Buy And Hold With Jeff Mascio, CEO Cannabis One (Podcast Transcript) – Cannabis One Holdings Inc. (OTCMKTS:CAAOF)

Editors’ Note: This is the transcript version of the podcast we published last Wednesday with Jeff Mascio. We hope you enjoy it.

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Rena Sherbill: Hello again to our listeners. Today, I am very happy to be joined by Jeff Mascio, CEO of Cannabis One Holdings (OTC:CAAOF), which is a publicly traded company headquartered in Denver Colorado. Prior to Cannabis One Jeff worked at Smith Barney, Merrill Lynch. He was also a fund manager and President of Meridian Capital Advisors.

Before we get to our interview with Jeff, just briefly some news in the cannabis world and some things we touch on with our – in our interview with Jeff. Lot of management changes across the board and something that Jeff thinks and that I agree with is a sign of a changing in the trajectory of the cannabis or should I say a natural part of the trajectory of the cannabis sector where as we’ve mentioned and discussed many times on this podcast, especially since the end of 2019, company is really looking for profitability.

Really looking to maintain high levels of capital within the crunch that’s happening sector wide. Within that a lot of companies that were spending aggressively, excessively some say irresponsibly that management is mostly changing and the board’s shareholders are demanding more responsible growth. So, we’ve talked about this on the show before.

MedMen (OTCQB:MMNFF), the CEO and Co-Founder, both Co-Founders actually gave up voting shares; and TerrAscend (OTCQX:TRSSF), the CEO also stepped down; and Sundial Growers (NASDAQ:SNDL), they also saw the CEO and COO step down. So, interesting to pay attention and to be aware of the fact that this doesn’t portend bad news for this sector actually it points to higher and better emphasis on responsible growth.

To that end, this week also saw two ETF shutdown evolve funds, shutdown work trades in the TSX under SEED and what trades on the New York Exchange under USMJ. So, we’ve had a couple of guests on here before we talk about the ETF scene in the cannabis industry and how it is not quite there. So, these funds have folded and interesting to watch for how the rest of the ETF sector plays out, as these stocks themselves figure out the next stage of growth.

So, looking forward to talking to Jeff and hearing what he has to say about where we are in this state of things, what investors should be looking for, what to be nervous about, what not to be nervous about? So, lots of good things to get to.

For reference purposes, this interview was recorded on February 4, 2020.

Jeff, welcome to the Cannabis Investing Podcast. It’s really great to have you on the show. Thanks for joining us.

Jeff Mascio: Thanks for having me.

RS: So, talk to us about your journey to the cannabis industry and what you’re doing right now.

JM: My journey in the cannabis industry started out about a little under five years ago when Colorado passed Amendment 64. At that time, I was working in the financial services industry and spent the better part of last two and a half decades in that industry and started a hedge fund to fund the cannabis space and at that time I had no intention of being in built involved as much as I am today, but since there was not a real path to success after I raised the capital and invested into the cannabis industry, I found myself being the one to really go in and solve all of the issues that we were having at the time, and as of 2016 December 31 became full time in the cannabis space.

Where we are today from that point, we – or back in 2015 we invested $2 million in four licenses in Colorado and have expanded today to be in five states and have more than 500 SKUs, multiple manufacturing facilities scattered throughout the country in Colorado, Oregon, Nevada, and Washington and we have just recently launched our products into the California market as well, and we also have a retail concept called the joint that’s been number 1 on Leafly for the last three years running.

And recently we’ve merged with a company called One Cannabis, not be confused with Cannabis One, but the interesting things is, we were being confused in, it started out about, right after we went public in the Canadian Securities market in February of last year that we started crossing paths with One Cannabis Group and we ended up setting them with seize and assist and we are in process of merging together and they bring to the table a very, very complementary set of assets and unique skills in the franchise space, which then allows us to have a much stronger presence in the expansion into the retail market without the capital outlay that is required for owning brick and mortar dispensary stores.

RS: Right. That’s an interesting business model to merge with people that you once thought were such a close competitors. It’s nice that you guys work that out and found some synergy there.

JM: Most definitely. And interestingly enough though, in the cannabis space because the industry is so small and the demand is so large, we are not looking to many of our competitors as competitors and it is one of those things where if we all combine together the industry itself is still large enough that we will not be really competitors at all and we will just be a stronger force to be able to hit that relevant size so that when we see the federal government move out of the way, and de-schedule cannabis that we will be a strong enough company to survive the – what I have been saying the tidal wave that’s going to ensue in the likes of our competitors will look like big pharma, big tobacco, and big alcohol rather than be start-up companies that exist today in the cannabis space.

