Before we discuss why we see them generally as attractive, it’s important to understand why they got beaten up so much. We think it’s a function of their operations and their investors.

So far this earnings season, outlooks have been sharply reduced by GrowGeneration, Hydrofarm, Leafly, Scotts Miracle-Gro and WM Technology. They are struggling with the weakness of their customers with respect to capital spending, which we view as a temporary rather than permanent condition. The slowdowns in California, Oregon and Washington are impacting the businesses the most.

Too many exiting owners and a lack of new buyers is compounding, in our view, the short-term slowdown in business. The sector has grown in the number of publicly traded companies because it appeals to investors who may be locked out of MSOs. These ancillary cannabis stocks are not burdened with the 280E tax or limited by law regarding doing business in any state. These companies in the index all trade on the NASDAQ or NYSE, unlike MSOs, which trade in Canada and the OTC. We think that the sector did very well because investors were looking to capitalize on the impact from legalization on the industry and its stocks, but now they are looking to exit and are struggling to find buyers of their stocks. We have been aware of an investor bias in favor of direct companies for a long time, and this is compounded by views that MSOs could win Congressional approval to list on higher exchanges.

At our premium service 420 Investor, we are already long a REIT and 5 of the non-REIT names that are in the index in our model portfolios, which are up more than 25% since June 30th. During that same period, their benchmark index, GCSI, is up just 5.4%. Our model portfolios are long ancillaries relative to their index due to their generally low valuations. As the cannabis industry resumes strong growth in the near future as states in the East go legal for adult-use, the ancillary companies should see business accelerate.

420 Investor provides professional, real-time, objective information about cannabis stocks in order to help investors Capitalize on Cannabis™.

Understand complex financials, deal terms, legislation updates that can effect stock prices and important catalysts by using the longest running cannabis stock due diligence platform trusted by investors for 9 years.

New Cannabis Ventures publishes curated articles as well as exclusive news. Here is some of the most interesting business content from this week:

Exclusives

While many celebrities lend their names to cannabis brands, former pro boxer Mike Tyson is a hands-on kind of guy. His brand Tyson 2.0 has reached 24 states from coast to coast since 2021 driven by cannabis industry partnerships and Tyson’s commitment. In an exclusive interview, Tyson and Tyson 2.0 Co-Founder and President Chad Bronstein discuss the company’s products, partnerships and ambitious growth plans. Bronstein said he anticipates that the brand will be able to do $100 million or more in revenue next year.

With $40 million in funding, cannabis ecommerce company Lantern spun out from online alcohol delivery platform Drizly last year. Since then, the company has been establishing its place in the cannabis delivery business and building out its capabilities. Lantern launched in Massachusetts, and it has steadily grown its reach in the state and established operations in Colorado and Michigan. In an exclusive interview, Co-Founder and CEO Meredith Mahoney discusses the company’s growing footprint, social equity incubators and competitive position.

Michigan cannabis sales rose 12% compared to June and increased 23% year-over-year to a record $209.9 million in July. The state breaks out sales by medical and adult-use. Medical sales fell 50.6% from a year ago to $21.1 million and were down 2% sequentially. Adult-use sales grew 47.1% year-over-year to $188.8 million and were up 13.8% sequentially.

Capital

Ancillary cannabis company Greenlane secured a $15 million asset-based loan for a term of three years. The funding will support the company’s strategic initiatives and working capital needs. Previously, the company said it planned to reduce its cost structure and increase liquidity. “We are excited to secure this accreditive credit facility at a pivotal time for Greenlane and our industry,” said CEO Nick Kovacevich. “We continue to make great progress on our strategic shift to a consumer house-of-brands business while remaining uniquely positioned as a key supplier to many facets of the burgeoning cannabis ecosystem.” 

Earnings

Acreage Holdings Q2 revenue rose 8% sequentially to $61.4 million and was up 39% year-over year. The company executed “a significant milestone” with the launch of adult-use sales in New Jersey. Acreage also completed the first phase of expansion of its cultivation facility in Syracuse, NY, completed the sale of its cultivation and processing facility in Medford, Oregon and concluded operations in Oregon with the sale of four retail dispensaries there. “During the latter half of the year, we will continue our preparation for pending adult-use sales in these developing Northeastern markets, such as New York and Connecticut, in addition to strengthening our presence in New Jersey,” said CEO Peter Caldini.

