Canna Business Resources: Update from Benzinga Cannabis Capital Conference

As a New York-based cannabis financing firm, Canna Business Resources is a definitive resource for cannabis operators in the United States, having provided more than $100 million in financing in 2021 for operators in nearly every state and every vertical and on pace to eclipse that amount this year.

We were delighted to sponsor this year’s Benzinga Capital Cannabis Conference and we have yet to encounter such an enthusiastic and exciting set of new opportunities presented to practically everyone in our great industry.

Consumer and patient purchasing habits have gone a long way toward increasing investor interest in plant-touching businesses. Annual sales figures of cannabis continue to break records year after year, with global sales revenue in 2022 projected to reach more than $35 billion, according to BDS Analytics.  Despite challenging economic conditions, most cannabis operators are doing pretty well especially compared to other industries.  Big players in the tobacco, alcohol and pharmaceutical industries have bought into the cannabis industry in recent years. All this activity is precisely what hesitant investors were waiting to see before embracing plant-touching investment opportunities.

Quick History of Cannabis Financing

Since funding from banks is largely unavailable, many entrepreneurs in the cannabis industry have sought financing from angel investors or venture capital and private equity funds.  Several sizable private equity funds have launched and continued to capitalize cannabis operators of all types, but the reality is there just is not enough equity to support the industry’s growth in the next five years.  We are seeing this right now in the financing market for closely held, entrepreneurial and publicly listed organizations.

In the early years, equity was essentially the only financing source, accounting for 81% of total capital raised in 2018-19. That made sense given the nascent nature of the industry, the lack of widespread public awareness of the business and the fact that most industry players had sharply negative cash flow and little cash-flow means to support debt.

But crashing stock prices in the second half of 2019 changed the landscape in lasting ways.

Between the first and fourth quarters of 2019, cannabis equity prices plunged by nearly 52%, leading to a sharp decline in equity issuance.

By the end of that year, public company equity issuance had essentially been squeezed out of the market.

Debt accounted for 74.5% of total capital raised in 2020, the first year in cannabis history that debt exceeded equity in capital raised.

That year also was the beginning of the trend toward debt with no conversion features or warrants, led by issues from Curaleaf and Cresco.

Newfound optimism as 2020 turned into 2021 regarding the prospects of federal legalization produced a 120% rally in cannabis stock prices, triggering the second big wave of cannabis equity issuance.

According to Viridian, public companies issued $1.2 billion of equity in the first quarter of 2021, a record at the time.

From the third quarter of 2021 through the first quarter of 2022, debt accounted for 93% of total financing, with private companies raising a record 10% of that total.

This trend of debt financing is expected to continue for the foreseeable future.  In the current environment public companies are loathe to raise equity for two reasons:

• Prices are well below perceived intrinsic values.
• Hope for legalization reform that could enable uplisting is freezing the market.

Like it or not, the financing trends for publicly listed issuers provide tailwinds for closely held companies.  And in the last six to eight months, the major MSOs all issued financings that are now trading under issue price.  Yields (read: risk evaluation) have all increased across the market as risk perception has increased across the board.  Rising interest rates, in the recent few months, has been a significant driver of cost of capital particularly for cannabis companies.  

Public Market Financing Carries Over

If publicly listed MSOs – generally speaking, those companies with the most liquid equity and debt capital markets and those with diversified revenue streams – are either electing not to raise equity and / or cannot raise equity and are therefore raising debt capital, it is inevitable that the same financing trend is likely to dominate the closely held markets as well.

We were fortunate to meet with hundreds of operators at the Benzinga conference and were grateful to hear first hand the challenges even the best operators are finding in raising equity capital.  For the Canna Business Resources team, this is not a big surprise.  We speak with thousands of potential borrower clients every year and have a unique view of what are the driving forces for canna-business financing in nearly every US market. 

What are the Primary Financing Options for Operators? 

Sale and Leaseback Transactions

Sale-Leaseback (SLB) transactions allow companies to free up liquidity from their balance sheets without dilution of the operating company. We have seen an increase in these types of real estate-based financings as cannabis companies increasingly have been selling their cultivation, processing and storage facilities and immediately leasing them back as a way to instantly raise operating or growth capital. The potential downside is that an SLB locks the asset seller into a longer-term commitment than other straight debt alternatives. 

Senior Debt

It should be noted, however, that in common unsecured debt transactions lenders will be looking for more than a mere promise to repay. It is becoming more typical that lenders today require a corporate or personal guarantee or some type of seniority in the capital structure – often called “senior debt.”  Senior debt often has a fixed term but has many structural flexibilities that SLBs do not, making it more attractive in many cases.

Asset-Based Lending

Based on the valuation of real estate and equipment assets, a cannabis company can typically borrow from within the range of 40% to 75% of asset value. In the case of development projects, the loan is usually based on project costs.  We at Canna Business Resources have a strong history of extending tens of millions in asset-based financing and have a highly experienced team of underwriters in this vertical. 

Working Capital – Cash Flow Based Lending

One of our core products at Canna Business Resources is cash flow-based lending.  That is, we evaluate an operator’s historical and pro forma cash flows and offer a form and size of financing that fits with each individualized operator.  A relatively bespoke process, this underwriting and offering require a collaborative approach to understanding an operator’s business, the market, and growth prospects.  These characteristics are true as important to other forms of debt – however, cash flow based borrowing is critical to helping operators meet working capital needs.  

Convertible Debt

Up to this point, most debt financing by cannabis companies was found in convertible note options with low conversion premiums – which essentially delay the dilution of equity. The company creates a note that converts to equity, often preferred stock, at a future date based on a future valuation method. These notes, similar to promissory notes with interest payable on or before a maturity date, have given investors security that they are repaid before equity holders if something goes wrong. For both the investor and the company this note structure allows the valuation question to be answered in the future while providing needed capital to the company and a more secure instrument to investors.

Expanding Resources

To meet these new-found challenges of our great industry, Canna Business Resources has expanded its presence to provide more robust lending alternatives and top-notch services to our borrower clients.  We take a hands-on approach to the financing process.  We have the ability to create flexible structures and will spend as much time as is necessary to customize a solution for our borrower clients.  In this challenging environment, we encourage operators of all sizes to reach out so we can offer growth-oriented solutions. 

For more information, you can contact CannaBusiness Resources at info@cbrfunds.com

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