RS: Yes. It’s interesting. I mean, your guys model definitely has a sense of community behind it, the franchise model in terms of banding together to create growth. Was it difficult to settle on that as a business model or did that seem obvious to you?

JM: You know, in our business model we had always intended to franchise the joint concept, but we weren’t going to be looking to do that probably for another five years, but when we came in contact with One Cannabis Group, they have a very strong background in the franchise world and they bring that expertise to the table today and they’ve already sold actually when we got together with them last year, end of last year, they had already sold 14 franchises and since the announcement of the merger, I think we’re up to 30 franchises having been sold.

And the model itself is a very, it fits very well into the cannabis space because there’s a lot of areas in cannabis that are underdeveloped if you will, and we need local representation in those markets where we have people that are very familiar with those markets as we’re expanding into them. Otherwise, we run a great bit of risk in that Greenfield expansion and find ourselves in a market where we’re not really familiar with the local economy, with the local demographics and having those franchises come to the table and help us develop those markets has been a definite win-win for everybody and it also gives us additional pull through, which is the real key on our products and we’ve really believed the industry is moving towards the branding of the industry in the next 12 to 25 months.

And what I mean by that is, most industries are really defined by the products and companies that make up that industry. We haven’t really seen that happen in cannabis just yet, and probably because the fragmentation of the ability for interstate commerce to exist and the ability for the brick and mortar development of the industry to occur is just taking a lot longer than what you would expect in today’s world, but if you look at it from stepping back and looking at the cannabis industry at 50,000 foot view, we really have several different industries from agriculture, meaning the cultivation of the product, to manufacturing and distribution to retail sales and it’s not the traditional tech model that we have seen in the past where you build it and they will come.

It’s really a capital intensive labor intensive and it takes a good bit of time for the industry to develop and having the ability to bring more people to the table without the capital outlay to be able to build those brick and mortar stores in areas that are underdeveloped is absolutely a win in the cannabis space because it is very capital intensive and with the franchise model, we don’t have the same capital outlay. Now, we’re still acquiring corporate stores underneath the – our own umbrella, but those will be complementary to the franchise model and in our development of the cannabis industry, we really need that retail presence in order to understand the consumer and the consumers behavior.

RS: And do you envision going to all the states, let’s say that are available, do you see expanding even further as, you know kind of near and long-term?

JM: Yes. We do indeed and that is kind of the business model we’ve been. We’ve been coming in to the states that are more developed, more like the apple model not necessarily first to the game, but best to the game, and acquiring existing dispensaries that have been producing and really have a stable revenue and profitability already. So, if we can come in and acquire those businesses that are already operating in the black and have already penetrated their local market and then bring the – either the unity road brand, which is our franchise brand or our corporate brand right now the joint, then we are able to really just rebrand those particular dispensaries that have done a very good job of really penetrating the local market.

And then what we have to offer that particular franchisee if it is a franchise or the corporate store is the products and services that we bring to the table as Cannabis One. Right now, I think we have nine brands and more than 500 SKUs, and we are in more than a thousand dispensaries in addition to our own dispensaries spread out across the states of Colorado, Washington, Oregon, Nevada, and recently launched in the California. And the reason we’re spending most of our efforts on the Western Half of the United States is because the Eastern Half is a little bit behind from a time standpoint and that’s where we are really pushing the Unity Road model for the franchise.

And with those two models and with our distribution plans that we have, we plan to be in all of the currently 11 retail states and as more states go to legalize cannabis or we plan to expand as the industry is expanding and really pushing the envelope in the United States and also abroad, we have expansion plans already planned for Mexico and Canada as well. So, it is moving relatively quick even though it is a very slow process in building out these brick and mortar presence and making sure that we have the distribution infrastructure in place to get there.

RS: I’m interested to hear your take on the global markets, but first I wanted to ask you know we’ve definitely seen, especially in the MSO space a lot of acquisitions go south, not come to fruition, there is obviously the capital crunch plays into that. How do you decide who to merge with, who to acquire, what are you looking for before you partner up with somebody?

JM: Yes, so a year ago when we went public, the environment was entirely different, and our criteria that we were using for acquisition at that time was really focused on market share and that top line revenue and if we were able to find businesses that were doing on the dispensary side, at least 5 million in top line revenue with a 40% to 50% gross profit or better than that was an acquisition target for us.

We weren’t really focused on the bottom line because the market itself, the public markets in particular in Canada in this case was really rewarding that top line revenue and not really concerned about the profitability or the bottom line if you will. That changed quite suddenly when we saw the industry take a serious down turn in mid-to-late 2019 and in particular after Canopy (OTC:CGC) had wrote down 1.5 billion of the 5 billion that Constellation Brands (NYSE:STZ) had invested prior in the year.

