Investing in Cannabis: Analyzing the Industry’s Future with Jennifer Drake, Chief Operating Officer, AYR Wellness. David Feuerstein, Co-Founder & Partner, Feuerstein Kulick. Rob Sechrist, President, Pelorus. Emily Paxhia, Co-Founder & Managing Partner, Poseidon.
Moderated by Matt Karnes, Founder, GreenWave Advisors.
SPEAKERS
Jennifer Drake
Chief Operating Officer
AYR Wellness
Emily Paxhia
Co-Founder & Managing Partner
Poseidon
David Feuerstein
Co-Founder & Partner
Feuerstein Kulick
Rob Sechrist
President
Pelorus Equity Group
MODERATOR
Matt Karnes
Founder
GreenWave Advisors
TIMESTAMPS
EPISODE TRANSCRIPT
Matt Karnes: (00:07)
Well, hello, everybody. Thanks for joining us this afternoon. These are panelists, I'm Matt Karnes, Jen Drake, David Feuerstein, Rob Sechrist, and Emily Paxhia. I thought for those of you who are not familiar with the cannabis industry, just to give you a quick backdrop, for all intent and purposes, the industry pretty much was established in 2014 when Colorado introduced its first recreational use market. Back then, that was about eight years ago, sales were about three point eight billion dollars, fast forward to today, now we have 18 rec states, adult use, and 36 medical.
Matt Karnes: (00:49)
The industry has progressed quite a bit over the past eight years. There's been ebbs and flows. Last year, 2020., We estimate the retail sales were about 19 billion, this year, 23 billion, 28 billion by 2022., And really the thing that I focus on is where we're going to be at the end, at maturity. And I think we're looking at an 80 to a $100 billion market. If you compare that to tobacco, which is 120 billion, beer, 110, spirits and wine, about 150 billion combined.
Matt Karnes: (01:25)
So there's a tremendous opportunity, but the industry remains illegal under federal law, which is a problem, and a good thing, in a way. So what I thought I'd do is kick it off to you, David, our lawyer, our expert legal person here, and why don't you walk us through where we are at a federal level, the policy changes that have been introduced?
David Feuerstein: (01:49)
Sure. Well, thanks, Matt. As I think, if I'm sitting in your seat and I put myself in your seat, the first thing I'd want to know, when investing is, whether I'm investing in something that's actually legal. As Matt referenced, cannabis is still illegal at the federal level, but for those who are following cannabis in any respects, I'm sure you're aware that Senator Schumer and Booker recently released legislation with respect to how you would federally legalize cannabis. Meaning that you would not only take it off the scheduling list, you would allow for banking, listing, you would allow for interstate commerce.
David Feuerstein: (02:29)
There's also many social reforms in that social equity, decriminalization and sort of criminal reform, so that is now on the table in Washington, DC. Many industry participants have commented on it and provided insight as to what they think about that legislation. And what I would expect, in the future, is some sort of incremental change. I think it's hard to envision a widespread federal legalization with a snap of a fingers, but I do think that within time, you'll see sort of small steps towards federally legalized industry.
Matt Karnes: (03:11)
Great. And Jen, in light of the challenges, the legal challenges, how is AYR able to establish such a compelling national brand in light of the federal illegality?
Jennifer Drake: (03:24)
Sure. Well, for people in the audience, maybe, who aren't as familiar with cannabis, AYR is a publicly traded equity. So we started our life as a SPAC, raised about a $100 million in 2017, and are now a two and a half billion dollar publicly traded company. So we give the industry viewpoint on this panel. And just a little bit by way of background. I used to be in your shoes, I think went to my first SALT in maybe 2009, in the private credit world. And it's such a compelling opportunity in cannabis that I actually, several years ago voted with my feet and moved into doing the first cannabis SPAC.
Jennifer Drake: (04:07)
But if I'm in your shoes, if I think about to back to when I was looking at an alternative investment, what's super compelling about cannabis is that it is incredibly fragmented market. And so for the few businesses, like ours, that are at the top of the food chain, in terms of multi-state operators who are able to have a footprint across many of those legal states that David mentioned. You can both have a very compelling cashflow opportunity today in your operating business, because you are vertically integrated, you grow it, you manufacture it, you produce it, you sell it at wholesale, you sell it through retail stores, which in many cases are in a limited license environment. So for instance, in Nevada, our most productive stores do $35 million per year in revenue, which is over $10,000 per square foot. So it's a really compelling industry structure, for today.
