Investment banking is a complicated subject for most individuals. Many startup companies fail because their leaders choose not to learn about the nuances of raising capital and growing sustainably.
MJIC Media and the Marijuana Investor Summit events capture the most useful information and share it with the larger cannabis industry. One of their most exciting events of the year, the Cannabis Capital Growth Conference in Las Vegas, is currently in progress.
The first day of the conference touched on topics like navigating Nevada’s local medical cannabis regulations, taking a company from private to public status, and the growing issue of cannabis companies using reverse mergers to go public with less funds and little to no federal regulation. A few public company pitches were also included, providing a fascinating window into some of this industry’s very first publicly traded success stories.
Overwhelming? Yes. Enlightening? Very.
The afternoon gave way to a handful of informative speaker sessions, Q&A, and some prime networking. Read on for a snapshot of each session.
Sandra Tiffany, former Nevada State Senator and the GM of GrowBlox Sciences ($GBLX), shared her journey through the medical cannabis licensing process in Nevada after leaving public office.
Tiffany struggled with obtaining proper funding and licensing for her cultivation business, until she bought out her former business partners and merged her cultivation licenses with GrowBlox Sciences in order to have more leverage in the licensing process.
“I can’t stress partnerships enough in this industry,” she said.
Tiffany also gave a great breakdown of how Nevada’s cannabis landscape is different from any other region of the US.
Due to its constant influx of leisure tourism and business travelers, and plethora of affluent and savvy jet-set types, Nevada created a unique and inclusive medical cannabis program that contrasts sharply with states like California and Arizona. First, Nevada’s dispensaries are for-profit entities, allowing for greater development of capital in the local industry (and investment opportunities for the wealthy). Second, the state allows out-of-state holders of medical cannabis recommendations to purchase from Nevada dispensaries, capitalizing further on its tourist population. Nevada medical cannabis licenses are also open to applicants from out-of-state.
The dispensary program has really just taken off, and Nevada votes on adult use in November 2016. Tiffany is confident that the openness of the policy will promote exponential growth, making Nevada one of the most promising areas for cannabis investment in the next few years.
Regulators in Nevada are already experts in dealing with privilege license, having managed regulation, taxation and enforcement for bars and nightclubs and casino gaming, as well as adult entertainment and brothels – all high volume and cash-intensive industries.
The former legislator encourages anyone interested in investing to first do your homework: meet with your potential partners, tour facilities, and ensure compliance processes are in place before jumping into the rich ecosystem of the growing Nevada cannabis industry.
Using & Abusing Shells as Public Vehicles
The SEC and FINRA do not look fondly on these mergers because they allow companies to bypass many of the regulatory hurdles that keep the financial industry regulated. One company is “absorbing” the other without necessarily going through the normal channels. It’s quick and less expensive than a traditional IPO, and for companies who work directly with the cannabis plant, it provides a sense of security that the business may not be audited or scrutinized as closely.
It makes sense, as getting traditional financing is difficult in the cannabis space, so entrepreneurs often turn to bad options, often with huge interest rates and leading to significant debt.
SEC violations are occurring at an alarming rate now, because the cannabis industry is growing so quickly, and the SEC has suspended a few companies as an example. In the few years that cannabis has been moving into the mainstream, there is already a history of outlandish reverse splits to capture liquidity. Now investor confidence is down, and federal scrutiny is up.
David Friedman, who moderated questions for Horwitz, shared his two cents on an important issue as well. Industry insiders may have noticed an increasing prevalence of investor relations (IR) firms. These are public relations agencies whose primary focus is to share their clients’ corporate and financial news and facilitate communication with shareholders.
According to Horwitz, the activities of some of these IR firms border on the “pump and dump” media tactic that is cause for investigation in the financial industry – specifically, spinning subjective news in press releases while tagging it as investing-quality news, or creating excessive or unreasonable hype about new public companies “just to get their name out.”
