Searching For Cannabis Catalysts (Podcast Transcript) – Seeking Alpha

Editors’ Note: This is the transcript version of the podcast we posted on March 23. 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. Enjoy!

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Rena Sherbill: Hi, again, everybody. Welcome back to the show. Happy March 23rd. Great to have you listening with us as always. Super excited to bring back Nick Gastevich, who we had on way back in July of 2020. And he had some great insights. He runs his own family office in Chicago, a fellow Chicago and he gets into the investments that he started with. The investments that he’s evolved into, where he sees the sector going, how he sees it today, what advice he would give to investors? A salient conversation, an interesting and compelling one for cannabis investors for investors in general, I think.

And for those following along, if you want to read more of Nick’s insights, I would really check him out on Seeking Alpha. He comments under CannaVestments. He’s got — I mentioned it because he’s got some great write ups on the recent earnings for a few companies, TerrAscend (OTCQX:TRSSF), Ayr Wellness (OTCQX:AYRWF). A bunch of others that he’s written about previously, some really great insights there. Really tightly packed insights. But I hope you enjoy this conversation in addition to those great earnings takeaways.

Nick, welcome back to the podcast. It’s great to have you back on Seeking Alpha.

Nick Gastevich: Rena, thanks for having me. As I mentioned to you before, this is one of my go-to-listens every week. So, it’s honor to have you back on.

RS: Thank you, Nick, I appreciate that. And you’re one of my favorite people to follow on Seeking Alpha. Follow Nick on Seeking Alpha under CannaVestments. Got some great stuff on earnings. Even though he’s not writing full articles, maybe we can encourage him to do so. But great takes on recent earnings, and I really enjoy following along. So, you’re coming from your family office in Chicago and Illinois. You were on the podcast a couple years ago. You want to catch listeners up on kind of where you’re seeing the industry these days.

NG: Yeah. Absolutely. Yeah, like you mentioned, I’m here in Illinois, run a family office out of downtown Chicago. As family as you can get, it’s my two siblings, and my mom and I traditionally focused in the real estate and private equity space. We’re fortunate number of years ago now back in 2014, to get a pivot into the cannabis space, our first investment ever was for the seed stage funding for a company called Green Thumb Industries (OTCQX:GTBIF) when they won their first retail and grow license ever here when the Illinois Medical market first emerged.

Yeah, honestly, a perfect company for us to get started with and not only from a success standpoint, but just in terms of learning the entire industry. So, fast forward, eight years now, which seems like a long time and we’ve made probably 20 or 25 investments in this space, primarily concentrated in plant touching MSOs, everyone from Cresco Labs (OTCQX:CRLBF) to Verano (OTCQX:VRNOF) to Ascend Wellness (OTCQX:AAWH), PharmaCann, Holistic, been investing across the entire supply and value chain, seed stage funding to growth stage, ancillary companies like TechPlace, it’s pretty much we look at the entire industry as a whole always looking for new opportunities as they present themselves.

RS: Awesome. Will you catch us up because last time you were on, we were talking about Illinois Social Equity Program and the fits and starts that were happening. And unfortunately, we do not have a great update for listeners. But will you kind of, I feel like you have a nice vantage point from where you sit. Will you kind of catch us up on the Illinois market specifically?

NG: Yeah. I mean, like you said, it’s kind of amazing. Last time I was on I think it was July 2020 and we were talking about it back then when the adult use program here started in 2020. They initially just grandfathered all the existing medical operators, which was 55 Medical retail stores at the time as well as 20 grow licenses for the whole state. They gave all those operators one new store to open. So, over the next like year, year and a half, it jumped from 55 to 110.

And then subsequently they were looking to award, the number has changed quite a bit but the main thing they were looking to award were what is now 185 new retail licenses primarily oriented towards social equity applicants, to give back to the people who have been disproportionately affected by the war on drugs. In addition to that, they’re issuing some craft grow and infuser licenses as well. And unfortunately, we’re here now in 2022 and those licenses are still held up.

They were awarded officially, but as we’re seeing not only here in Illinois, it happens pretty much in every new state that tries to issue licenses, lawsuits followed. So, they’ve been held up in court for quite some time now. It looks like we’re inching towards, like, essentially, all the court cases got merged into one. And the judge is set to make ruling, I think, in the next month or so as to like whether a word all then it looks like they might issue a few additional ones.