Jennifer Drake: (05:06)
And for tomorrow, as Matt mentioned, the future is branding. The future is when cannabis becomes a proper consumer product at a $100 billion plus or minus, in terms of annualized revenue, putting it up there with all of the other major consumer products, kind of in the sector. And the key to being that great consumer products company when the industry matures, is first and foremost, having a great product.
Jennifer Drake: (05:39)
And what does that mean for cannabis? Well, I think people don't realize how hard it is to grow great cannabis. And I certainly didn't know this three years ago, you certainly wouldn't want me growing your weed. What you want is incredibly experienced cultivators, who've been in the industry for a long time growing a great product. Because half of what gets sold is flower, is the flower that either goes in your pre-roll or gets ground up and goes in your joint. I never thought I would be talking about this. But half of our product is flower, and so it is all about the plant. It is all about growing a great product, and that is why, for us, the way to build a great brand is to do all the normal things a consumer product company would do, excellent customer experience, excellent approach to branding.
Jennifer Drake: (06:35)
But first and foremost, it all starts with the quality of what goes in the box. It all starts with the quality of the plant, and any operator, I'm the operator kind of on the panel today, but any operator will tell you the same thing, that is the key. And that is why for us, the key is to be the largest scale producer of high quality flower in the US.
David Feuerstein: (06:59)
One other thing, just to Jen's point, was when we started five or six years ago in the business, you used to have people say, "We had the greatest cultivator," and it's been doing it for 20 years, which sort of made you scratch your head for a minute, because 20 years ago, there was no legal industry at all. But now as you see the industry evolving, you have true horticulturists, PhDs, real scientists who are growing cannabis in real controlled environments with greatest technology. So just in our experience, just being in the space, it's completely evolved.
Matt Karnes: (07:32)
It's definitely not like growing tomatoes, that is for sure.
David Feuerstein: (07:35)
No.
Jennifer Drake: (07:36)
No.
Rob Sechrist: (07:36)
Not quite [inaudible 00:07:38].
Matt Karnes: (07:38)
So Rob, from your perspective, you run a fund, it's a REIT fund, Pelorus, from your perspective, what do you think needs to happen before federal legalization actually occurs? What is the industry missing, aside from it actually being legal?
Rob Sechrist: (07:57)
And just to give you a little color on us, we're the largest privately held, private mortgage REIT, that's lending specifically to the owners of cannabis properties, with cannabis use tenants, I should say. And we've put out nearly a quarter of a billion dollars in this sector. For us, the most consequential legislation that's has already happened in 2014, which is the Rohrabacher-Blumenauer amendment at the time, which defunded the Department of Justice from many prosecution, but cannabis-related business. So that was the clear path for us to lend to the owners of commercial real estate and allow for cannabis use tenants.
Rob Sechrist: (08:28)
It's very important that that's there, and that's the bedrock that I think that most of the people are here. In regards to what I think needs to happen, legislatively, or where things are going to go, I am less optimistic as my peers, that legislation reform is going to de-conflict state policy from federal policy in the near term. I just don't see the progressive states, California and New York, and liberal states giving an advantage to the Republican states that are coming in late to the game to completely legalize it. And on top of that, there's a patchwork of different laws and tax structures that are already in place, so I just never see the interstate commerce clause coming into play. I could be wrong. I think the bill is too broad. I think that if they just focus on removing 280E from the IRS code, it's a simple one-shot kill.
Rob Sechrist: (09:18)
And if allow credit cards to be run on the federal system, we've killed two major issues out there with very targeted measures. But that's not how Congress works, we know many of these representative Dana Rohrabacher is our friend, and our local Congressman, and we were implementing funding him at the time. I just don't see a broad bill passing with the 60 votes that are necessary to get past the filibuster. And unless they include it in the infrastructure bill, I just think the opportunity has passed. And I think the Democrats will lose the house in this midterm.
Jennifer Drake: (09:48)
That said, I don't think you have to have federal legalization in order for the investing opportunity to be compelling. And I know Emily does a lot of investing in the space. So, I mean, why don't you talk a little bit about that?
