High Spirits: The Cannabis Business Podcast
Hosts Ben Larson and AnnaRae Grabstein serve up unfiltered insights, reveal their insiders' perspectives, and illuminate transformative ideas about the cannabis industry for people who want to make sense of it all.
High Spirits: The Cannabis Business Podcast
#064 - The Watchful Eye of Seth Yakatan
Seth Yakatan, a key player and influencer in cannabis finance and M&A, joins us to unravel the financial intricacies of the cannabis industry. Gain invaluable insights as Seth shares his extraordinary journey from health and wellness to becoming a significant figure in raising capital and selling companies within the cannabis sector. Discover how his unique experiences provide a fresh perspective on the challenges and opportunities facing the industry today.
Embark on a journey through the landscape of cannabis finance as we explore the infusion of new talent from traditional sectors like alcohol and tobacco. We discuss the potential integration of hemp beverages into the Texas alcohol supply chain and celebrate the harvest in the Emerald Triangle, highlighting the hard work of cultivators. The conversation shifts to the delicate art of data gathering and pattern recognition, emphasizing the power of transparency and truth-telling amidst the polite façades of venture capital.
Prepare for an insightful discussion on the looming challenges and future consolidation strategies within the cannabis industry. We delve into the structural deficiencies in capital flow and the potential for strategic refinancing as companies face a daunting "debt wall." Despite these hurdles, there's optimism for growth through acquisition amid regulatory changes and market consolidation. Engage with us on LinkedIn to continue this conversation and share your thoughts on the promising future of cannabis.
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Hey everybody, welcome to High Spirits. It's episode 64. I'm Ben Larson and, as always, I'm joined today by Anna Rae Grabstein. It's Thursday, october 17th 2024. And today we're diving into the financial underpinnings and strategic maneuvers shaping the cannabis industry. But before we go there, anna Rae, are you recovering from Benzinga yet?
AnnaRae Grabstein:I am?
Ben Larson:I'm not clearly.
AnnaRae Grabstein:I've been having lots of great follow-up calls with new folks that I met. Amazing to be in this industry for over 10 years and to keep seeing new faces and old friends and also just hearing about growth stories and new plans for companies that are going through different phases of reinvention. So, yeah, I am recovered and I've kept very busy making sure that I'm following up with everybody. How about you?
Ben Larson:Good, you know, to that end I was talking to Patrick and Elliot Lane and they were talking about how they're marketing the cannabis conference across all the Benzinga assets and that they actually had about 5% of the ticket purchasers be through the channels of their mainstream website. So there are new people coming in just looky-loos, or people jumping in coming to the Capital Conference, so that's exciting.
AnnaRae Grabstein:Yeah, it makes sense. I mean, I see in my business that there are a lot more folks who are not in cannabis yet but whose industries are starting to decline with their traditional consumer bases like alcohol or tobacco, that are starting to think about different channels for innovation and are exploring cannabinoids. So it does not surprise me to see that there are new folks showing up at the conferences to to learn what they can.
Ben Larson:Yeah, and I I think it's only going to accelerate from here. Um, just this morning we're kind of watching what's going on in Texas. Uh, looks like there's a big push to get hemp beverages into the the alcohol uh supply chain, uh, and get put under the Texas Alcohol Beverage Commission, the TABC that would be really interesting.
AnnaRae Grabstein:Is that good for you? Is this forward progress in your mind?
Ben Larson:Yeah, yeah, I mean, look, anything that ratifies us into the mainstream channels, I think is positive movement. It's certainly a broader audience than, um, what is you know in the regulated channel. And it is more official uh than say you know what I guess the broader hemp category is currently doing in texas. Um, there's a big battle that's going to be going on for all the different, you know, form factors and all the different outlets that it's being sold. Um, but from a beverage perspective, yes, you can argue that the three tier system that we you know that wasn't optimal or isn't optimal, uh, to have cannabis beverages being put into the three-tier system. But you know it's a system that works and it's proven that you know they can deliver you know intoxicating products to the market. So why?
AnnaRae Grabstein:not? Yeah, I see that. And then one more call out that I want to make just before we bring on our guest today is that it is mid-October, we're in the middle of outdoor harvest season and yeah, you know, I love to think about the cannabis that's coming down all over the country now, but certainly, you know, where I came up in, the Emerald Triangle, is kind of the trophies of the season. And so just to everybody that's out there that's pulling down their outdoor harvest, putting it in free freezers for extraction or or you know, curing it, trimming it, getting it into the new season's product lines, just keep working hard, excited to see what's coming down this season and at least in California I think it's going to be a good one. We haven't had any weird rains or fires that are going to hopefully damage the crops and, yeah, it's a fun time of year. Trophies of the season that's what I see those flowers as.
Ben Larson:I love it. I love it. Yeah, it's like this week, or this week and last have really been a distinct change in the weather. I'm the hoodie season is back and I'm really here for it, because it was a bit of a hot summer, despite there being no fires.
AnnaRae Grabstein:Well, let's jump in to our main event Today. Our guest is Seth Yakutan. Seth is the founding partner of Katan Associates and is known for lots of candid insights and expertise in finance. Having raised over a billion dollars and sold over 20 companies across biotech, pharmaceuticals and cannabis. He's a powerhouse dealmaker, has a no-nonsense approach that, if you have been following cannabis, you have probably seen. His prolific presence on the social channels, mainly LinkedIn, he's become kind of a daily read for almost everyone following industry news and is an all-around super cool guy to chat with. So, seth, it's great to have you today.
