We are moving Trssf up two notches on the Hedgeye Cannabis LONG list.
Yesterday was an ugly day for TRSSF, but they have some high-class problems (and some temporary issues). Terrascend reported 2Q21 (A)EBITDA of $24.3M vs. FS $27.1M and Revenue $58.7M vs. FactSet $65.4M; Cash flow from operations $3.4M vs. $7.2M year-ago. The company incurred an "expansion related yield reduction in Pennsylvania" issue in PA, which is temporary, and more importantly, prioritized allocation of the company branded products to its New Jersey dispensaries, given the rec sales in NJ are likely to be in 180 days. Despite this setback, the company reported adjusted gross margin and adjusted EBITDA margins were 61% and 41%, respectively, some of the strongest in the industry. Additionally, the company has a solid balance sheet with over $150 million in cash. Unfortunately, the ripple effect of the issues during the quarter caused the company to withdraw guidance for 2021. Giving the company's position, 2022 will likely be a strong year as they will benefit from investment in cultivation capacity expansions and best-in-class retail experiences. We expect Pennsylvania to show explosive growth benefitting from the current cultivation expansion, while in New Jersey, we have a strong retail presence in an underserved market. The company's strength can be seen with Cookies signing a Licensing agreement with TerrAscend to provide New Jersey with access to Cookies branded products. Cookies is likely the only true national brand to emerge from the early days of the Cannabis industry. Additionally, TerrAscend will debut “Cookies Corners” (store with a store) in all three Apothecarium dispensaries in New Jersey
Insurers Ramp Up
Insurance companies all over the US are quietly gearing up their coverage options for when legislation is passed. However, insurance companies have to finesse their way around federal laws that govern what insurers can and cannot cover. The total insurance industry wrote only about $250 Million in policies last year for cannabis companies. Many dispensaries in certain states pay for armed guards because they are cash-only businesses that are not insured. "There is an overwhelming need for the right kinds of insurance," said Rocco Petrilli, chairman of the National Cannabis Risk Management Association (NCRMA), a trade group of 3,000 cannabis businesses. Some large insurers such as Progressive and Liberty Mutual are offering certain coverage options in legal states. Progressive said its vehicle policy cover liability and physical damage but does not ensure cannabis cargo.
When companies can find insurance, it is often very overpriced. Directors & Officers insurance, which is crucial for attracting seasoned business leaders and raising capital, is also expensive, said Gavin Kogan, CEO of Grupo Flor, a licensed cultivator, distributor, and manufacturer with five dispensaries in California. He said he pays $85,000 to $100,000 annually for $1 million of D&O protection, "and the coverage is super limited." For transportation of cannabis, oftentimes, large fleets deliver $1 Million of goods but can only find coverage for $500,000 worth of goods. Insurance companies are finding ways to get around current legalization but are also starting to ramp up coverage to prepare it when legalization occurs.
Dispensary License Value
The following are the median values of dispensaries in each state based on acquisitions in each state. Both NJ and MA have licenses which are over $30 Million each. Therefore, companies that have operations in these states are very well positioned in terms of license assets. Medical only states which have precious licenses are PA, FL, and MD.
IRS Tax Event
The Internal Revenue Service recently hosted a forum dedicated to tax policy for marijuana businesses and cryptocurrency. The forum was aimed at tax professionals providing a high-level overview of financial issues unique to cannabis and crypto. They emphasized that despite cannabis is considered illegal from a federal standpoint; companies must still pay federal taxes. On the other hand, they did point out that there is an opportunity for limited deductions when reporting COGS for retailers and producers. Although the IRS has not advocated for federal policy change, it has stood out as an agency that understands the complications created by prohibition. To collect taxes from cannabis companies that don't have bank accounts, the IRS literally has to build "cash rooms." This is one of the plethoras of issues prohibition creates. Justice Thomas and several other government officials have voiced their opinion on this matter. We all hope there is some resolution soon and cannabis businesses are treated like any other business.