Now, we since have restructured the company and started to look at all of our own business silos and also the acquisition targets that we’re focusing on and now we’re really focused on not only the top line, but also forcing in a 10% EBITDA. Now, that has changed the dynamics if you will or the targets diminished by about probably 80% to 90% because there is very few businesses either public or private in the cannabis space that are operating in the black.

Now, we spent the last nine months making sure that we as a corporation are EBITDA positive and operating cash flow positive because of the depressed valuations and being able to raise capital at these valuations that exist today are much lower than our private valuation as a public company and therefore we have no interest in going out and using that currency anymore to make acquisitions.

Right now, we’re making acquisitions that are very accretive to both top and bottom line, much like the acquisition with One Cannabis Group who has several revenue sources that are operating in the black in a capital light model for expansion. So, it’s a much different environment and expanding businesses that are Brick and Mortar and Ag and distribution is much different than just building a platform in tech for instance and hoping that once you built it out, all you have to do is bring users on and it will be profitable, but we found that a lot of the industry was moving in a direction of manufacturing that we’re manufacturing the products and services that they were selling wholesale for lower than the manufacturing costs.

So, that was causing the industry as a whole in this race to the bottom and this attempt to gain market share to find themselves in a position where everyone was losing money at such a rate that it was unsustainable and I think we’re going to see several probably, I have estimates as high as 70% of the existing cannabis companies that are operating today that are not profitable, perished, and that’s typical of market cycles. I think we just completed the first market cycle in the expansion of the cannabis industry and I think where we are going forward – as we go forward we are going to see a lot more focus in the U.S. and a lot of the cap raise coming from U.S. institutional capital with interest in companies that are going public in the U.S. once we see the abolishment of probation of cannabis at the federal level.

We think that is going to happen in this year, before the presidential election. So, we are anticipating a dramatic shift from focusing Canada capital markets to U.S. capital markets.

RS: That is interesting. What are you basing that timeline on? Do you think it’s going to happen before the elections?

JM: So, we have information from lobbyists that essentially is indicating that the political equity that exists from cannabis right now, it may be too great for at least some of the or, it will be a political platform that will be used before the election and we just don’t see that it is not played before them, and we’ve heard rumors that the use of the cannabis card if you will by the Republican party or the White House is definitely in play if some of the Democratic candidates start to gain traction on that platform, but we understand that President Trump is willing to take action and remove that by a legalization of sorts.

We know that’s rumor right now, but it does stand to reason when you look across the landscape of cannabis and there is really not a lot of naysayers and there is not a lot of reason why the industry doesn’t move in the direction from a state level after looking at the profitability and the tax revenue that’s being collected by the states that have already legalized cannabis. So, we really think there is a movement and support, because 72% of the American people believe that the cannabis industry is a states right. So, those are the reasons we believe it’s moving faster than it appears if you will.

RS: It’s interesting and could be like a nice political boost before any election, interesting.

JM: We certainly do see that it is a high value card if you will for the political environment before the election and then once the election occurs, we just don’t see its political value being as strong. So, for those reasons we think it will be used prior to the presidential election this year.

RS: Okay. So, let’s say cannabis gets de-scheduled and it’s legal on the federal level. I imagine it’s going to take some time before you know that gets in active, you know in terms of regulations and companies really starting to come online, but where do you see, you know you said that this was part of the business cycle in the cannabis industry, which I completely agree with.

Talk to me about where you see the next cycle and how you see that playing out for instance, you know, if you look at share prices across the sector you will see the charts on a big downward slope, do you see the companies that survive as regaining that market share, do you see them even going higher than it was before, let’s say this bubble, I don’t want to say burst, because it didn’t burst, but where we are in the cycle right now?

JM: Yes. I mean we went through a cycle early on last year and the year before where we saw valuations way out of whack and the assets and the underlying businesses really weren’t supporting those valuations. I think the opposite is true right now in cannabis where the valuations do not support the actual businesses that are operating in the black. Now, that being said, I think there was a certainly a situation where the baby was thrown out with a bath water type of scenario where a lot of the good businesses that are now operating in a cash flow positive or EBITDA positive environment that are also trading at a very compressed valuation, but having said that, you look across the landscape and there are several businesses where if you really peel back the layers of the onion, there is no sustainability that exist because of extensive debt that is lightening the cash flow that’s just not there and you are still seeing a lot of these businesses that are attempting to restructure, but they are running into problems because the access to capital and the depressed valuations are just so dilutive that it’s a Catch 22 sort of situation, where if you are raising capital at these low valuations it’s really destroying integrity of the business.