But I’m hoping that in the next maybe three to six months that they officially get resolved. And then, hopefully by year end 2022 or perhaps early ’23 is more realistic for those new stores to get open.

RS: And do you feel like, we were talking about this on the California episode and how tough it is dare I say impossible for a small business to succeed there. And as you’re talking, you’re kind of alluding to the fact that it’s pretty tough for small businesses across the country, because of everything that they have to deal with that is a lot easier when you have a huge amount of capital behind you. Do you feel like there’s a path to success for the smaller operators in Illinois, but also in general?

NG: Yeah. It’s an interesting question and even a lot of these big companies, a lot of the public companies that we know, there’s only a handful of them that are actually netting positive and profitable in the traditional sense of the word, mainly just because even if you’re raking in revenue at good margins, you’re still facing to 280e taxes, high insurance costs, all the all the added costs that come with the cannabis industry, unfortunately. And that’s only amplified further for small operators.

So, you kind of see I mean, the United States is an interesting kind of just testing ground given the state markets are all siloed. So, you can see all these different states try different formats, whether Out West, it’s typically more on unlimited license oriented. But even in those markets, like you can get a license, but often that means, that doesn’t mean you’re going to have success. So then here in the Midwest, and in the East Coast, they’re sticking with the limited license model but trying to have a disproportionate amount of those limited licenses go-to-social equity applicants.

But like I mentioned, it’s becoming hard just to award them. So, I do think there’s potential. If we look at a market like New York, they’re trying something pretty novel. The Governor there is kind of doing a very leading way of awarding, they announced recently they’re going to award first 100 or 200 retail licenses to social equity applicants even before they grandfather in the medical operators. So, I think a market like that there’s potential. If they do get open and you’re one of 200 retail operators in a massive state like New York, I think there is a genuine possibility of succeeding.

And then along with that, they’re creating some funding programs to for startup capital for those operators. That does seem to be like, in my opinion, the best way to give them a real honest chance of succeeding. But as we see, in practice, it’s much harder to actually implement than it is on paper.

So, there really isn’t a great example of a state that has done this well. I think it’ll be interesting to see we kind of have a wave of new states, whether it’s New Jersey or Connecticut or New York that are trying and doing a very like leading manner of incorporating these small businesses into the fold. We’ll just kind of have to wait and see if it actually plays out the way they’re planning.

RS: Yeah. And do you have this sense like, just getting back to this social equity specifically? Do you feel like Illinois is figuring it out and trying to do better? Like, do you hope in that? Are you encouraged by that? Or — well, yeah, I’ll leave it there, let’s say.

NG: Yeah. I mean, I do think they had the right idea for a state of our size, 11 12 million people, good tourism numbers especially here in Chicago. We’re only going to, even after they award those 185 new retail licenses, we’ll have just over 300 for the state. And you compare that to a state like Colorado, for example, or Denver itself has more than 300 retail licenses just within that city. I think those stores here actually do have a good chance. I mean, just on the numbers, they’ll be $10 million annual revenue type stores, just because of how limited they are in number.

So, I think the intention was good as to what Illinois had planned. I think the unfortunate reality is that the large MSOs who now have had a, what is a two year over a two-year Headstart, do kind of have this incumbent advantage, like number one, their vertical. A lot of the biggest ones have hit the max of 10 retail stores here in the state and significant cultivation that comes along with it. So, that definitely is an inherent advantage.

And then being here early, customers come to know their brands. So, I think unfortunately, all of those are benefits as is they’ve had the pick of the litter in terms of identifying top locations for those retail stores. So, all those kind of are just benefits that existing operators do have. But there’s still plenty of room. There’s large swaths of the state that people are driving 40, 50 miles to get to the nearest dispensary. So, there’s a lot of room to still fill in the gaps and have success.

RS: Speaking of filling in the gaps, I know the illicit market is an issue. How big of an issue is it in Illinois? And how do you see that developing as the legal picture develops?

NG: Yeah. I mean, Illinois I would say, definitely, of course, has an illicit market like most states, but we don’t have the same exact issues that a lot of the West Coast markets have, where there’s where the illicit market on the grow side is actually within the state itself, which states like California and Oregon and Washington deal with. All the illicit market here is primarily imported from either the West Coast or even a lot of it comes from like the Michigan market which has been around for a while. So, there definitely is a presence from the illicit market.