Agrify postponed its earnings call for another week after indicating its preliminary Q2 results show that it missed expectations. Although annual revenue is expected to increase to $19.3 million from $11.8 million the previous year, Agrify said its Q2 revenue is expected to decline sequentially. Agrify said it will be taking a big write-off in the quarter that is expected to result in “significant non-cash impairment charges.” Agrify said it withdrew its most recent guidance “given the current difficult macro business environment, and specifically a drastic downturn in the cannabis industry.”

Charlotte’s Web Q2 revenue fell 3% sequentially to $18.9 million and was $5.3 million lower year-over-year. The company blamed lower comparable retail shipments and lower traffic to its e-commerce site that was partially offset by modestly higher conversion rates. “While we are disappointed with the second quarter revenue, we achieved significant distribution and customer wins consistent with our growth priorities to expand our coverage in existing channels and enter new verticals,” said CEO Jacques Tortoroli.

Cronos Group Q2 revenue decreased 8% sequentially to $23.1 million but rose 48% year-over-year from $15.6 million. The company said the year-over-year increase was primarily driven by a rise in net revenue in the Rest of World segment driven by growth in the Israeli medical market and the Canadian adult-use market. “We continue to expand our borderless cannabinoid product portfolio with the recent launch of a CBN vape and gummy in select markets in Canada, and we achieved the THCV equity milestone in partnership with Ginkgo,” said Chairman, President and CEO Mike Gorenstein.

Curaleaf Q2 revenue increased 8% sequentially to $338 million and was up from $312 million year-over year. At the same time, the company continued to execute its growth strategy in Europe. Curaleaf also continued to grow its retail footprint, expand distribution partners and launch new product lines. The company also announced three key hires: Ed Kremer as chief financial officer, Camilo Lyon as chief information officer and Mitch Hara as chief strategy officer.

Glass House Brands Q2 revenue was up 18% sequentially at $16.5 million but was down 12% from the previous year’s Q2 revenue of $18.7 million. At the same time, the company announced a preferred equity offering of $26.5 million “to provide additional capital to solidify our balance sheet and we expect to be free cash flow positive by the first quarter of next year, excluding capital expenditures for facility expansion,” said Chairman and CEO Kyle Kazan. The company said its aggressive retail expansion remains on track, with plans to have at least 11 dispensaries by year end, up from just three a year ago.

Goodness Growth’s Q2 revenue rose 35% sequentially to $21.1 million and was up 48.2% year-over-year. The company attributed the positive results to growth in the Minnesota, New Mexico and Maryland markets, as well as benefits from the recent wind down of operations in Arizona. “Strong sales growth catalysts resulting from the recent regulatory changes in Minnesota and New Mexico are expected to persist into next year, and we’re also looking forward to contributions from the launch of edibles products which occurred in Minnesota earlier this month,” said Chairman and CEO Kyle Kingsley, M.D.

Hydrofarm Q2 revenue slipped 12% sequentially to $97.5 million and was down from $133.8 million during the same period a year ago. At the same time, the company reiterated its full-year 2022 outlook, which was updated on Aug. 2. Looking ahead the company anticipates net sales of approximately $330 million to $347 million, assuming similar sales levels to those experienced from late second quarter through July 2022. “We remain confident that the industry will eventually return to normalized growth, and the actions we are taking to refine our organization will leave our business leaner and stronger, and as a result, better positioned to take advantage of future growth opportunities,” said Chairman and CEO Bill Toler.

Lowell Farms Q2 revenue increased 6% sequentially to $13.2 million, but was down 13% from the previous year’s Q2 reflecting a 51% reduction in bulk flower pricing year over year. The company noted it continues to face competition from the illicit market. “California cannabis is in the middle of a fight for survival. There are fewer chairs at the table than there are attendees,” said Chairman of the Board George Allen. “While the second quarter is a disappointment, we are well prepared for our upcoming 35’s launch in September.”

MariMed Q2 revenue rose 5% sequentially to $33 million and was up slightly from $32.6 million in the previous year’s quarter. The company also revised its financial guidance for 2022, anticipating revenue of $135 million to $140 million versus the previous range of $145 million to $150 million. “The second quarter brought some challenges to the industry and MariMed that were primarily outside of our control. We took assertive actions that drove additional traffic into our dispensaries and launched multiple new products that are increasing our sales within our wholesale business,” said Chief Financial Officer Susan Villare.

