This past year has been game-changing for the industry. Cannabis was deemed essential, and regulators showed a willingness to quickly revise and roll out emergency rules allowing for online ordering and more flexible delivery options. These changes advanced the industry by several years in a short period of time and reassured investors who returned to the space in the second half of 2020.
Voters went to the polls in November and voted to legalize medical or adult-use cannabis in five additional states. One in three Americans will live in a state with legal adult-use cannabis once those states come online, and that’s just the tip of the iceberg when we consider how neighboring states will likely respond with their own legislation.
As we welcome 2021, we should celebrate the gains made in 2020 and look forward to opportunities to build on those gains in the new year. Here’s what I expect to see.
The East Coast Adult-Use Market Will Become a Formidable Force
In November 2020, New Jersey voters approved legal adult-use cannabis, followed by state legislators quickly passing a bill to establish rules and regulations for the state’s new adult-use market. New Jersey will put tremendous pressure on New York and Pennsylvania to create their own adult-use markets. New York Governor Andrew Cuomo has already signaled that he will push for legalization, in part to address massive state budget deficits. Some of the largest MSOs already have a presence in New York’s medical market and will be well-positioned when the state legalizes, creating the country’s second-largest market.
Cannabis Mergers and Acquisitions Will Accelerate
Expect to see headline-grabbing M&As in 2021 as large cannabis MSOs act on tremendous opportunities. With the U.S. Senate control flipping to the Democrats, reform is a given, which will unlock new capital. This is the signal investors have been waiting for, and they expect to be rewarded for their patience. The M&A scene will be competitive, for sure. For every winner, there will be losers that will need to justify to their board why they were unable to close the deal.
SPACs Will Contribute to Industry Consolidation
Historically, Special Purpose Acquisition Companies (SPACs) have had a mixed reputation. However, they serve a unique purpose within the cannabis industry, which lacks conventional funding sources in the absence of banking reform. A lot of good can come from SPACs if done right. We saw MTech (which became Akerna) and Ayr Strategies successfully raise significant capital using this method. More recently, the historic Subversive Capital deal captured headlines for its potential to consolidate California’s cannabis market, beginning with its pending acquisition of Caliva and Left Coast Ventures in a deal set to close in January 2021. Looking forward, SPACs will likely be the vehicle for massive consolidation in the cannabis operating companies and brand space in 2021.
Profitability Will Matter More Than Ever
Profitability will be at the front of cannabis operators’ minds in 2021, as investors look for companies with strong bottom lines. The cannabis industry has matured and the metrics have become more precise, making it easier for investors to sort the wheat from the chaff.
In 2020, we saw many publicly-traded MSOs with significant negative cash flow or fuzzy financials, especially in their adjusted EBITDA. Those practices will not cut it in 2021 if a company wants to stay in the game. Large investors want to see operators utilizing generally accepted accounting principles (GAAP) in their reporting. In the coming year, we will see more mature companies embrace GAAP and other uniform standards that build investor confidence. Moving forward, we will see more focus on boosting the bottom line, with operators demonstrating they are ready for the large-scale investors that are waiting in the wings.
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