And I would say more and more, we’re seeing this across the country is the rise of kind of like, I’d call them like THC alternatives like Delta aids and hemp derived THC that kind of operates in a gray market area. So, there’s CBD like shops that are essentially selling Delta A products that are operate and have an effect very similar to normal cannabis. So, definitely some pressure coming from those. But I would say even with how high prices are here in Illinois, it’s definitely still a very robust market nearing or around a $2 billion run rate as of right now.

RS: And what are your thoughts as the U.S. develops and as the map kind of starts getting filled in with greener and greener colors? How do you see it developing? And what are your thoughts as kind of, the Federal picture isn’t as robust as the state-by-state picture, like, how are you thinking about that?

NG: Yeah. I mean, it’s kind of crazy because what we’ve been through the past, essentially since the Democrats took office and even since the last time I joined you on the podcast, we’ve gone through a full boom and bust cycle. We had close to eight to 10 months of just up until the right from kind of what was the start of the COVID era and up until like spring 2021. And now we’re on month 12 of contraction in the market and a lot of that seems to be due to the federal picture.

A lot of people expected much quicker movement. There’s a lot of promises made by, Biden was always pretty light on it, but from the Biden administration in general and then from leaders like Chuck Schumer and Cory Booker, who have made promises that this is going to be a priority. So that clearly hasn’t happened. I’m hoping this spring that we get something on the table, although not like super hopeful that anything would get passed.

So that’s made the state-by-state development more pertinent I would say in the interim. Any major growth or factors would come from new states opening up and even since we last talk, we’ve seen states like New Jersey, New York, Connecticut, Virginia, New Mexico, all switch over to adult use. Most programs haven’t started yet, but they at least had a formal vote. So. I’m definitely paying attention more to the state-by-state developments for now.

Given any federal votes, it looks Like Schumer is going to push forward his CAOA bill, which the common consensus seems to be that it will not remotely have the votes to get passed, even from the Democratic Party itself, let alone getting 10 Republican senators to vote with them. So, I think the common ideas that he’s going to push that for a couple months, and then ideally, hopefully he realizes it’s not possible and will pivot towards some sort of bill like SAFE Banking.

So, I think that’s the best federal reform bill that we have in the near term. But yeah, I’m definitely focused more on state-by-state developments, at least for the next year or two.

RS: Is there — Do you feel like there’s something happening kind of on the legislative side that investors aren’t paying attention to?

NG: No. I actually think investors at this point have a pretty good picture of what’s going on just because of how long it has taken to develop. I mean, the Schumer’s bill was introduced quite a while ago. Now, we’ve had things like the MORE Act, SAFE Banking has been on the table forever has been approved by the House Democrats and actually a contingency of the more bipartisan votes, I think it’s passed the house like six or seven times now and has never gotten a vote in the Senate.

So, I actually think investors are well aware of what legislatively is on the table. I think, unfortunately, and it’s reflected in where the stock market is today for these cannabis companies. People have just lost hope that there’s a genuine chance of it of federal legislation succeeding in any way.

RS: And do you feel like how you would counsel those investors that have lost hope? Would you say that the federal picture isn’t really the saving grace that it’s touted to be on Twitter?

NG: Yeah. It’s tough just because I’d say in the past two quarters especially, there’s probably five or six different kind of factors, all coming together right now. Number one, there’s definitely been a slowdown in growth across key states that had previously driven a lot of growth in the top line revenue for these companies as well as the margin profile. So, states like Illinois and Pennsylvania and Florida and Massachusetts, for the past two years have grown at just exceptional rates and more importantly, have operated with big supply demand and balances that create really good margin opportunities.

As those states have slowed down as of late, growth has slowed along with it. And then alongside that, we have large macro-economic factors like the invasion of Ukraine and rising inflation rates that have all led to increase costs, in general on the operating side. So, not only are we seeing market growth slow, we’re seeing margins compress and then we’re seeing costs increase so, unfortunately, Q3 and we’ve seen a few big names report here in Q4 GTI, Curaleaf (OTCPK:CURLF), Ascend, most recently and Columbia Care (OTCQX:CCHWF) just yesterday released kind of some preliminary numbers and growth across the board is slowing. And margins are definitely coming down incrementally.

And normally, I would say that’s fairly normal. Those are things you could expect. But unfortunately, we were still waiting on those kind of new markets to open up that would offset some of these kind of tougher pressures. So, I think a lot of people expect the New Jersey to come on line a bit earlier, a lot of people expected the Illinois retail licenses to be awarded earlier. So, I think we’re kind of waiting for those state market developments to kind of come up and I think they will hear in Q2 and Q3 as well as there’s always some seasonal elements.

