Editors’ Note: This is the transcript version of the podcast we published last Wednesday with Jon Sandelman. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy!
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Rena Sherbill: Welcome again to the Cannabis Investing podcast, where we speak with C-level executives, scientists and law and sector experts to provide actionable investment insight and the context with which to understand the burgeoning cannabis industry.
I’m your host, Rena Sherbill. Hi again, everybody. Welcome back to the show. Glad to have you with us. Excited to bring you the show today. We’re talking to Jon Sandelman, CEO of AYR Strategies (OTCQX:AYRSF), which is a U.S. MSO multi-state operator, a company that is cash flow positive, rare in the industry.
Interesting to hear what Jon has to say about being cash flow positive, building that financial discipline, which I would say is the number one takeaway from this episode. And, in general, something we keep harping about the importance of what’s happening in the balance sheets of any given company that you’re looking at.
And something Jon talks about is building that discipline, it doesn’t just come in a year. That’s a strategy that a company builds from the beginning. And at times like this, when assets are distressed, things are to be found on the cheap, a lot more value in partnering or picking up assets at this point than it was a year ago.
So a company that’s been building towards that, that has the cash on hand to be able to implement those strategies, that takes discipline something Jon talks about leading a company through that with that financial discipline, something salient to look for when you’re investing.
The second takeaway I would say is the interesting point Jon brings up about in most given industries, there’s five leaders. And how AYR is positioning itself to be one, at least, of those leaders and what it takes to get to the top of the U.S. cannabis industry, the biggest market, obviously, in the world, what it means to focus on that. Does federal descheduling help or hinder? Does it matter? The States going by a state-by-state approach, which looks more likely at this point, given the state of the world, what that means for an MSO going forward.
The third point I would say is the importance of building an edge in the industry. It’s something that Jon talks about – what brought him into the industry that he wouldn’t get into the cannabis industry, not just for the opportunity, but he wanted to bring an edge. It’s something we’ve heard from guests before.
What is it that they have that’s unique, either in their company or in their background? Or what are they – what’s their innovation that they’re bringing to the table? What are they moving forward in the industry? And Jon talks about that from becoming a SPAC through AYR Strategies at – in its current iteration, what that looks like. What kind of edge they’re building.
So really great to hear from Jon and really fun to see the Cannabis stocks, especially the ones in our portfolio, doing well soaring. Follow us along on Twitter. That’s @canpod1. A lot more discussion happening there. AYR Strategies is actually on our watch list. So really exciting times in the industry. Excited to bring you the interview today.
And before we begin, a brief disclaimer. Nothing on this podcast should be taken as investment advice of any sort. And in my model cannabis portfolio, I’m long Trulieve, Khiron, GrowGeneration, Curaleaf, Vireo Health and Isracann BioSciences. You can subscribe to us on Libsyn, Apple Podcasts, Spotify, Google Play and Stitcher.
Jon, welcome to the Cannabis Investing Podcast. Really, happy to have you on the show today. Thanks for joining us.
Jon Sandelman: Thank you for inviting me.
RS: So talk to us about how you got to AYR? How it was formed? But also how you came to the cannabis sector, in general?
JS: So by way of background, I’m a 35-year finance individual. I’ve been investing since I’m a young man, actually, started with my bar mitzvah money. But I got to Salomon Brothers in 1985, and very quickly became one of the youngest partners and eventually ran all global proprietary trading for the equity side of the bank.
I left there and did a joint venture with Bank of America for financial products business again as an investor and then eventually became President of its Securities company. After a period of time, I opened up Sandelman Partners, which was a multi-strategy hedge fund. And then in 2010, I decided to close that and start a family office.
So I’ve been an investor in my whole life. And the lessons that I’ve learned is, when I invest in my core competency, I tend to win. And when I stray from my core competency, I always lose. So with that discipline, we started investing our capital in the family office.
In 2017, like most days, I got a call from someone who was showing me an opportunity. And they said, “Hi, Jon.” I said, “Hi.” They said, “I got the opportunity for you.” Fantastic. It’s an industry growing at 30%. It’s highly fragmented and it lacks capital. So I said, “Well, I’m searching for those ideas every day. How did you find one of these? I said, What could it be?” He goes, “it’s cannabis.” I say, “not my core competency.”
