RiskWatch: Steven Arthur George on Corporate Cannabis Risks and Opportunities

Founder of Kaya Advisors and former Tilray EU Alliance Manager, Steven Arthur George, joins the RiskWatch podcast to discuss risk and opportunity in the corporate cannabis space, including recreational legalization in Germany and the evolution of third party relationships. This conversation covers:

00:31 - 00:51 Introduction 

00:52 - 05:50 Steve’s trans-Atlantic cannabis journey

05:51 - 11:30 Comparing the European and US corporate cannabis markets

11:31 - 14:00 Market growth predictions

14:01 - 15:42 The corporate cannabis risk landscape

15:43 - 18:59 The evolution of third party risk in the cannabis industry

19:00 - 22:14 Vetting local partners

22:15 - 27:29 Supply chain struggles and human rights concerns

27:30 - 29:00 Partnership hesitations of traditional industries

29:01 - 32:45 Engaging the cannabis community on social media

Transcript

Seth (00:03):

RiskWatch is a due diligence and compliance podcast, featuring interviews with leading compliance, investigations and research professionals to shed light on global corruption and compliance related issues. RiskWatch is brought to you by Vcheck global, a business-to-business provider of due diligence, background checks, employment screening, document retrieval, and specialized research of both business entities and individuals. 

 Seth Harlan of RiskWatch here, joined by Steven Arthur George, founder of Kaya Advisors. We're gonna discuss some exciting developments in the European cannabis space, then dig into third party risks and challenges facing the cannabis industry and its investors. Steve, welcome to RiskWatch.

Steve (00:49):

Hey Seth. Thank you so much for having me. It's a pleasure to be here.

Seth (00:53):

Of course, let's jump straight into your cannabis advising journey. I think it's pretty cool how early on in your career you gained hands on experience cultivating and harvesting legal cannabis plants in Michigan. I'd imagine this gives you some pretty unique insights into the industry.

Steve (01:11):

It does, you know. Having that initial hands-on experience all the way back in 2008 allowed me to start getting more involved in the cannabis industry in general, and to educate myself and find new knowledge about the industry and some of the medical benefits as well. So yeah, that early stage not only got me the hands-on experience, but just got me into the industry from an early stage point so that now, 12 years later, I have a wealth of knowledge around the cannabis plant itself, as well as the industry that's developing.

Seth (02:17):

So how'd you go from hands on work in Michigan, all the way to Europe managing partnerships for Tilray and then founding your own advisory?

Steve (02:25):

Yeah, that’s a good question. Actually there was a little bit of a break in there. So I was in Michigan and then started cultivating, I think it was 2010, 2011. And this was actually when I was finishing my university years. So after I graduated with a finance degree, I moved down to Nashville, Tennessee and spent five years there where there are no medical or adult use cannabis regulations. Now it's important to mention that I still had some friends that were cultivating back in Michigan, that I was supporting in kind of a friend consulting way. And not as a business, but more as a friendship while I was working on my own career in finance. Then in 2017, I had a mid-twenties crisis and ended up realizing that I didn't enjoy the finance industry.

 I also didn't really enjoy where I was live living. I was looking to pivot and so I moved out to Portugal in 2017 and did the Lisbon MBA program. This was the same year that Germany changed its laws around medical cannabis and the same year that Tilray started to build out a facility in Portugal so the timing was perfect. I was in the right place with the right knowledge. I had a good corporate background and reached out to the management team at Tilray where I was able to get myself an opportunity to join them.

Seth (04:08):

When did your idea to create Kaya advisors emerge? Is there any special meeting behind the name?

Steve (04:15):

There's actually quite a few different things behind the name. After three and a half years of spending time with Tilray as both the country manager of Portugal and Spain, so helping get the first product first dried flower approved here in Portugal, as well as then moving on to be the European Alliance manager, which meant I was handling all the business-to-business partnerships. At Tilray we were at the forefront of what was going on in the European market. So being that I had a strong corporate background, had always been in business development, sales and marketing, I started to realize that the knowledge that I had was quite valuable and that there weren’t a lot of individuals with that knowledge. So I started to see that more people were coming for licenses. People were always reaching out to me and to Tilray in general and to other producers to try to understand more about the industry, looking for partnerships, so I got to see that what the market was asking for and what was developing. Then it was clear to me that I'd be able to find some advising opportunities if I went out on my own. And I had the confidence behind myself with my sales and marketing background that I could promote that and get some work.

Seth (05:50):

It's really neat how your arrival to Europe coincided with the opening of medical cannabis in Germany. My interest in the European cannabis space was really piqued by Germany's upcoming legalization of recreational cannabis which we're seeing make a ton of headlines recently. I’ve noticed that for many North Americans, European cannabis stops and ends with the Netherlands, when in reality, countries across the continent have become major players in the cannabis space. Could you paint a picture of the state of the corporate cannabis market in North America versus Europe?

Steve (06:25):

I could and I think it’s super fascinating Seth. Things are happening quite a bit differently from what we're seeing in North America, especially in the U.S. As you mentioned, the Netherlands has always been known, especially Amsterdam, for the ability to go and visit these coffee shops and consume cannabis. But what's ironic about that is that the actual supply of the flower to the coffee shops is not legal. You mentioned that in 2017, when I got to Europe, was when Germany started to change some of their regulations around medical cannabis, Portugal made some changes in 2018 and we've seen many other countries here in Europe make some changes as well.

