Recreation Lounges May Lift Sales Attributed to Tourism
State law limits consumption to private residences, barring all public spaces, including parks, schools and community centres. Gaming regulators and casino owners have positioned themselves against cannabis, banning its use on resort property in order to protect themselves from penalties by gaming authorities. Las Vegas officials are working to open the state's first marijuana consumption lounges by the end of the year. Officials are looking to implement hookah-style lounges for legal consumption by adults in a municipal Bill which was heard by a recommending committee in early October. If support for the Bill is garnered, the city would expect to start taking applications for lounges in November. This action would greatly facilitate access to legal cannabis for the approximately 40 MM tourists that visit the state each year, and could provide a lift for the market by increasing access to consumption points, driving higher demand for end products.
COMPANY LEADERSHIP
Management Team
Ken Villazor, Director, President & CEO - Mr. Villazor has a resume which includes numerous senior positions in the pharmaceutical industry working for companies such as SmithKline Beecham, GlaxoSmithKline and Biovail Corporation. His work in pharmaceuticals saw him exposed to government regulated aspects of commercial operations, including formulary/market access, pricing compliance, price controls, manufacturing grants, regulatory approvals and shaping government policies. Ken also possesses board experience having served on Organic Garage Ltd. (OG; Not Covered) since 2016 on its Audit, Governance and Compensation Committees. Ken's experience is not limited to the pharmaceutical industry, as he also spent over a decade in sports and entertainment as an Alternate Governor and advisor to the Ottawa Senators franchise of the National Hockey League.
Geoff Miachika, CFO - Mr. Miachika is a Chartered Professional Accountant who most recently held the position of Senior Manager at KPMG, where he worked for 10 years. His time at the firm provided exposure to audit, accounting advisory, securities engagements, mergers, acquisitions and dispositions.
Jean St. Martin, Corporate Secretary - Ms. St. Martin has over 19 years of experience practicing law, 11 years at her first firm where she reached the level of Partner followed by 6 years as a sole practitioner. Most recently, she has taken the role of Partner at another firm, Adamski, Moroski, Madden, Cumberland and Green. Her professional focus spans real estate and land use, environmental law, corporate and business law. Ms. St. Martin also possesses board experience having served as counsel to the boards of directors of several private US companies.
Amit Varma, Director - Mr. Varma has over 17 years of experience spanning corporate finance and banking, having worked with some of the largest financial institutions in Canada, as well as some of Canada's largest agriculture companies. Mr. Varma possesses corporate and client relationship development experience, having been responsible for sourcing, developing and maintaining relationships with strategic financial partners as it related to capital sourcing. Mr. Varma carries a resume that boasts delivering several billion dollars in different financing structures to companies in the public and private sectors.
David Wesley, Director - Mr. Wesley has extensive experience in commercial greenhouse operations, having delivered over $400MM of agriculture, office, industrial and other green field construction. Mr. Wesley also has extensive multi- national experience leading development efforts and regulatory compliance spanning local and federal agencies.
Warner Fong, Director - Mr. Fong is a certified professional accountant with over 25 years of experience in accounting and administration. For the past 14 years, he has devoted his career to senior management roles in the greenhouse industry, responsible for all reporting requirements, capital budgeting, cash flow management and developing internal control processes for new reporting entities.
Advisory Team
Steven Newell - Steven Newell has 30 years of agricultural experience, including the last 20 years working in all areas of large-scale commercial greenhouse operations. He has extensive experience in site selection, designing, permitting, planning and building commercial greenhouses and related processing and packaging facilities. He has developed strong relationships globally, including with international suppliers of technology and equipment. Steven attended Queens University School of Business.
John Newell - John Newell has 30 years of agricultural experience, including the last 20 years working in all areas of large-scale commercial greenhouse operations. His strong background spans all areas of sales and marketing, general management of greenhouse operations, developing and fostering third party grower relationships, and sourcing of bought in product. John majored in microbiology at University of British Columbia.
Anthony Martin - Mr. Martin has over 35 years of financial management experience in commercial greenhouse operations as a Chief Financial Officer since 2008. He was previously the CFO, COO and President of one of Canada’s Top 100 TSX listed issuers, and formerly the President and COO of the largest service provider of banking solutions to financial institutions and ATM networks. He has extensive knowledge of Canadian and U.S. taxation, accounting, financial reporting, capital markets, debt markets, corporate governance and operations. Mr. Martin holds a B.Com (Magna cumLaude) and Graduate Diploma in Accounting from Concordia University. He is a member of both the Canadian Institute of Certified Public Accountants – Chartered Accountants and the Quebec Order of Certified Public Accountants – Chartered Accountants.
