Many moving parts are involved in cutting a deal in the cannabis sector—enough to make a dispensary or cultivation facility owner’s head spin. Processors and other industry stakeholders are also likely to have a long list of questions.

In part one of this Q&A, Claudio Miranda, co-founder of Guild Enterprises, breaks down the basics of what the industry needs to know about raising capital and consolidation trends. Check back for part two, on when to buy and sell your cannabis business and some specifics on the 2020 Cannabis Conference’s Deal-Making Summit, in which Miranda will provide detailed capital and M&A information for industry members.

Cannabis Dispensary: How should vertically integrated companies raise capital to further grow and expand?

Claudio Miranda: In general, I think a good theme for this whole event is going to be the fact that the capital markets are really dry right now. One way of answering that is more theoretically, like what are the theoretical ways one can raise money? The other side of that question is, what are the actual available ways that they can raise it today? Those lead to different answers because the capital is very hard to come by right now. It's very few and far between, and the hope is that once the capital markets free up again, we'll have a more diverse set of options for operators, let's put it that way.

Basically, I think the best way to do it right now, I would say, where we are seeing the most traction, is capital coming from multi-state operators. They tend to be ones that, at least on the face of it, seem to be most capitalized, and as multi-state operators, a lot of them are establishing more vertical infrastructure across multiple states. They have a team of people and the financial resources to help a vertically integrated company further develop that model, because again, it's a model that seems to be one that they're actively working on. That's a bit of a general statement. There are some MSOs that are just retail-only, but there certainly are some that are more vertically integrated in that regard. At least where we're seeing money coming from right now is from MSOs as one of the main sources.

Another option there is that we're just seeing a lot of private equity—more high net worth individuals or private equity groups that are coming together to get in the cannabis industry. The thing is there, for vertically integrated operation, they're very capital-intensive, as opposed to someone that just wants to, let's say, start a small mom-and-pop edibles brand. The capital requirements are very different. If you're vertically integrated, by definition, you're going to be spending a lot of money on CapEx for a grow, potentially for a retail space and, depending on how vertically integrated, for distribution infrastructure. It's very CapEx-heavy to undergo a vertically integrated plan like that. So, you can't be looking at small mom-and-pop investors, you can't be looking at angel investors that are singular because those types of investors tend to write small checks. What you're looking for, then, is you're going to have to have larger, more well-capitalized groups coming in that have an appetite for capital-intensive operations. And that, again, is why I went to the MSOs as kind of the best example of that -- or some of these private equity groups, or another example of that is like a SPAC, a special purpose acquisition company, that has raised $100 million-plus specifically for this purpose.

MSOs, SPACs tend to have kind of that larger capital structure and appetite … we're [also] seeing the group that's got behind Caliva ... [including] Joe Montana. [The industry is] bringing in a lot of NFL players, bringing in celebrities like P. Diddy, and between all of them you're aggregating tens of millions if not $100 million-plus. Again, that is the sufficient amount of capital to support a vertically integrated business in its growth.

CD: Is it a lot different if a retailer wants to add cultivation or if a cultivator wants to add retail? Can they go to some of those angel investors or mom-and-pop investors?

CM: There’s a couple different factors there. One, we've got to look at the jurisdiction. I'm a California operator, so everything I tend to look at is through the California lens, and there's licensing types, for example, a microbusiness license here in California, where the license itself allows you to have a retail and then to very easily tack on a grow, whereas in other jurisdictions, it can be a completely separate license type. In California it is, too, but you can also have it bundled into a microbusiness. The question there is, what are the initial requirements of that? If I'm a retailer and I want to now get a grow operation going, do I [have] to now jump through a bunch of loopholes to actually get that cultivation license? In some jurisdictions, it's a lot easier to go through that expansion than others. So, that's kind of the starting point.

Assuming, as we have here in California, where it's not that hard, that if you have a retail license, you can try to get a microbusiness license or you can just apply for a cultivation license, and the barrier to entry is fairly low if you're going from retail to cultivation—because cultivation licenses are fairly easy to obtain, relatively speaking—in that case, [with] the capital requirements, it's not as challenging to get that. You might have a more receptive investor because they know that your chances of getting a cultivation license is pretty straightforward, whereas the reverse isn't true.

