Cannabis industry: ‘Thank God for the lenders,’ reporter says

POLITICO Federal Cannabis Policy Reporter Natalie Fertig and Viridian Capital Advisors President Scott Greiper join Yahoo Finance Live to discuss the state of the cannabis industry, the progress of cannabis legislation in the U.S., and equities.

Video Transcript

- In Canada over the last couple of years, we've paid a quarter of a billion dollars in taxes that got put back into the economy there. We've created over 750 jobs, built up facilities for $1 billion. And we have taken bad cannabis off the street that's laced with fentanyl and stuff like that. So it is frustrating, but Tilray's not going to sit by and depend upon the government. We as a consumer packaged goods business are going to grow our business in cannabis, beer, spirits, and wellness foods.

- Well, that was Tilray CEO Irwin Simon earlier this year expressing his frustration over the progress of the cannabis legislation in the US. Fast forward to today. Discussions are still in view as US leaders gather to speak on cannabis legislation being discussed and debated by lawmakers. Now, the pace of progress in cannabis legislation remains a point as the market struggles to find legal footing.

For more on this, we have Politico Federal Cannabis Policy Reporter Natalie Fertig. Natalie, thank you so much. So you're right in the mix of all this happening in DC. We have the lawmakers looking at this. You have, of course, the one side, the decriminalization aspect, the Safe Banking aspect. Talk about the progress that you're seeing and the discussions that are surrounding both of these today.

NATALIE FERTIG: Yeah, so this has been a couple years in the making. Congress right now is considering a couple of different pieces of legislation. The one that is most likely to move forward in this Congress is the Safe Banking Act, which you mentioned. It's a bill that would make it a little bit easier for cannabis businesses to access banking services as well as auxiliary businesses like ScottsMiracle-Gro or the plumber who shows up to fix the plumbing at the cannabis farm. All of those businesses right now have a hard time accessing banking services, both checking accounts, savings accounts, and also small business loans, which is something that smaller operators in the cannabis industry really want to have access to.

- And something that-- even with Safe Banking, you know that it's not a catchall for some of these other financial issues that are tied to trying to do business here. So what else still needs to be addressed?

NATALIE FERTIG: There's a lot that still needs to be addressed. There was a bill introduced last week, or maybe earlier this week, that would address the 280E tax loophole. That bill was introduced in the last Congress and did not move forward, so I'm not sure if it's going to have a lot of momentum in this Congress. But that's a big issue that the cannabis industry is constantly talking to lawmakers about.

It's a loophole that means that they cannot write off the majority of their business expenses, things like payroll, on their taxes every year because they are selling a federally illicit substance. It was a loophole that was passed in the '80s, and it's still impacting the cannabis industry really deeply today. It's actually one of the reasons, from reporting that Politico has done, on why the industry is still having so many struggles in making money.

One of my colleagues looked through a bunch of different records last year and found that the largest publicly traded cannabis companies in the United States collectively lost more than $550 million in the first six months of 2022 even while making revenues of nearly $4.5 billion. And the 280E tax issue is one of the biggest reasons why they're still losing money.

- And, of course, the struggling legislation aspect to cannabis clearly showing up in equity markets as well. I want to bring in our next guest with us. Natalie, make sure you stay with us. Scott Greiper, Viridian Capital Advisors president, also joining us. So Scott, what is this doing, then, in terms of what we're seeing with equity markets here when you do have this federal legislation stranglehold you're in, maturing markets, and, of course, debt also adding to the mix?

SCOTT GREIPER: Yeah. Well, good morning. Equity is dead in the cannabis industry. It's challenged in all sectors, but specifically in the cannabis industry. It's just become too prohibitively expensive, too dilutive for public companies in particular to issue equity, cannabis companies. And so what do you do? You need to scale your business. You need to grow another operation so you can lower your cost of production.

Thank God for the lenders, the debt financiers coming into this market in the last-- let's call it two to three years. There's been over $10 billion of debt capital coming into the industry, which is an interesting representation. What do lenders always look for in any business? They look for hard assets, real estate so that they have good collateral for their loan, and they look for cash flow to be able to service the loan and keep the loan current. And for the larger cannabis companies, particularly the public ones, they've been attracting that debt capital. So equity really is not almost nonexistent in this market. Debt financing has plugged that gap somewhat.

