CEO Cannabis Survey Report 2023 | Fireside Chat

Rami El-Cheikh: Okay, welcome everyone to EY’s fireside chat. This session is being recorded. I’m joined today by members of our cannabis sector advisory board who are either current or former cannabis executives or adjacent industry executives. I’ll ask them to introduce themselves in a few minutes. Our agenda for today is three-fold. First, we will show key insights about our Cannabis CEO survey report which we launched earlier during the year.

Then, we’ll facilitate a discussion with our advisory board members and ask them to weigh in on some of the findings of the CEO survey. And then finally, we will leave some time for questions from our participants.

So, before we jump to the cannabis CEO survey, I just want to create awareness about EY’s Cannabis Centre of Excellence, which was created as an innovation hub to help cannabis companies with thought leadership and impactful advice on critical business challenges. Our mission in the CoE, or Cannabis Centre of Excellence, is to help propel the cannabis industry forward.

Now, if we move to the Cannabis CEO Survey which we launched early in the new year, we had almost 50 cannabis CEO participants or C-suite executives. And these cannabis companies were from North America, Europe, and other parts of the world like Israel and Australia as well. We asked them about their reflections on 2022, we asked them about business strategy, we asked them about their outlook for the industry and the outlook for their companies themselves.

And here’s what they thought. So, on their reflections for 2022, most of the executives felt that 2022 was an unprecedented year, primarily challenged by industry-specific challenges, but also exacerbated by inflation and limited capital availability. So, as a result, most cannabis companies underperformed either from a top line or a bottom-line perspective. And the forces that impacted these businesses were primarily related to competition, oversupply, pricing and margin pressure, tax and regulatory burdens, inventory write downs, goodwill impairments and some legislative setbacks in the U.S. To counter these forces, most of these cannabis companies launched performance improvement programs, cost reduction programs, they tried to streamline their operations and they divested non-core business assets.

If you think about 2022, what we heard from the CEO executives, survival was the theme of the year for most of these cannabis companies. Now, when we asked them about their outlook for 2023, most of these executives shared that they're expecting most of the challenges experienced in 2022 to be the same in 2023, except they're going to be more intense this time.

And the way to counteract this, they're going to be focusing on improving their margins and trying to drive revenue growth either through new product introductions, through pricing optimization, and potentially to new market expansions, where there is an existing market that exists with clear regulations like Germany, Australia and Israel, and these are medical cannabis markets. A lot of the executives are also expecting competitors to exit from the market. A lot of them admitted that they need financing for the next 6 to 12 months, either to sustain operations or to fund operations or potentially to fund some of their M&A initiatives. But 2023 is expected to be a tricky year for the industry. But a lot of the executives mentioned there's significant upside for cannabis companies that have a strong balance sheet are better capitalized and have done some strong foundations.

The last thing that we asked the cannabis executives as what scenarios are they expecting for the market? From a market perspective, most CEOs mentioned that the mature markets like Canada, Colorado, California, they'll continue to experience slow to flat growth, oversupply and margin compression. So that's the new normal, and they're going to try to operate in this environment.

For emerging adult use market, a lot of them are expecting the saturation point to be reached faster than historically experienced because a lot of the MSOs, a lot of the cannabis companies have mastered the art of expanding and scaling very quickly. And then on the market as well, they expect inflation to persist and it's going to continue to pressure the margins of these cannabis companies.

On the regulatory front in Canada specifically, they expect a lot of public policy effort to continue reducing excise duties and regulatory fees. They're not expecting regulatory changes or progress on U.S. federal legalization or rescheduling in the U.S. or that that market is going to continue to operate the same way it has been. And the uncertainty around the German recreational market is expected to be the same moving forward.

On the capital markets, as you can expect, the access to capital was expected to be limited and more expensive. So that's what's expected in 2023. They've said that some U.S. plant touching companies or MSOs are expected to list on TSX to expand their investor base and enable liquidity. And then on the M&A front, it's expected to be limited or slow.

And finally, on the financial performance scenarios, most of the cannabis CEOs say that the balance sheets will become more stretched in 2023. That's going to force a lot of cannabis companies to either equitize or refinance their debts. A lot of them are focused on achieving the path to profitability. There's going to be a lot of effort on tightening the cost controls, managing their working capital and also reducing CapEx for 2023. And many of the CEOs admitted that insolvency is inevitable. We're going to see a lot of that in 2023 as the conditions are very challenging.

So, our outlook at EY, let's think about what are the key takeaways from this. So, I think the consensus outlook for the industry is bleak. The challenges experienced in 2022 are going to continue and be more intense in 2023. And we're seeing that. And 2023 could be a year where the industry faces a reset. And I think in this new normal, operational execution and financial management are going to be key. M&A should be on the table. But what we've heard from the CEOs, when we consider M&A, it's going to be very carefully calculated because we can no longer afford to take risk.

Having said this, we understand that the outlook is not positive. But for us at EY, our outlook on the long-term industry is positive. Frankly, we see a lot of opportunities for strategic and financial investors if they sharpen their pencil. As a firm, we'll continue to invest in the cannabis sector. That's why we've invested in the Cannabis Centre of Excellence. That's why we've onboarded the members of our advisory board, like the panelists you see today.

