Differentiation Factors Emerge for American Cannabis Operators

This is a copy of the September 8th edition of our weekly Newsletter, which we have been publishing since October 2015.


Having watched closely the evolution of the Canadian cannabis industry since 2014, we are in a great position to observe how much more rapidly the American legal cannabis companies are scaling their operations.

Despite an abundance of capital for the sector over the past few years, Canadian LPs on the whole have been generally slow to ramp up substantial revenue, something we blame on the regulator to some degree but also the structure of the market until just recently as well as challenges like limited retail distribution. Initially, all LPs had to pursue the same model of cultivation and sale of dried flower to end patients. Of course, the market has evolved, and we are certainly seeing many points of differentiation, including a focus on the medical or non-medical markets, the pursuit of non-Canadian markets, whether global or the U.S., and even an emphasis on certain parts of the supply chain. These important developments are something LP investors are following closely.

While most of the larger multi-state operators (MSOs) are newer companies than the larger Canadian LPs, many are generating revenue at higher levels already. MSOs are able to participate generally in a wider range of activity, including a substantial emphasis on retail, a part of the market that is not available to Canadian LPs. In contrast to the early days in Canada’s medical-only market, MSOs have the ability to participate in many different markets, ranging from medical-only to adult-use. Even within these markets, there is considerable diversity in terms of market structure, with some having very limited licensing and requiring vertical integration.

While the MSOs have scaled impressively in the early days, we note that access to capital remains a challenge given that they operate illegally from a federal law perspective. Still, we are beginning to see some very big differences in how the MSOs operate, whether it is how they access capital, which markets are of most interest and which parts of the supply chain they see as having the most potential for value creation. As it relates to capital markets strategy, we have seen two of the larger MSOs access debt markets, both including a very small amount of warrants, while another MSO has pursued convertible debt. Another aspect of capital markets approaches is how aggressive some companies have been with their mergers and acquisition strategies, while others have preferred to grow organically. Most of the MSOs cite California, Florida and Massachusetts as the most important markets in the near-term, but we have seen several be aggressive in markets like Arizona and Nevada as well. More importantly, several MSOs during the Q2 conference calls discussed that their geographical footprints are set, and they will now optimize and expand in these states that are important to them. In contrast, some believe they need to be “everywhere”. Finally, while it’s a bit early to categorize MSOs as “brand operators” or “retailers”, we are seeing several gravitate towards one or the other (and sometimes both). We don’t hear too many MSOs saying they believe the value will be created in cultivation.

The legal American cannabis industry is just getting started, and we expect to see the MSOs become even more differentiated over time as they refine their core competencies and as they seek to take advantage of so many diverse opportunities state-by-state. The return towards end-of-year prices for many of the MSOs despite substantial improvement in the fundamentals in 2019 thus far makes this an excellent time to explore the group, and the upcoming Benzinga Capital Cannabis Conference in Chicago next month will be an excellent opportunity to do so, which we are excited to partner again with Benzinga, which has earned a reputation for hosting exciting conferences for cannabis investors. Chicago is a particularly attractive venue given not only that the state will be legalizing in January but also that it serves as home for several of the leading cannabis companies. We hope to see you there!

Join us at the Benzinga Cannabis Capital Conference in Chicago, where investors come face-to-face with top cannabis companies to hear about their advancements in the rapidly changing space, while industry professionals discover new opportunities to grow business enterprises with lightning round presentations and 1:1 meetings.

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Alan & Joel

Exclusive article by Alan Brochstein, CFA
Alan Brochstein, CFA
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

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