If you're a cultivator and you want to go for a retail license, the number of retail licenses is a much smaller universe and are harder to come by, so there's higher risk involved in an investor that might be backing that type of opportunity, because they could risk a lot of legwork going into a license that's never granted, for example. That's another thing to look at there. It depends on, really, who the operator is and are they a retailer that's looking for cultivation—a little bit easier—or cultivation going to retail—a little bit harder. In either case, because you're just tacking on another kind of business unit, the capital requirements are a lot less than if you're going after multiple licenses or trying to build out a vertical stack. There, you could be looking at more of the angel investor kind of individual investor or family office-type investor that will have the capital resources and the appetite to undergo that expansion, which again, is a lot smaller of an expansion move than if you're going through a full vertical set.

CD: What are some of the market consolidation trends you're seeing right now?

CM: No. 1, it's vertical integration. What you currently see is brands might buy flowers from a cultivator, and they're paying fair-market prices for those flowers, and then they just brand it themselves with their own brand. You might find one that wants now to get into cultivation and go ahead and move in that direction so they can, again, increase their margins. So, that's one area where you're seeing consolidation, is where you have standalone brands that want to actually absorb infrastructure so they can start to produce things in-house and start to create that vertical integration and then essentially have lower cost of goods.

Another trend that we're seeing with a lot of big players—CannaCraft, Kiva, Flow Kana here in California—they're essentially consolidating a portfolio of brands because that not only helps them utilize that excess capacity that they in their distribution and sales infrastructure, but it gives them more purchasing power and leverage when they go to a retailer. If I go to a retailer and I say, “Hey, I've got one market-leading brand,” I'm going to have a lot more leverage if I come to that retailer with five or 10 market-leading brands that that retailer really wants on their shelf. We're seeing portfolio consolidation, is the short way of saying that, on the brand and distribution side of the equation. Now, that doesn't always involve acquiring those brands. It could just be making strategic investments in them or just providing that service for those brands.

We're seeing that a lot also on the cultivation side, where you have a lot of small cultivators—mom-and-pop, small, family cultivators—that don't have the resources to really compete aggressively on the sales, marketing and distribution side. You're seeing a lot of consolidated groups, like True Humboldt and Flow Kana and groups like that, that are consolidating a lot of farms, to be able to then be that single brand outlet for an aggregation of farms.

Then, lastly, going back to that vertical integration … for example, my company, with Guild Extracts, we're focused mainly on the manufacturing segment, but it would make sense if we can vertically integrate and bring a farm under one end, bring a retail under the other. We actually used to have that vertical set in our history but then broke it apart for various reasons. It could make sense to reconsolidate those vertical segments for reasons that I've explained in this conversation.

President Trump’s 2021 federal budget proposal leaves out a long-running rider that has shielded state-legal medical cannabis businesses from interference on the part of the U.S. Department of Justice or the U.S. Drug Enforcement Administration. It’s an olive branch that’s been in place since 2014, a signal to businesses operating in the 33 states that have legalized medical cannabis that they’re safe from federal law.

Looking ahead to the next year, Trump’s actions on this budget proposal put those businesses at risk of federal prosecution. While the president has not come out as explicitly anti-cannabis, his rhetoric usually elides any real policy position.

“To those following this issue closely, the president’s latest move hardly comes as a surprise,” Justin Strekal, political director for NORML, wrote in a recent op-ed. “Despite Trump mentioning during his campaign that he supported medical marijuana and a general states-rights approach to cannabis policy, his presidency has consistently proven these words to ring hollow.”

The Congressional protection is an explicit mandate that the DOJ not spend any funds on the prosecution of medical cannabis businesses. Without that guarantee (and in the absence of the 2013 Cole Memo, which former Attorney General Jeff Sessions rescinded in 2018), there would be no accord between the state-legal cannabis industry and the federal government—not that there is anything particularly agreeable otherwise about that relationship.