Emily Paxhia: (10:00)
Well, I mean, hi everyone, I'm the founder of Poseidon. Poseidon has three funds dedicated to investing in the cannabis industry. We opened our first fund, right when Colorado opened our doors to their legal adult use market in January of 2014, and we've invested across the entire capital spectrum, and really in the United States, Canada, Latin America, and Western Europe. So we've really explored and engaged in across the entire supply chain and have understood the levers you can pull to really drive returns in this really early emerging markets. But Jen's point is spot on, and I totally agree.
Emily Paxhia: (10:35)
For us, actually, the ability to deploy capital before federal legalization, this is the time to be putting money into this industry, because by the time the lawmakers move to get something legalized on the federal level, I think the alpha will be out of this space. And you'll just be kind of investing where it's very easily accessible. Our whole thing is to kind of exploit the delta between perceived and actual risk, when it comes to investing in this market. And the way we do that is by being boots on the ground, we spend all our time on the road in these facilities, understanding the people involved, understanding the regulations involved, because the regulations are also kind of a gas pedal and a brake pedal.
Emily Paxhia: (11:14)
So we have things where we want to change, 280E, which is our egregious federal tax code around cannabis, where you cannot write off ordinary business expenses. So you have these tremendous effective tax rates, and Jen can speak to that in her business. What we also have, in the US, is a lack of access to the capital markets. We are currently listed on the OTC. We trade in Canada, but what that does is it creates a lot of challenges around what actually happens around these public names. And for us, we've seen a couple of cycles. I don't know if anyone here is familiar with the Gartner hype cycle around tech, but we've been observing a very similar pattern in cannabis. The one big difference is that institutional capital has largely been sidestepping this industry.
Emily Paxhia: (11:59)
So it's time for smaller firms like ours to be able to get into the mix, invest along the way, and then when we see that institutional capital opening up, when we see the capital markets opening up, and people can participate at a broader base into this industry, that's when we're really going to see some serious liftoff. And you can see how that's been mirrored in Canada, where they do have a federal legal program, and they've been able to access the capital markets.
Emily Paxhia: (12:27)
An interesting conundrum is that we have tremendous operators in the United States. The fundamentals of these businesses are very strong. You can't see a consumer sector that's growing at the rate it's growing at over 30% year over year with EBITDA margins like we're seeing in cannabis, it's really unparalleled, almost. And so it's just a very exciting time to be in it. But then you see the Canadian operators who don't have those same strong fundamentals, but they have access to our NASDAQ and to our New York Stock Exchange, and so they have a totally different experience in terms of how their public companies perform.
Emily Paxhia: (13:02)
So I don't know, one of the things we said when we launched Poseidon is, we would have to get very comfortable, often being uncomfortable, and so that's been part of our whole thing. And we just lean in on our work to really understand how to engage in this sector.
Matt Karnes: (13:18)
What I think is really compelling about the story in the US is, the ability and the proven track record of many of the MSOs, the ability to generate free cashflow and cashflow from operations in light of federal prohibition, because there are added costs of prohibition. There's the 60 to 70% effective tax rate. There's a higher cost of capital. There's added compliance costs. I mean, the list goes on. And so in my view, when federal legalization occurs, or when there's any meaningful change to state law, the cashflow profile will accelerate dramatically. And that's when you'd want to be in now, I would say.
Matt Karnes: (14:00)
But, Jen, just getting back to like the capital markets like, for AYR, you guys have made a series of acquisitions. I mean, that's sort of the play now in the sector, there's a lot of acquisitions and consolidation and so forth. And AYR has done some of their transactions, cash, stock, a combination thereof, valuations have come down as we talked about. And so how do you think about deploying the capital that you have? You're also doing a share buyback.
Jennifer Drake: (14:28)
Well, one of the things that's amazing about this business is even at... we've talked a little bit about the barriers and the extra costs about running this business and the extra taxes, et cetera, but even with all of those headwinds, you're still able to have an incredibly robust margin structure, an incredibly robust cashflow generation. Which means, you have really great kind of credit metrics, and the ability to, when you deploy capital, you can do it extremely, extremely profitably. For instance, and this is going to sound crazy to the people in this room, when we engage in capital projects, which can have multiple returns, in terms of return on invested capital, we get our capital back within like 18 months. So people are always very worried, is it worthwhile putting $30 million into this cultivation facility in Massachusetts? What is going to happen with federal legalization?