So I passed on the idea. And he said, “No, no, no, I need you to meet this individual. And I think that if you heard what was happening in the industry, you could become interested.” So I agreed to meet the individual, because I was going out West on a family vacation. He came to have lunch with our family. And he described what was then transpiring in the U.S. in the cannabis business.
And again, I walked away saying, “This is not really something I can bring an edge to. I don’t typically invest unless I bring an edge.” If I’m the same as everyone else, then I should expect a commoditized return, so not my focus. But then I started to notice the Canadian LPs start to trade very actively. And this market was pretty robust.
So I did some work to find out why this cannabis idea was so interesting. And what we do in our family office and what I’ve always done is help investors to do deep dives on a lot of research. And what I found now that in the States, in the United States, where cannabis and beer were both legal, beer sales were trending down. And millennials were turning away from alcohol and more focused on weed.
So I did more work and I said, “Yes, but it’s illegal. And Jeff Sessions is threatening everyone at that time. What power does he really have?” And turns out, if you read the most recent budget – federal budget at the time, there was an amendment called the Rohrabacher amendment. And it specifically said that Jeff Sessions, the Justice Department couldn’t use any of their budget to go after marijuana companies.
So then I say to myself, because I’ve been an arbitrageur in my whole life. There may be this misperception arbitrage, the perception of Jeff Sessions threatening and being actually able to prosecute is a misperception. And therefore, the values that I see in the market is a misperception arbitrage. They’re just too cheap versus the threat.
So I called back the individual who educated me. And they said, I would like to do a SPAC. The SPAC is a special purpose acquisition company. Sell it, issue it in Canada to do this arb, sell in the rich market, Canada, are the only legal market to buy these assets that we’re being overly penalized for an incorrect perceived threat.
So again, what I’ve done my whole life, lots of research arbitrage. Sell into the Canadian rich market, the only legal market to take advantage of a roll-up opportunity in the U.S. because I saw at that time because of the consumer appetite, the beer sales, consumer tastes switching from alcohol to cannabis, this would be one of the great forward CPG opportunities.
RS: And how did you decide to go the route of an SPAC as opposed to, I don’t know, coming on board a U.S. company or going to one established, how did you decide to go that route?
JS: So my background is essentially a financial engineer. I’m a mathematician. The reason why I used this SPAC is because, at this point, there were no RTOs. There had been no public companies that were issuing in Canada and trying to roll up the U.S. opportunity. We were the first. We started in March of 2017. We included our roadshow and raised our money in December 2017. So we were the first.
The reason why I used a SPAC is because of the optionality embedded in the vehicle. When I went to market, the reason why I thought the SPAC was so interesting is, because when the investors give you their money until you acquire a company, which could be 18 to 24 months later, their money is sitting in treasuries.
So let’s think about the environment at the time. People were scared of Sessions. They were scared to invest in the U.S., because they didn’t want to get arrested, and maybe that environment would change over the 18 to 24 months. So I’m an investor. I said, “Well, it’s an interesting concept, Jon, that you tell me, but how do I know it’s true?”
And I would say, “Your money is sitting in treasuries. And in 18 months, the environment changes or becomes more clear. And what I’ve done in my whole life for my personal portfolio is create free optionality. So I get paid 2%. If the environment changes, then those options that you’re long would go deep, deep in the money, and you would make an outsized return.”
And so I’m not sure if I didn’t employ us back at that time, I would get – I would be able to find investors that would be willing to invest in the U.S. At that time, there was no investment in the U.S. It was all about the Canadian LPs. In fact, when I started calling underwriters and telling them what my concept was to sell in Canada by the U.S., three or four underwriters wouldn’t even take the underwriting. It was only Canaccord in Canada that agreed to do it.
RS: That’s interesting. How quickly – well – and maybe not so quickly, but things certainly do change. So how was it? How has it been these past few years since you’ve gotten involved? What have you kind of been surprised by and what are you more encouraged by?