The winter and cold months in general tend to be slow. And there’s usually a pickup around March or in April. So, I’m hoping the confluence of those new states opening up particularly in New Jersey, where a lot of the big MSOs have exposure as well as the normal seasonal pickup will kind of give us a return. And then I think, unfortunately, the Federal development is ultimately what’s going to really guide this industry. Because that’s what really brings new investors into the space that we desperately need. Because volumes in this industry are just anemic.

RS: But do you feel like that requires I mean, I get like the big picture about federal legal realization and I also get for social equity purposes, the big deal about it. But in terms of obviously, I get like with institutional capital and just it’s easier if there if it’s not an illegal substance. But do you feel like there are work arounds that can be gained until we get to that place which, quite honestly, like seems a far way away at this point?

Do you feel like there’s like little measures, maybe not this year but do you feel like they might be I mean, I know that this is like, every everybody loves to speculate, but are you kind of thinking that way at all? Or do you feel like federal legalization is kind of what we need to open up that volume?

NG: No, I definitely think there are ways and most of that, at some point valuations will just become so compelling, just from either an EBITDA or price-to-sales perspective that it’ll just become a no brainer for a lot of investors. And we’ve seen the industry run in the past, having been invested in this space for quite some time, like, it wasn’t always contingent upon some sort of federal movement to get the stock market going.

So, I do think if we can return to some of those former growth rates, and I do think that’s coming. I think it’ll start in Q2 with New Jersey turning on, but then in the back half of 2022 and I think even more so in the first half of 2023, once states like New York and Connecticut in Virginia turn on. Those are 20 million to 30 million groups of population that are now going to be adult use markets that weren’t present before. And like we’ve seen in other states in the early couple years of those markets, that there does tend to be huge supply demand imbalances and the margin profile on the opportunity is really attractive.

So, I do think we’ll, if we can return to the growth rates we saw, for example, in Q2 Q3 of 2021, it’ll bring just attention to the space from the common investors. So, I don’t think it’s fully like federal legislation is definitely kind of that rocket ship catalyst that’s out there. But there can definitely be just steady solid growth created from expansion into new markets and the development of the U.S. in general, because it’s still very much early days. It’s slower to develop than people want.

But when you zoom out, there’s only, we’re still very early on, there’s only a handful of adult use states, huge portions of the country don’t barely have a medical market. And all of those are just opportunities for some of these companies to take advantage and really grow the business.

RS: And when you say that, like New York and New Jersey going online will catalyze the industry, do you feel like that that will be reflected in share prices?

NG: I think so. I don’t think it’ll necessarily be instantaneous. It might be to some effect because New Jersey and New York especially are just in the media’s eye as states and the importance they hold. So, there will definitely be a wave of even just pretty common like news articles and media attention that comes with those markets turning on and I do think that offers a catalyst. But I would say like it could be slightly delayed as companies report what usually is three to six months after those markets actually turn on.

So, I think those initial earnings reports that factor in some of that growth will also serve as a catalyst for the stock prices.

RS: So, looking at some of these recent earnings that we’ve seen, who are some of the companies that you feel like investors should be looking at or who are you particularly impressed or disappointed by, in these recent reports?

NG: Yeah. So, I mean, like I said, with growth certainly slowing the past couple of quarters, I certainly put a lot of value on companies that are truly profitable and producing actual substantive cash flow. And there’s only a small handful of them. And I mainly say that because when stock prices are depressed, you obviously don’t want to raise equity at these levels because it’s very dilutive to raise equity at very low share prices.

And the debt markets can be tapped to some extent but a lot of the major MSOs have already tapped the debt markets. So, you don’t want to get overloaded with debt, especially in this industry where even though interest rates have come down, they’re still tend to be in that 8% to 10% range even for the best operators which is very expensive capital in any — very expensive debt in any other industry.

So, I definitely, we only have a handful of companies that reported so far but and not to my first investment ever but Green Thumb reported with pretty good top line revenue, margins did come down a bit like I discussed earlier, but they produced $49 million in positive operating cash flow just in Q4 alone and finished the year with $132 million I want to say in positive operating cash flow. So, that’s just a real difference maker when you can self-fund the business and not have to rely on bringing in outside capital, to continue your growth. So, I would definitely highlight them.

