In Cannabis, You Have To Be Comfortable Being Uncomfortable (Podcast Transcript)

Editors’ Note: This is the transcript version of the podcast we posted last week. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy!

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Rena Sherbill: Hi again, everybody. Welcome back to the show. Great to have you listening as always. Welcome to the 101st episode of the Cannabis Investing Podcast. Today really happy to have Scott Hammon on. He is the Partner and leader of the cannabis practice at MGO, which is a national cannabis practice. And he gets into what MGO does and how they made their name. And he has a lot to say.

They just released a report recently about M&A trends in the cannabis industry. Certainly, we’re on the cusp of a new trend, according to Scott, and we can see that playing out, the new kinds of M&As that are developing, not the M&As of last year, certainly not the M&As as of two years ago, or the promised M&As of a year and two years ago.

More responsible, we’ve been talking on this podcast for a while to find the responsible players in cannabis. There are so many companies to look at. But the ones really worth investing in are not necessarily the ones with the flashy headlines, although sometimes they are. But the ones that are being responsible stewards of capital, which if you are a listener of the show know we love to support fiscal responsibility.

So Scott gets into that, and talks about the further maturation of the cannabis industry that we’re in. We get into some topics like beverages in the cannabis space, how COVID has been an accelerator of trends that were already present, both in the cannabis space and more broadly. And we get into the candidate space and what Scott thinks about that. And when companies should be going public and the trends that we’re seeing there and what companies are deciding to do and what they should be deciding to do. Obviously, not a one size fits all approach, but Scott gets into some reasons where companies are deciding where and when to go public have.

A great conversation about the state of the cannabis industry and things to be looking for coming up, obviously, so much news related to the cannabis industry. Lots of promises and excitement, not all of them coming to fruition. And as I saw a former guest of this podcast, Dr. Jessica Knox, speak about all of these legal measures. Some of them are great, some of them aren’t going to happen. But whatever does happen, it really doesn’t mean much when there’s so many people without access, and who are still sitting in jail. People still going to jail for these cannabis offenses.

So when we are talking about all the excitement out there, really important to keep in mind, all the components that go into that, not just as investors but as good investors, and supporting the industry maturation in the right way, something Scott and I also discussed briefly in this conversation.

So excited to get this interview to you guys and excited about the interviews we have coming up. Next week we have Nicholas Vita from Columbia Care (OTCQX:CCHWF), an interview I’ve been promising you guys for a few weeks, excited to get that out. We have Saul Kaye, our very first guest – going back to our roots on the podcast – catching us up on the Israel cannabis scene, which is very promising right now and has a lot of exciting things coming down the pike. We’re going to get into what all that means and what investors can look for there.

And followers of the show, you and I are both excited, hopefully about our second episode, our second part of our master class investing in cannabis back with James V. Baker and Julian Lin. James Baker doing some great work on Facebook being an activist shareholder on Liberty Health (OTCQX:LHSIF). If you want to check that out, we get into that and other topics. For cannabis investors you don’t want to miss it. Part one was great. Part two I imagine will be even greater. And get me any points and questions and topics you want us to cover and hopefully we can get to that. Thanks as always for listening. Thanks again for your comments, your participation.

And as I tweeted a couple weeks ago, Ido Barak, a long time listener of the show published his first couple cannabis articles on Seeking Alpha to much, much fanfare, really great pieces on some of the cannabis legislation. And another request for anybody out there who writes — who wants to write about the cannabis industry, who wants to have their voice be heard in the hallways of Seeking Alpha and in the broader internet atmosphere, we would love to have you. Please get in touch with me. It’s Rena, [email protected] would love to hear from you.

And before we begin, a brief disclaimer, nothing on this podcast should be taken as investment advice of any sort. And in my model, cannabis portfolio, I’m long Trulieve. Khiron, Grow Generation, Trulieve, Vireo Health and IsraCann BioSciences. You can subscribe to us on Libsyn, Apple Podcasts, Spotify, Google Play and Stitcher.

Scott, welcome to The Cannabis Investing Podcast. Really happy to have you on the show. Thanks a lot for joining us.

