Steve Gutterman considers himself “such a lightweight” as a cannabis user, but the president of Harvest Health and Recreation has heavyweight ambitions to turn his company into the next “Monsanto or Diageo” of legal marijuana. In a wide-ranging conversation with Cannabis Professional, Mr. Gutterman addressed the challenges of operating in 15 different American states as “separate fiefdoms” and how new federal laws might dramatically alter that structure. He boasted of a “massive cash war chest” approaching US$1-billion, an M&A pipeline “that is quite full” and said Harvest would “always evaluate the opportunity” to move its public listing from the Canadian Securities Exchange if U.S. law allows. The full conversation, lightly edited for length and clarity, is reproduced below.
Cannabis Professional: You come from the Ivy League, degrees in law and business from Columbia and a background in finance. What was your path to legal pot?
Steve Gutterman: I actually don’t enjoy it. I am such a lightweight. I can have like 5 or 10 milligrams of anything and that just puts me under the table. Such a lightweight.
CP: You don’t really enjoy your own product then?
SG: No, I do, I do. That was the wrong word. And I have certainly learned to enjoy it more in the last year or so [laughter]. There is lots of stuff that helps with sleep, but I was not a large user and I’m still not. But to answer your question, for me, I’ve spent 24 years in various industries and what I will tell you after having pushed a lot of products in a lot of industries it is a lot more fun to be on the right side of the trends. I started my career selling online financial services at E-Trade and it was incredible. What we found out… by the mid 2000s was, at least for the distribution of financial services, the internet was by far the best system ever created. We were on the right side of the trend, it was fantastic. I remember looking around and saying to the team our job was just not to screw it up, we just had to manage this growth. Selling weed to millenials and people in pain and people who just want it? Right side of the trend.
CP: How did it first come about for you, though?
SG: It was really a great confluence of events. I was already looking at the cannabis industry and for a person who loves to be in high-growth environments, I don’t know that we are ever going to see a market like this that goes from zero to $50-billion in market size over the span of just a couple of years. It is crazy. People talk about it like it is prohibition 2.0, but it is more like if prohibition had worldwide distribution and the internet and ten times more people. It could be the greatest growth story in 100 years and what I realized very quickly, to bring things back to Harvest, the industry is still nascent but there are already winners and losers. Like if you and I, we’re smart guys, if we decided right now we wanted to start a cannabis company, aside from it being kind of a niche lifestyle thing, it is already too late. There are already companies like ours that have size, scale, expertise, licensure, brands. Even though the industry is nascent, the winners, the next Monstanos or Pfizers or Diageo’s, are going to come from this cohort. So for me, I just had to figure out how I could work for one of these three or four companies and I was introduced to the guys at Harvest by some friends and as it turns out, they were looking for someone experienced leading high-growth companies so it was just a great fit.
CP: What is the biggest difference you’ve noticed working in cannabis versus the more mature industries you’ve worked in before?
SG: Well the biggest difference is that at some point in the future, all the cannabinoids to the extent that they are grown in flowers and not in yeast or enzymes, will be grown in California and then processed in Arkansas and then sold around the country. But right now, because there is this byzantine set of state-by-state rules and regulations, every state is its own fiefdom. That creates logistical challenges. We basically have to have 15 totally different operations in 15 states, vertically integrated operations. We do have various brands and all the back office stuff that is integrated, so it is not totally true that they are their own fiefdoms, but much more so than if we were in any other industry.
CP: You said it is already too late to start a company that can be among the ‘winners’, but there already are hundreds of multi-state operators - or maybe even more at this point - with very similar business models to yours, many with a comparable level of scale and previous high-growth industry experience. How do you convince investors Harvest specifically is the next Diageo or Monsanto as you said?
SG: The data would suggest, just given our market cap, our ability to raise money, our profitability, our revenue, that we’ve already got some data to suggest this is not a theory.
Our track record is that we really are the best people in the country at winning licenses. That is just data. I’ll give you a good example. Recently we won six licenses to go along with the one license we had in Pennsylvania, we are the only company in the country that won licenses in every district in Pennsylvania so we are going to have 21 dispensaries there.
CP: What happens to all those separate fiefdoms once federal laws change and you no longer need to have so many assets in so many states, do you have a consolidation plan?
SG: I think [American federal legalization] is going to come in phases. I think the STATES Act is going to pass this year and that is going to be very helpful for us. It is going to make banking easier and probably allow capital to flow in and it is probably going to create some other opportunities but states are still going to be operating independently. The actual game changer is not until cannabis is taken off of schedule one [of the Controlled Substances Act].
CP: But many believe that is not too far off either?
SG: Unfortunately I think that one is a little ways away, even though 61 per cent of Republicans actually think cannabis should be legalized. I do think it is coming but it could be a while. But to answer your question on what happens then, we would have some [assets] that we still have and others that we would consolidate and some that we would sell. Ultimately though if you’re asking about where is the future of cannabis then long-term it is not going to pay to be a farmer. That will be the commoditized part of the business. The parts of the business that will pay will be great brands and customer touchpoints so our focus really has been on acquiring both of those. We raised about US$300-million in conduction with our RTO and right when we did that, we acquired a company in Colorado called Evo Labs which has the largest manufacturing complex in Colorado, which is a big deal because that is such a competitive market. We then acquired a company called Falcon in California which has some of the leading flower and vape brands in California and this amazing distribution system where they interact every week with 420 of the 500 legal dispensaries in California. We then acquired Verano, which in addition to having a great and complementary footprint to ours, has this amazing edibles brand which was something we really didn’t do. Growth internally and also through acquisition, we are developing these great brands and right now we have, through all of our acquisitions, the ability to open 120 dispensaries across the country and we are going to keep going. Our cash position is very strong.
CP: You did just announce that US$500-million convertible debt offering?
SG: Yes. We still have significant cash from our RTO on the books. It is well over US$500-million when you add up our cash and Verano’s cash and we also have access to this [real estate investment trust] that we developed that is another US$100-million to US$200-million so we have a massive cash warchest in addition to two and a half billion dollars in market cap so as you can imagine, our M&A pipeline is quite full.
CP: Is that ultimately the strategy to become the Diageo or Monstano of weed, to essentially just buy out the rest of the industry?
SG: For sure. Yes. You were talking about the hundreds of [multi state operators], let me give you a point of reference. In 1999 there were a couple hundred online brokers, by 2004 there were really four of any substance so we have seen this movie before and I don’t know if it is going to be four, it could be ten but I think there will be a couple really leading ones and obviously I’m biased but we are pleased with the acquisitions we have done so far. We take pride in not overpaying.
CP: Has the M&A market evolved at all since you starting making acquisitions?
SG: There has been a noticeable flight to quality. Sellers are becoming more discriminating, they understand that not all [multi state operator] paper [stock-based buyouts] are created equally. People want Harvest stock though and they may want Harvest stock then other potential bidders’ stock.
CP: When does that wave come in your opinion and how quickly will it all happen?
SG: Well, it is happening right now. You’ve already started to see some consolidation and I think you are going to see a lot more of that over the next year or two. I don’t know where the end-point is, but I think that you’re going to continue to see small, mid-sized acquisitions then I expect there will eventually be some consolidation at the top as well.
CP: Where does Canada fit in the Harvest M&A strategy? Or the organic expansion strategy for that matter?
SG: Aside from the fact that I love Canada. Some of our best investors are Canadian and some of the bankers we used to go public are Canadian so we have close ties in that sense and we are in Toronto all the time but right now our geographic is on the United States because there are just so so many opportunities. I would never say never, but right now our focus is the U.S.