Seth Yakatan:Wow, first of all, I'm honored to be here. Thank you so much. I don't take these opportunities lightly, so I appreciate that and I might have to record that intro as my walkout from now on with the powerhouse. That was phenomenal. Thank you very much.
AnnaRae Grabstein:You got it.
Ben Larson:You have turned into a media powerhouse. You put any LinkedIn activity I do to shame. So congratulations for being the voice of the industry. Thank you, thank you.
AnnaRae Grabstein:Yeah, so I'd love to just dive in. You have been in cannabis for a while now and you've seen the industry evolve, but what I don't know is how did you end up in cannabis? What was the entree point that brought you here?
Seth Yakatan:Kind of an accident. You know, I think Wes from Mammoth. I was in a meeting with him about six months ago and he said the greatest law of the universe is the law of unintended consequences. And so, you know, I was on the buy side for about 11 years in venture and in kind of a funding mechanism for private equity in a fund that was owned by a bank, and I started an advisory firm with my dad focused on life sciences in 2001. That kind of started to get more into health and wellness, because the development of early stage therapeutic drugs is very difficult.
Seth Yakatan:In 2011, I was approached by I did two therapeutics companies that kind of just worked, and I was approached by in I did two therapeutics companies that kind of just worked. And I was approached in 2011 by a bunch of guys who wanted to effectively create a mimic of GW Pharma for the express purpose of doing a pump and dump. Like, hey, we've got a story, we can make a lot of money if we take it public and leave, and I was like, awesome, let's do it. So I flew to Israel. I had a lot of connections there and met Rafael Mishulam and licensed three molecules from him and went down this path from 2012 to about 2017, where I took this company public and raised a bunch of money and got involved in two or three others and somehow, in 2019, and along that path, I met a guy named Jason Pinsky and somehow Jason got hired by Eaze and when he moved back to LA, I started hanging out with him again because I had hung out with him a lot, and one day Eaze decided to hire me as a consultant to help them raise money at that inflection point that they had in the summer of 2019, when Jim Patterson left and Roe was hired and they looked like they were heading to the trash heap.
Seth Yakatan:And in that period of time, in the fourth quarter of 19 and the first quarter of 2020, I helped Ease to close a $40 million Series D. 2020, I helped Ease to close a $40 million Series D and Ro asked me to get involved in the company and I did so. I was inside of Ease for two years as a consultant doing corp dev, biz dev, m&a and capital markets and, as you probably are aware, that was an amazing place to be. So that's how I got in and I have not looked back.
Ben Larson:That's wild, I didn't realize. You were like embedded at ease for for a number of years. And wow, and, and now we, we, we see kind of a new, new headlines coming out about ease at the end of this year Maybe they they wish they still had you on board.
Seth Yakatan:I don't know. I don't take credit for a lot of things. I don't like to take credit for things that I haven't done. I will tell you that the Green Dragon acquisition that was done by Ease was found by a person who worked for me named Nick Brandes and that was our deal and myself and Corey Azzolino and the counsel of the company at that time, a guy named Mark Woods the three of us did that deal, got it approved, papered, it was on every purchase and sale agreement. That was my transaction, so I don't know that they would be.
Seth Yakatan:It was also very clear in some of these deals that once you do the deal, that you're no longer needed. So I skedaddled and, without providing any material non-public information, I can tell you what I think is happening at ease, which is I posted on it earlier this week which is the same thing that's happening at all of these other debt refinancing and equitizations that you have, like Ascend and AYR and Forefront and Statehouse, where the debt holder is figuring out a way to take over the company and claw back more equity in exchange for its debt. Unfortunately, I think, given the way that it's manifesting at ease, it's publicly looking like it's a lot worse than it is, and I think the fact that they legally can't say a lot of things is providing a lot of disinformation for headlines months. So my alleged sage prognostication is that not much is going to change at EASE, except a lot of people are going to lose jobs and EASE will figure out a way to maintain doing what it's doing in at least three states into 2025, pretty successfully.
AnnaRae Grabstein:I totally agree with you. I think that people don't come in and purchase assets to shut them down and to throw them in the garbage. You don't spend 50 plus million dollars on that. So there will be a rebirth of what is valuable and what is determined to drive forward, whatever the new goals are profit or whatever is coming.
Seth Yakatan:You know, I learned so much at Ease. It was one of the most fun experiences I've ever had professionally. The environment there was amazing. I also learned a lesson that I had never really learned before, which is a guy who's worth $4 billion as your principal investor, who's directing the investment on his own, is a different animal than any other animal I have experienced in the jungle before or since. So be careful, be careful. I watched this. I watched this mini series on Netflix called the Terror. I think it's about these guys that are shipwrecked in the middle of the Antarctic trying to find a northwest passage, like across from Great Britain, and they get attacked by this spirit animal, which is like a soul-stealing, unkillable polar bear. I love where this is going and that's who you're up against like a soul-stealing, unkillable polar bear. I love where this is going. That's who you're up against.
Ben Larson:You can't win.
Seth Yakatan:You're dealing with a supernatural force.
