Co-Chair of the Cannabis Industry Group, Sander Zagzebski sits down with the Managing Director of Sharp Capital Advisors, Colin Campbell to discuss the current state of marijuana sector mergers and acquisitions and the cannabis dealmaking landscape in 2023.
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Welcome to the Clark Hill Cannabis Industry Group Podcast. I'm Sanders Egzebski, a corporate securities partner in the Los Angeles office of Clark Hill and co chair of our International Cannabis Industry Practice Group. With me is Colin Campbell of Sharp Capital. Colin's been a good friend for a long time and Sharp Capital is one of the leading Investment banking firms in the cannabis space. Today, we're going to talk about capital markets, mergers and acquisitions, and the dealmaking landscape involving the cannabis industry in 2023. Collin, thanks for joining me. Thank you for having me, Sander. So, uh, let's just kind of dive into a conversation here. Uh, 2022 was a little bit, uh, a little bit choppy to say the least in the cannabis industry. You and I had a few conversations about that. Uh, what's your take on the kind of the current state of the industry, uh, uh, going into, uh, you know, kind of halfway into Q1 of 2023. Uh, where do you see things right now? And, uh, where do you see things going, you know, big picture wise? Yeah, I think I think to think of Q one and beyond this year, just a quick, um, level set of context coming out of 2022. And I think we all recognize that that was that was a challenging year. Um, I think in some senses, it was not maybe as challenging as. At least I thought it could have been at the outset. Um, I think that the hopes that SAFE was going to pass towards the end kept hopes alive that there would be some form of rescue and we can certainly debate, debate the merits of what SAFE could or couldn't have done. Um, but it kept, I think, some deals from getting done that, that otherwise. You know, operators would have recognized they had to deal with the reality that was in front of them. And instead, I think some companies tried to, to extend that runway as much as possible. Um, I think we saw some lenders recap their own debt, and I think you and Bob have done a great job talking about receiverships in the industry and, and how complex those can be. And so I think in many cases there was lenders that sort of continue to extend terms and. Extend capital, uh, for companies otherwise would have, that could have been the catalyst to go and do something. And so I think a lot of that fortunately, and unfortunately, as, as maybe, um, harsh as that may sound, I think a lot of that is going to come to a head. I think the capital markets remain very constrained, um, debt capital markets, despite the best efforts of many of the lenders in the space. I think in general, they're all pretty good actors. I think in some cases they get a bad rap for how expensive the capital is, but the reality is, is the cost of capital reflects the risk that they're taking as, as capital providers. And I think we're beginning to see a lot of that risk manifest itself in companies that are. Potentially overextended, they're reaching the limits of their debt covenants and lenders are having to think creatively about what do they do now? And you can't just continue to re extend terms. I think equity capital markets are also very constrained. Um, again, I think, you know, the capital that we see available right now is largely coming from high net worth and family office providers. And those checks, um, look different. I think they've looked in the past and I think all of this means that in Q1 and beyond, um, I think you're going to have companies facing some hard decisions. And I think the reality is that there's a lot of good companies out there that have a reason to exist, but unfortunately, the growth wasn't there. The cost of capital is very punitive and difficult to operate in. The regulatory and tax... Environment is incredibly complicated and not helpful for making businesses successful. And so I think we're going to see, we'll see some M and a, we'll potentially see some capital raise, but I think a lot of it's going to have this distressed overlay, which again, you and I have talked about, I think there's a flavor to that, that hopefully we probably need to work through on, on this conversation. Um, but I think that's, that's the flavor that we're going to see this year is a fair amount of distress and trying to architect deals to rescue good companies. That have a reason to exist for the benefit of the consumer for the benefit of the patients and really for a benefit of the industry longer term in terms of building out the infrastructure to make it a mature industry that that can exist and and contribute to the greater good. If that doesn't sound too philosophical. Yeah, I mean. Look, I, uh, hate to say that you're preaching to the choir here, but I think we, we, we see these things in a relatively similar way. I mean, uh, you know, let's look at a couple of headlines, right? Uh, uh, you know, last year, the, um, Well, I guess it was, it was early this year, Air Wellness canceled their deal to acquire Gentle Ventures. That was a pretty significant transaction. Um, not a huge transaction, but, uh, it looks like, you know, this is a, a deal that had been pending for some time, nearly repriced, but then closed their transaction to, um, And then the Bruno goodness growth deal, which was a significant deal, uh, broken and looks like it's now going into litigation, which is never fun. So I think, you know, is. This is kind of a sign of the times. In other words, did some of these companies enter into these deals with, you know, a bit of optimism, perhaps thinking safe would pass last year or thinking there would be some, uh, some, some rebound finally to the, uh, you know, the