The twists and turns of the cannabis industry are enough to give an observer whiplash. While all the news of late is about what’s going on in DC - let’s take a walk down memory lane and put things in perspective. Cannabis businesses have always seemed to be valued on some “new metric” that the industry adopts as the end all barometer of progress. Here are some prior examples:
As we discussed in our last Bengal Blog post, California retail sales data suggests that consumers are not particularly brand loyal when it comes to cannabis flower and concentrates, instead preferring to try out many different products across different brands. The edibles market in California seemingly is behaving, unlike these other categories.
American Cannabis Operators Index Continues Steep Decline in October | Mike Tyson Launches New Cannabis Company, Tyson 2.0 | Grass Lands at Outside Lands was actually an Overwhelming Success
Verano Upsizes Credit Agreement to US$250 Million at 8.50% With an Additional US$100 Million Option | Texas says Popular Cannabis Extract, Delta-8, is Illegal, Sending Retailers Scrambling | Marijuana Companies Turn to Training, Sommelier-like Roles to Stem Employee Turnover | Why Mainstream Businesses Are High On The Cannabis Industry
Cannabis firm Jushi secures $100 million funding with 9.5% interest rate | US Senate Panel Removes Barrier to DC Recreational Marijuana Sales | Greenlane Acquires Vaporizer Tech Company DaVinci for up to $20mm (New Cannabis Ventures
Is It Ever OK to Get Stoned With a Client? And Other Questions as Pot Comes to Work | Trulieve Completes Acquisition of Harvest Health & Recreation Inc. Creating the Largest and Most Profitable U.S. Cannabis Operator | Recapping Hall of Flowers Santa Rosa 2021
Challenges Abound in New Jersey’s Hot Cannabis Real Estate Market (MJ Biz Daily) | Trulieve Announces $350 Million Private Placement of 8% Senior Secured Notes (Yahoo Finance) | Ceres Acquisition Corp. Announces the Mutually Agreed Termination of Its Business Combination Agreement With Parallel (Reuters) | Pelorus Equity Group Closes Offering of $42.2 Million of Senior Unsecured Notes due 2026, Marking a First for the Cannabis Sector (Yahoo Finance)
Do you trust your doctor about cannabis? (The Cannigma) | Ascend Wellness Borrows $210 Million at 9.5% for Four Years | TerrAscend to buy Michigan cannabis operator Gage in $545 million deal (Marijuana Business Daily) | Planet 13 to Enter Florida Medical Cannabis Market with $55 Million Acquisition of Harvest License (New Cannabis Ventures)
Josh Rosen joins Goodness Growth Holdings Board of Directors | Cannabis company Tilray acquires stake Medmen notes in bet on U.S. legalization | U.S. cannabis firm PharmaCann plans IPO as New York weed legalization lifts demand | Eaze to Acquire Green Dragon, Executing on Vertical-integration Plans | Jay-Z-Backed The Parent Co. Appoints First Black CEO In Major Public Cannabis Company, Troy Datcher
The summarized cannabis industry news from the week of August 9th: -The Constantly Changing Cannabis Industry with Sanjay Tolia at Bengal Capital -The Man Behind Green Thumb Industries -Cannabis Site Leafly to Go Public via SPAC Merger
It’s been a few months since we last checked in with our brand new “Antarctic IPA” consumer, so we thought we’d check in with them, or at least see if we could find some data that supported our thesis that when consumers first discovered a new product category in cannabis they “want to try some different types and experiment before settling in on a definitive brand of choice.” In this environment, what then gives a company’s valuation and revenue potential protection is not just a punchy brand, but a consistent underlying infrastructure -- the ability to get on dispensary shelves and stay on the shelves thanks to sales execution and consistent distribution.
Consumer packaged goods (CPG) are fast-moving products that consumers use frequently. Packaged foods, toothbrushes, and even alcohol all fall into this category. It’s also a term you hear thrown around a lot in cannabis, usually as a kind of shorthand for how the industry works and what’s important to look at when analyzing it.
Cannabis is today’s Wild West of politics and business - the rewards for successful pioneers are staggering, but the risks are high (pun intended), and the trail to legalization is not well-marked. Colorado, having legalized adult-use in 2012, is one of the original cannabis pioneer states. What lessons does it hold for other states and cannabis legalization generally?
While some companies are valued based on multiples of earnings or sales, many of today’s public companies seem to be valued on EBITDA - Earnings Before Interest, Taxes, Depreciation, and Amortization. Cannabis companies are especially often judged on EBITDA, so it helps to understand EBITDA’s origin and limitations.
Having recently finished “Alibaba: The House Jack Ma Built” by Duncan Clark, we decided to offer a few thoughts linking Alibaba back to what we see in the cannabis industry. Alibaba is a Chinese e-commerce juggernaut and, by virtue of that, is something of a global juggernaut as well. Often called China’s Amazon by us Americans, it took a very different approach in some ways to developing than America’s ubiquitous online bookstore. Alibaba seems to have come out of nowhere, but the reality is that it was founded before the Dot Com bubble in the late 90s and took a while to find its stride in terms of business models.
In last week's Bengal Bite, we found the Lost $5.3 Trillion U.S. Sovereign Wealth Fund by looking at the massive costs of the drug war at just the federal level. We looked at a pretty direct question: how much did it cost, and what could have happened if we’d taken the money spent and redirected it elsewhere?
As bad as the “War on Drugs” has been, it’s actually been worse than most people realize. In fact, the drug war is an example of the worst kind of public policy mistake: one that does not accomplish its stated goals causes significant and lasting social harm (millions of lives destroyed), costs the country massive amounts of money, and prevents taxpayers from seeing the benefits of that money directed more productively elsewhere.
