Cannabis Musings - November 29, 2022

Friends – I hope your MJBizCon was as productive and fun as mine. The conference remains vital, still being the only one that seemingly the entire industry attends (in an industry that still has way too many conferences). It makes for a busy week.

At breakfast one morning with a keen observer of the hustle and flow of the cannabis business, my dining partner commented that it seemed to them like a number of the bigger deals lately have been geared towards pushing the NYSE and the Nasdaq to finally open up listing to cannabis companies. Sadly, I can’t take credit for this astute observation, but I’ll expand upon the idea. To me, a number of things have happened lately that are testing the limits that have constrained cannabis companies for years. We’re indeed primarily seeing this in deal activity:

• Canopy’s very highly structured transactions to consolidate the Acreage and TerrAscend assets into its financials while trying to maintain TSX and Nasdaq listings.

• GTI’s deal to co-locate dispensaries in Florida with Circle K gas stations, although one has to wonder how Circle K’s Canadian parent, Alimentation Couche-Tard, stays listed on the TSX if it’s a landlord to a US-based cannabis company, directly violating the Controlled Substances Act (the reason US exchanges and the TSX won’t list US cannabis REITs).

• British American Tobacco’s large and curious investment into CBD-manufacturer Charlotte’s Web, which I assume was made because Charlotte’s Web has an option to acquire cannabis MSO Stanley Brothers.

• Cresco’s agreement to sell a bissel of cannabis assets to A-list celebrity Sean “Diddy” Combs, which made national news well beyond the cannabis press.

Each of these transactions seems to be pushing the envelope – against the exchanges, against federal legal risks, against public perceptions. However, I think a recently-filed lawsuit highlights best this trend of rejecting the status quo. Recently, an Oregon-based wholesale cultivator filed a federal lawsuit challenging the constitutionality of Oregon’s laws prohibiting the interstate transport and sale of cannabis products.

We’ve been talking about the challenge/opportunity of interstate commerce in these Cannabis Musings for years (most recently a few weeks ago, and certainly well before it was cool). I’ve always been a little skeptical that someone would actually file this lawsuit, given the substantial cost of fighting the state through appeal and the existential cost of suing your regulator, as well as the fact that I’m not sure anyone really wants to know what happens when the dog catches the car it’s chasing. Interstate commerce is inevitable, but I think it’s going to dramatically alter the national marketplace, particularly for cultivators, so it surprises me that someone (the plaintiff here is a wholesale cultivator) would actively want to (metaphorically) summon Gozer the Gozerian in its destructor form at a time when yields are high and prices remain seriously depressed. And yet, here we are.

All of this tells me that companies are getting bolder in their actions and pushing the limits of lawyer creativity to try to make things work and gain an edge – they’re not gonna take it anymore. Granted, poking the bee’s nest to get honey of course always comes with the risk that the swarm gets angry and attacks – the Nasdaq delists Canopy; the TSX delists Couche-Tard; the federal government slows down investment activity (like what happened under Attorney General Bill Barr); the federal courts decide that, even though state laws prohibiting interstate commerce violate the constitution, for policy reasons they’re not going to strike them down. And it’s always good to remember that this industry exists solely as a result of the grace of the federal government. But without bold action, nothing can change.

Be seeing you.

© 2022 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.

Cannabis Musings - November 12, 2022

Friends – you may have noticed that the business world has demonstrated an unusual amount of weirdness in the past week or so. I’m thinking in particular about Elon Musk’s take-private of Twitter and the debacle in the crypto industry capped by the implosion of crypto exchange FTX this week. Intelligent people making seemingly poor decisions with other people’s money (yes, Musk put up a lot of money to acquire Twitter, but he also raised outside equity and borrowed a pile of bank debt that remains unsold). These two threads both have interesting lessons to teach the cannabis industry. Bear with me here.

The way I see it, Musk bought Twitter because he thought he could improve it – economically, operationally, and existentially. I could be wrong about that, but I don’t think I’m totally off base. He’s had outsized (to put it mildly) success building other companies, so how hard could it be to wrestle Twitter into shape? Granted, it’s still quite early days, but if you’ve spent any time on Twitter over the past week, it’s gone all farpatshket.

