The medical cannabis space: A successful targeted investment strategy

In this interview, David Engel from Full Moon Investments in the U.S., charts the firm’s successful targeted investment strategy – informed by industry-leading experience and expertise – including comments on the CBD hemp and medical cannabis space

David Engel’s favourite page on his firm’s website features a map showing the jurisdictions in which Full Moon Investments and its substantial investor base has investments. The visual representation of Full Moon’s transactions and ownership to date captures the story of the firm’s smart, steady growth since its founding in 2013. The map also shows jurisdictions where Full Moon Investments has applications pending or is interested in investing if presented the right opportunity.

Today, Full Moon essentially has four types of investments in CBD hemp and medical cannabis in both the United States and in international markets, including South America and the European Union (EU). These include:

1. Equity investments in private cannabis companies.
2. Organic applications in jurisdictions where licenses are to be issued.
3. Acquisitions of companies with existing cannabis licenses.
4. Convertible debt instruments – generally to loan money to build out licensees’ cultivation and processing facilities or retail dispensaries – with an option to buy into the company at a later date, at a discount to the future value of the company by providing the capital and expertise to build out and begin commercial operations.

While large multinational corporations have encountered serious challenges with their forays into the industry, Full Moon Investments has consistently helped licensees get to market much more quickly than normal for the industry. At the same time, the group’s disciplined financial approach has delivered exceptional and impressive returns to investors.

We recently sat down with Engel, Full Moon’s Managing Partner, to learn more about the firm’s approach and what has differentiated it from other companies, as well as its outlook and goals for 2020 and beyond.

How did you first enter this industry?

My business and financial background has been a mix of private equity, small and middle market business turnarounds, wealth management, and all types of real estate; this experience is complemented by an MBA and CFA. The CFA is the gold standard for expertise, knowledge, and ethics in the investment business. These business and financial activities set the stage when I was working on a business project with a successful wine and spirits family business in the District of Columbia. Out of the blue, knowing my unique background, the family I was working with said they would like me to help them with their new business – medical marijuana. They had been awarded two of the first seven licenses to cultivate and laboratory process medical cannabis in the USA capital city; Washington D.C.

D.C. was the first jurisdiction on the East Coast of the United States to legalise medical cannabis. This was in 2013. I offered to help them and engaged in the business and financial aspects and it all turned out to be very lucrative. I realized a new LEGAL business had been born – and would over time replace an illegal business. We set out to make this new business a focus.

Full Moon has a unique strategy and process. Can you explain what makes you different and the advantages you provide both licensees and investors?

First, it’s our experience. We’ve been through the process of getting a licensee operational and to the market many times, including operations, products, cultivations and laboratories. We’ve learned from our mistakes and gotten better and better and more efficient each time. We keep a notebook with a list of all the mistakes we’ve made so we don’t make them again. Before moving forward with each deal, we read the list and make sure we are not getting into something that caused us consternation in the past. Today, we are focused on helping other people avoid these mistakes for our mutual benefit.

Time and time again we see new licensees in this industry, make the same types of mistakes, have massive cost overruns, crop failures, relying on the wrong types of individuals to work in their business etc. Experience in this space includes understanding and adapting to jurisdictional nuances. Because we work hard to understand unique nuances in the jurisdictions we enter. We problem solve as follows: how can we cut the time it takes from the time of gaining licensure to becoming operational at scale, and making money. Our focus is fundamentals, we are responsible to our investors and to ourselves as investors.

When someone invests with you, do they select specific projects or jurisdictions? Or is it in a total fund?

We do not offer a blind pool or blind fund to our accredited investor base. We invest jurisdiction by jurisdiction. We have been fortunate to develop a loyal long-term accredited investor base, and explain that we have the next deal available and one by one you decide when to participate. This creates a discipline on us to make sure each opportunity stands on its own. We do not treat this business as a “land grab”, as many of the public companies in our business have. Perhaps it’s an agency problem. We certainly do not have an agency problem. We have skin in the game. Our attitude is “we are only as good as our last or current deal”.

We are fanatical about making good investments and implementing with prudent urgency. Principals of Full Moon invest our personal capital and the firm’s capital in all our deals. That kind of “skin in the game” shows a complete commitment to driving returns. We have long-term business relationships extending back 20-plus years with our close-knit friends, family, and business partners. And at the same time, we need to be clear that this is not an offer of a future investment, just an informational piece about our internal strategy.

There is a sort of gold rush right now of startups, investment groups, and even multinational corporations entering the medical cannabis space. Have there been any consistent threads that have differentiated the firms and groups that are succeeding today?

What we have seen, for example, with some of the Canadian public companies are those that got ahead of themselves. “Positive” press releases for them are “we lost money at a decreasing rate during the quarter from $500,000 to $400,000 loss”. “We are not going to run out of cash in six months, we diluted our equity, now we have a full 12 months before cash runs out”. You get the point. It’s senseless to a rational outsider. So, many companies got ahead of themselves, tried to grow too fast. They seemed to have thrown out the window even basic supply demand analyses. The last quarter we have seen many cannabis companies laying off hundreds and hundreds of workers. I don’t think that’s indicative of the industry’s future at all, but it is indicative of strategic missteps.