“News comes from actual newsworthy things happening in the company – not the PR or IR firm,” said Horwitz. “Research studies, thought leadership, and legislation advocacy are all excellent ways of creating news for the company in a non-promotional manner. It takes time to build genuine interest in your stock.”
What to look for in an IR firm? Ask for information and histories on some of their portfolio companies, and obtain references and examples of their successful trading history. “If they say ‘that’s confidential?’ Run. That information is not confidential and they should be able to produce references and examples of their work,” said Horwitz.
More wisdom from Larry Horwitz:
- In the cannabis industry, with a few exceptions, the “best of breed” companies are not going public right now.
- Watch the volume differences over time on the cannabis stocks to see if they are really trading, or if the company is adjusting the price point in a way that doesn’t make sense.
- “The capital drives the deal” – while on the ground level of the industry, ideas and trades can be as good as currency, playing in the investment banking world still requires some serious cash-on-hand.
Public Company Pitches
CLS Labs ($CLSH)
Jeff Binder, an attorney by trade and the founder of many companies across several industries, made his jump to the cannabis industry in order to create something different and profitable. The result was Cannabis Life Sciences Holdings, a Colorado-based company specializing in whole-plant cannabis extractions, as well as some business services.
The foundation of the company is scientific, centered around a proprietary, patent-pending chemical process that allows them to achieve a higher cannabinoid yield within the cannabis plant. pure & consistent process
It’s a cleaner extraction than those done with butane, which CLS Labs is lobbying to get banned from the industry, as the process leaves behind carcinogens and heavy metals, while running the risk of explosion during the extraction process.
CLS Labs uses a similar method to ethanol extraction, but what makes their process unique is that they can actively separate the various cannabinoid compounds, including the terpenes of the plant.
Four things that make CLS Labs different from other processors in the space:
- Strong Profit Motive
- They process the entire plant, even crystals from the trim floor to maximize yield, and have consistently acheived higher THC return than any other, providing value and quality to customers
- Emphasis on Labeling & Testing
- Binder believes that testing regulations should be more stringent and include more substances, and that labeling must be standardized across state lines to include testing data
- Providing a “One-Stop-Shop”
- CLS Labs handles plant, oil, packaging, and vape cartridge filling technology, helping to serve local customers and “whitelabel” products for out-of-state sale
- Binder ensures money goes toward studying the medical aspects of the plant and providing treatments to children who cannot afford it
Binder says the company’s future success lies in getting in front of federal regulations. CLS Labs is OSHA compliant with lengthy & detailed standard operating procedures that are sure to satisfy regulators.
Daniel Yazbeck, an entrepreneur with experience at Pfizer Pharmaceuticals and Panasonic’s medical technology, started his own company in San Diego and developed the world’s tiniest chemical analysis machine: MyDx. Its three variations can be used to test carcinogens in food, EPA-standard air quality, and with the CannaDx, the cannabinoid, terpene and pesticide levels in cannabis.
Playing on consumers’ increasing interest and mindfulness of what they put into their minds & bodies, the device comes fully integrated with a mobile app component where users can journal their chemical measurements, and, for cannabis, the corresponding feelings or side effects for every flower they’ve tested. Users can mine their own database at any time, and with time, the app will begin to make custom recommendations based on the user’s past tests and recorded effects.
“The vision was to make the testing lab simple and portable for consumer use,” said Yazbeck. “We also want people to learn that when it comes to testing, it’s not all about THC; it’s about the TCP, or total chemical profile, of each cannabis strain.”
MyDx has an amazing product, but it’s also a success story in going public. It reverse-merged to become a public company in 2014, then uplisted to OTCQB in May 2015. The company will be reporting its first financial statements in February. MyDx grew 74 percent to $2.7b by 2014, and with increased marketing and adoption, is projecting $10.8b by 2018.
Taking the “razor and razorblade” recurring revenue approach, MyDx requires that sensor inserts be changed every six months, and also charges $2 for every completed test.
The company boasts HIPAA compliant data, regulator support, and heavy intellectual property patent protection.
Stay tuned for a brief recap of the conference’s second day, jam-packed with more informative expert speakers.