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As the state-by-state markets continue to grow, major players outside the cannabis industry are looking for a way in. And those already with a footprint in the sector are poised to go bigger.

Earlier this month, a blockbuster deal kicked off the 2021 cannabis merger-and-acquisition season, when Ireland-based Jazz Pharmaceuticals inked a $7.2-billion deal to acquire United Kingdom-based GW Pharmaceuticals, the manufacturer of the Food and Drug Administration-approved Epidiolex. It was the biggest handshake yet for the cannabis industry, and it could be just the beginning of what’s to come in a global market still in its infancy.

At Fox Rothschild, a Philadelphia-based law firm with a national cannabis practice group, Partner Melissa Sanders and Associate Jared Schwass told clients there is much more room for businesses to expand in an alert they released Feb. 1.

Sanders advises corporate clients on a wide range of business matters, with a particular focus on mergers and acquisitions, private placements of securities, financing transactions and ownership transition programs. Schwass is an attorney in the corporate department and a member of the firm’s Cannabis Law Practice Group. He advises businesses entering and operating in the legalized cannabis market on regulatory compliance, risk mitigation and business transactions.

“At the end of 2020, we saw an uptick in merger-and-acquisition activity as the industry shook off some pandemic-related instability, and we expect that trend to increase significantly in 2021,” they said in the alert.

“Despite abundant money available to the large multi-state operators (MSOs), most cannabis companies still have relatively limited avenues to raise capital due to the federal illegality of the industry,” they said. “However, that may change soon with the democrats now controlling both houses of Congress and the White House.”

When cannabis is descheduled, Sanders and Schwass said they anticipate an influx of cash into the sector, as previously reluctant investors and institutions enter the market without fear of federal repercussions.

Here, Sanders and Schwass share more about M&A activity trends, anticipations and indicators, and how MSOs and smaller businesses alike can position themselves for possible growth opportunities.                        

Tony Lange: What stood out most about how M&A activities shaped up in the 2020 cannabis industry?

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Melissa Sanders: I think we were seeing a lot of the distressed assets being snapped up. And even outside of the distressed assets, there were some good deals to be had. As we’re moving into 2021, that’s continuing. But I think that with the change in the Senate and legalization potentially on the forefront, additional capital is coming in and we’re going to see more M&A overall.

Jared Schwass: When COVID-19 first hit, there was kind of a lull in activity. Then, when medical necessities and distressed assets became available, that’s when the serial acquirers were buying up. And then we did see, towards the end, a couple of mergers that that were big news. I feel like more of that’s going to happen in 2021.

TL: How much would cannabis legislation at the federal level impact M&A activity?

MS: Federal legislation has some weight. I don’t want to overstate it, because we have to wait and see, but I do think it will bring in some potential money of folks who were still a little hesitant to maybe get into the business and essentially raise capital or put capital into other companies. The actual operators, they’ve already made the bet on cannabis. So, for them, a lot of it has been dependent on where the capital’s at.

JS: In addition to the increased capital that we can see, I believe with the descheduling on the Controlled Substances Act, that we’ll see major players outside of the cannabis industry start looking at trying to get into the industry.

TL: Regardless of the makeup of Congress, what are your anticipations for the rest of 2021?

MS: Regardless of what does happen at the federal level, I think M&A activity is going to be on the upswing. There are still a lot of good deals to be had out there. I also think people are anticipating and hopeful for an economic turnaround. So, deals are going to continue to happen and continue to grow.

I do think that we’re in a little bit of a different position than we were the last time there was this huge amount of M&A activity in the sense that companies are more mature. They’re seeing the things that maybe went wrong or weren’t ideal in former deals. So, although the increase is going to make for more competition for acquirers, I don’t think it’s going to be the same as it was in 2019, when people were really overlooking some real blemishes in companies just to keep growing and get in there. Now people really are looking at the fundamentals of the business and making sure they’ve got the corporate books and things like that.