AnnaRae Grabstein:So let's dive into the bigger picture stuff your work today, what you're working on, what you see as the key trends that you're putting your effort behind. Give us a picture of today. You gave us a picture of before. Now what's in front of you?
Seth Yakatan:So I seem to have this amazing luck where an organization will decide that they want me to help them from a capital markets perspective and I kind of call those enterprise clients. So after I left Ease, somehow I stumbled into Glasshouse and I've been inside of Glasshouse doing the same thing as Ease for almost two years M&A, capital markets, helping them, making capital allocation decisions. So about a third or half of my time is really spent doing that on behalf of Glasshouse, which has been another amazing experience, given the capability of Graham and his team to execute and the financial discipline that Mark, as the CFO, has at that company and just the absolute incredible market presence and awareness that Kyle has as a vision and also as a capital raiser. He's unlike many people that I've ever worked with in my career. Just his ability to say we're going to go do this and raise the money can do it. He's got probably one of the most powerful capital markets syndication desks in cannabis on his desk Right. So I've been really fortunate to be there and that takes about half of my time, takes about half of my time.
Seth Yakatan:I have the capability because of that to do things outside of California, so I maintain relationships with a few companies that I advise. I keep a very watchful eye on Arizona, Missouri, Illinois, Ohio, Maryland, New Jersey, Pennsylvania and Florida. To a lesser extent, my relationships and the companies that I work with or talk to closely tend to more be on the multi-state brand side or on the smaller two, three-state private MSO side outside of California. Two, three state private MSO side outside of California. So I tend to be looking at those trends. I advise two funds, so I see a lot of things. For some reason, Anna Rae and Ben, some people think that I just have the capability to go get money for anything under the sun. So I do get a lot of inbound can you help me? Requests and I try to try to answer them all. So that's what I'm. And then just, and then this whole LinkedIn thing has just become a whole animal unto itself. It's a full-time job. It's a full-time job. It's a full-time job.
Ben Larson:So yeah, well, I appreciate you dropping in the eponymous term in there. You do have a very kind of watchful eye of the industry, right, and I'm curious as to where you're getting your data. Like, you seem to be able to have access to information. I don't believe it's proprietary information, otherwise you wouldn't believe it's proprietary information, otherwise you wouldn't be putting it on LinkedIn. But you are connecting the dots and telling us stories that we aren't seeing elsewhere. And so, yeah, where are you gathering this information? What's your process for kind of evaluating the true health of companies in the space?
Seth Yakatan:There's a multi-state brand that I talk a lot about who has invited me to be the closing speaker at their national sales meeting next week with 150 reps. Do you know why? Because the founders of that company trust me. Everything that I do is a strategy. Everything that I go about is just a sales process, and sales for me comes down to relationship.
Seth Yakatan:How good is your relationship? Do you have a relationship? If you text that person, are they going to text you back in 24, 36, 48, 72 hours? If not, you don't have a relationship. The first thing you got to have is the relationship. The second thing you got to have is mindshare. I can have an amazing relationship with you. If you don't pay attention to me and I don't have your mindshare, it doesn't matter. So relationship plus mindshare equals action. Okay, the reason that I've gotten 20 companies sold for founders is because I have the relationship and I have mindshare.
Seth Yakatan:How do I get data? Part of the key of having the relationship and keeping mindshare is if you call me and tell me something, I'm not going to go tell someone else. So the way that I get data is that people give it to me. So every major investment bank I get all of their research. Anyone who publishes a compendium or a view on the industry, I get it. I've developed a deep relationship now with Hoodie. They're pushing me data so I look at it all as a compendium, as a dashboard, and I take it all in to watch trends. So I'm also a data junkie. So if I find someone who has good data or has a good report, I'm going to say, hey, I really like what you're doing. This is really important. Can I get it? And just to share with you that, the further.
Seth Yakatan:There's three pieces of data that I want to see every week. So SSC Advisors out of Canada puts out a 1520 slide report that talks about market cap and relative public market activity and volatility of stocks. So I want to see that every week. Okay Day puts out his weekly piece that I read like the Bible. So whenever that comes out Friday or Tuesday or Sunday I bookmark it, I flag it in my inbox and I'm going to look at it because I want to see is there anything I missed? Is there anything that happened this week? Is there a deal that I didn't have? He usually is able to break down the metrics of deals. It informs market. Break down the metrics of deals. It informs market, and there's an analyst at ATB called Frederico Gomez who also puts out a weekly report, and the level of granularity of his data on a state-by-state basis is as good as anyone I've seen. So for me, that's my dashboard and how I put it together.
Seth Yakatan:But honestly, Ben, it's, it's kindness, you know. Like, hey, I like what you're doing. Can I use it and I'll give you the attribution. Like the other thing is attribution right? I'm kind of on a roll, so I'm sorry, but like I think the guys at Viridian put out great data, you know, and some of the stuff that they drop. I think there was a post I did on GTI, like three weeks ago, where I messaged Frank and I was like dude, this is really good. I'm basically going to plagiarize it in my post, Are you OK with that? And he was like yeah, just give me the attribution. So part of it is just like being a good human, you know, but I'm a, I'm a fiend for it. I want more. Know, but I'm a, I'm a fiend for it, I want more.
