Cannabis Chart Of The Week: Q1's Sequential Quarter Revenue Decline Is A Prelude To 2023's Revenue Deceleration

• The graph shows the actual or expected sequential revenue growth from the 4th quarter of 2022 to the first quarter of 2023 for sixteen of the top MSOs.  Eight of the sixteen companies have already announced Q1:23 results; these companies have an “A” after their ticker symbol. The sequential revenue growths for the eight companies that have not yet reported are calculated based on consensus estimates of Q1:23 revenues compared to actual Q4: 22 revenues.

• A significant part of Q1’s revenue declines are attributable to seasonality. The 4th quarter tends to be stronger than the first in most markets except Florida. The group is projected to have an aggregate sequential revenue decline of 3.1% in Q1:23, but this is not much worse than the 2.1% decline in Q1:22.  

• Still, there IS an underlying deceleration of revenue growth projected for 2023. The companies on the chart had a 15.7% revenue growth in 2022 but are projected to have only 4.9% growth in 2023. 

• Why the slowdown in growth?

  • 2022’s growth stemmed from large capital spending programs funded from record capital raises in 2021. Similarly, 2021 saw many of the largest M&A deals ever completed in the cannabis space, and the companies on the chart were the beneficiaries of that activity. 

  • Capital spending and M&A activity were sharply curtailed in 2022 through Q1:23 due to the contraction in the cannabis capital markets, and this lack of capital is the primary driver for the upcoming slowdown in growth.

  • Wholesale price compression is a contributing factor, cutting into cannabis margins and making the sector less attractive to investors.

  • Inflation caused further margin damage and impacted consumers, contributing to basket size reductions nationwide.

  • The subsequent decline in cannabis equity prices (and their use as acquisition currency) was driven by decreased profitability and growth expectations.

  • Although some new markets like New Jersey have been quite successful, New York’s rollout has been a spectacular failure, diverting hundreds of millions of revenue into the illicit market.

• What will it take to reignite growth?

  • New rec states have always driven significant growth, and the recent openings in Missouri and Maryland are promising. Two sizeable markets, Ohio and Pennsylvania, seem likely for 2024.

  • Capital markets resurgence. Banking reform (whenever it happens) will indirectly lead to uplistings, increased institutional investment, and renewed capital flows. A 280e eliminating rescheduling would be a far more important, albeit less predictable, outcome. Movement in Washington may be more psychological as a catalyst than substantive in the near term.

  • Consolidation:  Prices have been firming in some of the hardest-hit markets in the country. It has little to do with enforcement and more with the reduced supply through the failure of marginal competitors. Paraphrasing Jason Wild, 2023 will be a year where things are so bad, they are good. In the long term, industry consolidation is required for price stability.

  • State Reforms: Can New York and California quit squandering their potential as the most vibrant cannabis economies? California’s over-taxation and regulation and New York’s fixation on social equity have crippled their respective cannabis industries. We hope an Econ 101 graduate will rise to power in one or both of these states. New Jersey’s recent move to eliminate 280e on state taxes is an example of the forward-thinking that will be required. We are highly skeptical that increased enforcement will be a crucial factor. The first war on drugs didn’t work, nor will its next reincarnation. Reduced taxes and regulations are the keys. 

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.