The recent vaping-related health crisis prompted a crackdown at the FDA—at Trump’s behest—over flavored tobacco vape products. In the cannabis industry, there are concerns that this development might create an obstacle to any goodwill that Trump might previously have had for the state-legal market. He’d said in earlier news clips that he would be in favor of a states’-rights solution to the cannabis legalization question, going so far as to cut a tacit agreement with U.S. Sen. Cory Gardner (R-CO) over the matter. 

In a recent interview reported by Marijuana Moment, however, Marc Lotter, Trump’s reelection campaign communications director, told KLAS that the administration may take a harder stance against cannabis. “I think what the president is looking at is looking at this from a standpoint of a parent of a young person to make sure that we keep our kids away from drugs,” he said. “They need to be kept illegal, that is the federal policy. I think the president has been pretty clear on his views on marijuana at the federal level, I know many states have taken a different path.” 

While the 2021 budget proposal is not yet approved (votes aren’t expected until sometime closer to Oct. 1), the medical cannabis protection provisions may be a sign of things to come—for better or for worse.

The Vermont House of Representatives formally approved S. 54 on Thursday, advancing a bill that would set up a taxed-and-regulated marketplace for adult-use cannabis. The state bill now returns to the Senate, where an earlier version passed on a 23-5 vote.

Vermont legalized cannabis in 2018, but it has not yet formally developed the regulatory infrastructure needed for adult-use retail sales. According to a recent poll conducted by Public Policy Polling and commissioned by the Marijuana Policy Project, 76% of Vermont residents support a tax-and-regulate market structure for consumers who’d like to purchase cannabis.

Shayne Lynn is the founder and executive director of Champlain Valley Dispensary, a born-and-bred Vermont resident who’s been advocating for this sort of legislation going back at least 10 years. He cheered the state’s decision to legalize cannabis in 2018, but what he’s seen since then tells him that the time is now is move forward with more concrete reforms. Other states have gone on to kickstart adult-use sales (Massachusetts, Michigan, Illinois), and, in the fall of 2019, a vape-related health scare raised alarms over the untested cannabis marketplace.

“I think people really understand that the legacy market has some real challenges to it that can be deadly,” Lynn said. “So, how does Vermont get ahead of that and create a regulated program? The momentum is there.”

Both chambers have clearly expressed interest in getting this bill passed. Gov. Phil Scott, a Republican, has pushed back on previous conversations around legal cannabis, insisting that he needs guarantees to fund a state after-school program (via cannabis tax dollars), a provision that’s been added into the current bill. Scott’s other sticking point is roadside safety and law enforcement’s wish to perform saliva tests on drivers without a warrant (an amendment that was shot down during the Thursday hearing in the House).

READ MORE: The Marijuana Policy Project has published a detailed summary of the Vermont legislation 

If this bill were to pass, current medical cannabis license holders would get priority in applying for adult-use licenses. Those medical cannabis license holders would also get a six-month head start on the market. During that time, Lynn pointed out, the state would begin to issue licenses to small craft growers, who may then sell into the established dispensaries.

The state’s medical cannabis market includes only five vertically integrated licenses, and Champlain Valley holds two of those. (The other three are held by subsidiaries of Grassroots VT and iAnthus).

At its zenith, Lynn said, the state’s medical cannabis market clocked 5,700 registered patients. That number has fallen to “less than 4,700,” he said, referencing the jittery reaction to vape products last year.

“We've seen a decline of over 1,000 patients on our registry over the past year,” Lynn said. “That's really influenced our business, and that's why we're looking to S. 54 to create the future market. We want to sustain the medical market.”

Even zooming out to a broader adult-use market, Vermont’s population is only 626,000 (as of 2018). The pool of prospective small businesses and consumers is limited, and Massachusetts’ dispensaries are just a short drive down the road. Lynn said that the provisions in S. 54 would make a very vocal statement of support to the business community in Vermont.

Part of this legislation, on both the adult-use and medical sides, is a maintenance matter. Cannabis is so new in each of its U.S. jurisdictions that regular legislative tuning is required. S. 54 represents not only a step forward in the state economy, but a recognition that the task completed in 2018 isn’t done. Cannabis is a work in progress.

“Statehouses do have to be ready, [because] the industry is going to come back year after year now,” he said. “This is a new industry, and you've got to adapt and adjust. It has to be managed.”