-Melissa Sanders, Fox Rothschild partner 

JS: To add to that, regardless of what happens in Congress and the Senate, I think that M&A activity is going to still continue. We’re going to see a significant activity in that area, and there’s going to be a lot of consolidation in the coming years.

TL: Do you think small-scale cannabis businesses are a dying breed?

MS: I personally don’t think so, because there is a market for these independent companies and independent brands. That market is going to remain in cannabis and other industries. I do think that it’s going to be a lot harder for them to survive and compete, but I don't think it’s a dying breed.

We’re still seeing a lot of small, one-off acquisitions. A lot of them are actually growing but not looking to necessarily become a huge MSO, although some of them are.

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JS: I don’t think it’s dying. I think it’s difficult, especially the small farmers up in Northern California are struggling. But I think through struggle comes perseverance. There is something to be said about these small farms and these small kind of craft brands that there still is a market for them, and there will continue to be a market for them.

TL: How can some of the small-scale cannabis businesses make themselves attractable for sale, if that’s the path they want to go?

MS: If they want to make themselves attractive, the biggest thing is getting everything in order, making sure they’ve got records or descriptions, depending on how old the company is; there was a time when companies weren’t keeping great records. If they don’t have them, they don't have them, but getting whatever they do have in order, looking at where there are holes to the extent that they’re fixable, to work on those, and also just getting kind of all of their paperwork in order to make sure they’re tracking things will help. When an acquirer comes in, they’re going to want to do a lot of due diligence on the business and legal side. And, so, being able to present those materials quickly is important.

JS: I second that. Clean books are very important so there’s no questions on ownership or taxes or anything like that. And, generally speaking, good cashflow, not a lot of debt on the books, that type of stuff is important too.

TL: How can MSOs stay on top of the competitive M&A market so they can take advantage of opportunities as they arise?

MS: That’s a good question. A lot of it is just staying on top of who all of the operators are in the areas that make sense for you strategically. I think MSOs are going to acquire strategically this year, and making sure that they understand who the players are in each market, and whether those players might be open to sale, can help them approach the right people at the right time.

JS: Knowing who to acquire, what licenses, where, what states are opening up and doing your own market research is valuable in making sure that if you want to enter into a market in a different state, that that’s going to work for your business. Just doing your own due diligence and research in the market is essential to taking advantage of those opportunities.

TL: What sparks companies to decide whether a merger is right for them, or they’re better off pursing an acquisition?

MS: The same deal could really, in most cases, be structured as a merger or an acquisition just depending on certain legal points and tax points. I think we are seeing a lot of the larger deals as mergers, in large part because it’s going to be stock-for-stock and not a lot of cash. A lot of the stock deals are more merger-oriented and a lot of the cash deals may be structured as acquisitions, but that’s not 100% across the board. And definitely the smaller one-off deals, those are almost always structured as acquisitions and not mergers.

JS: Generally speaking, the bigger deals are to be more of a merger, when two bigger companies come together, whereas when you have a bigger company looking to just expand its market in a specific area, just buying a small business here and there, those are going to be obviously acquisitions.

TL: What states or regions do you forecast being hotbeds for M&A activity in the U.S.?

MS: I do think states that recently passed adult-use legalization, especially those that previously had medical programs, a lot of times there are going to be procedures for them to convert their companies, and those states will probably see M&A activity.

JS: California has a bunch of independent operators, and I believe the market is right for consolidation if companies can find synergies within themselves. Regardless of what happens in Congress, I think that we’re going to see continued M&A activity just because the market, the industry itself, is in its infancy and people are growing. But if the federal government decides to deschedule or legalize cannabis this year, I believe we will see a significant uptick in that activity.

Editor’s Note: This interview has been edited for style, length and clarity.

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If Gov. Ned Lamont gets his way, Connecticut will no longer wave the white flag to out-of-state cannabis markets, like neighboring Massachusetts, that are currently deploying advertisements to funnel away potential revenue streams.