JS: So early on in part of my research, I understood this could be one of the great CPG industries. But the other part of the work that I started to understand and get excited about two other aspects, one, the demographic appeal of the product. So I didn’t, in my investing history, ever see a product that is demographically appealing across a diverse spectrum? What do I mean? Millennials like it. Moms like it. Dads like it. My mother is 88, likes it.
So I said, this is the only product that compares to sugar, like every demographic group likes sugar, and this has the same demographic appeal. The only difference my research showed me is, it was about form factor, how people wanted to ingest their THC. So for each demographic group, they tended to favor different form factors.
Additionally, what I looked around and noticed is that people were trying to really sell a differentiation in product. And the way I thought about it, because my family, my father was in the advertising marketing business. When I examined the product, what I determined is THC. This is going to be a secret, I’m going to share with you a chemical compound. So I compared it when I talked to investors. 10 years ago, I’d go to a liquor store and there’d be one bottle of rose. Now when I walk in, there’s 50 beautiful bottles. And it had more – has more to do when people walk in. They’re all pink, the shape of the bottle determines consumer appetite. And so that found knowledge that it’s a chemical compound. And really the differentiator will be branding, will be packaging, will be messaging, really set us apart.
Now, I bought five companies in the SPAC, no SPAC in the history had ever done five companies. And, Rena, I know why, because it’s super hard. I wouldn’t want to do it again. We closed all five companies on the same day. And the SPAC turned out to be one of the best performing SPACs in their history of SPACs, because we hit the market… sometimes you just got to get lucky and we just hit the market at the right time.
Now, my theory in life, yes, you got to get lucky. But you got to have your net in the water to get fish. So luckily in 2017, we acknowledged what the arb was. We acknowledged what the opportunity set was. We picked the right vehicle, which was the SPAC. We bought the best five-in-class operators in the markets we bought it.
But most importantly, Rena, and this is what’s so relevant today, because I’m a finance person and I’m super disciplined, from day one, I said, “I’m only going to buy companies that are both EBITDA and cash flow positive.” So the company would be EBITDA positive from day one.
Now why is that relevant? Because the market as we de-SPAC’d became AYR, we went from Cannabis Strategy Acquisition Corp. SPAC to AYR, the MSO. And because as I said to you, I never enter a market unless I have an edge. When I looked around over time as other people RTO and raised money to invest in the U.S. market, I was the only finance veteran. That was my hit.
I knew that I’d run my business as a very disciplined company, that would be an excellent steward of shareholders capital. That was important. I understood a fortress balance sheet. I understood EBITDA and cash flow positive, would be very helpful, because, Rena, markets are cyclical. And that was lost on the investment community and the MSO executives.
RS: Yes, I think people saw a straight line up and there wasn’t a ton of strategizing. And certainly, I think at the time that you’re talking about a lot of emphasis was put on expansion and scaling and not much was put on profitability and which we’re seeing now kind of a lot of companies paying the price for that I think.
JS: Well, the market’s in chaos now, and it was overly aggressive. And markets, the stocks would rally on the land grab. So I used to say to my team, let our competitors grab states. We’re going to grab talent. For 35 years, I’ve made my money and my investors’ money by having the best culture and the best talent and being completely transparent with the public. Whoever has the best team wins. And for me, talent, Rena, has always been there. It’s always about the people.
I say to my team, I’m not the smartest person, I’m just a great chooser of talent. And so I say to my team, let them do the land grab, stick their flag wherever they’re offered a license. But because the talent pool in this industry, because it’s a nascent, industry is so shallow, they’ll never be able to operate in 16 states.
RS: Are you attributing it to a point of talent more than anything else?
JS: So, I have this view when I meet people and I asked them to join, I actually ran and look at their resume. And if you’re 40 years old, and you’ve never had a success in your entire life, I ask you why? Okay. So if you think about the people, again, the edge, what did I bring? What did my team bring to this industry? Did we have an edge? Yes, we’re disciplined financial individuals.
At the end of the day, you need a disciplined balance sheet, because markets again are cyclical. And if you build your business, which many did based on the cheap – cheapest equity capital in the world, which is Canadian retail capital, okay, which is not – it’s not permanent in capital, which is momentum-driven. And the price that it’s offered is artificially low. That if you got any blip in the direction from the left quadrant to the right quadrant, any, you would get sidelined. That’s how tenuous the business plans were and the balance sheets.