And with that, I'm going to ask them to introduce themselves and I'm going to ask them to state why they joined our Cannabis Centre of Excellence and what perspective they bring to the table. So maybe I'll start with you, Greg, and then I'll move to Andrew, Paul and then Patrick.

Greg Engel: Great, thanks, Rami. To give perspective, I'm Greg Engel. Before joining the cannabis industry, I was a long-term pharma and biotech executive, working both internationally, in the U.S. and in Canada. And then I joined the cannabis space in 2015. I was the CEO of Tilray for 2015 - 2016, and then I was the CEO of Organigram, which I left in 2021. So, I’m fairly long-tenured in the cannabis space. It was interesting, when I was at Tilray, we were very focused on the medical space, that's pre-adult rec. And then both companies, Tilray and Organigram, became leaders in both the medical space and ultimately in adult-rec space and continue to be leaders in cannabis space today. It was also interesting when I was at Organigram, we founded a centre of excellence with British American Tobacco, which included a minority investment from them of $221 million. That was really focused on product innovation, which I think is critical and continues to be critical kind of going forward for the industry.

Since leaving Organigram, I've been doing consulting work in pharma, biotech, cannabis and also sit on the psychedelics board. And what really led me to joining the Cannabis Centre of Excellence at EY and why I’m excited about it is - I want a chance to kind of bring together a group of key people with diverse backgrounds and look at things from an industry perspective and how we can bring the learnings that we all have from different perspectives to assist other companies going forward.

And I think that's one of the things that's critical is you'll see when everyone goes through here is all of the members of this advisory group have a diverse experience not only in cannabis but also their other experiences as well and bring those to the table. So that's my perspective, Rami.

Rami El-Cheikh: Awesome. Thank you. Greg. Andrew?

Andrew Stordeur: Okay, thanks Rami and great to be here today. My name is Andrew Stordeur. Prior to my cannabis experience, I've been in the fast-moving consumer goods space, working for Fortune 500 companies in the food and regulated product space. Pre-legalization, 2018 until 2023, I built out SNDL, or formerly known as Sundial Growers, and was president and Chief Operating Officer of that business. So, I got to see all aspects of the cannabis space from pre-2018 all the way through where we are today.

And to answer your question a little bit around why EY, I think I’m pretty excited about today on a couple of fronts. I think obviously as you mentioned in the survey, the sentiment in the space is pretty negative. I think we're at this kind of precipice where we have to have some thought leadership. And I think it's great to make an investment now to pop our heads up a little bit and think about where this industry is going. There's going to be lots of positive momentum. There's going to be profitability here. There's going to be growth. There still is growth – I’m excited about that.

Coming from my previous kind of life in these really established industries, we would celebrate, you know, small growth or single digit growth or even flat to declining growth. We have to close our eyes sometimes remind ourselves that, this the industry has put in $3 billion of growth in Canada, particularly since 2019. You know, CAGR at 55%, and even in 2022, I think we saw the industry grow by 18%. So, that's a real positive.

And I think to Greg’s point, being able to listen and to learn, I think from some of the operators that have kind of been there, done that, have failed, come out the other side with some battle scars, I certainly wish I would have had this opportunity to learn five years ago when I was building out Sundial. So, great opportunity, really great to be here. And I just you know, I think we've got a short period of time today. For the audience, we won't go as deep as I think is we want to go. But I certainly encourage you to reach out to us as we're pretty passionate about the space and we've got a lot to say on it, so thanks.

Rami El-Cheikh: Awesome. Thank you, Andrew. Paul, can I turn to you, please?

Paul Furfaro: Sure. Absolutely. Hi, everybody. My name is Paul Furfaro. Prior to being in cannabis, I actually spent over a decade working in the tobacco industry, so British American Tobacco, both in Canada and in the United Kingdom. I think back in 2015, cannabis started to pop up on my radar and it was pretty much an easy switch. You know, when you look at a plant that you can grow, dry, cure, roll and light on fire.

Well, there was over a decade of experience, and it made a little bit of sense to start looking at cannabis. My cannabis journey started in a start-up, where I was with a group of individuals to be able to create a cannabis company and to go out and raise money, which we successfully did. We did so in such an impressive way, that coming from the province of Quebec, the government actually reached out to us and wanted to know if any of us would volunteer our time to go set up the Société Québécoise du Cannabis, or the SQDC, which is the only legal government retailer in the province of Quebec. And I decided to make the jump and to be able to go over there. So, part of the original team of four people who sat in a room and started drawing what dispensaries will look like and how we were going to actually sell products and start working with the health ministers and the finance ministers within the province to be able to do things right. And under a very specific set of conditions and a very specific mission for the province of Quebec.

I was the vice president of operations there. I then became the interim president and CEO. I've left the government since, and today I am currently the Senior Vice President of Strategy for Village Farms International.

When it comes to EY and why I'm excited to be here, I'm going to say a comment that is completely born out of confidence and not out of arrogance at all, but when I get to sit and talk and what we've been doing over the past couple of months with my colleagues who are on the call, I always get the feeling that we're from the future. And it's a little bit echoing what Andrew said, imagine if we would have had this experience five years ago. Imagine the different choices and how can we apply hindsight to be able to create foresight? And I think now EY is in a fantastic position to be able to talk with other partners and other people in different markets around the world who are starting to go through the same things that we've gone through.

