For Your Consideration...

Interview: Leslie Bocskor of Electrum Partners talks about the once in a lifetime opportunity in the cannabis industry

In this audio interview, Leslie speaks about the once in a lifetime industry in the cannabis industry.

Topics covered include:

Why Leslie and Electrum Partners are interested in the disruption of industries and businesses that will change the way we live and do business in a massive way.

The friction between State markets that allow for legalized cannabis and the federal illegality of the plant which creates a “ringed-fence” economic environment within each state offering cannabis. How wholesale pricing is insulated from larger competitors due to federal prohibition of cannabis and why some states have distinct advantages over others due to better regulatory frameworks.

How the experience of working with States such as Nevada and Pennsylvania allows Electrum Partners to offer invaluable insight to entrepreneurs seeking guidance on how to engage State and local jurisdictional matters as they prepare their business to enter the market.

Why businesses in the cannabis industry must have the agility to quickly adapt to changing regulatory environments.

Why it is critical to be able to sift through and correctly interpret the mixed messages that have been conveyed by the Trump administration. Why we want to avoid the same fate as the dot com/internet industry experienced when former Federal Reserve Chairman, Alan Greenspan declared that there was “irrational exuberance” in the marketplace.

Leslie also makes a point to express his appreciation for Senator Earl Blumenauer from Oregon who has worked tirelessly to end cannabis prohibition and who has championed the cause for citizens in need of medical marijuana.

His advice to startups raising capital is to build a great team with successful experience, make sure your value proposition is very well supported with evidence you can reference, you want to be extremely well read in the vertical you are in, make sure you have some type of defensible advantage over your competition and lastly to have a well thought out exit strategy.

Leslie Bocskor is the Founder and Chairman of Electrum Partners, a venture development company specializing in medical and adult use cannabis and ancillary businesses.

Follow Leslie on Twitter

Predictions for the Cannabis Industry in 2019

Electrum Partners humbly offers predictions by company staff for the hemp and cannabis industry in 2019.  We wish everyone around the world a fun and safe Holiday season and a prosperous 2019!

The States Act will pass in 2019, making cannabis essentially federally legal in the states that have chosen to regulate it. This will provide comfort to the states that have held off on creating any commercial cannabis market. The States Act also creates a potential mechanism for states to begin shipping products to other states, provided that state law allows for such shipments.  

CBD products will begin appearing on big box retail shelves. Well-established brands will begin incorporating CBD into their existing product lines, which will increase competitive pressure on newer, less mature brands entering the market.

Madison Avenue marketing agencies will pounce on this exciting new product category, further de-stigmatizing the plant. Consumer attitudes will continue shifting towards a mainstream acceptance of cannabinoids’ essential health benefits.

There will be a continued influx of capital from institutional investors, which will sustain intense M&A and IPO activity in the sector.

By the end of 2019, the cannabis industry will generate 100,000 new full-time jobs as the result of new hires in both plant-touching companies and the ancillary businesses that support them.

Hemp will become a cash crop for the US and boost the agrotech and equipment supplier industries. As the trade war between the US and China continues to worsen, farmers will look to hemp as a viable alternative to soybeans and other crops whose markets have been affected by the Trump administration’s aggressive trade policies.

Hemp will become a commodity crop and we will see the development of financial instruments—like crop insurance, futures, swaps—that are unavailable given its current legal status.

Asian countries will begin taking steps to legalize Cannabis. Thailand and to a lesser extent South Korea represent important pioneers in the region which includes massive markets of Indonesia, India and others. Leading Canadian cannabis companies will continue to leverage first mover advantage in terms of meeting export market demand, but countries like Thailand coming online signals that their advantage may be short lived.

Liquor and tobacco companies will continue their entry into the space. We will see several additional blockbuster acquisitions by blue chip companies looking to quickly establish brand equity and an operational footprint.

Cannabis will likely be reclassified from Schedule 1 to Schedule 3, which will open the floodgates on clinical research for universities and pharmaceutical companies looking to develop cannabinoid therapies for a broad range of indications.  

Cannabis research will emerge as a hotbed industry out of the federal actions, driven by the pursuit to develop opioid alternatives by large pharma players to avoid disruption by cannabis startups and the potential for extraordinary profits in the event a blockbuster cancer or Alzheimer’s drug is developed from derivatives of the plant.