equity capital markets that had declined so much since the early days of the Biden administration. I mean, what do you think is, uh, what was Was causing those deals to, to get, uh, to run into trouble. Yeah, I think there was a little bit of the sense that you, you hope for the best, but plan for the worst. And I think certainly some of those companies that you named that are, they had the capital, they had the sophistication, they've done a lot of deals already in the space. And I think we should probably talk later on about what. What that could look like here in Q1 and Q2 for some of those deals that previously got done. Um, but I think they had the wherewithal to understand that don't stop doing deals just because you don't know what the next six months or 12 months are going to hold, but that's where you need good deal teams, like. Like you guys and hopefully like us that can help structure deals so they have the flexibility to get done And that's where in good times when cash is plentiful Maybe there's more of a cash component in in tough times where the cash is is kind of king And you need to shore up that balance sheet Maybe you use more equity and so we see deals with a lot of structure We see deals with a lot of even sometimes seller financing, um in order to get a deal done I think in the case of trike, I think You know, not, I wasn't involved in that one, but that seems to me like two parties that both entered into an agreement. They wanted to get something done and they recognized the environment changed from the time that they started it to the time that they were going to finish it. You look at just the, the market price for Curaleaf during the course of that time, and the stock was not as valuable as it was at closing as it was when they began. And I think that's. Not through any fault of anybody's in particular. That's just the reality of what happened. The flip side of that, I think, is the goodness growth deal. I think that was a north of eight times revenue when it was announced. And you know, that if I, again, I don't know the inner workings of that one, but from the outside looking in, I would say if you're unwilling to retrade your company and you believe in the long term prospects of it, then, then maybe you don't retrade. And maybe you just decide you're going to keep it. Um, I'd be interested, you know, the litigation coming out of that. That's, that's tough for everybody. Um, but you know, you see deals getting canceled like, like the gentle ventures one you talked about. The other thing you see is deals in our space. And I think You probably know this better than most, they take a lot longer because of all the legal and the regulatory compliance reasons, transferring licenses that they can, from the time they get announced to the time to get closed can be upwards of a year, and that's not even talking about the 6 to 9 months it took leading up to announcing it. To get the deal prepped, ready to go, the marketing process that probably was involved, and then the negotiation. So, these deals take an incredibly long time, and the old adage in our business, right, is time kills all deals. I think we're seeing that. I think that's the case. Sure. Yeah, well, let's talk a bit about, um, about Cureleaf, because they had an announcement a couple weeks ago that they were, that they were pulling out of the western, uh, states. I think it was California, Colorado, um, And Arizona or Nevada, I mean, you know, California, they, they, they came in with a splash when they both select back in 2019, I remember when that deal was, was announced because, um, I had a transaction that was in the middle of a hard Scott Rodino review, along with all the other big deals that were announced in 2019, including, you know, uh, curious select and, um, uh, You know that a number of those deals, um, didn't close by the way in 2019, uh, you know, med men, pharma can write, uh, stuff like that. We're on a harvest. Um, but, uh, uh, you know, the cure leaf select deal did close, albeit I think on revised terms. Uh, so, you know, that has to be a pretty, a pretty, uh, uh, hard pill for them to swallow, to decide that they're going to exit California after making that sort of investment. A hundred percent, a hundred percent, but, but I mean, Sometimes you have to make hard decisions, right? And sometimes you have to understand that the investment didn't originally play out the way you thought it would. And so you need to be able to adjust. Um, I think, you know, in many cases in this industry in particular, I think a lot of the private operators take cues from the public guys. And hopefully this is a cue that. Look, we're going to have to deal with the reality in front of us for the, for, for years, there was this concept and we saw this in tech, as did you, there's this concept that you grow at all costs that can't always be the case. And so if you're not doing the requisite analysis to understand how are you deploying the capital and what's the ROI on that capital, give, especially given it costs it's so, so expensive, then maybe. You need to think twice about where you deploy it. And again, nobody I think could have anticipated things have followed the path that they have recently. Um, I think there was a lot of hope that the industry would be this up into the right trajectory. And I think, unfortunately, we're realizing that The reality is there probably needs to be some sort of rationalization in the marketplace. And there has to be, I think, more discipline at the operational level to make the numbers make sense to make these companies kind of survive. And maybe that comes from, you know, hard decisions can also be especially I've been an entrepreneur. You've been an entrepreneur. I think it can be realizing that, you know, the company is not going to look the way I originally envisioned