Germany's Weed Legalization Efforts Progress: This Week in Cannabis Investing

Germany is currently making strides in its recreational weed legalization efforts. 

In recent news covered by Marijuana Moment, Germany's leading regulator and health minister, Karl Lauterbach, stated the country has received "very good feedback" from the European Union (EU), the most critical governing body in the weed legalization process. 

The EU's approval is essential for Germany to proceed with adult-use weed legalization, given that cannabis use for recreational purposes is restricted by both European and international laws. Previous attempts by other European countries, like Luxembourg, to legalize cannabis have been stymied due to similar legal challenges.

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Germany still has a considerable amount of work to do, and expectations for the previously stated target of legalizing cannabis in 2024 has now been pushed back to 2025. 

The current proposal for the bill would allow adults to buy and possess up to 30 grams at licensed stores and grow up to three plants. It also includes suspending and closing criminal proceedings related to offenses made legal under the reform. 

While we view this announcement positively, we approach it with some skepticism given the EU's previous stance on cannabis legalization. However, if Germany can create a plan that adheres to European law, it could serve as a model for the entire continent. This could pave the way for fast-tracking weed legalization in other countries, particularly those that have expressed an interest in following Germany's lead, such as the Czech Republic.

Another cannabis banking bill is in the works

Three months after the SAFE Banking Act failed to be included in the federal spending package, Senate Democrats are now working on another cannabis banking bill.  

This news is completely expected, and the cannabis industry knows to respond to actions, not words, when it comes to cannabis banking.  

As we've stated many times before, evolving cannabis banking would be a big win for the industry. Democrats in Washington D.C. should expect a cautious, "once-bitten, twice shy" approach absent meaningful support from the Republican party for the new banking bill.

We are back to a near-zero probability of any banking reform for cannabis in the U.S. for the foreseeable future. This probability has further declined after the recent demise of Silicon Valley Bank (SVB). The regulators and auditors both blessed SVB as a well-capitalized bank weeks before it collapsed. Meanwhile, executives sold stock and paid bonuses days before the bank failed to secure much-needed capital. SVB was forced to shut down and hand over the keys to the FDIC.  

The bank failed on a basic premise of depleting deposits and disregarding simple interest rate risk management, i.e. buying long-duration securities in a rising interest rate environment, topped off with arrogance and greed. This is likely the beginning of more bank failures, three in the last week or so, in the U.S., as this duration crisis morphs into a defaults crisis. It seems regulators are now waking up and trying to head off another 2007-2009 global financial crisis.

As a result, we expect no room for politicians or regulators to prioritize cannabis banking while they are struggling to catch up once again. 

For those in cannabis, it is a good idea to have redundancies with banking if you don't already. We know banking challenges are not new in cannabis, so we are generally better equipped, but these diverted efforts are still not where we all want to be devoting time.

The challenges in the banking sector are likely to tighten risk capital on a macro level. Lending has already been tightening in commercial sectors, and we expect that to spread to other areas, which will keep a lid on capital for cannabis. 

TerrAscend seeks listing on Toronto Stock Exchange 

It's proving to be a year of action for the cannabis industry. We are done with cheap talk in D.C., and brave CEOs are pursuing action. Waiting is deflationary, and we have all spent enough time waiting. Companies are working hard to build their businesses in a challenging, long-lasting capital drought. This approximately 760-plus day bear market – the same number of days since the peak in the prices of most marijuana stocks – has forced and will continue to force companies to focus on balance sheets and execution. 

In the meantime, cannabis stocks have struggled with declining trading volumes as retail investors move on. Declining participation creates more of a deflationary feedback loop, leaving many to ask and hope for change. 

Well, change can come from within, and TerrAscend (TRSSF) is stepping up to the plate this week with a bid to list on the Toronto Stock Exchange (TSX). Membership with TSX would make TerrAscend the first U.S. multi-state operator (MSO) to be listed on the major stock market exchange.

TerrAscend is pursuing a similar structure to Canopy Growth (CGC)/Canopy USA, but it's exploring the TSX over the Nasdaq. This seems like a good potential path for creating public company structures that can list on major exchanges, which can have great benefits like expanded and lower cost of capital, additional potential access to institutional investors and more participation from passive ETFs. We will continue to follow this journey and expect other U.S. operators to follow suit should TerrAscend make it.  

Ascend Wellness earnings are in

Announcements for 2022's fourth-quarter and full-year earnings continued, with Ascend Wellness Holdings (AAWH) reporting mid-week. We are generally frustrated with the analysts' work in cannabis, or their lack of work, as it impacts consensus estimates on which people base a company's performance. 

Ascend increased Q4 revenue by more than 22% year-over-year to $405.9 million, but lost $15 million during the three-month period. However, Ascend's 2022 consensus was very close to actuals on revenue, gross profit, and EBITDA (earnings before interest, taxes, depreciation and amortization). We expect analysts will lower their previous 2023 estimates, consistent with their work post-earnings from others so far. 

Overall, it was a solid year of execution for this emerging U.S. operator. Ascend maintains that it is the top operator on revenue per door metric, the top growth rate in adjusted EBITDA and the sixth-largest operator on total adjusted EBITDA dollars generated basis. 

The company experienced some modest headwinds in their Illinois retail and wholesale in Q4, but this was offset by gains in the Massachusetts and New Jersey markets. Ascend sees good growth opportunities in their soon-to-be-closed Maryland retail acquisitions, as that state is fast-tracking towards its recreational sales, with further store openings in Ohio and Illinois. The company has uniquely positioned itself with asset concentration in many of the most profitable U.S. markets, without overexposing itself to volatility in these states by limiting its cultivation capacity. 

In the current environment where many of its peers are shuttering and divesting assets due to price compression and wholesale exposure, Ascend is among the few public operators actively growing its business. This growth can be tracked through M&A in attractive markets (e.g., Maryland) and organically through quality improvements in smaller, easier-to-manage cultivations and cost efficiencies in downstream assets like retail. Management is focused on continuing to execute its growth initiatives under tight capital controls and driving toward generating cash flow.