On October 17th Burns and Levinson hosted its Sixth Annual Cannabis Industry Conference. Our very own Scott Moskol sat down with the following experts to discuss the current state of the national cannabis market and diagnose the events of the last couple of years that led the market to where it currently resides.
David Bunzel / Managing Director – Investment baking, M&A, Public & Private Markets / Young America Capital
Kyle Patrick Judge / Vice President – Management Liability, Cannabis & Transaction Risk / HUB International
Tiffany Liff / Managing Director / Entourage Effect Capital
Richard Ormond / Senior Advisor / PGP Capital Advisors
Jacques Santucci / President / Opus Consulting
There is no denying that the national cannabis market is undergoing a thorough “shake-up,” resulting in depressed prices, a reduction in annual gross profit, and an increase in defaults under debt instruments leading to the institution of receivership and other foreclosure proceedings. But how did we get here, and what should cannabis operators keep in mind when strategizing ways to safeguard the health of their company?
Straight from the mouths of our experts to your computer screen, here’s a non-exhaustive list of the realities that make running a cannabis company so darn tough.
Operating Expenses for a Cannabis Company Far Exceed that of Many Businesses
- The capital requirements for a cannabis company are immense, including, without limitation, capital to fund: application and licensing fees and expenses, the purchase (or lease) of suitable real estate property, the requirement to be vertically integrated (required in some states), and, of course, myriad professional service providers’ fees and expenses related to the foregoing.
- Further exacerbating this difficulty is both that (1) cannabis companies’ access to the capital markets and premium terms for debt are heavily restricted, and (2) cannabis companies cannot take advantage of business expense deductions under Section 280E of the Internal Revenue Code with respect to their tax filings, in each case, due to federal prohibition.
Over-Leveraging of Debt
- Related to cannabis companies’ restricted access to the capital markets, debt often comes with unfavorable terms, including high-interest rates, exorbitant fees, warrant coverage, and excessive lender oversight. To satisfy the capital requirements set forth above, cannabis companies are often forced to take on debt under terms that make it incredibly hard to become profitable or even get to a position to refinance on better terms. Fortunately, for this reality, hope is on the horizon through the participation of a greater number of state-chartered banks, private lenders, and credit unions in the cannabis lending space as well as the possibility of passage of the SAFE Banking Act at the federal level (see previous blog post regarding the attributes of the SAFE Banking Act if so interested).
Competence of Management
- Over the past two years, there has been a professionalization of the management of cannabis companies, with many veterans migrating from other industries into the cannabis space and taking decades of problem-solving skills and creative growth ideas along with them. However, before that, anyone who could pull off the funding and obtain a license could call themselves CEO. Running a company under the conditions a cannabis company labors under is a tall order. A not-insubstantial number of cannabis business founders have mismanaged their business into the uncertain (or outright precarious) situation it finds themselves in today.
- Further complicating the role of senior management at a cannabis company is the occasional requirement, or the conscious business choice, to be vertically integrated. It is nearly impossible to excel operationally in retail, manufacturing, agriculture/cultivation, transportation, and logistics. Additionally, the personnel issues that arise are now broader and more frequent, given the different locations and conditions employees work under.