Leading economists predict that the US is heading towards a slowdown. In the event of a recession,  cannabis companies will largely, but not completely, be insulated from the effects of an economic downturn. We may see:

    • A decrease in sales in highly regulated medical markets due to a combination of high prices and reduced purchasing power. Consumer preferences might shift to more concentrated products to make their dollar stretch farther, and move away from non-psychoactive products.
    • There will be overall decreased liquidity in public capital markets, which could slow the pace of IPOs and/or RTO’s.
  • In private capital markets, you’ll see a stronger preference for collateralized or asset-based lending, and a weaker preference for riskier seed or series A placements. If the recession is caused by or correlated with changes to monetary policy (i.e., an increase in the fed funds or prime rate), we will see an increased cost of capital generally.

If the unemployment rate rises, cannabis businesses will have their pick of highly qualified, displaced professionals looking for work.

Happy New Year!

The Electrum Partners Team

Altria Group investment in Cronos Group is a sign of big things to come in 2019

wall street

Yesterday, Altria Group, the parent company of Philip Morris USA,  maker of Marlboro cigarettes (AKA Big Tobacco) made a major investment into cannabis company Cronos Group, Inc. The investment was $1.8 billion (US)  dollars for a 45% of the company and an option to gobble up the remaining 55% over the next 5 years. This follows a wave of other M&A deals earlier this year including the mammoth $ 4 billion investment by Constellation Brands (AKA Big Alcohol) in Canopy Growth Inc.

So as of yesterday, two giant players in tobacco and liquor have planted their flags firmly in the cannabis industry. There is no better indicator of faith in the future growth of an industry than large investments by well-established, globally recognized brands. And these investments differ greatly from a traditional M&A deal to leverage economies of scale. This is about real disruption and the need for entrenched players to make bold moves to ensure the future livelihoods of their enterprises. They (liquor and tobacco) have shown their hands in regards to their concern and the need to stave off am explosive growth industry that is beginning to emerge as a massive force in the global economy.

This bodes extremely well for strong cannabis brands in the U.S. going forward because they currently remain insulated from the large competitors due to federal prohibition. In some respects, this is the inverse of the internet bubble in the late nineties. Instead of hordes of fly-by-night dot-com’s with zero revenue skyrocketing in value overnight and then crashing in spectacular fashion, you have cannabis companies methodically building real value while large potential acquirers can only sit and watch while mini-empires are built in large commercial markets. However, with the strong possibility of the Farm Bill passing and the potential signing of the States rights bill by President Trump, the table may become set for the largest M&A feeding frenzy in history. In other words, buckle up for a wild ride in 2019!

At my firm Electrum Partners, we have coined this large scale, once in a lifetime merger and acquisition phenomenon, The Big Roll Up.

 

By Leslie Bocskor

About the Author

Leslie Bocskor is the Executive Chairman of Electrum Partners, a venture development company in the legal cannabis industry. Please direct inquiries to the Contact form on our website.

 

Follow Leslie on Twitter: @lesliebocskor

Follow Leslie on LinkedIn: https://www.linkedin.com/in/lesliebocskor

Barry Grissom SVP of Global Policy for Electrum Partners interview with FOX4 News in Kansas City

Barry Grissom, former U.S. Attorney and Senior Vice President of Global Policy at Electrum Partners was recently interviewed by Mark Alford at FOX4 News in Kansas City (Facebook video).

In this Facebook video, Mr. Grissom speaks about his role in the position of US Attorney for Kansas spanning 6 years under the Obama Administration. During the interview he discusses an interesting criminal case and emphasizes that the investigation was a successful team effort.

Mr. Grissom also states in the interview that he believes our laws should reflect public policy that is good for us as a community and country. He points out that listing cannabis as a Schedule 1 drug no longer reflects the current view of the majority of Americans and cites a recent Gallup poll that 61% [66%] of Americans now favor medical cannabis being legalized.

He reiterates that he is pro-law enforcement, stating that the limited money we spend is much better suited to be pursuing more serious crimes than wasting police officer time for minor trafficking of cannabis.