So, lots of successes, lots of failures. I think we've all been through the ringer numerous times, and we learned a lot through that and hopefully we can share some of those learnings with the group, with the audience, and with some partners in the future.

Rami El-Cheikh: Awesome. Thank you, Paul. Patrick, over to you.

Patrick O’Driscoll: Hi everybody, good afternoon. So, I'm Patrick O'Driscoll, and I'm somewhat of the odd one out on this panel, in that I'm not actually from the cannabis industry, but I have been in the so-called “sin industries” before. So, I had 35 years in the wine and spirits industry with two of the largest players in that sector. Most latterly, I was CEO of Corby Spirit and Wine here in Canada and it was actually during that time, during that tenure we conducted a very thorough project to determine that time first of all, whether the cannabis market was going to pose a big threat for our existing business and secondly, whether we should enter the market ourselves. So, in the end, we actually decided for a variety of reasons not to enter. But since then, I've actually stayed fascinated with the category, followed the market's development very closely and trying to look and see how some of those assumptions that we made back in 2018, how those panned out.

For some context, my original background is in marketing, and I very much bring that lens to bear when I look at how well cannabis companies are bringing products and brands to market and how they're enabling themselves to appeal to consumer needs. When I had the opportunity to join this group of esteemed colleagues here, I absolutely jumped at it. I loved the industry I was in, but I always wished I had been, at the start of it, because it was very exciting alcohol industry going back and so, getting to see this new industry come to fruition is a very interesting thing to do.

Rami El-Cheikh: Awesome. Thank you, Patrick. And thank you all for the introductions. So, let's start with the first question. As current or former operators or adjacent industry observers or market entrants, you've left the cannabis sector journey from the start-up phase to today. What are your reflections and what have you learned? So maybe we can start with you, Andrew.

Andrew Stordeur: Yeah, sure. Thanks, Rami. So maybe what I'll do is I'll start at the macro level and then I'll weave back into some reflections on that. And, you know, I think to understand where this thing is going to go, you kind of need to understand where we've come from. And I see this as four kind of distinct phases, particularly in Canada, as far as the cycle of where cannabis has come from and where it's going to go.

And the first phase is what I call the “prepare phase”. And this was pre-legalization. This was, marked by a lot of capital being raised by some very significant projections and some really gnarly KPIs like funded capacity and things like that to really get going. And then obviously the lobbying side kind of pre-legalization is really, really important. So that was kind of the first phase.

The second phase is what I call the “produce phase”. And this was kind of the couple of years post-legalization and this is where we saw this kind of concept of first to market really be the driver. And you saw companies bringing on as much capacity as possible online. You saw retailers trying to scale and get as many leases as possible across the space. And then I think we also saw a little bit of the early sprinkling of some M&A in that time frame as well, too. So that was the produce phase.

And then I think as the third phase, the one that we're currently in and you mentioned this, and it pops certainly in the CEO survey is the survival stage. And this is the one we're in right now. We're going to be here for the next couple of years at least. This is really about where we're at with violent restructuring. It's about cutting costs. It's about getting balance sheets in a healthier position. And obviously, that's largely a lot of the companies now are tapping ATMs, which that the market and instruments obviously to raise capital to get these balance sheets healthier. And we're seeing monetization of inventory really to bring in cash to keep the lights on. So, it's a really distressed time in the space and that's the survival mode.

And then the fourth one I see is the one we're going to be in in a couple of years. And I think that's the sustained phase. I think what you're going to see in this phase is supply and demand is going to start to balance, brands are going to start to form. My view is I think you're going to start to see the low-cost producer as well as, I think the discount retailer really start to take a bit of an oligopoly in the space. And I really think that's going to pop up there. But, I state those and come back to my reflection - I state those because I think if you think about the first three phases of the space, outside of a pandemic that got thrown in there, as well as some political movements south of the border, the first three phases were absolutely predictable. They were 100% predictable. And when you think about the projections being too high, which led to access to capital, which was too easy to get, which then created too much supply, which created too much competition, and now we're sitting in a position where we've got companies sitting on way too much debt.

Canada last year, in 2022, I think 33% of all CCAA filings in this country were cannabis companies. I mean, that's a huge number. We are going to see more of that come through. We saw that in the survey. But I guess as we think about that next phase for me, Rami, I think there is hope. There is good news. I think we're going to be talking about what some of those ideas are as we think about this next phase, which is sustained as we get into this panel. So, looking forward to that. Thanks.

Rami El-Cheikh: Wonderful. Andrew, I like how you describe the four phases. Maybe, Paul, I can turn to you. What are your reflections? What have you learned?

Paul Furfaro: Right. I think, you know, my reflections and I try to look at it a little bit more in terms of present day, what are we starting to notice? And one of the reflections that I can really see right now is those who can focus can win. Okay. And I don't think focus is a guarantee of success, but I think if you're focused, you're going to have a much better chance at success than if you're trying to be all things to all people, all at the same time across all categories and all markets around the world. Right? As legislation continues to change and evolve. And I think right now that reflection, we can really see it in the data, and you can really see a couple of companies in Canada, a couple of LPs in Canada really starting to pull away from the rest of the pack. When you look at some revenue data, sales data and volume data.