During his budget address on Feb. 10, Lamont announced his legislative proposal for adult-use legalization, with cannabis sales to begin in May 2022. The proposal offers a comprehensive framework for the cultivation, manufacture, sale, possession, use and taxation of cannabis that prioritizes public health, public safety and social justice, according to a fact sheet he also released Feb. 10.

Revenue from taxing the adult-use cannabis market in Connecticut would generate roughly $100 million by fiscal 2026, according to Lamont’s proposed budget.

“And now our neighboring states are offering recreational marijuana on a legal and regulated basis,” Lamont said in his address. “Massachusetts dispensaries are advertising extensively here in Connecticut. And rather than surrender this market to out-of-staters, or worse, to the unregulated underground market, our budget provides for the legalization of recreational marijuana.”

Lamont’s 163-page proposed cannabis legislation, An Act Responsibly and Equitably Regulating Adult-Use Cannabis, states that prohibition has failed, and Connecticut needs a new approach to protect public health and safety, especially for communities of color disproportionately harmed by cannabis arrests and convictions. According to Lamont’s summary, the proposal provides expungement for cannabis possession convictions prior to Oct. 1, 2015, as well as expungement by petition after that date.

Under the proposed legislation, adults 21 and older would be allowed to possess 1.5 ounces of cannabis or equivalent amounts of other cannabis products. Possession of any amount above that would only be punishable by an infraction for a first offense, according to the summary. In addition, home grow would not be legal, but the criminal penalties would be substantially reduced. 

The revenue streams from adult-use sales would begin May 2022, via sales taxes at retail and delivery and an excise tax on cultivation. The current state sales tax is 6.35% in Connecticut, which also applies to the purchase of alcohol. The excise taxes proposed include $1.25 per dry gram of flower, $0.50 per dry gram of trim and $0.28 per gram for wet cannabis, to be collected upon the first use, transfer or sale of cannabis.

In fiscal 2023, an estimated $33.6 million in revenue would be generated from the cannabis market in Connecticut, growing to $97 million by fiscal 2026, according to the summary. Beginning in fiscal 2024, the state would intercept 50% of the excise tax (estimated at $26.8 million by fiscal 2026), with those proceeds getting directed for municipal aid.

“These additional revenues will go to distressed communities, which have been hardest hit by the war on drugs,” Lamont said in his address. “Half the tax revenue should be allocated to pilot payments, in addition to the 3% local excise tax option. And, importantly, my proposed legislation authorizes the automated erasure of criminal records for those with marijuana-related drug possession convictions and charges.”

Similar to other states with adult-use cannabis programs, a 3% local excise tax option would allow cities and towns to benefit directly from cannabis retail in their municipalities for their own revenue.

Here, additional elements of Lamont’s proposal are provided (as listed from the summary):

• Market: The proposal preserves the medical market and sets up a well-regulated structure for adult use to ensure that people have access to safe, high-quality products. It aggressively limits marketing to children and allows cities and towns to zone cannabis businesses away from places where children gather. It updates the state’s Clean Indoor Air Act to incorporate cannabis smoking and all vaping.
  

• Licensing: Cannabis will be cultivated and sold by licensed adult-use businesses. The proposal establishes licenses for cultivators, retailers, hybrid medical/adult-use retailers, micro-cultivators, product manufacturers, food and beverage manufacturers, product packagers and delivery services. Delivery service, micro-cultivator, and food and beverage licenses have lower barriers to entry and thereby, will help promote equity in the market. Licenses will be allocated by lottery. Existing medical businesses will be able to convert to adult-use for a substantial fee.
  

• Driving: The proposal updates the state’s impaired driving laws to create a process to suspend licenses of drivers who are impaired but haven’t been drinking alcohol. It creates a plan to drastically increase the number of officers trained at different levels to recognize behavioral impairment and a public education campaign about the risks of impaired driving. The Department of Motor Vehicles will add staff to implement behavioral impairment standards.
  

• Costs: Department of Consumer Protection (DCP) will have the primary responsibility of regulating cannabis businesses and cannabis products and will have 64 positions to accomplish this. The Department of Mental Health and Addiction Services, the Department of Public Health, and the state Poison Control Center will also be provided additional funding to assess and manage public health.

