Out of Money, Out of Time, and Debt Piling Up – The Benzinga Cannabis Conference Miami 2023
I wanted to not be a curmudgeon.
I wanted to talk about the key phrases the speakers kept brining up like “cash is king”, “data is so key to your future”, “AI is here and coming for cannabis”. But alas, none of that will matter if everyone closes due to expenses being greater than revenue.
I wanted to go to Benzinga and find out there is a light at the end of the tunnel, and cannabis industry in North America has a bright and vibrate future.
Well, as Roadrunner taught us, the light at the end of this tunnel is actually another train about to run you over called Federal Legalization and international legalization.
The toils of the cannabis industry are well written about now, high taxation, high regulation costs, no access to capital, a fierce black market emerging in all legal states, 280E tax code issues, etc, etc. But after 72 hours in Miami checking under the hood of the cannabis and psychedelics industry, it is much, much worse than you thought.
The best way to go over how bad it is right now is to pull out a rap battle, Comedy Central Roast, or old Henny Youngman or Rodney Dangerfield type of narrative. Do you remember, the “your wife is so fat, she could put on high heels and hit oil!”, and the next comedy would jump I and say, “Well, your wife is so fat, she can XYZ..”
No respect, as Rodney would say, but let me get to my point about, “the cannabis industry is so bad” comedy routine…
To be clear, the Benzinga group and cannabis conference is 1st class, and the most important cannabis show to hit all year due to it’s access to VIP people, great networking events, fund raising options there, etc. They show is fantastic each year on South Beach and you NEED to attend it if you want to know what is really going on with the movers and shakers in weed. That being said, even that group of fabulous people can only polish a turd so much. This is a review of the cannabis industries problems, not a reflection of the Benzinga show or people, that is top notch, first rate, invest in them if you can.
Let’s get to the main event…
The cannabis industry is so bad…. The show opener on the “deal and finance” stage was a rousing, high-five-ing talk about how “lucky we are this year because we only paid 8% on debt, and everyone else is double digits! Woooohoooo! Give me some love!.” I paraphrase but you get the point, that was the opener of the show! Not “Jumping Jack Flash” or “Start Me Up”, we got the “my debt payments are only half as bad as I thought and way better then the other guy drowning in debt!”
And that talk opened the show, on the “let’s make a deal” stage!
The cannabis industry is so bad…we were told if you paid all your bills and paid all your taxes including your 280 taxes, and had 0 left after that, you are winner this year! If you ended the year and were able to pay your debt and taxes, and had nothing left after that, guess what, you killed it! You are a cannabis 1% er! Congrats on that take-home pay.
The cannabis industry is so bad…. Deal makers talked on stage about how if it weren’t for debt financing, there would be no marijuana industry anymore. All cash has completely dried up, equity deals are dead as no one wants crappy stock and buyers don’t want to dilute their shares and ruin the cap-x tables. No cash deals, no equity deals, only thing left is debt. Debt costs have obviously risen greatly in the last 6 months as interest rates climb in the US. The industry is living off credit card debt basically, turning over debt frantically and trying to find where the next dollar is coming from regardless of payback terms and rates. The future be damned, if we don’t do it, we are done anyway, was a common realization for people in the last 72 hours.
The cannabis industry is so bad…. Sellers can’t even sell. There is no more cash payout and go to your own island and retire. The M&A experts said sellers may be lucky to get 10 to 20% in cash. There are no more sales, only getting acquired. Whoever buys you is going to give you a modicum of cash, and stock in the company or project you are being acquired for. If it is Walmart, you are getting some small cash payment and Walmart stock, if it is Jungle Gym Vapes buying you, are getting $50 and a whole lot of “what could be” with JGVapes stock. Buyers are taking much longer to close deals and doing more due diligence. Cash, and cash flow is king right now, preserve it, protect it, because you have no idea if someone or company will ever hand you cash again.
The cannabis industry is so bad….that certain attorney presentations talked about clients wanting to “use the IRS as their banks, don’t pay the IRS but keep paying your lender, the fees and penalties are worse from your lender than the IRS, so let them finance you.”
I fell on the floor after that one. The OG cannabis legend I got to spend the show with just looked at me like he didn’t believe what he just heard. I would be 32% richer too if I didn’t pay my taxes, too, but that doesn’t mean you can do it. The problem is the IRS will throw you in real jail if you skip out on your taxes long enough, Citibank can’t and won’t. This is one of the worst ideas in the history of bad cannabis ideas. Stiff the IRS and let them finance you? No way. While there is one tax strategy out there used by some MSOs on 280E called deferment, or, as we call it, kicking the can down the road.
That basically means they are deferring this massive tax sums to future quarters hoping that federal legalization will happen and they can take the IRS to court to say these taxes are actually not invalid, as weed is now a federally legal drug and subject to regular IRS regulation and not draconian 280E.
How long can companies keep rolling the amount forward? Does the IRS allow unlimited deferment? I can defer paying my taxes for 10 years? 50? 100? There is a limit to how long you can “kick the can down the road praying for regulations to change”, the IRS is not stupid, and the one thing to remember is that they will never run out of people, time, or money, and you will. This may work for now but the massive bills coming due, whether we see federal legalization or not, are going hurt some bottoms lines of your favorite cannabis investments in the future.
