20 January 2022 |

The Constant Change In Cannabis

By Matthew O'Brien

CANNABIS BRANDS

The Constant Change In Cannabis

Breaking down the top cannabis brands from LeafLinks flash reports…

Every month, cannabis wholesale marketplace LeafLink, releases a flash report presenting the biggest retail data points in the cannabis industry.

This latest report contained a treasure trove of interesting data, however, something stands out above all else — not a single one of the top cannabis brands which were included in the 2021 report were in the 2022 report.

Top Cannabis Brands By Region; December 2021

  • High Grade (Arizona) 
  • Cannavative (Nevada)
  • Seed & Smith (Colorado) 
  • Pacific Stone (California)
  • Pharmer’s Market (Oregon)
  • Peregrine Manufacturing (Michigan)

Top Cannabis Brands By Region; December 2022​

  • Jeeter (California)
  • CHOICE (Michigan)
  • Cannapunch (Nevada)
  • Higher Cultures (Oregon)
  • DRIP Oils + Extracts (Arizona) 
  • Colorado Cannabis Company (Colorado) 

Additional data-points…

1. Wholesale Orders:

As the demand for cannabis products continues to increase, the demand for wholesale cannabis orders continues to increase alongside it.

Wholesale cannabis sales have increased a staggering 44% from December 2020 to December 2021, with 54% of buyers having increased their spend in December 2021 vs December 2020.

2. Exponential Growth:

Massachusetts legalized medical cannabis in 2013 & adult use cannabis in November 2016, however, wholesale cannabis sales in Massachusetts grew over 800% from December 2020 compared to December 2021.

3. Flower Is Still King:

The cannabis industry has seen no shortage of innovation in recent times when it comes to product development, however, flower retained its number 1 spot with 31.8% of gross merchandise value in December 2021.

4. Demand For Concentrates:

Concentrates saw the largest increase in market share in December 2021, gaining 2.2 percentage points month over month, the second month in a row this category led market share increase, however, the 16.6% overall market share marks a 3 percentage point decrease over the same period last year.

Looking forward…

Two things are very clear from this report.

1. The only constant is change in cannabis.

2. The cannabis industry shows no signs of slowing down anytime soon.

While many of the brands that found themselves on the 2021 list are still succeeding in the cannabis industry, it’s abundantly clear that cannabis brands are struggling to retain market share.

The cannabis industry is so young and so experimental, that consumers are trying new things all the time. What’s flying off the shelves one month might not be moving the next. Seasoned consumers have their favorites, but usually they are making additional purchases along with their tried and true picks. 

Our Take

While it’s incredibly difficult for cannabis brands to become market leaders within the categories they choose to focus on, it’s evidently even more difficult for cannabis brands to retain this market share long term.

In 2022, it’s truly open season for all cannabis brands who understand the marketplace and the industry’s culture. There’s no reason a small brand can’t outsell a large brand in 2022 and beyond. And that is nothing but exciting! 

Find the flash report’s full highlights here

CANNABIS M&A

Why Cannabis M&A Goes Wrong

Breaking down why cannabis mergers and acquisitions often fail…

Today, Cresco Labs announced the termination of its previously-announced agreement to acquire 100% of the equity interest in Blair Wellness, LLC.

Blair Wellness is a medical cannabis dispensary in Baltimore, Maryland.

“We have terminated the purchase agreement with Blair Wellness due to the failure of certain closing conditions to be met prior to our specified termination date.

We will continue to look for other avenues to expand our footprint in Maryland, and execute our strategy of going deep in meaningful, material states.” said Charlie Bachtell, Cresco Labs’ CEO & Co-Founder.

Cresco Labs didn’t say what the specific reason for the fallout was, aside from “failure to meet certain closing conditions.”

Cresco Labs’ 2019 M&A Back-out 

This isn’t the first time Cresco has backed out of a deal, having also backed out of a deal to acquire Florida-based VidaCann worth approximately $120 million in 2019.

Cresco Labs terminated the acquisition to save money, and in the same press release they announced the signing of a binding agreement for the sale-and-leaseback of two properties to increase their available capital reverses.