And so the analogy I used to my board a few weeks ago before we got closed down in Massachusetts in Nevada when we all started talking about our plan for COVID was a very simple analogy. If you think about the tale of the three pigs, right, one pig was building a brick house, and the other ones were building straw houses and dancing and singing. And I could never tell you that it was COVID that would be the catalyst for the environment we find ourselves today. But I knew there would be a catalyst, because if you build your business priced for perfection, how often do we realize perfection?
RS: In terms of COVID kind of showing who is swimming naked, I guess, the tides – this high tide is coming. How surprised are you in terms of kind of the sheer capital crunch that, that so many companies are suffering from? And what do you think that does to the state of the U.S. markets? And also, in terms of COVID, the fact that cannabis was deemed essential in most states.
I’d also be interested to hear your take on the fact that it wasn’t so recreationally in Massachusetts, how much that’s affecting you guys? But in general, like how much is this COVID period going to affect the cannabis ecosystem long-term? And how do you think it’s going to?
JS: Okay. So there’s a lot of questions in there. So I’m going to try to answer them in order, but I’m going to probably blow it. So just stop me.
RS: I will remind you; sometimes the questions come fast and furious and I just let them come. So we’ll try and take them one by one.
JS: And that’s why I have a quick understanding we’re cut from the same cloth. So here’s what I think. So there was going to – in my view, there was going to be a catalyst for the rationalization and the consolidation of this industry. So after I did – that bought the five companies, the market was looking for me, again, the brick house looking for me to make further acquisitions to extend my reach, okay, to become a larger multi-strategy and multi-state operator.
I took a very disciplined approach and looked at the behavior that was going on in the industry, I understand the cyclicality of markets. I said, this is not going to end well, okay? Keep slapping on debt, keep raising equity, no negative EBITDA, negative cash flow. So, in retrospect, everything I’m describing is pretty obvious in the direction of stock, the stocks, right? They’re going to go down.
So what I said is – and I told this at every conference to every investor, I’m betting that we will be able to create our footprint at a fraction of the cost that others have created it, whether they were starting to consolidate with massive overlaps, I didn’t understand the consolidations.
So as licenses would come out, the supply and demand economics would change. Well, all these folks were chasing all the licenses at the same time. Now they’re going to all sell them at the same time, so that they would get cheaper. Again, markets are cyclical. I thought they would have to retrench. They certainly, right before COVID, took on a lot of sale-leaseback debt, I think, the – a lot of the companies have under-calculated the true cost of that sale-leaseback debt. I think it’s very, very expensive.
And so I always thought, again, not knowing the catalyst, the asset values would get cheaper, and then we would effectively start covering, because we didn’t buy it at the top. So that makes us short, because everyone else did. And then we’d cover when the values got cheaper. Values are a fraction of where they are, a fraction.
Now, I would say, this is an interesting phenomena. The private market MSOs have been fairly sticky on the multiples they’re asking for, while the public market is down 80%. So it was difficult to do a transaction in the private market, because it was just too sticky. But now, it’s a great thing.
If you don’t have to mark to the market every 30 seconds, like public companies do, and your investors are not – if they’re willing to fund you, then why not play for a day when this will all come back? Hopefully, you live to see that day. I had to think a lot of the privates won’t, and they’ll slowly come into that realization.
So for me, there was nothing to do, because it wasn’t good value for our shareholders. Now go back to the brick and the straw, right? So our stock while it did extremely well de-SPACing, never commanded the multiple of the straw houses, because they had a much sexier story, right?
They were going to be Starbucks. They were going to create Nike overnight and Microsoft and Apple overnight. These companies took 25 years to create these brands, I would say to my team. But there was a push and a theory in the market, you could do that overnight. I didn’t believe that as an investor.
But today, Rena, things have drastically changed. Liquidity has dried up. We create cash every month. We’re a machine. We produce cash every month. So with two states and only two states, we have the third most cash flow and EBITDA in the United States, because we disciplined ourselves from the beginning, understood what’s important and understood markets is cyclical.