You have some groups who have been absolutely ruthless and focused on low-cost, high-quality flower at scale. You see those who have been incredibly focused on pre-rolls, and I would say more convenient options. So instead of carrying around papers and a grinder and something else, it's actually this idea of pre-rolls and what that can actually lead to.

We have a lot of people who now have carved up some pretty unique spaces when it comes to vapes and extracts. We're seeing that stuff in the numbers, we're starting to see some companies succeed and become very, very good at those things that they're doing. And what I like about focus is focus typically leads to efficiency. Efficiency typically creates more time. And if you have more time, that actually opens up the door to creativity and different types of innovations. And I think that's kind of the second part.

The second reflection, especially when it comes to innovation and creativity. I think at the beginning of the industry or at the beginning of legalization, everybody was trying to emulate their model after alcohol companies. And why were we doing that? Because it was about the branding, because it was about the lifestyle, because it was about the events, because it was about the way we were going to be able to have this cultural impact in terms of being part of people's everyday experience, to be able to relax or to be able to have fun or to be able to experience one of those moments.

And one of the reflections I had was, we're all looking at alcohol because of the branding and lifestyle, rather than looking at something which a lot of people would call blasphemous or a lot of people would be upset with us saying - which is commodities. And, there's a lot of things we'd be able to learn from commodity marketing and we look to alcohol. Well, maybe we should be looking a little bit at salt. And I use salt as an example because, it's been around for thousands of years. You know, at one point in time it was highly valuable. You were you worth your salt. And salt was used as a currency. So that was something incredible. But over a thousand years, it's been relegated basically to table salt.

And recently you see much more pink Himalayan salt. You see kosher salt. You see low-sodium salt. You even see that if you sprinkle salt a certain way, it can become viral on the Internet and sustain that viral ness because of the way somebody sprinkled it. Right. And how that can create influencers. And I think there's a lot of lessons that we can take from commodity marketing because cannabis is not the only industry that it is, you know, market restrictions. It is not the only industry where you cannot communicate lifestyle. And it's not the only industry where everybody's trying to come up with something new and innovative. But there's a lot of rules and regs in place to prevent you from doing that. I think there's a lot of lessons from other categories that exist today that have demonstrated quite a significant amount of success that we in cannabis could look to as well.

And I think the last one, just in terms of reflections and again a very current one, is cannabis remains a taboo. There are quite a few people on the call today and we all eat, sleep and breathe cannabis on a daily basis. We are a minority, and this is one that still shocks me a little bit or catches me off guard and it shouldn't anymore. But any time I'm in a different country and speaking to regulators or policymakers or doing focus groups to be able to understand consumers, you can see that cannabis has become very normalized for us. But for the rest of the world, it is still a taboo, and we have to take that into consideration as we're building out our plans, whether it's for more local expansion or whether it's for global expansion, it still remains a taboo today.

Rami El-Cheikh: Excellent points, Paul, thank you for sharing this. Patrick, can I turn to you?

Patrick O’Driscoll: Yeah. Again, this is very much an adjacent observer’s remarks. And I think, the first thing that I go back to is 2018, pretty much all of the assumptions at the start-up phase were probably somewhat erroneous. Clearly, a lot of market hype. It was probably more aimed at raising finance than necessarily settling on very sound strategic platforms.

At that time, we met with many LPs and I know I noticed that the leadership was really highly focused on raising investments, and building large growing facilities. And it was quite unusual to find anybody in the senior team with a deep focus on product development, branding or even go-to-market strategies. And I think as the rollout happened, particularly with issues of route to market, I think that that really showed up as quite an Achilles heel.

To be fair, I have to say, the goalposts of regulation, they were continually changing at the time and that really required management to be incredibly agile, far more so than you would get in an established industry. But I think, many of these strategies, as I said, they were focused on building scale and not a lot of thought to the route to market or indeed maybe what the consumer might want at the end of the day.

Then of course, we did get clarity on some of the legislation and regulations, particularly here in Canada, which were relatively draconian. Many LPs, I think, were caught off-balance as classic brand building routes became unavailable. And even in the US actually where the marketing routes are a little bit freer, it's still very difficult to operate mature added value brand building. And I think differentiation has been still relatively weak and obviously with oversupply, driving companies towards a price fighting strategy, if you like.

What I learned, what are my reflections? Well, I suppose the first thing is, something that seems to be true is probably just that. But, seriously, I think what we have to remember is this is a very, very young industry. And if we compare it to the alcohol market, know that the branded alcohol market has been around more than 150 years at least. But, you know, that faced a lot of challenges on the way. It was not all smooth, smooth sailing - prohibition in the US, for instance.

I think the expectations this would be a smooth meteoric growth business from the get-go was kind of wishful thinking. But I am absolutely convinced that the industry will be successful over time. It will be bumpy. As was mentioned, we got to get over some of the issues of taboo of the market. But I think what we really need is a very prudent and strategic approach for companies to be successful.

Rami El-Cheikh: Excellent. Thank you, Patrick. Greg, Can I turn to you? You've run several companies now. What have you learned?

Greg Engel: Yeah, I mean my reflections would be, I mean this has been alluded to already, but I mean certainly strong balance sheets are critical. It was critical throughout the last five, six, seven years. But it's also critical going forward. Companies that have a huge amount of debt are in a very challenging place right now and may not be around as Andrew alluded to. And ones that have a strong balance sheet are poised well for the future growth.