AnnaRae Grabstein:Well, I want to comment on what you're saying too, because what you're talking about is data, but actually what I think is the overarching theme of what you're talking about is synthesis of information, because data is only as good as what you connect it to, and so I think that what is the most powerful thing and what I relate to about what you're talking about is this concept of pattern recognition, about connecting dots. It's like we can have all the dots in front of us, but it's about how you take that press release that Day shared in his newsletter, with the credit information from viridian, with the consumer data that you see from hoodie, and nothing is private. But you start to see how it's all connected and it correlates to each other, as opposed to just taking it at face value. And um, and adam grant, who's this incredible organizational psychologist? He talks about that as the idea of synthesis, and that synthesis and pattern recognition is really what it's all about. It's not just about data, it's about how we synthesize it, and I love that.
Seth Yakatan:That's really interesting because you could have all the information in front of you and not put it together, right? So I think there's also a third piece to the pattern recognition, because the pattern recognition I don't want to say oversimplifies it, but once you recognize the patterns, you then have to interpret the patterns and make a prognostication on the patterns, right? So, just to go back to my dad, you know, my dad literally grew up on the street of Philadelphia, right, like on the streets, like I'm, I'm a, I'm a, I'm a genetic modification away from probably should be incarcerated, right? So the other thing that I think that's interesting in the third step about the data is that, like, the one thing my dad would always do is he would confront the elephant in the room immediately from inception and put it right in your face.
Seth Yakatan:And I think the thing about maybe the way that I connect is that I'm just going to tell you what I think is the truth based upon the data. Hey, you did a really good deal because you did a deal that's better than market data. Hey, you did a really good deal because you did a deal that's better than market. I'm going to tell you, you did a really stupid deal because market's here and you did this, or you're putting out a press release that says this but this is really happening. I'm going to call you out on that.
Seth Yakatan:And I think the other thing which happens because I was an institutional investor for a long time is that there's this kind of decorum that happens in high-level corporate finance, where you're not supposed to be combative and you're not supposed to tell the truth and you can demystify what's going on. I think that kind of pulls it all together and getting all of the front end data allows you to create, you know, the pattern recognition or gauge where market is, and then the interpretation is kind of saying, well, did you do better than market or did you do worse than market? And I think that's a lot of kind of my, my process and how I think about things you know. So, like we were talking about before we got on the phone, the headline isn't really usually the truth. So what's the truth? And part of what I like to do is unpack all three of those things to get to what I think the truth is.
Ben Larson:You kind of reminded me of a lot of the quotes about kindness versus being nice, and you know, truly being kind to someone is telling them the truth that they need to hear. Right, and venture capitalists, to your point, like, are notorious for never delivering people the news that they need to hear. They're nice. They want another bite at the apple if they choose to pass on the first one right. Has your truth telling ever gotten you into trouble, often, often? Or is there a certain occasion in recent history, maybe from a linkedin post or otherwise, where you've had to kind of really reflect on it? Maybe go back and and and and. Uh, yeah, go back to someone and talk to them.
Seth Yakatan:Usually it's an unintended consequence, but yes, it's happened. Uh it it, it wasn't so much truth. I I put up a post a few weeks ago. Um, I made a offhanded remark or comment to someone that if it was the three of us intimately, you'd probably figure that out. And when I wrote it it wasn't intended to be a neg or a slight on that person or that relationship, but they took it as such and they were very offended. And when I read what I wrote I saw that it could be construed as a really bad slap in the face.
Seth Yakatan:And this person is a friend and a mentor and an investor of mine. And yeah, I messed up and I apologized and I will publicly continue apologizing to that person. You know who you are and I messed up. So it's happened. And I've also had a bunch of CEOs call me privately and say yo, dude, can you take the heat off? And I'm like but no, stop doing dumb fucking deals or hire me. Or hire me, cause whoever you got working for you is stupid. So no, it's not like you're calling me to saying oh well, here's why this makes sense and here's why we did this. You're calling me to saying stop pouring gasoline on my fire, sorry.
AnnaRae Grabstein:Well, so then let's um, let's dive into these mistakes that cannabis companies are making. What do you see as the biggest pitfalls that companies are making that are making them either uninvestable or on a path to future implosion? What do you think so?
Seth Yakatan:in Las Vegas in order to stack the deck in favor of the house. They will deal blackjack out of a seven-shoe deck, correct, all right? Well, we're dealing out of a one-shoe deck and all the face cards and the aces are gone. In this industry, right in a way, there are some structural deficiencies to the way that capital flows into the industry that have forced us, as an industry, to deal with worse cards than anyone else, which is no private equity or public equity capital markets that turned on really hard and then turned off really hard, with no exits and no returns. A group of probably eight or 10 private equity funds that deployed a billion to a billion to in capital. There's a technical Yiddish or Hebrew term called makhala, which means it's completely done, it's over, it's dust, it's done.
Seth Yakatan:No disrespect to Gotham Green and Merida and Matt Hawkins at EEC, who I really like, but you've deployed all capital in fund one and two.
Seth Yakatan:You have almost no return. You're not getting a third bite at the apple unless Jehovah or whatever data you believe in, comes down and it occurs right. So you don't have any real public private equity capital and it leaves you with debt, and I was a debt capital markets investor for nine years of my life, and the whipsaw of leverage is very, very, very difficult. If you take a company and you lever it up six times and it works, awesome. If you take a company and you lever it up six times and it doesn't work, they are coming for their $500 or $600 million in debt. And you've seen that repeatedly in cannabis, with the companies that we've talked about AYR and Ascend and Forefront and Statehouse, and Ascend and Forefront and Statehouse, where you just have too much debt capital and not enough money to service the debt, and I think that's going to be, you know the way of the future, and MedMen and IANTHUS and I could keep going.