Scott Hammon: Rena, it’s my pleasure, and thanks for having me.

RS: So I like to start out by asking guests where they started and how they arrived to the cannabis industry. So do you want to give listeners your version of that journey?

SH: Sure, maybe a little bit different origin story than some of your other guests. I’m a partner here with MGO where I lead our cannabis practice. And MGO works with a lot of different industry groups. But one of those industry groups is state and local government. And the firm has a lot of offices in California. And as a firm, we got into the space initially through insights from our government practice. They were working with cities in California, which had tax regimes and those cities were coming to our government practitioners, raising questions about whether they’re getting their fair share of the tax revenue if they were under their local cannabis tax jurisdiction setups.

And so that made us — the rest of us aware that there was a real business here, that this was a growing industry. We started to dip our toe in the water and we were fortunate enough that one of our first relationships was to do an audit of a vertically integrated operation in the Bay Area. It was being acquired by what was to become the first plant touching public company in the U.S. The industry was so small, the number of people playing in the space were so small, that when that document got filed, and our name was associated with it, it really gave us a lot of prominence early on, and we’ve benefited from that.

So from that start about six years ago, we’ve been able to grow dramatically. And that’s how the firm came to the space. For me personally, I got involved. I have prior experience I grew up. I guess I was born in ’64 so I grew up in a time when cannabis was popular, and certainly a particularly appropriate time in my life. And I grew up in an area that was semirural and growing, was common. And so I had friends that grew and so forth famously. One of my friends took a basic ag science class in high school so they could improve yields and production. So I’ve been involved with it in some form for quite some time.

RS: Nice. Did you ever think that you would get to this side of things?

SH: No, I mean, I think when I first got involved with that initial transaction, it was okay, I’ll do this. But this is going to be a niche thing. It’s a California thing. It’s a West Coast thing. And at that point, if you had asked me that the industry would evolve as quickly as it had, would grow as rapidly as it had and evolve as fast as it has, I would have said you’re kidding. I was fortunate enough to be part of the dotcom boom in the late 90s. And that’s the only other thing I really should say the tech from the late 90s dot com was more early 2000s. But that’s the only thing I can equate this to.

And there’s a core difference in that the tech industry was at a higher level of maturity from start. Cannabis really started from ground zero. And everything had to be built, everything from tax regimes, regulatory regimes, industry operations, et cetera. So the pace has been breathtaking, it’s been exciting. And it’s been wonderful to be part of.

RS: This was on something I wanted to ask you about. I wasn’t going to ask you now, but I feel like it dovetails nicely into what you just mentioned. I’m curious, do you think that there’s a unifying thread between who is more successful in the cannabis industry? In other words, do you think that it behoves people that have come from the law field that have come from a finance background, more than let’s say somebody that’s coming from the legacy cannabis market or the oil and gas sector or something else? Do you think there’s something specifically that helps people succeed?

SH: I think like with any industry, as the industry goes through its own life cycles, there’s probably a greater demand for certain skill sets than other times. And so certainly in cannabis, we’ve seen as the industry has matured, more demand for people coming from other industries with we’ll call more traditional skill sets to be able to apply those skill sets to that stage of cannabis evolution.

Having said that, I think the one core principle that is necessary in an industry like cannabis that’s growing so rapidly and is evolving, it’s touching so many areas, whether regulatory, operational, et cetera is being flexible, being creative, being innovative. And the ability to look ahead and have a thought process and be able to implement that thought process based on unknown factors. Some people are uncomfortable, I think, in some — you have to be comfortable being uncomfortable to succeed and so that’s probably the core thing I would say.

RS: Yeah, definitely. And the ability to be nimble as you as you said. So MGO recently released a report on cannabis talking mostly about mergers and acquisitions within the industry. And you write about how we’ve kind of gone through the past two years gone through this journey of there were all these promising headlines and deals being touted and M&As. A lot of excitement, I remember being at conferences like around that time, when there was just a ton of excitement and a ton of talk and a lot of those fell through.

