Speaker 1: Hello, and welcome to another episode of the Oblots podcast.
Speaker 1: I'm Joe Wise and Paul and I'll Tracy. You want
Speaker 1: to hear something funny always? So, I think in our
Speaker 1: work chat the other day, I don't think you were online.
Speaker 1: I think you were off that day. But in our
Speaker 1: work chat the other day, I was talking to some
Speaker 1: of our colleagues and I found out that they have
Speaker 1: a different description of me and you. They have a
Speaker 1: different way of thinking about our roles. Oh really, okay,
Speaker 1: have you heard this? I'm very curious. No, okay, So
Speaker 1: you know how like I am always sort of jumping
Speaker 1: on like whatever the hot market story is. Last year
Speaker 1: I was talking about crypto a lot, and this year
Speaker 1: I wrote an article about cannabis or whatever it is.
Speaker 1: And you consistently cover of the very serious things, right,
Speaker 1: So you're it's like credit markets and market structure, and
Speaker 1: you basically have an understanding of the things that will
Speaker 1: be enduring through markets for a long time, whereas I'm
Speaker 1: much more flighty and just sort of jumped to whatever
Speaker 1: is hot. So anyway, apparently they say that that I'm
Speaker 1: the momentum I'm the momentum factor, and you're the value factor.
Speaker 1: Is sort of how they see our different roles, and
Speaker 1: that perfect. That's great. Um, I guess we need to
Speaker 1: think about rebranding add thoughts as a momentum and value,
Speaker 1: cause it sounds like a terrible like sitcom, but it
Speaker 1: is a good characterization anyway. So, you know, I wrote
Speaker 1: the story a few weeks ago for Business Week about
Speaker 1: exactly what I'm talking about, cannabis and crypto and various
Speaker 1: investing fads and bubbles and psychology and stuff like that.
Speaker 1: And in doing the research for that story, I came
Speaker 1: across what at the time was a group of anonymous
Speaker 1: experts in marijuana investing called the Canna Lists, and they
Speaker 1: have a podcast and a page on Reddit where they analyze,
Speaker 1: really intensely breakdown the various businesses of all these marijuana
Speaker 1: companies that people are investing in. And it's pretty clear
Speaker 1: that they're very far ahead of the pack, like a
Speaker 1: few different guys whose understanding of the granularity of the
Speaker 1: industry are far above where most of the media and uh,
Speaker 1: most Wall Street analysts are on this nascent area. Right.
Speaker 1: So I remember reading a little bit about this in
Speaker 1: that piece that you did for a Business Week, and
Speaker 1: I thought it was really fascinating because every once in
Speaker 1: a while you see these communities essentially spring up on Reddit,
Speaker 1: and uh, sometimes these communities go into an insane amount
Speaker 1: of granular detail about what they're talking about, and the
Speaker 1: Catalysts is definitely one of those. And even though you know,
Speaker 1: I started by saying how you and I we we
Speaker 1: sort of have different complementary approaches. One thing that I
Speaker 1: know both of us are very fond of is any
Speaker 1: stories of essentially someone on the Internet becoming the ax
Speaker 1: in a certain space. So like we both used to
Speaker 1: like Calculated Risk Bill McBride, we had him on the podcast,
Speaker 1: Like we both love these stories of like someone online
Speaker 1: on their own, independent of major institution, is becoming the expert,
Speaker 1: becoming the must read on some new area, right especially
Speaker 1: when it's new. And that's I think the thing that's
Speaker 1: the most interesting about cannabis stocks right now, because you're
Speaker 1: talking about an entirely new industry potentially with a whole
Speaker 1: new set of rules, in a whole new way of functioning,
Speaker 1: and a lot of the people, the traditional people, the
Speaker 1: cell side analysts on Wall Street haven't really wrapped their
Speaker 1: heads around it just yet exactly right. So the interesting
Speaker 1: thing is right after my article came out. The Canalysts, Uh,
Speaker 1: they d anonymize themselves. They docks themselves in real and
Speaker 1: revealed who they are. And we're very lucky because one
Speaker 1: of them has agreed to come on Today's Odd Lots podcasts.
Speaker 1: So I would like to bring in uh, Craig Wiggins.
Speaker 1: He is one of the three Canalysts. Craig, thank you
Speaker 1: very much for joining us. Joe Tracy pleas pleasure to
Speaker 1: be here. It's it's nice to be a guest on
Speaker 1: a podcast and not have to run the run the show.
Speaker 1: I know it's really I've been whenever a few times
Speaker 1: I've been a guest on a podcast, I always appreciate
Speaker 1: how much easier it is. I'm glad you're with us.
Speaker 1: Tell us, why don't you just give us the background?
Speaker 1: Who are you? Who are the cannalysts? And why do
Speaker 1: people read your stuff? Well? With respect to the cannalysts,
Speaker 1: I actually found both Cytochrome Graham Jones, who's our PhD
Speaker 1: candidate at Brock University in biotech, and Molly Time Andrew
Speaker 1: Udell on social media forums and the social media forums.
Speaker 1: You would think in most cases you to these farms
Speaker 1: and uh, someone characterized it as a zoo very loose dialogue,
Speaker 1: a lot of pumpers, a lot of bashers and the like.