And those businesses probably will not survive. I think we are going to see several that do not. I mean it is reminiscent of all industries that are new and emerging, look at the tech industry back in the early 90s in the first wave of your CompuServes and all of those businesses that really came out of the gate strong, including Netscape and they turned out to be irrelevant because of the first cycle if you will of tech when that first down turn happened.

I think we’re going to see the same thing here is cannabis. We’re also going to see a lot of businesses emerge that may not be on the radar today or diamonds in the rough if you will that have been really operating strong businesses, but haven’t scaled up just yet, because they are either timing developing products or whatever the case might be, but this next wave of cannabis is going to be more institutional capital, I believe, coming from the U.S. and more mature markets whereas up until now it’s been the retail investor primarily out of Canada that’s been funding the industry.

And I think that investor pool have been small enough that it wasn’t able to sustain the capital needs of the industry. And now as we move into the U.S., where we start to see the capital markets opening up, especially on a private equity level right now with hopes of public offerings coming in the next one to two years that we’re seeing a lot more institutional capital coming to the table. So, we do believe that the industry itself was not even close to the valuations even at those high valuations in the last cycle of where the industry is going. The industry, I’ve heard estimates, any existing industry is as large as 65 billion underlying the U.S. economy and as high as I’ve heard a $100 billion industry as it develops out.

So, it’s definitely moving forward. I mean, you look at Cannabis One for instance and we’ve expanded and really grown the business over the last year and are finding ourselves in a position where the business is strong as it’s ever been, but the value of the company is much lower than probably the second round we raised privately where we were really just an idea on a napkin with a few licenses in Colorado type scenario. So, as we move forward into this next cycle, I think we are going to definitely see a lot of consolidation, it’s going to be much more strategic, the investing public is going to be much more strategic, and we’re really going to see the strength of management start to prevail as we go into this next cycle.

RS: So, I was going to say, you guys had some management changes this year, can you talk to me a little bit about, are you guys looking to grow even more, what’s your kind of like, and then you can also talk about the decision to go into the international markets, but the management changes and we have seen that across the sector right now. It kind of seems that companies are maybe pivoting might not be the right word, but maybe adjusting their plans and taking on new management that will take them there, can you speak a little bit about that?

JM: Yes, and one of the things that we have focused on from day one is really attracting the strongest minds and the most talented people in the cannabis space from the beginning. And the industry has been small enough for us to literally look out across the landscape and truly identify who those talented individuals are and for the – for instance, Jerry Velarde out in Nevada who started Evergreen Organix and who is moving forward with us on – as partners and obviously Evergreen is an acquisition of ours that we have yet to close because of our depressed valuations, but we are still on track with that acquisition and the management changes that we made, we are really restricting in the scale up that we went through as we were anticipating the growth of the business. And then as our valuation tumbled and we were unable to use our stock as currency, we started to scale back the management that we had really brought on board for our large scale expansion and in that – those changes it was really just a downsizing if you will or a swing to grow in order to keep our expenses in order.

Now, looking forward, we still see that there is a lot of talented management teams out there. Some of them are operating businesses that are not operating in the black yet. And some of them are really starting to gain traction. Those are the targets that we’re focusing on and had always focused on as far as the partnerships that we’re looking for. And for instance in the One Cannabis Group, we’ve got one of the most talented individuals running the business that has a back ground in franchise law that is absolutely invaluable to our management team and as we bring together all of these talented management teams, I think we’re going to be positioned better than any from the standpoint of our ability to grow based on the quality of our management, quality of the team that we’ve assembled. And that’s what we’ve really been focusing on for the last five years.

It is really putting together a solid management team. The successes that they’ve had is really just a resume of what they can do, because where we’re going, we think we’re really only in the first second inning of the growth of the cannabis industry and for us to be really a real competitor in the states. We really need to assemble and consolidate the best management teams that exist in cannabis today and that’s really been our focus over the last year and will continue to be that focus for the foreseeable future.

RS: So, do you envision yourselves in a few years as being one of the main players in the cannabis industry as having accumulated so many brands and acquisitions that you guys are one of the top players, is that something that is one of your goals?

JM: It is and we really do believe that we are positioned to accomplish that goal. I mean, starting in Colorado and when we started out there were no practices, let alone best practices, and we definitely have been instrumental in creating a lot of the best practices that exist in the industry, a lot of the technology and extraction and product development and manufacturing we’ve developed and have really been a leader in that and we continue to be the leaders in the thought process and where we are going with the industry.

I mean, thus far it’s been a difficult environment because it’s so fragmented and interstate commerce hasn’t been possible let alone international commerce. And where we’re positioning we’ve been building the foundation and the ability to be able to scale the business.