And I think the people that have seen a lot of the companies that have succeeded through that were a lot smarter with their capital with their finances, didn’t expand in an overwrought fashion. And so now you right that we’re about to-we’re on the cusp of another burst of M&A, but one that’s predicated on something a lot more grounded in fiscal responsibility. Do you want to talk to listeners about that kind of evolution or kind of return to a point in the wave? And how this is working itself through the industry?

SH: Absolutely. Great question. And it’s — I think it’s something that’s not uncommon for any industry that’s growing so rapidly and maturing so quickly. And again, people have — it’s no insight, people have analogized, what we’ve gone through in cannabis to the tech boom of the 90s, to the dotcom of the early 2000s. And there certainly are similarities. And one of those is that, as you initially said, yes, there was definitely a demand for a physical geographic presence, licensing or revenue growth. And that was the be all, and all.

And as we highlighted in the M&A guide, over the last several months certainly 2020 or most of 2020, you’ve seen a focus on core operational success, whether it’s EBITDA, positive cash flow, net income, et cetera, those things are paramount now. And so we certainly have seen that return to normalcy. And we think that’s an indicator really, it’s not a bad thing. We think that’s an indicator of the maturation of the industry. And that’s net-net good for everybody, because it does put some realistic pragmatic, filters or governors on everything from pricing to making sure that the industry is sustainable along that.

RS: So how do you see that shaping out like, on the heels of this election, where a wide section of the successful companies are coming from the States, and especially the multi-state model. Do you think that they have an advantage, especially when you’re talking about being able to pick up assets, especially distressed assets during this time? Do you think that there’s an advantage there?

SH: I think the advantage is less with any particular class of operator by size, then going back to your comment about certain characteristics. I think good operators, will be able to take advantage of this current marketplace, regardless of their whether they’re one of the larger players, a medium sized player or a small niche player. Because the same issue you just highlighted the potential ability in this next wave of consolidation to acquire potential — that potentially valuable licenses assets for any operator, certainly, it applies to a bigger MSO, but also applies to a smaller operator that maybe wants to expand in their current geographic location, even if it’s a small city.

So I think those opportunities are there for the good operators, whether they’re big or small. So we think those types of issues and the impact of M&A is going to be felled all up and down the value chain of cannabis if you will, or the sides or parameters of cannabis.

RS: And do you think — do you subscribe to the notion like a lot of people do that limited license states they’re more valuable just by the sheer nature of what it means to be limited?

SH: I think that regulatory barriers do help to protect those who are in maintain a steady level of floor a — higher floor under those values. So I do think that’s probably a truism. I do think as we see — I’m not going to say national brands of all because I think we’re away from that still happening. But I think as you see regional brands, which certainly you’re starting to see regional boards And I think one of the aspects of retrenching, as people have given up the desire of having a true national footprint at this point, most people or many people focusing more on having strong regional markets where they can have a bigger market presence.

I think you’re seeing that regional brand start to take hold. And I think that’s going to be interesting to see how that plays out.

RS: And do you think that gets doubled down like now that the states that have passed something – like Harvest (OTCQX:HRVSF) in Arizona? It seems like they’re going to be doing a lot better, the fact that it’s gone legal. TerrAscend (OTCQX:TRSSF) is one example, Curaleaf (OTCPK:CURLF) in New Jersey. There’s a lot of examples of companies able to double down on that, do you think that just pushes that theory forward even more so?

SH: I do. I also think that even for good operators, I think that if you if you agree that maybe we’ve gone from having a pure national goal, as many people started with three years ago to having a strong regional footprint. I think the next evolutionary step that you’ve already seen it this is — other people are doing this, is not just a single regional footprint, but two or three regional footprints if you will, almost an island hopping strategy.

And so I think what you’ll see is you’ll continue to see operators who have the financial management and operating capital to do so they will look to be expansion oriented, but in certain clusters. And so you might see somebody that’s got a strong West Coast presence decide operationally, they want to be in the upper Midwest, and they’ll try and aggregate two or three states or more in the upper Midwest. And they may even go into that market around not their core West Coast brand, they may develop an entirely new, upper Midwest specific brand, or they may leverage one of their acquisitions and build around that or some combination.

