Our firm is composed of a few principals, a few young and ambitious staff, a handful of partners and our capital partners we have done business with for over 30 years;  not ragtag but lots of opinions as to what happened so far this year, what is going to happen next and what are we gonna do about it.  How do we grow our business while informing, advising and helping the legal, lawful cannabis business?  We agreed that a clear pedantic free review of deal flow is a great way of seeing where things were, are and will be going.

Valuation

We currently are underwriting a  testing lab merger between an out of state public testing lab and a pre-revenue California based lab.  The merger creates another Multi State Operator (MSO) in the lab space which is exciting news since California needs SAFE cannabis.  The agreement to merge is gaining meaningful traction, however, there is a divide between what each party understands the value of their respective entities is.  No surprise. This alone could be the undoing of the entire merger.  Here's what we learned:

• Buyers always under-value the asset

• Sellers always over-value the asset

• Vision and Purpose is poorly conveyed by both parties

• Bravado and egos dominate which causes me anguish and wasted time

• Mergers and acquisitions benefit immensely from third-party facilitators

More Desert Hot Springs (DHS) and Adelanto, California

Since May 2020 we have received 7 real estate capital loans--first and second trust deeds--in DHS and Adelanto for a combined gross potential construction and build-out loan amounts totaling $40mm.  We have systematically passed on these construction loans and will likely continue through this year for the following reasons:

• Infrastructure still incomplete--streets, gutters and utility services.  Delay after delay.

• 400% - 600% increase in RE values over the last 3 years has us concerned.  RE speculators made a killing.

• Founders--in these few instances--are woefully under-capitalized

• We are still stuck in the belief that the highest talent is up north, drifts down from Humboldt to Mendo to Ukiah to Santa Rosa to Santa Cruz to Salinas to Paso Robles to Santa Barbara to Los Angeles and then finds its way to the desert communities.  It's a bias we are working on changing or validating.

Talent Drift

A small but growing percentage of our business dealings this past quarter have been with former NBA superstars, mega-successful Wall Street financial analysts and early industry super-stars (now many taking professional respites) to discuss the one subject near and dear to each:  capital for expansion that we can provide. These conversations and meetings reveal the following:

• Most all cannabis founders seek smart and fairly priced debt and equity

• Smart cannabis operators are learning quickly that talent is the driver for success.

• Big names, big personalities and superior talent is a phone call away.  Accessible.

• Big names and big personalities mean little without direction, purpose and well-defined roles and responsibilities.

• There is growing big leadership and talent cross-over from traditional industries to cannabis.

Conclusion

Our firm received approximately 135 calls from cannabis founders, real estate brokers, wealth managers, CPA’s and attorneys.  Despite the tempestuous and difficult times, cannabis business continues and forges ahead.  In fact, none of our business discussions are without a strong acknowledgment and awareness of our national body politic and feelings of wanting to do more, be more and add something to improve our state of affairs. For our part, we use each call and inquiry to see where we can assist--even where we are inclined to pass on the deal--and move the dial for our industry.  

We are very excited about helping the industry grow throughout the next 2 quarters of 2020.