Reddit AMA with WeedMD’s CFO, Keith Merker

On May 24, 2017, WeedMD’s CFO, Keith Merker, took part in a Reddit AMA.  Below is a brief transcript of this event.

Question: I have a couple questions for you:

A close friend of mine is a family physician in Ontario. He says he currently will not prescribe cannabis to his patients because of lack of evidence supporting the medical claims. What are companies like yours doing to help inform doctors of the benefits of medicinal cannabis? Do you see any major hurdles to cross here?

Will WeedMD be focused solely on supplying medical cannabis or do you intend to expand into recreational/non-prescription sales? Will you remain focused exclusively on the seniors’ market?

You have 26,000 sq. ft. currently, and claim to be scale-able to 220,000 sq. ft. What are your current expansion plans? What levels of production are you hoping to achieve in the next year?

Much of the Canadian cannabis sector has been in a downtrend for the past few months and many new investors may be getting cold feet. What milestones/catalysts do you anticipate for WeedMD over the coming months?

Answer:   I’ll answer your questions in order:

I think there will always be hurdles amongst a certain portion of physicians until there is solid, science based evidence that supports the therapeutic and medicinal uses of cannabis, specifically double-blind placebo controlled clinical studies (which we hear doctors asking about the most). There are a lot of other LPs as well as cannabis companies that are engaged in clinical research and we intend to join that cohort. What are we doing: first, it begins with education as part of our physician outreach program, and second will be supporting that outreach with research collaborations of our own to help support and validate the medicinal claims plus discovering new derivatives and delivery methods.

A most emphatic no! When we first built our business plan, the medicinal market was all that was available. We have a unique and comprehensive offering for our target market (seniors), as well as the medicinal market in general. However, we would be crazy to ignore the development of the recreational market and the enormous opportunity that it represents. With the expansion plans to 220,000 sq. ft. that you mention in Q3, we expect to allocate a portion of that square footage to recreational products. The seniors market is where our management’s expertise lies, but we also have our eyes on the broader medicinal market and recreational market with brand initiatives in the works to specifically target unique and differentiated consumer groups.

Commercial extraction lab beginning construction this quarter, expansion from 26,000 sq. ft. to 220,000 sq. ft. this year (to be complete ahead of the anticipated rec start date), plus exploring other alternatives to accelerate growth and expansion plans to augment for medical and recreational demand. Expanding to 220,000 sq. ft. would allow over 15,000kg pa before expected yield increases from productivity and operational improvements.

Addressed in our investor presentation (https://www.weedmd.com/investing-in-weedmd/), but: 1) construction and potential licensing for an extraction lab, 2) facility expansion, 3) other catalysts that we can’t announce at this time unfortunately – please stay tuned!

Question: First off, huge fan here and I would like to thank you for doing this!

I’m invested pretty heavily in WMD as I believe you guys are extremely undervalued compared to your peers right now. With that said there seems to be some resistance in and around the one dollar mark. I think part of it is psychological and I think some of it is uncertainty from fear that you guys will be diluting to raise money for expansion. Were also in a bearish market so that’s not helping.

I guess what some of us are looking for are numbers on the near future. Are you looking to raise money for expansion or are you going to focus on what you have now and expand in the future? Can you tell us what that looks like and how you plan to pay for it?

I picked this up from your local newspaper and I’m not sure how accurate the numbers are as it seems incredibly cheap to me. “$3 million, 220,000 sq. ft. expansion that will increase its output tenfold and boost WeedMD’s workforce to 100 employees.” Is this accurate or are there more cost involved there?

I’m invested either way as I see a bit of dilution could be an incredible opportunity for your business. 20-25mm cash puts your cash to cap and P/B ratio’s in a far better place than a lot of the LP’s out there.

Answer:  Thanks for your support and certainly agree with your sentiments. Tough questions to answer given that WMD is a publicly traded company. I can’t tell you whether we are looking to raise money or not but what I can say is that our current operation is fully funded and we have potential options and warrants proceeds of over $12 million (assumes all exercised). Costs to expand will be announced in due course as we finalize our plans. We have always taken a very responsible approach with shareholder capital, and any potential future financings will only be used to generate value that significantly outweighs any associated dilution.

Question:  As medicinal expands it will require a strong emphasis on capsules and oil especially for elderly. Can you expand on when you will have your oil license, and necessary equipment for creating capsules and what type of oil extraction you are planning?

Also, can you provide what catalysts are in the near future?

Answer:  Timing on our extraction construction, potential licensing, and future catalysts can be seen in the deck here: (https://www.weedmd.com/investing-in-weedmd/).

Capsules are something that we’re excited about and exploring but nothing to announce yet. On the oil extraction front, we’re looking into both supercritical CO2 and ethanol extraction, leaning towards ethanol extraction.

Copied from another answer: “1) construction and potential licensing for an extraction lab, 2) facility expansion, 3) other catalysts that we can’t announce at this time unfortunately – please stay tuned!”

Question:  Have you looked into other extraction techniques such as MAP technology? Much quicker technique to CO2 and ethanol.

How many grams will you be producing annually at the start of legalisation? How much are you planning for, and when?