The IRS should never be your bank or finance option. They are a taxation collection agency, they can put you in jail if cheat enough or brazenly enough like this industry is thinking of doing, take the L and pay, the future is much worse if you don’t. The interest and penalties on those taxes numbers are going to be much worse than your 9% credit line.
The cannabis industry is so bad....the top NY panel said "New York is uninvestable for the next 12 to 18 months". Umm, what? The crown jewel of the East Coast, the market that was suppose to save the industry is so poorly set up right now, that most investors won't touch it for 12 to 18 months. Heavy taxation, brand new licensing rules coming in May, no real sales until quarter 1 of 2024 maybe, restricted advertising to the point of not being able to advertise, just a complete s-show according to the New York panel.
And that state was supposed to save the market, well done regulators.
The cannabis industry is so bad – two lawyers on stage talked about doing deals out of receivership or bankruptcy, if the cannabis companies could even declare it. Yes, some people are moving on distressed debt and buying companies from the owner of the loan, but is $0.55 on the dollar a good deal if you can pay $0.20 in 90 days? It is a small and bold crew calling a bottom in April of 2023.
The cannabis industry is so bad…even the data people I talked to, who are right by the way, think using your data to improve your margins is nice, but can only do so much. So I asked, “The black market is beating you 85 to 0 and by improving your margins and getting tighter on what you offer and knowing what you clients want will make it 85 to 10?” They all nodded and said, “yeah, kind of”. I applaud the use of data, but data can only boost your efficiency so much to improve your bottom line, 6% here, 12% there, it can’t overcome a 93% price difference in legal to illicit edible pricing.
The cannabis industry is so bad…. venders are now setting up “buy now and pay over time” for their industry. Why? Because no one has cash to pay their bills. Remember, Weedmaps now has hundreds of vendors in errs for over 90 days. That means they are nonpaying clients, unable to pay the monthly tab for being on their map and selling weed. The famous vape brands setting up the “buy now and we will finance you” model said they listened to their customers biggest problems and they all need help paying their invoices.
So now brands and suppliers are financing the retail guys, the guys on the front lines, sharing their pain of a very restricted cash flow. If brands and suppliers don’t do it, their customers won’t be able to pay the invoice anyway, so might as well work with them on financing the deal. A little of something is worth more than nothing as they say.
Yes, you knew the cannabis industry was a disaster right now, but, no, you probably don’t know how bad. The biggest problem is that there is no good news coming down the tracks like a train at the end of a tunnel. I few speakers and investors talked about how we are at the bottom, and it may be a great time to buy. Says who? One deal maker said he got a company that raised over $10 million for only a $1 million this week. That’s great, but what if you could have got that company for free next month since they can’t pay their debt? You just overpaid by $1 million dollars. You could then go to their lenders and say I will pay you $0.02 on every $1 of debt, take it or leave it, $0.02 is better than the 0 you are going to get. The lender will likely want to get anything they can for the investment and say yes.
The cannabis industry is a falling knife right now and some people are thinking of trying to catch it. Warren Buffet will tell you that is one of the hardest things to do in life, catch a falling market at the right moment.
If the cannabis industry was worth a $1, but is now worth $0.35 in your mind, that doesn’t mean it is a good time to buy, it may find a bottom at $0.05.
The next two events coming to save the day are also strong negative influences for an already punished market. The light at the end of the tunnel to save the day is an oncoming locomotive called Federal Legalization. If you think we are within 36 months of Federal legalization (I am not of that thought), interstate commerce will decimate the industry margins as legal and illegal markets begin selling and shipping massive amounts of cannabis by taking orders online and shipping through major channels.
Price compression, round 64.
The second catalyst to save the idea is international legalization, changing the UN drug treaties and allowing every low-cost provider country to ship and sell cannabis. That is the end for the US legal market and will also take a good chunk out of illegal market sales. As we covered with Colombia producing at $0.04 a gram and shipping all over the world already, look for Latin and South American countries to win this war long term.
There is no way at the current cost structures that currently run the cannabis industry.
What happens to all that debt when ounces when there are $50 ounces online, free shipping and 48-hour delivery? If that is the new legal price with interstate commerce smoothing out the industry, as we look at here on the black market, if ratios hold, you are looking at $25 to $30 ounces on the illicit markets being shipping all over the country too. Does the price and revenue model of your company work at those numbers?
There will never be enough cash or refinancing to take on all this debt, even with legalization. We will see a major MSO bankrupt, if not more, as funding may dry up even for them. There will be many losers and life savings lost on this cycle. It will have to crumble to be rebuilt with the correct prices for the commodity known as cannabis.
The current industry is bleak, and the future doesn’t look much better, unfortunately.
The cannabis industry is so bad…. the best idea I heard was to sell legal cocaine in British Columbia. BC recently decriminalized aggressive drug use and there are so many people dying of fentanyl, they are supposedly issuing licenses for clinics to sell medically pure cocaine as a gateway drug off fentanyl. Groups were pitching their licenses and the potential of being a legal coke dealer in Canada.
The best idea in cannabis is to be a legal coke dealer in Canada.
That about sums it up.