Chalice Drops Truth Bomb

In a fairly depressing letter to shareholders, Oregon-based Chalice Brands (OTC: CHALF) dropped a truth bomb about the industry’s woes. The letter starts out nice enough. It talks about the progress made in the number of states that have legalized cannabis even if the Federal government has chosen to stay on the sidelines and keep it registered as a schedule 1 drug. It notes that cannabis was considered an essential service during the pandemic, which was a huge boost to the industry that would’ve been devastated had it been forced to close like other retail stores.

The Good News

The letter points out the success of the Oregon state cannabis market. “Based on data from the Oregon Liquor and Cannabis Commission (OLCC), cannabis sales in Oregon rose from $795 million in 2019 to $1.11 billion in 2020, and a peak of $1.18 billion in 2021 – nearly an increase of 50% in two years.” However, after delivering the good news, it was time to get real and stuff got real – real fast.

The Bad News

The letter hit on the macroeconomic trends of inflation, higher interest rates, the skyrocketing cost of housing, and the effect of consumers spending less. Digging further the letter says Oregon’s cannabis operators have been beset with repetitive theft, increased overhead, and excessive competition.

According to OLCC data, Oregon adult-use cannabis sales sold $319.7 million in products through the first fourth months of the year, a decrease of 14.4% from the $373.7 million sold during the same time period last year. Furthermore, Portland flower sales peaked in June 2021 recording $21 million, while June 2022 flower sales tallied $11.5 million – a decline of almost 50% year-over-year. Some of this decline is due to falling average retail prices (ARP’s) reported by BDSA Q1 Cannabis Market Overview, with the equivalent ARP in Q1 2022 falling 5% from Q4 2021 and remaining almost flat from Q1 2022 across Oregon, California, Nevada and Oregon markets. Declines in unit sales resulting from the fading pandemic work-from-home lifestyle, escalating macroeconomic factors, and state-specific challenges underscores the vulnerability of operating a cannabis business and the ongoing headwinds facing the industry.

Chalice Challenges

Despite all the negatives, Chalice told its investors it was staying the course. The company owns 16 dispensaries and operates 2 retail locations in Oregon. However, the company also said that capital has dried up in the industry. the company wrote, “The insufficient capital markets have continued to challenge our working capital. We will maintain our pursuit of constant margin improvements despite the lack of access to capital in order to remain competitive in the marketplace.” Chalice also said it is trying to improve its margins through product mix, and the way it is buying products – through both first-party and third-party margins.

Revenue Growth

The company has also changed its auditors causing a delay in filing its financial statements. Despite not having audited results, Chalice reported that its dispensary revenue for the first quarter of 2022 was $5.3 million, representing a 45.1% increase compared to the same period in the prior year. “The increase was the result of the Homegrown Oregon acquisition on May 19, 2021. Dispensary revenue for the second quarter of 2022 was $5.2 million, representing a 1.4% increase compared to the same period in the prior year. Similar to the first quarter comparison, the dispensary revenue increase is largely attributable to the Homegrown Oregon acquisition. Dispensary revenue for the first six months of 2022 was $10.5 million representing a 19.5% increase compared to the same period in the prior year.”

Pay Cuts

The moves include cutting gross wages and salaries by 30%. The letter said that the Board members and the Chief Executive Officer, Jeff Yapp, are all operating with no compensation and will continue to do so for the foreseeable future.