Friends, as a transitionary year for the cannabis industry comes to an end, I wanted to offer up some of my own personal (and not those of Reed Smith or my colleagues) thoughts and predictions for 2020.
- Equity Capital – equity will still be hard to come by in 2020 for companies; however, distressed private equity funds will come to market targeting troubled cannabis companies, infusing priority capital on very aggressive terms in exchange for a lifeline.
- Debt Capital – recent trends of significant debt capital raises will accelerate, as companies that relied previously on equity issuances on the Canadian Securities Exchange will continue to lever their asset bases. This will come as more traditional financial institutions and hard asset lenders (meaning non-bank groups that will lend against equipment, inventory, licenses, and real estate) participate in the industry, and more REITs raise capital to provide liquidity on real property assets. Although not directly dilutive to equity ownership, the interest/lease cost is dilutive to cash flow and could make positive net income even harder to achieve. In addition, this access to debt capital comes with its own risks – the lack of access to bankruptcy protection in the US is already putting pressure on an industry strapped for cash. Companies in distress will have to make hard choices to avoid a “race to the courthouse” scenario when those creditors start demanding payment.
- Mergers & Acquisitions – M&A activity will continue unabated and blockbuster transactions will still get done on a stock-for-stock basis, with little or no cash exchanged, while valuation remains a wildcard (though far be it from a lawyer to predict what company valuations will actually be).
- Valuations – industry professionals will still continue to struggle to find consensus on valuation methodologies (e.g., EBITDA multiples, current revenue multiples, future revenue multiples).
- Congress – the SAFE Banking Act will not become law in 2020, nor will any other federal cannabis legislation get done. Recent actions and statements suggest the Senate indeed has other priorities going forward. (see also link) The industry will instead start to consolidate around a coordinated push for federal descheduling of cannabis (i.e., legalization) as the most viable solution to many of the industry’s current problems.
- Interstate Commerce – a major industry operator will finally challenge state laws prohibiting interstate commerce on constitutional grounds (which I wrote about here link).
- Hemp – biomass and oil will become more standardized in response to commoditization and state testing requirements. More resources will shift into researching and promoting the industrial uses of hemp. The FDA will issue regulations on the use of hemp-derived products in food, beverage, and dietary supplements, and no one will be happy with them (but perhaps they will allow me to finally start my fully-legal CBD knish business).
It ought to be noted that none of this is legal or investment advice, nor is any of it based on actual knowledge of anything that may or may not happen, so you should not rely on this for any reason. I will come back to this topic at the end of next year to see if any of my predictions actually pan out. No matter what happens, I am certain that it will be an interesting year for the cannabis industry.