For Q1 2022, there were 70 capital raises totaling $1.2 billion. Compare that with Q1 2021, which saw 163 capital raise transactions totaling $4.6 billion. That’s a decline in transactions of 57% and a decline in total capital raised by ~74%.

So, what’s happening here? 

To be fair, Q1 2022 followed a strong first quarter when the number of capital raise transactions and total invested capital reached historic levels.

Nonetheless, the quarter reflected a sharp falloff in investor interest in the cannabis sector due to:

1) any legislative progress re cannabis legalization;

2) declines in the market valuation of public cannabis companies, which made equity issuances dilutive and expensive;

3) and the general decline in overall market sentiment. The S&P 500 declined more than 5% during the first quarter and has continued its decline since. Cannabis stocks are not immune from overall market trends, and given their more speculative nature versus larger more established companies the case could be made that cannabis stocks are inclined to fall more than the market at large. Further the appetite for M&A transactions and other kinds of financings tends to be diminished during times of market turmoil.  Nobody likes doing deals amid uncertainty.

Shift in Capital Allocation by Industry Sector

Courtesy of Viridian Capital Advisors 

Cannabis transactions (capital raises and M&A) are allocated into one of 12 industry sectors to track the flow of deals by sector. For the last year, there has been a rotation of invested capital into different cannabis industry sectors. The chart below and the accompanying narrative detail this sector rotation.

Cultivation & Retail, historically the most significant sector for equity financing, accounts for only $14 million (1.6%) of equity raised YTD in 2022, compared to $1.9 billion (52%) in 2021. This declining trend is likely to continue for several reasons:

• The MSOs have been able to use equity in acquisitions, one of their primary needs for new capital.
• The Tier 1 MSOs have strong cash positions and are expected to be free cash-flow positive in 2022 and 2023, eliminating any pressing need to issue equity in a down market.
• Greater availability and better pricing of debt is a further restraining factor.

Investments/M&A, which is chiefly composed of SPAC IPOs, has also fallen deeply out of favor as an industry sector for capital inflow. This category made up only 9.9% of 2022 YTD raises, compared to 16.1 % in 2021, and is likely to represent a lower percentage in future periods due to increased SEC scrutiny and poor performance of de-SPAC’d stocks.

The Real Estate sector, which is composed of cannabis lenders and sale-leaseback providers, has been a beneficiary of the sector rotation in 2022. Riding the trend toward greater use of debt capital, this sector has accounted for 47.3% of 2022 equity issuance YTD, compared to only 7.6% for the comparable period in 2021. Given our expectations that meaningful legalization will remain elusive and stock prices will have difficulty rebounding in the overall market downturn, we think this sector will continue to benefit.

Software/Media companies have also taken a bigger piece of the financing pie, accounting for 22% of YTD raises vs. 7.1% in the previous year. This trend is likely to continue as MSOs look to improve the efficiency and compliance of newly built and acquired operations.

Agriculture Technology is down YTD, a resurgence in demand as MSOs build out operations in newly opened adult rec states. 

Debt Increases as a Percentage of Total Capital Raised

Courtesy of Viridian Capital Advisors 

For all of 2021, debt financings reached their highest percentage level since our tracking began, reaching 44% of total dollars raised in 2021, up from 38% in 2020. Debt capital raised increased to $5.62 billion in 2021 from $1.65 billion in 2020. Seven of the largest 10 capital raises of the year were debt transactions.

This trend is likely to continue in the current environment as cannabis companies remain hungry for growth capital, but cautious about issuing equity because of low public market values.

M&A Activity

There were 319 M&A transactions in 2021, the highest number since 2018 and up 235.8% from the 95 M&A transactions recorded in 2020. The total transaction value of $25.2 billion in 2021 was up nearly 573% from 2020.

Courtesy of Viridian Capital Advisors 

For the first quarter of 2022 there were a total of 58 M&A transactions, down 21.6% vs. the first quarter of 2021. Despite this decline, M&A activity held up much better than it had in previous cannabis stock price swoons. And against the backdrop of a 73.9% decline in capital raises by cannabis companies in the second quarter of 2022, the pace of M&A activity remains robust.

