I’ve read several dozen summaries, spoken with a dozen industry experts, I’ve listened to a few different X Spaces, podcasts etc. There’s a lot of hope, and a lot of confusion.

Here’s what I see, not advice, just thoughts and summaries of summaries.

• HHS finds (via the FDA) that there is medical benefit to cannabis

• Therefore they recommend formally to DEA to reschedule from 1 to 3.

• Background:

  • Schedule 1 is for the harshest drugs with no known medical benefit, because of how terrible they are, there are punitive measures in the form of 280E taxation which forces sellers to pay taxes on gross profits versus net profits (if you’ve followed cannabis for more than 5 minutes you’ve heard this all before)

• Schedule 3 narcotics are not subject to 280E

• It is now up to the DEA to run their analysis (there are 8 specific questions/ways they need to analyze the request) and propose (either agreeing or disagreeing) with HHS on the reschedule.

  • While DEA has historically never gone against the HHS/FDA recommendation they must consider non-health related factors such as enforcement, Federal and State implications and even international treaties.

That’s what we Know. There are a lot of unknowns. Cannabis has NOT been rescheduled, cannabis companies are not suddenly awash with cash after ditching 280E. No one knows if or when DEA will formally reschedule, they may have to release an interim finding within 90 days, that does not change anything, following that DEA will still have to go through the administrative rule making progress.

This is great news, I hate sounding like a Debbie-downer, but for now there are more known-unknowns. Will cannabis be rescheduled? Yes, I believe it will. My take, for what it’s worth is that this will become a highly political issue going into next year’s election. Hopefully both sides of the political spectrum take it on and congress is pressured to act. I hope so. For now stocks are likely to whiplash up and down, left and right with any news or rumors. We’ll see.

I read a lot, I have for years, I didn’t read a lot in high school or college but somehow after all that I realized there were lots of things I hadn’t learned about so I just started buying - and actually reading - books. Most of them are non-fiction, biographies, histories, business books, science books, some of the worst are finance books. I’m reading two of them now that are actually quite good (albeit dense) and they seem to go well with the times we’re going through, both in the macro-level and within the cannabis industry.

First up is Stephen Moyer’s Distressed Debt Analysis, I’ve been at this for about two weeks and I’m maybe 2/3rds the way through it. It’s a little daunting but it’s a primer on understanding and investing in distressed companies. That could be pre or post bankruptcy (sorry cannabis) and is typically through the companies debt where sometimes attractive rates of return can be found if you’re willing to take the risk. I’ll post a longer Chat-GPT summary below, but this is interesting to me (and potentially to some of you) because of the immense stress the cannabis industry is currently under. Slowed growth, massive, outrageously expensive debt structures, lack of liquidity in stocks, taxation, lack of equity capital, massive Capex projects. The list goes on an on. The point here I’d try to make is that the cannabis industry as a whole is currently distressed, bonds are trading way below par, companies are struggling to get their debt refinanced and while perhaps there can’t be US based bankruptcies there are going to be Chapter 11 or Canadian parent company restructurings it is inevitable. A few companies have or are in the process of going through these processes in the US and they are incredibly messy. Distressed investing is not for the faint of heart and neither is cannabis investing but in a Venn diagram that overlap is potentially a new level of hell. Can it be profitable? Very likely but it’s going to take a long time.

The second book is William Magnuson’s “For Profit, a History of Corporations.” Livelier in part because I’m listening to this one but it is exactly as its subtitle explains a history of companies starting with Ancient Rome, Dutch East India Company and so-on. About half way through this (vacation with kids is not vacation fwiw) and the point seems to be Companies were setup to make money, to return a profit (there were other noble and ignoble reasons the author delves into but I’ll keep it simple) they were given the permission to act like a “person” in that they shield the investors/owners from liability, this led to greater risk-taking and tremendous positive change. Random tangent, Eli Broad wrote a book titled “The Art of being Unreasonable” referencing a quote I’ve since forgotten the author of, that all progress comes from someone being unreasonable and standing against the status quo. 100% true for the founders of companies, perhaps particular in Cannabis. Like them or not the current management teams of the MSOs are all trying to do something counter to prevailing wisdom (selling weed in the open and pushing for legal ability to do so).