I think that’s one of the more fascinating evolutions as I mentioned is — and we’re working with clients right now they’re making determinations, they may have a very geographic focus brand as they move into other regions. Do they try and transplant that brand cache? Or do they build off a more regionally logical brand, things like that.

So I think those are some — the industry continues even though it’s reached a new stage of maturation. There’s just so many new and interesting issues that the industry has to work through branding how it plays is one of them certainly.

RS: And do you think that depends on, the company itself in terms of deciding what to do based on the geographic location? Like, how much to tweak their formula? Is that just dependent on the specifics?

SH: It does. I think, we’ve always said that cannabis is an aggregation of multiple industries, and one of them is kind of a CPG retail type approach. And so you see those same kind of issues that a traditional CPG company would be faced. Do I want to export a brand a lifestyle, and bring that with me or do I want to leverage off a localized more regionally focused for that region, and change my brand and build off of it?

And it gets interesting, too. Because before we get to full federal legalization, if and when we get to that point with interstate commerce and so forth, there’s been some discussion about whether we’re going to get to a place where regional contacts come into existence, and whether we’ll have to see two or three, four states come together and allow interstate commerce among those states. And that’s going to drive some of these questions as well.

So there are people far smarter than me, they are thinking about these things. And I suspect some of those are driving some of those decisions, both about physical expansion as well as branding issues and so forth.

RS: Do you see it as an issue of kind of like these clusters developing and then they kind of just like, keep spreading out until it’s all just one big mass?

SH: Yeah, I do. I do think that it’s almost analogous to how legalization is gone. It’s gone. Started at certain very specific states and kind of a western region establish itself and then other places in the northeast or southeast were footprints. If you look at Florida was the first, Southeastern state to really go in a major way. And now of course, you’re seeing other states in the region start to come along. So I think you’re going to see that kind of process revolution.

RS: And how much do you think it affects like how companies are — or I should say, in terms of like, the retail picture specifically, like how much COVID has affected things? Obviously, these questions about inter-commerce retail, like, they are affected too. But primarily COVID has been such a disruptor in the retail picture. And a lot of people have really innovative — have innovated ways around that and really made it work for them. But I’m curious, do you see a lot of companies kind of rethinking their scope of focus and maybe pivoting away from the retail picture, or — yeah, go ahead.

SH: Sorry. It’s an interesting question because a lot of times we talk about cannabis. We talk about the industry, sometimes we’re talking about national issues, other times we’re talking about state by state issues. Because again, each state is evolving at its own pace based on when it adopted a program, whether that program is just pure medical, whether it was medical involving the rec — sorry, recreational, or whether it’s always been recreational for day one.

And so it’s hard to answer that question across a national answer. But clearly COVID affected retail. And going back to our earlier comment, those people that were comfortable being uncomfortable, nimble were able to pivot faster, and has been talked about much the fact that most states declared cannabis to be an essential industry certainly helped. But even their restrictions whether it was curbside delivery mandates, delivery only mandates take the pick.

Retailers had to be flexible and nimble to adjust. I think most of them have done a pretty good job. Because they’re still — it’s still a relatively new industry is still a relatively new supply chain. So people are used to pivoting and navigating around a changing environment. I think that was a skill set that was very helpful during COVID.

But the other part of what you’re asking is really a broad question about the future of retail in a way. And I’m not a retail expert, but I can read like yourself and others. And certainly, I think we’ve seen malls really take a massive hit even before COVID, but even more with COVID. And I think the traditional retail model with a few exceptions is going to be challenged post-COVID. I think what COVID as many people have said is probably accelerated by 5 or 10 years processes that were probably already underway, and were going to happen gradually, COVID’s accelerated.

So I wouldn’t say that retail is dead. I would never say that. I think there is always going to be a place for it. But I do think that cannabis operators will be looking at a rapid evolution in their retail concepts going from a traditional storefront. And you’ve already seen it with some companies, Planet 13 famously in Las Vegas, to an entertainment driven, I’ll call it or social experience model. And then the further evolution down the road a little bit is when and if cannabis is mainstreamed into traditional retail channels, what does that do to that standalone dispensary. But again, even then that’s not a national issue. If you look at somebody that’s a medical-only state and stays medical, then that retail model continues to work.