M&A activity is primed to remain strong as the industry at-large is still top-heavy in licensed operators—and cannabis companies in general. Consolidation is needed in the current state of the market and is a healthy dynamic for the industry.

Change in M&A by Industry Sector

Since 2015, companies in the Cultivation & Retail sector have been the dominant acquirers as they consolidate within markets and expand to new states. This trend continued into Q1 2022. However, two sectors that saw a real uptick in M&A activity in Q1 2022 were Biotech/Pharma and Software/Media. 

The Biotech/Pharma sector comprised 4.7% of all M&A deals in the first quarter of 2022, vs. only 0.5% in the first quarter of 2021. This reflects the emergence of the psychedelics sector, which is on a faster FDA drug development and clinical trials pathway than medical cannabis.

Courtesy of Viridian Capital Advisors 

The Software/Media sector comprised 14.7% of all M&A deals in Q1 2022, vs. 5.5% on Q1 2021. This reflects the demand for more sophisticated ERP, inventory management, POS and other enterprise systems to better manage operations as cannabis companies scale.

Sale-Leasebacks

The sale-leaseback story in the cannabis sector to date has been a cap rate compression story largely due to long-term confidence of legalization at the federal level—despite little immediate progress—as well as growing strength of credits in the space.  Sector cap rates—which are the implied multiple of the operating income of the underlying property—have declined from as high as 17% over the last couple years to a 11-15% range today. 

These rates, while high relative to the overall sale-leaseback universe, still provide for attractive financing levels for cannabis operators due to sector-specific capital constraints. However, the volatile interest rate environment in Q1 leading into Q2 provides a wrinkle in this narrative.

In the traditional sale-leaseback universe, the cap rate environment in Q4 2021 and into early Q1 2022 was one of the strongest seen across the board. The increasing pool of investors, combined with the low interest rate environment made for very attractive sell-side dynamics with compressed cap rates and outsized valuations.

We began to see a different story in the tail end of the first quarter. 

Despite cannabis industry-specific compression, and credits which are growing stronger by the month as smaller entities move through their first grow cycles, the interest rate environment began to provide unfavorable headwinds. The 10-year treasury climbed ~70bps throughout the quarter and since has risen ~50bps since the end o the quarter, impacting sale-leaseback investors’ cost of capital.

Over $50 million of cannabis sale-leaseback transactions were priced in the first quarter of 2022, spanning Massachusetts, New Jersey and Pennsylvania. 

Specialized players such as cannabis real estate investment trusts (REITs) have filled the financing need in the space thus far, and we have not yet seen traditional sale-leaseback investors grow comfortable with the sector. This year will be a very interesting time period as we see the narratives of increasing interest rates and an inflationary environment go up against positive drivers of growing multi-national operators and increasing legalization initiatives.

Scott Greiper is the present and founder of Viridian Capital Advisors a financial and strategic advisory firm to cannabis enterprises. 

 David Rosenberg, CFA is a principal of SLB Capital Advisors, which advises businesses and private equity investors on a wide range of sale leaseback transactions.  

As New York cannabis regulators steady the ship for the launch of adult-use sales by the end of the year, the state’s Cannabis Control Board (CCB) members approved June 1 their first regulations for the broader market.

Those regulations establish specific parameters for packaging and labeling, marketing and advertising, and laboratory testing in the forthcoming industry.

The board members’ unanimous approvals on Wednesday came after nearly three months of work by Office of Cannabis Management (OCM) officials to carry out the state’s Seeding Opportunity Initiative, which aims to position individuals with prior cannabis-related criminal offenses to make the first adult-use cannabis sales with products grown by New York farmers.

Specifically, through OCM recommendations, CCB members have approved 162 existing hemp farmers for conditional adult-use cannabis cultivation licenses for the 2022 growing season, including their latest batch of 16 approved applicants on Wednesday.