“We recognize that responsibly allocating our shareholders’ capital is fundamental to long-term success,” said Cresco Labs CEO and Co-founder Charlie Bachtell said at the time during a press release.

Why Cannabis Mergers Crash…

Per the Harvard Business Review, an estimated 70-90% of all such M&A deals fail.

1. Volatility In Stock Prices:

A key factor of consideration as to why such a large percentage of M&A deals in cannabis fail in the end is the volatility in cannabis companies stock prices.

When a company wants to acquire a smaller company, it’s common practice for a portion of the purchase price to be paid for in stock.

Unfortunately for cannabis companies, the volatility in their stock prices proves to be very problematic as such volatility can significantly increase or decrease the valuation of the company they are seeking to acquire.

2. Capital Remains Expensive

If using your stock isn’t an option when striking deals to acquire smaller cannabis companies, then cash is the currency of choice.

Courtesy of cannabis being a federal I substances, accessing capital remains prohibitively expensive today.

In 2019, when Cresco terminated with VidaCann, multi-state operators’ capital was especially tight. Stocks tumbled throughout the year, for multiple reasons, leaving much to be desired when 2020 rolled around.

3. Additional Regulations

Even in an ideal scenario whereby cannabis companies have access to the capital they need to purchase smaller companies, there are several additional hoops cannabis companies are forced to jump through today.

One such example is the requirement for cannabis companies to be auditable and compliant with section 280e of the Internal Revenue Code that prohibits taxpayers who are engaged in the business of trafficking certain controlled substances from deducting business expenses.

An acquiring company might find the company they are seeking to purchase isn’t auditable ie. the ability of an auditor to get accurate results when they examine a company’s financial reports which is more than enough to prevent a larger cannabis company from purchasing a smaller cannabis company.

4. Local Policies

Local regulations and licensing policies are another reason cannabis mergers and acquisitions commonly don’t work out.

Most state governments don’t allow the transfer or sale of licenses without the entire business being purchased, which is yet another hurdle cannabis companies have to account for when considering M&A.

Without the approval of local policy markers, a cannabis company is very limited with what they can do with the cannabis licenses they have acquired.

5. A Clash Of Culture

Cannabis education company, Green Flower, argues that company culture is a huge reason why cannabis M&A often fails. 

One such example outside of the cannabis industry is when Sprint purchased a majority stake in Nextel Communications for $35 billion stock purchase in 2004.

One year after this deal was struck, both companies agreed to terminate the deal in August 2005, citing cultural differences as being incompatible. 

Although the cannabis industry has not seen a transaction of this size fail so far, there are many smaller examples to learn from.

M&A Deals To Watch…

1. Leafly x Merida Merger Corp

Leafly’s $30 million SPAC merger with Merida Merger Corp. to go public hasn’t failed yet, but it’s certainly in question.

The deal was announced at the tail end of 2021, but the meeting to vote on the deal is being delayed. The original meeting was set for January 14th, 2022.

2. MedMen x Ascend Wellness

MedMen terminated a deal with Ascend Wellness on January 3rd, 2022, but didn’t provide further context.

Ascend Wellness wasn’t so quiet.  “MedMen is essentially challenging the regulators’ authority and ignoring the regulations of the state’s medical program” by not closing the deal, according to a statement from Ascend. 

The CEO of Ascend Wellness added they are “dismayed by MedMen’s baseless attempts to terminate the agreement and is increasingly concerned about MedMen’s ability to keep its New York license in good standing.”

Looking forward…

M&A failure isn’t unique to the cannabis space, though there are extenuating circumstances that can make it 1) more likely and 2) more destructive to small brands relying on access to new capital from the merger.

There’s ample opportunity for error in the cannabis space, so if you’re a company seeking to be acquired, ensure your financial records from the past five years (or more) are crystal clear, accurate, and auditable for the IRS. If you’re a company seeking to acquire, vet your buy beforehand. 

Our Take

The conditions in cannabis makes it incredibly difficult for small cannabis companies to succeed, however, despite these constraints it’s questionable if joining a larger cannabis conglomerate is the right move to make.

For smaller cannabis companies who operate in regions where the regulations are unfavorable for small business owners, the unfortunate reality is that they might not have the luxury of making this choice.