So again, I think cannabis operators until such time as we have full federal legalization, I’m not sure that’s going to happen in my professional career. And until that happens, they’re going to have to operate in different retail environments, and each of those environments will dictate a different retail strategy.

RS: You’re not sure that federal legalization is going to happen in your professional career?

SH: As you can tell, we’re on a Zoom call and you can tell there’s a fair amount of gray. So there may not be a long runway but I do think that — and I analogize to sports betting, I’m not sure how familiar you are with that. That was something that with the Supreme Court ruling on that about two years ago, it allowed states to decide. And so I’m not sure given the political environment in the U.S. that full legalization, meaning legal every state, subject to the same rules of interstate commerce et cetera, et cetera is going to happen in the near term.

I do think we’re going to see some version of states’ rights as at least an interim step before we get there and it may be the permanent step that we operate and may always be a state’s right kind of marketplace.

RS: And do you think if it goes that way, like they get rid of things like the 280E and they take away those kind of onerous regulations and leave it in some kind of murky in between state?

SH: Yeah, I do think that a murky in between state is — there’s multiple outcomes and different number of outcomes. But I do think that’s probably one of the more likely outcomes. I would hope because of the impact that banking access and 280E has on the industry that with that would come relief. And I think when you talk to many people in industry, and there’s different opinions about this, but some people would argue hey, before we try and fight for full legalization, let’s get 280E off the books, let’s get access to banking and capital.

So some people would argue that’s more important in the near term than full federal legalization.

RS: Right, right. Yeah, I mean there’s a whole host of issues that people feel like are more important than federal legalization just stamping that. Yeah.

SH: And even as we were talking about that, I’m not an accountant, I’m a business person. I tend to focus on finance and accounting. But everybody in this industry in particular, but even more broadly, it would be — I’d be remiss if we didn’t highlight that issues other than 280E or banking that are out there, whether it’s social justice, expunging criminal records, making sure that our drug laws reflect a practical reality of what works best for society, I think we can all agree that we probably don’t have that situation now. And there’s got to be progress made in those areas. And that’s equally important or maybe more important some of the things I talked about in the long run.

RS: Yeah, absolutely. And something we’ve been talking about on this podcast has been even when those social equity components are developed and are implemented into legalization for a state like Illinois for instance, it’s still — it’s such a long process until it’s truly implemented, if it even ever is implemented as it was thought that it would be. And then I was reading somebody’s writing about New Jersey and how it’s legal and everybody’s so excited. And everybody — all of this bullishness. But you can still get busted for cannabis in New Jersey. And that’s crazy. Like it’s just a crazy, crazy ecosystem that is happening right now.

SH: But it’s one that’s pretty consistent for cannabis. If you look at cannabis history, it’s an issue where the reality on the ground frequently lags behind the discussions in the media or the pitches for new company capital raises or the buzzwords that’s are out there. And that’s just because it’s moving so, so quickly that that it takes a while for reality to catch up for what’s possible and what’s being discussed.

RS: Yeah, yeah. That’s a nice way of looking at it. It’s moving so quickly, it’s tough for reality to catch up. Yeah, that’s great.

So talk to me a little bit about like how you are advising companies in this moment in time in terms of capital that’s out there in terms of companies looking to merge or be acquired or acquire? I’m also interested in how much a company that maybe hasn’t been doing well, or maybe didn’t know, weren’t the best stewards of capital at the beginning. And it took a while for them to figure it out. Do you see instances of companies like that merging with another company or being acquired and kind of that unified entity kind of builds it to be successful in a way it wasn’t by itself?

SH: I’ll maybe answer your last question first, which is we are seeing instances of that. In some cases, tying into your first question, that’s advice we’re giving. So we’re seeing situations where you may have an operator or a company that’s got great assets, but they for whatever reason just haven’t been able to pull the right management team into place to fully leverage those assets.