it. When I set out on this journey and that's not necessarily a bad thing and you can create, you can keep that hope alive and that dream alive and that brand and whatever it is in some form or fashion, it just might have to look a little bit different. And maybe that's part of a different house of brands. Maybe that's a different part of the industry. Um, but you have to be able to make those adjustments and pivot. And I think that's what Cura is doing. I think you see that with some of the other businesses too. Um, I think they're, they're just making hard decisions and rightly so. Yeah, I mean, let's talk a bit about some of the transactions we are seeing. I mean, it's, you know, this sounds perhaps a little more grim than it needs to be. I do know, for example, I mean, we're, we're seeing a lot of transactions where people are, are selling assets to, to pay down some debt. And, and so the, you know, the cash is coming in, um, creditors are, are getting a bit of a carrot and a stick, right? It's it's extend help me out, but I'm also going to sell off, uh, a big chunk of assets, and I'm going to pay you down, you know. 30, 40 percent of your principal, something, something significant, right? And so predator gets, uh, gets, uh, reduced exposure, borrower gets, um, a lifeline and, you know, somebody comes in and now has an asset, um, that is that, you know, they can operate in, uh, you know, uh, uh, separate and apart from the, you know, the, the larger called mothership. Um, number one, are you, are you seeing deals like that? Um, and then number two, what is your kind of opinion of those? Cause I'll, I'll, I'll have to have mine a little bit. I think it's actually quite healthy that people are, are looking to shed assets, pay down some debt and essentially figure out how to right size their balance sheet for a period of time where they have to weather a storm. I would agree with you. And I think you've seen a lot of companies. Unfortunately, um, they have already executed their seal sale leaseback strategy, and they don't have the assets on the balance sheet anymore. And in many cases are committed to these long term leases. Um, that, that adds another layer of complexity to those businesses. But, but otherwise, yes, I think that's right. If you can sell the assets that you have, recap the balance sheet so that you have a sustainable operation, then it's not ideal maybe for everybody, but it's a solution that can work for everybody. Um, I think there's two other interesting pockets of capital that We should probably talk about because they're not necessarily always well understood one is the distressed funds And I know that comes maybe with you know, uh, um not not a great, um kind of uh Flavor to it, but I think the reality is they have a role to play right and they can come in And they can help again keep an entity alive that has a reason to exist It may not exist in the same fashion And i'm hopeful that some of them Are able to come into the market here in the near term, and I think there's a couple folks that are starting to make moves. I think that we probably need more, and I'm excited to have conversations with them and talk about what they want to do and how that's going to look. I think the other piece is family office, and in many cases, They were somewhat the capital behind some of the institutional investors. I think we see more of them moving in and making direct investments. And I think what's particularly interesting about them is that there is no defined hold period, right? For a private equity company, they need to be able to return capital back to their investors in three years, five years, seven years, whatever the fund length may be. Um, for a family office, they can wait indefinitely, and so they're not waiting for safe to happen in the next, um, you know, the next three years or whatever. They have a lot more flexibility and can be patient, and in many cases, they're very smart capital as well. Um, they can be fickle, they can be very insular, um, but they can also be great. Capital sources for the right opportunity. So I'm excited to have more conversations with them, too, and see where they start coming in. Yeah, I would agree with you with private equity or sorry with family office, right? I mean, it's what's strange about about cannabis is you don't have a deep bench of funds. You don't have a deep bench of VC funds. And to a large extent, you know, family office kind of broadly defined has right. Filled the void, uh, that, uh, the cannabis industry has by not having a deep, uh, venture capital or private equity, um, uh, industry behind it, if you will. And what I think I've seen is, is, you know, family office money, certainly to the extent the family office is already in the space or already has exposure to an investment. You know, they, they have. Oftentimes the flexibility and the war chest to be. Uh, actively involved in a, in a restructuring and my own view is they're, they're often sort of the entrepreneur's best friend because family offices typically don't, you know, want to come in like a vulture fund and, you know, give you a loan to own deal, right? They, they want to protect themselves and they want to limit their downside, but if they see a light at the end of that tunnel, even if it's a long tunnel, they're. They're likely to, uh, to participate with you, whereas, you know, a distress fund, which might be a little bit more opportunistic, could see an opportunity to wrestle control, right? You and I have talked several times about distress funds and distress money, and, you know, when is it going to assert itself with a little more, um, aggressiveness in this space? I do think that money is, is, is there, uh, and. And frankly, you know, if there's new equity capital coming in right now in this environment, it's almost assuredly going to be