Answer:  Given the time between now and then, the 220,000 sq. ft. facility will support over 15,000kg pa of flower. This doesn’t take into account any yield increases from improving operations, productivity, or efficiency. We are also looking at alternatives to accelerate production ahead of the rec market that can’t be announced at this time.

Question:  When do you expect to be taking orders for dried flowers? I was recently prescribed MMJ and am waiting to see your lineup.

Do you guys have or do you plan on releasing a video walk through of your facility? We’ve seen some still images that show a nice clean grow with what look to be beautiful buds but no video.

That’s it for now, others have asked some of my other questions. I may be back with more.

Answer:  We expect to be accepting patients within the next two weeks – sorry for the delay as we need to make sure that we have all of our systems and processes down pat. The video walk through question is a great idea! Thanks for your comments on the grow and product. We work hard at WeedMD and hope that ultimately this will be appreciated by a loyal group of patients.

Question: Over the past few months, many Canadian LPs have gone public. Why should we invest w/ WeedMD over the many other alternatives available to us. What makes you guys stand out?

Answer:  Like most of our peers, we’re expanding aggressively in anticipation of the recreational market while being mindful of international opportunities, and have purchase options on neighbouring properties to do so. We have a unique approach to the medical sector by focusing on the long-term care and seniors market, areas in which our management team has strong relationships and significant experience. We’re focused on maximizing shareholder value and we think we’re comparatively cheap on multiple metrics (absolute and relative) compared to the aggregate LP landscape as well as to peers with similar qualitative and quantitative characteristics.

Question:  I get the impression from what I read in the news that R&D in the cannabis industry is going more towards growth methodologies and post-harvest processes. From a plant breeding perspective, I’m interested in learning more about what sort of work is being done to develop better varieties. I understand that this could be sensitive information and is not necessarily your wheelhouse, but can you discuss any general breeding advancements or improvements that are being made at WeedMD or in the industry as a whole?

Answer:  Very interesting and difficult question to answer as a numbers guy, but let’s see. With medical really taking off in Canada, you’re starting to see a lot more focus on the breeding aspect. You’ve got companies such as Anandia Labs that are doing serious scientific analysis into cannabis genetics. THC and CBD are just two cannabinoids of over 100 documented, so I think we’re going to see more exploration into 1) the entourage effect and how THC/CBD interact with terpenes and 2) the effects of the other cannabinoids. Selective breeding has done wonders to develop strains with good genetics and will do wonders to support future research. We are very fortunate as a company to own a very significant library of genetics, currently in both live and seed form, from which we can develop our products. There are tremendous advantages to this in timing and efficiency – ultimately financially.

Question:  A criticism of WMD that has been bandied about is that focusing on a specific subsector of the market (the elderly) would appear to limit WMD’s upside for investors as compared to LPs who are attempting to appeal to the entire market, including both medical and rec (i.e., Canopy, Aurora, Cronos, Aphria). How do you respond to such criticism?

Answer:  There’s no question we intend on driving a portion of our business towards focusing on the long-term care and seniors market; however, we will also be participating in the broader medical market and intend on participating in the recreational market when it comes. We’ve got aggressive (but realistic) expansion plans to go from 26,000 sq. ft. to 220,000 sq. ft. ahead of the recreational market. In addition, we are exploring alternative strategies that would allow us to accelerate our growth for the recreational market. While we take pride in our unique target market strategy, this is by no means our sole ambition as a company.

Question:  The medicinal qualities associated with cannabis are well known and accepted by younger generations, however it seems that older folks are less knowledgeable about cannabis’ medical capabilities, and perhaps even view cannabis negatively.

Do you see social stigma as a potential barrier with the age demographic you’re working with, and if so, how do you overcome it?

Answer:  Yes and no. Cannabis has such a long history that I think it will really be case-by-case. From what we’re seeing, the older generations are becoming more and more attuned to the younger generation’s activities and likes/dislikes. Overcoming the stigma will be about education to (potential) patients and physicians, through medical research support and by example. We’re seeing a lot of examples of people – young and old – that are able to treat their symptoms with cannabis and this will definitely assist in breaking that barrier. I’m consistently amazed at how quickly the “barrier” that this stigma represents has melted away and public perception amongst the young and old has changed.

Question:  As the CFO, what’s your day to day like?

Beyond the financial analysis that might be performed when considering expanding or constructing new facilities, what qualitative factors do you guys consider for an expansion?

Answer:  Great questions! Honestly, the past year has been a whirlwind for everybody at WeedMD, including myself. Given all of the things we have accomplished, from achieving our cultivation license, successfully commissioning our facility and ramping up our cultivation, going public, and achieving our license to sell, I cannot say that there is a “typical” day. Every day is a new adventure with new challenges, both expected and unknown. As for your second question, we try to consider everything when it comes to expansion (or any deal for that matter). Beyond the numbers, this includes things such as “cultural fit”, location, strategic advantages. We definitely focus on the long term when looking at opportunities.

Question:  What book (or author) has been influential on you either personally or professionally?

