Topic: Cannabis M&A from the U.S. to the Canadian Securities Exchange with Richard Carleton
Things We Learned This Week
Guest: Richard Carleton, CEO of CSE (Canadian Securities Exchange)
Richard Carleton was appointed CEO of the Canadian Securities Exchange in July 2011. During his tenure, Richard and the CSE team have positioned the exchange to take a leading role in the provision of public capital to entrepreneurial companies; since 2014, the CSE has set a series of records for new listings, capital raised by issuers and trading turnover. An early advocate for the cannabis industry, the CSE is the global exchange leader in the sector. Recognized by the Financial Post Magazine as one of Canada’s “25 Cannabis Industry Power Players”, and a recipient of the American Trade Association for Cannabis and Hemp’s “Captain of Industry” Award in November 2018, Richard is a frequent speaker on early-stage company finance issues around the world, and involved in Canadian Securities for 30 years.
2021 Year synopsis: US Cannabis biz and shareholders retail with limited institutional money involved, Challenges for US investors to invest limited access OTC markets - example: Robinhood
Canada Legal for medical use circa 2014, 2017 recreational use. Federally legal in Canada.
Most large US operators on CSE, US companies operate in specific states, but listed on CSE for raising money, as Rules similar between CSE and US Stock Exchange
OTC markets to trade cannabis - Retail oriented with US companies and not much institutional US money vs. private equity from Canada investing.
2022 Year Outlook – expect more retail investors to get involved through ETF and more OTC, also big operators expand and buy more thru M&A, especially in NY and other east coast states new to Cannabis
MSOS – ETF, can invest in.
MJ Biz Vegas – epicenter of industry, annual event in Nov each year, all facets of industry go.
Asset valuations – recovery of share price for multiple cannabis stocks, sales increasing, raised money, 4.8 billion in 2021, good balance sheets, economies of scale
Companies used invested capital for M&A to grow size of business and scale, sales plus.
IRS ACT and US Federal Government made little progress on cannabis and still Federally illegal, so late 2021 assets and stocks were sold and gave back some value.
Probably little movement on cannabis in 2022, though Stocks not getting love, fundamentals of sales and growth are good.
More states in the US legalizing soon, especially in the East coast.
Big Themes – cannabis companies able to raise debts (bonds) at reasonable rates, vs. past 15%.
In past few years, Canadian companies over invested in cannabis.
US companies benefited from that experience and learned from Canada.
$5.4 billion raised in exchanges. $4.8 million by US operators vs. 2020 $2 billion, 2018 #3.5 billion
Secondary offerings vs. IPO (1st)
Private placement - hold stock and buy at discount, but can dilute current shares.
Offering with Prospectus – public offering – everyone can invest at the same rate, no hold period.
* Early stage companies, pre-revenue, R&D companies, mining exploration companies
* Tech, block chain / crypto, Life Science – psychedelic space and medical space, mental health.
Cannabis industry paved the way for life sciences and mental health. Drugs and pharmacy applications and work for FDA approval – long process and lots of financial investment vs. cannabis / retail and quick turnaround – recreational.
Guest: Melissa Diaz w/ Rebel Rock
- customized accounting solutions, HR, and M&A for the Cannabis industry in AZ
Melissa’s accounting experience as a CPA spans numerous industries, both domestically & internationally, including healthcare, hospitality and, of course, Cannabis. In addition to co-founding and serving as CFO to Rebel Rock, Melissa is CFO and Shareholder for High Rock Accounting, which places an emphasis on utilizing technology to strategically make day-to-day and long-term financial decisions, while pursuing company goals and compliancy. At High Rock and Rebel Rock, Melissa helps companies remain competitive and efficient in increasingly high-pressure and high-stakes environments. Starting in 2016 she started branching out into the Cannabis industry.
Regulations and Reform on the Fed level, Safe Banking Act – no movement or reform in cannabis, no Federal banking in cannabis. Can only bank with state charter bank, may not lend money.
M&A activity in 2021 – 3x increase because it was tough to get loans, so private equity and other big players had money to buy in.
Growth through acquisition – buy other business to build your organization.
In cannabis, tough to franchise since it is a state by state business. Sometimes the only way to get into a state is to buy in. No uniform regulations on Fed level.
Do not Buy the Cannabis Operator License, technically buy seats on the board, then control license. Have to gain multiple seats to control the License.
It is difficult to get a bank loan in cannabis, operator cannot use the license as collateral.
MSO – Multi State Operators
REITS – investing in property, get 1st position.
First mover has huge advantage. Example: Cureleaf – large MSO. Purchased Blume Dispensary for $211 million vs. $66 million. All cash deal want license IP and zoning/physical location.
M&A – Mergers & Acquisitions
Merger - 2 companies come together
Acquisitions – 1 company buys the other company in a Stock or cash setup, ie - 50% cash / 50% stock.
An acquirer may pay all cash if competitive because of supply and demand.
136 Cannabis Licenses in AZ plus some rural license. Example: Yuma or Gila Bend. The 136 core licenses in bigger cities are more valuable.
Large MSO Cannabis operators like Harvest, Verano, Cureleaf own many licenses – consolidated.
Cannabis in AZ is a maturing market. Florida is similar. Alabama and Missouri are newer markets.
Different states have different rules.
Edibles and children packaging – child safety (gummies)
Nationwide – more private equity, but slow because of risk.
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