coming in through some sort of distressed vehicle, right? I mean, that's where the opportunity is, you know, why would you, why would you, uh, buy something at par when you can get it for such a discount right now, um, you know, uh, I mean, there's just all sorts of good buying opportunities. So, yeah. Thank you. Uh, the, the distress distress funds are, are really, I think, um, that to the extent they've been on the sidelines, they're, they're gonna start coming off the sidelines. Mm-Hmm. in 2023. What do you think about going private deals? You think we're gonna see more of those? I, I do. I mean, I, I hope so. Um, , yeah. I think I, I put out a piece not long ago, but we looked at. I think over 360 public companies, and there's a lot of additional costs that goes into being public and all of the reporting and the compliance that's required. I think a lot of companies went public, uh, probably prematurely in hopes that it was easy capital and the growth would be there and it hasn't materialized. So yes, I think even just looking at the public markets. There's a lot of good opportunities to take out companies that are doing good, have good assets, have good brands, have good product and have a reason to exist. Um, but maybe not in their, their current fashion. And we don't always like, let's be clear. We don't always necessarily need a distressed fund to do this. And there's been cases where you can look at two companies with different geographies or different parts of the supply chain. And I think for a sophisticated. Financial engineer, you can look at that and say, let's just push those two companies together. And I think you even talked about this on one of your recent podcasts, um, about relative valuation versus actual valuation. And I think that's an important message. I've been, I've been watching. I've been listening. I'm glad I had a listener. I'm so excited. You did, you did, but I think that's, that's an important, you know, Term that I think a lot of it gets lost on a lot of people, and I think it's important to talk about because there are opportunities to realize synergy between putting two companies together and having the benefit of that combination, and you can do that in a way that doesn't necessarily always require outside capital, and maybe that's a way of keeping that, you know, let's be honest with entrepreneurs. It's their baby. Right. They've put in all this blood, sweat, and tears to build this business. Um, they have this dream. This is a way for them to keep that alive and still create that multi generational wealth that they had envisioned. It just might be under a slightly different form than, than what they had originally intended. Yeah, well, I think, you know, when you bring up relevance evaluation, that when you're dealing with a private to private transaction, right, it's always struck me that you can have two sets of founders or two sets of entrepreneurs, or even two sets of institutional investors, each of which have optimistic, let's say, ideas about their company's value. But if they are Equally optimistic, you know, in terms of their values. So, so, uh, you know that I know my company, I think my company is worth 50 million. You're an investment banker. And you're going to tell me, look off the record, you'd be lucky to get 35. Well, if, uh, if I'm combining with another company that has proportionally the same degree of optimism about their value, we have a pretty good chance of getting a deal done actually. Right. Right. Maybe not getting it, uh, maybe not getting it debt financed at the value. We like certainly as between the equity, we can, we can, we can figure things out. And that kind of leads me to, um, Another concept, which I will just sort of roughly refer to as alternate deal structures, right? Because to the extent you're listening, you're, you're a founder, um, you know, I, I can, I can think of multiple groups of folks, as can you, who've been in this game for a number of years, they've been working really, really hard, 80 to 100 hour weeks, um, Building their businesses and to an extent chasing their tail because the more they go, the, you know, the margin ain't going up to 80 still, still eating their lunch. And, and so they're not putting a bunch of cash in their pocket for a time. They were expecting the, the. Equity, uh, equity in their, in their business to, to make up the difference. And now they're listening to guys like Sandra and Colin talk about, about the industry being in a downturn and talking about distressed deals. And, you know, that's not going to get you super excited, but if you are going to grow, you still have to stay in motion, right? You still have to have to move from point A to point B. And you know what, if it's raining, you can stay inside or you can, you know, you can put your raincoat on and go out. Right. And most people have to go out. And so I think, I think alternate deal structures are structures where, okay, I'm not going to be able to get liquids. I'm not going to have the multiple I'm expecting or hoping for. I can do a transaction with you, all the joint ventures, strategic alliance, whatever it is. I can, I can continue to expand my footprint. I continue to grow operationally. I can continue to, to push my relevance and, and assert my kind of reason to exist as you, as you've mentioned a couple of times in this. Conversation. And at the worst, live to fight another day. But at best, you know, have something that, you know, when the when the equity markets come back and they will, right? I mean, right now, they're kind of bouncing around the bottom. So it's unlikely to see them. I can't imagine they're going to get a whole lot worse. So when they come back, and there's more enthusiasm, then all of a sudden, I'm sitting there, right? In a much better position than I would have been if I just, you