AnnaRae Grabstein:What do you mean? The way of the future? People are calling it the debt wall that's coming, and yet it seems that at least the publics are able to keep somehow refinancing this debt, pushing it forward, restructuring it in different ways. Is it the debt that's going to kill them? Why are some able to refi when others are not?
Seth Yakatan:You had a debt wall that approached at the end of 23-24. That I thought was a broader market signal for health. I think once you get to kind of above $350 million or above $500 million in revenue, let's say like an AYR is, I don't want to say you're too big to fail, but as a lender you're kind of like, okay, we can surgically figure out a way to cut 20 to $30 million of GNA out of here and squeak through. So I think the debt wall that's coming doesn't concern me as much because you're going to see another round of largers re-equitize. I think when you get in trouble is when you have something like a state house where you put company A that had too much debt and company B that had too much debt and company C that had way too much debt and you put them all together and you have $140 million of debt on $100 million P&L with no cash. I prognosticated that occurring. It's occurred.
Seth Yakatan:I'll give you an exclusive because I haven't said it yet. I am rooting for Lori Holcomb at Goldflora. I think she is an incredible CEO. I think she has got a great understanding of the industry. I can't see outside of a bolus of capital, how that company survives.
Ben Larson:So there's this period of time where there will be survival and death right of some of these larger companies and we know it's a tight capital market from a fundraising perspective and you know there's been this concept or this theory that there's going to be a bunch of like m&a and and roll-ups and and all that kind of stuff, largely removing yourself from all this landscape. It feels like the industry is moving in the right direction, that people are more optimistic about what the future holds, just not necessarily from a short-term capital perspective. Where does this all go? We get beyond this hurdle of this debt wall. Some people refinance, some people don't. What does next year look like of this debt wall? Some people refinance, some people don't like. What does? What does next year look like? Are are we seeing opportunities open up or are we waiting for certain triggers like rescheduling or Kamala's legalization plan to really kind of open, reopen a new set of floodgates.
Seth Yakatan:Let me answer that by looping back to a question that nra asked, a question before, which is what's kind of the commonality with these things not working right? One of the questions that I think you have to answer in the context of your question is what are you trying to do? Meaning like, are you trying to? Meaning like, are you trying to? I think cannabis is challenging in and of itself because a lot of people go out and try and build things to expected or projected demand as opposed to actual demand, and I think the companies that I've seen successful have been able to either self-fund or get to a critical mass and get a slug of growth capital to go do what they want to do again, or the same thing that they do in a couple of states. So to the M&A question right, I will firmly tell you that the reason that I am in this industry is that I can see with clear that I am in this industry, is that I can see, with clear, prescient vision, massive consolidation in the future. I can't tell you when it's going to occur, when I can tell you what I think two or three of the catalysts for it are going to be, but I'm convinced it's going to occur. It has to and and the reason that it has to is that when you look at cannabis share of wallet for consumers versus cannabis penetration, the average cannabis consumer spends about $475 a year and 12% of the US consumer wallet is penetrated with cannabis. And if you look at alcohol, beverage, tobacco, pharmaceutical luxury CPG, wellness, coffee I'm probably missing one they're all in the 48 to 62% penetration range for less or greater share of wallet. So Dr Pepper, keurig and Pfizer and Unilever and Monster Energy, they're all looking at how do I grow? And they grow through acquisition and cannabis is just a CPG that's been relegated into the stone age of distribution. So I think in the next year you're seeing bright spots in cannabis. You're seeing catalyst states happening. You're seeing M&A activity happening. You're seeing money flow, the debt maturity and the debt wall is going to get pushed through. You have headwinds like we haven't seen in terms of two presidential candidates who seem to be favorable to cannabis reform and schedule three in the wings, which I think causes some things to occur.
Seth Yakatan:I think you're probably going to see not much happen in 2025.
Seth Yakatan:And I think as you get out of 2025 and into 2026, I think you're going to see if you get farm bill clarity beverage move in and alcohol move in, because if you have two to five years of clarity on intoxicating altenoid beverages, you have four companies, as you know, ben, that are kind of getting to almost 50 million in revenue. And once you get to 50 million in revenue, if I'm Can or Breeze or Uncle Arnie's or Keef or insert, whoever Wonder or Happy I probably missed one, but they're all kind of that cohort, right, I can take your cannabis beverage business and I can get rid of it, and I can just take your THC beverage business and I can buy it and we can figure out what to do with your cannabis business later. But I'll take your $50 million THC beverage business that I can buy for six to eight times and throw it into my mechanism and turn it into an $800 million product and put it on a Superbowl ad, just like I did with IV water If I'm Unilever for a crappy product that no one wants.
AnnaRae Grabstein:Amen to a lot of that, very much aligned, but I do want to push back on something that you said about companies making decisions based on basically future casting, like demand that isn't there versus actual data and proof, whereas you were talking about that within the context of rolling up the industry or industry consolidation. I believe that there are certain catalysts that will create levels of consumer demand or shifts in the supply chain, like federal legalization, that we're not going to wait for for consolidation to keep happening, so there's a level of future casting that becomes a part of it inherently. And I guess what I want to ask you on the back of the concept of consolidation is if consolidation was in your hands starting tomorrow and you had the opportunity to create your model portfolio of companies to be rolling up starting at the beginning of 2025, what would be the strategy?