Chat-GPT provided summaries:

"Distressed Debt Analysis" by Stephen Moyer is a comprehensive guide to analyzing and investing in distressed debt securities. The book is intended for professionals in the distressed debt industry, including hedge fund managers, portfolio managers, and investment bankers.

The first part of the book covers the basics of distressed debt, including the characteristics of distressed securities, the sources of distressed opportunities, and the key players in the distressed debt market. Moyer also provides an overview of the bankruptcy process and the legal framework that governs distressed debt investing.

The second part of the book focuses on the analytical tools and techniques used in distressed debt analysis, including financial statement analysis, credit analysis, and valuation methods. Moyer also covers the different types of distressed securities, including bonds, bank debt, and trade claims, and provides case studies to illustrate how to analyze and invest in these securities.

The third part of the book discusses the practical aspects of distressed debt investing, including portfolio management, risk management, and the mechanics of trading distressed securities. Moyer also provides insights into the market dynamics of the distressed debt market, including the impact of macroeconomic trends, regulatory changes, and industry-specific factors.

Overall, "Distressed Debt Analysis" is a comprehensive and practical guide to investing in distressed debt securities. The book provides a detailed overview of the key concepts, analytical tools, and market dynamics that are essential for success in the distressed debt industry.

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"For Profit: A History of the Corporation" by William Magnuson is a comprehensive history of the corporation, from its origins in medieval Europe to its modern-day dominance in the global economy.

The book covers the evolution of the corporation from its earliest forms, such as guilds and religious orders, to its emergence as a powerful economic force in the 19th and 20th centuries. Magnuson examines the role of corporations in economic development, political power, and social change, and highlights the key individuals and events that shaped the history of the corporation.

Throughout the book, Magnuson explores the tensions between the public good and private profit that have been at the heart of the corporation's history. He also discusses the ways in which corporations have adapted and evolved in response to changes in technology, politics, and society, and the impact of these changes on the wider economy and society.

One of the key themes of the book is the tension between corporate power and democracy. Magnuson argues that the concentration of power in the hands of corporations has eroded democratic institutions and values, and he calls for a renewed focus on the public good in the governance and regulation of corporations.

Overall, "For Profit: A History of the Corporation" is a comprehensive and thought-provoking history of one of the most important institutions of modern society. Magnuson offers a nuanced and critical perspective on the role of corporations in economic development and social change, and provides insights into the challenges and opportunities of regulating and governing corporations in the 21st century.

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Over the weekend Credit Suisse was acquired by UBS in a shotgun marriage run by the Swiss central bank and national banking regulator (very likely with significant assistance and pressure from other US and EU central banks). The details are all readily available so I wont waste time summarizing them here. What’s nerve wracking for me is it feels an awful lot like the Bear Stearns and Lehman collapses at the start of the Great Recession.

I don’t know what comes next but I don’t see how Cannabis can benefit from it either. Some folks are saying that enabling banking reform and getting cannabis deposits into banks will help provide liquidity. But the truth is banking does exist for the cannabis industry, can I deposit money with JPM or Citi, no, but I can with smaller regional banks which are also chasing deposits. So the flight to quality, folks pulling large savings balances out of smaller banks and putting them into the largest banks (the SIBs) actually puts more pressure on the smaller banks which are banking our industry. Plus there’s the unfortunate fact that currently the industry is so small and short of cash that the balances aren’t really going to move the needle. This is a from the gut number but the top 10 MSOs probably have combined cash balances of $500-600M, these are spread out over potentially hundreds of accounts given the state level regulations and dozens of corporate entities most of these companies operate through. The Swiss Government lent CS $50B overnight on Thursday and then another $150B over friday/the weekend. While at the micro level, or within the industry half a billion dollars is a hell of a lot of cash, it’s a rounding error for the largest banks and comes with way more risk, regulation and complexity.

My take is that the banking implosions are not going to lead to any opening up or any avenue for safe banking passage. Don’t get your hopes up.

Long term, it’s possible that something like what happens over the next few months could have an impact but this is very arm-chair psychology-y and fortune telling. The Great Recession had a massive psychological impact on Gen-X and Gen-Z, basically my age folks and those younger than us. That pushed some to protest and live on the streets of NY, and others to leave the finance industry for the tech industry. The tech industry is also on the edge with all the biggest tech companies announcing layoffs, so it is possible that folks graduating from HS or college now or over the next few years will be so pissed off with these industries that they look for something else. That could be Cannabis and those folks could help to push forward real reform. Or they’ll all work on micro startups with ChatGPT and its other AI breathers. I guess we’ll see.