know, ran and ran and hid. Yeah. What do you know? I think about that. I agree. One thing I think we need to distinguish to you, right, this conversation has largely been around licensed plant touching businesses. When we talk about how complicated it is and how tough it is, I think let's not, let's not lose sight of the fact that there's this entire ecosystem around licensed plant touching businesses, which we'll usually call ancillaries, or I like the tech side. So the Canada tech stuff. Um, what's interesting is that a lot of those are getting painted. With a very broad cannabis brush and are dealing with some of the similar dynamics even though they don't have the 280e Complexity even though they aren't a plant touching business and their revenue actually comes from non plant touching companies So that I think is kind of fascinating and probably another piece but I wanted to give them a nod and say a lot of this conversation is It's kind of the plant touching piece. I think the the creativity around deal structure is Is necessary, uh, in order to kind of get deals done right now. I think one of the structures that I'll throw in there, um, is, is the managed services agreement. I mean, we're seeing a lot of these and sort of this asset light model. And I think I made this comment, uh, I mean, last year we were talking about how the industry was shifting to this asset light, non CapEx, kind of a licensing model, right? Going into new states as a way of being able to expand your footprint and leverage your brand. And there again, we can debate the merits of brands and, and what sort of equity they have too. But the, the managed services agreement in many cases, as I see it right now are being used as a quasi M and a opportunity. And in many cases, someone's coming in and signing. This managed services agreement, maybe they're bringing capital, maybe they're not, but there's typically in some cases, an exchange of equity and participation in that upside. And I think that's interesting. I think that's an industry being forced to be creative and find a solution. Um, and I'm sure you see it from your side. I'd be interested to get your take, you know, the level of complexity that goes into some of those and how do you make them successful and avoid some of the pitfalls that make them very. Very unsuccessful in some cases. Yeah, you know, I've talked about this topic too, as, as you know, but I think a willingness to do transactions like that will start to separate. Winners from losers, particularly if we have a prolonged rough patch in this industry, in my mind, right, because, you know, I like, I kind of look back and I say, look, other than a few new states that are coming online, the easy money has largely been made in cannabis. I mean, there was a period of time when margins were so good. You didn't have to, you just had to not screw up really, really badly in order to make money in cannabis. Well, you all, we all know those times are long gone. Yeah. Um, now you're looking at this situation in my mind where you're at, you really are at a, a, uh, You're operating where your management team can either give you a premium or not, depending on, on their, their skill set and creativity. Are they willing to, to do the work to structure deals where, you know, that they're. Where they're not looking at a lot of, a lot of margin to throw around, right? Then you're really sort of slicing, slicing it rather thin. And, but are they, are they still able to go and do those deals, stay disciplined, operate within those very constrained margins, uh, during this. Tough period of time, keep their costs where they need to be, uh, and and continue to continue to move forward in that sort of environment, right? Are they able to do that? Because if they are, then they can increase their footprint inexpensively and over time, in my mind, they can set themselves up to be quite a significant player without, you know, putting it all at risk. If they can't, if they don't have the patience, they don't have the discipline to do that, or, you know, they're, they're, they're too, um, they're too stuck in a, in a mindset where they're just hoping for, uh, hoping for federal policy to change without any reason for it to change so that everything comes back and, and we're back to, you know, Q1 of 2019 again. Uh, well, those folks, Thank you very much. Are going to be disappointed, I think. And, uh, as well as the folks and I would throw in that camp, by the way, I mean, you still see people out there that are really trying to find, um, big homerun type deals, you know, Hey, I'm going to do a big, big, big credit facility. And look great. If you can do it, if it pencils out, if you can get it on the right terms, I, I think that's fantastic. That's, I mean, that's how you and I made money last year, but it's also, uh, from an operational perspective, you know, being able to, you know, trim the fat. I mean, being lean right now, unfortunately is very important. There's just not a, not a lot of margin to throw around on stupid stuff. No, and, and, and I was going to say, you know, and that's where you see some of the big public eyes to their, unfortunately, they're laying people off and that's, that's not, you know, it's, they're not spending money on stupid stuff. And that's not to say that those people are, are, are not necessary. I think it's just. They have to make very tough decisions, and I don't want that to get lumped in to that, you know, we made a bad investment or we, we, we don't need these people. That's just not the case. The fact is they do need those people, right? Yeah. They do need to have that headcount. They do need that quality labor. The, the problem is, is just that the market right now can't support that infrastructure that they've invested in, and that's what I think is, is very sad about. Some