Marijuana Markets on Both Sides of Niagara Falls

Marijuana Markets on Both Sides of Niagara Falls

The California Cannabis Business Expo wound down on March 8, closing with two panels at the Marijuana Investor Summit: one featuring the CEOs of three U.S. based firms active in the cannabis space; the other featuring four business and financial executives from Canada, who could speak to the state of the same industry in a very different legal and cultural context.

 

The U.S. and Debt

The first panel consisted of: Paul Smithers, CEO of Innovative Industrial Properties (NYSE:IIPR); Nick Kovacevich, CEO of Kush Bottles (OTC:KSHB); and Derek Paterson, who holds down the same post for Terra Tech Corp (OTC:TRTC). Their distinct business plans involve respectively the purchase and lease of properties valuable for cannabis growing; contract work with cannabis businesses that includes branding help and high-quality packaging; and the outright ownership of both dispensaries and grow operations.

These three CEOs talked a good deal about debt. Many firms active in this space have taken on debt that allows the lenders to convert to equity. Of course if such conversions happen they definitionally dilute the value of the shares. Even if the conversions never happen, the existence of such debt serves as a weight on the share prices.

Asked about this, Smithers replied, “Toxic debt only becomes toxic if you weren’t doing anything creatively with the money you’ve borrowed.” He acknowledges that the use of such securities has turned against some firms. But he expects that when the industry relationship with the banking system is regularized, the debt dynamic in the industry will change very rapidly.

Kovacevich picked up on the subject, saying that his company stays away from debt with conversion features.

Scott Jordan, of Dynamic Alternative Finance, stood up during the audience Q-and-A and assured the panelists that “there is money available that is not toxic, it’s just kept quiet.” They seemed to be happy to hear this.
 

Canada and Confidence

The motif of the participants in the Canadian panel was not debt: a subject barely touched upon at all. Rather, their motif was confidence.

This panel consisted of: Donato Sferra, a principal and managing director at Eight Capital; Sean McNulty, principal of XIB Financial; Jason Zandberg, special situations analyst at PI Financial Corp.; and Michael Gorenstein, CEO of the Cronos Group (TSXV:MJN).

Early on in the discussion, Gorenstein said that his company is expanding its operations beyond Canada. “Since October we’ve had product on the shelf in Germany … [we] plan to be in a number of jurisdictions by the end of this year.”

That was consistent with the optimism of the whole panel: Canada is the one G7 country that has gone the furthest toward the normalization of the cannabis industry, and this puts its cannabis industry at or near the top of the world. The managements of its companies have already travelled far up the learning curve and they have an infrastructure in place.

Even Pesticides

Even bad news doesn’t seem all that bad in this time of confidence. The panel’s members discussed recent lawsuits against producers alleged to have allowed pesticides to contaminate their product. Sferra expressed the mood of the panel when he said, “The bad thing is that it happened. The good thing is that the system caught it.” This speaks in his view to the maturing of that system.

On the same point, Gorenstein said, “I don’t see this as impacting the other licensed producers long term.”

Christopher C. Faille, a Jamesian pragmatist, was one of the first reporters taking the hedge fund industry as a full-time beat, at the turn of the millennium, with HedgeWorld. His latest book, Gambling with Borrowed Chips, treats of common misunderstandings of the crisis of 2007-08.

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