Profitably Scaling Regional Cannabis (Podcast)

Summary

• What does it take to scale U.S. regional cannabis brands and do so profitably?
• We talk to Aviv Hadar from Oregrown and Eric Ross and Ed Weidenfeld of District Cannabis and Phyto Management. One from the Pacific Northwest, in Oregon and one from the East Coast in Washington DC/Maryland.
• We cover their issues with MSOs, why one believes in vertical integration and why the other doesn't.
• We also discuss why balance sheets are just as important as income statements, the mistaken emphasis on rapid growth over revenue or profit, the impact of 280E, and 'The Canada Scam'.

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Today, we're talking to two regional cannabis brands, one from the Pacific Northwest, in Oregon and one from the East Coast in Washington DC/Maryland. While Aviv Hadar of Oregrown strongly believes in vertical integration as the best way to maximize margins, Eric Ross and Ed Weidenfeld of District Cannabis and Phyto Management, believe in first focusing on their core competency. Both believe in eventually expanding to other states, but not before dominating the current markets they're in.

We first talk to Aviv Hadar, the outspoken Co-Founder and CEO of Oregrown Industries, a vertically integrated cannabis brand, and a decade long investor in the world's largest tech company with a background in digital communications and technology. In 2008, Aviv founded Think Brilliant Media Studios, an award winning software and technology company. Aviv's also a founder of the social media and content creation company SoulPancake.

Oregrown was voted Best Dispensary in all of Central Oregon each of its five years in business including Best Place to Work in 2017 by The Source Weekly and was crowned Startup of the Year 2017 by the Bend Chamber of Commerce. Aviv is also a founding member of the Oregon Cannabis Association, a member of the Oregon Liquor Control Commission Rules Advisory Committee, a Leafly Technical Advisory Board Member, a member of the National Cannabis Industry Association, and the first person in Oregon State history to testify to the OLCC on behalf of Oregon's cannabis legalization measure in 2015 - the same year he was awarded the inaugural High Times Political Trailblazer Award.

We then talk to Eric Ross, President of District Cannabis LLC, Phyto Management LLC (licensed cultivator) and Maryland Cultivation and Processing LLC and Ed Weidenfeld, Chairman, Co-Founder and Co-Managing Partner of District Cannabis LLC, Phyto Management LLC and Maryland Cultivation and Processing LLC.

Eric has over 30 years of varied financial, operational and investment experience. Previously, Eric was President of Capital Markets at Metropolis Capital and prior to that, he spent five years as President of Artery Capital, a Washington DC-based family office focusing on real estate and on private equity investments in emerging industries, including cannabis.

Ed is a businessman and lawyer, appointed to Boards and Commissions under six presidential administrations. He became a supporter of medical cannabis after he was diagnosed with Parkinson’s Disease and discovered that cannabis relieved some symptoms associated with Parkinson’s. This relief from medical cannabis, along with the excitement of cannabis law reform and the resulting emerging marketplace, led him to partner with Andras Kirschner to start District Cannabis.

Topics include:

• 4:00 - Aviv founded a software company after leaving an unsatisfying university experience. After a couple of nice exits, took a couple years break and enjoyed travelling around and surfing. Then Colorado went legal and as a lifetime lover of cannabis, knew a phenomenal grower; Oregrown as a brand name - known nationally and globally. One of the longest running, self-financed cannabis companies in a space where so many are failing or having to sell their companies for shares to do a Canadian roll-up.
• 10:30 - Southern Oregon and Northern California synonymous with high quality flower. Even the best growers in California user Oregon as a benchmark to grow flower. California focused on huge farms; Oregon is known more for craft and high end organic boutique cannabis. California a patchwork of laws; Oregon more established market. Working with regulators in Oregon.
• 13:00 - No other model that works outside of being vertically integrated. Brand side - Oregrown has significant footprint outside of cannabis; CPG side, manufacturing division and retail stores - companies with only one of those components are struggling and looking to partner with other companies. Hard to beat the margins that come with vertical integration both for profit and in raising capital. Nearing 60% margins with Oregrown. Desire is to dominate the state, not expand or follow the MSO model. Not much upside currently in being an MSO - issues with individual state are just magnified when talking about multiple states.
• 15:30 - The 'Canada Scam' of going public in Canada. Number of groups tried to buy Oregrown with over $20M in shares, but the numbers didn't make sense - Canada is smaller than California. Aviv's hypothesis came to pass with those stocks plummeting and companies on the verge of going under or having to find a way to file bankruptcy or manage/dismiss litigation - not much good happening in CSE.
• 18:00 - Valuations of Oregrown north of $20 million cash currently; see $20-40 million company being an $80-100 million company with federal legalization. Focusing on financials, balance sheet and maximizing value for shareholders - looking for the best return on investment. 6 years in, the last thing Aviv wants is a modest return or having to sell with the next owner experiencing the valuation jump that comes with federal legalization. After that, envisions the micro brew model - deep regional brands spread across the country. Employee stock option program - one of the first in the space - ensuring everyone gets as big of an exit as possible. Easy to scale Oregrown nationally eventually either by being acquired or partnering with another company.
• 22:00 - Cannabis space similar to tech - when companies expand fast without focusing on bottom line; disappointed cannabis industry didn't learn more from tech sector. Too much focusing on rapid growth over revenue or profit. For every Facebook there's a thousand combusted companies that have had millions of dollars invested in them. Not all about going as fast as you can and then trying to monetize - as we've seen with a race to the bottom with prices, no product margins and extremely difficult to sell Canadian shares as an operator. Oregrown trying to stand out with sophisticated financials; staying aligned with Board's vision not always smooth.
• 25:00 - Recently launched Oregrown CBD line. Waited for hemp prices to settle after Farm Bill passing. Now getting into space with full transparency. Oil is Oregon hemp which brings unique value. Too many products in the CBD sector that don't make sense or aren't good quality, but that doesn't ruin the whole sector. Knowing brand of Oregrown helps them expand with consumer loyalty.
• 35:00 - Oregon has passed legislation for export. Workarounds to federal laws against cannabis. FedEx (NYSE:FDX) and UPS wanting to get involved with shipping cannabis; bringing innovation to the table - huge additional revenue stream for them. Regulators continuing to refine and edit licensing language and regulations. State wants companies to succeed.
• 45:00 - How Eric and Ed came to work together - Eric, advising them from a family office always had the best advice so ultimately came on board as President.
• 37:00 - Ed was general counsel to Ronald Reagan's campaign and worked in Reagan White House, famous for its War on Drugs. But as a Libertarian, Ed always felt cannabis prosecution was a victimless crime that suppressed a plant with great therapeutic value but also a segment of society that had larger and larger numbers of minority families ripped apart with so many in jail. When Ed was diagnosed with Parkinson's Disease - an incurable degenerative condition - realized the full therapeutic power of cannabis.
• 43:00 - Eric also surprised to be in cannabis sector. Was President of a real estate oriented family office that had started to look at cannabis sector from the landlord side - which showed an imbalance with supply and demand. Ed and Andras had 1 of 8 licenses in Washington, DC. Partnered with top notch, long-time grower. Hydroponic operation as well.
• 47:00 - Licensed to sell in Maryland and DC; currently only selling in DC - hoping for first crop in MD in June. Staying focused on that area, but may expand down the line, once they've established presence in MD and DC. Can't produce the best flower when you're in all facets of the market in a number of states. Establishing core competency first - consistent, targeted experience. Largest share of the market in DC, cash flow positive. Because they raised capital from friends and family, important they first got their returns before expanding further.
• 55:00 - For retail investors, have to figure who is on path to profitability, so looking at the balance sheet, not just the income statements - who can become cash flow positive. Canada is over-capitalized and small - focus on the US players. Went up too fast, that always comes crashing down; good entry points to be found. Best thing for medical cannabis with descheduling is ability for real research.