Whenever I talk with someone who’s thinking about getting into the cannabis industry, particularly if they think that they have some novel approach, I give them my free advice that you can’t adapt the cannabis industry to what works in any other industry – you have to adapt what works elsewhere to how things work (or don’t) in the cannabis industry. I’ve watched too many people think they can walk in and easily apply to a cannabis business the basic techniques that work everywhere else, and that clearly no one else in this industry is smart enough to have even thought of doing that. Oh, and they’re easily gonna make a pile of money. They’re smart, and they’ve proven themselves before, so of course it’ll work again. (Narrator: “it won’t.”) To me, this is Elon Musk vis-à-vis Twitter.

(In case you’re wondering whether this is a commentary on Diddy’s signing of a deal to buy various cannabis assets from Cresco for up to $185 million last week, it’s not. From what I can tell, the motivation is totally different. Look for example at Combs’ reported comment: “My mission has always been to create opportunities for Black entrepreneurs in industries where we’ve traditionally been denied access, and this acquisition provides the immediate scale and impact needed to create a more equitable future in cannabis.”)

Samuel Bankman-Fried built crypto exchange FTX into one of the space’s largest players. Bankman-Fried was touted as the face of crypto for helping to build the nascent crypto industry. As FTX all came crashing down this week, ending in a bankruptcy filing on Friday (a luxury not enjoyed by the cannabis industry), it’s been reported that FTX was apparently not only massively overlevered (particularly by providing leverage on its own tokens), but also possibly self-dealing by lending customer holdings to Bankman-Fried’s own crypto hedge fund. The tale seems to get weirder by the hour. In properly-regulated finance, there’s rules against that.

Piles of capital were raised by cannabis companies in 2017-19 based on meshuge valuations and expectations, with companies generally taking a blitzscaling approach to build an infrastructure base to grow the state-legal industry. Some succeeded, some spectacularly didn’t, and most are still hanging in there. While many were led by people trying to do the right thing by investors, I’ve seen my fair share of self-dealing, poor disclosure, and all-around cuspy and untoward behavior, the kind of stuff that gives lawyers nightmares. They believe in the transformative nature of cannabis, as a product and as a business, but they don’t care a single whit about things like fiduciary duties and good corporate governance (perhaps it’s because they figure, “hey, I’m breaking the law anyway”?). To me, this is Sam Bankman-Friend vis-à-vis FTX.

What’s my point? Well, the space has seen a real transformation over the past five-ish years that I’ve been involved. Many of the macro problems that the cannabis industry is facing are not very different from those faced by other newborn industries. (The rise of the crypto industry (if that’s even the right word for it) is I think a pretty good analogue for the development of the state-legal cannabis industry (though without the Ponzi schemes), but the first tech bubble provides a particularly useful history lesson for understanding the cannabis industry’s first wave.) Just like elsewhere, success for cannabis companies won’t (and can’t) be found by overconfidence, opportunism, or carelessness (do your diligence!). From what I’ve seen, success has been found with the right balance of professionalism, care, and sheer love of cannabis. If you’re gonna put up with all of the tsuris, you really need to believe in the product.

Be seeing you.

© 2022 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.

Cannabis Musings - November 3, 2022

Friends – I got into a friendly Twitter debate earlier this week, and just as one should never go in against a Sicilian when death is on the line, one shouldn’t go in against an ex-lawyer from New Jersey (born and raised!) on Twitter. The topic was one that’s interested me for a long time –how cannabis imports might change the US marketplace post-legalization. We’ve discussed this topic before in these Cannabis Musings (apologies that I don’t have a link), but I thought it was worth reexploring in more detail.

You may recall that, earlier this year, Democrats in the Senate introduced the Cannabis Administration and Opportunity Act (CAOA), which won’t pass, but if it did, it would legalize cannabis federally. Separately, Senator Nancy Mace (R-SC) introduced the States Reform Act (SRA), which also won’t pass, but likewise would legalize cannabis federally if it did, which it won’t. Curiously, neither of these bills (that won’t pass) included language banning the import of cannabis. Indeed, the CAOA even contemplates taxing imports.

