Washington Cannabis: Buckle Up for a Brisk 2021 in M&A Activity

The year 2020 was a shock for all of us from both personal and business perspectives, but 2021 is shaping up to look much better, especially for Washington cannabis companies. In the past three months, I have had serious conversations with many clients and prospective clients regarding M&A activities. The pace of inquiries has accelerated significantly since early January.

Recently I wrote about Washington M&A activity (see here):

MSOs (multi-state operators) and international cannabis companies (especially Canadian public companies) are trying to buy and sell interests in WSLCB licensees. We can expect more of this in 2021 and more WSLCB resistance to MSOs and foreign funds investing in the Washington cannabis market.

Based on the term sheets we have been receiving and preparing, it is clear that retail licenses, which have always been in demand, continue to be the most desirable acquisition targets and command the best value. We have seen offers for bare retail licenses go as high as $1MM each, while groups of retail licenses with a consistent, solid retail brand go for many times that amount.

There is increasing interest in producer and processor licenses, as well, with bare licenses generally topping out around the mid-$400k range for a Tier 3 license. Where additional assets are involved, and especially where the seller has created a viable business ecosystem (and not just sat on a license), many other valuation factors come into play in the negotiation process.

Purchase options are always in demand where non-Washington and non-U.S. funds are involved because the pure sale of a purchase option, where no money flows through to the licensed company, does not need to be disclosed to the WSLCB. That allows MSOs and international operators to buy and sell the bulk of a licensee’s Washington marijuana-affiliated assets without WSLCB oversight.

This restriction also means that companies that are willing to hold cannabis escrow funds and act as closing agents are always in high demand. As attorneys we cannot represent our clients and act as escrow or closing agent for our deals, so if you know any good cannabis transaction escrow, please send them my way. I am always on the lookout for more industry contacts.

With industry consolidation comes a general increase in sophistication among potential acquirers, and that also means there are more tire kickers and window shoppers. If you are a prospective buyer, do not try to save money by avoiding an attorney and having your broker prepare your term sheet or letter of intent (LOI). You will most likely come across as an unmotivated buyer and get ignored.

I know that brokers provide valuable input and services, and many of them are well worth their salt. But I can always spot a term sheet, LOI, or contract that was prepared by a broker – or sometimes worse – by both sides’ brokers before any attorney is consulted. Save yourself some time by having your broker put your bullet points down in an email to your transaction attorney. Your attorney will thank you for it, and your deal will go much smoother from the gate.

And one other tip: don’t confuse a real estate broker with a business broker. I cringe every time I get an LOI that comes from a real estate broker’s office because it is always less helpful than one coming from a business broker who is playing attorney. I have no problem with brokers flexing outside their core territory if they get it right, but it is often not right. (Once I was involved in a deal where the contract needed six amendments because the parties insisted we stick with the original subpar contract prepared by the brokers. It wasn’t cheap or easy for anyone involved from that point on.)

On the bright side, I had a great conversation recently with an M&A advisory firm based in Silicon Valley, and they report that cannabis business valuations are getting more grounded in reality. That is better for buyers than sellers, but it is really good for everyone because it means the market is maturing and we will have more solid data to rely on. This firm formerly worked exclusively in tech and since 2017 has worked exclusively in cannabis, helping prospective sellers and buyers justify company valuations as the purchase price negotiations are happening. Here is what I learned:

  • Private companies are currently valued at ~8-10x earnings
  • The market is shifting away from earnings toward an EBITDA model to reward better companies
    • For 2021 sales, a current EBITDA of 5-6x is appropriate
    • A $20-30MM revenue company could defend 8-10x multiple of EBITDA
  • For retail companies
    • Valuations dropped to 0.75x revenues in 2020 but have already increased to 1.25x revenues in 2021
    • EBITDA margins of at least 15% and there is still some room for growth
    • Brands still hold the most potential; a good brand can get 2-2.5x revenue

So as we’re off to the races in 2021, keeping these points in mind will help sellers get good value for their companies and buyers establish good metrics upon which to make their offers. See you out there.

The post Washington Cannabis: Buckle Up for a Brisk 2021 in M&A Activity appeared first on Harris Bricken.

Interview With an Arizona Cannabis Expert – Peter Davis, CPA, ABV, CFF, CIRA, CTP, CFE

I recently had the opportunity to sit down and interview Peter Davis. Most people in the Arizona cannabis industry know Peter. Peter was one of the first receivers appointed over a dispensary in the United States. Since then, Peter has built a very reputable cannabis practice. He is currently the receiver over a Phoenix based dispensary that also has a grow operation. Peter has been a receiver over dispensaries on three occasions. In addition to Arizona, Peter has also assisted clients in California and Nevada.