Answer:  There are quite a few. I generally read non-fiction and other than the financial and market based books (Ben Graham, Nassim Taleb), I have more recently focused on cannabis based reading.
Check out “Smoke Signals: A Social History of Marijuana” by Martin A. Lee and “Chasing the Scream” by Johann Hari. Fantastic education for me on the plant and the drug war in general.

Question:  What do you see as WeedMD’s catalyst/requirement for uplisting to the TSE, and do you have a time frame for getting there?

Answer:  It’s great that two of our industry peers have successfully graduated to the big board. That being said, it is still early days for WeedMD and there is no timeframe yet. There are a number of requirements that depend on the type of company you are and that includes a minimum market capitalization, tangible assets, working capital, revenue and cash flow, evidence of commercialization of product.

Question:  Can you tell us more about procurement in long term care facilities?

Recent studies show cannabis helps people addicted to opioids. Do you plan to extend your business model to rehabilitation centers?

What challenges do you face when it comes to financing? What do you think of the recent trend in streaming financing in the cannabis industry?

What do you think of the way some companies count their inventory as biological assets? Do you get asked to report the financial statements in a specific way?

Answer:  The long-term care industry is notoriously difficult to penetrate. Fortunately, our management team has extensive expertise and connections within this world. WeedMD has developed a program with which we will provide a system for the integration of cannabis within these facilities. This program was built by industry veterans, who know how to speak the language and create something that fits hand-in-glove with the current standard operating procedures and policies of a long-term care facility. We are not simply selling them a product, we are providing a service.

I find the opioid epidemic to be very disturbing. Thankfully, more and more people are starting to realize the potential for cannabis to alleviate this problem, on both an individual and a societal level. We would love to, and look forward to, the opportunity to be a part of this solution.

When it comes to financing, the biggest challenge in this industry has been investor sentiment; the cannabis market is very sentiment-driven. As for streaming financings, I think they are interesting but have to be viewed from a different lens than straight equity. For the streaming company, it diversifies exposure across grows, management teams, and provinces. For the company being provided the financing, it’s a production-for-capex exchange that may come with synergistic benefits through the respective streamers’ platforms.

Yes, under IFRS there is a very specific way of accounting for plants that have been harvested and are sitting in the vault (inventory) vs. plants that are in the processing of growing (biological assets). The cannabis industry has no choice currently but to abide by these accounting standards. To be frank, some of these standards were created for agricultural commodities and do not always provide the best (or easiest) interpretation of a licensed producer’s financials. This is just one more example of how the cannabis industry often finds itself a beautiful round green peg being squeezed into a square hole.

Question:  Will you be exploring the option of non-dilutive financing such as a streaming deal with CBW?

Also since nobody else has asked yet, and we do not want to break tradition: What kind of car do you drive?

Answer:  Our management team’s goal is to create value for its shareholders. Streaming is non-dilutive in that it doesn’t require issuing equity, but it also reduces the attributable value of the project by giving up a portion of the production. So, it requires weighing higher NPV and more dilution vs. lower NPV and lower dilution. We analyze any opportunity, including streaming, very diligently. This includes a full financial analysis, as well as taking into consideration qualitative factors, as referred to in a previous question.

I didn’t realize that the car question was a tradition! Far be it for me to break tradition. I wish I could be more exciting here, but I drive a 2015 Toyota 4Runner. Love the reliability.

Question:  Is there anything that you want to share with us that doesn’t fit in with the other questions? Please feel free to share.

Answer:  There is a lot I could share here. I guess I’d like to point out that in WeedMD, you will find one of the hardest working groups out there, who have achieved every goal we have set out to achieve, with no intention of stopping any time soon. We are successfully growing some great product and look forward to ramping up sales. We have a great unique strategy for the medical market and look forward to unveiling our strategies for recreational and expansion. It’s been a great and challenging road to get here and we look forward to fulfilling our ambitions for WeedMD!

Question:  Do you mind if we call you The Weed Doctor?

Answer:  I love that handle.

Question:  Any plans to get a ticker on the OTC market?

Answer:  Hi there! Thanks for your interest. We are not currently pursuing a listing on the OTC market, but this is not to say that we will not look at this at some point in the future. We’ve had a lot on our plates successfully getting listed in Canada!

Question:  What are your thoughts on product discovery for this market? Assuming it goes rec, your company will face unique challenges in marketing your products. Resources like lift.co help consumers compare and discover products, but what will your company do internally. Do you have any unique takes?

Answer:  It will be a unique experience for all involved as the medical products being grown now may not necessarily transfer over and meet the vary demands of recreational consumers. For us, it’s all about data. The US and some other countries are a wealth of information upon which we can draw conclusions for what sells well (strains, products, brands, etc.) and what consumers are looking for (convenience, look/smell/flavour/cannabinoid content, price points, retail experience, etc). Furthermore, and perhaps most importantly at this stage of the game, we are growing some fantastic product. There will always be a market for quality.

All, Thanks so much for the opportunity to engage on your forum and I hope that I have provided you with some answers as well as some food for further thought. I’m signing off for the night right now, but will check back in the am should there be any further questions. Cheers! Keith