Cannabis Chart Of The Week: Is California About To Fix Its Cannabis Mess?

• California is the largest cannabis market in the world, but the state has struggled with seemingly intractable problems since its adult recreational launch in 2016:

  • High cultivation and excise taxes and a generally burdensome regulatory environment have hindered the formation of a vibrant legal market. 

  • Local municipalities were granted too much power to disallow retail dispensaries in their jurisdictions resulting in a severely under retailed market. There are 866 licensed dispensaries in California, serving a population of 38.9 million. There are over 500 dispensaries in Colorado, with a population of only 5.8 million.

  • California had 7548 cultivation licenses, far more than any other state. Estimates suggest that the amount sold in the illicit market is more than double the amount sold in the legal market.

• The result of these issues is a thriving illicit market estimated to be over $8B in annual revenues.

• The state seems to be considering concrete remedial actions finally. The governor of California just unveiled an updated budget proposal to eliminate the state’s cultivation tax. Passage of the bill is not a certainty, but the bill would have rather dramatic effects on the profitability of California cannabis cultivation.

• The graph shows the Revenue, cost of production, and gross profit from the cultivation of  1 pound of cannabis in three different cultivation settings: outdoor, greenhouse, and indoor.

• The column headings are our estimates of the wholesale prices in each setting, the brown bars are the production costs, the state flag shows the cultivation tax based on $10.08 per ounce of flower, and the green bars depict the gross profit. The production costs are country-wide estimates and are only indicative of actual expenses.

• The graph shows the meaningful boost to cultivation profitability that the removal of the $161 per pound cultivation tax would make. It is unclear how much of this gain would be passed down to distributors, retailers, and customers versus how much would be retained by the cultivators.

• The percentage difference is most significant for outdoor cultivators, who have been hurt the worst by the pricing decline the state has witnessed over the last year. We estimate outdoor cultivators are currently losing approximately $75 per pound of cultivation after-tax.

• Removing this tax will not cure all of California’s problems, but it goes a long way to helping farmers who might otherwise go out of business in the next year.

• California cannabis stocks reacted sharply to this news. Harborside HBOR and Glass House Brands GLASF  were two of the top gainers for the week.  

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.