On the other hand, we may have a client or be aware of a company that has a great management team, but maybe is capital constrained, haven’t been able to raise capital or their assets aren’t well positioned. And so we’ll talk to those entities and see if there’s an opportunity to bring them together and leverage the strengths of both sides and have one and one and one plus make three. So you definitely see that and I think you’re going to see more of that as we move into the stage of consolidation and M&A.

Two years ago was all about size and getting big footprints and so forth. And now, you’re seeing I think more selective M&A happening. As part of that people are doing different deals for different purposes at different timeframes. So you’re seeing a wide range of deals for a wide range of reasons.

When you look at the advice that we’re talking to both clients and non-clients about in the area of M&A or capital raising, I guess I would say there’s a couple of broad themes. In the area of capital raising there’s good news and bad news. The good news is that you’re seeing through the evolution, you’re seeing some more traditional sources of capital come in. And so for example, we’re talking to commercial lenders, commercial banks that are starting to dip their toe in the water to do traditional loans to cannabis operators. Two years ago, you just didn’t see that by and large. It’s still relatively small, but it’s real. It’s out there, and it’s going to continue to grow. And I think that’s very exciting for the industry, because it allows operators to develop a more traditional capital structure, one includes both equity and debt. Historically, this industry was disproportionately funded solely with equity. And that’s a real expensive way to go. And when the market moves against you and values drop, it can be very difficult to navigate and maintain your expansion plans or your operational plans.

So that’s an exciting, very positive development. We’re also seeing in small numbers additional family offices, high net worth individuals and investment funds coming into the space. That’s good. The bad news is that without federal legalization, there still are large numbers of traditional institutional investors that would normally fund a rapid growth industry like this, that either are factually constrained by the terms of their operating agreements to the fund itself or they are philosophically constrained where they just don’t want to try and navigate or have to deal with fighting, explaining their limited partners why they’re getting into the industry.

Again, that’s getting better. But there still is a big chunk of traditional private equity institutional capital that just is not available to deploy in the space. And that’s the bad news, and that is the downside of not having federal legalization in place currently.

RS: Do you think, like as you said, it’s getting a little bit better when you’re talking about institutional capital coming into the markets, like we just saw the Green Thumb (OTCQX:GTBIF) deal? Do you think with each deal it maybe inspires a different entity to get into the game?

SH: Absolutely. I think everyone that comes in, it’s accretive and it’s like a scale. At some point, the scale will tip in a way down on the side of more in than not, when that happens, I think you’ll — it becomes a game changer even without federal legalization. So yeah, there’s no question that each one that comes in is beneficial, because that fund has both personal and professional relationships with 5 or 10 other funds or investors, and some percentage of those other 5 or 10, if they’re not already in cannabis, will look at that funds actions, and will change their decision.

It’s not going to be 90% of them but even if 20%, a quarter of them make that decision, then again you’re bringing along two or three other funds, and they have that same. I’m old enough to remember the Claire commercials of where they’re just replicated time and time again. So it’s the same multiplier effect.

RS: Got you. So when you’re talking about companies looking towards the future and trying to figure out what they want to look like or what path they want to go in order to achieve what they’re looking to achieve, how kind of far into the future do you think it’s wise to be looking out or do you advise companies to be looking out? Because so many things can change like, even if we’re just talking about the retail picture for instance, are we looking five years out, are we looking two years out? Because I imagine those are two like completely different things and so much of it is hard to predict?

SH: I think the answer, and not to be flippant, the answer is yes. So in this industry, we talked about an industry that’s moving rapidly evolving quickly. You have to look short term, medium term and long term. And I think if you’re an operator that doesn’t have a strategy or a thesis for each of those, you’re in big trouble. And that’s what we talk to our clients about. Because you have to have the ability to execute in the near term. That’s what’s driving current cash flow, allowing you to fund your more medium term or long term theory, thesis and strategies. If all you do is focus on the short term, then you’re going to be caught unawares, and the markets and will evolve and leave you in the dust. So again, necessary to execute on all three levels.