Jennifer Drake: (15:23)
Well, every dollar I get after a year and a half is gravy, because I paid back my $30 million investment. There's no other industry where your return on capital is that fast. And it's because of the margin structure of this business is so robust, and because the leverage you can get from capital projects is so material. So when we invest in capital projects or an M & A, I mean, our business currently trades at about, and this sounds like a crazy number, like five, six times 2022 expected EBITDA. For a business growing a 100%, year over year, in terms of revenue, with a 30% EBITDA structure, that's crazy, but it's because of these structural hurdles to investment. And when we buy other people, we're buying at a creative EBITDA multiple, so M & A is sub six times, capital, we invest in capital projects, returns within one and a half years.
Jennifer Drake: (16:22)
It's an incredible, incredible proposition to grow your company right now, which is why we're so acquisitive and why we want to expand our business as much as possible. Exactly, as Emily said, before it's federally legal, because when it is federally legal, there will be a rush of capital in, both from the people who are on the sidelines now, whether it's the Canadian, they're called licensed producers, LPs, the Tilray and Cronos and Aurora and Canopys of the world, or even the big tobacco and alcohol companies who have been desperate to get into the cannabis business for donkey's years, but still won't do it, until there's more clarity on federal legalization. When those people come into the business cost of capital is going to go down, return on capital is going to go down, so we want to get as much as possible at these cheap levels before federal legalization
Matt Karnes: (17:23)
And David, speaking of, on the topic of M & A, one of the things that I really scratched my head on during the Trump administration was attorney general Barr. There was a lot of M & A activity going on, and the Department of Justice was conducting antitrust reviews, so to me that didn't make a lot of sense to have a federal investigation or deploy those resources into an activity that's fairly illegal. A lot of money was spent. A lot of time was spent, unfortunately for you guys were on the sidelines when they did it, and had to deal with all that.
David Feuerstein: (17:57)
A lot of delay.
Jennifer Drake: (17:57)
Oh, no deals broke, and we bought them. That's we're happy.
Matt Karnes: (17:59)
Yeah, exactly. Well, that's part of being a good operator is knowing, when to deal.
David Feuerstein: (18:03)
There's a lot of, I guess, asymmetries, so a federal government that's using federal funds to conduct investigations into antitrust issues in state run businesses doesn't seem to make a whole lot of sense. And major transactions were sort of kept on the sideline for many, many months waiting for the antitrust review to sort of pass by. It is sort of inexplicable, but I think that's one of the smaller inexplicably things of the past administration. So in any event, I don't disagree that federal legalization is some time off, but as I said, there's nothing in this country that I'm aware of right now that has more sort of consensus-
Jennifer Drake: (18:54)
No.
David Feuerstein: (18:55)
... than legalization of cannabis, believe it or not. I believe at the last election was over 60% of eligible voters agreed that cannabis should be legalized for adult use. I assure you that any of our politicians would fall over themselves for that kind of approval. So there are things that don't make sense and are inexplicably in our government, but certainly you would expect that given the population sentiment, there will be movement, eventually, towards federal legalism.
Matt Karnes: (19:26)
And I think there's going to be a smoother ride to the finish. I mean, there was a lot of bumps. It was like being in a bumpy, old jalopy or something, under the old administration. And now it's sort of just smooth. So we don't know when the timing is, but in the meantime, there are restrictions around access to capital, that's a challenge. And there's been a variety of different solutions to that, one of which are the REITs, which has been very important in the sector over the last few years. So Rob, can you talk about what the advantages are to the operator and sort of what the advantages are to the investor?
Rob Sechrist: (20:07)
Sure. So we're a mortgage REIT, which is different than a traditional REIT, we don't own properties. We just get the tax advantage of being a REIT, which we've passed along to our investors, which is a 20% tax savings on the ordinary income that we generate. In addition to that, the other super significant advantages is that the state tax is only paid in the state that you're domiciled. So our largest portion of our investor base is in no tax states, such as Texas and Florida and other various states like that.
Rob Sechrist: (20:36)
But in regards to the capital markets and things out there, I will share kind of off the record that the institutional investors are ready and willing, and we'll be making an announcement next week that the largest investment banks and community banks, insurance companies, pension funds are active and ready to come in. So there is a path through, we have a different structure, since we're non plant touching, as opposed to some of my peers here. So we're specifically only lend to the owners of the property and allow for cannabis use, so we have a little bit of delineation there.
Rob Sechrist: (21:05)
But in that quest for investors, since 2016, almost five and a half years, we've been dedicated to this space. We've had to go through every single approach that there is. And there was no short path, easy path. There was no broker dealer. It was myself and my team raising every single one of those dollars ourselves. We started with retail investors, and now we're finally to the institutional investors.