Speaker 1: But both these individuals I found to be incredibly intelligent
Speaker 1: and boy was that was that or a good call
Speaker 1: in my base my part, So we were both All
Speaker 1: three of us were casually introduced by myself as a
Speaker 1: as a group, and in November of last year, we
Speaker 1: decided to break off from another reddit, weedstocks subreddit and
Speaker 1: formed the Cannabists because we wanted a curated place for
Speaker 1: engaged investors that was deep, it wasn't people giving opinions
Speaker 1: without fact. So we actually formed the Cannabists last November,
Speaker 1: very late November early December last year, and we've had
Speaker 1: quite quite a run of it lately. We have several platforms.
Speaker 1: We use our quarterly earnings analysis where I complete rundowns.
Speaker 1: I'm a credit guy by trade. I was in I've
Speaker 1: been involved in international trade finance and supply chain management
Speaker 1: finance for over thirty years now, Molly time Andrew was
Speaker 1: thirty years in credit risk management and energy trading, so
Speaker 1: he knows the equity box. I'm I'm a lender. I
Speaker 1: like to get repaid, So I know that fundamental credit
Speaker 1: analysis stuff. And when we added Graham to the mix,
Speaker 1: which does he does our science side and our patent review,
Speaker 1: we became very very three dimensional. And uh so we've
Speaker 1: we've expanded that or ask me anything series is been phenomenal.
Speaker 1: It is c suite. Uh we bring in the executive
Speaker 1: suites to talk about their companies and our community asks
Speaker 1: them any anything that that like. And uh, it's amazing
Speaker 1: the response we've had. We've had CFOs come on and
Speaker 1: we after two hours they give us six which is amazing. Tracy,
Speaker 1: I was just gonna say, a credit analysts talking about
Speaker 1: cannabis kind of the perfect guest for the two of us. Oh. Absolutely,
Speaker 1: And I love the credit risk manager with thirty years
Speaker 1: experience whose user name is Molly Time. That's fairly unusual.
Speaker 1: It's named after his cat. Actually, just to take a
Speaker 1: step back for a second, why were you all on
Speaker 1: social media or on the Reddit forums talking about pot
Speaker 1: stocks in the first place. What sparked your collective interest? Well,
Speaker 1: on my side, it was about the name accounting treatment
Speaker 1: of h I f r S international financial reporting standards,
Speaker 1: where these companies growing cannabis at harvest we're able to
Speaker 1: take the entire profit before sale, less the selling expense
Speaker 1: through their income state. I found it to be very,
Speaker 1: very misleading, so I dug into that and started commenting
Speaker 1: about that in the industry. For Andrew Uh, it was
Speaker 1: more about a long lifetime passion for cannabis and the
Speaker 1: stock market quite frankly, and for our younger PhD candidate,
Speaker 1: it was about learning the finance side and applying the
Speaker 1: science to it. So all three of us came from
Speaker 1: a different place where we were very fortunate to meet
Speaker 1: each other. So for for those who haven't been following
Speaker 1: the ins and outs of pot stocks, can you maybe
Speaker 1: describe the state of the current cannabis industry, like where
Speaker 1: are we in terms of legalization and where are we
Speaker 1: in terms of companies actually getting started and producing and
Speaker 1: selling cannabis. Well, next week, October seventeen, Canada will become
Speaker 1: the first G seven country to legalize adult use cannabis.
Speaker 1: We've had medical cannabis for a decade and Uh under
Speaker 1: various regimes and the last four year is under a
Speaker 1: pretty steady regime. And when Trudeau was elected, part of
Speaker 1: his platform was I'm going to legalize adult use cannabis.
Speaker 1: So we're we're a week away. It isn't going to
Speaker 1: go smoothly in Canada. It's not California, it's it's not Colorado.
Speaker 1: We have government's provincial governments that have inserted themselves into
Speaker 1: the supply chain and are acting like central warehousers and
Speaker 1: they're gonna handle all the online sales. So that's a
Speaker 1: little different. But right now the market extremely froth. You've
Speaker 1: got to be very careful jumping into this market because
Speaker 1: as an investor, if you're a trader, you love the volatility.
Speaker 1: But as an investor, and I'm an investor, I'm not
Speaker 1: a trader. Andrews the trader in our midst like, I
Speaker 1: look at it and the fundamentals. These companies are so
Speaker 1: far out over their skis right now on valuations versus fundamentals,
Speaker 1: and I think there's gonna be some massive failures within
Speaker 1: the industry, and you've got to be very choosy about
Speaker 1: what you're investing in. I'm fifty two years old. I
Speaker 1: don't have a lot of time to recover if I
Speaker 1: screw up, So I'm a little different than the thirty
Speaker 1: year olds. In the twenty year olds, Well, let's talk
Speaker 1: about this because I think the only two things that
Speaker 1: most people would know when they come to it is
Speaker 1: that the legal cannabis market is still fairly small around
Speaker 1: the world, certainly in the US, but there is pretty
Speaker 1: big potential for it to get much bigger as legalization expand.