Costco is a phenomenal company and a recent episode of Business Breakdowns, a new podcast from Patrick O'Shaughnessy (host of Invest Like The Best, an interview series with investment professionals), took a look at some of the reasons underlying its success: Maniacal Focus on the Customer: Jim Senegal, one of Costco’s co-founders and the CEO that oversaw much of its early growth, instilled an almost unparalleled focus on the customer and perfecting Costco’s model to increase customer value. This ethos still makes up a significant portion of the company’s DNA. Leveraging Advantages: 75% of Costco’s operating margin is generally the subscription fees its customers pay. This allows it to run very low gross margins on products and still ultimately be profitable - everything that makes people continue their membership is ultimately a good deal for Costco. The bigger Costco gets, the broader the selection and bigger the discounts - a virtuous circle that tech investors dream about that was happening for decades in large warehouse stores. Careful Margin Expansion: 25% of Costco’s sales are Kirkland Signature store brand products. Costco has been methodical about giving their customers a quality, budget choice - and with a legitimate focus on the “quality” aspect. Often Kirkland Signature is not the cheapest product Costco offers. Costco has grown its house brand enough to make it the largest standalone brand in America by sales volume. Highly Considered Product Selection: Costco runs about 4,000 SKUs vs. a typical store’s 40,000. It coordinates deeply with its vendors and, even though it is a hard negotiator, is able to leverage large volumes into significant discounts it passes to customers. Costco also takes months vs. the over year average of most stores to try new products on shelves, allowing it to quickly test demand, apply any information learned, and continue to iterate. Retail is Detail: A famous saying of Jim’s, it embodies Costcos focus on the little things that provide small, compounding advantages that competitors haven’t matched. Things like forcing suppliers to package in form factors that are shelf-ready and can also be stocked on pallets easily, which allows Costco to utilize more of each stores’ floor space as selling space (vs. a typical Walmart which has 30% of each store as inventory storage), and larger form factors that minimize shrinkage. This list should give a flavor of what makes Costco great, but it is certainly not exhaustive. How do these Costco core competencies translate into financial performance vs. competitors? Fairly well: Source: quickfs.net The stock market has generally rewarded Costco with a higher earnings multiple. Below is a graph of Costco vs. Walmart P/E multiples over time: Source: macrotrends.com As it relates to our little corner of the investing world, Costco holds some lessons for looking at cannabis companies. Not because MSOs should focus on copying what Costco did by rote - store brands, leveraging discounts, etc., are all tools that have their place but mindless copying is not the point - but because it's important to keep in mind how current US MSO financial results reflect investments for future compounding. Costco wasn’t always rewarded with a premium multiple. For much of its earlier history, many observers did not quite understand its advantages and how it was compounding them. Costco would build 20-30 stores per year, with an initial capital expenditure on the building, merchandise, etc. for a new store costing tens of millions of dollars (about $100m is what it costs today). But each store by itself only contributes 3-8% in margin, with about a 10% free cash flow yield on the initial invested capital. In most years, because of the expansion, Costco wouldn’t show much in the way of earnings or EBITDA at all. But the additional stores led to more buying power, which led to better value for customers, which led to more memberships, which led to a compounding machine that only became obvious to everyone years later. While it’s more difficult for investors to see, coming to an accurate conclusion about whether an MSO is wisely investing into becoming a platform for compounding value, like Costco, is likely much more important than tracking whether a company met or beat analysts’ quarterly EBITDA estimates. Again, US MSOs shouldn’t copy Costco’s business by rote but should look at the underlying themes and reasoning for hints as to what could help them build value in their markets. Except for $1.50 hot dogs, which the MSOs should mindlessly copy immediately.
Green Thumb Industries (GTI) gave everyone yet another reason to become familiar with its name (looking at you Jim Cramer) recently by finalizing a $217m senior debt financing on April 30 - $105m to pay back other debt, the balance for expansion, and an additional $33m that could be drawn over the next twelve months. Larger amounts have been raised in cannabis before, but a few things stand out about this particular raise that investors should notice: the interest rate is 7% (likely the lowest of any U.S. MSO capital raise of this magnitude), the warrant coverage is modest, and the raise was non-brokered so GTI did not have to engage an investment bank to source the majority of the money.
Let's assume we are all sitting down with friends for a beer (feel free to switch out “beer” to your beverage of choice, bourbon, champagne, La Croix, etc). You’re by no means an expert on said beverage but years of experimentation have informed your decision on what types and brands you tend to enjoy.Suddenly your friend hops up and says “You have to try this new kind of beer I just picked up - it’s an Antarctic IPA!”
Last week we looked at cannabis as an emergent consumer staple - something that a significant portion of the population regularly purchases regardless of economic conditions. But cannabis is currently an outlier among consumer staples for two reasons, both of which are potentially significant to investors: growth of state-legal cannabis outpaces even the fastest-growing consumer staples, and the stocks of cannabis companies are much more volatile and are valued differently, than other consumer staples companies.
Cannabis SPACs’ Cross-Border Push Threatens Tax Hit on Investors (Bloomberg). OUR TAKEAWAY: Special purpose acquisition corporations (SPACs) have been a big deal in cannabis financing as of late, but a recent report reminds us that there are downsides to the financial vehicle. Due to Obama-era anti-inversion tax rules, when a Canadian SPAC acquires more than 80% of a U.S. company, any profits that flow up to the Canadian company will be treated as U.S. income. This triggers different tax consequences for U.S. shareholders and foreign shareholders of the cannabis company.
In what should have probably been predictable in hindsight, the U.S. cannabis industry thrived during the COVID pandemic (where it was able to stay open thanks to “essential” designations), recording significant sales growth even in “mature” adult-use markets like Washington and Oregon. Not many people would have predicted that over a year into a pandemic cannabis sales would be up 30-60%. Maybe that’s because people are focused on looking at what’s new and different about cannabis (and there’s a lot) instead of first looking at how much cannabis behaves like products we know well, we budget for, and buy regularly - consumer staples.
For better or worse, high levels of THC have become a proxy for quality in many cannabis consumer’s minds. For cannabis to fetch a “premium,” or in some markets even “medium,” price it must usually be 20% or more. So, to a grower, a THC test that shows under 20% can significantly threaten margins by forcing them to discount inventory. Economists would call the 20% THC line in the sand a “sharp nonlinearity in the payoff function for competitors” which is sometimes a “key feature” in things that are “ripe for corruption.” Not unlike when researchers looking at conscription records from France in the 1800s found a “puzzling” amount of French men measuring under 1.57 meters tall when the minimum conscription height happened to be 1.57 meters. It shouldn’t be a surprise then that a recent study of Washington and Nevada lab results show an “unusual spike” in the occurrence of dried cannabis products listed as having just over 20% THC. After looking through the data, the study authors realized why this was the case: “The average THC results were higher for the labs who had their licenses suspended. But also, there’s just not the same bunching around 20% for the largest (more trustworthy) labs... The plant doesn’t care if it’s got 19.8% or 20.2% THC, but consumers seem to care and you see that in the testing results for the labs who had their licenses suspended, but not for (the other labs).”
