The "marijuana mullet" is back with avengence in the cannabis industry as great top-line, headline-shocking, numbers for revenue got released with the usual massive losses on the bottom line, as usual.
Last year, an analysis of public filings by Green Market Report revealed that among the twenty largest publicly traded marijuana companies in the U.S., only one managed to turn a profit, while the rest collectively incurred a hefty $2.3 billion in losses. Despite generating over $8.7 billion in revenues altogether, these vertically integrated operators, with retail outlets, cultivation facilities, and manufacturing plants across various states, struggled to remain profitable.
These financial figures offer a glimpse into the overall performance of the cannabis sector. In 2022, a similar examination of financial filings indicated that merely two out of twenty-four public cannabis companies were profitable, with the sector as a whole facing losses exceeding $4 billion. However, it appears that losses have notably decreased year-over-year, signaling potential improvements in the industry's financial landscape.
Top Performers and Underperformers
Green Thumb Industries (CSE: GTII) (OTCQX: GTBIF), based in Chicago, became the only cannabis firm to record net profits in 2023, with a $36.3 million profit on top of an amazing $1.1 billion in sales. This was a huge increase above its $12 million profit in 2022, demonstrating a stunning triple of yearly earnings.
In contrast, Florida's Trulieve Cannabis Corp. (CSE: TRUL) (OTCQX: TCNNF) experienced the most significant setback of the year, with a whopping $527 million loss compared to $1.13 billion in sales.
However, Trulieve was not alone in its financial struggles. Curaleaf Holdings (TSX: CURA) (OTCQX: CURLF) of New York incurred losses of $281.2 million, despite leading in revenue among the twenty companies with an impressive $1.35 billion.
GTI, Trulieve, and Curaleaf were the exclusive trio to surpass the $1 billion revenue mark last year.
Other notable underperformers include:
- Ayr Wellness (CSE: AYR.A) (OTCQX: AYRWF), a Florida-based multistate operator, recorded a loss of $272 million.
- Cresco Labs (CSE: CL) (OTCQX: CRLBF) (FSE: 6CQ), headquartered in Chicago, faced losses amounting to $180 million.
- The Cannabist Co. Holdings Inc. (NEO: CBST) (OTCQX: CBSTF) (FSE: 3LP) from New York, reported losses of $174 million.
- Verano Holdings Corp. (Cboe CA: VRNO) (OTCQX: VRNOF), based in Chicago, incurred losses totaling $113 million.
The widespread financial struggles within the industry underscore the urgency behind potential regulatory changes, such as the Biden administration's proposed shift of marijuana from Schedule I to Schedule III. Such a move could alleviate the industry's tax burdens, potentially saving hundreds of millions annually, as estimated by various sources. However, the timeline for realizing these savings remains uncertain.
Market Upheaval
The dissimilarity between the evaluations from this year and the previous year emphasizes the volatility of the market, which is further emphasized by the removal of four firms from this year's list.
MedMen Enterprises (CSE: MMEN) (OTCQX: MMNFF), one of the absentees, has essentially filed for bankruptcy. Due to a change of auditors, StateHouse Holdings (CSE: STHZ) (OTCQB: STHZF) and Vext Science (VEXTF) have not yet submitted their full-year financial reports to securities regulators.
The fourth omission, secondary multistate operator Red White & Bloom Brands (CSE: RWB), reported losses of $104.9 million and carried a debt of $240 million in the previous year, against revenues of $88.3 million disclosed in April.
According to Matt Karnes, Founder of GreenWave Advisors, the persistent losses stem from the exorbitant costs of operating within the federally illegal U.S. marijuana industry.
"Profitability and cash generation are formidable challenges," Karnes remarked. "This underscores the urgency for government intervention... because financial resources are depleting rapidly. Section 280E is proving to be detrimental to all."
Karnes acknowledged additional factors contributing to the sector's financial downturn, including misplaced optimism surrounding the initial public offerings of many fledgling companies in recent years, and an underestimation of the competitive pricing in the illicit marijuana market.
Furthermore, political advancements at the federal level have been notably delayed compared to earlier industry expectations, resulting in failed expansion endeavors, unproductive infrastructure investments, and widespread price pressures, all culminating in diminished profit margins for the cannabis sector.
"The inability to accurately forecast when these dynamics will change, to decipher the political landscape effectively, presents significant challenges," Karnes concluded regarding the ongoing financial setbacks. "This uncertainty remains a substantial obstacle."
Emerging Trends and Future Outlook
Even in the face of economic uncertainty, several new developments in the cannabis sector point to possible directions for expansion and stability. The growing focus on cost control and operational efficiency is one such trend. Businesses are actively looking for creative ways to save expenses by simplifying their processes, allocating resources as efficiently as possible, and lowering overhead. These businesses want to improve their bottom line and lessen the effects of market and regulatory uncertainty by concentrating on efficiency.
The diversity of product offerings and market tactics is another noteworthy development. Companies that deal with cannabis are branching out from typical flowers and investigating new product categories including drinks, topicals, edibles, and wellness items. Targeting specialized markets and customer groups and customizing items to fit their requirements and tastes is also becoming more and more important. By lowering reliance on any one product or market segment, this diversification not only increases the variety of revenue streams but also fortifies the resilience of the market.
Looking ahead, the industry's future prognosis is heavily reliant on regulatory developments and policy changes. The Biden administration's prospective reclassification of marijuana from Schedule I to Schedule III may have far-reaching consequences for the business, including lower tax costs and better access to financial services. However, the timing and breadth of regulatory changes are unknown, providing hurdles for businesses navigating the changing regulatory landscape. Despite these uncertainties, ongoing innovation, strategic adaptability, and a focus on long-term sustainability will be critical in determining the cannabis industry's resilience and development prospects in the coming years.
The other main problem the industry may never be able to overcome is, as Jeff Bezos put it so well, "your margins are my opportunity". Once the 280E tax breaks get worked through the system, and that cash bonanza gets dispursed, the industry will always face the unrelenting pressure of the illicit or black market. As soon as prices start to get too high, where stores and brands start to increase margins, the illicit market will become that much more appealing for their lower prices. If the legal industry tries to push prices too high, the black market will snag market share from more price conscious consumers. There is a glass ceiling on how high the legal market will ever be able to raise their prices due to price pressures on the black market.
While consumers may pay for the appearance of safety through lab testing and the convience of a brick-and-mortar store, the fact remains that cannabis flower is 60% cheaper on the illicit market and edibles can be up to 93% cheaper when local and state taxes are taken into account. People will price shop when the spread between legal products and illicit products widen to unreasonable amounts.
Bottom Line
The cannabis industry's financial struggles, as highlighted by the significant losses incurred despite substantial revenues, underscore the need for regulatory reforms and operational adaptations. While some companies have managed to thrive, many others have faced considerable setbacks, grappling with challenges ranging from regulatory constraints to market volatility. The emergence of new trends, such as cost management initiatives and product diversification, offers avenues for growth and resilience in the face of uncertainty. However, the industry's future trajectory will largely depend on the pace and scope of regulatory changes, as well as companies' ability to innovate and adapt to evolving market dynamics.
Margin compression and the ever-looming black market may always create a glass ceiling for cannabis product prices going forward. Push to hard on a string and the consumer will look to save up to 85% on prices by finding a new piece of twine.
THE MARIJUANA MULLET, GREAT ON TOP, BAD ON THE BOTTOM, READ ON...