Peter also comes from the insolvency and financial advisor world. I have had the good fortune of working with Peter on Chapter 11 bankruptcy matters. Among other things, Peter was appointed as an Examiner for group of c-stores that filed bankruptcy in Arizona where my client was one of the senior secured creditors.

Peter started Simon Consulting in 2000 and recently merged with JS Held, which has 1,200 professionals worldwide. Peter is a newly appointed practice lead for JS Held’s cannabis practice. To read more about Peter and his background, please CLICK here.

Ethan: Peter, thank you for taking the time to sit down with me. What are some of the issues you’re seeing in the cannabis industry in Arizona?

Peter: Good question, Ethan. Right now, the biggest issue facing the industry is supply. Since recreational marijuana became legal in Arizona, there has been a shortage of product.

Ethan: What impact has that had on the market?

Peter: The price per pound has gone up rapidly. Before recreational marijuana was legalized, a pound of flower was selling for around $700. Now, the price per pound is $2,000, and I see the price continuing to go up until supplies can catch up with demand. The pricing also depends on how the cannabis is grown. Essentially, there are three ways to grow marijuana – outdoor, in-door greenhouse or in-door grow facility where all of the grow conditions are controlled by specialized lighting and nutrients. The in-door grow facilities typically produce the best products. However, it cost millions of dollars to properly build-out such a facility.

Ethan: Given the cost of a state-of-the-art grow facility, are you seeing any investment activity in that area?

Peter: Definitely. Current owners need access to capital to build-out these type facilities. Because traditional financing is not available, and alternative financing can be very expensive, some owners have turned to outside investors. So, while procuring a new license is difficult given the cap on the number of licenses in Arizona, there are other ways to get involved in the industry.

Ethan: What kind of regulatory issues have you seen lately?

Peter: If you aren’t in compliance with the regulations, then the Arizona Department of Health Services will take notice and may revoke a license or pursue other disciplinary action. The industry is subject to random audits by the Department, but so far, I have found the Department pretty reasonable to work with. If you follow the regulations and ensure compliance, you should be in good shape.

Ethan: Now that Arizona allows recreational use, are you seeing a lot new players in the market?

Peter: Yes, we are seeing national players enter the Arizona market. They’re interested in all facets of the industry – from owning and running their own dispensaries to assisting current owners with growing more product. They are also well financed and able to pay the price for a license in the open market.

Ethan: You just touched upon a subject I wanted to ask you about. Given the limited number of dispensaries allowed in Arizona, how is that impacting the price for a license?

Peter: We have seen the price for just a license go as high as $10,000,000 to $15,000,000 – and that would be for an average type dispensary. That’s just for the naked license, without real estate and other assets. I don’t see the price coming down any time soon, and in fact, now that dispensaries can sell both medical and recreational products, I think the prices will continue to go up. As long as you have a limit on the number of dispensaries, you’re going to see high values as well.

Ethan: How much does location impact profits?

Peter: We moved a dispensary in receivership, pursuant to a Court order, from Wickenburg to Phoenix. It is possible to move a dispensary and moving to the right location can result in significantly higher revenues as we experienced in the recent move.

Ethan: Now that marijuana has been legalized and some people are trying it for the first time, do you expect recreational sales to stay high or level off?

Peter: We are at a tipping point in Arizona and nationally. Now that states are legalizing marijuana, I think we will see continued demand, especially as less stigma is attached to the use of marijuana. Eventually, marijuana will be viewed like alcohol and become part of a mainstream for entertainment.

Well, this seems like a good place to stop for today. I want to thank Peter for his time and insights. In the coming months, we intend to check back in with Peter to get a bird’s eye view of the market.

The post Interview With an Arizona Cannabis Expert – Peter Davis, CPA, ABV, CFF, CIRA, CTP, CFE appeared first on Harris Bricken.

Episode 346 – Jobs, Jobs, Jobs!

Andrew Livingston and first-time guest Ngiste Abebe join host Heather Sullivan to talk about the growth in legal marijuana jobs and the pressing need to address social equity disparities within the entrepreneurial community. Produced by Shea Gunther.

News & Links:
New York Governor Reveals Amendments To Marijuana Legalization Plan Weeks Before Budget Deadline | Marijuana Moment

New Jersey Lawmakers Send Marijuana Compromise Bill To Governor’s Desk, Setting Stage For Legal Sales | Marijuana Moment

Oregon marijuana firms enjoy booming market fueled by pandemic, consumers shunning illicit suppliers | Marijuana Business Daily

Photo: Beverly Yuen Thompson/Flickr

California May Decriminalize Psychedelics

On February 17, 2021, California Senator Scott Wiener introduced SB-519, a bill that if passed, would decriminalize a host of both natural and synthetic psychedelic drugs. In this post, I’ll unpack what the law would do in its current form.