In 2020 state and local cannabis tax revenues brought in $3B. With New York, New Mexico, and Virginia poised to have recreational legalization come online in the coming months, that number is most likely going to soar even higher. We at Bengal believe that the increased need for tax revenue by governments will continue to drive increased recreational legalization of the plant. One day pot taxes could be used to fill potholes across the U.S., even if President Biden might disagree. While cannabis is legal in a wide array of states, it is still illegal to smoke or consume in public. For that reason, cannabis lounges are poised to make a comeback when pandemic restrictions relax more fully, especially in tourist-heavy markets like Nevada. New York, in a very cannabis-user friendly move, made it legal to smoke cannabis wherever it is legal to smoke tobacco.
A different green new deal: In 2020 state and local cannabis tax revenues brought in $3B. With New York, New Mexico, and Virginia poised to have recreational legalization come online in the coming months, that number is most likely going to soar even higher. We at Bengal believe that the increased need for tax revenue by governments will continue to drive increased recreational legalization of the plant. One day pot taxes could be used to fill potholes across the U.S., even if President Biden might disagree. (Institute on Taxation and Economic Policy) Pot lounges ready for a comeback: While cannabis is legal in a wide array of states, it is still illegal to smoke or consume in public. For that reason, cannabis lounges are poised to make a comeback when pandemic restrictions relax more fully, especially in tourist-heavy markets like Nevada. New York, in a very cannabis-user friendly move, made it legal to smoke cannabis wherever it is legal to smoke tobacco. (Marijuana Business Daily | 8 News Now | Ganjapreneur)
The city that never sleeps might get a little help thanks to a recent deal struck between embattled Gov. Cuomo and the legislature. The bill permits delivery and consumption lounges, and also directs the majority of tax revenues towards drug treatment, prevention, education, and investments in communities disproportionately affected by the war on drugs. While sales for legal cannabis products are still more than a year away, medical patients in the state will be allowed to start home growing cannabis in 6 months. After having announced that past usage of marijuana would not be a dealbreaker for employment, the Biden administration abruptly let go of five staffers. Over 30 Democrats sent a letter criticizing the Biden administration’s totally uncool actions.
“I don’t know about that . . . that doesn’t feel right to me at all” was the best argument a CNBC host could muster at Ben Kovler, CEO of Green Thumb Industries, Inc. (GTI) during a recent interview at the claim that cannabis is actually an “exit” drug that reduces opioid deaths. Unfortunately, the entire conversation about cannabis and opioids, and doubts about cannabis being able to reduce opioid use, is obscured by another, terrible, underlying truth. Like a frog in water that is slowly being brought up to a boil, the entire debate often misses the reality of just how much opioid death rates have increased (see graph below) in the last few decades:
The SAFE Act was re-introduced by Rep. Earl Perlmutter (D-CO) this week, sparking a wave of cannabis news, and buzz about the effect of the reintroduction on U.S. cannabis company valuations. The Act explicitly allows banks and other financial institutions to accept proceeds sourced directly from state-legal cannabis businesses, an area right now which is murky. Many were hopeful that this version of the SAFE Act would include a safe harbor for stock exchanges as well as banks to allow U.S. MSOs to uplist to NYSE and NASDAQ, but it did not (yet, it may work its way in). Investors now set to work trying to read the tea leaves of current political developments to see what it means for U.S. MSO stocks - but a little bit of nuance is important here.To vastly oversimplify, all stocks’ long term performance depends on two factors: operations (i.e., how much profit the business actually produces), and perception (i.e., what multiple investors are willing to value these earnings - basically a proxy that combines a perception of how “safe” and repeatable these earnings are with a view on how quickly they will grow in the future).
Last week and the week before, Parts I and II, we discussed the growth of SPACs, the incentives of the various parties, and some historical financial results. This week we write on where and when investors might want to keep an eye on SPACs for opportunities:SPACs Trading Below $10: This should go without saying, but if a SPAC share is trading below $10 (the standard redemption value of a share), an investor could buy the share and just wait to redeem it for $10 to earn a relatively riskless profit. SPACs don’t often trade for much under $10, but when the market is disrupted significantly, there may be more opportunities to pick up free dollars in SPACs than in other sectors because of a factor many investors may not appreciate: how hedge funds employ leverage.
SPACs in 2020 raised more money than they did over the entire preceding decade. Last week we covered the “what” of SPACs, and this week we look a bit deeper and try to get to the “why.” Why have these vehicles gotten so popular, and what are the motivations of everyone involved?Recall the basic SPAC pattern: A sponsor puts in a few million dollars to fund the costs of the IPO of a “blank check” company which has 24 months to search for a private company (the “Target”) which to buy/merge with (the “Qualifying Transaction” or “QT”), an experienced and credentialed management team (sometimes part of the sponsor, sometimes paired with the sponsor) that has a track record of success in a certain industry and want to repeat that success with another company, initial IPO investors invest in the SPAC IPO and get in at $10 share with a half warrant to buy another share at $11.50, the right to redeem out their stock for cash value ($10 plus interest) if they do not like the QT, and then investors who purchase the SPAC on the open market.
Cannabis is our little corner of the investing world, but sometimes developments from the broader world of finance seep in - like the enormous recent growth of Special Purpose Acquisition Companies (SPACs). A SPAC is a publicly-traded pile of money paired, in principle, with a bankable management team which has a recognized track record of success that is actively looking to acquire another company, the proverbial “target.” The SPAC acquires the target - effectively taking the target public, and the SPAC management team is now at the helm to drive even more value creation - again, in principle. Management gets up to 20% of the resulting company for their efforts if the target acquisition closes - a huge chunk of “sweat equity.” Investors get some protections, like the ability to sell their shares because the SPAC is public and to vote against the purchase of the target if they aren’t happy with the potential transaction. They also get some carrots, usually in the form of ½ warrants to purchase shares of the SPAC for $11.50 (SPAC IPO shares are usually sold for $10).
In August 1814, during the War of 1812, an army of Canadians, then still British, marched into Washington D.C. with a force of 4,500 men and burned the White House, U.S. Capitol, and many other public buildings. In 2020, many cannabis analysts, who tend to be Canadian because the Canadian investment banks remain the key players in cannabis financings, and investors, who tend to at least sometimes listen to analysts, seem to be expecting another invasion as soon as there is any kind of U.S. federal easing of restrictions on cannabis – that of major LPs flooding over the border taking meaningful share in the U.S. THC markets. This belief is possibly the biggest disconnect in cannabis between analysts/investors and those actually leading U.S. multi-state operators (MSOs) – a serious possibility, or even certainty, that must be priced into an LP’s stock according to some analysts and investors, and regarded as an utter farce almost unanimously by MSO executives in private.