Nova Cannabis Q2 revenue increased 13% sequentially to C$56.3 million and was up a whopping 90% from the second quarter last year when sales were $29.7 million. The company attributed the increase primarily to the 29 retail cannabis stores that were opened since March 31, 2021, and increased sales from stores that were rebranded to the Value Buds discount banner from “Nova Cannabis,” “YSS,” and “Sweet Tree” at various times throughout 2021. “We will stay the course by being disciplined in how we expand our footprint, remaining customer focused and choosing the best real estate for our strategy, whether through acquiring stores or building our own,” said CEO Marcie Kiziak.

Schwazze Q2 revenue rose 39% sequentially to $44.3 million and was up 44% compared to $30.7 million in the same quarter a year ago. Since December 2021, Schwazze added 15 cannabis dispensaries, 10 in New Mexico and five in Colorado, as well as four cultivation facilities in New Mexico and one in Colorado and one manufacturing asset in New Mexico. “As we look to the future, we expect continued growth in Colorado and New Mexico through both organic and inorganic means. Our operations continue to mature and gain momentum, and we firmly believe that we are winning in our markets,” said Chairman and CEO Justin Dye.

TerrAscend Q2 revenue shot up 31% sequentially to $65 million from $50 million in the previous quarter “as New Jersey adult-use sales got off to a great start,” according to Executive Chairman Jason Wild. Year-over-year revenue was up 10.4%. During the quarter, the company launched Cookies and Gage brands in New Jersey, resulting in a 40% increase in sales for the first full weekend versus the prior weekend, with continued momentum and growth since the launch. “Growth should continue as we remain on track for each of our stores in New Jersey to achieve at least a $40 million run rate in their first full year of adult-use sales,” said Wild.

Trulieve Q2 revenue ticked up 1% sequentially to $320.3 million, but jumped 49% from $215.1 million a year ago. “Our team delivered strong second quarter results with top line growth and margin improvement by staying focused on our plan,” said CEO Kim Rivers. The company said it met several milestones including celebrating its six-year anniversary of the first retail sale in Florida. It opened seven new dispensaries and currently operates 175 retail dispensaries and more than 4 million-square-feet of cultivation and processing capacity in the U.S. The company also said it is considering exiting the Nevada market.

Village Farms Q2 cannabis sales were up 24% sequentially to $35.6 million and were up 44% year-over year. “The continued successful execution of our differentiated Canadian cannabis strategy drove strong year-over-year and sequential sales growth, achieving a new record high for the second quarter, as well as our 15th consecutive quarter of positive EBITDA for that business,” said CEO Michael DeGiglio. He added that he expects the second half of 2022 to “trend favorably” for the Canadian Cannabis business as the company launches new products.

WM Technology Q2 revenue inched up 1% sequentially to $58.3 million and was up 24% compared to the prior year period. “We believe these results again demonstrate how WM Technology is the enduring platform for the cannabis end-markets,” said CEO Chris Beals. “And while the current macro environment, including challenges specific to the cannabis end-markets, did impact our results, our pace of innovation and continuing to deliver healthy returns to our clients resulted in us achieving growth that exceeded our end markets by a wide-margin.” The company also announced that its board of directors appointed co-founder Douglas Francis as executive chair.

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Sincerely,

Alan & Joel

Based in Houston, Alan leverages his experience as founder of online community 420 Investor, the first and still largest due diligence platform focused on the publicly-traded stocks in the cannabis industry. With his extensive network in the cannabis community, Alan continues to find new ways to connect the industry and facilitate its sustainable growth. At New Cannabis Ventures, he is responsible for content development and strategic alliances. Before shifting his focus to the cannabis industry in early 2013, Alan, who began his career on Wall Street in 1986, worked as an independent research analyst following over two decades in research and portfolio management. A prolific writer, with over 650 articles published since 2007 at Seeking Alpha, where he has 70,000 followers, Alan is a frequent speaker at industry conferences and a frequent source to the media, including the NY Times, the Wall Street Journal, Fox Business, and Bloomberg TV. Contact Alan: Twitter | Facebook | LinkedIn | Email