Canadian Producers, US States to Watch and M&A — Experts Review Cannabis in H1 2022

Financial struggles in Canada only lead one way

For several years, financial experts across the board have told INN that the enthusiasm surrounding Canadian cannabis players has dissipated.

That reality hasn't changed much in 2022 due to regularly reported losses from the biggest players in the market, and this may lead to an increase in distressed assets.

“We're going to see some bankruptcies. It's inevitable,” said Rami El-Cheikh, strategy partner at EY-Parthenon. “A lot of cannabis companies are running out of cash right now, and it's hard to raise money.”

The expert said he expects to see more consolidation take place among struggling players, and for the market to ultimately have fewer players than it had at the start of the year.

“I wish I had a more positive outlook on the industry, but I don't, unfortunately,” El-Cheikh said.

In his opinion, there will be an uptick in mergers and acquisitions (M&A) out of desperation as struggling Canadian firms continue to run out of options.

Will cannabis M&A recover?

Although El-Cheikh sees more M&A activity on the horizon, 2022 has been a quieter time for consolidation.

Charles Taerk, president and CEO of Faircourt Asset Management, told INN that the slowdown in M&A seen since the acquisition deal between Cresco Labs (CSE:CL,OTCQX:CRLBF) and Columbia Care (NEO:CCHW,CSE:CCHW,OTCQX:CCHWF) is related to poor market conditions.

“Because with rising rates, debt issuance is now more costly (compared to) last year and earlier this year,” he said.

The financial advisor said that previously US operators were able to see debt issuance at 8 to 9 percent, making it more favorable to conduct significant deals. “But now with interest rates rising, smaller companies are finding it more difficult to borrow,” he said.

When it comes to consolidation, Joseph Dowling, CEO of CV Sciences (OTCQB:CVSI), said it relates to creating efficiency, and currently that’s a pressing need for that in the market.

“(Consolidation) will allow stronger, more prominent companies … to lead the way in a still challenging environment,” Dowling said. “It really needs to be done by the adults in the room.”

States to watch in the US market

Experts have been excited to see the development of the cannabis market in the northeast corridor of the US, where movement has been accelerated by the opening of adult sales in New Jersey. This has been described as part of a domino effect caused by the state's rule change.

A representative for Ascend Wellness Holdings (AWH) (CSE:AAWH.U,OTCQX:AAWH), a US-based operator with assets in New Jersey, said the opening of adult sales in the Garden State has been a key catalyst this year.

“From a retail perspective, New Jersey has really helped in driving a lot of the growth in 2022,” Rebecca Conti Koar, senior vice president of investor relations with AWH, said.

She noted that regulators in states near New Jersey are becoming more familiar with adult cannabis sales.

“They're able to see kind of how smoothly it's been rolling out in New Jersey … then at the same time, the state's getting all the tax revenue,” Conti Koar said. “I think it might help pique some interest in our neighboring states. I'm sure it will, as long as the rollout continues to be smooth.”

Taerk also sees the domino theory playing out in New Jersey, and is interested to see how much further other states will add to general cannabis revenue lines and economic growth.

“Because of where New Jersey is, it is putting pressure on other neighboring states to move forward with their transition from medical,” Taerk said.

Leonard Tannenbaum, partner and CEO at AFC Gamma (NASDAQ:AFCG), shares the anticipation about the northeast corridor. The executive also pointed to Maryland, Missouri, Georgia and Florida as states to watch.

“People are scrambling to get positions in Missouri, because it's going to go recreational. And when it (does) … taxes are going to be a lot better than the border states like Illinois,” the AFC Gamma executive told INN.

When it comes to Illinois, Tannenbaum said he is worried about over-saturation and the tax situation in the state.

“(The northeast is) probably the most exciting part of what's going on in cannabis globally,” Taerk said.

Cannabis expectations for second half of 2022

All the experts INN spoke with pointed to several key factors to watch out for in the remainder of 2022.

Taerk said he will be closely watching the progress of cannabis reform from Washington, which is a much-anticipated event for almost everyone involved in the cannabis business in one form or another.

Despite the lack of progress for cannabis reform at the federal level, Dowling told INN he is encouraged by the changes related to rules around CBD because states have been making positive adjustments.

According to Dowling, some states have moved forward due to the slow federal pace. “We've got to take our own lead here in establishing a regulatory environment for our state,” Dowling said. “And they've done that.”

For her part, Conti Koar pointed to specific states, telling INN that when it comes to the second half of 2022, it’ll be about two key markets in the US: New Jersey and Illinois.

Investor takeaway

Investors are well aware of how difficult 2022 has been for the cannabis market.

Coming into the year, expectations were already declining for Canadian players, and when it comes to the US, the slow march of time waiting for meaningful legislation changes has affected the present for many operators.

The remainder of 2022 will to test operators and investors, but experts continue to plan for a brighter day.