Reddit’s online trading forum, Wallstreetbets (WSB) has moved on from Gamestop with some members now attempting to short squeeze major Canadian LPs. As this was originally being drafted, Canadian LP stocks shot through the roof, while US MSO stocks had solid but more muted gains. MSOS, an ETF made up of mostly US MSOs (which we recommended as our favorite cannabis ETF last week) was up 14% over the last five trading days ending on February 10 while MJ, an ETF that holds mostly Canadian LPs with no MSOs, was up 42% in the same time. By close on February 11, as this was being finalized, MSOS was down 7% while MJ was down 25%, leaving them almost neck and neck over the last five days - 3% gain for MSOS and a 5% gain for MJ (see 5-day performance chart below).
The largest Canadian licensed cannabis producers (LPs) trade at significantly higher multiples than their cousins, the largest US cannabis operators, commonly called Multi-State Operators (MSOs). The chart below tells much of the story. Not to paint all LPs with one brush, since there are some that have significant potential for growth from both Canadian market share and global opportunities (U.S. companies will likely not compete globally for quite some time). But, the largest LPs trading at such aggressive premiums over the largest MSOs suggests that the Canadian market, which has been operating for almost two years, will grow faster than U.S. markets, including newly legalized Illinois and Michigan (which combined hold 60% of the population of Canada). Based on fundamentals, this is not the case.
Game, Stopped. GameStop, a company that at one point appeared to have over 130% of its shares shorted, seems to have been involved in one of the largest short squeezes ever (a short summary of what happened from The Verge). One evidently orchestrated by individual, anonymous traders that inhabit the online forum, Reddit’s r/WallStreetBets. From under $20 per share to almost $350 in one month, and then back down to under $200 in one day, the GameStop roller coaster has become a mainstream story with something for everyone - retail investors vs. hedge funds, tech startups vs. regulation, establishment vs. millennials.
Home to one of public cannabis’ best performers, ~$5b market cap Trulieve, the Florida medical cannabis market was again in the news recently as companies announced their moves into the Sunshine State, already a >$1 billion market: Cresco, having previously cancelled a $120m all-stock acquisition of Florida licensee VidaCann in 2019, announced its intention to purchase Bluma Wellness for $213m (all-stock), A couple of weeks ago, Ayr Strategies announced it would acquire Liberty Health Sciences for $290m (all-stock), and Several weeks ago, the large private player Verano Holdings announced that it would go public through an RTO while also merging with Florida licensee AltMed (23% of the combined entity before giving effect to the proceeds of the RTO, and $35m cash in installments to certain former AltMed owners).
Cannabis operators in the United States are rushing to take advantage of the currently favorable canna'nomic' environment. A unified Democratic government, albeit with thin control of the Senate, led to investor optimism, which in turn led to larger U.S. cannabis companies utilizing the resulting momentum to raise significant amounts of capital. Potentially tellingly, many of the raises are equity at a slight discount to market prices - far from the terms investors were demanding months ago. Investors wary of such large capital raises dampening stock prices, as notably happened with some large Canadian LPs, may be comforted by the fact that U.S. firms’ financial trajectories are distinctly different from their Canadian cousins - solid growth, with more players expected to inflect into positive cashflow from operations this year. Taken together, the financial and political developments foreshadow a year ahead that will be anything but dull.
With the certification of President-Elect Biden’s win and the Georgia runoffs concluded, the 2020 elections are finally over. The last election of the cycle ended with two Democratic victories, giving the party control of both chambers of Congress to go along with their control of the White House, portending a continued and accelerated “rising tide of legalization.” The Senate will be led by Chuck Schumer (D-NY), who himself has been a forceful advocate for legalization, making it more likely the legislature will take up cannabis liberalization -- be it the MORE Act, which would deschedule cannabis on the federal level, or the STATES Act, which would allow states to take their own path on cannabis legalization.
The biggest cannabis business story of the last few weeks has been the pending merger between Tilray and Aphria, two of the largest cannabis companies in Canada, to create the “largest global cannabis company.” “Largest,” in this case, meaning that the combined company would have the most revenue over the last 12 months - about $673m USD vs. #2 Curaleaf’s $648m. It’s incredible how far the industry has come in such a relatively short time, but Tilray/Aphria’s reign will almost certainly be very short-lived - Curaleaf’s last quarter revenue already exceeded Tilray/Aphria’s, with GTI neck and neck. The noise of stock markets sometimes obscures simple, important underlying patterns. By plotting the bigger picture on a simple graph, the rapid growth of U.S.-based cannabis companies jumped out as a critical pattern to watch in the years ahead and was a simple visual reminder of why we are focused on U.S.-based opportunities at Bengal Capital.
Cannabis is more accessible than ever with 1 in 3 Americans living in states where recreational adult-use is legal, and cannabis is popping up more often in everyday American life. Cannabis operators are rushing to capture the opportunity presented by this newly budding "cannabis awareness." A Harris Poll commissioned by MSO Curaleaf finds not only a general increase in cannabis consumption, but a marked increase in people replacing alcohol with cannabis. In particular, parents have been putting down alcohol and picking up cannabis. The survey found that more than half (57%) of parents with children under 18 who have ever consumed cannabis have reduced or replaced their alcohol consumption with cannabis since the start of the pandemic.
There has been a flurry of market activity in the cannabis space, suggesting that financial markets might once again be warming up for cannabis operators. This past week brought an RTO, M&A, another SPAC merging with an iconic cannabis brand, and the opportunity to watch the supply and demand “canna”nomics of the industry at play in public markets. Multi-State Operator quarterly recap - 3Q20: 2020 was an “outstanding” year for U.S.-based MSOs with strong growth rates and improved margins. Looking to 2021, Needham shared an optimistic view, “We can point to no macro, regulatory, or fundamental factors that would materially alter the pace of revenue growth, and we expect continued improvement in operating metrics into 4Q and '21.” Moving forward, they see “capital raising activity over the next few months required to sustain growth.”