Ascend Wellness Holdings (AWH), a cannabis operator serving medical and adult-use cannabis across five states, announced its new partnership with 1906 to bring “Drops” to Illinois dispensaries.

Drops are in 1906’s best-selling line of swallowable pills, each ranging from 2.5mg of THC to 2.5-25mg of CBD per dose; they are tasteless and calorie-, gluten- and allergen-free, according to the release.

“The introduction of Drops means Illinoisans will finally have access to low-dose, rapid-onset cannabis in a non-combustible format,” the release states.

Drops are fast-acting and are available in six formulations that use organically-grown and pesticide-free cannabis. They are designed to elevate or help a person’s sleep, energy, anxiety, focus, mood or libido, the release states.

In addition to Drops, AWH announced it is also launching new live resin cartridges and PrePacks through its premium cannabis product line, Ozone.

"The live resin cartridges capture the essence of the whole flower in a vaporized form, and each strain of premium flower is extracted at the right time in sub-zero conditions to ensure the maximum amount of cannabinoids and terpenes are captured," the release states.

Additionally, PrePacks are resealable, repackable and recyclable glass pipes prepackaged with .3 grams of top-shelf, hand-trimmed flower, the release states.

“We are constantly striving to add innovative products to consumers who are more discerning than ever before,” said Chris Melillo, AWH chief revenue officer, in an email to Cannabis Dispensary and Cannabis Business Times. “We’re proud to deliver product extensions like our Ozone Reserve Live Resin that captures the most complete cannabinoid profile or the unique 1906 Drops that represent a new frontier in cannabis medicine, both pathbreaking product formats our customers want.”

Illinoisans can get all three new products at dispensaries throughout the state, including MOCA and Midway dispensaries in Chicago and Ascend Dispensaries in Springfield and Collinsville, the release states.

New York legislators have introduced a bill that would legalize smokable hemp flower, something that was conspicuously left out of the state’s recent suite of hemp regulations. 

Earlier this week, A2682/S4340 passed the state legislature’s Health Committee and advanced to the Codes Committee. The bill, introduced by State Assemblywoman Donna Lupardo and State Sen. Michelle Hinchey, proposes direct sales of hemp flower from producers to consumers. 

Last fall, we spoke with Empire Standard CEO Kaelan Castetter, who said that much of the backlash against the state’s hemp and CBD regulations was focused on the flower ban. “It’s a bright spot in the marketplace,” he said, “and many people have been setting up to grow [flower].”

Allan Gandelman, president of the New York Cannabis Growers & Processors Association provided the following statement:

“The New York Cannabis Growers & Process Association is a coalition of New York based hemp growers and processors who actively advocate for laws and regulations that support and encourage a vibrant, diverse, and sustainable cannabis industry. We express our strong support for the passage of A-2682/S-4340 and our members recognize the urgent need to repair harmful regulations proposed by the NYS Department of Health that would prohibit the sale of hemp flower to the consumer.

“Hemp flower is among the most popular and fastest growing segments of the CBD market, and prohibition cuts off one of the only practical and lucrative avenues for growers. By preventing retailers from carrying hemp flower, farmers must rely on selling directly to processors at a significantly reduced per pound basis than if they sold flower.

“We thank Assemblywoman Lupardo and Senator Hinchey for their leadership in bringing these bills to the floor, as well as all of those legislators who have publicly expressed their support. The passage of this vital legislation will not only serve to help hemp growers, processors, and retailers in the midst of historic economic challenges – it will also allow consumers access to tested and safe hemp flower products.”

#Hemp farmers across NYS feel backed into a corner right now, and talk of a lawsuit should come as no surprise to anyone. We remain committed to pursuing a legislative fix to this problem. We need to pass the @DonnaLupardo - @MichelleHinchey #HempFlower Bill without delay. https://t.co/DAjUu1wSZl

— NY Cannabis Growers & Processors Association (@ny_cgpa) February 10, 2021