For instance, we have been working in the background with our partners at the Cheech brand in order to develop distribution channel that will be instrumental in being able to go from manufacturer to distributor to retailer rather than what today in the fragmented market is manufactured to retailer. So, the growth of the industry and really the vision of where we’re going, we have been laying the foundation if you will for that scalability in the industry. And even though it looks like the – from a revenue and growth perspective over the last year has been modest, the actual foundation and the ability for us to scale up and distribute the products and have the pull-through, the technology and all of the partnerships worldwide have been strongly developed and we really do believe that in the coming months we’ll start to really see the fruits of those infrastructure and foundation that we’ve put in place over the last couple of years.

RS: And how do you envision the international markets playing out? Do you envision like open cross borders internationally?

JM: That is our hope and we are working very hard to try to make sure that the decision-making and the lawmakers before they set the laws that have become problematic that we look across the entire landscape of the various states and also countries that have legalized cannabis so far and learn from their mistakes and see what has been successful and what has not been so successful, and we have actually been working with the senators down in Mexico that are working to put together the legislation for Mexico that’s going to be released in April. And we really believe that that law makers and the laws that they bring forward are going to have a huge impact on the overall cannabis economy and the overall cannabis industry.

Simply because cannabis the plant grows so well down in that area of the world. And with the passing of the USMCA we do believe that if we position things properly, we can get cannabis included in the USMCA Treaty, an International Trade of cannabis will be no different than International Trade of any other commodities such as coffee or other ag products such as, you know that grow well in those regions close to the equator.

RS: And you also mentioned that you’re looking to get into Canada. What’s your vision of Canada over there? They’ve had a lot of issues with the retail stalls, how do you see that part of this space playing out there?

JM: Yes. So, the big challenge in Canada and our movement in Canada was – we really had a big push because of our partnerships up there. We have Josh Mann, who is our President, came from Canada and has deep relationships in the Canadian marketplace. And we started to expand and push a lot of effort into the Canadian space to bring the joint concept of the Canada and also all of our products to be distributed up in Canada. We have in-roads to be able to do that and we have really laid down the foundation to do so, but we’re really waiting to see how the lawmakers up in Canada and how the industry develops, but we do see a day when all of the Cannabis One products are distributed through Canada and we also see a day when -either the Unity Road franchise or our joint retail concept is brought to Canada.

We are working to that end. We don’t want to run too quickly given the fact that the government has been so indecisive on how they’re going to really govern going forward across the country, and like California it’s been a little bit fragmented and when we don’t know what the rules look like, it’s very difficult to play in the game when they’re constantly changing. So, we’re hoping they get more solidified and more concrete before we really put to push into Canada.

RS: Do you feel like once the U.S. goes federally legal that will set a better tone in terms of uniform regulations and there won’t be so many, I guess stops and starts?

JM: Undoubtably. I mean you look at the U.S. in every other industry, we’re usually the thought leader and also the leader in what happens from a legal perspective and also the way the industry has developed. I mean, you could look across tech, you could look across really any industry and the United States really is the driver. And it’s simply because we’re the largest market in consumer that the world is going to typically follow the U.S. lead and it has not been the case in cannabis simply because we have it as a schedule one substance.

When that changes in the U.S. and we’re hoping to have a huge influence on those – that trajectory once we seek permission of cannabis to launch on a federal level is at that point that we do believe that the rest of the world will begin to follow the US’ lead again and really allow us to take the lead as the industry develops and of the thought leadership as well as the capital leadership will come around as soon as our U.S. markets can participate.

RS: I am also interested in your thoughts about how the retail picture is changing in the industry. We saw recently this week out of Colorado about cannabis consumption from the cafés or private clubs, where do you see that going, what do you see the future of kind of cannabis retail?

JM: Well, we already have a partnership with a Tetra lounge, which is the first consumption lounge in Colorado. It might have been our media that you are ever seeing on that. We certainly believe that moving forward that consumption of cannabis, especially as we move away from the smoke variety of cannabis, we will become as casual if you will on the retail front as alcohol is. And we certainly believe that from a retail and a recreational perspective that alcohol and cannabis are very similar from the consumers’ behavior and the way that the consumer consumes alcohol is very similar to that of cannabis.

We don’t see the consumer in the cannabis space going into these big box retailers and shopping for cannabis for an experience like they have in the past weather getting their first exposure, you know the MedMen model comes to mind when we have these massive stores that are, you know very destination type stores. Whereas, we’re finding that the cannabis consumer consumes cannabis in the same way as alcohol. They go to their local retailer that is in their neighborhood with – and they frequent it.