In November a green wave swept across the U.S., evidence of the growing political momentum of cannabis. As we enter the first week of December we continue to see this building “cannabis momentum” - from sports & entertainment to finance, cannabis is seemingly at the forefront of every conversation. A boxing legend got back in the ring with a little help from cannabis, a hip hop mogul participated in the largest cannabis SPAC transaction ever, and the U.N. reclassified cannabis to remove it from its list of dangerous drugs. The headlines are monumental and demonstrate a clear momentum building behind cannabis.
Research and development are key to supporting the growing cannabis industry, helping companies adapt to changing consumer tastes, and pushing the boundaries of cannabis use cases. The industry relies on the development of technologies that can help support yields, streamline compliance, and reduce costs. The horizon of what might be possible for cannabis continues to expand thanks to “the science of cannabis.” Sleep and CBN: What we really know about the buzzy cannabis compound: The cannabinoid CBN has shown promise in helping cannabis consumers sleep. Due to increased consumer demand and industry experimentation, we are beginning to learn more about the sedative qualities of CBN. Turns out that CBN works, but it has to be in combination with CBD. Bloom Farms’ Sleep Tincture, featured in Mashable, contains a 5:1 CBD:CBN ratio.
At Bengal Capital, we have been fortunate to partner with companies that share our values and are some of the best operators in cannabis. These companies are driving growth and demonstrating the vast potential of the industry. Below we have collected articles that highlight our "partners in the news." Green Thumb CEO on its Q3 estimates beat, election results: Green Thumb Industries continues to demonstrate the incredible growth potential of the cannabis industry. CEO Ben Kovler joined CNBC to share what drove GTI’s successful results this past quarter. GTI has differentiated itself due to its conservative approach to capital allocation, an ability to avoid overextending itself, and through the pursuit of the highest ROI opportunities within the markets where it already operates.
A green wave crashed over the U.S. this past Tuesday as voters across the country said yes to cannabis legalization. Five states passed cannabis adult-use and medical legalization initiatives, opening up possibilities of cannabis consumption from Atlantic City, New Jersey, to Mount Rushmore in South Dakota. More than a third of Americans now live in a state where recreational cannabis use is legal. “The rising tide of legalization” continues to lift the industry and move it forward. 1 in 3 Americans now lives in a state where recreational marijuana is legal: “More than 1 in 3 Americans will live in states where marijuana is legal for adults to use. New Jersey and Arizona, with 8.9 million and 7.3 million residents, respectively, are the biggest wins for advocates this year. Legalization in New Jersey is expected to create a domino effect for legalization in other large East Coast states, including Pennsylvania and New York.”
Election Day 2020 is finally upon us. In the closing days of this election cycle, plenty of uncertainty remains, but it is clear that the ballot box will impact the development of the cannabis industry far beyond November. With residents in five states voting on cannabis legalization measures this Tuesday, the results will be heard across the country - “from the Halls of Congress” in D.C. to the outer reaches of Montana’s Big Sky. The cannabis industry could be a big winner on Election Day: Given the economic woes caused by the coronavirus pandemic, more states are beginning to see that cannabis legalization could be part of the remedy. New Jersey is expected to approve recreational-use cannabis on Election Day, and some believe approval in New Jersey will trigger a domino effect along the East Coast.
In comparison to mature, established sectors, the market dynamics of cannabis are distorted. Interstate commerce is prohibited, the supply chain is immature, and traditional infrastructure is lacking. Given the nascent stage of the cannabis industry’s development, accepted rules of economics do not yet quite apply, leaving the sector to sort out its own laws of “canna”nomics. That said, we are beginning to see some familiar forces at play in cannabis - supply and demand dynamics for biomass pricing, commoditization, and the emergence of brand equity. We are in the midst of witnessing the gradual evolution of an emerging industry. Cannabis vape companies are experiencing a sales boom during the pandemic...
From helping with insomnia to managing and mitigating migraines, studies are beginning to show the efficacy of cannabis and cannabinoids as medicine. Since Delta-9-THC (commonly referred to simply as “THC,” the most common active ingredient in cannabis) remains illegal at the federal level, industry and academia alike have only just begun to understand the “science of cannabis.” However, preliminary findings are highly encouraging and we are excited to see deeper studies into how cannabinoids can be harnessed to benefit patients in need. A survey of nearly 10,000 U.S. and Canadian migraine patients found that a third have tried medical cannabis to relieve their pain, and that 82% of those who have tried cannabis found it effective in providing pain relief.
"Your brand is what other people say about you when you're not in the room." —Jeff Bezos. Brand building is difficult and truly is “an art, not a science.” What consumers really want is not always clear, and that appears to be especially true when it comes to cannabis. With legalization, hundreds of cannabis brands have popped up for the “cannasseur” and “canna-curious” alike. While it is always difficult to determine exactly what makes a brand successful, we have found that the industry’s strongest brands share one common trait - authenticity. Brands that tell a story - be it through a founder’s history, pioneering products, or a real embrace of cannabis culture - can drive a lifelong relationship with a consumer. This week, we highlight some companies that are demonstrating “the power of authenticity.”
In only 32 days, cannabis will see another pivotal moment at the ballot box. Five states, representing citizens across the map, from New Jersey to Arizona, are moving forward with ballot measures that could make cannabis available to an additional 21 million Americans. If successful on Election Night, these initiatives have the potential to push the “rising tide of legalization” even higher. Utah’s new medical marijuana program more popular than officials expected: Only six months after medical cannabis became legal for purchase inside conservative Utah, the program has already surpassed enrollment projections. “I don’t think that anybody had an idea as to the number of patients that Utah was going to see this early...” said Cody James, manager of the Utah Department of Agriculture’s Industrial Hemp and Medical Cannabis Program.
Paul is dead. Flower is dead. “Rumours of my death have been greatly exaggerated.” —Sir Paul McCartney. Sir Paul (who was known to “get high with a little help” from his friends) borrowed from Mark Twain to address allegations of premature demise. Cannabis flower - the beloved, accessible, consistent staple of cannabis culture - continues to defy the “analysts” with its popularity and is next in line to declare that it’s alive and well. Even with the introduction of innovative, effective new form factors, flower remains as popular as ever with consumers. In this week’s Bengal Bite, we highlight some of the cultivators and geneticists that are driving flower and the craft-cannabis world forward.