Now post-COVID, I think that’s your second-half of your question. So the way I’ve thought about life and investing, there’s typically 1.0 and then 2.0, so we’ve had cannabis 1.0. And we understood how investors behaved and how CEOs managed and how consumers behave. Through my 35 years, 2.0 never looks identical to 1.0, people learn lesson.
The catalysts, whatever it is, changes consumers’ behavior, changes investors’ behavior. When the market goes from the left quadrant to the right, it’s in a bull bear market. Everyone I’ve seen that’s over 35 years looks like a genius and correlation is one, right, everyone looks the same just by them. In a bear market, you get massive dispersion. What do I mean by that? The second wave of investors come in and they really start to parse who has the ability to execute. In the beginning, the AYR team was thought to be very smart finance people. But people were agnostic how good operators we are.
I think at this point in 2.0, investors will want both good discipline finance people or good stewards of capital, as well as excellent operators. So what does consumer behavior look like post-COVID? I personally don’t think we’re just going to snap our fingers and go back to where we were just a short while ago. I think this will be in people’s minds for a very long time.
So in Nevada, we had the most successful business. We experienced 4,500 transactions a day in our stores. 4,500 different people came into our stores. Some stores would have 1,500 people a day. I’m not sure, Rena, that people want a crowd or will crowd ever again and want to be with 1,500 other people waiting to be served, I’m not sure.
And so, to that extent, when they closed our stores, where we produced 2 million of EBITDA a month in Nevada, they closed it late on the 20th of March. On the 21st, we were zero. And they said you could do delivery. The last time I delivered anything I was eight years old on my paper route. I will admit to you today, I’m not a logistics genius, or a delivery genius. I never did it and my team never did it.
And today, Rena, and I was on with my home management team post Nevada, Massachusetts. There was such a feeling of warmth and love, because we’re now doing over 1,200 deliveries a day. Our average ticket went from $61 to $137. Our gross margins went from 40 – went up 20 basis points, not 20 basis – 20%, not 20 basis. It went up by 50%, I’ll just say it that way.
And we hit $169,000 for the day. We used to do $245,000, but because of the average ticket size and margin increase. If we simply go from $169,000 a day to $190,000, we will produce the same $2 million of EBITDA in Nevada.
And this is the proudest achievement in my 35 years, that when I got them on the phone on the 21st and explained to them, because I’ve been in the market so long I have seen four crashes. Four times in my life, I’ve seen the world’s economy crash and somehow it always works out. And that, it’ll be interesting. What I’ve seen in the past, some of you will step up and want to lead and we will rebuild this company together.
Rena, my goal, as stated on the 21st, is not to fire or furlough a single employee or teammate. And I asked for their help and they did it. It’s going to be hard for our competitors going forward when you talk about past COVID to replicate that feeling on that call, that culture, and that feeling of being one team and one vision. That’s my edge going forward.
RS: We had Garyn Angel on a week ago, and he was talking about the companies that are going to survive this period are going to be the ones that have superior corporate culture. And it sounds like that’s exactly what you’re describing. I mean, as a human being listening to you, but also just as a person working in the world, it’s so nice to hear when executives, when team leadership kind of take that vision that they have – leaders tend to have vision, that’s why they’re leaders. But to extend the vision in times where the vision isn’t very clear, but just to go with kind of, not to sound too sappy, but to keep the human element in it and to pledge to not fire people, I think, it’s just really inspiring to hear that from a company and also in direct kind of opposition to what’s been happening in the sector, which is a lot of unfortunate layoffs, a lot of furloughs, a lot of also, companies just caught completely unawares.
The podcast we published today also reminds me of this, which was just keep it simple. And I think what you’re expressing is, while it’s unique to kind of keep it simple and just keep your emphasis on bottom lines and corporate culture and balance sheets. It’s surprising or at least interesting to see how few companies are actually really doing that.