And they go in and they don’t buy one particular brand, they go in and they buy several and one brand may have brought them in, much like an alcohol if you go into buy, say your favorite vodka Tito’s or whatever it is and you walk out with different varieties of wine or other varieties of alcohol that you didn’t intend to purchase.

We’re seeing the exact same thing in cannabis where it is really about the shelf space and we believe in a similar model to say InBev (NYSE:BUD) or Constellation Brands that if we can control the products on 40% of the shelf space in all of the stores that we exist not only our own, but other, the rest of the dispensaries out there that we will be able to capture between 20% to 30% of the total revenue in the cannabis space.

So, for that reason yes, we really do believe that the leadership in Colorado and we are an efficient market here in Colorado as though the industry has been around for very long time and the brands that exist in Colorado are very solid and very solidified if you will very consistent and the consumers are seeking those brands. Now interstate commerce has not been possible so it’s been really confined to these local markets, but Colorado is definitely still leading the charge and what the industry is going to look like and we think that Colorado, the MED in Colorado has done a fantastic job, even though they are a start-up at the exact same time we were.

So, without a question, being in Colorado and the progressive nature of the consumer as well and just the overall acceptance in the Colorado market is going to be shared throughout the world and we definitely believe we’re positioned to really bring that thought leadership and the effective deployment of cannabis to the entire country and the entire world for that matter.

RS: So, do you think like that model of the MedMen stores, do you think that’s totally going to fall by the wayside or do you think there is a space for that as well?

JM: Just the cost to operate that model, we don’t believe that that’s actually going to be sustainable for very long, because what happens is the consumer comes in and you have the wow factor the first time they shop in these large overwhelming stores with massive cost to build them out, but it’s not an easy shopping experience and when you have a frequent shopper for cannabis, I mean sometimes a lot of our customers are weekly even biweekly shoppers and those are the bread and butter and really the core of the industry that just like alcohol, you don’t see it being such a event to go shopping for alcohol, maybe right after prohibition was abolished back in the day of the alcohol prohibition, but today once the industry starts to mature and it is no longer identified by the, Oh, wow, we can actually buy cannabis.

It’s really identified by I need a selection of brands, I want to go in and buy, I wanted to be an easy shopping experience. I want to stop by the dispensary much like the liquor store on the way home or on the way to a party or whatever the case may be and consumer is looking for an easy shopping experience, but what’s ironic is we’re not seeing the online ordering take off as much as we had thought. It’s following that very similar model to alcohol where we don’t see the consumer shopping for alcohol so much online either.

So, it is really following the path of alcohol and that’s why we don’t believe these large overwhelming storefronts are going to be the real future and we’re starting to see those the profitability of those just unsustainable and in part not possible to make a profit because a lot of this real estate is in areas where the price of the cannabis to be able to sustain that particular building will price them out of the market.

RS: Okay. So, you know we’ve talked about the sector wide decline, it was also announced this week a couple of funds have closed, you know where would – when investors are looking to get into the sector or that have been in the sector and has been dissuaded by the declines, what do you tell them, do you say stay in at long-term, do you say buy and hold, do you say find the right companies or what advice do you give them?

JM: It is definitely a buy and hold model at this time and right now we’re in a situation where for the first time and really the cannabis space we’re seeing valuations come down to a level where they’ve been oversold. Whereas before, you are buying into a valuation model that was so overextended that it didn’t really have the opportunity for much upside until the industry really caught up. So, now we are really looking at it from a very different perspective and the traditional model of investing I think really applies here, where because we’re talking about traditional brick and mortar type business where it is ranging from ag production to distribution or manufacturing distribution and retail, we can use the exact same metrics when looking at companies in the cannabis space.

The problem is, there is not a lot of them available to invest in, yet the supply side meaning that the interest in investing in cannabis has historically been very strong from the retail investment investor in Canada and that retail investor in Canada, I don’t think is coming back to the cannabis space. It appears to us as though that entire investment group that was really funding the cannabis industry came from the oil and gas industry and when the oil and gas industry really imploded in that best removed to cannabis, and now that there has been a lot of investors that really have lost a lot of money given this recent down swing, those particular investors aren’t jumping right back into cannabis, but at the same time, we’re seeing U.S. institutional and private equity coming to the table to really kick the tires of the cannabis industry and are now looking very strongly into which businesses are going to be the survivors and the thought leaders and also the pioneers as we move forward in the legal front, legal space of cannabis in the U.S.

So, I think there is a real sophisticated investor starting to show up to cannabis looking at that pre-public, US-public offering trajectory and that is an entirely different landscape than we have seen in the past. So, right now, I would say, we are definitely in a transition period and investors need to be really cautious in what they are investing in because there is a lot of companies that are really just as falling nice at this point that are selling off assets and trying to curb the burn that they’re experiencing and not able to access public markets to be able to use investor dollars for that.