Popular support for cannabis continues to rise, making it an important issue at the ballot box in a number of states this November. As the electorate prepares to head to the polls, the “momentum of cannabis” continues to build as the industry proves to be a significant job creator that is popular across a wide range of the demographic spectrum. The legal cannabis industry is creating a new workforce amidst the pandemic: Cannabis remains one of the fastest growing industries in the United States with employment predicted to reach 300,000 by the end of 2020 (making cannabis as large as the beverage industry). At a time when some industries are struggling to stay afloat, the cannabis industry continues to hire.
At Bengal Capital, we have been fortunate to partner with companies that share our values and are some of the best operators in cannabis. These companies are driving growth and demonstrating the vast potential of the industry. Below we have collected articles that highlight our "partners in the news." Green Thumb Industries CEO Ben Kovler on Nevada expansion, building American cannabis and the War on Drugs: Ben Kovler has led Green Thumb Industries with a simple focus, “we start with the consumer. The business is built for the American consumer. That’s where we stick, and that’s where we see a ton of momentum,” he said. This focus has paid off as evidenced by first quarter revenues that exceeded $102 million (making Green Thumb the first US-based cannabis company to reach nine figures of revenue in a single quarter).
Cannabis markets are hyperlocal. Thus far, the federal government has taken a relatively hands-off approach to legal cannabis, leaving the role of regulator to states and municipalities. The resulting patchwork of local-level policies is complex and sometimes challenging to navigate for operators.A handful of cannabis companies, like Green Thumb Industries in Illinois and Trulieve in Florida, are quickly becoming industry blue chips not via a focus on scale and footprint but with a mastery of local regulation and leadership in their respective home states. At this early stage in the sector's development, the industry's current "Laws" of "Canna"nomics favor operators that can master the complexity of the local landscape.
Cannabis is on the cusp of causing major disruption to numerous, entrenched multibillion-dollar industries like alcohol and pharma as millions utilize cannabis to aid sleep, manage pain, and pursue recreation. With consumers finding new, practical uses for cannabis every day, demand continues to surge, even in the midst of a global pandemic.This demand for cannabis has led to unexpected innovations, such as cannabis vending machines in Colorado and insurance coverage in Germany. As consumers incorporate cannabis into daily life, views on the plant continue to normalize. We see this normalization as the fuel to drive further “cannabis disruption” across a myriad of industries.
Election 2020 is approaching rapidly. While the ultimate outcome remains unclear, we see several catalysts that could provide a “rising tide” to the cannabis industry, independent of which party occupies the House, Senate, or White House. Even if November’s results don’t bring the promise of full federal legalization, we believe there are a myriad of incremental measures, such as access to traditional financial services, that would be revolutionary for the industry and could garner bipartisan support given the political landscape. Outside of Washington, states and municipalities continue to move forward with November ballot measures to expand local access to legal cannabis in pursuit of the jobs and tax revenues that accompany a “rising tide of legalization.”
Cannabis companies continue to exceed expectations as numerous operators reported a significant increase in sales for the month of July, and this week several of the publicly-listed Multi-State Operators (MSOs) announced impressive Q2 results that exceeded estimates of even the most optimistic equity analysts.These results point to a promising second half of the year and suggest the “momentum of cannabis” is continuing to build in 2020. Legal cannabis provides a bright spot in a bleak economy: Since the arrival of the pandemic, cannabis sales are up as consumers turn to marijuana for stress relief and recreation. Furthermore, cannabis companies are doubling down on safety by implementing strategies to reduce contact between retailers and customers, including curbside pickup and at-home delivery.
In our previous Capitol Hill update, we at Bengal Capital shared our long-term view that popular pressure on Congress will ultimately lead to a relaxation of the federal prohibition on cannabis. Headlines of the past week only reinforce our view as the US House took steps to protect state cannabis laws, the FDA issued cannabis research guidelines, and the Senate introduced a bill to decriminalize cannabis.With a November election on the horizon and the general chaos of 2020, it remains uncertain whether significant cannabis reforms will pass this year, but we see the continuous stream of positive news emerging “From the Halls of Congress” as a massive tailwind for the industry.
In our global economy, a robust infrastructure exists to facilitate the supply, demand, and flow of goods. Supply chain finance, dedicated software, and lean manufacturing are some of the common tools that keep the established economy moving but have yet to be implemented at scale in cannabis. Given the nascent stage of the cannabis industry’s development, accepted rules of economics do not yet quite apply, leaving the sector to sort out its own laws of “canna”nomics. That said, the rapid growth of legal cannabis has spurred the development of “traditional” tools of commerce within the cannabis industry. Just last week, the industry’s largest supply chain finance deal was completed (article #2 below), and a new startup secured financing to train and place cannabis workers (article #3 below). As the infrastructure to support cannabis grows, we believe the economic impact of this industry will continue to multiply. We see the complex “canna”nomics behind the industry as a driver for growth and innovation.
The cannabis landscape evolves quickly, and innovation occurs at lighting speed. Within this nascent industry, entrepreneurs are hard at work creating unique brands and experiences that will resonate with a rapidly-growing base of legal cannabis consumers. This week, we feature some of our favorite products that are on the cutting edge of development. Jetty Extract unrefined live resin: Unrefined live resin is the latest innovative release from the Jetty Extracts team in Oakland. Cannabis becomes “live resin” through an extraction process that preserves the original cannabis flower by flash freezing immediately after harvest. “Refined” live resin extraction can lead to the loss of active cannabinoid components before reintroduction to the final oil product that is sold to consumers. In contrast, no active compounds are removed from Jetty’s “unrefined ” live resin, resulting in a full-spectrum experience (a concentrate product most-closely related to fresh cannabis flower) for the consumer.
Cannabis continues to be at the forefront of the national political conversation. The Joe Biden presidential campaign released its federal cannabis recommendations this week which called for the legalization of medical use cannabis at the federal level but stopped short of supporting nationwide recreational legalization. Given the wide bipartisan support for cannabis, with almost 67% of Americans supporting legalization, candidates’ views on cannabis policy has the potential to be the differentiator in races for the House, Senate, and, ultimately, the White House in November. Meanwhile, a bipartisan group of senators including Chuck Grassley (R-IA) and Dianne Feinstein (D-CA) has begun work on an amendment to the latest defense spending bill that will allow for cannabis and hemp research. As more representatives realize the positive tax revenue and social equity implications of cannabis legalization, the Bengal Capital Team is hopeful that we will continue to see momentum behind the “rising tide of legalization," regardless of electoral outcome this November.
