OUTLOOK

• Cannabis stock prices (measured by the MSOS ETF) were down 20.6% last week and 40.4% month-to-date and are now at their lows since the ETF commenced trading in September 2020.

• The failure of the SAFE Act points out the differences of opinion that still exist regarding the path for cannabis legalization/descheduling. If SAFE+ ever had 60+ votes, we think it would have been presented as a standalone bill. The reason to package a bill inside some other “must pass” legislation is precisely because you don’t think you can get it passed on a standalone basis. So why not, in the face of polling numbers that suggest widespread public support? We see two reasons: One issue is that no legislator feels that his political career rests on his cannabis vote. It is simply not a strong enough issue yet to sway votes. As such, cannabis has become just another bargaining chip in the logrolling process rather than an essential standalone issue. It may be as simple as the Republicans did not want to give the Democrats a “win” in the lame-duck session and felt no particular political pressure to do so. Another critical reason is the “+” in SAFE+. Republicans seem willing to pass a banking reform bill along the lines of the original SAFE but are less inclined to go along with the various social equity issues that have been added to the bill. Threading the needle between having enough social equity to please the progressive wing of the Democratic party while keeping the Republicans onboard continues to be a stumbling block.

• The failure of SAFE will not be felt uniformly. SAFE never benefitted the Tier one MSOs much, at least in the short run. They already have well-established banking relationships and access to capital. SAFE did nothing to cure their biggest problem, 280e, nor did it immediately enable uplisting. We think it would have eventually led to uplisting by encouraging the custody of cannabis stocks, increasing liquidity, and fostering the process of bringing in more institutional money. In the short run, we believe the lack of SAFE may be advantageous to the Tier ones as it increases the pressure on smaller companies to merge with larger, better-funded competitors. It allows Tier ones to continue to grow at the expense of smaller competitors. We frankly feel that this process will continue with or without SAFE. Cannabis is a capital-intensive commodity business that will inevitably have fewer and larger competitors.

• Tier 2 and 3 MSOs/SSOs and smaller entities like the social equity entrants would have benefited much more from broader access to banking services, especially credit. Capital markets are currently inhospitable to these companies, especially those without hard collateral like real estate to borrow against. It reminds us of the old credit saying, “never lend money to someone who needs it.” Meanwhile, the equity markets are nearly closed for U.S. cultivation & retail sector companies. Many face significant upcoming liquidity pressures, especially in the states that have already seen commodification-savaged wholesale pricing.   We think of this as primarily a short-term liquidity issue rather than a long-term solvency issue. Many startups and smaller companies have solid business plans and good potential but may fail due to a lack of funding.    In an environment like we are facing, with a recession of unknown proportions approaching, credit analysis trumps valuation. And the main thing investors need to be concerned with is Liquidity. Does your investee have the capability to weather the storm?