We’re going to see a lot of companies that aren’t going to make it as a result of that that burn that they are experiencing. The company is however that are operating in the black and our operating solids businesses and have really taken a slow and methodical approach to this industry and really built a strong foundation. Those are going to be the strong businesses as we move into this next chapter.

RS: And what’s your sense of the CBD market? You know, there has been a lot of struggle with the FDA and even since the Farm bill pass, a lot of confusion in the marketplace there, how do you see that working itself out?

JM: So, the CBD market was very interesting right after they passed the farm bill and I think the CBD industry really took off as a result of the legal framework, but what we’re finding is the ramp up to produce all of the hemp if you will for the CBD market, the wholesale cost of CBD have come down precipitously. And the expansion of the CBD market is definitely still strong, but the interesting thing about it is, the CBD and THC from a health and a wellness perspective are very similar in what they do for the body. So, the CBD market has really taken off because of the legal frameworks and we really see that the THC and the CBD complement each other. I mean the difference between the two, CBD and THC is really only one covalent bond.

So, when they work together and they really are going to be in my mind treated the same going forward, and then it’ll be up to the scientists and then the development of various products that are using not only THC, but all of the cannabinoid. We’ve identified about 107 cannabinoids that have a certain effect on the body and because THC and CBD have been in the spotlight for various reasons, they have been the leaders in the thinking, but the entire cannabis plant, I think is going to be used in a much different fashion rather than us just focusing on THC and CBD.

And now that we have the extraction processes down where we can really separate out all these various cannabinoids we can develop products that are very different in an approach to wellness or the psychological effect that we get in the retail use of THC. So, we’re going to see a little bit of a bifurcation of the way the cannabinoids are deployed, but the process to extract all the cannabinoids are the same. So, the industry itself will probably continue to develop products in both spaces. For instance, we’re bringing out several products in the CBD space that are geared towards, for instance we have a [dog treat line] or animal treat line that’s coming out in the CBD space.

And obviously, we wouldn’t be introducing THC because of its psychological effects into that particular product line, but the same is true when we’re developing products in the beverage, carbonated beverage space on the recreational side that we believe will be consumed very similar to alcohol at a bar. So, that bifurcation because of what those two molecules do is different, but it positions us because of the knowledge and the development of the science that’s behind it and the distribution channels and the partnerships that we have in the industry itself is still that small.

We will maintain our position really in the core of what cannabis is going to be doing, whether it be us extracting THC or any one of the cannabinoids and then wholesaling that if you will to the pharmaceutical industry or using the CBD only to develop products that are non-psychological or no psychological effect or using THC and CBD together for the effects that they have synergistically. So, they really fall in a category of themselves if we put them together and then a bifurcated category if we’re using the different cannabinoids for different reasons.

RS: So, you think it matters whether it’s a health and wellness product or a pharmaceutical product?

JM: Very much so. So, the health and wellness, we are seeing the demand for CBD as much, as very much the dominant cannabinoids and for good reason. Whereas in the recreational, call it the alcohol competitor space, it’s THC primarily dominating that product line, but the flexibility of what cannabis brings to the table as far as economically ranges in the gamut from like I was saying wellness treats for animals to topical and beauty products all the way to the other end of the spectrum for the recreational use of the THC derived products that we’re developing.

RS: And in terms of like the black market, still kind of has a hold on the industry, I think because of the challenges of regulations how long do you see that as being a factor in the industry?

JM: I think it really does depend upon how the federal government moves forward with the abolishment of prohibition of cannabis. You look at it in California for instance and they really have it laid down a structure of legislation from the state level going down into the municipalities. So, and they don’t have any sort of enforcement in effect. So, we see the black market in the market such as California, Chicago, and Florida where there’s traditionally been a good bit of call it corruption to still be the case in cannabis. In that black market, because the regulation is not there and the regulatory oversight is not there that those markets continue to see a very strong proliferation of the black market.

Whereas you look in Colorado and there is really a nonexistence of the black market because the taxing is appropriate. The choice to go to the black market where you’re buying products that are unknown that can possibly hurt you, the vape prices come to mind and most of those vapes that were hurting people where from the black market out of those markets I just described in particular California where they were putting Vitamin E into the vapes, which – there is no science behind that in that black market because it is not regulated in any way, was counter fitting products that were really represented in the legal marketing.

You couldn’t differentiate whether it was legal or illegal in that particular market, but once we see the federal government come in and we see FDA oversight and now we have the enforcement level of the federal government, I think black market starts to go away because the market is large enough on a – call it on a legal level, much likely when look at the abolishment of the prohibition of alcohol. Right after the states of Kentucky and Tennessee come to mind when they are abolishing prohibition alcohol much like Colorado and Washington, and has that abolishment moves forward, there was a very strong black market, because that was the only market that existed in alcohol.

