Raising capital in the current market is proving to be increasingly challenging for cannabis companies today.
“The current cycle in which we’re in has brought valuations to a significantly low level,” says Luis Merchan, president and CEO of Flora Growth FLGC, “so cost of capital is exceptionally high right now.”
Merchan joined other leaders in the cannabis space on a live panel at the Benzinga Cannabis Capital Conference on April 20 at the Fontainebleau Hotel in Miami.
“Trading volumes are down across the board,” added co-panelist Richard Carleton, CEO of the Canadian Securities Exchange.
He explained that many millennial investors opened their first brokerage accounts at the start of the pandemic and chose to buy stocks from cannabis companies because of their familiarity with the commodity. That helped push trading volumes for companies in the sector in 2020 and 2021.
Now, as people go back to work or switch to other investments like crypto trading, volumes are decreasing again. Inflation could also play a role in the mix.
“In any event, the interest level, not just in the cannabis space, but across the board, is maybe 60% of what it was in the first quarter of 2021, which was the high water mark,” Carleton added.
Merchan added that in order to get new capital, cannabis companies are now looking for consolidation – a partner that can help them find some liquidity or better access to capital markets– or they’re looking for more traditional debt instruments.
He said the situation is likely not going to change until valuations start to improve, “but that’s going to take some time.”
“The investor community as well as retail investors have run out of patience in terms of the long-term potential of cannabis and are looking for some meaningful short-term fundamental results.”
Profitability, revenue generation and long-term value, Merchan said, are going to become the main drivers for companies looking to raise capital or complete M&A transactions.