I think the other would be on adjacencies. Many companies were involved, and Patrick certainly outlining kind of their perspective, looking at the cannabis space. And, I think looking back, I would have focused on adjacencies earlier, making a bigger part of kind of what we did as companies. The two companies I was at and also look at adjacencies that you could expand into, and I think that's critical as well. I know core competencies is one of the key terms that we're all talking about. But at the same time, if you've got an adjacency that makes sense, that fits in, that can run independent of you where there's some key kind of benefits, I think it's worth considering how that could play in.

This has been alluded to as well. I mean, product lifecycle cycles critical, I think, as Patrick outlined, not enough companies have spent enough time in kind of traditional product lifecycle kind of management. But I also think innovation and new products and bring those products to market. I look at in Canada, for example, one of the companies that I think has done a phenomenal job in the craft beer industry is collective arts, and they cycle through a lot of new products, but they're always managing their portfolio long way out, looking at what's new, what's a new trend, how do we bring things to market.

And I think either through innovation or through genetics or a combination of both, that's critical for the cannabis space.

And then the last thing you know is, is I mentioned genetics and genetics are critical. It's one of the things from a plant perspective, what you're seeing in the early days of medical that I was involved in was the genetics were a big differentiator, same was true when adult rec started and now you're seeing genetics come to the forefront that have minor cannabinoids expressed. And I think that's a key learning of making sure the company's very focused on genetics. It's not about just looking at what you have today, it's about how what's the next trend, how are you going to get there, how are you going to differentiate yourself?

As Paul alluded to in the salt example, that's really the genetics example. How do you bring different products to market? And I think that's critical. So that would be my key perspective.

Rami El-Cheikh: Wonderful. Thank you, Greg. Let's go to the next question and probably Paul, I'm going to start with you. If you were able to travel back in time and have the opportunity to start these cannabis companies with a blank sheet of paper, what would you do differently to avoid today's challenges?

Paul Furfaro: Sure, I'm going to I'm going to put myself back in the seat of a of a retailer right now. And when I think back to the beginning of the SQDC I have to be really honest. I don't have any real comments on what the SQDC or what the government could have done better, because I think it was very, very strict parameters and I think it actually worked quite well for the province in terms of when we started.

Okay, so this is really personal. What I could have done better when I was sitting in the president’s seat, because that's probably when I could have influenced the most amount of things the quickest. I wish I would have been personally more transparent with a lot of the licensed producers that we were working with that were coming into the province.

At that time, we were operating 90 dispensaries. We had completed roughly 30 million transactions within the province over the years, and we had a lot of data that we didn't share. But more importantly, I think we had a lot of insights that we didn't share. And I wish I would have personally shared those insights because I think those insights through those 30 million transactions that we used to joke about all the time, the 30 million transactions was like doing 30 million focus groups because every day you had a client walking in the store basically saying what they were looking for, what they liked, what they didn't like, what they were enjoying, what was driving them a little bit crazy.

And I think we would have been able to share some of those insights. They would have been able to create a lot more foresight for the licensed producers we were working with. Greg mentioned minor cannabinoids. We were a canary in the coal mine. I mean, we had all these transactions where people were asking us questions that had to do with strains, that had to do with price, that had to do with potency, that had to do with minor cannabinoids. And I wish I could have just shared some of that a little bit more with some of the licensed producers.

I think that as a retailer in a province where we were the only path to the to the consumer, I think that sharing some of those insights would have helped the LPs build stronger plans for the province. I think that that could have led to better collaboration even amongst the industry, to be able to share some of that data. And although I think it was inevitable, I think we would have been able to push off the price war a little bit longer than we did eventually started within the province.

That's something I wish I would have done a little bit differently, is just shared a little bit more insight and if we would have done that, hopefully some of the challenges that our LPs were facing could have been avoided or at least postponed for a little bit longer.

Rami El-Cheikh: This is very helpful. Thank you, Paul. Patrick?

Patrick O’Driscoll: I remember when I was looking at the industry in 2018, one of the questions that I remember posing to myself, that seemed odd to me was, why do so many LPs want to effectively be farmers? Because essentially the building and operation of major growing facilities, this is kind of an agricultural activity.

And when I compare this to the business that I was used to, and the wine industry or spirits thinking was somewhat different. Wine businesses particularly ones that operate with scale, they don't all own their own vineyards, they may have a few acres under ownership, but the majority of their production is outsourced to contract growers.

And then those companies then add value via the processing, the expertise of the winemaker and through marketing. And that way they keep their capital needs for land and vineyard management to a to a minimum. And it's the same thing in the spirits industry, probably even more extreme. I don't really know any spirits producers that own their own grains.

They concentrate on added value processing in the form of distilling and aging and innovation and then generation of consumer demand. Now, I mean, that's not to say that growers and farmers can't make a good business, but you just need to be clear that that's your priority. And if so, you need to build that expertise and capable intake and then invest in high quality at the lowest cost and to the specification of what your customers want.

But I think the expertise needed for added value, premium brand building is quite different. Be it in innovation, effective sales organizations, CRM, consumer driven marketing, that kind of stuff. I think, if I was back in time, I very much made the decision what kind of business I wanted to build, be it growing cannabis, differentiating brand building or even retail because all of those need different management capabilities. And honestly, there were so many challenges in this nascent industry that's spreading yourself very thin across all these disciplines I think was very, very difficult.