of the layoffs that have happened is that they're good folks and, and those jobs need to be there. And that company needs those roles and functions. They just built it too soon. And I think that's, you know, when I say these companies are making tough decisions, I mean, I don't, I've had to, I've had to lay people off before and it is absolutely the hardest thing I've ever had to do. But you know that unfortunately sometimes it has to be done, right? Um, so it's, it's going It's going to be fascinating this year. Oh, yeah, look, I would say, I mean, you know, I grew up in the tech industry, as you know, and you have a big tech background as well. And you see kind of, um. Some of the unicorns and they, they, they, they swell their head count rather rapidly and they have, you know, hundreds, thousands of people doing stuff that most of us can't, you know, we can't really figure it all out. Um, and then, of course, they, they, they lay them off. Uh, I actually think for, for, for, I think the cannabis industry. Has been pretty disciplined in its growth in comparison to some, some others. Right? I mean, you don't see a lot of headquarters offices with yoga rooms and, and, uh, you know, internal cafeterias and, and gyms and, and, you know, quiet, safe spaces. I mean, it's just the cannabis industry has, has been forced to be much more Yeah. You know, much more disciplined in that, in that even, even when times are great, if we're being honest. Right. So, so when there's a, when there's a downturn and they have to, you know, trim the fat reality is they're, they're cutting into muscle and bone. Probably pretty quickly, right? There aren't, there isn't a lot of, there isn't a lot of access that they can trim and that's too bad because we've been in this industry and we've seen it and we know, know a lot of those people. Um, you know, I think, uh, I think, you know, the way the cannabis industry has been addressing it is actually pretty, you know, as, as for the most part, they're doing as. As good as you could expect them to do, I guess, um, the, so I think that the, the takeaway for me in 2023 is the industry is going to keep moving forward because it has no other place to go. And, and, and so I, and I say that because it. It's true, right? It has to move forward. In fact, I think, I think last year, a lot of people sort of held their breath. They hit the pause button. They held on because there was, there was, as you mentioned earlier, uh, a pretty, a lot of optimism around safe or safe plus or some federal policy kind of, uh, real, real federal, real move on the federal policy front to, to provide some additional excitement In called among the retail investor class, possibly. And reality is that didn't happen. There was a lot of expectation that it could during the lame duck session. Um, I know that it actually came pretty close from my conversations, but alas, it did not happen. And so now I think 2023, you are probably not, you know, absent either some, um. court decision that comes out of left field or some highly unusual circumstance, we're probably not going to see much in terms of the federal government in 2023 and probably, probably not much until we get into the election cycle in 2024. And so for cannabis operators, like it or not, you, you kind of have to figure out how to, how to live in this current environment. For another 12 months or more. Right. Maybe 18 months. Right. Now, I do think, well, tell me, what do you think the chances are that we end up with some sort of revised bankruptcy regulations? Well, that's actually, I think, the most promising right now, right? I know there are, there are people working on it. There was a, a, a case that came out, which hit the press about, you know, is there, Is there a little, a little opening for, for some bankruptcies to happen? Uh, if we were to have bankruptcy reform, I think that would be a huge boost because a lot of folks that are. Coming to, to us and coming to you and saying, Hey, I need to do a deal. Well, they're really not do they, they they've, they're coming too late in the process, right? They're right. They're going to, they're going to be in default in their notes next week. And now all of a sudden we're, we're, we're going hat in hand to people. And we're just playing whack a mole with a bunch of note holders or something like that. It's, it's difficult to maneuver in that environment over. Overlaying all of this is if you are a marijuana company, meaning you're a, you know, schedule one, you know, controlled substance, you're actually selling plant touching, uh, your, your, your plant touching. So your subject is too ADE and you can't go bankrupt. You're in a tough position because restructuring your debts is, is difficult. Um, unlike other companies that can at least threaten to go bankrupt and, and have that. You know, they can either do it and exercise it and go through the process, or they can at least threaten it and get their creditors sitting around the table, negotiating some, some real hard, uh, resolutions absent bankruptcy. You can't. So I think that the potential for a bankruptcy solution is probably the best news that the cannabis industry isn't talking about right now. And I personally would, would welcome it. I'm not super confident it's going to happen in 2023. Um, but I would be. Pretty excited to did. What are you hearing? And what are your thoughts on it? I've I mean, you're closer to the probability of it actually going through in the timing of it. So I'll defer to you in that. But I agree with you. I think it's it's an unreasonable situation to have operators that are beholden to a 2 80 here. Tax regulation. Um, many of the state tax schemes are pretty punitive and then to not provide them any sort of outlet for protection and work out. I think it's it's just tough. And unfortunately, it's indicative