Chatting with Chuck Rifici Cannabis Industry Visionary

Today, I am speaking with Chuck Rifici, formerly of CEO Tweed (now Canopy Growth) and CFO of the Liberal Party. Currently, he is the Chairman and CEO of Cannabis Wheaton Income Corp, and Founder and CEO of Nesta Holding Co. Quite an interesting resume Chuck, how did you get your start in the cannabis industry? Was it a strange transition going from politics to the cannabis industry?

I got into the cannabis industry when I saw the opportunity for the creation of a large scale federally legal production platform under the Harper government. I really saw this, as many other entrepreneurs, as an immense opportunity to build something at scale and really sink my teeth into a very large venture, serving a market that already exists. It was a “once in a lifetime opportunity” where you have a brand new industry that gets created, but where demand is obviously incredibly well known. It was attractive for those two reasons. For me it really started in California in 2010, when they almost became “the Colorado”; the first state to pass regulation at a state level to legalize. At the time, I thought I was really missing the boat on this exchange and then when California lost by 2%, I kind of vowed personally never miss that opportunity again, if and when it would happen in Canada. Which is why I was fortunate enough to already be scanning the landscape for these upcoming changes? The Harper government press released the draft regulation (creating the MMPR, now ACMPR), on a Sunday night, and I was reading the regulations within an hour of being public and ultimately that head start gave me a huge advantage in building up what became Tweed.

Did you face a lot of stigma? And how did you handle it?

I thought I would face more stigmas, I remember the days of whispering the word marijuana in a Starbucks, but very quickly that went away. I wasn’t sure what my parents would think. The stigma seemed to come from odd spots. For instance, it came from US suppliers, as we were building out our factory. Just trying to order fluorescent lights, certain US suppliers wouldn’t ship to us because we were a cannabis company. Even though we were federally legal, it seemed very odd. More recently, I think the biggest stigma has come from the big five Canadian banks, and I have been hugely disappointed with the treatment of the big banks towards the cannabis industry. They have asked certain federally legal, publicly traded companies to close their accounts because they are not banking on this sector.  I have had personal issues because of wealth created from publicly traded, federally legal cannabis companies and I am dumbfounded. Prohibition runs deep in some sectors and so it always comes from a surprising spot.  But, generally it’s never been an issue. People understand that the horse has left the stable and we are not moving backwards on legalization. So I find it is usually a non issue but it does come up once in awhile and it is surprising. 

 How would you rate Justin Trudeau’s handling of the legalization policy to date?

I think the Trudeau government has done a great job, I mean it’s a tough file. Canadians agreed overwhelmingly that we want to legalize, but when you start digging deeper into the details of how legalization is going to look, things get murkier. It is politically sensitive and it’s funny as both opposition parties are causing issues. The NDP would prefer that things move faster, which is easy to say when you are not in power and the Conservatives want things to not change at all. I think the Liberals are showing progress in the file, there is nothing that they have done to date that is contrary to the campaign platform they ran on. They want to legalize for all adults, “legality” is the key piece, 18 and up for all Canadians. They are talking about a potential mail order system, as well as distribution. They are allowing provinces to do what provinces typically do, which is handle local distribution of controlled substances. I think they are following a good path and we are seeing them prioritize the bill in recent debates. At the end of the day, to summarize, there is nothing from the government that shows me any weakness or any kind of area or level where I would be concerned about their commitment, Certainly a year ago I would hear a lot of people ask me and others “Will the government actually go through with this?” and I think that question is now very much extinguished.

 What are some of the things that you anticipate will happen come July 2018?

The big question for July 2018 is “How much will the provinces have done?” This is really pure speculation, by July 2018 on the adult use, legalization front, I believe the federal government will have their end of the work completely done, and I would suspect more than one province that have a framework for distribution in place. For provinces that have either not been paying attention or unwilling to move forward on this file, I would think, but I wouldn’t say guaranteed, that licensed producers will be allowed to mail order directly to adults in provinces that don’t have their own distribution system. I think it’s a great “stick and carrot” by the federal government to basically leave the door open on mail order. Maybe that impacts the tax revenue base or control in the system that is really an unknown. Distribution, ultimately with legalization, is the billion dollar question; it’s the multi-billion dollar question. I believe we are going to see more added values to distribution on retail over the next couple of years. That is the big question. And as a caveat or additional piece, in the meantime, I do think by July 2018 we are going to see pharmacy distribution on the medical side in at least one province and I think that is really important. It will help shape better legalization policies. If policy makers in different provinces go and see what it looks like in a medical regime and see that the sky doesn’t fall and the world still works, the regulations will be just a little bit better, if they get to see medical distribution first. This is internal to Health Canada and the College of Pharmacists’, there is really no parliamentary effort, so I really believe that before full legalization that it would be helpful for a better legalized system.

I have noticed Cannabis Wheaton has a different business model; can you elaborate on your “streaming model” concept? How did you come up with it as it makes sense in this rapidly evolving market?