There are definitely some strong private companies out there. Holistic Industries Inc. is an impressive US Multistate Operator focused on the fundamentals, applying for licenses organically, building operations prudently. Full Moon’s investors have a passive investment stake in Holistic. The other thing prudent, consistently successful companies are doing is not assuming that any jurisdiction that opens up is a great jurisdiction in which to do business. We are more careful about which ones we go into, and we spend a lot of time researching and gaining an understanding of the micro-economies in jurisdictions to determine whether it’s a good place to do business. Otherwise we pass.

The American market is still sorting itself out, and for a U.S.-based company, it would have been easy to be content to be active only in the domestic market. Why did Full Moon make the decision to expand into international jurisdictions?

It goes back to looking at the micro and macro jurisdictional landscape. Through our research and due diligence and studying various markets, we have come to realise that  cultivation of cannabis is very costly in the U.S., and even more so in Canada, going to other jurisdictions will enable us to gain cost advantages over the competition. We can produce hectares and hectares in Colombia at a lower cost so globally, we will be more sustainably competitive.

When we study other aspects of licensure, we want to understand: How can we get this product distributed to the world? We are presently implementing strategies to make our product highly desirable and available to the EU, and very soon, we will be entering the EU market.

As you evaluate the landscape of jurisdictions that are working on developing regulations or are on the verge of opening, which ones are you most closely paying attention to and why?

We are interested in Florida but the capital requirements are staggering. We like Michigan too. Internationally, we are also looking at some opportunities in the United Kingdom, Spain, Italy, Switzerland and Germany. We are looking for distribution partners in those places.

You have partnered with and evaluated dozens of licensees. What advice would you give to a licensee who is looking for a financial partner?

The single most important thing is the financial partner needs to understand the business, not just provide the financing. For most licensees, getting a financial partner that also knows the business can help them move forward successfully. A solely financial partner may develop unrealistic expectations, but those who have been in the business and understand it will structure a capital raise that will work. Also, someone who is just a financial partner won’t be able to help in areas where the licensee needs shoring up. You want to see real skin in the game by the financial partner – not just providing money – but someone who is able to understand the business and provide relevant expertise.

When you evaluate a licensee, what are you looking for in making a decision about whether to partner with them? What are some red flags you look for?

One red flag is if they do not have someone on the team driving the business forward. You have to have people who are pretty tenacious, who have an urgency about moving things forward. By nature, this business is painfully slow, so you need to have a problem-solver person to figure things out. This recent Covid-19 situation has tested many licensees resourcefulness. Unfortunately, there is no “Playbook” for cannabis businesses. You have to problem solve every day without the benefit of established formulas, to use a math analogy. Another key facet for us is the licensee has to be able to accept that in certain areas and aspects of implementation, they really do need help.

From a regulatory standpoint, which jurisdictions do you think have the best model or framework today?

Any jurisdiction that doesn’t “over-license”. I wouldn’t say there is a best. We look at the barriers to entry. population, and supply and demand; pretty basic business.

ACTION STEPS FOR READERS

What we encourage readers of this article to do.

1. If you have a cannabis license and seek capital and expertise as described herein please e-mail or call us right away. We will give your project consideration immediately, and let you know if we can help.
2. If you are an accredited (high net worth) investor and wish to invest side by side with experienced and fundamental financials driven private equity investors reach out and we will share our next opportunity with you for your consideration. You will have access to cannabis opportunities and investments unparalleled in the public cannabis investment market.

What are your goals for 2020?

We want to do two to three fundamentally sound investments and implementations a year. The typical capital required for that is about $10-15 million each. So, we have to balance that. We have goals for expansion, but we are not going to relinquish the financial dynamics of each investment being independent. We are constantly researching, viewing and doing due diligence on any jurisdiction now accepting licenses. We are studying how attractive it is to operate there, what the regulations are, and how it fits into an overall strategy to grow and process. In terms of specific deals, we are buying companies in Colombia right now. That’s exciting. Also, we will apply our cultivation/business experience to the Rose business. Watch for us in the Rose business!

Looking further ahead, what are you keeping your eye on?

A couple of things have happened recently that are very interesting. The new farm bill has just recently allowed companies importing CBD into the U.S.

November 2019 something historic happened. A U.S. House of Representatives subcommittee voted 24-10 to move forward the MORE (Marijuana Opportunity Reinvestment and Expungement) Act to legalise cannabis in the U.S. It would decriminalise cannabis at the federal level, remove it from the list of federal controlled substances, allow states to regulate it, create a 5% federal tax to establish a trust fund for people adversely impacted by past marijuana convictions, and allow for expungement of those convictions.

It will require more house committees to pass it and then go to the full House. But for that vote to even be taken and pass a subcommittee is a big step. It still might be many years away from passage, but it gives an idea of the rise in public acceptance of legalised cannabis. It is here to stay.

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Please note: This is a commercial profile