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The Great Cannabis Crash of 2019

California is famous for its cyclical booms and busts: housing, dotcoms, gold mining. Guess which industry is next.



The dotcom boom of the late '90s is widely considered to have begun in 1995 and ended in 2001, when the boom went bust, companies dropped like flies, and workers were laid off en masse. Back then, people talked about how fast everything moved, constantly referring to "Internet time." How, then, should we measure the duration of the marijuana boom? "Cannabis time?" If we measure the California pot boom from the first day of legal, recreational sales — January 1, 2018 — to today, this boom-and-bust cycle has lasted only one-third as long as the dotcom era.

The year that ended two weeks ago was a rough one for California's cannabis industry. Comparisons to the Internet boom were made with increasing frequency through 2019, as each new piece of bad news — layoffs, companies going under, stocks plummeting — was announced. But there are big differences.

For starters, cannabis is an actual commodity for which there is a known level of demand. During the dotcom boom, nobody knew how many "eyeballs" a website might attract or what, if anything, they might be worth. And nobody knew how many people might want their groceries or pet-care products delivered to their door. (It turned out, not nearly as many as the stock touts and marketing types had promised.) For year after year, investors poured money into companies they knew weren't making any money, and in some cases — as with and the online grocer Webvan — when they knew the companies were losing money on every sale.

Cannabis isn't like that. Margins are often razor-thin, but they're still margins — customers pay more for their pot than the retailer paid to obtain it. And the size of the market was more-or-less known before the first legal sale took place, thanks to estimates of the already existing illicit market, as well as the legal medical market. Pot is a real business, not the mere wish of one. Of course, companies that made real products to serve the dotcom boom — makers of microchips and routers, for example — mostly came out of the bust intact, and many continue to thrive. This is much like what happened during the Gold Rush, the original California boom-and-bust cycle, during which a few people made money by finding gold, but many more made money selling food, beer, equipment, or blue jeans.

Bad news about the so-called "Green Rush" rolled in slowly at first, picking up steam around the end of last summer. Stocks started to dive. Layoffs were announced. Executives who just months earlier were forecasting great riches suddenly acknowledged — mostly in whispers — the deepening gloom. Since last August, the North American Marijuana Index, which tracks cannabis stocks, has fallen by half. The problem with pot stocks isn't limited to California. It's continental: too many investors looking for a quick buck creates a bubble, as with Internet stocks in 1999, or housing in 2007. That bubble has now burst.

Some of the biggest pot companies in the world, including many whose underlying business is still growing, have lost enormous amounts of assumed value. From last spring to now, Curaleaf, a major company based in Massachusetts, has lost 56 percent of its value; Canopy Growth, based in Canada, lost about the same; Aurora Cannabis, also based in Canada, lost a swoon-inducing 82 percent.

Closer to home, Oakland-based Harborside, which went public in Canada via a so-called reverse takeover, was valued at $3.80 a share last June. As of Monday, the stock was selling for 61 cents. Edibles maker Plus Products, based in San Mateo, saw its stock hit $5.67 last February. Just short of a year later, it's trading at 90 cents.

The Culver City-based MedMen, which runs dispensaries in several states, has lost about 85 percent of its value over the past year. In November, it announced it would lay off nearly 200 employees, or about a fifth of its workforce, and restructure the company.

It's not just public companies. Right around the same time that MedMen was breaking the bad news, a whole bunch of private California cannabis businesses announced layoffs, including Pax Labs, Grupo Flor, Flow Kana, and CannaCraft. The reasons differ somewhat for each of them. Pax Labs, a maker of vape cartridges, was hit hard after a spate of serious lung illnesses and some deaths were tied to vaping across the country. The fact that most if not all of the illnesses were connected to illicit vaping products didn't matter: people became scared to vape at all, and that hurt big swaths of the industry, including dispensaries.

Etienne Fontan, co-owner of the Berkeley Patients Group and a board member of the National Cannabis Industry Association, thinks things will get worse before they get better. "Medium to small distributors are going to be this year's fallout," he predicts, citing the recent closure of Pacific Expeditors, a distribution operation in Sonoma County. "These collapses fall all along the supply chain but especially impact small farmers and producers," Fontan said. "They feel this and it will cost companies their business permanently."

We'll know things are getting really bad when we see huge implosions that go beyond companies that rushed to the public markets or otherwise overextended themselves. DionyMed Brands, based in the South Bay, was formed in 2017 as a "multi-state cannabis platform" and immediately went on an acquisition tear, borrowing millions of dollars and snapping up companies across the supply chain, from cultivators to manufactures to delivery services, including, among the latter, Berkeley-based Hometown Heart. In the meantime, it went public in Canada, through a reverse takeover. DionyMed had been partners with the San Francisco-based delivery platform Eaze, which announced its own layoffs late last year, but then filed a lawsuit against that company alleging that it was committing fraud by masking cannabis sales in order to retain credit-card services. Eaze denies the allegations and notes that, as a platform, it doesn't itself handle payments, leaving that up to its storefront customers.


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