And you kind of saw the, another investment Ascend Wellness was kind of the, unfortunately the opposite of the spectrum. They saw revenue drop margin shrink and cash flow worsen. So, I’m definitely watching companies that are really profitable. And you can kind of see that reflected in the stock price where Ascend has taken a larger hit than most, partly due to their deal in New York with MedMen facing some complications.

But yeah, we definitely, especially as companies like Trulieve (OTCQX:TCNNF) and Verano report shortly later this month, I think those two as well will report significant like true profitability, positive net income and real cash flow generation to drive the business. And I think that’s really important in this period of slightly slower growth.

RS: And speaking of Ascend Wellness and that broken merger, there’s been a handful of mergers. Maybe more since we’ve talked but in the past year there’s been a handful and most recently, there’s been a few really exciting ones. Is there one that you particularly like, or you’re like, they really got it or something that investors should be taking note of in the face of these consolidatory measures?

NG: Yeah. I mean, that’s definitely something I’m looking at just because there’s such great variation between companies and how they approach M&A. Certain companies look for more kind of tuck-in acquisitions, much smaller kind of additions to their platform that are a bit easier to integrate. And then you have really transformative deals like Trulieve and Harvest, for example, which was one of the largest mergers in the cannabis industry ever.

And it really transformed Trulieve from what people had historically criticized as one state focus company into a true multi state operator. I would say that I don’t necessarily deem one method or the other as it’s better than the other necessarily, but these small tuck-in acquisitions are much easier to integrate, and they don’t tend to influence margins or operating expenses in a big way. They’re a bit easier for a company to absorb.

Whereas we see with, if you look at Ayr, remember we talked about them on our last podcast as well. They went from essentially a two-state operator Massachusetts and Nevada and now are, I think, in eight states now and have really gone heavy on the M&A which I think long term will be key for the business and growing it. But in the couple quarters that it takes to integrate those operations, there is some choppiness in the reporting.

So, they did go from historically a very good financial company, near 60% gross margins, 30% EBITDA margins, cash-flow positive. And then the past few quarters, it’s dipped quite a bit just because they are taking on those new businesses. There’s a lot of redundancies in terms of integrating these new businesses. You have to kind of re — it takes time to reformat the two companies together to see how they work.

So, I would say those transformative deals that really change these companies have much larger effects in the long term, but in the short-term can create that choppiness. So, if you compare that to something like what GTI does, where it’s mostly just small one state acquisitions, those acquisitions have very little influence on the quarterly reporting.

RS: Yeah. Do you feel like your favorite stocks are the ones that you like the most out of earnings or do you have a favorite stock that hasn’t maybe reported yet or do you have a favorite stocks that you felt like didn’t do as well, but you still like them?

NG: Yeah. I mean, luckily all these names are super cheap right now so, I don’t think necessarily could go wrong. And at least for now, the industry largely moves together. There’s, of course, differences in how companies perform but it largely moves together. I’d say, I definitely like GTI a lot, but they’ve historically had a slightly higher valuation from a price or EBITDA perspective. But I think deservingly, so further consistency, I would highlight a company like Verano, who’s a little bit less known. Only went public in 2021.

But overall, has a pretty similar number one licensing footprint, but also operates in a very lean and profitable way, generating similar cash flow and net income positivity and general profitability that you’d like to see. And I’d say they’re just less known amongst the investing public, don’t have those successive quarters of reporting the analysts and the investor community in general come to know. So definitely highlight them.

And I would, just my personal opinion, I always stick with the well capitalized, at least even if they’re not cash-flow positive today, like a company that at least has a sound balance sheet and isn’t burning tons of money. So, whether it’s Trulieve or Verano or GTI, I definitely like those names.

RS: Do you look at any names in the international space? Or I’ll include Canada in that international space?

NG: Definitely not Canada. I would say we’re fortunate to, I mean, our family office invests almost exclusively on the private side of the industry, and we end up just operating an increasingly large public portfolio just as our companies go public. So, it’s we’ve almost entirely invested here within the U.S. Most growth opportunity has been here. Most investor capital has gone here. So, we’ve seen the most opportunity. And for the longest time, I would say why bother internationally?

I think we are reaching a tipping point where more attention can be directed that way. We’ve haven’t pulled the trigger yet. But we’ve looked at an increasing number of deals in the international space, whether it be primarily focused in Germany where largest European market and the new coalition government there announced developing an adult use cannabis industry is one of their top priorities. So, I think that will be really the first substantive adult use market in general market in Europe. So, that’s definitely somewhere we’re looking.

