While relatively quiet in the world of financial statement issuance, MSO’s share prices show a lot of activity. It’s been mostly red of late, which I ascribe to NY’s regulatory design. Might be, might not. I have also noticed a change in the general tone of the ‘#MSOGang’ on Twitter.

Usually upbeat (hey, rising prices on long positions will do that), the overall mood seems to be more muted as market values aren’t a hockey stick. TheCannalysts have also drawn the ire of several Twitter characters. That ire comes in the form of ‘butwhaddabout’ comments, usually nested in low heat insults. Or the more simple ‘you guys are wrong and smell bad’.

I could care less mostly (we even had an executive from an MSO take a shot at us), but I will comment that every single adverse comment I’ve seen so far has been cheap and lazy. Snipers do that: take potshots without doing the work to (lazy), and offer airy sell side pitch deck quotes in refutation (cheap). Blue and I are absolutely on the same page here as well: TheCannalysts are a research/analytical firm. We don’t pick stocks, we read financial statements out loud.

We also go where our research takes us, and from what we’ve seen, there is potential for a significant change in asset valuation in the MSO space if a (1) 3-Tier regulatory system is proposed by the Feds. And unless specifically deactivated by an act of Congress, the (2) Dormant Commerce Clause could also significantly impact capital allocation and asset valuation on its’ own.

The third vector is within (3) social justice and restorative measures. While typically state level in implementation, the Feds hold the piggybank, and can induce policy stateside by offering higher levels of federal excise monies in exchange.

There is a ton of ‘maybes’ and contingencies and cross-dependencies in that ‘Regulatory Trinity’ that we’ve identified and talked about so much. And sure as heck, we’re in the same boat as everyone else as to being able to predict moves by the US Federal government at this point: we’re guessing. And I guess that’s the point: if someone is telling you with full confidence what the future is going to be – in something as multifaceted as this – they’re full of shit.

What we are doing is highlighting the risks we see to capital and positions. For myself, I don’t see a scenario where potential rewards outweigh the risk of a change in fundamental asset valuations at this point. You might. Cool. But be wary of being caught in an echo chamber of opinion, and keep in mind that sell-side is always one direction, and that they’re very good at being professional apologists around adverse outcomes. They are salespeople first and foremost…… always keep that in mind.

Anyhow, since the MSO’s have been drifting, this morning caught my eye in a hard drop in Trulieve ($TRUL), which is far and away a business that’s been pounding out cashflow and completely owning market share. As of today (April 19th, 2021), it’s off more than 5% this morning:

I went hunting for news – the equity’s come off from a high of $64 in less than 20 trading days which is a massive drop in value. I couldn’t spot anything, but I did come across a George Hackney (via Telogia Pharm) who back in February had had his Super Shares converted into some 10MM subordinates. Seems $TRUL is looking to unwind some of the tension in their capital structure, I’m guessing in anticipation of up-listing. I don’t believe the kinds of overhang we see in cannabis is tolerated much by the more serious investors found on the big boards.

George followed that up by converting some multiples into subordinates last week. We find out that not only does he have some 11.6MM subordinates – he also has another 8.5MM of them waiting to be printed. Above all, note that for the 20MM subordinate shares he’s receiving (about $900MM in equity at today’s prices), $TRUL will have received the sum total of $0 in exchange.

That should really stand out to a shareohlder.

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Neptune Wellness ($NEPT) – a company I had little regard for when I looked at them a year ago – announced this morning they’re now a ‘CPG’ company. Whoopee-ding.

The reason I remark on them is that they claimed to present one of the highest extraction capacities in 2021 of anyone out there. Our piece – “Legalization 2.0: Extracting the Numbers” – originally published in in September of 2019 detailed this. <In retrospect, Radient’s ($RTI) declared capacity of 3.5MM kgs of biomass/year in 2021 could be seen a cruel joke at this point>.

And….that like every single extractor out there…..$NEPT has pivoted into all things CPG – including edibles and pre-roll provisioning.

If GoBlue is dour on retail’s prospects, I am equally dour on ‘extraction’ in general as a standalone business model. Throughput is the business of refining, and demand simply doesn’t look large enough to support many standalones. Despite $VLNS’s recent share price run, they’ve a long ways to go in terms of sales. And also depite $XLY’s position in the market, they’ll need sales expansion as well.

What we do know is there’s a raft of preroll manufacturing capacity coming online this summer – which will further condense supply models, squeeze margins further within LP’s, and continue to put pressure on capital thin outfits.

As we see in the Supreme/Canopy deal – and as I expect to continue – consolidation is an inevitability.

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I’m a bit spent lately, and need a brief recharge. I’ll also be on the road for the next couple of days in transit to take care of an aging relative, but will resume regular output midweek.

I’d like to leave you with this thought: GoBlue and I have been discussing the US market a lot lately. And what I see is a ton of parallels between Canada and the US in their respective ‘early’ periods of formation. And I am beginning to wonder if the premise that the US is going to ‘different’ – is flawed. I’ll be writing about this later this week.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in any of the companies mentioned.