of so many other aspects of our industry where we see things that were created may be well intentioned, but not necessarily all the way thought through or the the Pieces that had to be put together to create the industry were done somewhat in a vacuum, and they're, we're realizing now in retrospect, there isn't the coordination between it all to make it all work. And so it's, it's legislators legislating in a, in a vacuum. It's business people trying to build businesses in a vacuum, and there isn't the foresight and the communication from the ground up, as it was being built to really give it the best chance possible. So unfortunately we're in a situation where we're trying to recreate certain things and correct other issues to get something that actually has a more mature and self sustaining industry. And look, let's, let's be honest with each other, right? Most, a lot of industries kind of began through the same painful maturation process. And there was. You know, um, disconnects at various points in supply chains and things had to be worked out. So this is, this is a painful part of the maturation process. Um, I think if we, if we put on our, you know, uh, the vining hats a little bit and try and project out, you know, Q1, Q2, I think One other thing that isn't necessarily being talked about, um, is the level of intangible assets on balance sheets. And I know this gets a little bit academic and kind of financial, but if you just humor me for a moment, you know, a lot of the big public companies did a lot of deals. And in many cases, that created parts of their balance sheet that are intangible assets. Or goodwill, which is basically just the amount that they overpaid for a business. And in many cases, companies are sitting with hundreds of millions of dollars in license value. And I'll tell you in talking to lenders, you tell me if you think it's different, lenders will tell you those don't have the same collateral value that they used to. And so I think when we look at the stock market and how the capital markets have performed, and, you know, I think you said we're bouncing around a bottom here. I sure hope so, but I could anticipate in the next three to four months as people come out with earnings, you know, they start taking a loss on some of those and just restating what the value is on the balance sheet. And that'll create a bit of headline risk and you'll see the stock markets react. But the reality is those are, those are non cash items, right? That money has already been spent. It's really just sort of recalibrating those non cash pieces on the balance sheet. But I think that's, that's a headline risk that the industry isn't really thinking about. Right now, um, and that will unfortunately further complicate getting deals done in the next, you know, three to six months. Um, because, because the stock market, the, the equity value for a lot of those public companies, in some cases, that is the currency they're using to do deals. And I think that's going to be another challenge for, for them in those cases. If you are, um, financial advisor to a board or an audit committee or a special committee, um, and, and they talk about those assets, they talk about the goodwill they have on a balance sheet. Um, would you recommend right now, if they can do it without, you know, kind of blowing out their debt covenants, would you recommend that they take a, uh, you know, a real hard look at a big adjustment and, you know, kind of, kind of bite the bullet and. You know, put it into, put it into their announcement for their, you know, 2022 year end. And, you know, kind of just say, hey, we're, we're gonna, we're gonna do our mark to market right now. And we're going to revalue these things and. And, um, just, you know, take it on the chin and let it, but with, with the idea of being that now we have, now we have a, a more appropriate balance sheet and life will get a little bit easier as we go forward. Yeah, you touched on a piece of it, right? You got to be cognizant of what the balance sheet looks like post write off with all of the debt covenants and everything else, but look, I mean, there is a strategy and you see this when there's a CEO change or a CFO change and they'll come in and they'll say, man, time to clean house and they'll put a bunch of losses in the last period and just pull off the bandaid and they can start fresh and they can kind of blame it on the prior administration and say, well, I don't know what those guys were doing. Yeah. You know, there's a case to say, we all look back and go, we know 2022 was a really tough year. Maybe we go ahead and we take those losses, shove them into that year and just say, we're, we're prepped now. And we've rationalized the balance sheet and we're off on a better foot for 2023. Um, you know, I say that there's been a lot of announcements recently about executive changes at some shops. Um, Years past, you've seen companies delay their end of year earnings report. So it comes out more coincidentally with their Q1 report. You one tends to be a good quarter. So some might say that it's a little bit of a distraction. Don't worry about last year. Those were a bunch of write offs. That was a bunch of non cash items, but look how good Q1 is and how prepared we are. To have a blockbuster year this year and I think that's especially when you're public and we talk about the complexities of being public you know a lot of it is how you communicate to the street and analysts and I think maybe pulling off the band aid and going into the year with a positive outlook that could be a benefit so I wouldn't be shocked if we see some of that strategy play out. Yeah, I wouldn't either. I mean, I think you obviously, you know, if you're listening in this conversation, you can see sort of the different issues that a public company C suite needs to wrestle