Well, then, yeah, and then I think I would have avoided the rush to scale already until they the true size of market demand became clear. Having said this, I if I also had the benefit of hindsight, I would have bought more Tesla shares in 2018 as well.

Rami El-Cheikh: Awesome. Greg. What about you? What would you have done differently.

Greg Engel: Yeah. I think the one that Patrick alluded to, certainly in terms of less investment in cultivation and more focus on innovation and product development and downstream processing. The ability to package product and bring it to market, whether it's pre-rolls or packaging and everything in that perspective but bringing those innovative new products to market is critical.

I think lobbying is one that I mean, we've all talked a little bit about kind of some of the challenges the industries face. Certainly, in the CEO survey it came out that we’ve consistently seen some of the big challenges and whether or not it's in taxation, whether or not it's marketing and branding, and whether or not it's in terms of packaging around edibles, those are three key issues that are really having a pretty fundamental effect on the industry. So as an industry, it's important to lobby.

And I think at times the industry wasn't consistent in their lobbying voice. And I think really that would be something if was able to go back in time and kind of do over, that would be something to focus on.

One other idea that's kind of a bit out there and interesting because only one company went this route was, makes sense to be a TSX listed company, be a NASDAQ listed company, raise capital, focus on that.

But I think there was an opportunity where there was a window once you would raise significant capital to down-list to the CSC. From a regulatory perspective, if you're able to go after the US market and you know, because U.S. companies in the early days and still struggle at times to raise capital, being CSC-listed only and I think you know that U.S. market is there - it's the biggest market cannabis market in the world. And having that ability to access it would have been one that, looking back it’s something I would have definitely considered as an option to go forward. Those are the kind of things I would say from what would have done differently.

Rami El-Cheikh: This is this is great, Greg. Andrew, I think your perspective would be interesting. So you've been part of a company that has been subject to a lot of restructuring and then became a serial acquirer. What have you learned? What would you what would you have done differently?

Andrew Stordeur: Not much time we have on this one. Lots of learning. But I would say first and foremost, just going back, I agree with Greg there. I think leading for a healthy industry dynamic and getting really organized there certainly have been helpful as we face right where we are right now. But, look, I think, at a really simplistic level, I think the most important thing to do is rip the rose-coloured glasses off both of myself, as well as the team and mandate that everyone does that.

Because we spent so much time focusing on the upside, we didn't spend enough time understanding the downside. And so as I mentioned in those four phases, building the company strategy to flow with the cycles that this thing is eventually going to take requires, you know, some leadership and require some foresight. But not complicated if you think about it, given my comment before that, everything was pretty much predictable in those first three phases.

So a bit of wet cement as far as how you think about that strategy goes, but maybe a little bit more specific on some tactical things. I think as cliche as it sounds, I think building a great offense from a great defense actually, would have been a sound strategy to make and specifically, what I mean by that is really building capability in your FP&A in your finance structure.

Getting your finance team upstream on your sales and operations planning, getting super clear on your working capital requirements, you're going to need five times more than what you think you could need. And I think getting a good cadence on your 13-week cash flow and really understanding your enterprise risks and opportunities. I mean, it sounds so basic, but these things were not done because we were so focused on where this thing was going to go.

And we didn't necessarily protect the downside. Certainly there and I think this was touched on before, but I think it's important to maybe say it again. I think a fit for purpose innovation capability is key, and I think I would highly recommend telling myself, looking into the future here a little bit, that it's okay to be a fast baller.

And in fact, I highly recommend being a fast baller from a product innovation standpoint. You know, it's too risky to kind of lead on the front end there. And I think that leads into a little bit of this concept that we're talking about, which is product lifecycle. Having a brand pack and pricing a channel strategy and making sure that you're understanding that product lifecycle.

You know, it's one of the it's one of the killers of your working capital if you can’t get that right. And to Patrick's point I think is really, really, really an important one certainly that I live through is get really clear on what parts of the supply chain you want to own. And I think it's a really, really important point.

And it's all about being agile in your strategy and understanding where does your strategy start? Where does it end to take advantage of those profit pools and where are you going to really add some value?

Rami El-Cheikh: This is great. Thank you. Thank you, Andrew. I'm going to ask you to be quick for the last question that I have for the panel, because I'd like to turn to questions from the audience. But let's forget about the past. Let's come to the present moment.

If you were tasked to fix one of the larger cannabis companies that's struggling today, what would be your top three actions to make the business model more viable and to make the company more sustainable from a financial perspective?

I'd like to start with you, Patrick. How would you fix the problem? What would be the top three actions?

Patrick O’Driscoll: I think probably reiterating what I mentioned before. I think it was kind of interesting in detail of the CEO survey. Most CEOs said they were pretty confident in their strategies and yet in that same survey, pretty much everyone was admitting to being impacted by similar issues. If all the strategy is right, they shouldn't all be impacted by the same thing.

I think the first thing is, you know, really examine how the strategy is differentiated in competition. Be absolutely clear about what business you're in and implications for the business focus, the structure, the consumer and customer targeting. Coming from the industry where I've been, you know, I think when margins are very thin, obviously you can cut cost.