Matt Karnes: (21:27)
Great. So interstate commerce, we talked briefly about that. That's a very important issue now, a lot of people are talking about it. Because, for those that aren't aware, each state has to operate in a closed economy within cannabis, because it's a state by state, it's illegal federally. So the question becomes, are you able to... it's obviously a lot more efficient if you're cultivating in just one state or however many states, rather than in every single state, but the ability to cross state lines, that's weighing a lot on people's minds. What is your take on that, Jen, on how important it is in the near term or medium term as you think about investing?
Jennifer Drake: (22:10)
So I think it's one of the many uncertainties in the space is when we finally get mainstreaming, when we finally get legalization, what is that going to look like? Is it going to look like full federal legalization? You can cross state lines, and PS, if you cross state lines, you can pretty much cross international lines. So that's another thing that is a wrinkle that, even if people decide, oh, I have no problem having all the cannabis in the US grown in California and then shipped around the country, does that mean they want cannabis coming up from Mexico and from Columbia and in from Canada? That's probably not exactly what lawmakers want. So there's a lot of uncertainty around that.
Jennifer Drake: (22:56)
And that's why I think a lot of people have a view that, at least in the interim, something called the STATES Act is the most likely more mainstreaming approach to cannabis. And that basically says, federal government's going to take their hands off, like the Rohrabacher amendment, but like forever, and the states can do whatever they want. But in that environment, it is unlikely that THC will be able to cross state lines. So we'll be in the similar situation that we are today. But who knows, it's a lot of uncertainty. There is a lot of talk about, well, maybe states can make interstate, pacts, and Indiana and Ohio can make a decision to trade amongst themselves. It's a little bit of an uncharted territory, if we were to do something like that, but it is less of a kind of big bang than just to allow interstate commerce.
Rob Sechrist: (23:50)
And if I could just add to that, Cory Gardner is a friend of ours. He was a co-sponsor with Elizabeth Warren of the STATES Act. And at the time that he was a Senator, he had the 60 votes necessary to get it through, so those votes are there. Mitch McConnell wouldn't bring it to the floor. They were afraid because Elizabeth Warren was a presidential candidate that the other presidential candidates would try to move the bill a little bit farther and farther saying, "STATES Act is not enough. We need to decriminalize." The next one would say, "Well, there needs to be reparations." And so they were afraid they'd lose the vote. So what that tells us is that there are enough Republicans. I believe there are 17 had been identified that are willing to do it, but neither side is willing to get the other side the win.
Rob Sechrist: (24:29)
And the political machinations that are happening behind the scenes have nothing to do with what the laws are. And so it's just such a broken system. And unless they get it through budget reconciliation, I just don't see it happening in the very near term. And I think the political capital right now is in decriminalization, not legalization. And so that's where I think that they'll focus and that could be national.
Emily Paxhia: (24:51)
I also think that implementation of regulation changes around cannabis takes years. So even if we got federal legalization-
Rob Sechrist: (24:58)
True.
Emily Paxhia: (24:58)
... even if they were to open up interstate commerce, the implementation of a framework around that, I mean, if it takes two years for California to turn on, I mean, we're in New York, we're watching what is going on here and the timelines there, on a federal level, I can't even imagine. And just even thinking through all of the ways that this starts and stops, like if you look at after alcohol prohibition, we still have blue laws in states, we still have states that are not as open to importing from California, for example, or you have to pay a fee or a tariff to do so. So there are different challenges around this that I think we...
Emily Paxhia: (25:33)
So even if it did happen, where they said, "Yes, we have federal legalization and there can be interstate commerce." I think there are many barriers to the full implementation of that. So I think we have years until we see this laying out. I mean, even the states that are very opposed to having legal cannabis, I could see them saying you cannot pass through our state with legal cannabis to get from the West to the East Coast.
Emily Paxhia: (25:56)
And I think Jen's point, too, about once you think about the global infrastructure of what a global cannabis market looks like, then you start to see Columbia has massive cultivation going on in greenhouses down there, and by the way, with EU GMP certification. And so if you can produce cannabis in Columbia at that level, at that certification, and be importing that into Europe for a medical distribution chain, I mean, things start to get very interesting, when you think about the commoditization of the raw material, which is really a plant. That's many years away, but it's just, once you start to go down that path, you really have to go the whole way down that path.