with when it comes to these sorts of decisions. But, you know, having having, uh, having those assets inflated on your on your balance sheet can have its own set of headaches. Um, Let me, uh, since we've been chatting for a while, and I appreciate you taking the time with us, Colin, um, what, what would you sort of, uh, uh, say to, or what are you saying to your clients in terms of your, The, the, let's say the silver lining, the light, you know, the, the encouraging news. I mean, what, when, when it comes to, uh, when it comes to the people you're talking to the industry, you know, plenty of reasons to be, uh, to be, you know, a little bit disgruntled, but what are the things you tell them to focus on for the future? I mean, how does, how does this get better? Yeah. And I go back to my days as a. Private wealth manager and planning for retirements and helping people with their estate planning. I think you know this We all know markets go up and down and so you have to plan on the long term You have to deal with the reality in front of you, but let's build businesses with the right amount of discipline and thoughtfulness That they'll survive this and this will pass and there are deals that can get done Um, it's better to raise your hand and ask for help sooner than later Because if you wait too long, your options do get limited, but it's not as, it's not as doom and gloom as so many of these podcasts make it out to be. And I know I'm guilty of that too, because it is complicated and it is complex, but there is a path through it when you have the right team and this will pass and companies that make it through the other side will be better off and stronger for it. Yeah. And I, I would echo that too. I would also, I would also, um, Uh, urge people to, to, uh, you know, reach out to the other stakeholders, um, on their cap table, right? The, there, there's always, it's always easy to, to look at a, at an industry wide, um, storm, if you will, and say, Oh, this is your fault. This is the management team's fault. And generally speaking, um, yeah. People aren't perfect. And so let's assume the management team did make a couple of mistakes or didn't, didn't anticipate things quickly enough. Uh, so it's, it's very easy for investors and management teams to get a little bit cross with each other. But the reality is, in my view, um, you know, the, the organism that is the company that the people that are, that are. Most incentivized to seeing it succeed are those founders that management team and that those, you know, the investor group, whether it's lenders, whether it's, you know, preferred equity investors, whether it's common investors. And so being, uh, you know, reaching out to the folks that, that, that got you there and dialoguing with them and including them in whatever you're thinking of as a solution. In my experience is more helpful than harmful because the truth is, uh, you know, if, if, if you're, if you're hostile in this environment, you know, you better be very certain of your outcome, right? The hostility usually works to everybody's disadvantage. Um, look, Colin, uh. How, how do our listeners get in touch with you if they want to, uh, if they want to talk to you a little bit more and get your, get your advice or reach out to your colleagues at Sharp Capital? Yeah, uh, email is Campbell, my last name, just like the soup. I tend to be on LinkedIn probably more than I want to be, but that's always a good place to get ahold of me. Um, but look, I think we get to see a lot of things. Hopefully what comes across as we remain very active in the space. And honestly, we're still very bullish on the space. And if we can be helpful, please, please, please don't hesitate to reach out. Um, and even if we can't be helpful, let us know. Because we, we get to see a lot of things and happy to just share insights and ideas. And not everything is, you know, is, is the right fit for us. But I think we're all trying to build this industry together, kind of brick by brick. And. I think, you know, Sandra, you and I are a great example of this. We'll share ideas with one another just to help further the industry and further, you know, good, good companies that need to exist. So let's all try and just weather the storm together and we'll make it through. Yeah, I appreciate it. Um, one little reminder for folks, uh, our podcast here at Clark Hill is for information purposes only. It's This is not legal advice. This is not investment advice. Uh, you know, if you're listening, we certainly appreciate it. But, uh, listening by itself does not, uh, does not make you a sharp capital client or a Clark Hill client. And, uh, uh, so we caution you to take the, the words you've heard here today, um, and, and learn from it. But certainly when it comes to your specific situation to seek. independent legal advice, uh, independent financial advice, or to reach out to us at Clark Hill or to call in at Sharp Capital if you want some specific advice about your current situation. Collin, always, always a pleasure to, uh, to reconnect with you. I wish you, uh, a productive afternoon and, uh, look forward to talking to you soon. Thank you, my friend. Thank you. Talk soon. This podcast is intended for general education and informational purposes only and should not be regarded as either legal advice. or a legal opinion. You should not act upon or use this publication or any of its contents for any specific situation. Recipients are cautioned to obtain legal advice from their legal counsel with respect to any decision or course of action contemplated in a specific situation. Clark Hill PLC and its attorneys provide legal advice only after establishing an attorney client relationship through a written, Attorney Client Engagement Agreement. This recording does not establish an attorney client relationship with any recipient.