While the Seeding Opportunity Initiative guides initial steps toward developing a “strong” adult-use market, CCB Chairwoman Tremaine Wright said she and her colleagues recognize that “there is so much more to do in order to establish a robust adult-use cannabis market” in New York.

“So today, we’re going to consider two sections of regulations that will be a part of the broader and much-anticipated adult-use regulations,” she said during Wednesday’s regular meeting.

“These regulations were selected as the first sections for consideration because they will help ensure products are safe and tested with appropriate consumer protection labeling,” she said. “We also recognize the need to expand our cannabis laboratory testing capacity within the state to ensure we have enough third-party labs online and ready to properly test regulated cannabis products.”

The approved packaging and labeling regulations aim to ensure adult-use cannabis products are safe for consumers and do not target youth or promote overconsumption.

Minimum standards include:

• Child-resistant, tamper-evident and nontoxic packaging that is enclosed to prevent contamination or degradation
• Label components such as warnings, serving size, potency, ingredients, and usage and storage instructions
• A universal symbol to be placed on all licensee packages
• Licensee recycling programs for cannabis packaging
  

Prohibitions include:

• Attractive to individuals under the age of 21 (e.g., cartoons, characters, celebrities, toys)
• Include false or misleading statements (e.g., “organic,” “craft,” health claims)
• Multiple brand logos or unapproved graphics
• Features emitting scent or sound
  

Packaging Environmental Sustainability Program

• All licensees are required to implement an environmental sustainability program for cannabis product packaging, which may include reuse (after sanitation), or the use of non-plastic or compostable materials.
• Licensees must report key metrics on the implementation of their program annually
  

Violations and penalties

• Violations may result in suspension, cancellation and revocation of a license
  

Those regulations were crafted based on numerous discussions with experts from other states, building off of best practices and lessons learned over many years of legalization efforts outside of New York, said Lyla Hunt, OCM’s deputy director of public health and campaign.

The packaging and labeling regulations have two primary goals, she said during Wednesday’s meeting. 

“The first goal is to maintain safety quality. To that end, all packages are required to be child-resistant, tamper-evident, non-toxic and must fully enclose each product,” Hunt said. “The second goal is to inform consumers about what it is they’re consuming. So, to that end, labels include any key public health messages, serving sizes, potency, ingredients, and usage and storage instructions. False or misleading statements, or statements that make health claims will not be allowed.”

Board Member Jen Metzger spoke on the packaging parameters for the Environmental Sustainability Program.

The Marihuana Regulation and Tax Act (MRTA), which former Gov. Andrew Cuomo signed into law in March 2021, recognizes the “critical importance” of setting New York’s cannabis industry on a sustainable path and puts environmental protection and climate resiliency up front in the intent of the law, Metzger said.

“We face a climate crisis, and we have a real opportunity to get it right from the start rather than repeating the mistakes made elsewhere,” she said during Wednesday’s meeting. “And this includes how we approach the packaging of cannabis products. The rate of plastic production worldwide is doubling every 15 years, and this has been largely driven by packaging.”

Metzger added, “The proposed regulations are intended to encourage use of materials other than single-use plastics. But if plastics are used, they would need to have a minimum post-consumer content of 25%. Licensed applicants, depending on the license type, will be required to submit an environmental sustainability program for packaging as part of their application. And this would be a program of the applicant’s own design; and the reason why it’s being included in the application is because the MRTA directs the board to consider waste and single-use plastics specifically along with other criteria in licensing decisions.”

The regulations also require annual reporting from licensees to help OCM establish a baseline of information and evaluate progress over time, she said.

Meanwhile, the approved marketing and advertising regulations also aim to ensure adult-use cannabis products do not target youth or encourage overconsumption.