RS: And we’re an investing podcast. So is your advice — there’s a lot of investors looking at the space now. There’s a ton of bullishness with all the bullish factors that came out of the elections and really widespread support for cannabis which brings about huge soars in some cannabis stocks. And there’s a bunch of companies that are soaring that maybe I would advise listeners not to buy, but a lot of investors are buying those stocks.

What do you say to investors who are looking at these entry points and getting really excited, but there’s been some issues, like a MedMen (OTCQB:MMNFF) or iAnthus (OTCPK:ITHUF) or an Aurora (OTC:ACB), there’s a whole host of examples that you could look at, what’s your advice to investors there?

SH: So first of all, a couple of points. We don’t make recommendations. In our role, we would never recommend particular stocks, whether it’s a client or non-client. So I won’t talk at this point about any specific companies.

Having said that, and I think this ties back into some things we commented on and guide, the industry is at a point where core good management, good operating results are very, very powerful. Those companies that can show that they can perform, meet expectations get to profitability, get to positive EBITDA, get to positive cash flows, those are the ones that I would say, common sense dictates would have the longest strategy — survivability. They’ll be the ones standing at the end of the game, and more likely to be an acquirer and an add value versus somebody that’s going to get acquired or bought to its potential.

RS: And you’re only advising U.S. companies, is that right?

SH: No, we work with — I mean, while most of our clients are U.S., we work with Canadian based companies as well. Many — again with the interesting structure of U.S. and the limitations on the exchanges here, a lot of our clients have gone public and we continue to work with Canadian public companies with operations in the U.S. So we’re working with Canadian companies and U.S. companies. We also have a smaller number, but we do work with international cannabis operators as well. So we have a pretty broad footprint in the industry.

RS: So what’s your thoughts on, I guess one, these are two separate questions, even though they both pertain to Canada. But one kind of what’s your take on the Canadian land — well, let’s leave it there for now. What’s your take on the Canadian landscape? There was bearishness, now, there’s more bullishness as they kind of work out the retail space and the supply issues, what’s your take there on Canada?

SH: So first of all, I love Canada. Secondly, it’s a relatively small marketplace with a large number of operators. And I think there’s a reason that some of those operators have placed bets, if you will on U.S. assets, or are executing on strategies to migrate into the U.S. market at the appropriate time. And I’m talking about those are listed on TSX, not the Canadian Stock Exchange listed which can cross the border and so forth. So there are limitations.

And so the Canadian companies have a more complicated environment, if you will because those that are — we are talking about the traditional large LPs in Canada, they’re having to navigate the Canadian market, they’re trying to keep an eye on the U.S. or place bets on the U.S. market. Many of them are also navigating certain specific international markets. So that’s a more complicated operating environment to be successful. And so enough said.

RS: Got it, got it. And what do you — kind of what’s your advice to companies? Obviously, a lot of them go public on the Canadian exchanges, because of the legality issues. How do you advise a company when to go public — when to go public on the Canadian exchange? If they should wait to go on to the American exchanges? How do you advise companies there?

SH: Yeah, a couple thoughts. Number one, we remain hopeful that regardless of federal legalization, we’re hopeful that NASDAQ and NYSE will open up to the industry. And I hope they’re willing to do that before full legalization for all the reasons I mentioned earlier.

Secondly, the decision to go public primarily is unique one specific to every company. And there’s not a one size fits all type of answer. That’s even on the basic decision of where to go public or to go public, much less, which exchange to try and list on. What we are seeing, I’ll just share some trends that we’re seeing. So a few years ago, really everybody in the U.S. that wanted to go public was listed on CSE, one because of regulatory restrictions. And secondly, because of valuation metrics that, that exchange was seeing large valuation differentials over a comparable company that was only listed, let’s say on the OTC in the U.S.

That gap has diminished. It always varies by entity, but generally speaking, I would say that gap has closed by and large or diminished. And so therefore, for U.S. operators listing the OTC has become more attractive. Having said that, I think for any company one, you have to make the decision whether it’s appropriate for you go public, and then the decision of where to list is a separate and secondary decision. That may be transitory based on what the environment is at that point in time, because many of the companies that where U.S. operators are listed in Canada, ultimately are also doing dual listings and there’s all sorts of strategies to get your exposure in both marketplaces over time.

