TLRY Folly
Irwin Simon, CEO of Tilray (TLRY), said Thursday that his firm would drive growth in the wake of its ho-hum earnings report by building its medical business and looking for potential acquisition candidates. He is "laser-focused" on building the world's leading cannabis-focused consumer brands, being all things to all people while generating $4 billion by the end of the fiscal year 2024, assuming U.S. federal legalization and acquisitions. Yet, legalization may not happen until 2024. He can only get there, as shareholders approved an increase in the number of authorized shares of the common stock at the special meeting held last month, giving the company about $4.0 billion equity available. The company is looking for at least $1.0-$1.5 billion of sales out of the U.S. market. So with the expansion of cannabis sales, product sales, medical sales, it will be highly beneficial to us to be in the biggest market. The average US MSO is currently trading at 2.5x 2022 revenues, having declined by 1-2 turns over the past six months. If TLRY has to pay 3x revenues for quality U.S. assets, it will cost TLRY $3.6 billion or 90% of its available capital. He is leaving no money to buy assets in Europe or Canada. In an interview with CNBC, Simon argued that an M&A approach to growth can fast-track the process (LOL) because it allows TLRY to skip the hassles of building a business from scratch. Given his tenure at HAIN, we know his M&A strategy does not build a long-term sustainable business, so building it from scratch might be a better option.
In the short run TLRY has to pick acquisition targets carefully, focusing on Canadian companies rather than U.S. ones because he can't enter the U.S. "With Canadian producers, I get sales, I get EBITDA, and I get savings. All of this hype is on the back of reporting a quarter that was wider than analysts had predicted. While recreational sales make up a large chunk of its overall business, Simon stressed the opportunity in the medical cannabis field. The company saw just 9% sales growth in its latest quarter. Yet the $200 billion opportunities he keeps referring to do not represent "medical" cannabis. To fuel growth, Simon suggested lobbying Canadian authorities to make cannabis products available through the government's prescription plans.
We are building a case to short this name but are patiently waiting on the sidelines for the right opportunity.
NBA
Players won't be subject to random tests for marijuana this season, according to the @NBPA memo shared w/ players and obtained by ESPN. That's been adjusted policy thru Orlando restart and the 2020-'21 season. However, testing continues for "drugs of abuse and performance-enhancing substances."
FFNTF
FFNTF Acquires MA-Based New England Cannabis Corporation (NECC), a father-son team that the company has known for a few years. NECC's fully operational 55,000 sq. ft. licensed cultivation facility strengthens 4Front's expanding footprint in this critical limited-license state. The Transaction will more than double 4Front's total flower canopy in Massachusetts to over 30,000 sq. ft. With further expansion potential for up to an additional 10,000 sq. ft. of a canopy, and will approximately triple 4Front's kitchen, processing, and distribution space. 4Front will acquire 100% interest of NECC for total consideration of $55 million, funded through the issuance to the seller of 25 million subordinate shares and $25 million cash. The cash portion will be funded through proceeds raised from a $15 million convertible notes offering, led by Navy Capital, a vendor take-back note, and balance sheet cash. The convertible notes have a maturity date of 36 months following their date of issuance and bear interest at a rate of 6.0% per annum, payable annually. In addition, investors can elect at any time to convert their outstanding balance into shares at a conversion price equal to $1.03. The company is paying around 4x EBITDA for the assets.
IRS
The IRS has recently launched a cannabis initiative named the Cannabis/Marijuana Initiative. This will entail large-scale training of IRS agents, revision of IRS policy, and also outreach programs. The IRS recently launched irs.gov/marijuana to address the plethora of issues that cannabis businesses have to deal with. Although the IRS can create sites and launch initiatives to walk cannabusiness owners through the web of cannabis tax law, they cannot remove 280E. 280E bans businesses from deducting ordinary business expenses when paying taxes. Until a law is passed to repeal this, canna-businesses will be stuck paying significantly higher taxes than non-plant touching companies. "As a consequence of these arcane restrictions, businesses are forced to hire armored vehicles to transport their tax payments in cash to the local IRS," IRS Commissioner Charles Rettig revealed to Congress in a call for change. This situation strongly encourages fraud and criminal activity, as cannabis businesses become a juicy, cash-filled target for would-be thieves. The IRS commissioner has called upon Congress to pass the Safe Act, overwhelming bipartisan support. Without Safe or some legislation, these companies will continue to operate below their full potential.
AZ Tracker
The state of Arizona just released its sales data for Arizona, and it isn't pretty. Sales were down 9.6% sequentially to $111 Million. Arizona sales are unique in which Medical sales still make up the majority while adult use remains the minority. Arizona's annual run rate is $1.38 Billion.
MA Tracker
Along with the rest of the country, Massachusetts sales have declined slightly into September. However, sales have remained steady at about $27 Million, a 39% increase over last year. M.A.'s annual run rate is $1.47 Billion.