General requirements include:

• Warning content and format (e.g., age restrictions, reasonable consumption, bolded text, bright yellow box)
• Reaches an audience reasonably expected to be at least 90% age 21 and older, websites or digital applications restrict access to those age 21 and older
  

Prohibitions include:

• Marketing that is attractive to individuals under age 21, including both images and audio
• Promote overconsumption, be false or misleading, or suggest products are safe or have curative/therapeutic effects
• Be in the form of a billboard, be within or visible at 500 feet of schools, recreation centers, childcare centers, playgrounds, public parks or libraries
  

Violations and penalties

• Violations may result in suspension, cancellation and revocation of a license and/or fees or fines
• Advertising, marketing or outdoor signage that is not in compliance shall be removed or discontinued
• Licensees must maintain records that advertising and marketing meets the requirements
  

In addition, the regulations include rules for content and location of outdoor retail store signage.

And the cannabis laboratory testing regulations establish an application process to permit independent cannabis testing laboratories and approval of laboratory sampling firms.

Some of the specific regulatory parameters include:

• Existing independent laboratories already certified to test medical cannabis under the Department of Health (DOH) will be authorized to test medical and adult-use cannabis under OCM.
• Labs must be ISO 17025 accredited and meet other quality assurance and staffing requirements.
• Lab ownership is prohibited from having a direct or indirect interest in any other registration or license type under the cannabis law.
• Laboratory sampling firms, independent of registered organizations or licensees, will be collecting samples from registered organizations and licensees for lab testing to ensure that there are random sample collections to help protect public health and safety.
  

The regulations include requirements for a state reference laboratory to test when needed for quality assurance matters and to assist with method development.

While establishing those regulations, OCM officials considered what Board Member Reuben McDaniel called “lab shopping” that goes on in other states, where licensees take their samples to testing facilities that are known to generate more favorable results.

Nicole Quackenbush, OCM director of health and safety, went into further detail at Wednesday’s board meeting.

“The regulations include the independent sampling firms to collect the samples so that the licensees are not selecting specific samples. They’re randomly collected,” Quackenbush said. “Additionally, there’s no ownership intermingling with the sampling firm as well as the licensees or the registered organizations to promote that third-party scenario with the sampling firm collecting.”

With 162 conditional cultivation licenses now approved, among roughly 200 applicants, Metzger urged the board to act swiftly upon further OCM license recommendations with the 2022 growing season already underway.

TILT Holdings and Highsman agreed to a manufacturing and distribution partnership in Massachusetts and Pennsylvania.

 

TILT will offer Highsman products across retail stores in both states starting in September to mark the start of the 2022 football season.

“Authenticity and unique brand architecture are two of the most important considerations for TILT when evaluating potential brand partnerships. You would be hard-pressed to find a group more equipped to meet those criteria than Ricky and the team he has assembled at Highsman,” said Gary Santo, CEO of TILT Holdings. “As the stigma around cannabis continues to fade within the general population, most athletes are still playing in organizations slow to slow the use of cannabis for wellness and recovery. Tilt is committed to delivering a broad selection of the highest quality cannabis brands to the markets we serve, while helping independent brands expand and scale. We are thrilled to bring our unique and distinctive level of partnership to the table for Highsman and introduce this exciting brand to the East Coast.”

RELATED: From Heisman Winner to Highsman Owner

The partnership with TILT marks the introduction of Highsman products to the East Coast, expanding the company’s reach since launching operations in November 2021. Highsman’s product line includes three cultivars: Pregame, Halftime, and Postgame.

 

“2022 marks a year of considerable growth for Highsman, and we are proud to partner with TILT as we enter our first East Coast markets,” said Eric Hammond, CEO of Highsman. “TILT has a proven track record of significantly expanding the footprint of the cannabis brands they work with, and I am confident that our strategic partnership will further establish Highsman as a leading national brand.

“Highsman was created to inspire greatness in athletes and sports enthusiasts alike, and we are thrilled to introduce our products to the people of Massachusetts and Pennsylvania – two states that take their sports, and cannabis, very seriously,” Hammond adds.

RELATED: The Intersection of Cannabis and Sports: Q&A with Highsman CEO Eric Hammond

TILT's portfolio of brand partners now includes Highsman, along with 1906, Airo, Black Buddha Cannabis, Her Highness, Old Pal, Timeless Refinery, and Toast.