During the Lift & Co Cannabis Expo in Toronto (May 25-27) the Investing News Network (INN) had the opportunity to catch up with Aaron Salz the CEO of Stoic Advisory, a firm working with cannabis companies on corporate finance.
Salz participated at the conference through two different panels. On Thursday (May 24) he served as a speaker for an investing panel on the Cannabis Business Conference day. Then on Saturday (May 26), Salz was part of a startup cannabis company pitch competition where he acted as a judge alongside other experts.
So far 2018 has been largely dominated by advancements in consolidation and M&A activity among cannabis ventures. Salz said he sees two driving forces causing this effect, with one being the need by some of the larger companies attempting to extend their reach.
“You have companies that are trying to be the largest in the industry,” Salz said. “They want better access to capital, they want better trading liquidity, they just want to be big as humanly possible and have as much cash as possible.”
Investors in the space will find Salz provided poignant commentary on an industry he has been following through closely. Salz critical points on the development of the cannabis space can also be found on his personal Twitter (NYSE:TWTR) where he comments on the market news.
To watch the interview scroll to the top of the article to find out more about what Salz had to say. The full transcript of the interview will be added shortly.
Watch the video above for more insight from Salz on how to navigate the evolving cannabis space. You can also read the transcript below.
INN: For the Investing News Network, I’m Bryan Mc Govern, here at the Toronto Lift Expo. Here with me today, Aaron Salz from the Stoic Advisory. Aaron thank you so much for your time today.
AS: Thanks for having me.
INN: First off, can you remind our audience exactly what you do on an everyday basis and what Stoic is doing?
AS: Sure, yeah. So Stoic Advisory is a corporate finance advisory firm, which is a fancy way to say we advise companies on anything linked to the capital markets whether it’s M&A advisories in markets and acquisitions. Whether it’s helping them structure different sorts of deal demands into other companies, partnerships, investments, those sorts of things. We help companies go public and we also can help advise companies on ways they can potentially raise capital.
INN: Yeah. So crazy year so far for the cannabis industry. We’ve seen a lot of M&A. We’ve got a lot of predictions about that earlier in the year from cannabis analysts. What’s kind of your take so far as to the impact we’ve had in all these acquisitions that have been happening?
AS: Yeah, so I think, I think there are two driving forces really of M&A so far. It’s – it’s some of the larger companies that are trying to combine and just get larger for the sake of getting larger, I think in many cases. You have companies that are trying to be the largest company in the industry, they want better access to capital, they want better trading liquidity. They just want to be as big as humanly possible, as much cash as possible, and to have what you call I guess a “war chest” for further acquisitions, and for global expansion. And then I think you have a lot of M&A in which you are seeing more in the mid and small-cap companies. They are either acquiring or merging to try and solve the problems that they may have. So WeedMD (TSXV: WMD) and Hiku Brands (CSE:HIKU) would be the perfect example. You have Hiku which is a company that is recreationally focused with brands and retail. Then you have WeedMD which is very medical and cultivation focused and so the combination of those two companies really solve problems on both sides. Hiku is able to bring a larger cultivation platform which lets WeedMD perfectly integrated, and they brought in a medical platform as well. And, for WeedMD it solves their problems of needing brand, and needing retail and needing access to that recreational market. So I think you’ll see generally synergistic type deals where it’s companies trying to solve each other’s problems. Then you’ll see deals where companies are trying to gain size and scale from a production standpoint, from an asset standpoint, and most importantly cash and market capital so they can just be bigger and do bigger things.
INN: Yeah, some of the bigger LP’s, you know, the biggest names out there feel like they’re doing a lot of these deals, like you said, to get bigger, and to keep expanding their production. For the mid to smaller guys who are still in the public space what’s that kind of landscape looking right now? So we’ve seen a lot of people say who’s next, or what’s coming up next for these companies? Or, they are now a perfect company to be acquired. For these companies in that mid-space is it still appealing to keep doing their business or keep doing their thing, or to maybe even seek those acquisitions.