But really for me the only direction to go is to premieurize your product and drive top line. I don't think there is a lot of option for cutting costs. Developing true premium added value products on innovation I think has to be an absolute key route to take. On a little bit more of a kind of tactical thing, with things very restricted in terms of the marketing channels and the routes that we have available to us in the cannabis industry.

But that's not entirely unusual. There are even in the alcohol market, there are many dark markets, meaning in markets where advertising promotional activities are very restricted. Particularly in Eastern Europe, in various Indian states, highly regulated. And yet strategies are found to build brand dependencies. I think in general the pool of marketeers in North America and not very used to operating in these conditions, maybe with the exception of tobacco, but I think I might go out and find these people who really understand how you can build brands and products in a highly restricted market.

And then the final one is very, very quickly, geographic expansion. I don't see the Canadian model changing much in the near term. U.S. for sure right now I think is a huge market with lots of opportunities but there are going to be newly legalized markets in the future. And I think it's very important that companies get in early to lobby and help governments to ensure that the future legalization doesn't fall into kind of the same trap and can create viable business models for supply.

Rami El-Cheikh: Awesome, thank you Patrick, very helpful. Andrew, can I turn to you for this one? What would be your top three actions to fix these struggling cannabis companies?

Andrew Stordeur: Yeah, sure. I'll try and fly through this. Thanks, Rami. And I think to Patrick's point, and I don’t think there's a silver bullet here, but I think there are some commonalities that I think are worth mentioning. And no matter what company I look at, whether you're a licensed producer, whether a retailer, I think come back to what I call kind of the three B’s.

And for me, that's board effectiveness, balance sheet and building capabilities. Let me talk about board effectiveness first. I think board effectiveness is really you have to start with the top down. I mean, I think, what board got you to where we are in the phase in the cycle. It's probably not the board that's going to get you to the next phase, which is really going to be the sustained phase.

You've got to start there and then you've got to work down from there and going to start with your management team, you have to start building capability. I think contrary to what we hear in the space, I think it's a really, really critical time. And actually, you can go get talent. You can go get senior talent in the space right now.

You just got to make them part of the upside that those are going to create. Board effectiveness is one. Second one that we talked about is balance sheet. And I'm not going to belabor the point on balance sheet. You know, we've been there, done that. But I think a couple of things for me is, is you have to make the tough choices now.

You have to move quickly. You can't do a thousand cuts, you know, death by a thousand cuts. It's a culture killer. And it's certainly what I'm seeing from companies right now. But you've got to be deliberate about we're going to make those cuts because you're doing a bit of a balancing act around cutting in certain areas, pulse point before getting really, really focused. And then really placing bets on where you want to get to as we come out of this on the eventual kind of curve and sustain mode.

And then the third one is around building capability. And you're going to have to be the best in the survival mode right now, that's a reality. If you're a retailer, low-cost producer status is table stakes.

And I say that broadly because there's lots of companies that are procuring now or they're cultivating or they're doing a hybrid approach. But you're going to have to be a low-cost producer. And if you're not getting cash cultivation costs, sub $0.70, sub $0.50, you're not going to really make it.

And if you're a retailer, you're going to have to make some very tough decisions if you don't have scale when it comes to exiting leases and SKU rationalization and getting comfortable in the space where you're going to have to make less than 20 points on your business.

If you can live through these areas, and those three Bs, calmer waters are on the outside, but it's but it's certainly going to be a bit bumpy before we get there.

Rami El-Cheikh: Thank you. Andrew. Greg and Paul, just ask you to be quick, what would be your top three reactions? Let me start with Greg here.

Greg Engel: Sure. I'll be super quick. I mean, these have all been spoken to, so market expansion, as a Canadian company, if you're not GMP certified, get GMP certification to go after medical markets elsewhere. If you're a US company, focus on your IP and technology, know-how brands and see how you can help license that. Core competencies, as Andrew said, focus on what you do well and do more of it and do less of what you don't do well.

And then the last one I've spoken about as well is just lobbying, whether or not it's in Canada and the Cannabis Act to make those changes or in the US. When you think of the US today, there's 40 states and D.C. with medical cannabis approved and 23 states and D.C. with adult-rec approved but still banking’s challenge, interstate commerce, all of those things.

While in the CEO survey, there was a lot of consideration that that wasn't going to change overnight, that they didn't see changes in the foreseeable future. It only changes if you make it happen. And that will totally change the business capacity and capabilities in the US if they can remove some of those barriers. That would be mine.

Rami El-Cheikh: Great points. Paul?

Paul Furfaro: Really quickly, I think the first one is, and this is more of a mindset comment than a definitive action plan, but everybody in the survey reading it, there was a lot of people who said, the big issues in the industry are pricing, taxation, competition, regulation. Just remember that everybody's facing the exact same thing that you are.

And I think that's a really important realization where if there is going to be excise relief at one point in the future, doesn’t matter if we believe there is or if there isn't. But if there is going to be excise relief in the future? Remember, everybody is going to go through that excise relief at the same time, which is going to bring another bunch of problems and different competitive environments for people to be able to compete with.

And what we're experiencing in cannabis, in Canada, might seem quite harsh, but we have to keep in mind that every industry deals with these similar issues. So we're not unique and that's a big mindset change that I think has to happen within some of the operators here. I think the other one, Andrew, you said it really, really well.