Speaker 1: So everybody by now essentially knows that that's the story
Speaker 1: or that's the theme. But then you mentioned there's gonna
Speaker 1: be a lot of failures. A lot of these companies
Speaker 1: are out over the skis, out over their skis. So
Speaker 1: if you're deciding among stocks, what is the first thing
Speaker 1: you do to actually sort of ascertain who's really going
Speaker 1: to be able to profitably exploit this market? Well, I'm
Speaker 1: going to start with something that's probably the hardest thing
Speaker 1: to evaluate, and that's management. Um management is everyone can
Speaker 1: print off a very nice looking TV that that looks
Speaker 1: really good. A lot of companies, uh those cvs. The
Speaker 1: back stories for management look very very good. But making
Speaker 1: sure you map what management says to what they actually
Speaker 1: do to me is very very important, especially in the
Speaker 1: new industry. Like I'm a big believer in jockey before
Speaker 1: horse and hope that the trainer gets the horse up
Speaker 1: to speed and and that's how I've approached it. And
Speaker 1: I'm again I'm a lot more cautious. I'm a little older.
Speaker 1: I'm not going for the I'm not looking for the
Speaker 1: biggest company. I'm looking for the most profitable company. Can
Speaker 1: I ask you, know you mentioned management just then? How
Speaker 1: standardized are corporate practices of cannabis companies at this point?
Speaker 1: You talked about I f r S accounting rules. There's
Speaker 1: certain guidance that comes with being a public company, but
Speaker 1: the vast majority of cannabis companies at the moment aren't
Speaker 1: actually public. So what are the disclosures like? What what
Speaker 1: is the financial um or corporate governance like the corporate
Speaker 1: government needs a lot of work in my mind. There
Speaker 1: are some more professional companies like Constellation coming into Canopy
Speaker 1: I I think was hugely important for them. I think
Speaker 1: it provides a lot more rigor to their operations, which
Speaker 1: I haven't been fond of. Quite frankly, Constellations with with
Speaker 1: four or seven board members, they're professionalizing that firm. And
Speaker 1: I think till Raise another good example. Till Ray, by
Speaker 1: the way, is the only one that does not report
Speaker 1: in under I f r S because they went right
Speaker 1: to the US markets with NASDAC and they're using good
Speaker 1: old U S gaps. So I love chatting with those guys.
Speaker 1: It makes it a lot easier to look through their company.
Speaker 1: Afreya is a very solid company. Aurora interesting company, they
Speaker 1: have a lot of They've done so much vertical integration.
Speaker 1: And you know, it's really fascinating about the industry is
Speaker 1: there's so many different races being run and I'm amazed
Speaker 1: at the different race as they are being run. Who
Speaker 1: knows who wins? But on a corporate governance seriously lacking
Speaker 1: in the in the mid caps and small caps there
Speaker 1: that there's some questionable stuff out there. Well, explain that.
Speaker 1: What do you say multiple races being run? Let's get
Speaker 1: a little more granular. What are the different specific opportunities
Speaker 1: that people are competing for here? Well, let's look at
Speaker 1: the three let's say main players, although till race market
Speaker 1: cap would put them in a main player. Let's look
Speaker 1: at Canopy, Aurora and Afria. Canopy wanted to be the biggest.
Speaker 1: They were first to do a lot of things. First
Speaker 1: to go public, first to acquire a new company, first
Speaker 1: expand into Europe, first to get on the New York
Speaker 1: Stock Exchange or US listing. So Cannopy was about getting big,
Speaker 1: and it's big on both the adult youth side in Canada.
Speaker 1: But medical medical globally is gonna be huge, and I
Speaker 1: don't think a lot of people appreciate that. And all
Speaker 1: these companies are looking at medical globally. Aurora, on the
Speaker 1: other hand, uh one very massive facility that they've they've
Speaker 1: completed as guy in Edmonton. They have some smaller facilities
Speaker 1: and they've acquired a bunch of companies. They acquired Seemed,
Speaker 1: they acquired med Relief, and both of those are I
Speaker 1: think Semed was a billion plus. Med Relief was three
Speaker 1: and a half billion dollars for companies with ten million
Speaker 1: and quarterly sales fifteen million and quarterly sales, which is nuts.
Speaker 1: Then you have Aura, who have largely until this year
Speaker 1: really built to scale, and all they cared about was
Speaker 1: we're gonna build our own facilities in Leamington, Ontario, the
Speaker 1: greenhouse capital of Canada. We're gonna build them to scale.
Speaker 1: We care about EBITDA and as a traditional credit guy,
Speaker 1: EBA does my drug of choice. UM. I really like
Speaker 1: their management and that's where I put a lot of
Speaker 1: my capital in. And I've revolved it around, but they
Speaker 1: still aren my largest holding. And what I like about
Speaker 1: them they are a bit of the tortoise versus the
Speaker 1: hair with canopy, But I care about building scalable businesses.
Speaker 1: To me, there's a lot of hints that you can
Speaker 1: get from from management, even in even when revenue hasn't scaled.
Speaker 1: There's a lot of things you can pick up, and
Speaker 1: I just like the executive over there a little bit better.
Speaker 1: So when you look at the cannabis industry, is there
Speaker 1: a parallel conventional industry that you think it's most similar to.