Matt Karnes: (26:38)
One thing, some companies now are establishing an exchange, developing, or conceptually anyway, futures contracts around cannabis. But if you have a futures contract, if you trade on that in the same mechanism than any other futures, you have to be able to take delivery of the product. So with interstate commerce not being permissible, I don't know how that's going to work out, but that's another discussion. But anyway, David, what's your take on what's going on with interstate commerce?
David Feuerstein: (27:08)
Well, I mean, I think we've talked about it, but for this room, I think the takeaway should be that the opportunity exists now. Because of regulatory hurdles, because of the fragmentation, because of limitation of state's licenses, there's opportunities abound in terms of investing.
David Feuerstein: (27:28)
I think Jen touched on Massachusetts. Massachusetts is super attractive state, in particular, because there are limitations on canopy. No matter how wealthy you are, no matter how big you are, you can only grow so much cannabis in the state of Massachusetts, which means that there's an absolute supply and demand, in favor of demand right now. So prices are very high, which is why Jen's company's able to get return on her investment in 18 months.
Jennifer Drake: (27:53)
Yeah. I mean, and it's the same across, basically, everywhere east of the Mississippi, you had the same limitation on canopy, so it's New York, well, it will be New York, we know, it's New Jersey, it's Massachusetts, it's Pennsylvania, Illinois has a higher cap, but all of the Eastern US is implementing a similar license structure, where there are these caps. And that's why, when we were talking earlier about that incredibly robust margin structure, there are these regulatory limitations that allow for that robust margin structure, and keep it really, really pervasive for a long period of time.
Jennifer Drake: (28:37)
I mean, people have been asking me for over three years when Massachusetts going to be less good on a wholesale basis. I'm like a long time from now, and it's five years ahead of Pennsylvania and New Jersey. So it's a persistent opportunity that's structural, and if you can get in it, it's the hardest business I've ever seen. It's an incredibly challenging business to really operate in, but if you can operate well, you have an incredible structural advantage. And I personally would like federal legalization to be as far as away as possible, because I want the biggest portfolio possible, the biggest wholesale business, the best brands, and the biggest retail footprint ahead of that.
David Feuerstein: (29:19)
And I just think one of the countervailing points that you haven't heard yet about federal legalization is that you have state constituents who are going to be super opposed to interstate commerce, save for maybe the state of California and the state of Arizona. Every state on the East Coast, every governor, every delegate, every senator is going to say, "We don't want interstate, because we have tons of tax revenue that's coming in from our state operators. We want to keep cultivation facilities and dispensaries-
Jennifer Drake: (29:50)
Jobs.
David Feuerstein: (29:51)
... and jobs and tax money coming in. What are we going to do?" The state of Colorado, it was a startling statistic about the amount of tax revenue they've generated and how that goes to schools. So imagine if all of a sudden that revenue base is taken away, because jobs are lost or tax dollars are not there anymore. So I think once they even get, sort of again, to Emily's point, once they get to the point of actually legalizing it, from a legislative point, the regulation process and enacting regulations are going to abound and it's going to be very difficult to get consensus quickly. So I think you're going to find every governor coming to Washington DC to lobby against interstate commerce.
Jennifer Drake: (30:28)
But again, good for the incumbents.
Matt Karnes: (30:30)
Yeah. Well, it's clear the smokes out of the bomb at this point, in terms of federal legalization, it's going to happen. But there are still a lot of challenges around trading and capital markets and stuff, so, Emily, your Poseidon, you have some publics in your portfolio, what are the challenges that you are faced with in terms of, if you want to exit or trade?
Emily Paxhia: (30:58)
Well, yeah, because the markets are... there's low liquidity in these names and they're very thinly traded. And so when you're affirmed, that's really kind of one of the institutions trading in it, you can definitely impact the market. And, for example, we saw, was it Credit Suisse that said, "No more trading." Yeah. And so we know there were a number of actual big funds that were in the space, they weren't big for their funds, but for the space, it was hundreds of millions of dollars. And so there was some force selling through April. And you could just see across the entire sector, what that did to the sector in terms of the volume and also just the pricing, so that was really difficult.
