Business
High cost of raising capital in marijuana industry expected to continue in 2023
Many marijuana companies seeking capital are expected to find limited pickings and costly terms this year, providing little relief from 2022, when the amount of money ponied up by investors tumbled more than 60% from the year before.
Still, investors are expected to open their checkbooks for certain types of businesses and opportunities.
Analysts pointed to M&A deals aimed at scooping up distressed assets as well as ancillary businesses that often require less money to operate than plant-touching companies such as cultivators and retailers.
On the flip side, these same plant-touching businesses will likely face more obstacles raising capital, according to analysts.
Last year, nearly every cannabis sector tracked by Viridian Capital Advisors – from M&A to cultivation to real estate – saw steep declines in capital raises compared to 2021’s capital markets boom, which was driven by sales growth, less expensive capital and hopes for federal reform.
Just biotech/pharma, infused products and extracts and psychedelics grew in 2022. (Viridian, a New York-based capital, M&A and strategic advisory firm, started tracking psychedelics as a counterpoint to cannabis.)
“The equity side of the capital markets just completely went away at the end of last year for U.S. cultivators,” Frank Colombo, director of data analytics at Viridian, told MJBizDaily.
“And for the first three weeks of 2023, we had no debt deals, which was really surprising to me because that was the thing that was holding the market up.”
That’s until Massachusetts-based multistate cannabis operator MariMed announced in January it had secured a $35 million credit facility from lenders Chicago Atlantic Advisors and Silver Spike Investment Corp.
“It was good news because it showed that even medium-sized companies can still get debt capital,” Colombo said.
High cost of capital
On the other hand, Colombo said, the terms of the deal also show how expensive capital is and how important it is for that capital to be allocated strategically.
MariMed will receive $30 million at close with the option to borrow another $5 million over the next six months.
The loan carries a floating interest rate of the prime rate plus 5.75%, with 30% warrant coverage.
“I come from a high-tech background, so it took me a while to get over what the price of lending is in cannabis,” MariMed Chief Financial Officer Susan Villare told MJBizDaily.
“Never in my career had I done debt financing over 10%.”
But when Villare looked at the rates other players were paying in refinancing deals, the fact that the SAFE Banking Act failed to pass Congress and what MariMed could achieve with the $35 million, she decided it was the right deal.
After listing on the Canadian Securities Exchange last July, MariMed announced its $20 million acquisition of Maryland medical cannabis business Kind Therapeutics.
The deal came shortly before Maryland voters overwhelmingly approved adult-use marijuana legalization last November.
MariMed also plans to expand operations in Illinois, Massachusetts and Missouri.
“We could certainly do it with cash flow from operations. But we said, ‘Hey, let’s accelerate that,’” Villare noted.
“We’ll do the secured financing to get that done. It’s pretty short term – three years – and we’re confident with cash flow from operations that we can pay it down, and we did negotiate hard to ensure that there would be no prepayment penalties should we pay it all down after 20 months.”
Growth opportunities
Both Colombo and Patrick Rea, the managing director at San Francisco-based venture capital firm Poseidon Garden Ventures, said they expect cultivators and cannabis license holders to pay a premium for capital and struggle to secure investment through 2023.
Even though software and media companies have been downsizing and, in the case of Denver-based Akerna Corp., exiting the industry entirely, non-plant-touching ancillary services are scalable, without the burden of licensing.
“I find a lot of the investors I spoke with are really just focusing on ancillary technology and taking a break from licensed operations because what we’ve learned about licensed operations is that they’re capital intensive. It takes a lot of money to get them up and going,” Rea told MJBizDaily.
“And when cannabis regulators and legislators realize that the sky didn’t fall and there’s no zombie apocalypse (after legalization), they issue more licenses. And every additional license they put out decreases the value of the existing licenses because there’s more competition.”
Colombo said more funds will likely be created with the purpose of raising money to invest in financially struggling operations and companies.
“We’ve both talked to people and heard secondhand of other groups trying to raise money to pursue acquisitions of distressed properties,” he said.
Similar to predictions that M&A would be dominated by acquisitions of distressed assets in 2023, capital raises will also go toward either distressed asset acquisitions or rescue financing for companies struggling to stay afloat.
Psychedelics
One area that is attracting investor dollars is the psychedelics business.
Viridian started tracking capital raises in psychedelics because the company was noticing the flood of capital going into the sector, Colombo said.
“So it’s an incredible counterpoint that shows businesses that have incredible growth potential like cannabis,” he said.
“And it’s further behind the curve in terms of development of actual revenues.”
“But it’s way, way ahead of the curve in terms of regulatory approval,” Colombo said, because some psychedelic drugs used in treatment clinics such as ketamine aren’t Schedule 1 drugs.
That means the sector is perceived as less risky, with lots of opportunity for capital raises and M&A.
“If you had asked me three or four years ago if psychedelics would be more legal than cannabis, I would have said, ‘What are you, crazy? You must be joking.’
“But that is indeed how it has transpired.”
New Mexico regulators fined a cannabis operator nearly $300,000 and revoked its license after the company allegedly created fake reports in the state’s traceability software.
The New Mexico Cannabis Control Division (CCD) accused marijuana manufacturer and retailer Golden Roots of 11 violations, according to Albuquerque Business First.
Golden Roots operates the The Cannabis Revolution Dispensary.
The majority of the violations are related to the Albuquerque company’s improper use of BioTrack, which has been New Mexico’s track-and-trace vendor since 2015.