Cannabis Wheaton, our most high profile company in our portfolio of companies, is the world’s first cannabis “streaming” company. The concept was borrowed from the mining sector, but fundamentally different for the cannabis sector. What we do is provide capital to fund either existing licensed producers or late stage applicants to build out their facilities, either expand or build out their first facility. We provide very creative capital, a good value for them and in exchange we take a small equity interest in the company, so we have minority ownership and we allow our partners to keep control of their companies. Typically, early stage applicants, especially when they go to raise that first round for the kind of money they need to build a facility, you might lose control of your company or set yourself up to lose control on the next financing. We allow our partners to basically continue with their dream and build their business. Then we also take a portion of the output of the facility we help expand, which we call our “stream”. Typically, for a lot of our deals it would be a third of production, but it really varies and that allows us to buy that product at cost of our partner. The real advantage is that our partners get the benefit of our team that we built of industry experts in every sector: design build, cultivation, branding, legal and regulatory. We help “de risk” our partners execution of business and from an investment perspective we are a second set of eyes for due diligence for investors. It’s a very interesting platform and we are in the middle of a very significant financing to start funding those deals, so there is more to come on that front.  

Cannabis stocks have been fluctuating lately, what are your thoughts on the how and why? How is your company doing?

We have seen recent IPO’s in the space and some of the big names have had some negative pressure, although there is always a lot of volatility. Today actually seems to be a good day for a lot of the names. I think it has to do with the fact that as the Liberals start heavily debating legalization a lot of the investor interests in cannabis stocks are retail investors, and by that I mean individuals that are buying the stocks. I think people tend to underestimate how long it takes for legalization to take place. The fact that it isn’t just legal as soon as people discuss it in the House of Commons leaves people disappointed. It’s more temporary lack of patience or understanding of the legislative process, but I think from an industry perspective things are moving very well. I see the volatility or negative pressures as temporary. We are facing massive supply shortages, demand outstrips supply in the medical market, and looking forward to legalization, we probably need 20 to 30 times the capacity and the industry is moving very fast. Cannabis Wheaton, as well as other platforms and producers, are aggressively looking to build out capacity, so the industry is going to respond to the lack of demand. What it means is that there is more growth to come and that is exciting for everyone.  

Are you concerned about what is going on in the US and do you think will affect Canadian markets? Specifically, referring to Trump’s administration recently perspective on the US cannabis industry.

I am not too concerned about the US as it is a different market. None of these Canadian companies have a large investment in the States, some may have minority shares, but those are pretty rare. The Canadian exchanges typically don’t allow Canadian public companies to invest and have US based cannabis investments, so I think it’s a bit of a distraction. It adds temporary short term volatility to the stock and in some cases the Trump administration and continued prohibition in the US is a significant gift to the Canadian market. It allows Canadian companies to continue to attract more capital, attract more US investor that would otherwise probably be investing locally in the US if it was already federally legal there. So we get this tremendous gift to the Canadian market as we continue to build scale and dominance, and puts Canada, our production system and our cannabis industry in general further ahead. This will lead to a more guarantee of significant presence on the world stage when it comes to cannabis because of the States continued prohibition policies.

What do you see as the biggest innovation in cannabis in the next few years?

For innovation, I think of retail innovations and concepts, as I don’t really think we know what cannabis retailing looks like? Initially our government and the legislation will make it so we have a limited amount of choice, there won’t be a lot of options on how you design retail but over time the innovations will be there. We know what a coffee shop feels like, that model has been figured out over the years, but coffee shops didn’t really exist 50-60 years ago and it has developed over time. We know what bars look like, they have been around forever, and so what does a cannabis establishment look like? That is going to evolve into a very defined model and I think that is a really interesting innovation, we are going to see a lot of different versions of that in different parts of the world. Over time it is going to emerge as that third area of vice, or of consumption of something that is like caffeine or alcohol. It will be interesting to see how that retail environment will play out.

Last year the Star made a prediction as follows, do you think this is an accurate prediction? “Legalized recreational marijuana promises to spark a $22.6-billion industry in Canada, eclipsing combined sales of beer, wine, and spirits, a new study suggests.” – The Star, Oct 2016

I think they are actually a little bit low, I certainly agree that it’s in that ballpark. I think people underestimate the reduction in alcohol consumption that will follow from increased cannabis use. I read a report recently right around the Lift convention from an alcohol related association saying they are expecting a 1% drop in sales and that was completely laughable. There is a sizable market today and making something legal, when we look at the negative consequences of consuming alcohol vs. cannabis, I think people will come to the conclusion, that many of us in the industry have come to, that there really is a preferred option. And so those numbers are baseline numbers in my view and we are very bullish on the space.

So what’s next for Cannabis Wheaton?

Our recent big news was the appointment of Hugo Alves as our President. I am very pleased to have Hugo join as President to run Cannabis Wheaton; he’s leading the most successful cannabis practice in the country. Hugo has been counsel to many of the top licensed producers, a countless numbers of applicants, and over 50 ancillary businesses in the space. He has really been on one side or the other, of almost every transformative transaction, so he is very much a top legal mind, strategist and relationship builder in the industry. Hugo has been a lawyer for over 20 years and to leave his firm, I am tremendously humbled to have him come and join me with Cannabis Wheaton. We are really excited to execute on this business together.

 Well thanks Chuck! That is very exciting news!  

Well we are looking forward to updating you on that front and anything in this industry. There is lots of opportunity and we are driving forward and looking forward to what next year has to bring!