JS: I agree. When the news came down right away I thought about personally, like, what am I going to do? How am I going to run the company? What happens to the shareholders? And then I switch gears immediately before I got on the call. And I said, “Everyone is scared. They’re scared of getting the virus. The world’s, everyone – I mean, everyone on the team, right they’re scared of the virus, their health, their family’s health, their economics, their career.” And so I immediately switched to how this affects them, and what is the best plan before I get on this phone that they understand, I’m looking after them.
RS: Well, very inspiring. It’s really nice to hear. So let me ask you quickly about Massachusetts. How – what do you think is going to be kind of the end result there or at least the temporary end result there in terms of allowing adult use? And how much does that affect you?
JS: So, again, I’ll repeat what I said earlier. I think all of these changes, as we open up are going to come quite slowly, both from the government’s point of view and the consumers’ point of view. Again, what I said earlier, I don’t think consumers are going to rush into crowded stores.
And so the way we’ve – the way we’ve built or rebuilt our business and dealt with the closures is that, in our stores, we do curbside pickup. We do appointment only if you want to come into store. And yesterday, we started – I think we’re the only ones that do curbside. And that yes, that’s true. We’re the only ones who do curbside, but yesterday, we started home delivery.
Now the good news is, when we started home delivery in the bottom, we didn’t have a playbook, because we’d never done it. And the good thing about this company is, there’s broad communication and sharing of IP from New York, Massachusetts and Nevada. And so we talk about – talked about last night on this call with all the managers from all three cities is how Nevada can hand Massachusetts their experiences on home delivery.
Massachusetts has been doing curbside, because we feel in the next couple of weeks, it’s likely, not definitely, as some easing starts to occur that we may see drive-thru and curbside in Nevada. And because we’ve perfected that in Massachusetts, that IP goes the other way.
And so that’s generally what I think the future is. It’s a slow roll. And we have decided as a company even past COVID that we want to deliver our brand however the consumer wants to receive it, Rena. If they want it in their home, we’ll continue post-COVID to deliver it to their home. If they want to do it or receive their product or buy their product curbside, we will be there to supply it for them curbside.
And if they want to do it through drive-thru, AYR will make sure that they all have access to their medicine through a drive-thru. And we’re not going to force them to take their medicine and purchase their medicine the way we want them to do it. We want to adapt to our company to make sure that they’re able to receive it however they feel comfortable.
RS: Yes. Now it’s definitely, I think, the time to be adapting. What do you think about – I think there was a kind of a consensus or close to a consensus in the months leading up to this period that maybe there was a chance that instead of going state-by-state, the U.S. deschedules cannabis? Obviously that’s not on the agenda right now, and also even the state-by-state process has been everything on pause. What do you think COVID does in terms of the regulatory picture? And as a U.S. MSO, kind of how much does that matter to your plans going forward?
JS: So we never factored into our plan. If you’re asking someone who work at a big bank, I think, the idea that the federal government doesn’t allow, of course, the SAFE Bank Act, seems to lack control. For me, if the more transparent you make the business, the more controls you’ll have over the business. So banking – and allow for banking would allow an additional control over the entire industry, because you’d see every transaction.
So that seems irrational to me. They want more control. This is a great way to do it as a first step. So I – it’s hard for me to justify why not take the first step? If you ask me to rationalize, and I hope you wouldn’t insult me by doing this, because we’ve become friends, to rationalize why heroin and cannabis are equally as dangerous and scheduled the same way, I don’t think I could do that. It just seems completely irrational.
So then let’s get to the state level and the federal level. On the state level, there is going to be a drastic need for revenue. So I think more states will go recreational. On the federal level, I think, after spending $12 trillion, there’ll be a drastic need for more revenue. Will they look to cannabis as a source of additional revenue? I don’t see that in the immediate future, because I think this country is wrestling with issues that are more pressing and affect the health and well-being of our citizens. So I don’t see an immediate change there.
RS: And how much does it matter, I guess, either way in terms of like, if cannabis just gets descheduled in one fell swoop, I mean, I understand that even when it gets descheduled, there’s a whole process that has to happen. It’s not like everything changes in one day. But do either – do you prefer, I guess, either outcome is – do you have a preference?
JS: Well, there’s two different outcomes here. One, I think is super positive. The other one I have to think about. One is, it becomes – think about this, this is an industry that’s federally illegal and the companies themselves pay federal tax and the individuals that work in the industry pay federal tax.