Before I get into the specifics of the bill, there are three things that are important to note. First, this bill was just introduced and it’s highly likely that it will be amended–possibly even substantially–during the legislative process. Second, it’s by no means guaranteed that this bill will pass. The California legislature has had a hard enough time trying to pass a hemp CBD law that we don’t recommend getting your hopes up just yet.

Third, and most importantly, this law would NOT legalize psychedelics in the same sense as states have legalized cannabis across the nation. There is a big difference between decriminalization and legalization, and the difference can often be complex. But in the simplest terms, this bill won’t open up legal commercial opportunities; instead, it is mainly designed to reduce and eliminate penalties for possession and personal use by persons over 21. And it certainly won’t change federal law.

With that, let’s take a look at what the law would do:

Remove possession penalties.  The law would remove criminal penalties for possessing a host of drugs on Schedule I of California’s Uniform Controlled Substances Act, such as DMT, ibogaine, LSD, mescaline, peyote, psilocybin, and psilocyn. Again, this is not full-fledged legalization, but the removal of certain penalties for possession only.

Allow social sharing.  The law would also allow the possession, processing, obtaining,  ingesting, “social sharing” or transport of DMT, ibogaine, LSD, mescaline, psilocybin, or psilocyn. It would also make lawful cultivation or processing of plants capable of making these substances at a person’s property for personal use or social sharing.

It’s important to note that any kind of sharing would have to be with someone over 21 and provision to a minor could lead to penalties. Social sharing is limited to giving away or counseling the administration of these substances to persons over 21 without financial gain and in the context of things such as group counseling or spiritual guidance. This does NOT allow for commercial sales–the law is clear that social sharing cannot be for financial gain. The one seeming exception is that the term “financial gain” does not prohibit charging fees for services such as counseling or spiritual guidance. There are similar, though more narrow, provisions for MDMA.

Decriminalize paraphernalia.  Existing law criminalizes drug paraphernalia. This law would provide a carveout to existing law for paraphernalia related to the personal possession, growing, sharing, or safe use of a host of substances, including DMT, LSD, psilocybin, MDMA, and ketamine. The purpose of this carveout is to allow for harm-reduction tools such as drug-checking kits and other paraphernalia that can help test and ensure the safety of these substances.

Working Group.  The California Department of Public Health would be required to convene a working group to study and make recommendations regarding decriminalization and even legalization and regulation of psychedelic substances. The CDPH’s report to the state legislature will be due by January 1, 2024.

Expungement Opportunities.  The law would provide mechanisms to seek to recall or dismiss sentences and possible sealing, if those persons would not have been guilty of an offense or would have been guilty of a lesser offense under certain parts of this law. The state Department of Justice would be required to review records in state criminal proceedings and notify, over the next few years, prosecutors of cases that would then be eligible for dismissal or recall. The law then lists out a complex process of allowing challenges to the dismissal or reduction, and ultimately would allow courts to reduce or dismiss convictions in some cases.

__

This is a very ambitious law and is likely to undergo substantial changes in the legislative session. Please stay tuned to the Canna Law Blog for more updates.

The post California May Decriminalize Psychedelics appeared first on Harris Bricken.

Patent Infringement Indemnification: Do You Have It?

Last week, a major cannabis brand was sued for patent infringement by Geographic Location Innovations (“GLI”) in the District Court of Colorado. The Complaint alleges GLI is the owner of the ‘285 Patent, titled “Device, System and Method for Remotely Entering, Storing and Sharing Addresses for a Positional Information Device,” which among other things, allows a user to request an address, such as the address for a store, from a server. The server determines the requested address and transmits it to the user. The system can also determine route guidance to the store address based at least in part on the location of the user.

The defendant’s website has a similar store locator system that GLI claims infringes the ‘285 Patent. A user is able to input an address and the website will provide a list of the nearest retail locations. The website will also load navigation if the user requests directions. If you’re reading this and thinking “wow, most retail websites I’ve accessed lately have this feature,” you’re absolutely right. GLI has been busy – our search of the federal courts found that GLI has filed 49 lawsuits since 2016, with 11 of them still ongoing. And of course, it bears mentioning that this trend of patent infringement litigation will only become more and more prevalent in the industry as players focus on their online presence.

