Friends – as 2020 thankfully comes to a close, I thought it might be fun (and humbling) to look back at my cannabis industry predictions for this year and prognosticate for 2021.
Let’s see what I said last December:
- 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.
Verdict – I was mostly right. Until the fourth quarter, equity capital was still fairly non-existent in the industry. Only in the past few weeks have we seen equity raises from well-positioned MSOs that have seen their stock prices firm up. We didn’t really see a wave of distressed private equity funds, I suspect because, for much of 2020, there still wasn’t much demand by equity investors.
- 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.
Verdict – I called it! Debt took over the primary capital role in cannabis in 2020, with traditional non-bank lenders fueling a debt issuance frenzy and REIT activity remaining strong (true, a sale/leaseback to a REIT is not really debt in the traditional sense, because a real estate lease is not an obligation for borrowed money, but it’s close).
- 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).
Verdict – I was wrong until I was right. The industry saw precious little M&A activity throughout most of 2020, as the industry was laser focused on dealing with the pandemic, while valuations remained depressed. However, in Q4 we really have seen deal activity pick up, highlighted in a recent Musings. (link)
- Valuations – industry professionals will still continue to struggle to find consensus on valuation methodologies (e.g., EBITDA multiples, current revenue multiples, future revenue multiples).
Verdict – I was sort of right, sort of wrong. Public MSOs now have positive EBTIDA and a solid revenue track record, with some even reporting positive net income, so we’re seeing analysts apply traditional public stock valuation metrics to these companies. For private companies, valuation methodology still remains a bit more of a wildcard.
- 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.
Verdict – wrong. Yeah, this was wishful thinking.
- 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).
Not too bad for a corporate lawyer.
So what about 2021?
- Regulatory – nothing will get done in Congress for non-hemp cannabis (including SAFE Banking). The new US Attorney General will continue to maintain the Justice Department’s historical approach to non-hemp cannabis ala the Cole Memorandum, but won’t formally reinstate it as a policy. The FDA won’t issue regulations on hemp-based CBD in food/beverage/dietary supplements. Congress will revise hemp regulations to raise minimum THC limits and solve the hot hemp extract problem (link). At least one enterprising state will require insurance coverage for medical use.
- Capital Markets – debt will continue to reign supreme as balance sheets grow to sustain leverage (translation – more assets mean more ability to borrow), and as more non-bank lenders wade into the space. MSOs will continue to tap public equity markets as valuations remain firm, while operator IPOs will remain relatively scarce. SPACs will stay active, both in formation and in finding deals to de-SPACing (link).
- Mergers & Acquisitions – M&A is back, baby! (link)
- Interstate Commerce – no one will challenge interstate commerce laws in court (discussed link). If New York adopts adult use in 2021, we’ll see the first interstate commerce pact among adjacent states (in this case, New York, New Jersey, Connecticut, Pennsylvania).
- Miscellaneous – A major US beverage or beverage distribution company will take the risk of making a direct investment in a plant-touching business. I’ll see many of you at MJBizCon in Vegas in December 2021. I’ll expand my references in these Musings beyond knishes and theoretical physics.
Now, if the Democrats win the Georgia special election and take control of the Senate, I’ll be revising every single one of these predictions.
Happy new year to you all! I appreciate your continuing to read (and engage me on) my take on this exciting and enigmatic industry, and look forward to continuing the conversation in 2021.