Speaker 1: Is it, you know, maybe drug developments like the pharma industry,
Speaker 1: or is it potentially something more recreational. It is agricultural,
Speaker 1: it is pharma, it's consumer package goods. It's unlike anything
Speaker 1: I've seen, quite frankly, because you're gonna be producing for
Speaker 1: a recreational market as you try to develop patentable strains
Speaker 1: and drugs for for medical avenues. And to me, again,
Speaker 1: the medical side of this is the big plus. And
Speaker 1: once the US takes the wrap so often, let's farm.
Speaker 1: I really dig in and analyze the plant and analyze
Speaker 1: the hundred plus minor cannabinoids and what each one of
Speaker 1: those is capable of. I think that's the big story.
Speaker 1: It wreck is flashy, wreck is fun, It's it's the
Speaker 1: party cruise. Medical is a longer tunnel, but uh, in
Speaker 1: the endgame, health science and wellness is can be huge
Speaker 1: in this industry. Speaking of recreational marijuana, here's something that
Speaker 1: I've been curious about for a while. So right now,
Speaker 1: when it comes to alcohol or tobacco, people have some
Speaker 1: conception of brands that they like. Maybe I have a
Speaker 1: favorite beer and I drink at the most, but I
Speaker 1: certainly don't drink it every single time I drink beer.
Speaker 1: I'm curious what the expectation is on cannabis. Are people
Speaker 1: going to have brands that they really like, that they
Speaker 1: identify with something that they are going to use all
Speaker 1: the time that will be difficult for smaller brands to
Speaker 1: enter or or consume. Were expected to be more promiscuous,
Speaker 1: so to speak, and making it difficult for the various
Speaker 1: sellers to really establish large moats around their strand that's
Speaker 1: that's a great question. Um. Buying cannabis isn't like entering
Speaker 1: into a cell phone contract. You're not locked in for
Speaker 1: an extended period of time. So I expect a lot
Speaker 1: of brand hopping at the beginning. Uh, people settling in,
Speaker 1: they'll they'll be the cores light of cannabis out there,
Speaker 1: and there also will be the Johnny Walker Blue label.
Speaker 1: We recently toured Broken Coast Cannabis, which after you've purchased
Speaker 1: for almost a quarter billion dollars earlier this year, and
Speaker 1: we have a video out on it, and they're by
Speaker 1: far the highest quality LP that we've ever toured, and
Speaker 1: we've toured quite a few. I think they given their
Speaker 1: their history and uh, their medical side, patients just love them.
Speaker 1: I think that's going to be that's getting Broken Coast
Speaker 1: Cannabs because it's not big facility is gonna be like
Speaker 1: getting Hamilton's tickets on Broadway. So good luck to everybody
Speaker 1: who can actually get their hands on some of that stuff.
Speaker 1: But there's gonna be the cores light. There's gonna vape
Speaker 1: pens aren't going to be legal in Canada for another year.
Speaker 1: Edibles won't be legal in Canada for another year. All
Speaker 1: we're going on for the first year for consumables is
Speaker 1: flour and oil, and it's not the oil that you're
Speaker 1: used to it where you can vape in the States.
Speaker 1: It's it's diluted oil in a carrier oil form, so
Speaker 1: you can use it in baking and stuff like that,
Speaker 1: but it isn't what you fill your vappens with in
Speaker 1: the US, and and vape off vapens are gonna be
Speaker 1: enormous and that's why all the greenhouse capacity is coming online.
Speaker 1: So I have a related question, which is about the
Speaker 1: notion that one of the defining things about weed at
Speaker 1: the moment is just the sheer number of strains that
Speaker 1: are out there, and there are always new ones being created,
Speaker 1: Like that's pretty much what growers do is constantly cross
Speaker 1: breeding different strains. And at the moment, if you're at
Speaker 1: least a recreational consumer, you probably base your choice on
Speaker 1: you know, I like sour diesel or I like Girl
Speaker 1: Scout cookies, and your options are probably limited to whatever
Speaker 1: your dealer happens to have available. So how does the
Speaker 1: sheer number of strains interplay with this brand loyalty that
Speaker 1: we were just talking about. Well, you know, I think
Speaker 1: the strain, the sheer number strains is gonna be a
Speaker 1: lot different in California than it's gonna be in Canada,
Speaker 1: because we're going to have these ten provincial buying authorities
Speaker 1: that are purchasing, and you have to have enough volume
Speaker 1: to fill your skews with them. So I like for
Speaker 1: to give you an example, Broken Coast is only going
Speaker 1: to have five strains. That's it the skew level though
Speaker 1: I've been to Organagram and I think that their skew
Speaker 1: level is somewhere around forty two to fifty two. Excuse
Speaker 1: to one province, but that skew level because there's loose
Speaker 1: roll single loose rolls probably in half gram and gram size.