Seth Yakatan:How do you think the industry should be strategically consolidating? Okay, so let me go back and address one or two. First of all, you're very smart and we should talk more often. Second of all, I think there will be a couple of different waves of consolidation. So I think there has to be some level of peer-to-peer consolidation. Whether that's Cureleaf coming down and buying stuff or whether that's the six or eight people in Missouri and the Midwest coming together, there's going to be some level of peer-to-peer.
Seth Yakatan:I think there's going to eventually be a lot of outside in consolidation, right? So all the industries that I talked about coming in. And then, if you look at private equity, there's more lower middle market private equity money in the United States than there's ever been. It needs a home and I kind of think someone's going to force a couple of things together in a platform roll up. So I think there's three different ways it could play out in the future. To the point on future casting, I agree with you, but the point that I was trying to make was I saw a project a couple months ago for a guy who wants to build a 600,000 square foot greenhouse in New Jersey. We don't need any more grow in the United States we don't, so I'm talking about that.
AnnaRae Grabstein:And I agree. I think that we see eye to eye. I'm just calling out that there's many ways to look at it and that we won't. The industry isn't going to wait for the politicians and yet there will continue to be shifts of where capital comes in and where the opportunity lays and in some ways, there's going to be some risk associated with it. Because, as we think about when federal policy change occurs like we were mentioning in the intro about Texas thinking about regulating THC beverages the way that they do alcohol in their three-tiered system and if cannabis was to be moved into a three-tier system at the federal level, there could potentially be a breakup of vertical companies. But should we be making decisions about that today? You know we should be thinking about it, but should we be making decisions about that today? You know we should be thinking about it. We should understand that it's likely. Is it the strategy to be acting on tomorrow? I'm not so sure about that.
Seth Yakatan:So let me go back and address that, which is like are we going to see a, a regional telephony, my bell breakup in cannabis? It's the third time that's come up this week. You might, I don't know. I also don't know that those models are unassailable hegemonies and I also think those models have been created because of their ability to raise capital and win licenses early, not because they're the most effective. I don't know that retail 20 years from now is going to be important. I just don't.
Seth Yakatan:To answer your question of what would I do if I was going to do things, everything that I would do would be incumbent upon profitability. So what I would probably do with $100 million is I'd probably try and go roll up three or four asset light brands with complementary skews that were multi-state, that were all real pre-tax cash flow positive, um, and create a megalodon house of brands that was cash positive. I might tuck in a two to three state vertically integrated MSO with some retail that was profitable, because there seemed to be six, eight, 10 of those. I posted on one today called standard wellness. You know, when you've got a company that's in the $60 to $130 million revenue world, that's doing double-digit EBITDA in any industry I've ever been involved in. That's an acquisition candidate for someone who's doing a billion. So would I place a bet on one of those guys and just beat the shit out of Curaleaf, trulieve and GTI to buy me and take their paper and play the upside for a couple hundred million bucks? Yeah, I probably would.
Seth Yakatan:No one's going to want to hear this. The other thing I would do is I would also buy a lot of debt. There's two fairly sophisticated banks that have active secondary debt capital markets trading desks banks that have active secondary debt capital markets trading desks. You can buy paper bonds and preferred equity strips of almost every major public cannabis company at deep discounts to where the face value of those bonds are. So I think I would also become a pretty active debt capital markets trader. So those are the three things that I would do, but fundamentally, if I'm going to go buy a bunch of things, I would not invest in D9 companies, harry, because I do not have visibility on the future of those as a fiduciary. To answer your question, though, the guiding light for me would be cash flow. Another company one more.
AnnaRae Grabstein:One more. Sorry, I got to get it out.
Seth Yakatan:Another company who I frigging love, chris Emerson at Level Pro Tabs. Okay, yeah, there is not a company that is better suited to be distributed in a drugstore chain than Level Pro Tabs. Look at how it's packaged. Look at how it's affected. Look at how it's formulated. Look at how it's consumed. Every time I go into a CVS, I look for the shelving slotting that I'm going to put Level Pro Tabs in when I redesign the packaging and sell it to someone who's going to distribute it there. Right?
AnnaRae Grabstein:I talked to Bree and Chris on Monday and they're rock stars and I think that that is a great product and very unique form factor in the market.
Seth Yakatan:So yeah, Right, so we got to get them on the pod Great team, great team and and I don't say this lightly and I am a bit of a hype machine master pharmaceutical formulator right, phd. In bit of a hype machine master pharmaceutical formulator right, phd in biochemistry from stanford. He worked at novartis. The formulation capability of that company, in terms of what he's doing with miners and rares, in effect off the charts off the charts.
Ben Larson:So I want to I want to kind of use this as a segue kind of a little bit away from the market trends and the financials. And you know, like many of us is like the success of a lot of companies is the leadership, their leadership style, not just their capital allocations and whatnot. So, getting into that kind of philosophy, what is your personal leadership philosophy or what do you look for in founders in addition to a well-run company that signals to you that there's success on the horizon.