And then for sure, the market in Israel has got a lot of attention. So, I’m definitely aware of companies like InterCure (INCR) and a few, Isracann (OTCPK:ISCNF) who operate there. But for now, we’re definitely U.S. focused. I would say, number one, just from a growth perspective what we see but then also just sticking with what we know and where we think we have a competitive advantage in terms of investment knowledge, just because these international markets are very different from the U.S.

So, it’s a bit of an effort to cut and try to like come to understand the licensing structure and what perhaps is the best way to target those new countries.

RS: For sure. I’m curious and I’m putting you on the spot but I’m curious what you’re kind of like and you can say like on one foot thoughts on just because we’ve covered InterCure a few times on the podcast and I’m personally invested in Isracann Biosciences which has made me a multimillionaire so far. Do you have any kind of thoughts on those two stocks just looking at them briefly?

NG: I would say, there’s not many options to play the Israeli market. So, you’re kind of limited to those. And…

RS: Or I guess, sorry. I’ll put it like this if I may, like InterCure’s approach of kind of trying to be the biggest, is that something that you feel like is I guess you think of positively like that approach?

NG: Yeah. I think so. Like if the U.S. has taught us anything, obviously, this market in general has been taught but I think that’s the most well capitalized companies and those that have that foot in the door ahead of time, and to have an inherent advantage just from a scale perspective and from just really connecting with the consumer base early and forming those relationships so that every time they return to buy new product, they recognize the brand. So, I definitely think that’s the way to target the market.

And to really go after it early. And I think InterCure especially has created some actually good scale and shown ability to actually operate without burning a ton of money, like we see in Canada and other international markets. So, this is definitely a name I’ve looked at for a little while now.

RS: I mean, just to kind of get an answer on why you are still negative on Canada, would it be the reasons that we’ve stated, they’re just kind of not getting it together and not figuring out that market and there’s just not going to be the kind of returns that are going to be in the States?

NG: Yeah. I would say like the one benefit of the Canadian market is it’s actually federally legal. So, those operators can list on the NASDAQ or the NYSE and that offers an inherent advantage just in terms of volume and they occasionally enter, how I call like meme stock territory, where they get intention from like large investing groups like Wall Street beds and you see names like Sundial (SNDL) just trade to enormous valuations at times same with Tilray (TLRY) at times.

But just from a fundamental perspective, that’s just such a difficult market. It continues to grow at an impressive rate. They’ve added a ton of stores in Ontario which has fostered a lot of the growth. But it’s just so competitive. There’s now just 1000s of stores and I think an average Canadian retail store in Ontario does maybe a million or two in revenue when you compare that to stores in certain states in the U.S. that are doing $10 million to $50 million, just the opportunity is tough.

And then increasingly, if you look at like what your options are in terms of investing into public names in the Canadian market, you would think of names like Canopy (CGC) or Tilray or Hexo (HEXO), just because those were the market leaders. If you look at their market share over the past year, year and a half, it’s plummeted, despite heavy M&A activity. Hexo and Tilray alone, each have gone from roughly 18% to 20% market share now to both 10% or below.

So, a lot of the private small mom and pop operators in that country are actually taking share from the big guys. But you obviously can invest in a lot of those private names. So, from a consumer perspective, it’s a great market. Prices are super cheap. But from an investing perspective, it’s tough, just there’s margins are low. Competition is extreme. The governments certainly, doesn’t help with number one, the excise taxes that they charge. And then number two, just the regulations they have, whether it’s branding or even things like with beverages, there’s significant limitations on even how many you can buy.

We’re invested in a company called Cann which is a social tonic beverage with a bunch of celebrity investors. And if you compare, they recently entered Canada, and if you compare their Cann here in the States versus the Cann up and Canada, just even the branding that they can have. It looks like a medical product with a huge warning label in Canada. And here it’s like a very artistic, cool looking consumer packaged goods. So, I think just there’s fundamental attributes of the Canadian market that just make it somewhat investable in my opinion.

RS: Yeah. That logo or the packaging thing, do you feel like they regret it? Or do you feel like they deeply believe in it?

NG: Yeah. I mean, it’s tough like if your goal is safety and preventing perhaps like children or young teenagers in general from consuming the product, in that regard, I assume there’s benefits to having them because it’s clear as day when you open the package, all the all the warning labels on it. But from a kind of just economic standpoint in terms of developing a true consumer packaged goods industry, I would say it’s very limiting.