The real takeaway I have from reviewing this lawsuit is this: do you have intellectual property protections in place? Most of our clients are visionaries that are building and implementing their business plans, establishing business relationships, etc. They’re also establishing their online presences, but the actual work of creating a website is being outsourced to web developers more often than not. In such situations, it’s important to not gloss over the indemnification provisions of the agreement.

Some developers, who are aware that intellectual property trolls are on the rise, flat out refuse to agree to any indemnification. These developers feel they’re just building what the client is requesting, and the client should therefore bear the burden of potential patent infringement. However, if the developer is suggesting features, or using “home grown” templates or tools, full intellectual property indemnification is probably proper and should be fought for (or at least, paid a premium for). Given every situation is different, your arguments for partial to full indemnification may change, but in absolutely every case, the risks and benefits that may result from this typically “boilerplate” provision need to be weighed.

As you can see from the cautionary tale above, it may serve you very well to have proper indemnification clauses in place. Otherwise, if you find yourself in litigation over something you had very little to no control over, you might be left holding the bag for someone else’s mistake. Don’t rely on your web developer for legal advice. Our intellectual property team has seen it all and is here to help.

For past posts on the importance of indemnification provisions in other contexts, see:

The post Patent Infringement Indemnification: Do You Have It? appeared first on Harris Bricken.

Will the FTC Adopt Less Stringent Substantiation Requirements for CBD Claims?

If you follow our blog, you know we keep a close eye on enforcement actions taken by the Food and Drug Administration (the FDA) and the Federal Trade Commission (the FTC or the Commission) against companies selling and marketing cannabidiol (CBD) products.

Back in December, we discussed the FTC’s decision to adopt new and more stringent enforcement practices on companies making false and deceptive medical claims about their CBD products.

What wasn’t publicly known then was that two FTC Commissioners did not entirely approve of the Commission’s newly adopted enforcement strategy. Ten days following the issuance of this last round of FTC warning letters, Commissioners Rohit Chopra and Christine S. Wilson issued personal statements to the Commission expressing some concerns with the FTC’s CBD enforcement priorities.

Although both Commissioners agreed that the FTC should pursue enforcement actions against companies making deceptive and false claims, they suggested that the Commission shifts its enforcement priorities and refrain from imposing an unduly high standard of substantiation on CBD companies.

In his statement, Commissioner Chopra reminded the FTC of the need to prioritize its authority to crack down on misconduct related to substance use disorder treatments, specifically opioids treatments– particularly given the growing dependence on these substances since the start of COVID-19.

Back in 2018, Congress enacted the Substance Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (the SUPPORT Act), which empowered the Commission to impose civil penalties, restitution, damages and other relief against actors that engage in misconduct related to substance use disorder treatment and to prosecute deceptive marketing of opioid treatment products.

Chopra opines that using the FTC’s penalty offense authority under the SUPPORT Act would make warning letters more effective. Commissioner Chopra further argues that by imposing a “reasonable basis” for claims, the FTC would likely incentivize voluntary compliance by marketers, and thus, would operate more efficiently. To further increase its level of efficiency, Chopra also suggests the Commission shifts its limited resources from small businesses toward large companies that are better funded, and thus, able to provide financial relief to victims.

For her part, Commissioner Wilson recommends the FTC impose stringent substantiation requirements “sparingly.” In her statement, Commission Wilson expresses concerns with mandating such level of claim support, which she fears may result in denying consumer truthful, useful information, diminishing incentives to conduct research and potentially deterring manufacturers from introducing new CBD products to market. To support her argument that the Commission should refrain from imposing such burdensome standard of substantiation, Wilson points out to the existence of “many research studies […] currently seeking to determine whether they are other scientifically valid and safe uses of [CBD].” This, she said, shows that credible science already exists – or is on its way – to reasonably support that CBD products may indeed treat certain conditions.

Though it is clear the FTC will continue to take enforcement actions against bad actors making wholly false and deceptive medical claims about their CBD products, Commissioners Chopra and Wilson’s statements suggest that the Commission may refine and clarify its enforcement standards for the CBD industry and possibly approve–or at least tolerate–“reasonable” claims backed by reliable scientific data. This, of course, would greatly benefit the industry, which for the past two years has conducted a wide range of studies on CBD’s therapeutic values and has begged federal regulators to establish realistic standards to help ensure compliance; and to provide them with an opportunity to lawfully operate in the marketplace.

The post Will the FTC Adopt Less Stringent Substantiation Requirements for CBD Claims? appeared first on Harris Bricken.