Speaker 1: There's a a flower in a graham probably an eighth
Speaker 1: and a quarter uh. There might be a complementary oil
Speaker 1: to that strain. So you're not going to get the
Speaker 1: strain selection that that you see, I think in California,
Speaker 1: because you have to fill the pipe and then you
Speaker 1: have to continually fill the pipe. And the problem is
Speaker 1: like from genetics to to product, you're probably looking at
Speaker 1: a year uh if they find something good, and we
Speaker 1: found that finding something good in genetics is one in
Speaker 1: a hundred and one in a thousand chants, you get
Speaker 1: something very unique. So I think the strain selection unfortunately
Speaker 1: is gonna be limited until we see some of the
Speaker 1: craft producers, which is the next round of reg's allowing
Speaker 1: the small batchcraft guys into the market, and then it
Speaker 1: might fracture a little bit. But still these monolith uh
Speaker 1: provincial buying authorities, they think different. They think I think
Speaker 1: alcohol and uh and will they have will we have
Speaker 1: hit records of strains for the summer? I sure hope.
Speaker 1: So I think that would be fun. But you need
Speaker 1: a market that can react quickly, and then I don't
Speaker 1: think Canada is going to be that market because of
Speaker 1: those monolithic buying entities that are between the the grower
Speaker 1: and the consumer. God. I have so many questions right
Speaker 1: now and I don't even I'm trying to think which
Speaker 1: way to go. But I really want to drill down
Speaker 1: on that last thing you said, because I think this
Speaker 1: is really crucial for people understanding the market structure of
Speaker 1: Canadian cannabis. So they're gonna be the LPs, the licensed
Speaker 1: producers who grow the stuff you mentioned a few of
Speaker 1: their names. They're going to be private retail outlets who
Speaker 1: sell the stuff out on the street to people. But
Speaker 1: then in between them there are these state run or
Speaker 1: provincial run warehouses that ultimately are where the buyer and
Speaker 1: seller meet, Can you explain how that works? I get
Speaker 1: asked this a lot, and I always tell people, do
Speaker 1: not think like a retailer, Do not think like a consumer.
Speaker 1: Do not think like the company selling cannabis and growing it.
Speaker 1: You have to think like a greedy finance minister and
Speaker 1: a greedy provincial finance minister. And if you think like
Speaker 1: a greedy provincial finance minister, a lot of this makes
Speaker 1: sense because if the LPs don't grow in your province
Speaker 1: and all the profits are going to land in the
Speaker 1: LPs laps and other provinces, how do you really relocate
Speaker 1: profits while you insist on being a nanny state and
Speaker 1: uh and centrally warehousing the product such that you can
Speaker 1: dispense it within your rights in province, because every every
Speaker 1: province has different regulations on this. Not only that, these
Speaker 1: greedy finance ministers are also taking on the all the
Speaker 1: online sales. So if you're a retailer like Medmen, which
Speaker 1: you're probably familiar within the States and Canada, the model
Speaker 1: is gonna be very very different. You're going to buy
Speaker 1: from just one source, so you don't get to compete
Speaker 1: out all your sources in order to drive down your prices.
Speaker 1: Then that that source that's selling to you is going
Speaker 1: to compete against you online. To me, you've got to
Speaker 1: be very careful entering the retail space in Canada. There's
Speaker 1: a lot of people very anxious to do it. I'd
Speaker 1: be very cautious to do it because I think this
Speaker 1: is gonna be You're gonna have to have a high volume,
Speaker 1: low margin business. Maybe it changes when edibles and the
Speaker 1: secondary products come in, but I really worry for for
Speaker 1: those companies that I think they're going to do really well.
Speaker 1: And what we call it, we've been calling it is
Speaker 1: boxed in retail because you're boxed in by the seller
Speaker 1: to you, who's competing against you. It's it's an odd
Speaker 1: Canadian phenomenon. So just to be clear, when people are
Speaker 1: trying to wrap their heads around who's going to make
Speaker 1: the profit, it's really important to realize that the provinces
Speaker 1: have inserted themselves as essentially monopsony buyers of the product
Speaker 1: from the growers and monopoly sellers to the product to
Speaker 1: the retailers. So just from a pure echo one on
Speaker 1: one standpoint, you could sort of figure out who's going
Speaker 1: to take a huge slice of the profits in the
Speaker 1: whole thing. Plus they're they're layering on an excise tax
Speaker 1: and in a sales tax, so yeah, you could figure
Speaker 1: out who's who's making the problems. And I love the
Speaker 1: folks in the States too. I find them far more
Speaker 1: honest about why cannabis is going to be allowed. Eventually,
Speaker 1: it's about jobs, it's about taxation. In Canada, we've been
Speaker 1: saying it's about saving little Timmy from from getting his
Speaker 1: hands on cannabis at the local high school. We're gonna
Speaker 1: regulate it. It's it's been very health driven, which is
Speaker 1: a nice liberal message that that resonates a lot more.
Speaker 1: And I can see why it works better in Canada
Speaker 1: quite frankly, But at the end of the day, I'm
Speaker 1: a capitalistic nature and I find uh taxes and jobs
Speaker 1: really speak more to me than the health benefits. But
Speaker 1: they're they're are there. There's demonstrated drops in youth use
Speaker 1: when it becomes regulated, so we'll see. But yeah, they
Speaker 1: don't mistake Canada for the US. So when it comes
Speaker 1: to selecting a successful Canadian cannabis company, is the thing
Speaker 1: you want to look out for then just first move
Speaker 1: or advantage and economies of scale and efficiency. I think
Speaker 1: it's low cost production. I think it is can be
Speaker 1: very key. Uh, this is gonna be commoditized. It was
Speaker 1: very sexy when people were like these LPs with very
Speaker 1: little competition. We're selling medically because on the medical stream,
Speaker 1: just just to make the point, medical is still federally regulated.