Mr. Grissom also discusses visiting a dispensary for the first time in Aspen, Colorado, and finding it to be clean and professional. In regards to the successful launch of recreational cannabis, he mentions that $1.5 billion didn’t go to criminals in Colorado and instead went to tax paying businesses and employees/staff.

Mr. Grissom later mentions the Cole Memo and how the framework was structured to be similar to the way alcohol is regulated. He finishes the interview by discussing the importance of making decisions based on real-world data. If people take a deep breath and approach cannabis from a data driven standpoint, they will see the benefits of making changes to local public policy.

The Impact of Legalized Cannabis in the U.S. – Part 1 of 2

There are now 33 States in the US with some form of medical marijuana program and 10 States that have legalized cannabis for adult use, and the question on everyone’s mind is “what will the impact of legalized Cannabis be on the US once prohibition ends?” This article will examine the potential impact on the US from several different perspectives.

American flag graphic in the shape of a marijuana leaf

  • Government: State and Federal Tax revenue
    Looking at a few States, Colorado reported a billion dollars in sales in 2018, adding $200 million to state coffers in tax revenue. Nevada collected almost $70 million in tax revenues in its first year of adult use sales and exceeded projections. Other states that are considering adult use legalization are releasing estimates. A 2018 report by the Illinois Economic Policy Institute (ILEPI) and the project for Middle Class Renewal at the University of Illinois at Urbana-Champagne projected that an estimated $1.6 billion would be sold in the state of Illinois with approximately $525 million generated in new tax revenues (pdf file) based on a 26.25 percent excise tax on retail cannabis in addition to the 6.25 percent general tax. In addition, over 23,600 jobs would be created and more than 2,600 new businesses would be formed. This would be a significant boost to the Illinois economy and represents a microcosm of the overall impact legalization would have on tax revenue, jobs and new business creation on a national level. On the federal level, a 2017 report by New Frontier Data estimated that legalizing cannabis at the federal level would lead to $131.8 billion in aggregate tax revenue being collected between 2017 and 2025. The number was based on a 15% retail sales tax, payroll tax deductions and business tax revenue. Although this estimate was based on a 35 percent retail tax rate before the tax cuts in December 2017, the revenue is still enormous. However, there is a catch-22…
  • Balancing Act
    The catch-22 in regards to federal legalization is that there are currently no tax exemptions available to cannabis companies under tax code 280E. This forces cannabis companies to pay tax on their gross profit rather than net profits, resulting in real taxation rates of 70% to 90% on income by some estimates. So while the plant remains classified as a Schedule 1 drug, the federal government continues to rake in an increasingly large windfall in tax revenue as the industry matures and larger players enter the space. The Motley Fool points out that “if the federal government removed marijuana as a controlled substance, it would no longer be subject to 280E. If marijuana businesses were allowed to take normal business deductions, its estimated that the federal government would lose $5 billion in tax revenue over the next decade.” Further, these numbers are based on 2017 projections which are low considering the financial breakout the industry experienced in 2018. Therefore, this reduces the fiscal incentive for federal policy makers to legalize nationally since they would see a reduction in taxes collected on cannabis companies.
  • Addition by Subtraction
    Yet, in the big picture, by removing cannabis from being a Schedule 1 Drug, the cost savings from the reduction in unnecessary arrests and incarceration to US taxpayers is significant. A 2013 report from the American Civil Liberties Union (pdf file) found that federal cannabis enforcement costs were approximately $3.6 billion per year. Also, by removing cannabis from the controlled-substances list, it would reduce the number of marijuana related court cases that go to trial every year. This number is difficult to extrapolate but undoubtedly in the tens if not hundreds of millions of dollars in terms of legal, law enforcement and judicial hours wasted combined with the burden on tax payers to incarcerate people who could be leading productive lives and contributing to the U.S. economy by paying their federal taxes. While the private prison industry might take a hit, the hidden benefit is that law enforcement agencies would not be wasting their time on minor offenses such as possession and minor trafficking and would instead be focused on reducing serious crime, which would be of benefit to all of society.

By Leslie Bocskor

About the Author
Leslie Bocskor is the Executive Chairman of Electrum Partners, a venture development company in the legal cannabis industry. Please direct inquiries to the Contact form on our website.

Follow Leslie on Twitter: @lesliebocskor
Follow Leslie on LinkedIn