Emily Paxhia: (31:41)
There's also just the challenges around, where you can hold the stock, who you have as your brokerage firms that are actually working in this space, and then you have the Canadian and US piece to it. So even if you go public and you have public stock, the perception of liquidity that you're now free and you're trading is just not there. There's a lot of steps you have to take to navigate through it. And we're generally long the names that we're in. We do some shorting in our first fund, but it's very specific and very short shorting, but we're generally long the sector. We're long the names that we select for the portfolio. So we're okay with the buy and hold, and we're generally really just trying to be mindful of our entry points and timing the market right.
Emily Paxhia: (32:25)
But for us, it's not been as much about getting in and getting out. It's just continuing to build positions, especially as we've watched this market draw down, since I think it was like February 20th was when we talked ticked at the last time. But it's just not the same as being on the listed exchanges, and until we have some... From what we understand, it's not necessary to get the banking reform in place, it's just that the exchanges would like to see that before they potentially endeavor into the space for the plant touching companies.
Rob Sechrist: (32:57)
And if I could add to that, it's not just the custodian of the shares, it's the custodian of the securities we help.
Emily Paxhia: (33:03)
That's right.
Rob Sechrist: (33:04)
So we've had those challenges as well with some of the things we're working on. But something that most people don't know is that there's 684 banks that are currently listed on FinCEN's website that are actively accepting cannabis depositors, tier one banking. And so there's an enormous amount of banking already out there, state banks and credit unions. We're in an FDIC insured bank, and we're tracking all those banks and private lenders. And of those banks, there's dozens and dozens of them that are already lending direct. So it's much more robust than people realize and think. The challenges that we're talking about are challenges that are kind of ancillary challenges, but they have to be thought all the way through.
Rob Sechrist: (33:42)
And it's one of the challenges of this industry, you're like, "Okay, I've got my capital source, I've got my deal source, I've got my due diligence source," and you go to close, you realize the custody escrow company can't hold anything to do with cannabis related whatsoever, and the title company won't deal with it, and the [inaudible 00:33:58] insurance won't deal with it, and all the way down the line, the property insurance. And you've got to disclose that, you've got to get it disclosed in writing, because if you ever go to make a claim, they're going to deny that claim.
Matt Karnes: (34:09)
Sure.
Rob Sechrist: (34:09)
And so getting an insurance company, a major insurance company, or somebody to put that in writing is a major challenge. So you have to know how to work those things and have those relationships. And so even once you get past the biggest challenges that you thought were in place, these little challenges, you don't have any leverage with these third parties. And so these really become the bigger obstacles that we're all having to face here at different value points in the product space.
David Feuerstein: (34:34)
There's also-
Matt Karnes: (34:34)
So... oh, go ahead.
David Feuerstein: (34:36)
... issues from the federal illegality is, how do you secure against your debt, if you're issuing debt? And what do you do? There's no bankruptcy protection. A number of companies have once tried to file for bankruptcy, they've been kicked out of bankruptcy court. So what are you doing if you're going to lend money, how are you going to be able to seize your collateral? How are you going to be able to ensure that there's no leakage of collateral? Those are things-
Jennifer Drake: (34:57)
Yeah. I would say, though, that you're well compensated for that. I mean-
David Feuerstein: (35:01)
No, of course.
Jennifer Drake: (35:02)
... cannabis spreads are 500 basis points over similar comparable credit companies-
David Feuerstein: (35:06)
I agree. I'm just saying from a legal [crosstalk 00:35:08]-
Jennifer Drake: (35:08)
... and like billions of dollars have been raised in the cannabis credit markets. So, I mean, definitely, yes, what you're saying is true, although UCC, but I will say that people find the potential returns sufficiently attractive that billions of dollars of cannabis credit has been raised.
Emily Paxhia: (35:24)
I agree.
Matt Karnes: (35:25)
So we're almost out of time, but one thing I want to touch on, because of the name of the panel is the future of cannabis.
Jennifer Drake: (35:30)
Sorry.
Matt Karnes: (35:32)
So when I rolled up my sleeves nearly eight years ago, and I thought about the industry, I thought there were going to be three lanes. There's the rec market, there's health and wellness, and then there's pharmaceutical. And the rec market, or the rec lane is widening now, as we have more states. Well, same with the health and wellness, as we have more CBD products and so forth. I think medical will be redefined and recalibrated, as big pharma comes in and there's more research that's done. And that's a whole nother panel and discussion about true medical marijuana. But what are your each of your thoughts on how the industry is going to look in say 10 years, 10 and 15 years? I'll start with you Jen.