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Digging in. Over the years investors, executives and research analysts have sought to cast Cannabis as the new pharmaceutical, BevAlc, CPG, you name it they’ve drawn comparisons. But MSOs are both more than that, and less than that. I don’t judge or place blame on anyone for this, it’s natural to try and find a comparison, a mental shortcut so that you can compare one thing to another but I think we’re now seeing in the record low stock prices, the total lack of liquidity, the lack of focus and interest that there is just nothing to compare it to. Here’s why.

Your average MSO is in 12 markets, they’re vertically integrated which means they grown, process and sell retail (and sometimes wholesale), they’re in a mix of Medical and Adult-use markets (this is really more of a legal construct than anything, more on that in another missive). There revenue was growing double digits sequentially a few years ago and single digts annually last year. That’s our caricature. But digging in more deeply there are different businesses within that MSO, it’s commercial agriculture (the grow), it’s extraction, manufacturing, packaging, R&D, product development (processing) and then it’s a distributor/wholesaler, trying to push their products into other dispensaries, and finally it’s a retailer. Vertical integration became important a few years ago because there were product shortages and growing, processing and retailing your own product meant that you were turning $1-2 costs to grow a gram into $60-80 dollars eights which is to say it was incredibly lucrative. But there are material differences between all those different business, Marlboro doesn’t grow anything, they don’t retail anything, Budweiser doesn’t grow, or retail or even distribute, they’re brands and products. Those two companies acquire raw materials, work their magic on it and crank out cartons and 6-packs for others to distribute and eventually sell. I think that’s evolved over the last several decades because different companies had different expertise (lets say logistics) and profit-margin thresholds (distributors have very narrow profit margins). So our first failure as an industry was over simplifying and comparing a 60-100 year old industry with something that is brand new. It was a shortcut that led folks to attribute valuations of cannabis companies that were more than their BevAlc competitors because instead of a 15-20% margin these companies were believed to generate +60% margins. Nonsense.

The second failure was pumping these companies full of cash, asking them to chase growth (flags! revenue! funded-capacity!) and not profitability. Very very very few cannabis companies are routinely cash flow positive (that is after tax, capex, everything). How can that be when you’re turning pennies into dollars? Well there’s a shit-ton of work between those points, lots of hands, people, gross inefficiencies and outrageous costs of capital (more later). Because of the legal framework in the United States these companies cannot build one enormous facility in a single location to provide their products to the country, no instead they need 12 grow and processing facilities and a handfull of dispensaries to serve their markets. That cash is spent, it’s gone, instead of one facility that cost $40-100M is highly scaled, insanely efficient our model company has 12. Will those facilities be needed forever, probably not, they’re limited life between now and whenever interstate commerce and federal legalization occurs then a majority of them could be mothballed. Federal Legalization whic

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h so many are hoping or begging for may make stock prices moon but it’s going to also lead to completely different kind of competition.

If you hadn’t already guessed I don’t have an answer on how to value MSOs, there is no easy mechanism or comparison so for now I think the only thing that prudent investors can do is apply a multiple on forward cash flows. Discount that is based on the company’s ability to pay off debt (not amend and extend), their cost of capital, and their growth and competition profile over the next few years. That may mean that we haven’t seen a bottom in stock prices.

This is not in any way shape or form meant to be investment advice, the majority of my personal net worth is in cannabis stocks and cannabis ETFs and that is (and has been) crushingly stupid over the last two years.

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I’ve been in the cannabis industry for a little more than 5 years. It all started at a holiday cocktail party where I foolishly pitched a consulting gig to try and find a way to process credit cards in the industry. It was foolish because I didn’t know at the time just how illegal that was but ultimately after banging my head against the wall for a few months we ended up creating a private label credit card in the industry. That was the start that ultimately led to my running M&A for one of the larger MSOs, analyzing a few hundred potential transactions, performing due-diligence on several dozen, completing 8 acquisitions worth about a Billion dollars, signing one massive merger agreement (at signing about $2.2B) and a few divestitures. That’s me, well at least a part of me. My name is Joshua Snyder, Hi, I’m a drug-dealer. Kind-of.

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