Despite federal roadblocks, research continues and “the science of cannabis” is beginning to yield important discoveries in areas such as depression treatment, pain relief, and sleep management.We envision that expanded research will unlock uses for the plant we have not yet begun to contemplate. “The science of cannabis” has the potential to bring immeasurable benefits to patients and consumers as well as massive disruption to multiple industries.Lastly, the science behind cannabis extraction is to thank for the tremendous increase in concentrates products available to today's patient and consumer. 7/10, 4/20's lesser known cousin, is the cannabis community's day to celebrate the benefits of concentrate "oil" (710 = OIL upside down). Happy 7/10 to those who are celebrating, and for those who want to learn more, this link offers an excellent primer.
Cannabis is already legal in 33 states, and more than half of the U.S. population has access to the plant in some shape or form. Today there are almost 250,000 legal cannabis industry jobs in the United States. This year legal cannabis will generate nearly $1.5 billion in federal tax revenue. Now, with the arrival of a global pandemic, the industry's performance has lent credence to the growing notion that cannabis may be recession-proof and could be a boon to beleaguered budgets. Total U.S. retail sales fell 21.6% in April from the previous year, yet cannabis sales in several states posted significant sales gains."The momentum of cannabis" continues to build...
A vast majority of Americans support the legalization of cannabis. With over 200 million Americans living in states where cannabis is legal and with the industry already generating nearly $1.5 billion in annual federal tax revenue, one might wonder why cannabis is still illegal. Historically, the industry's progress at the federal level has been blocked in "the halls of Congress" by the Senate, though this week's headlines regarding the Department of Justice (DOJ) suggest that the Senate may not be the only organization in Washington putting up roadblocks for the industry.Over the long term, we believe that overwhelming national support for cannabis combined with the industry's ability to generate tax revenue and create jobs will pressure Washington to relax federal prohibition on cannabis.
With the protests that have been roiling the United States these past few weeks, the country has been faced with difficult questions about the criminal justice system. Given its illegal status at the federal level, cannabis has been in direct conflict with the criminal justice system since it was made illegal in 1937. Questions about reform have been at the forefront of the industry for generations, and those questions have only become more complicated by the "rising tide of legalization" beneath the industry. U.S. cannabis consumers overwhelmingly support criminal justice reforms (see this week's first article below), and with a vast majority of Americans in support of cannabis legalization, questions around reform will only become more pressing, especially as state and local governments face pressure to tap the industry for the tax revenue and jobs created by legalized cannabis.
A global pandemic has “disrupted” the world. In many cases, COVID has been a catalyst to accelerate change that was already in progress. Momentum behind “cannabis disruption” has been building for years, and the industry is on the verge of causing major disruption to numerous multibillion-dollar industries. Cannabis has already made inroads into the $65 billion+ pain management category as patients opt for medical marijuana instead of opioids and senior citizens utilize THC inhalers and cannabis balms to manage arthritis and other chronic pain. As research unlocks novel uses of cannabis, billions of dollars of health & wellness, pharma, alcohol & beverage, and cosmetics market share is in play.
Due to prohibition, research into the "science of cannabis" has been limited to the handful of pioneers able to navigate the complex regulatory environment surrounding cannabis. With cannabis still federally illegal, universities that "touch the plant" through research are at risk of losing federal funding, and these restrictions prohibit the scientific community from fully understanding cannabis and the cannabinoid system.The industry has only scratched the surface in understanding the "science of cannabis," but preliminary findings are highly encouraging. The female pioneers of cannabis science: With revolutionary discoveries such as the CB1 receptor and nontoxic, cannabinoid-based cancer treatments, these bold research pioneers have advanced the "science of cannabis" and expanded our understanding of the plant immensely.
According to a majority of Americans, cannabis legalization has been a success thus far. The collective change in attitude towards cannabis has been remarkable. Previously, cannabis was stigmatized. Presently, cannabis is now legal (in some form) in a majority of states, state governors welcome it with open arms, and universities offer cannabis courses. "The momentum of cannabis" only continues to build.Ray Dalio notes that "over the course of our lives, we make decisions that are essentially bets." Bengal's bet is placed on the positive shift in attitudes, favorable demographics, projected growth, and "momentum of cannabis."
At Bengal Capital, we have been fortunate to partner with companies that share our values and are some of the best operators in cannabis. These companies are driving growth and demonstrating the vast potential of the industry. Below we have collected articles that highlight our "partners in the news." GTI becomes the first American cannabis operator to exceed $100 million quarterly revenue: GTI reported first quarter revenue of $102.6m and adjusted EBITDA of $25.5m, both above Wall Street consensus. Grassroots Taneytown cannabis cultivation center completes expansion, offers job openings: Grassroots continues to expand cultivation capacity and captures "a unique opportunity in this unprecedented time to provide jobs."
The "rising tide of legalization" around cannabis has produced the fastest growing industry in the United States, created hundreds of thousands of American jobs, and generated significant tax revenue for state governments. In this time of uncertainty, we anticipate the benefits of legalization will be illuminated in states that are able to battle unemployment and budget shortfalls with jobs and revenues created by the cannabis industry. Cannabis employees are in high demand during economic crash: Despite the economic hardship caused by the pandemic, cannabis companies in a half-dozen U.S. states are hiring thousands of workers. The cannabis industry is playing a pivotal role in the American economy as it is one of the few industries providing jobs and needed services right now, alongside groceries and medical care.
No one reaches for moonshine or bathtub gin to pour a cocktail. Both are relics of the past because no one is willing to risk blindness or death to save a couple of dollars on alcohol when safe, regulated, and consistent spirits are available.Based on the same logic, legal operators will ultimately prove to be the cannabis industry's winners. At present however, the illicit, legacy market is putting up a fight and has been emboldened by a regulatory framework that has not yet figured out how to support the legal market. For the time being, legal operators are forced to adapt to an environment that is more "gray" ("we will get by") than black or white.
Cannabis companies, like all businesses, have been forced to adapt in response to the uncertainty created by COVID-19. Astute operators have used today’s challenging environment as an opportunity to prepare for the future by auditing cost structures, examining marketing practices, and increasing delivery and online presence during this pandemic. Evidence continues to support the idea that cannabis is a resilient, recession-resistant staple, and we are encouraged by cannabis operators that have adapted with curbside pick-up, delivery, and online payment to capture larger basket sizes for purchases.Those that continue “adapting until things make sense” will be well-positioned when uncertainty around COVID and, eventually, the industry clear.
