Public companies are trying to plant flags in the Coachella Valley cannabis business by buying early-stage weed shops.
The Desert Sun tracked four companies – each with shares listed on public exchanges – that have either announced they’re in due diligence to acquire a local cannabis business or have already completed an acquisition.
The companies involved in this flurry of acquisition activity have some qualities in common. On the selling side, local businesses that have put themselves up for sale said they’re interested in being acquired as a way to get growth capital for their ventures, or as a means to exit the cannabis market entirely. They said it can be difficult to raise money in an industry locked out of traditional banking and wondered if they could continue to compete with larger businesses entering the pot business.
And on the buying side, the four companies seeking to acquire local cannabis startups tend to be early-stage companies or companies entering the cannabis industry for the first time themselves. Many are seeking to operate in more than one state, have stocks that trade for less than a dollar and are based out of offices in Canada.
Greta Carter, the CEO of Highroad Consulting in Desert Hot Springs, said her firm fields calls every day from investors trying to dip their toes into cannabis deals for the first time.
“People are wanting a piece of the action,” she said.
Greg Jelden, managing partner of the consulting firm Canna Management Group, said getting acquired by a public company allows a privately-held company to sell a portion of its business, rather than all of it.
But there are risks, too.
“Their stock price could go down,” Jelden said. “A lot of people think there’s a bubble.”
And Morgan Paxhia, managing partner of cannabis industry fund Poseidon Asset Management, said the transition to a regulated cannabis market has pushed companies to consolidate as they try to use economies of scale to their advantage at a time when new taxes and regulation are making weed industry profit margins tighter.
But Paxhia is skeptical of some business combinations in the wider cannabis industry, which can be a quick way to boost a stock price and generate publicity.
“They’re trying to do it for a press release,” he said. “They can put out a press release that says, ‘We’ve entered the California market,’ and they hope it’ll pop up their stock price and maybe they can raise capital against that.”
Cashing out of cannabis
The Desert Sun examined three cannabis retailers in the Coachella Valley that have sold their dispensary or are in the process of executing a potential sale.
Thom Miller sold his dispensary, Green Leaf Wellness in Desert Hot Springs, in February 2018. The business turned a profit, he said, but Miller thought it would be difficult to keep competing with other dispensaries in the city, especially with new taxes and regulation. For a while, he hired a broker to market the shop for sale.
Then, he got a call from an attorney at Marapharm Ventures Inc., a Canada-based company that had already purchased a pair of one-acre plots of land in Desert Hot Springs in 2017, where the city has approved a plan to build a cultivation facility.
Miller said Marapharm, which is trying to develop weed-related businesses in three states and Canada, gave him a compelling reason to sell.
“They had the money,” he said, “plain and simple.”
Marapharm paid $1.6 million for Green Leaf Wellness, according to regulatory filings.
The company changed its name to Liht Cannabis Corp. in October 2018. Linda Sampson, Liht’s chief operating officer, said buying Green Leaf is part of the company’s long term plan to be completely vertically integrated – that is, to grow, process and sell cannabis in-house rather than relying on third-party vendors in the three states and two countries where it operates. At present, the company grows marijuana in Washington and Nevada but has not started growing or processing in Canada and California. Sampson said the company has put plans to develop vacant land in Desert Hot Springs on hold temporarily.
Liht’s stock has been declining since its peak in November 2016, after California voted to legalize adult-use cannabis. It traded at 20 cents a share in U.S. currency at the closing of the OTCQX market Friday afternoon.
Sampson said the decline was driven by investor sell-offs after then-Attorney General Jeff Sessions threatened a federal crackdown on cannabis companies operating legally in the United States, a European securities services company stopped handling certain cannabis stocks and initial fear in Canada that investing in cannabis could result in being denied entry to the U.S.
Two other dispensaries are in the middle of deals that could transfer ownership of their shops to public companies.
Klint Jackson and his wife own the dispensary Remedy on Vista Chino in Cathedral City. Jackson said the business is financially healthy now, but he worries that eventually, he’ll be stuck competing against businesses with “limitless capital.”
“You have a lot of larger companies looking and finding out this isn’t a fad,” he said. “I really think with these companies looking at this, the small mom-and-pop shops are going to have a hard time competing with these bigger companies.”
So Remedy has signed an agreement in which it would sell its business to Ventura Cannabis and Wellness, a company listed on an exchange in Canada. Jackson and his wife would remain at the shop for a year under the agreement. The sale has not closed pending regulatory approval.