And then you think about all the new programs that the governments put out to get money in unemployed people’s hands. These individuals that work in these industries that our competitors have laid off, large numbers of people are not entitled to any of that insurance. After having paid federal taxes, I don’t even understand that. So I’m at a loss for that.
Where federal legality, I think, would be interesting, it would open up the pool of investors that could now invest in the industry? And what I’ve said at conferences, starting two years ago, I think, it would be healthier if the investors – the sophisticated investors that are barred from investing in this industry now started investing, using traditional financial tools and models, more discipline would have been placed around the industry, and it probably would have been healthier.
So I’ve been very public. We take great pride at the end of every quarter to be the first company to report. And what that speaks to, not only my competitiveness as an aside, but to the house we’ve systematized our financial practice, right, our financial disciplines that at the end of the quarter, we can simply push a button and our earnings are ready to go out, okay?
So I have been rooting for the day when those traditional buyers coming in using those traditional methodologies to value companies, because I think it’s better. It’s better for the entire industry if everyone is practicing business correctly in it or disciplined, because the industry gets a bad taint when there’s bad actors.
Now, COVID, to your previous question, is going to force the consolidation. And what I like to say if I look at other industries, Rena, there’s five beer companies, five soda companies, five cable companies, five banks, there’s something around this magic four or five number. And I could see that in the very near-term through consolidations and mergers, that there’ll be five leaders in this industry. And hopefully, there’ll be the strongest five with the right culture that improves the image of the industry.
RS: So is that your goal? I mean, I could kind of hear the tone in your voice on the conference call. I mean, I didn’t listen to the call. I read the transcript. But I could hear it through the words, kind of how excited you were. And I could sense some aggressiveness coming from the company plans. I don’t know how much of that’s true, but I don’t also know if that’s been affected at all by where we are today. But, in general, is your plan to do more acquisitions to keep growing? Or what’s the plan there?
JS: So my plan is always to grow to be a top five, hopefully better. Traditionally, I would never settle for top five of anything. But in my near-term goal and I know that doesn’t sound consistent with some of the things I’ve said is to be amongst the best companies in this industry. I’ve told you that I’ve been waiting for the values to get right. I think that time is now.
I think we have a strong balance sheet. I think we create cash every month, so that we can merge our company with a good footprint that hasn’t been managed as well as we might manage it using our excess cash flow to improve their operations, and my ultimate goal is for the rerating of our stock.
So if we sell for the issues that investors had, they have no issue with the way we operate, no issue with our financial discipline. If we sell for excess liquidity – extra liquidity, stock trading more often, which should increase our stock price by three x, if we make the right acquisition.
Now my theory has been all along, when I was on Wall Street, we used to examine our – what percentage of our customers drove our business? While we thought we had a cover at 1,000, it turned out, there was the 80/20 rule. 20% of our customers paid us 80% of our earnings.
When I looked at the map of the United States, Rena, I think, there’s 10 states. I don’t need to be in 50. I don’t need to be in 16 or 90. I think, there’s 10 states that will represent 80% of the wallet. And I think, our goal is to be in those states and penetrate them deeply, so that our brand is the single best brand in every market we’re in.
RS: That’s interesting. Do you – you call those markets in terms of being like the most, I don’t know cannabis users per capita, something like that or the most entrenched in terms of cannabis users?
JS: In population, right? So when you think about – this is a population of 20 million, what percentage of that population is actually a cannabis – a potential cannabis customer? You think about the industry, only 50%, I think, in a survey I’ve read, it says that 50% of Americans have tried cannabis. So there’s a whole 50% of this country that are potentially new customers, if you educate them and deliver a consistent, excellent consumer experience and that’s the goal of our company, while delivering great products, right?
RS: Yes, I’ve been – something that we’re trying to do on this podcast is try and get people kind of interested in what’s happening in terms of investing in cannabis. And I know that a lot of people are scared because of the share prices and they look around and they see cash crunch and struggle to gain capital.