Speaker 1: Medical only is sold from an LP online to a
Speaker 1: medical recipient who has a script, so that's not going
Speaker 1: to change when adult use comes up. That medical system,
Speaker 1: the direct delivery medical marijuana. We're not in pharmacies yet.
Speaker 1: Strapper's Drug Marder largest pharmacy chain, has a license, but
Speaker 1: they're gonna act like a central warehouser as well and
Speaker 1: ship to all their their customers of the pharmacy. So
Speaker 1: it was really nice selling things at nine dollars a
Speaker 1: graham that we're costing three dollars a graham. That's a
Speaker 1: heck of a margin. But when the provinces come in
Speaker 1: and compress that margin, that sales price down to four
Speaker 1: fifty three fifty a graham. You better be selling producing
Speaker 1: sub dollar in order to compete. So even if you
Speaker 1: if you want to farm it out and compete. So
Speaker 1: these first movers are all scaling large sets of production.
Speaker 1: But their cost structures are wildly different. And so even
Speaker 1: with these large greenhouses coming online, it's gonna skew the
Speaker 1: cost program of all these companies. But even if you
Speaker 1: don't want to grow it yourself, if you want to
Speaker 1: be big, you need acts as to enough and enough
Speaker 1: I'll put in really hard quotes there, low cost, good supply.
Speaker 1: So this is going to eventually be a branding game
Speaker 1: when it gets to edibles and vapes and and and
Speaker 1: the medical products. But you need access to the supply,
Speaker 1: good premium, good quality supply at a good cost. And
Speaker 1: so first movers are important because they've scaled the most,
Speaker 1: they've got access to all that capital, and they've built out.
Speaker 1: They've had a longer runway to build out. I'm very
Speaker 1: cautious about it, all the new entries, new entries in Canada,
Speaker 1: extremely cautious about all. Right, So we've sort of danced
Speaker 1: around this in the beginning and during this conversation, but
Speaker 1: we need to talk about the accounting treatment of gain
Speaker 1: on biologicals because this is the first time that I
Speaker 1: actually tried to really work through the P and L
Speaker 1: statement of a cannabis company. And I forget which one
Speaker 1: I was looking at maybe Chronos or something right up
Speaker 1: at the top of the income statement. I ran into
Speaker 1: this thing. I didn't understand this profit from gain on biologicals.
Speaker 1: And then you and I went back and forth and
Speaker 1: DM for like thirty minutes, and you try to explain
Speaker 1: it to me. But for anyone in the US investing
Speaker 1: in a Canadian company that doesn't use a GAP, but
Speaker 1: I f R S explain what this line is and
Speaker 1: how crucial it is to understanding this line in order
Speaker 1: to sort of judge the true profitability of the company. Yeah,
Speaker 1: first of all, it's ludicrous. It's uh, it's meant for
Speaker 1: think of a tequila producer where they're at gave A
Speaker 1: takes years and years to grow. Cannabis grows in at
Speaker 1: twelve into fourteen a week cycle. So this is an
Speaker 1: agricultural phenomenon and it's also in livestock as well. And
Speaker 1: what it allows the the producer to do is and
Speaker 1: I'll just talk about at harvest because it also impacts
Speaker 1: the growing plants, but the at harvest is the big dollars.
Speaker 1: So at harvest they get to treat it like they
Speaker 1: hold it and they get to capture the profit less
Speaker 1: any selling expense, So that would be like going into
Speaker 1: a ACE Hardware in the States, and ACE Hardware has
Speaker 1: already taken profit for everything that sits on their shelves
Speaker 1: less the selling expense. That's ludicrous. So there's two items
Speaker 1: that you have to look for, and I always use
Speaker 1: gross margin when I do my trend analysis. In my
Speaker 1: line analysis, I use gross margin before I f R
Speaker 1: as voodoo as I call it, because there's two items.
Speaker 1: There's the gain on biologicals, so that's all the growth
Speaker 1: in the the plant material the unharvested plants which is
Speaker 1: smaller than the harvested plants, um so they're taking profit
Speaker 1: as they grow, not as they sell. And you only
Speaker 1: get to take profit once you don't get to take
Speaker 1: it multiple times. Then the other line item is fair
Speaker 1: value increment on good sold in that quarter, and what
Speaker 1: that is is showing you how much profit they took
Speaker 1: when they actually harvested it versus when they sold it.
