It's been a busy couple of weeks for cannabis companies reporting earnings as several were forced to tweak their numbers for Massachusetts. The state legalized adult use cannabis, but was slow and deliberate with the issuance of licenses. The first recreational sales began in November 2018, but consumers were forced to wait in long lines at dispensaries with few choices.
As of August, there are now 23 dispensaries open with more expected. After six months of sales, the state had racked up $140 million of recreational business. The Marijuana Business Factbook from MJ Biz Daily estimated that 2019 recreational sales in Massachusetts would be in the range of $450 million-$500 million. That looks doubtful at this point even though sales have been increasing every month.
Many of the cannabis companies had plugged in those projected sales from Massachusetts in their business plans and now are being forced to recalculate their estimates. During this past earnings season, many had to let their shareholders know how the cautious approach by the state will affect earnings.
"Massachusetts has been a slower rollout than people had hoped originally," said Canaccord Genuity senior analyst Bobby Burleson. "There were a lot of stale expectations out there. It was certainly partially due to the slowdown in Massachusetts, but also the immaturity of the cannabis sector as a public sector. The companies might have been dealt with better if they had more history." In other words, a more mature company would have addressed the issue earlier with their shareholders rather than waiting to the last minute.
Burleson revised his revenue estimates for TILT Holdings (SVVTF) for the third quarter to $59 million from $89 million and his 2019 estimate to $215 million from $281 million. He also dropped his 2020 estimate to $442 million from $771 million.
"While we are lowering our estimates on delays for Massachusetts recreational retail licensing, TILT is seeing a sharp uptick in revenue in the state from its wholesale operation," he wrote in a report dated Aug. 28. "We believe MA revenues will accelerate through the balance of 2019 as cultivation and production ramp, setting up for a more substantial opportunity in the state next year."The price target was lowered from to C$2.50 from C$4.00.
It wasn't all bad for TILT within the state. The analyst added, "Total revenues increased 13% from Q1/19 with growth coming across the business and particularly from the company's software and distribution platforms and wholesale operations in Massachusetts." The analyst has a "Speculative Buy" rating on the company.
Slang Worldwide (SLGWF) was also forced to reckon with the issues of Massachusetts. It cut its outlook to a more conservative $70 million-$100 million from a previously estimated $130 million-$160 million. The company also said that it has decided to focus on growth in mature markets where its brands were performing well, versus Massachusetts and Michigan which have been growing much more slowly.
"These markets have been developing at a slower pace than anticipated and are currently facing supply constraints," said Slang CEO Peter Miller in a company statement. "While management believes these markets offer significant longer-term opportunities for the SLANG brands, further investment in growth initiatives in the current environment would put pressure on margins and profitability."
One company that has benefited from the state's methodical approach is Ayr Strategies (AYRSF) (CSE: AYR), which has quickly become one of the largest wholesale operators in Massachusetts following its receipt in June of a recreational wholesale license.
Canaccord's Burleson wrote in a report on Aug. 20, "AYR is one of only sixteen licensed cultivators permitted to serve the MA rec market and one of only three without operations currently tied to retail. AYR currently services sixteen of the state's twenty-nine recreational dispensaries. Driven by a sizable supply/demand imbalance, we believe MA is one of the most attractive markets in the country in which to wholesale flower and other cannabis consumer products."
Burleson is forecasting C$121 million in wholesale revenues for Ayr Strategies in 2020 and C$65 million for its retail business. He has a "Speculative Buy" rating on the company and a C$25.00 price target. The stock was recently trading around C$13.65.
It seems cannabis companies had their fingers crossed hoping sales would hit the books sooner rather than later. Unfortunately for many, it didn't come during the second quarter.