AS: Yeah, I think there’s – I mean there’s a lot of companies up for sale right now. I think companies are nervous that if they don’t get to a certain size before say legalization they may be forgotten or, you know, orphaned in the public markets which is why you are seeing all this kind of frenzy of activity. I think to me it’s clear that oversupply is coming. You know, in our model we have 2 to 2 and a half million kilos of funded capacity. In Canada, at its absolute peak, they only demand a million kilos, years from now. I think for a lot of these companies from the mid to small caps start to think ‘how do we actually differentiate our strategy. We don’t necessarily want to be the farmers, there’s enough product in the market already. I think what you’re seeing in sort of the mid to small caps is they’re all trying to climb their path in terms of what’s going to be my unique differentiator. How am I going to keep my edge? How am I going to build a moat around my business? And so you starting to see companies focus on different sort of verticals of cannabis. They’re either going may be very hardcore into retail. They are going very specific into a certain product type, like a dose vaporizer or something like that. So I think these smaller mid-cap companies are realizing they can’t compete on scale of cultivation. They need to compete elsewhere, and you are seeing more investment in, you know, brand and retail and product as opposed to just dealing dirt in the ground.
INN: Yeah. Another major announcement for the industry at large is the entry of the major banks in Canada. Can you talk about how crucial that has been as a development this year?
AS: Yeah, so I think when any industry is maturing going from sort of small and penny stock type of industry to more mature blue chip type investable market. It’s usually driven by big banks coming in, it’s driven by institutional style investors. So far it’s largely been retail investors that have been driving the market in cannabis and pot stocks, if you want to call them that. And, so when you see big banks come in and definitely is sort of legitimizing what’s happening in the capital markets. And, that should really bring flow of funds from larger institutional funds and larger mutual funds, and all that really does two things for the market. Again, it legitimizes things…
AS: …but it also brings added trading liquidity and it should make things more efficient. Everyone talks about how potentially overvalued cannabis stocks are, maybe they’re undervalued, and it’s usually institutional investors that ride that efficiency to what is fair value. And, so I think it’s really important for legitimacy and efficiency and just maturity of cannabis capital markets.
INN: Yeah. There has been a fair amount of criticism towards the valuation of these companies. Where they are right now and especially where the M&A activity – how much is it actually worth it if that’s the deal that’s taking place right now. Now I wanted to ask you earlier in the year we had a huge market correction that drove a lot of the stocks down.
INN: Since then I feel a lot of investors are desperately looking for that next catalyst, that next announcement, and a lot of observers have predicted that the official date of legalization will be that major driver. Do you expect that yourself?
AS: Well I think – I think on or before June 7th if we actually get royal assent to the bill, I think that will be really important. In saying that, I mean the expectation is that we meet the deadline. We can’t let it beat that expectation so we either miss or we meet expectations which isn’t really a tremendously positive thing. I think people will be quite excited about it, but summers are usually slow so I think we could have potentially a small trade into that kind of June date, and then summers, again, are just are always slow, and cannabis historically can be a very seasonal trade so…
AS: …and typically that seasonality is the fall. There always must be something in the fall. Last year it was the task force report. This year it’s the actual start of our, you know, legal market. And, I think people will still see risk in timelines until stores open.
AS: So to me the big kind of driving catalyst is more going to be when that first store opens and that first person walks in and walks out with a gram.
AS: And, you know, I think to me that’s more of the driving catalyst and back to my other point in terms of flow of funds I think the institutional investors as well are waiting to see that happen before they really commit their own funds to investing in these companies.
INN: Yeah. Now as the last thing I feel like every time I ask an expert can you give advice to new investors coming in the size of the industry keeps just growing more and more since the last time we spoke about that. You know, as soon as the public launch of these companies there are so many options now.
INN: There are so many things out there on the TSX, and on the TSXV, on the CSE, US options, US coming over here. You know, how do new investors just like get a sense of what’s happening right now?
AS: Yeah, it’s a really good question, I mean it’s really tricky. I think – I think you need to have a diversified portfolio so you should pick a handful of sort of the small – the larger cap companies that most people trust and understand, and then you can go into the mid and small-cap range and pick their spots. I think people as investors you should always invest in things you understand. You should always invest in things you can even, you know, relate to and so if you’re are a person let’s say that is particularly passionate about pets or something like that, and there might be, you know, a pet, you know, cannabis company for you. Or, if you are particularly passionate about the medical side of it and delivery mechanisms there might be, you know, a company that’s specializing in dose vaporizers or something like that. So I think it’s having a diversified portfolio in large small mid-cap companies and sticking to your strengths and making sure you understand what you’re investing in.
INN: Okay. Aaron, thank you so much for your time today. I really appreciate it.
AS: Thank you.
INN: For the Investing News Network from the Toronto Lift Expo, I’m Bryan Mc Govern.
Don’t forget to follow us @INN_Cannabis for real-time updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Editorial Disclosure: WeedMD and Hiku Brands are clients of the Investing News Network. This article is not paid for content.