Especially if these companies ultimately want to become global operators, which I assume they do, it’s tough to start in that market and try to, if you go into the United States, you’ll essentially have to reinvent the book and come up with new branding all together to try to enter. Just because obviously, I think they’re limited to one color on the packaging itself, and then like a very small, like usually like the name of the brand or whatever on the packaging. But other than that, they like, can’t include anything. So, I’d say like in terms of developing a true CPG industry that it’s highly limiting.

RS: And what are your thoughts on the Canadian companies that have some optionality in the States?

NG: Yeah. I mean, it’s interesting to see all the different approaches. Canopy certainly has gone with tying themselves to future optionality in terms of entering the states on the plant touching side. So, we know they have agreements with Acreage (OTCQX:ACRGF), a smaller investment into TerrAscend and they recently did the deal with Wana Brands. The challenge there is you do have that if, kind of we talked about earlier, if the federal change ever does occur, they will be somewhat well situated in terms of having an early footprint in the States.

But the challenge is, they are paying a good chunk of money for that optionality now and as a company, they’re just hemorrhaging money, burning just insane amounts of cash. So, the idea of paying out money today for the chance of having a future business here in the States is problematic in a way. And you can contrast that to Tilray has definitely taken a different approach of targeting, particularly in the alcohol space, and trying to find kind of brands and CPG oriented companies that they actually have businesses today.

So, in that sense, they’re not just burning money. That the alcohol side of the business is actually one of the most profitable parts of the Tilray business today. But the difference there is how that translates to a future actual operation in the THC side of the business here in the U.S. is a bit less clear. I’m not exactly sure how you take like the sweet water, beer brand and like, they obviously have ties in some of their offerings to cannabis, but it’s not like that immediately translates to a flower or pre-roll brand.

So, I think all these companies are trying different approaches to having an early step in like, CBD is obviously one that a huge host of companies have tried. And that’s one I would definitely not touch just because the CBD market has become commoditized very quickly. And again, it’s just not very profitable. So, I think it’s tough. There’s I don’t see a clear way that you enter the U.S. ahead of time without potentially putting your listing at risk. You could potentially highlight Kronos as someone who’s taken a different approach by essentially doing very little, and just saving their cash and hope that one day it comes.

I don’t know what the best approach is, but it is interesting to follow what all these different companies are doing.

RS: For sure. Do you feel like do you spend time thinking about like, investing in cannabis stocks broadly as what risk may come down the pike to kind of throw derail my thesis? Do you think about that? Or do you feel like this is happening. It’s just a matter of putting your money on the right players?

NG: Yeah. No, I certainly think about, there are definitely regulatory changes that you could think of that would dramatically alter what the industry looks like and certainly, the interstate commerce discussion is one that I’ve thought about quite a bit and what that does to the industry. Another is how involved does the FDA get and certainly, factors like those you can see playing out and would definitely up end the current format, the state-by-state structure of the industry like it is today.

I will say, none of these things happen overnight. Like we’ve already seeing that with how slow legislation is to develop. So, not only is that slow, but any implementation of that legislation is also just going to take years. So, it’s definitely something I consider and I think all investors should consider and keep an eye on. But it’s also important to realize that nothing changes overnight. And I think states will be highly incentivized to fight to keep their state programs as strong as possible.

RS: How do you think about the interstate commerce picture? How do you think of it? Do you feel like you have a sense of like, how you think it’s going to go? And thereby how you think about it changing the industry? Or you also curious even how it’s going to look the fact of interstate commerce?

NG: Yeah. I mean, for our family office, we’ve certainly, we definitely rode the wave of, we just — we invested in quite a few of just the plan touching MSOs from what was early 2014 all the way through and kind of 2018 2019 and that just offered great opportunity. I think they were clear, the companies that offered the greatest growth profiles and the best way to target the industry. Say, for the past two years we’ve definitely not fully pivoted, but at least given more attention to ancillary or tech like plays in the industry as well as brands that will be, I would say, less influenced by any change should interstate come around.

So, whether it’s, these are names we invested in but it’s like a Weedmaps (MAPS) or a Leafly (LFLY) or like a Hydrofarm (HYFM) or Greenlane (GNLN), any number of companies we’re doing mostly on the private side, but those companies aren’t necessarily significantly altered interstate opens up. So, I think that’s one way to kind of hedge your bets by not just being purely exposed the MSOs who are somewhat built for this state-by-state model. And then, I think you can look at companies that are clearly building themselves for that future market.