RISKS
Federal interference with lawful state businesses - Cannabis remains a controlled substance and illegal at the federal level. Appropriation Bills passed by the United States Congress limit the use of federal funds for prosecution of state legal medical cannabis businesses, but not adult-use entities. In addition, these appropriations are temporary in nature and must be renewed each year, with no guarantee that they will be renewed. In the event that Appropriation Bills are not renewed and/or the federal or state justice departments make the decision to take legal action against cannabis business operators, individuals or businesses could be prosecuted for violations of federal law despite being in compliance with state law. Violations of federal law could result in fines, penalties, sanctions and/or convictions which could adversely affect a business or result in it shutting down. Enforcement approaches/priorities and political attitudes are also subject to rapid change, as evidenced by the rescission of the Cole memo. While probability of the prosecution of state compliant cannabis businesses currently appears to be low, it is impossible to predict whether or not federal law enforcement and law makers will change their outlooks moving forward.
Access to capital and liquidity - Federal law governing banking activity and securities exchanges makes access to traditional debt and equity markets a challenge. While private debt is available, it often carries a high cost of borrowing. Public equity markets in Canada have been available to date; however, shifts in the market on a micro or macro level could reduce investor appetite for high growth investments, subsequently reducing access to equity capital markets. Without access to growth capital, US cannabis businesses will have a difficult time in fueling growth and strategic initiatives, and in some cases, day-to-day operations. Additionally, US cannabis companies with shares listed on the CSE rely on the Canadian Depository for Securities Limited (CDS) to clear and settle trades. While the TMX Group, which owns the CDS, has signed an MOU with the CSE regarding regulatory oversight and review of cannabis related issuers, there can be no guarantee that the CDS's stance will change in the future. If the CDS ceased to clear and settle trades for issuers with US cannabis operations, it would have a material adverse effect on the ability of shareholders to clear and settle trades, and would result in the securities of US cannabis issuers becoming highly illiquid until a suitable alternative is implemented.
Heightened scrutiny - Due to the operating environment, US cannabis businesses often face heightened scrutiny from banking, tax, securities and licensing authorities/regulators. The increased cost of compliance can place an additional financial burden on firms, affecting their profitability. Failure to comply with laws/regulations could also have adverse effects on the financial results and ability for the business to carry on its regular operations. In addition, a sudden change in laws or policies from a securities, tax, and legal, etc. perspective could materially alter the ability for the business to operate in an efficient manner. Scrutiny also extends to third party services providers, which could decide to cease having a relationship with a cannabis business which could further affect revenues, expenses and financial health of a company.
Increased competition - Some states have limited licensing, while others have no caps on the number of licenses awarded. Increased access to capital also increases the number of market players competing for limited market share. As time goes on, the level of competition in a state may increase, making it harder for a company to retain its current level of market share.
Licensing - US cannabis businesses are subject to a number of state and local level licenses to manufacture, process, package, distribute, transport and sell cannabis and its related products. Licenses often require renewal with the period of time between renewals varying. Failure to obtain and/or renew the necessary licenses could materially affect a Company's ability to operate in its preferred operating environment.
Consumer adoption - Legal cannabis markets compete with the existing illicit market. We believe that consumers will eventually shift to the legal market; however, there are no guarantees. With no established legal marketplace or operating history, uncertainty remains over consumer adoption of the legal market, and with that, the various products, brands and SKUs that consumers will ultimately prefer. If an operator does not effectively cater to consumer needs, it could materially impact the estimated market share we believe it can achieve, impacting its overall profitability. Cannabis businesses are also reliant on increasing consumer adoption from the general public that may have never consumed cannabis before. If social attitudes toward cannabis shift toward one of abstinence, it could have a material adverse effect on a company's growth prospects.
Scaling - The effective use of capital in scaling up cultivation, distribution, processing or retail operations is a key element in driving returns on capital for shareholders. The on-time and on-budget build out of facilities is key to building operations and increasing market share. Failure to effectively scale could materially impact a company's profitability and competitiveness in a nascent marketplace.
Product quality - State law largely outlines strict rules for quality assessment and control, cleanliness, manufacturing, pesticide use, etc. and tests are routinely carried out. Failure to adhere to these standards could result in product recalls, product liability, loss of reputation and increased costs to produce.
Pricing and cost - Pricing in the US market can be extremely volatile, depending on the demand and number of cultivators in the state. The ability to effectively control costs and maximize revenue per unit sold is a key element in achieving profitability over time.
Taxation - 280E regulations can result in effective tax rates over 50%, which has a material adverse impact on the profitability of a company. There is no certainty as to whether or not the tax regulations will change, for better or for worse, in the near future.
Distribution and logistics - Having the proper scale on both brick-and-mortar and online retail outlets, along with the wholesale and logistical infrastructure to support them, will be key in creating a retail network that facilitates sales and ultimately profits for US cannabis businesses. A lack of scale or disruption of a retail/distribution network could have large implications for sales volumes.
Biological assets - Cannabis is a biological asset that can be prone to pests, disease and other means of crop failure. Preventing and/or mitigating pests and disease and promoting a clean and healthy growing environment for crops have significant impacts on plant yields, production costs and producer margins. As a result of entities rapidly scaling and adapting to newly constructed facilities and grow environments, the risk of biological asset loss has the potential to increase, which can negatively affect costs, product quality and profitability.