And today obviously, we don’t have a black market in the alcohol space. We see the same thing happening in cannabis but over time that black market will go away and become a legal market because it just won’t be able to compete because the consumer will choose the brands that they know and in respect rather than those black market brands especially when they can just go into the store and for a reasonable price purchase the cannabis that they can trust from the brands that they can trust.

That will happen after the branding of the industry, which we think is happening as we speak over the next 12 months to 24 months and we believe with all of the products that we have with Cannabis One will definitely be the leaders in that area.

RS: And do you see any hesitation in terms of what do you see the packaging restrictions in Canada as something that’s going to loosen up and kind of help brands get, well get to be brands I guess?

JM: Yes. That has been a difficult thing and there’s a lot of politics that go into play, but what we’re finding is, the packaging and the labeling and the marketing to the younger crowd or to children is not happening in the way everyone thought it was. There was this big fear that somehow the cannabis industry was going to take the path of big Tobacco and really try to bring in those younger consumers and just the opposite is happening. For instance, we have no interest in seeing teens or anyone below 21 consuming any of our products, unless they are on the medical side and have a medical condition.

And if the industry itself is marketing to the non-use of cannabis under the age of 21 then we’ll see that those statistics start to change and in Colorado for instance we’ve seen teen use decrease rather than increase simply because of the education that we’re putting out in the market and it’s just the opposite of what the fears are that we’re not marketing to these younger generations. We’re marketing against or educating them not to use cannabis because we don’t have enough information to know if it’s safe for brains that have been not fully developed yet.

So, as we as an industry continue to do the right thing, I think it becomes much easier for lawmakers to say okay the industry itself can self regulate in that area and then we will punish the brands and the companies that are not following the rules whether it be from the FDA or whether it be from the same type of enforcement that we see in alcohol. And when you look across the landscape of most of the jurisdictions that have legalized cannabis, they are giving the rulemaking and also the oversight to the liquor control board.

So, I think we can assume that the path that cannabis on a recreation level is going to follow that of alcohol because the same people are making the laws for cannabis here in the U.S. And if Canada is concerned, I think once the U.S. starts to lead in the space, Canada will start to follow whereas right now they’re trying to figure out the leadership and there is a political environment in Canada that’s making it very difficult for the industry to proliferate.

RS: Interesting. Well, I think we will leave it there. I have one question I’m interested to know, if you had anything to do since you are in touch with the Mexican legislators, one of my favorite lines of anything that I’ve read in the cannabis industry is what they have in their constitution if they legalize cannabis that they said, freedom of personality development, you know about that?

JM: You know, I’ve heard a little bit about that. What I don’t know is how it’s going to apply to the go forward here as we – Mexico right now doesn’t really have any laws related to cannabis believe it or not that are. It’s obviously been crime driven if you will, the production and proliferation of the cannabis industry in Mexico, but if we make cannabis just another plant, how does that change the entire environment, and that’s something that the question has been asked and we’re definitely front and centre in influencing that decision, but if we can get cannabis really turned into an ag product that is not an illegal plant, it changes everything in the way that the regulators can regulate because now you get to the Department of Ag if you will to come in make sure that plant is grown in a way that is free of pesticides, free of contaminants, and then goes for testing, and then we’re able to track the entire manufacturing distribution of all of the cannabis much like any other ad product.

And we really see it is developing out in a way that is really not a lot different than same way coffee is distributed and processed and delivered throughout the entire world. In coffee, if you will, it also contains a drug obviously caffeine in that particular case. So, it’s not too difficult for me to really look forward and see a very similar path for cannabis as we’ve seen for other ag products that are similar to cannabis if you will.

RS: Yes. That’s certainly lots of work to be done.

JM: Much, much. There is a lot of heavy lifting that still has to happen both on the political, the infrastructure the ability to really find the capital as well and the investment where for instance Mexico was that first only wanting at 20% investment from outside of Mexico, but we’re hoping to see that open up where it’s a free market, especially with the USMCA treaty signed and allowing the risk capital that exists in the United States to come down to Mexico and help develop out those markets. And we really see that being a huge benefit for Mexico if they’re able to put down the infrastructure in the laws that are supportive of the industry rather than afraid of the illegality of what’s happened down there in the past.

RS: Right. Well, Jeff I really appreciate all your insights you’ve given us, a lot of great things to think about and a lot of great insightful takeaways. So, thanks for taking the time.

JM: Thanks for having me.

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