There's no silver bullets, honestly. You just got to get the ball in the net and it doesn't matter how pretty it looks when the ball goes in. You just got to score those goals. And where I can extrapolate on that is I think everybody's trying to be very big and very global and very international very quickly. Perfect the model and then industrialize. Make mistakes, try things out, see what works and see what doesn't work in your local market, and if you're able to meet the need better than your competitors are, you're going to be able to then explore that across multiple markets. But perfect the model, then industrialize.

The last two points is - I think data is your friend. I think there's still a lot of groups that I've encountered who are making gut decisions or rather than looking some of the data because the data is incredibly compelling. Invest in getting that data to be able to make sure you understand well what's been working, what hasn't been working for you and your competitors. And then to be able to make informed decisions, to be able to move forward.

And then the last one is, you know, everybody knows the story with capital markets. Everybody knows the story with revenue, whether it's top line or bottom line and what that means to what's left in your pockets. I think you're going to have to scale through partnerships. I think this idea of there are people who are not the big LPs that have been known for a long time, who have been doing some pretty amazing things in their basements, and they're going to hit the market through different partnerships. You want to tap into that expertise to be able to scale up through these different partnerships to acquire new skills. I fundamentally believe that those who can do very creative dealmaking in the future to get to those win-wins will be the ultimate winners.

Rami El-Cheikh: Thank you for all these great insights, team. Now, let me take a question or two from the audience. I have one here that's for the entire panel. Let's be quick with it - if you could describe the state of the legal Canadian cannabis industry, as it nears the fifth anniversary of adult use legalization in one word, what word would that be?

Let me start with you, Patrick. One word.

Patrick O’Driscoll: Immature.

Andrew Stordeur: Schizophrenic.

Greg Engel: Infancy.

Paul Furfaro: Zombie.

Rami El-Cheikh: Okay. There's another question here that I see. That's for you, Greg. Investors love to look closely at price charts and analyze performance that way. Could you share how much time would a cannabis CEO spent looking at the stock performance?

Greg Engel: Yeah, you know, it's a great question. I think you hear a lot of CEOs in every industry talk about how they don't follow the share price. I think that's a bit disingenuous, right? I think for me personally, I would always spend time looking, pre-market kind of 6 a.m. 7 a.m. especially is the Nasdaq trading company, what your pre-market pricing was what news flow was out from your competitors and what their share price was out.

And then you'd look at it throughout the day. I think you don't manage your company based on your share price. You manage your company based on your business plan, executing against your strategy and really focus on what you're good at. But at the end of the day, you need to be in touch with investors.

What's really challenging in the cannabis space is there was a lot of movement across the space based on other companies’ results, which is quite unique. I never saw that in pharma or biotech in the years I spent there. A lot of movement happened that wasn't necessarily related to the results of an individual company.

Anyway, my point is, CEOs should spend a lot of time following the share price, but at the end of the day, you don't manage your company that way. You manage against what your plan is, and you manage against what your strategy is.

Rami El-Cheikh: Thank you, Greg. Andrew, you're back. There's actually a question that is specifically for you. What are some of the biggest misconceptions about the business of cannabis operators?

Andrew Stordeur: Okay. Yeah, biggest misconceptions. Rami, I think from my perspective on that, maybe I'd start with the fact that the cannabis market has crested or that we're going to be permanently unprofitable here in Canada. I think that's just not the case. We've mentioned that we've just started. This is going to be out of the blocks for an ultramarathon here.

The global market going to be 10 to 20 times bigger than it is right now. Brands will start to form. We're going to see adjacencies come into play, as Patrick mentioned. And obviously, I think government is going to continue to evolve and help this industry kind of move forward, which I think it desperately needs.

I think second one for me is a bit more controversial, but certainly coming from pure play cultivation and having a lot of experience in this regard, I don't necessarily think you need to be an international export player to actually be successful. And the reason I say that is because it's extremely difficult and it's extremely capital intensive, and unless you really invest in that capability and you actually try and pick times where you can actually time with these geographical reforms are going to happen outside of Canada, it's going to be a very, very challenging situation to really put a strategy on that full force. I think, focus on domestic is not a bad strategy.

If you are going to go international, you certainly got to invest in it. But it sounds easy and trust me, it works extremely, extremely hard. And the third one to kind of say is a misconception is I think if you think about the current leaders in the space, I don't think those are going to be the future leaders in the space.

I think you've got unfortunately, many of the companies aren't going to heed the advice of what our panelists have shared today, unfortunately. I certainly recommend you do that. And I think also some of these new players in to come into the market, they're just not going to have that debt burden. They're just not going to have that baggage that we're seeing from these companies that are currently leading the space.

And they're going to be able to execute, move much more quickly than I think what we're seeing. Those would be my three, Rami.

Rami El-Cheikh:  This was a fascinating conversation with a lot of key takeaways, honestly, for the industry. Unfortunately, we have to end it now because we're running out of time. I want to thank our advisory board members, Greg, Paul, Patrick and Andrew for your contributions and insights today.

I also want to thank the audience for joining us today, and I want to encourage you to visit our website, download the cannabis CEO report, and join our webinars in the future. And thank you again. Enjoy the rest of your afternoon. Bye.

Greg Engel: Thanks.

Patrick O’Driscoll: Bye.

Paul Furaro: Thank you.

Andrew Stordeur: Thank you.