Speaker 1: So I'm always looking at management. And we talked about
Speaker 1: management earlier. If their production costs plus their fair value
Speaker 1: increment is greater than their quarterly sales, it means they
Speaker 1: were far too aggressive when they took the gain on
Speaker 1: biologicals in the first place, and it tells you a
Speaker 1: little bit about the company if they're gonna be that
Speaker 1: aggressive taking all the profit at harvest. You look at canopies,
Speaker 1: Vault Canopy has a hundred million plus in cannabis, all
Speaker 1: the profits gone. So everyone who thinks, oh, they're gonna
Speaker 1: sell the all that cannabis in the quarter one and
Speaker 1: quarter two of recreational and they're gonna make gobs of money. No, no, no,
Speaker 1: they already took all that profit. So it's very important
Speaker 1: when you're looking at this. I always use adjusted even
Speaker 1: that that is my drug of choice. It takes a
Speaker 1: lot of noise out of the equation, including gain on
Speaker 1: biologicals and fair value increment. But it's insane to actually
Speaker 1: accept even when it was just medical. The product gets harvested,
Speaker 1: it has to still pass q a QC quality Assurance,
Speaker 1: Quality control, and that takes four to five weeks. And
Speaker 1: unlike other agricultural goods, there's no futures market, so how
Speaker 1: do you actually figure out what the selling prices? So
Speaker 1: that was all left to management and it was all
Speaker 1: over the place, and UH to me that that there's
Speaker 1: a way too much noise in that to UH not
Speaker 1: back it out when you're doing your analysis. So I
Speaker 1: wanted to ask you about how the cannabis industry fits
Speaker 1: into the existing financial infrastructure. You mentioned there's no futures
Speaker 1: market at the moment. There also isn't a lot of
Speaker 1: analysts discussing the cannabis industry at the moment. UH and
Speaker 1: Joe alluded to this in our intro. But that's one
Speaker 1: of the reasons why the Canalysts is so interesting, because
Speaker 1: you guys are doing this analysis in a lot of detail,
Speaker 1: in a way in which Wall Street just isn't at
Speaker 1: the moment. Why do you think Wall Street is sort
Speaker 1: of behind on this one? Is it purely a question
Speaker 1: of the legality of the industry. I think they just
Speaker 1: found religion until Canopy and UH and Chronos listed in
Speaker 1: the US Canada was an afterthought. And so you get
Speaker 1: Canopy listing and UH and Jim Kramer UH talking it up.
Speaker 1: Then you get Chronos and then you get Till Ray
Speaker 1: and my, my, my mind, what a story that was.
Speaker 1: And you know how, I'm flattered that you think we're
Speaker 1: doing it well, because I gotta tell you, the people
Speaker 1: that I'm watching on the business shows in the States
Speaker 1: are doing it so poorly. They are uh, not talking
Speaker 1: about fundamentals. They're they're they're not talking about the fact
Speaker 1: that like till Ray, for example, the last quarter they
Speaker 1: ended the quarter with a finished goods inventory of eighty
Speaker 1: nine thousand dollars in flour and four and sixteen thousand
Speaker 1: dollars in oil extracts. No one's mentioned that. But if
Speaker 1: you're about to ramp up for ACT and it takes
Speaker 1: you four to five weeks after your harvest and you're
Speaker 1: sitting on under a day's worth of sales of finished goods,
Speaker 1: you've got some issues. And I love the til Reay guys,
Speaker 1: and they'll they'll get it figured out. They're very professional
Speaker 1: and executive. Their executive is fabulous. But not one mention
Speaker 1: of something like that, Not one mentioned in the media
Speaker 1: about waste. Even the Canadian media has been sadly lacking.
Speaker 1: Like I said, you can measure management without the financials
Speaker 1: in certain aspects. If you follow waste and you track
Speaker 1: through and dig through the m d na's management discussion
Speaker 1: analysis and the financial notes like we do, you can
Speaker 1: sometimes pinpoint how much waste these companies have and uh,
Speaker 1: some of them are over twenty six that's that's a
Speaker 1: little high if you're going to be at a consumer
Speaker 1: packaged goods industry. So I really think the listings in
Speaker 1: the US created the interest. I think the talking heads
Speaker 1: are talking heads. They they really don't know what they're
Speaker 1: looking at. They're fueling hype. And I got into this
Speaker 1: industry because, um, I didn't want to see Joe retail
Speaker 1: get taken advantage of. And that I have for or
Speaker 1: asked me was people getting taken advantage of. And so
Speaker 1: some of the the the cheering that's going on to
Speaker 1: me is a little irresponsible. It's bringing people into the
Speaker 1: market because it's hot and topical, not because it might
Speaker 1: be a good investment for their portfolio. Alright, So quick
Speaker 1: comment and then two very quick questions. First of all,
Speaker 1: I take that as a personal challenge as a as
Speaker 1: a business TV show co host to not be one
Speaker 1: of the talking heads and to actually live up to
Speaker 1: your standards. So I appreciate that comment. I'm it's something
Speaker 1: to strive towards. As for the two questions, one is
Speaker 1: a what is the future of the catalysts and where
Speaker 1: are you going to take it next? And be I
Speaker 1: just have to go back. You were talking about like
Speaker 1: what's going to be the hit strains, So like, is
Speaker 1: there a career where people can smoke pot and say, Okay,
Speaker 1: this is really fantastic stuff. Wow. I'll answer the first first.
Speaker 1: First of all, I hope you you dig deeper at
Speaker 1: the end of the day until it's until it's about
Speaker 1: the investor and not about the hits and the clicks.