I think Glass House Farms (OTC:GLASF) is kind of a go-to example that many people use, building out that just enormous greenhouse facility in what’s considered a prime climate in California. And a company that would certainly be a net exporter should the interstate walls fall. I always — I do think that’s a good company. I would just always caution that like, in the interim before interstate falls, like those companies are obviously siloed within California, for example, here which faces enormous problems in terms of taxation and black-market competition and a host of other issues.

So, there are ways to kind of hedge your bets against potential interstate opening up. But it’s also important to realize that that’s not a reality today. And a company like Glass House is going to still have to perform siloed within the California market, at least for the next couple years.

RS: Nick, as we wind down, so you’re going to be my first guest that I asked this too, but I’ve been thinking about, like having in a lot of interviews that I like, they have like a question that they ask guest at the end. And so, my question to you is your worst investment slash best lesson?

NG: Oh, man. No, that’s a great question. Because you definitely learn more from your losers than your winners I would say.

RS: I think so. I think so.

NG: They sting for quite some time. So, I would say we invested in on the private side in Acreage Holdings, several years ago now. And anyone who follows the space knows how that turned out. And at the time, they very much looked like, I’d say like Curaleaf or GTI at the time, really solid footprints, strong capital backing, raised a ton of money on the private side but as well as in their go public, so they seemed well capitalized. They had quite the board at the time with Bainer joining and drove a lot of the headlines and later got the camp relationships on paper.

It looked like a good business, a good investment. But as we follow the company, it became abundantly clear to me that, had been on paper alone isn’t important enough in this industry, I think you have to have the proper mix of both financial acumen as well as true operational talent. And I think the ladder there is what Acreage was lacking for a while. They essentially were a licensed aggregator, but they had no idea how to actually run a good cannabis business, attract consumers, get significant grow when retail operations stood up.

So, luckily, we exited a while ago. And it’s collapsed quite a bit further from that time. But that was certainly a learning lesson and just doing full due diligence and understanding what’s important for these companies to succeed from every angle.

RS: Yeah, yeah. That’s a great well, that’s a great answer, Nick. As we finish up, I want to really encourage listeners to, you can follow Nick on Seeking Alpha, even though he isn’t writing full articles, I really recommend following him just for his comments. And maybe while you’re there, you can encourage him to write full articles for us but until then he’s CannaVestments at Seeking Alpha. Nick, anything else you want to tell investors or listeners? How they can find you? Or if you want to be found, anything else to let them know?

NG: Yeah. No, yeah like you said, I CannaVestments on Seeking Alpha. I’m also on Twitter under CannaVestments. I mostly, yeah like you said, I mostly just comment I do quarterly reviews on most of the major MSOs. So, if you want to just kind of hear my thoughts, feel free to check me out there. And if any companies are looking to raise capital in the space, we’re always looking for new opportunities. So, you can reach me either on those sites or at our website which is That’s just my family office website.

So, either of those options work. And yeah, I’m definitely always, I’ve said this from the beginning is I’m happy to talk to people about this industry. I think it’s always mutually beneficial to get different viewpoints, different perspectives and really just dive deep into this industry to get a better understanding, because that’s really, really benefits everyone in the long run.

RS: Yeah. Well said. I mean, I really appreciate people that are coming from a knowledgeable place and willing to share and have a conversation. So, I appreciate you coming on this podcast to have a conversation with me. And I also really just appreciate the fact that you want to have them in general, because and I also appreciate the fact that you look at it as mutually beneficial, because conversations typically always are. So, Nick really appreciate you coming back on. I hope this is, we don’t go two years without talking again.

NG: Yeah, absolutely. Again, really appreciate it Rena. This is, as I said, one of my favorite podcasts and I’d recommend it to anyone out there who looks at this space seriously.

Thanks so much for listening to The Cannabis Investing Podcast. Subscribe or follow us on Seeking Alpha, Libsyn, Apple podcasts, Spotify or Stitcher and we’d really appreciate it if you left us a review on Apple podcasts. It helps other investors find our show and makes us feel fantastic. If you have feedback or questions, we’d love to hear from you at Nothing on this podcast should be taken as investment advice of any sort. I’m long Trulieve, Khiron, Isracann BioSciences, The Parent Company, Ayr Wellness, and the ETF MSOS. Subscribe to us on Libsyn, Apple podcast, Spotify and Stitcher. Thanks so much for listening and see you next time.

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