Seth Yakatan:You know, I'm always fascinated when I come on shows like this and I get asked a question that I have no answer to. So I don't know what my own personal leadership style is. Maybe it's frenetic generation, I don't know. But you know, I think I think when I look at leaders, I want to see someone who has hopefully built a team that they can rely on. Almost any transaction that I've ever gotten done in my life usually has a reasonably sophisticated financial person involved in it and a extremely sophisticated transaction attorney. You can do it without the reasonably sophisticated financial person if you have another reasonably sophisticated financial person in the room, but you can't do it without an attorney. So I think someone who's acknowledged that there's a tribe or a council that they need to get things done and they can't do it on Unichannel is probably one. The one thing that I will tell you, ben, is that if you put five companies in front of me and you said, pick which one was going to exit in five years, I don't think I could do that. But if three years from then, you said let's look at the five companies and pick a company that you want to exit with, I think I'm really good at that.
Seth Yakatan:So I think, having a sense of you know again, I've been doing this for 30 years and I've seen consolidation, waves of consolidation now in four markets. You can tell when it's happening, you can feel it. It's palpable and that window is very short and you've got to jump through it. So you know you're going to see it in beverage, in in can of beverage, there's going to be three, four companies. You're going to jump through it and then there's going to be no deals are going to happen. There's going to be 800 more beverage companies.
Seth Yakatan:Um, so I, I don't, I don't know that there's aspects of necessarily, leadership, you know, outside of the acknowledgement of I need more than myself to do it and I trust enough people to guide me through it, and I think for me it's more about understanding where markets and timings are at and going out and managing collective expectations to get things done is probably what I'm the best at Picking I'm not good at, you know, getting from getting over the goal, getting once you were in the red zone, like I'm the best, but like driving you down the field, I don't know.
Ben Larson:Just just really quick on on on the beverage front, just cause I know we have some audience members that are from that category. Is your prediction that we will see a massive or maybe not massive, but like kind of like a roll up, significant roll ups, before we see just a singular acquisitions of brands?
Seth Yakatan:Maybe roll ups require capital, pull-ups require capital and right now, unless a large unknown force comes into the market with 50 or $100 million of capital, I don't see that right? Can Arnie's, bree's, happy, wonder, keith tell me who I'm missing, right? Vertosa, source, rexis, like that's your universe, right? You guys are all out there trying to raise 3, eight, ten million bucks at the same time and some of you, some of them being really successful at it and some of them are having a harder time, right, the movement of five of those in the one probably requires like 100 million dollars of capital, because I know your company and I love it and you're not going to walk away for two million bucks, right? So I think, if Ebola shows up, that intra peer to peer consolidation occurs, if you have something that provides large bev elk legal counsel to not say no or to say okay, I can get comfortable with this, then you're going to see a day it's going to be like the british are coming. You know it's going to be. It's going to be on um and I think three or four people are going to sneak out and I think you're going to see two or three vitamin water kind of deals and then it's going to be done Interesting. That's what I think is going to happen. I also think you could see a super co emerge. The one thing we have two things we haven't talked about today is like 280E and public markets. Two things we haven't talked about today is 280E and public markets. The moment that you can list a plant-touching company on NASDAQ, you're going to see a billion dollars of cash flow into cannabis and I do think someone or someone is going to be smart enough to go to five companies and be like hey, I'm going to get 50 million bucks and go list on NASDAQ.
AnnaRae Grabstein:You want to come in and we'll create a $200 million beverage conglomerate, probably so you brought it up. Isn't that kind of what Tilray has just recently done with this backdoor? They were on NASDAQ and now they've announced that they're doing THC Bev in the US.
Seth Yakatan:Tilray is a vertically integrated Canadian MSO that has a legacy listing on Nasdaq because they do and does anyone that's listening to us think Tilray is going to be a successful player in the beverage industry. So they're in the same way that Kronos probably shouldn't be on NASDAQ. They're on NASDAQ. So, yes, from a legal, technical perspective, yes, With you.
AnnaRae Grabstein:I'm just poking. I agree it's just happening.
Seth Yakatan:It is occurring sort of it's also the stupidity of Farm Bill and state by state regulation on Delta and you know, Ben, you were part of this thing in in in Texas this morning. That sounds really really, really, really, really good. And then some idiots got to throw in childproof packaging on every can we're going to sell, Right? So it's like, please, please, elected officials, just stop, Quit your jobs. Quit your jobs and let the people govern and just get out. It's enough, man.
AnnaRae Grabstein:Well, I think it is optimistic that you're talking about if we get the next farm bill to allow for be a THC beverage or something that creates some sort of allowance as opposed to a prohibition, because I, I, I hate that. The farm bill is a piece of legislation that needs to be consistently renewed. It doesn't give long-term stability to anyone for for business opportunity, but it does buy time and that would buy it sounds like from your perspective, the three to five years for some larger players to invest in potentially standalone legislation or something that could give a better long-term pathway to the category.
Seth Yakatan:Yeah, I have got blasted publicly by a lot of people for using the word loophole and I apologize to anyone who I've offended. I think the farm bill has created for the cannabis industry a bunch of unintended consequences, and what I don't like about the lack of clarity there forget about what it means for consolidation is that I have friends that are operators in California who have done every single thing correct and by the book and are still struggling. And the guy next door decides to put on a direct-to-consumer Delta 8 vape company and he's making twice as much money and there's no enforcement. And if there is enforcement, he shuts down and he stands the business up the next day and no one cares. So that's the part of it that I don't like, something that you also triggered in terms of a bright spot.