Speaker 1: I think there it behooves us to to educate the
Speaker 1: investor because they're at such a disadvantage compared to the institutionals.
Speaker 1: Now I'll deal with your second one. It would be
Speaker 1: great and I think there's a lot of gamers out
Speaker 1: there that that would say, hey, it would be a
Speaker 1: nice adjunct to gaming if I can also comment on
Speaker 1: strains UH, and there is some strain review out there.
Speaker 1: What I can't wait for is for the myths to
Speaker 1: get busted and there there be actual like pepsi coke
Speaker 1: challenges where it isn't just preconceived notions. I can't wait
Speaker 1: for that. I think that's gonna be very interesting as
Speaker 1: to the future of the cannabis UH. In a year,
Speaker 1: we actually have a trade conference that we're doing in Leamington, Ontario,
Speaker 1: which is a small Hamlet just outside of Windsor, Ontario,
Speaker 1: which is about forty five minutes from Detroit, and we're
Speaker 1: actually doing a trade conference there with Grant Thornton. Uh
Speaker 1: this is within a year. Like we just released a
Speaker 1: video last week. And I can tell you if I
Speaker 1: told my partners back in last November, Hey, by the
Speaker 1: end of the year we'll have videos released and we'll
Speaker 1: be doing a trade conference, they would have hung up
Speaker 1: on me. So we're gonna go as far as our
Speaker 1: imaginations can take us and as far as our community
Speaker 1: will allow us to go. We're we're really focused on
Speaker 1: providing content to our community and making sure that they
Speaker 1: like what we do. And uh So, I don't know
Speaker 1: where we're going next. Quite frankly, it's it's very flattering
Speaker 1: that people like you, Joe, that that listen to me.
Speaker 1: My wife and my kids don't listen to me. But
Speaker 1: it's nice to know that there are some people out
Speaker 1: there that that find what I say and what Andrew
Speaker 1: and what Graham says as valuable in their investment decisions. Well,
Speaker 1: we wish you luck and I really appreciate you coming
Speaker 1: on and I, like I said, I do think it's
Speaker 1: important that the media moves beyond the hype and actually
Speaker 1: helps to educate people about what these companies are. So
Speaker 1: really appreciate your explanation. Freig Wiggins, thanks for coming up.
Speaker 1: Thank you very much for having me. It's been a pleasure, Trazy.
Speaker 1: I thought that really was like the perfect blend of
Speaker 1: my and your interests. You know what, I was really
Speaker 1: surprised about. We managed to go through that entire podcast
Speaker 1: without I think making a single uh marijuana pun. You
Speaker 1: know what. I'm so I'm so proud of us because
Speaker 1: I'm so tired of marijuana punt and I think it
Speaker 1: speaks to the uh, the degree of seriousness which with
Speaker 1: which we take it, and the maturation of the industry.
Speaker 1: And I I just I'm trying to kill marijuana punts
Speaker 1: every time I see them entitled or articles or so
Speaker 1: now they're they're bad. So I think that really does
Speaker 1: speak well of us that at no point in the
Speaker 1: conversation did occur to me to make one. Right, Um,
Speaker 1: There's one other thing that I was thinking throughout that discussion.
Speaker 1: Obviously we were focused on the financial and the business
Speaker 1: aspects of an entirely new industry, but if if you
Speaker 1: take a step back, it's also just really interesting to
Speaker 1: watch cultural and societal norms basically changing in our own time.
Speaker 1: You know, think back to twenty or thirty or forty
Speaker 1: or fifty years ago and the way people talked about
Speaker 1: pot marijuana, you know, reefer madness. People honestly thought that
Speaker 1: marijuana was something that was going to destroy entire societies.
Speaker 1: And now we're talking about the degree to which it
Speaker 1: should be legalized and basically incorporated into some people's daily lives.
Speaker 1: It's pretty amazing. Well, literally, n y C listing for
Speaker 1: a marijuana dealer is like about the pinnacle of cultural acceptance.
Speaker 1: I would say, so you think of like, nothing could
Speaker 1: be more normally and conservative than NYC NYC listing, And
Speaker 1: so I think there's something even though it's not fully legal,
Speaker 1: we're not legal across the United States, yet it's almost
Speaker 1: like that's even more striking. It's it's fully arrived by
Speaker 1: that point, right, or quality control for a Canadian provincial government, Yeah,
Speaker 1: or like I f r S treatment of how you
Speaker 1: account for from when you plant the marijuana to when
Speaker 1: it's sitting his inventory, it's pretty uh, it's pretty entrenched.
Speaker 1: It's here. Yeah, all right, Well this has been in
Speaker 1: another episode of the Odd Thoughts podcast. I'm Tracy Alloway.
Speaker 1: You can follow me on Twitter at Tracy Alloway, and
Speaker 1: I'm Joe Wise though. You can follow me on Twitter
Speaker 1: at the Stalwart, and you can follow our guest Craig
Speaker 1: Wiggins on Twitter. He is at Go Blue c d N.
Speaker 1: And you should follow our producer top for Foreheads at
Speaker 1: Foreheads T, as well as the Bloomberg head of podcast,
Speaker 1: Francesco Leaving at Francesco Today. Thanks for listening.