The science behind the industry is fascinating, but ultimately cannabis products and brands are what resonate with and connect consumers. There are exciting new offerings for consumers of all stripes, from the new customer to the experienced connoisseur. Below, we have highlighted a selection of products that have recently piqued our interest. Jetty Extracts Live Resin: Of late, cannabis aficionados have gravitated toward more natural and unrefined products. Jetty Extracts has recently released premium "live resin" products for dablicators, Pax Era pods, and concentrates. Live resin aims to deliver the terpene and cannabinoid profile closest to recently-harvested cannabis flower by flash freezing the plant at the moment of harvest. Live resin, sometimes called the "champagne of cannabis," provides a full spectrum of active cannabinoids for a robust, unrefined experience.
Over the past month, cannabis has been declared an "essential service" in almost all of the jurisdictions where it is legal. As the COVID-19 pandemic unsettles the global economy, legislators have moved to protect one of the few sectors of the economy that is actually growing despite negative global macroeconomic conditions. Pelosi wants marijuana banking access included in next coronavirus relief bill, congressman says: With the support of House Speaker Nancy Pelosi, Representative Ed Perlmutter (D-CO) is working to include provisions to allow marijuana businesses access to banking services in an upcoming COVID-19 stimulus package.
At the heart of cannabis are the cannabinoids - a group of over 100 molecules that bind to the CB1 and CB2 receptors in our body. Due to years of federal prohibition, scientists know relatively little about these compounds, but the science of cannabis is quickly evolving. Private research is expanding rapidly to better understand our endocannabinoid system and why certain cannabinoid and terpene (the molecule that gives cannabis its smell and flavor) combinations have such medical and recreational impact for many consumers. Not only do we find this science fascinating, but we also believe it ultimately will prove to be very lucrative. R&D will unlock the capability to offer cannabis consumers a consistent experience at scale and will produce the patents and intellectual property that generate long-term value. The "Science of Cannabis" will be the driver behind many of the industry's long-term winners.
The tide of cannabis legalization across the United States continues to rise despite difficult macro market conditions, and we believe the “Rising Tide of Legalization” will provide an enormous tailwind to the cannabis industry. Support among Americans for cannabis legalization continues to rise, and many government entities count on cannabis-derived taxes as a meaningful source of revenue. Even in these difficult times of COVID-19, we see vast potential for the industry. Numerous municipalities depend on tax revenue from the industry and have declared cannabis an “essential service” during this period of uncertainty. The tide continues to shift, and we see promise ahead.
Cannabis is here to stay, and we see being “long regulation” as a way to back the ultimate winners in an industry that has a massive market opportunity. Operators able to navigate the rapidly-changing regulatory landscape are in a pole position to capture market share in a growing, multi-billion dollar market vs. competitors that are unable to process regulatory change. Cannabis legalization throughout the United States generally has unfolded in a pretty consistent manner: A state legalizes medical use to treat a short list of conditions where cannabis generally has been accepted to be therapeutic.After getting comfortable with its initial medical use program, the state expands its list of qualifying conditions eligible for cannabis treatment.The state adopts full adult use (recreational) legalization of cannabis.The state updates and adds regulations as its medical and recreational cannabis programs evolve.
Even with the turmoil of the past couple of weeks, we’ve seen encouraging news for the industry. While many businesses have closed their doors in response to the COVID-19 outbreak, cannabis providers have been declared an essential service in California, Michigan, and several other states. Average basket sizes are up at the dispensary, and demand for delivery has soared. Michigan temporarily allowing curbside marijuana pickup, encourages delivery: As coronavirus spreads, Michigan is now allowing curbside pickup for medical patients and recreational cannabis users alike, and California has followed suit. Many retail shops have reported lower foot traffic, but customers that do come in are ordering much larger amounts than usual and appear to be “stocking up.” Delivery has also seen a surge in sales, likely due to the increased number of telecommuters and those staying at home in response to the spread of the coronavirus.
Cannabis legalization has created hundreds of thousands of jobs and resulted in billions of dollars of collective market capitalization for the industry’s public companies. We see significant momentum from the industry’s positive economic impact and with cannabis now legal in ⅔ of the United States in some form (medical and/or adult use), we anticipate legal barriers for the industry will continue to fall. The “Rising Tide of Legalization” has the potential to further lift an industry which is already experiencing explosive growth. Cannabis Jobs Report: Legal cannabis now supports 243,700 full-time American jobs: The legal cannabis industry is still in its early days...
Cannabis is disrupting multiple industries, most notably alcohol and pharma. Consumers are already finding an alternative to the detrimental effects of alcohol, prescription sleep aids, and opioids through cannabis. The addressable market of consumers that may ultimately seek to replace alcohol and prescription products with cannabis is massive. As consumers become more educated about how to utilize cannabis, its past stigma continues to fade. With growing support from constituents, governments have the cover to reassess past cannabis policies.The momentum behind cannabis is substantial. The views of both consumers and governments will evolve with additional education and exposure, and we anticipate both groups will expand the search for cannabis alternatives. Countless industries will be disrupted by the emergence of cannabis. We believe that is an enormous market opportunity.
“Face it, Jared, being too early is the same as being wrong.” —Richard Hendricks, Silicon Valley. Our good friend Richard at Pied Piper is right. Being too early in any industry - be it tech, finance, or cannabis - can be the death knell of a business. Cannabis is a burgeoning industry, and its early innings have been about making things work in an imperfect world. The industry has seen the emergence of some unconventional business models, but right now it’s all about “adapting until things make sense.”The operators who have adapted and succeeded this environment have done so in a crucible and are building the foundation for their future success. Only the strongest operators will “adapt until things make sense,” and those left standing will be awarded access to the massive cannabis market of the future.
Welcome to our first edition of “The Bengal Bite.” As a valued member of the Bengal investing community, we would like to share with you our perspective on some of the topics we’ve found to be most important in the ever-changing cannabis industry. Going into 2020, cannabis in some form is legal in 2⁄3 of America. The regulatory landscape is complex and varies from state to state, but one constant exists everywhere - the illicit market. Analysts estimate that the illicit market accounts for 75% of cannabis sales in California ($9bn in illegal sales out of $12bn total). The illicit market is massive, and it is potentially the biggest threat to legal cannabis operators everywhere. A fully legal market does not yet exist anywhere in the US. At best, licensed operators are operating in cannabis markets colored in varying shades of “gray.”