Jennifer Drake: (36:18)
I think that you'll find that a lot of people who use cannabis for "recreational" purposes are actually using it for wellness purposes. There's a whole plant wellness movement across the country right now, and what you'll see is as "recreational" adult use sales become legal in more states, you will see people, essentially, almost using cannabis, more like a nutraceutical. There are some people who will use it for it's... we call it the intersection of wellness and wonder, you'll see some people who are using it for its wonder properties, but a huge portion of the people who are using it, like my mom uses it for arthritis relief, because she has really bad arthritis, so she uses topicals. She has a bad back, and instead of taking opioids, she will use cannabis instead.
Jennifer Drake: (37:13)
So she substitutes it for some of the more OTC type wellness products that she would otherwise use. I think you'll see that expand materially. I think you'll see people substituting alcohol for cannabis. I talked to someone last week, we just bought a cannabis sparkling seltzer, that is basically like a LaCroix, but cannabis infused, and literally, I don't know this person from Adam, I met her for the first time over the phone. She told me she drives across the border to get our product, LEVIA, a 100 cans at a time, and then drives-
Emily Paxhia: (37:49)
Wow.
Jennifer Drake: (37:49)
... back across to New York, a 100 cans at a time. Literally, I had no idea, she was just like, "Oh yeah, great buy. I have two Levia's as a night now, instead of two glasses of wine, and my husband does too." So you'll see substitution, you'll see an expansion of OTC and nutraceutical wellness. And then I think you will see true pharmaceutical grade cannabis, like GW pharma's [dialects 00:38:18]. You'll see more and more of that come, because you'll have more research. But want [crosstalk 00:38:24]-
David Feuerstein: (38:23)
I would just add that, I think I agree with all of Jen's points, most of them, at least. I think the one point that I would add is that you're going to find that there's going to be significant research in what they call them, the minor cannabinoids. And they're going to find uses for those minor cannabinoids in all sorts of things. The human system has a cannabinoid system already long before cannabis has been talked about as a legal drug. And I think that people are going to figure out ways to treat multiple diseases and symptoms with cannabis. And so I look for the medical space to really explode in 10 or 20 years.
Rob Sechrist: (39:04)
Well, I would agree with all the things that they're saying, but from a debt perspective, we've already analyzed this space as being a $50 billion market size for the real estate sector, and only two and a half billion has been put out. So we see that the rates and the terms will be more mature and stabilized and similar to other types of debt markets out there. And we've got to work through and make sure that we are dealing with that and addressing that. But we believe that this specialty use lending market is similar to cold storage data centers and labs, and it will always help perform other types of debt/credit funds for real estate out there.
Rob Sechrist: (39:40)
So we're excited about it. We think it's here to stay in. And like you said earlier, I think 48 billion projected by 2025, so it's a massive... But that's from the consumer side, we're talking about the asset side. So we're a little bit different lane, but we have a different approach, but we're all in the same general business as well.
Matt Karnes: (39:58)
Emily final word.
Emily Paxhia: (39:59)
Yeah. I think that I'm really interested in watching how gen Z is really the first cannabis native generation, where they're entering the workforce. Their share of wallet is being dedicated to cannabis as opposed to alcohol. And there was just something released about, for the first time ever, alcohol use is down in college students, cannabis use is up. So I think where we're going next is that this is being integrated into people's lives differently. It doesn't have to be siloed or kind of off to the side. It can be a part of everyday life. And I think what is coming from that is the shifting from the form factors from just smoking it in a bowl or a bong to being able to drink it or being able to eat it, and having these other more socially acceptable and socially normalized ways of consuming cannabis.
Emily Paxhia: (40:41)
So I think that that's just really interesting, because right now, it's the Pareto principle, where the 20% of the population, they're spending 80% into our market, and it's all the flower, high potency products. But I think once we get to the outskirts of that, where we're hitting into those other form factors, and we're hitting more with women, we're hitting more with seniors, we're hitting more with the gen Z, that's really driving this, I think we're going to see a real spreading out of this market and actual depth to the growth of it. Not just from turning on new markets, but we'll see real depth in our consumer bases. So I'm really excited about where we're going next.
Matt Karnes: (41:13)
Awesome. Well, thank you everybody. There's certainly a lot to talk about in this space. We really didn't hit on every topic, but thank you all for participating here.
David Feuerstein: (41:22)
Thanks.