Seth Yakatan:There's one other thing that I'll tell you about M&A that I do think will happen with certainty, which is that if three occurs and three then manifests that 280E goes away barring the geniuses in Washington coming up with some other federal excise tax on cannabis, by any estimate you're going to inject $800 million to $2 billion of cash back into the cannabis ecosystem, which I think is going to fuel some level of consolidation, fuel some level of de-levering, which is probably going to fuel consolidation and perpetuate the existence of some of these zombies, companies that should die but haven't died and I do think that that is potentially coming in 25 and could be a giant shot in the arm catalyst for all of us and be a positive thing.
Ben Larson:Yeah, I love that. So much opportunity ahead of us and, seth, you're such a wealth of information and really appreciate all the insights that you've given us today. What's something that other people aren't seeing, that you're seeing, that you're excited about kind of coming here into the end of the year like what's, uh, what's really grabbing your attention, missouri missouri.
Seth Yakatan:The trends that we've seen, that I deal with on a multi-state basis, where you have an excess amount of cash and ebitda and then kind of a decline of pricing as supply increases over time, that we've seen in Colorado and Oregon and Washington and California and Oklahoma has crept into Arizona. So for the first time, arizona, which I thought was an unassailable market, is down. Basket sizes are down, aggregate transactions are down. That's happening in Missouri. That war is going to be waged in Missouri in the fourth quarter of 24 and the first quarter of 25 and 22nd quarter of 25 as a large private MSO moves into that state.
Seth Yakatan:So for me, in the election or the coming year, missouri is the battleground state in cannabis. Can the five or eight operators that are there that kind of control that state? The state functions, everyone makes money, there's a flat tax, it's a positive ecosystem. Can they fight the tide of discounting? Because if they can, it means different assumptions of positivity or growth for other markets that have yet to suffer that damage, or it means that discounting is an inevitability and we're never going to be able to get away from it as an industry and it's detrimental to everyone. So for me, the thing that I'm looking the most at is what is going to happen to unit sales in Missouri for Q4, 24, q1 and Q2, 25? And is STISI going to be able to do the same thing in Missouri that they've done in other markets? That's the biggest thing that I'm personally looking at.
Ben Larson:All right, the show me state is going to show us who the winner is going to be.
Seth Yakatan:I will be in the show me state at a conference the first week in November, so show me All right.
AnnaRae Grabstein:Wonderful, and while we could keep talking, we do have to call it. We don't make people listen to us go on and on for more than an hour. So we're at the place in our show. That is our last call, and this is when we turn the mic back to you, seth, for you to leave a lasting impression on our listeners. So, seth, what is your last call?
Seth Yakatan:Just thank you to everybody who supports the industry and the fight that we're all in, because, ultimately, we are all pioneers, we're all in this together and the three of us that are on this call I'm not sure any of us have been incarcerated for cannabis, but there are people that are sitting in jail right now for ideating and talking about all of the things that we're doing and running businesses on. So I think we need to stay true to that legacy and help them. But just thank you.
Seth Yakatan:What's happened to me in the industry and specifically on LinkedIn in the last year is only through the grace of people that have pulled as I can with other people. So you know, just keep supporting me and keep disagreeing with me on LinkedIn and I am not going to stop my voice unless they shut me down. And stay tuned, because I am planning to be around for a while and I am planning to be right on the field getting the Vince Lombardi trophy when the Super Bowl of Cannabis occurs, and you can timestamp this and you can say Yakatan prognosticated that he was going to be there and I am going to be there. So I am all in and I am ready to rock and if you need help, call me.
Ben Larson:Hell yeah, hell yeah. Thanks so much, seth. I really appreciate you taking an hour out of your day to hang out with us. Where do people call you or what's the best way for people to get ahold of you?
Seth Yakatan:I have a branded website for myself, which is just sethyakcom, and I have my corporate website, which is katenassociatescom, and my details are on there. Or you can just shoot me a DM on LinkedIn, and a lot of you feel the need to do that every day, so keep it up.
Ben Larson:Love it All. Right, manuel, really appreciate it. Really appreciate having you on, and again for all the knowledge that you're willing to share with us today and every day.
Seth Yakatan:Thank you both. Thank you for the opportunity. I'm really grateful. Thank you Appreciate it as well.
Ben Larson:Absolutely, Anna Rae. What a great conversation. I feel so lucky to have him on the show.
AnnaRae Grabstein:I just think you're smart. If people flatter me, I just like I want to have him back already.
Ben Larson:So I'm good, you are smart. I try to tell everyone you're the smarter one of the two of us, for sure. What do you folks think? It's a pretty great show. I hope you came away with some knowledge. I know you did Be sure to reach out. Let Seth know. Let us know who else you would like to have on the show. What topics would you like to have us cover? We are incredibly grateful for you joining us every week. Hopefully you're joining us every week. Follow us here on LinkedIn or in the podcast streams or on YouTube, wherever you like to listen best. Thank you, Thank you, Thank you to our teams at Vertosa and Wolfmeyer. We couldn't do it without you guys. As always, everyone remember, stay curious, stay informed and keep your spirits high Until next time. That's the show.