But what I – I’m always trying to say is that, there are players to look at. And another thing is that, I think, what do you look for in terms of a cannabis company? And I think everything you’re expressing here today is – I just put this video out about what to look for in a cannabis company and you’re kind of like hitting all the points.
JS: I promise I didn’t see it. I promise. I swear.
RS: I believe you, I believe you. No, I think it’s a synchronicity. But in terms of what kind of management talks about, I think, management can be really specific and management can be pretty vague. I’ve enjoyed the kind of specificity that you’ve provided.
So if you could kind of like talk to investors, I mean, you’ve given them a picture already. But investors that are kind of scared A, maybe to even get in the markets at this point; and B, specifically with a – with the cannabis companies, what is – what are your words of advice to them?
JS: So, when you look at the market, I think, depends – when you think about the – generally investors in the market, it’s important to look at them demographically. Like if you’re going to retire next year, the risk-adjusted returns you’re looking from assets and investments should be less risky. And I think if you’re on the other side of the spectrum, and you’re a younger investor and you’re 30, 40 years from retiring, I think, you should take more risk.
So I can’t give you one answer that will fit all investors, because I think people behave differently, depending on how far you are from retirement. This is what we – when I invested in the original SPAC, I wasn’t meant to be the CEO, I was meant to be the investor that put up the capital.
But as I did more work, I understood that this was a once in a lifetime opportunity. And, Rena, I said to myself, Jon, if I focus 100% on this, I think this will be one of the most rewarding experiences that I’ve had in my business life. Think about it. This is a new industry. No one has perfected their brand, yet. So to me, it’s like a clean white canvas before it’s been painted and we get the opportunity to define it.
So when I think about business, Rena, I never think about what’s happening locally, mathematically. I think about life in 3D. And so if you make a chess move, I try to make the third, not the second. And then once I define that space as ours, and it’s genuinely ours, and we’ve defined it, and all my competitors are coming to me. If you define it in 3D, you should expect an exponential return. If you’re the innovator, expect an exponential rate of return. If you’re the imitator, because you’re coming to our space, you should expect a commoditized return.
So I think cannabis, as I’ve said, I wasn’t there for cellular, when they were being auctioned off, any one of us could have won those licenses. I wasn’t there for cable. But I’m there for cannabis. And if you think about the economics, most of my competitors are building their companies to sell to a CPG company.
I want to build Starbucks, because I think in five years, eight years, I don’t know, this will be a $100 billion industry. When you think about the black market and the legal market, it’s about $50 billion, $60 billion today. If it’s a $100 billion industry and there’s five players, it’s $20 billion a piece if we’re all equal. If you think about the EBITDA margins contracting to 20%, that’s $4 billion. And if you think about putting a CPG multiple of 15, I’m trying to build this $60 billion company, because I don’t want to split this. I want to build it.
I wanted to build it to be one of the most admired brands, just like the names we talked about, Starbucks, Apple, Microsoft, just like that. So I would say to you I’ve never been short-term greedy. I’ve always been long-term greedy, except when I say that I don’t even think I’m greedy. I just love to live on the innovation curve, doing brilliant things and then the rewards come. And so that’s our stated goal for the future.
RS: Very good, very good. And mostly, that’s in this – you’re not planning on going global or anytime soon. Your focus is on the states for right now?
JS: This is the biggest market in the world and that’s our focus. It’s a game of focus and that’s our focus.
RS: Well, Jon, I really appreciate you taking the time. This has been a great conversation. I’ve really enjoyed it. Thanks so much for coming on the show.
JS: Thank you very much for inviting me. And hopefully, invite me one day to Tel Aviv, so I get to do the trip that we had planned before all this happened.
RS: Absolutely. Thanks so much for listening to the Cannabis Investing Podcast. Same old content we are not! Subscriber follow us on Seeking Alpha, Libsyn, Apple Podcasts, Spotify, Google Play or Stitcher and we’d really appreciate it if you could leave us a review on Apple Podcast. So we can help other investors find our show. If you have feedback or questions, please e-mail us at rena+canpod@seekingalpha.com. That’s R-E-N-A-+-C-A-N-P-O-D@seekingalpha.com. Thanks so much for listening and see you next time.
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