Cannabis Musings - August 31, 2022
Friends! Welcome to Cannabis Musings v3. I’m excited to continue this journey with you as I transmogrify from Cannabis industry lawyer into Cannabis industry consultant. I’ve started up Hauser Advisory, a platform from which I’m providing advice and strategy on Cannabis business lifecycle events (M&A, capital markets, workout/restructuring, large transactions, etc.) and industry engagement (for ancillaries, investors, lenders, etc.). I’m most definitely not practicing law anymore. Tell your friends!
Enough shameless self-promotion. This is the third iteration of Cannabis Musings (the first was a very informal email from my wine law firm days; the second, a more staid, balanced missive whilst at Reed Smith), but although the delivery mechanics are different (there's a non-zero chance this doesn't work properly, so I appreciate your patience), I promise that I’ll continue to provide you with the same irreverent, periodic, and free insight into the goings-on of this challenging industry. And for sure, a bisel Yiddish. Thanks for your continued readership and support. (If you’re looking for past Musings, they’re unfortunately no longer on the Reed Smith website, and I don’t have permission to repost them, but let me know if you’re curious about what I’ve said previously about a topic and we can figure something out.)
So much has happened since the last Cannabis Musings went out, and I’ve got a stable of topics waiting in the queue, but I thought I’d take the opportunity for us to talk briefly about the state of the industry.
Recently, I was talking to an industry friend, and they asked me what I thought it takes to succeed in Cannabis. I immediately responded with the most consultant-y thing I could possibly say: “In Cannabis, you win by not losing.” Rather than leaving you to consult a semiotician to parse that, I’ll try to explain what I meant.
The Cannabis industry is once again in a bit of a crisis. Back in the earlier days of the state-legal Cannabis wave (say, around 2017-2019), although awash in investor cash, outsized valuations, and unbridled optimism, companies struggled with constant operational uncertainty (e.g., underdeveloped supply chains, cash storage (this was before the credit unions really stepped into the fold), dearth of testing labs) and fluctuating (and seemingly capricious) regulations. Then, in mid-2019, all of the equity dried up and valuations tumbled, throwing most companies (large and small) into financial crisis without bankruptcy to save them. 2020-2021 saw amazing top-line (revenue) grow as companies cut back on spending (you can’t spend excess cash if you don’t have any) and some operations grew sort of more predictable. The industry hit a second peak in early 2021 as the Democrats took control of the Senate, insiders and investors (irrationally) thought that federal legalization was just around the corner, and everything was coming up roses. Capital (equity and debt) flowed again and valuations soared.
Well, legalization didn’t happen, and I’m still of the belief that SAFE Banking isn’t happening this term (which, as we’ve discussed here before, really wouldn’t do that much beyond opening up access to federally-chartered banks and insurance, and reducing risk for ancillary businesses), let alone anything else at the federal level any time soon. Public valuations remain a fraction of their early 2021 peak. Equity capital remains elusive for public and private companies alike. Lenders and REITs, which were very active in 2020 and 2021, have cut back their financing activities severely as interest rates climb. Revenues are flat or dropping in many legacy states, while illicit markets remain a real problem. Prices continue to drop. States continue to expand access, but the process of rolling out licensing in key states is farkakte. Social equity efforts remain woefully inadequate. In an industry where it was already near impossible to generate predictable, consistent positive net income, everyone I talk to lately is hurting.
And yet, despite all of the tsuris, the industry keeps moving forward. Although it often feels like we’re all a bunch of schlemiels constantly stepping on rakes (this links to a YouTube clip), most of the people I know aren’t giving up. Maybe, oddly enough, because bankruptcy isn’t available, conceding defeat isn’t a feasible option. Rather than taking the loss, people in the Cannabis industry are committed to building a strong, inclusive, normalized community that benefits everyone involved. That’s how we all win.
Let me know if you’re going to be at Benzinga Chicago September 13-14. I’ll be loitering in the lobby of the Palmer House.
Be seeing you.
© 2022 Marc Hauser and Hauser Advisory. None of the foregoing is legal or investment advice, and it may not be relied upon in any manner, shape, or form. Subscribe to, or unsubscribe from, Cannabis Musings at hauseradvisory.com.