What does it matter if neither of these bills are going to pass anyway? To me, it sends a signal that Congress isn’t too concerned about limiting the international cannabis trade, as compared to the states’ approach to the interstate cannabis trade. Longtime readers of these Cannabis Musings will know that I’ve been kvetching about how state laws are almost certainly violating the dormant commerce clause (not legal advice), the court-made doctrine based on the Commerce Clause of the Constitution that (very generally) says that states can’t impose an undue burden on interstate commerce. Like banning products from another state.

Let’s pretend the federal government legalizes cannabis and indeed allows for the import of products into the US. A handful of thoughts come to mind.

First, it would be really weird if Congress allowed for cannabis to come in from overseas, but also affirmatively allowed states to continue to limit interstate commerce, as has been proposed by some (such as Prof. Robert Mikos at Vanderbilt Law) based in policy/equity.

Second, even if Congress stayed silent on interstate commerce in legalization (neither the CAOA or SRA say anything about it), I’d expect the states to fight hard to keep their limitations in place. To be clear, legalization isn’t necessary for someone to challenge these state laws, but I think it would create a strong catalyst for it. So there could still be some weirdness post-legalization while that fight plays out.

Third, and here’s the part where I’m plagiarizing my old Cannabis Musings, the industry really needs to think about what all this would mean for domestic cultivation. I think the analog is the cut flower (the pretty kind, not the cannabis kind) trade. Cut flower production was huge in the US until the mid-20th century, when production took off in South America at a much lower cost. US cultivation of cut flowers never really recovered, other than for small producers.

Would the same thing happen to US cannabis cultivation? I have no idea, but it seems kinda plausible to me. There certainly are already licensed growers in South America such as Clever Leaves that are producing at scale and exporting globally. Now, whether it’s cost effective is another thing, and that’s where my Twitter counterpart took issue with my thesis. Fair point! (If you’re expecting me to have done any actual research into cost/pricing, you haven’t been reading these Cannabis Musings for long enough, but #Cannabis Twitter doesn’t know that.) However, I can’t imagine production and transportation getting more expensive over time as companies scale and global commerce increases.

The other counter to my thesis made by my sparring partner is that US cannabis customers are too discerning for mass-produced generic cannabis, so it simply won’t compete with the more specialized varieties of US cannabis. I think, however, that this is taking too narrow of a view of the future of US cannabis. His point may be somewhat correct regarding today’s average cannabis consumer, but I think it’s wrong going forward.

I’ve always speculated that this industry will eventually look like the beer industry – a handful of companies producing highly-branded, widely-distributed, mass-produced products with little typicity (to borrow a wine word); many regional, local, and hyperlocal producers of artisanal products for enthusiasts; and very little in-between. Beer isn’t the only CPG that has this kind of market structure, but it’s the best analogy I can think of. It’ll be an hourglass-shaped market.

It’s going to take a long time to get to that point (though it’s starting to shape up that way), but it will be driven in part by the need for the industry to attract customers who are new to cannabis. Growth in legacy states continues to flatten out in part because that base of legacy users is finally being satisfied. The newer uses who will drive future growth and expansion aren’t going to be as interested in high-end cannabis by their very nature – new wine drinkers don’t demand Domaine de la Romanée-Conti (very high-end Burgundy), they drink inexpensive, mass-produced wines, and there’s nothing wrong with that. Form factors (insider term!) such as beverages and edibles continue to improve in technology and provide the convenience and accessibility necessary for broad consumption. Nationally-recognized branding is still in its infancy.

In short, I think that there will eventually be demand for both high-end, locally-produced, artisanal domestic cannabis, and lower-quality, mass-produced, generic cannabis, whether it’s produced domestically or outside of the US. There’s room for both the expensive stuff and the cheap stuff.

What does it mean then for US cultivators if my thesis is correct? Whatever happens, it’ll be fartoost. As far as I can tell, the industry isn’t really talking about this, but I think it should be.

Be seeing you.

© 2022 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form. Subscribe to Cannabis Musings at hauseradvisory.com.