In terms of the bigger issue, which is a company making the decision to go public, that’s a decision that should not be taken lightly. That’s the first thing we advise clients. And we try and make sure that they are aware of the rigors that come with being a public company, and there are positives but there are also downsides. And there are also other options, whether it’s private capital, because it exists. And they just need to be mindful of the pros and cons and then with SPACs that’s introduced a whole another dynamic into the marketplace over the last for cannabis anyway, I mean obviously been around for a long time. But that’s introduced yet another dynamic that gives companies another option.

RS: Yeah, absolutely. Is there anything that you want to leave listeners with before we go and tell listeners how they can find you and MGO?

SH: Sure. I appreciate the opportunity for a plug. So MGO, you can reach us at You can download various articles we have on the industry and content, including our most recent M&A Field Guide. I’m also reachable and available via the website and happy to take questions, comments and always happy to engage in discussions about the industry.

In terms of leaving thoughts for the listeners, just regardless of the ups and downs of cannabis at its core, what we have is a rapid — rapidly maturing, rapid growth industry that still has a lot of runway domestically and internationally. And that’s a unique set of facts. And so you mentioned the investment focus to the podcast, I think there’s a small number of industries that have ever met that criteria much less meet it now. So it’s certainly a unique opportunity.

Having said that, because it’s a regulated industry with multiple layers of facets to navigate, good management teams will out and having access to capital is important. And these two things I might keep in mind when looking to invest in space.

RS: Yeah. Good advice. Good advice. Sound Advice. I want to ask you one question before I let you go, and that’s, I’m curious what your take is on the beverage side of the market and how successful you think that’s going be? And maybe when that’s going to be successful?

SH: Yeah. We’ve been fortunate because we’ve been working in infused beverage space now for several years. Because certain states have had very strong positions around it. So we do have a lot of experience in the space. But it’s certainly coming to maturity and this is one of the things of cannabis. It’s not just a monolithic market, there’s niches within the space. And certainly the infused beverage niches is starting to really take off in a major, major way. And certainly the Sweetwater transaction validates that theme or thought.

So I see — I think most predictions are they will have disproportionately rapid growth relative to the industry as a whole. And certainly the beverage players, Constellation being the most famous have been betting on that for a number of years. So I think we’re going to continue to see that. And I think you’re going to see — it’s part of that overall trend of more of a health and wellness approach to beverages. And I think cannabis and CBD fit well into that. So I think, absolutely going to see more continued growth in that space. It’s a very exciting area.

RS: Yeah. I think one of the most exciting things about cannabis, and as you say, like it’s ready to grow exponentially. I think there’s so many areas that are known that it’s going to grow in these areas. And then I think there’s all these niche areas where even there’s like a niche within the niche. I think beverage market is one example of that there’s like — I mean, you can think of so many ways that cannabis is going to kind of like totally shift the paradigm there.

SH: Correct. Because even a THC infused excluding CBD now you’ve got those that are focused on what we’ll call the recreational experience. Others that might be focused on a recovery or wellness approach to the beverage space. So even there, you see two or three different approaches, philosophies. So it’s going to be great for the investor and great for the consumer.

RS: Yeah. Absolutely. It’s exciting. It’s exciting. It’s exciting to be a part of. It’s exciting to talk about. Scott, I really appreciate you coming on and sharing your insights. I hope you come on again. This was a great conversation. I really appreciate it.

SH: Thanks for having join with you. And we’d love to chat again. Take care.

RS: Thanks so much for listening to The Cannabis Investing Podcast. Subscribe or follow us on Seeking Alpha, Libsyn Apple podcast, Spotify, Google Play or Stitcher, and we’d really appreciate it. If you could leave us a review on Apple podcasts. It helps other investors find our show. If you have feedback or questions, we’d love to hear from you at [email protected] Thanks so much for listening. See you next time.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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