Friday, February 19, 2021 Headlines | Marijuana Today Daily News

Marijuana Today Daily Headlines
Friday, February 19, 2021 | Curated by host Shea Gunther

// N.J. legal weed revived again as Murphy gets another reprieve from lawmakers. But it’s far from a done deal. (NJ.com)

// Draft of bill aims to curb underage use of concentrated THC set potency cap in Colorado (KOAA News 5 NBC)

// North Dakota Lawmakers Approve Marijuana Legalization Bill In Committee (Marijuana Moment)


These headlines are brought to you by Cova Software, the number one dispensary point-of-sale system in North America! Swing over today to see why two thirds of all Canadian cannabis stores run on Cova software, which is also the fastest growing dispensary software in the U.S., with more than a hundred new client dispensaries open for business in January alone!


// Cannabis bill with no commercial production cap passes committee (Taos News)

// Tax Court Rules Against Harborside In 280E Case (Green Market Report)

// Oklahoma medical marijuana sales surpass $800 million for 2020 (Marijuana Business Daily)

// Oregon marijuana firms enjoy booming market fueled by pandemic consumers shunning illicit suppliers (Marijuana Business Daily)

// Oregon marijuana firms enjoy booming market fueled by pandemic consumers shunning illicit suppliers (Green Market Report)

// Tilray Delivers Solid Quarter As Revenue Rises 20% (Green Market Report)

// NFL Explores How Marijuana And CBD Can Be Used As Opioid Alternatives For Players (Marijuana Moment)

Check out our other projects:Marijuana Today— Our flagship title, a weekly podcast examining the world of marijuana business and activism with some of the smartest people in the industry and movement. • Marijuana Media Connect— A service that connects industry insiders in the legal marijuana industry with journalists, bloggers, and writers in need of expert sources for their stories.

Love these headlines? Love our podcast? Support our work with a financial contribution and become a patron.

Photo: Phil Murphy/Flickr

FREE Webinar! Cannabis in Mexico Part 2: The Q&A Session

Register HERE!

On January 28th, in partnership with Mexico-based law firm Lawgic, Harris Bricken hosted the webinar “Cannabis in Mexico” (replay here). That webinar covered the basics of what stakeholders can and can’t do right now in the Mexican medical cannabis industry, what lies on the horizon for adult use, and how Mexico treats industrial hemp and CBD.

Due to the high number of follow up questions we received before, during, and after the webinar, we decided to host a second webinar to answer the pressing and popular questions we were unable to address during the program.

Please join us for our FREE hour-long, Q&A webinar on Thursday, March 4th, at 12pm PT to learn even more about cannabis legalization in Mexico, including:

  • current medical cannabis laws
  • current hemp laws
  • the status of enacted and proposed regulations
  • expectations for adult use cannabis program roll-out
  • markets analysis
  • insights on how businesses and investors can best position themselves in this industry, now and in the future.

Adrián Cisneros Aguilar, our lead Mexico cannabis law attorney, will join Lawgic’s Roberto Ibarra López to answer questions on these and other topics from our January 28th webinar. The panel will be moderated by Harris Bricken’s cannabis practice chair, Hilary Bricken.

Make sure to submit your questions when you register!

Register HERE!

The post FREE Webinar! Cannabis in Mexico Part 2: The Q&A Session appeared first on Harris Bricken.

FREE Webinar! Cannabis in Mexico Part 2: The Q&A Session

Register HERE!

On January 28th, in partnership with Mexico-based law firm Lawgic, Harris Bricken hosted the webinar “Cannabis in Mexico” (replay here). That webinar covered the basics of what stakeholders can and can’t do right now in the Mexican medical cannabis industry, what lies on the horizon for adult use, and how Mexico treats industrial hemp and CBD.

Due to the high number of follow up questions we received before, during, and after the webinar, we decided to host a second webinar to answer the pressing and popular questions we were unable to address during the program.

Please join us for our FREE hour-long, Q&A webinar on Thursday, March 4th, at 12pm PT to learn even more about cannabis legalization in Mexico, including:

  • current medical cannabis laws
  • current hemp laws
  • the status of enacted and proposed regulations
  • expectations for adult use cannabis program roll-out
  • markets analysis
  • insights on how businesses and investors can best position themselves in this industry, now and in the future.

Adrián Cisneros Aguilar, our lead Mexico cannabis law attorney, will join Lawgic’s Roberto Ibarra López to answer questions on these and other topics from our January 28th webinar. The panel will be moderated by Harris Bricken’s cannabis practice chair, Hilary Bricken.

Make sure to submit your questions when you register!

Register HERE!

The post FREE Webinar! Cannabis in Mexico Part 2: The Q&A Session appeared first on Harris Bricken.