- And Natalie, when we look at some of the issues that are obviously plaguing some of what we call big weed, these multi-stage cannabis businesses, what would you say is the biggest barrier for them right now?

NATALIE FERTIG: I mean, the biggest issue is just that cannabis is not federally legal, so the banking, 280E, the fact that states like Michigan, California, Oregon that have too much cannabis for everyone within their state market to consume it, they can't send it into states like New Jersey and New York that are still getting off the ground and could use a little extra cannabis or products to be sold in their dispensaries.

All of these issues are directly related to the continued state of cannabis federally, which is that it's a controlled substance. It's the same category as heroin on the Controlled Substances Act. So that's what it really comes down to here. And I don't anticipate that changing in this Congress. Never say never, but with a Republican-led House and with President Biden not being wild about reforming cannabis laws in the United States, it is not a likely bill that will pass in this Congress.

- And so Scott, let's talk opportunities here. Viridian has this cannabis deal tracker looking at the state of M&A in this space. So within the sectors that you follow, are there any areas that are gaining ground? What do you see-- what is on the horizon for you? What do you expect to see in terms of M&A activity here?

- Yeah, we could just go to our numbers, as you cited through the Viridian Cannabis Deal Tracker. So of the 12 sectors within the business of cannabis that we've tracked since January, '15-- everything from cultivation to agtech to biotech to real estate to brands-- real estate is where the action is right now because it's for the cannabis companies that are large enough to own their own real estate of size and in the cases where it's unencumbered. It's the easiest asset to convert to cash. You could sell the real estate, you can lease against the real estate, you can leverage it, or you could do a sale leaseback. So real estate is really where a lot of the action is. It's also what attracts the lenders.

We've seen an aggregation in several different sectors which is really healthy. Software-- cannabis companies are getting large enough right now where you can't use QuickBooks or a ledger. You've got to have more advanced ERP solutions, inventory management solutions, accounting systems. So there's been a rapid adoption of advanced software. And that industry has been rolling up.

Similarly on the brand side, this is a consumer packaged goods industry at its core. And the brand side is rapidly aggregating because consumers-- just like when they go into a liquor store, they don't ask where the potatoes are grown, and they don't ask if it's grown indoor or outdoor in a greenhouse. They're attached to the brand. They're attached to the way the brand makes them feel. That's ultimately what cannabis is evolving into.

So we've seen a rapid M&A consolidation within brands because, ultimately, the stores, the legal dispensaries that carry more than 30%, 40% of their own brands in the store, they're achieving EBITDA margins of between 20% and 25%. They're extremely profitable. So brands matter. And ultimately, this is a CPG industry.

- So Scott, for people who are looking at this industry and wondering is it worth investing, where are the most profitable places people can invest? And really, who are the cannabis leaders at this point when we look at the performance of some of these cannabis stocks this year?

SCOTT GREIPER: We're in a massive dichotomy in the industry. Last year, in 2022, there were about $30 billion of legal cannabis sales, so product grown by a licensed cultivator, sold by a licensed retailer, $30 billion. When we started Viridian in June of 2014, all of '14, there was $2.3 billion of legal sales. So in nine years, we've gone from $2 billion to $30 billion, a 15x increase. Not many other sectors in the world that are showing that level of compound annual growth.

And the opposite side of that is valuations are down. Public market caps are down. Capital availability is down. So in answer to your question, what we're seeing is non-cannabis investors-- private equity, large family offices, venture capital, traditional funds-- starting to take positions in this industry because they see an industry that has sustainable macro growth, 15x over the last nine years, growing globally. And yet all news is bad news. Valuations are down. Companies are missing their earnings estimates.

And for these non-cannabis players stepping in right now, the pricing risk of getting into the right company and the right state has been significantly reduced. So this is where these buy-side players have made their money-- coming into industries that are showing sustainable, predictable growth, increasingly on a global basis, but they're able to buy in at the declining asset value. So the price point, the entry point to get into the industry has never been better. So we're just in an interesting dichotomy right now in the industry.

- Well, certainly some silver lining there as we await more federal action on this. A big thank you to you both. Viridian Capital Advisors President Scott Greiper along with "Politico" Federal Cannabis Policy Reporter Natalie Fertig, thank you both for your time this morning.