The CCD alleges Golden Roots reported marijuana production only two months after it had received its vertically integrated license, according to Albuquerque Business First.
Because cannabis takes longer than two months to be cultivated, the CCD was suspicious of the report.
After inspecting the company’s premises, the CCD alleged Golden Roots reported cultivation, transportation and sales in BioTrack but wasn’t able to provide officers who inspected the site evidence that the operator was cultivating cannabis.
In April, the CCD revoked Golden Roots’ license and issued a $10,000 fine, according to the news outlet.
The company requested a hearing, which the regulator scheduled for Sept. 1.
At the hearing, the CCD testified that the company’s dried-cannabis weights in BioTrack were suspicious because they didn’t seem to accurately reflect how much weight marijuana loses as it dries.
Company employees also poorly accounted for why they were making adjustments in the system of up to 24 pounds of cannabis, making comments such as “bad” or “mistake” in the software, Albuquerque Business First reported.
Golden Roots was fined $298,972.05 – the amount regulators allege the company made selling products that weren’t properly accounted for in BioTrack.
The CCD has been cracking down on cannabis operators accused of selling products procured from out-of-state or not grown legally:
- Regulators alleged in August that Albuquerque dispensary Sawmill Sweet Leaf sold out-of-state products and didn’t have a license for extraction.
- Paradise Exotics Distro lost its license in July after regulators alleged the company sold products made in California.
Golden Roots was the first alleged rulebreaker in New Mexico to be asked to pay a large fine.
Source: https://mjbizdaily.com/new-mexico-cannabis-operator-fined-loses-license-for-alleged-biotrack-fraud/
Four marijuana companies, including a multistate operator, have filed a lawsuit against U.S. Attorney General Merrick Garland in which they allege the federal MJ prohibition under the Controlled Substances Act is no longer constitutional.
According to the complaint, filed Thursday in U.S. District Court in Massachusetts, retailer Canna Provisions, Treevit delivery service CEO Gyasi Sellers, cultivator Wiseacre Farm and MSO Verano Holdings Corp. are all harmed by “the federal government’s unconstitutional ban on cultivating, manufacturing, distributing, or possessing intrastate marijuana.”
Verano is headquartered in Chicago but has operations in Massachusetts; the other three operators are based in Massachusetts.
The lawsuit seeks a ruling that the “Controlled Substances Act is unconstitutional as applied to the intrastate cultivation, manufacture, possession, and distribution of marijuana pursuant to state law.”
The companies want the case to go before the U.S. Supreme Court.
They hired prominent law firm Boies Schiller Flexner to represent them.
The New York-based firm’s principal is David Boies, whose former clients include Microsoft, former presidential candidate Al Gore and Elizabeth Holmes’ disgraced startup Theranos.
Similar challenges to the federal Controlled Substances Act (CSA) have failed.
One such challenge led to a landmark Supreme Court decision in 2005.
In Gonzalez vs. Raich, the highest court in the United States ruled in a 6-3 decision that the commerce clause of the U.S. Constitution gave Congress the power to outlaw marijuana federally, even though state laws allow the cultivation and sale of cannabis.
In the 18 years since that ruling, 23 states and the District of Columbia have legalized adult-use marijuana and the federal government has allowed a multibillion-dollar cannabis industry to thrive.
Since both Congress and the U.S. Department of Justice, currently headed by Garland, have declined to intervene in state-licensed marijuana markets, the key facts that led to the Supreme Court’s 2005 ruling “no longer apply,” Boies said in a statement Thursday.
“The Supreme Court has since made clear that the federal government lacks the authority to regulate purely intrastate commerce,” Boies said.
“Moreover, the facts on which those precedents are based are no longer true.”
Verano President Darren Weiss said in a statement the company is “prepared to bring this case all the way to the Supreme Court in order to align federal law with how Congress has acted for years.”
While the Biden administration’s push to reschedule marijuana would help solve marijuana operators’ federal tax woes, neither rescheduling nor modest Congressional reforms such as the SAFER Banking Act “solve the fundamental issue,” Weiss added.
“The application of the CSA to lawful state-run cannabis business is an unconstitutional overreach on state sovereignty that has led to decades of harm, failed businesses, lost jobs, and unsafe working conditions.”
Alabama regulators are targeting Dec. 1 to award the first batch of medical cannabis business licenses after the agency’s first two attempts were scrapped because of scoring errors and litigation.
The first licenses will be awarded to individual cultivators, delivery providers, processors, dispensaries and state testing labs, according to the Alabama Medical Cannabis Commission (AMCC).
Then, on Dec. 12, the AMCC will award licenses for vertically integrated operations, a designation set primarily for multistate operators.
Licenses are expected to be handed out 28 days after they have been awarded, so MMJ production could begin in early January, according to the Alabama Daily News.
That means MMJ products could be available for patients around early March, an AMCC spokesperson told the media outlet.
Regulators initially awarded 21 business licenses in June, only to void them after applicants alleged inconsistencies with how the applications were scored.
Then, in August, the state awarded 24 different licenses – 19 went to June recipients – only to reverse themselves again and scratch those licenses after spurned applicants filed lawsuits.
A state judge dismissed a lawsuit filed by Chicago-based MSO Verano Holdings Corp., but another lawsuit is pending.
Source: https://mjbizdaily.com/alabama-plans-to-award-medical-cannabis-licenses-dec-1/
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