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California Cannabis Sector Lost Momentum

When you're right ---- flaunt it!

NOTICE: Being right has been a problem for our proprietary SP+GTM algorithm. Its success rate has hit +91 in predicting what may happens in California. Individuals requesting free advice has outstripped the ability to timely respond. Accordingly, we are temporarily suspending the service.

Now for the California's Problem

As 2019 comes to an uneasy close in California, the major headlines spinning around the state’s cannabis industry are bleak. Top tax brass in Sacramento announced an abrupt rate increase (effective Jan. 1, 2020), and the vaping-relating lung illness narrative continues to dominate the conversation among businesses and consumers. To make matters worse, several highly visible California cannabis companies have announced a startling series of layoffs. The job loss news has been building steadily this fall, and it seems indicative of broader troubles for a $3.1-billion state-legal industry that can’t seem to catch up to the sprawling illicit market.

CannaCraft announced that it would lay off 16% of its workforce, which is about 40 employees. “Everything was going really well. Then all of a sudden we weren’t hitting our target — and everybody was retracting,” Dennis Hunter, founder of Santa Rosa-based CannaCraft, said, “We had to make the responsible decision to cut our costs.”

Grupo Flor laid off 35% of its workforce (30 employees) around the same time, citing an investment deal that fell through. Flow Kana reportedly laid off 20% of its workforce on Nov. 14. “It was one of the toughest decisions that I’ve ever had to make,” said CEO Mikey Steinmetz.

On Nov. 15, MedMen announced that it would lay off 190 employees. The company cited restructuring efforts as it stumbles into the end of the year and grapples with a short-term cash flow problem. Year-to-date, MedMen’s stock price has fallen 84%. “While it is never easy to let employees go from the MedMen Family, we believe this decision is in the best interest of our Company as we position ourselves for growth in the years ahead,” CEO Adam Bierman said in a release.

And that’s just the major layoff news from November. Going back to October, a number of cannabis companies reported job cuts, including: Eaze, Weedmaps, Pax Labs and, up in Canada, Hexo.

“It almost feels like an epidemic of companies of similar size going through similar processes,” said Flow Kana’s Steinmetz.

Following aggressive growth through 2018, the first year of adult-use sales in California, there’s no doubt that the state’s industry is experiencing some form of contraction now. The tax hike isn’t helping matters, and many companies cite the imbalance between supply and retail shelf space. Simply put, getting legal cannabis in the hands of consumers hasn’t been easy. The illicit market continues to outpace the legal market in California.

Statewide, the Bureau of Cannabis Control counted 700 retail storefronts in early October, but the market is projected to develop at a 19% compound annual growth rate over these next several years. Greater access is needed. In the meantime, workers remain vulnerable to corporate restructuring and market adjustments. Two years on in this Prop. 64 world, California’s cannabis market is a long way from settled.

Our SP+GTM algorithm first reported the issue on March 12, 2019 and suggested wholesale liquidation of public companies in the space, and to reduce investment in the category. Based on the current value of the net investments, we estimate that a loss of 67% has occurred.

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