But despite its name, Ventura Cannabis isn’t a cannabis company yet. It’s in the middle of an extensive transition, in which it has changed its name and management and plans to change its business model, too.
The company operates addiction treatment centers in California and Oregon under the name BLVD Centers Corporation, according to securities filings. About a year ago, the company started trying to develop a beverage to curb weed use, but now it’s switched directions again and plans to sell the outpatient treatment centers, according to CEO Jacob Gamble, who joined the company in January. In the future, pending government approval, the company aims to treat patients weaning themselves off of other drugs, like opioids, with cannabis, Gamble said. For now, Ventura Cannabis could not legally prescribe cannabis to treat opioid addiction.
“We want to get ahead of the curve with anticipation that the government will see how useful this could be,” Gamble said.
The company operated at a 1.78 million Canadian dollar net loss in the year ending Feb. 28, 2018, and continued to record a net loss in the first three quarters of its current fiscal year, according to regulatory filings.
Gamble said selling outpatient facilities will strengthen the company’s balance sheet.
Under the terms of the potential sale of Remedy, Ventura would pay as much as $2.5 million for the dispensary, Gamble said.
Leef Industries is one of the first four pot shops in the Coachella Valley to receive an annual retail cannabis license in California, according to the Bureau of Cannabis Control. (Photo11: Amy DiPierro, The Desert Sun)
Another cannabis acquisition is further along.
According to a Nov. 30 news release, Leef Industries, one of the first retailers in the state with a permanent state license, has sold 80 percent of its business to a chain of dispensaries in Florida. Trulieve, which claims it has a 65 percent market share in Florida, will buy the remaining 20 percent of Leef Industries upon receiving final regulatory approval from the state, according to the release. The total sale price is approximately $4 million, according to regulatory filings.
Kort Potter, the owner of Leef Industries, declined to comment for this story. Trulieve did not respond to messages seeking comment for this story.
Chad Miller, Operations Manager at Leef Industries, works behind the dispensary counter. Leef Industries is one of the first four pot shops in the Coachella Valley to receive an annual retail cannabis license in California, according to the Bureau of Cannabis Control. (Photo11: Amy DiPierro, The Desert Sun)
Public markets, cannabis capital
In Coachella, a manufacturer is taking its business to the public markets in the hopes of raising money in an industry where federal regulations make it nearly impossible to get bank loans.
Tom Baird, the co-founder of cannabis manufacturing startup Mojave Jane, said the company spent the past year honing a process to turn marijuana trim into oils and distillates. But by June, Baird said, the company had burned through about half a million dollars it had raised in startup capital.
As an alternative to private investment or loans, Baird and his colleagues looked for a larger company to acquire them. High Hampton Holdings, which controls 11 acres of undeveloped land around the corner from Mojave Jane in Coachella, looked like a fit.
High Hampton entered Coachella in August 2017 with the acquisition of Coachellagro Corp., a company that had been founded by Richard Polanco, a former state senator who has stayed on as the chairman of the High Hampton board. At the time, Coachellagro had purchased land with plans to grow cannabis in the city.
In November 2018, High Hampton bought Mojave Jane for 8.9 million common shares, according to a securities filing. The company named Baird as its COO and Gary C. Latham, also previously of Mojave Jane, as its chief executive the same month.
But for now, the combined company is more an aspiration than a reality. High Hampton initially hoped to turn its Coachella land into a 257,000-square-foot cultivation facility, but Baird said the company is “reassessing what we actually want to build on the land.” High Hampton has licenses to grow, manufacture and distribute weed out of a location in Los Angeles County but for now the property is just a building in need of renovation, Baird said.
Baird said Mojave Jane, meanwhile, has two full-time employees working out of its 2,000-square-foot manufacturing facility in Coachella and sold its first liter of cannabis oil ever earlier in February to a vape pen manufacturer. Two subsidiary distribution companies acquired by High Hampton in July 2018 haven’t started distributing anything yet, Baird said, and edibles made by California Gold, another subsidiary, are off the market since the company does not have a state license.
High Hampton reported a net loss in its last fiscal year. It spent millions of dollars on advertising and promotion as well as professional, consulting fees and management fees during that period, according to securities filings, but reported sales totaling only tens of thousands of Canadian dollars.
Baird said the company’s management is “wading through a lot of consulting contracts” and increasing oversight on the subsidiaries it has acquired. He compared running the company to managing five startups at the same time.
Source: https://www.desertsun.com / Amy DiPierro covers business and real estate at The Desert Sun in Palm Springs. Reach her at firstname.lastname@example.org or 760-218-2359. You can follow her on Twitter @amydipierro.