 Now the big difference is that because even in the United States, no states started with adult use first. It was always a medical program. The medical programs in the U.S. at the state level do a great job at providing patient access. They made it simple for individuals to get a recommendation from a doctor to get a state ID card, to then be able to not only possess but cultivate cannabis as well. And then really soon afterwards. most states enacted their program, then dispensaries or some type of retail store appeared where patients can then go and purchase. That's in the U.S. In Europe, cannabis is regulated by the individual health regulator of the country. So for example, in Portugal where I live, Infarmed is the equivalent of the FDA, whereas at the state level, there's no FDA involvement. Back in the U.S., regulation is just at the state level, there’s no FDA involvement. So in Europe, cannabis is being regulated by the national health regulator or the equivalent of the FDA in that country. Meaning cannabis is more regulated like a medicine. It's not like a yearly card. Also, cannabis is dispensed in the pharmacy, which is completely different from the states. So there are no dispensaries or standalone retail locations. It's all going through the pharmacy. So those are two of the big differences when it comes to the medical market and it’s why you're seeing some of the larger corporate players in the medical space globally. When you have different countries that have both have medical regulation and the national health regulators on board with it, then you're able to move goods. So for example, while I was working with Tilray, I was moving cannabis from Portugal to other countries in Europe, as well as Israel legally just like any other narcotic, because they had these frameworks in place that are then regulated by the national health regulator. So that's the real big difference on the medical side compared to adult use. We're hoping to have some more information on German recreational cannabis legalization by the Fall of this year. We'll see what exactly happens, but it will be interesting to watch it all play out.

 I think it's gonna be quite a bit different because in the U.S. the medical market that doesn't really have a lot of structure to it when an adult use market comes in play. For example, Michigan, my home state, the medical market is where you buy the stuff from the exact same place as the recreational market. The only difference is the tax you pay. So what you see happen as adult use comes is that everyone forgets about medical. Germany is different in that it is reimbursing cannabis as a medicine as well. So you need to go through some additional paperwork to get this done, but many patients are getting their cannabis fully reimbursed. I think Germany, if they do this correctly and they roll out this market in the adult use space and don't dispense it through the pharmacy, but create another standalone shop, then I think they really have the ability for these two markets to coexist. 

Seth (11:30):

Do these developments have you pretty positive in terms of market growth in the coming years?

Steve (11:39):

For sure. A hundred percent. Like I said, Germany will be the first country in Europe to have commercial cannabis, though you have Malta and Luxembourg who in the last year allowed for a certain amount of possession as well as the ability to cultivate at home. But there's no commercial regulation in either country. Germany is also the largest market in Europe. And it's also one of the most influential markets, not only in Europe, but in the world, so it's a huge move for cannabis in general.

Seth (12:19):

I hate to be a downer but we're currently hearing a lot of recession talk and anytime there's a slowdown “Sin stocks” attract investor interest. What's your outlook for the cannabis industry through the rest of the summer and heading into the fall with everything that's going on worldwide?

Steve (12:37):

You know it's interesting. I look at it as a more defensive play. During the pandemic, both in the U.S. and in Canada, cannabis retailers were deemed essential businesses in a lot of places. Cannabis consumption is one of those things that I think many consumers and patients are using daily because they need it. It's for their wellness. It's for their health so cannabis is gonna be purchased before many of the other consumer goods in a recessionary period. I think it’s a defensive play moving forward. Unfortunately, the cannabis stocks have just gotten hammered over the last year or so.

 None of this is really on fundamentals or anything else. I think there was a lot of hype at first when the Biden administration came on regarding a possible move forward with some regulations but now, halfway through his term, we're not seeing any regulatory changes. So I think now everyone's realizing nothing's gonna happen until potentially next elections. This has kind of killed the momentum in the industry overall, but like you said, moving forward, if we have some trouble in the markets in general, like we're already seeing, then this could get some attention, and as you know, sales and revenue numbers will stay steady even through a recession.

Seth (14:03):

Stepping back from Europe for a minute, what's the corporate cannabis risk landscape look like in general?

Steve (14:12):

Great question. I think a lot of it's just regulatory timing. It's the biggest risk by far, the consumers are there. The market is there. The industry is there. It's just regulatory timelines that you have no control over. We already saw this in Canada. A lot of producers are building large facilities, hoping to export out to Europe and to other global markets. But the reality is just the regulations are moving slow. There's a lot of bureaucracy involved and it's just taking time to develop these patient populations. So your risk is always in regulatory timelines that you have no control over. Its possible that Germany will take longer to move forward with adult use. Does that mean it's gonna be at the end of this year? Is it gonna be 20, 23? Is it not gonna be till 2024? We have no idea. So if you're gonna make a bet on a large facility, production manufacturing, or whatever, without knowing these timelines and what demand you're gonna have, it's a risky business, even though the market long-term will be there. I still think in this short-term space for large corporates you deal with a lot of risk.

Seth (15:45):

You mentioned some partnerships so let's touch on third party risk mitigation. A wide range of third parties are involved in the cannabis industry. You've got shipping services, material suppliers, and dispensary operators. Could you shed some light on the nature of these relationships and why they exist?

Steve (16:05):

Yeah. You know, I was having this conversation yesterday as well. It’s like at the end of the day, especially when you look at the adult use side, cannabis is a consumer packaged good. What's interesting about it is that it can come in many different forms though. It can come in this dried flower form. It can come in an edible food form. It can come in a drinkable form, as well as powder, patches, creams and oils. The list goes on and on. So there are many ways it can be delivered. This leads to exactly what you're talking about, how all these different third-party services can get involved because at the end of the day, cannabis has always been around, but in the illicit market, there were not a lot of that third party partnerships, right. People are partnering with Ziploc, right? You're using a Ziploc bag and you're driving in your own car or they're working with someone, a friend or whatever. But now that you have a legal market, it's similar to any other consumer packaged good. The packaging issue is fascinating. There's all kinds of different opportunities to go with packaging. I think the risk to third parties is we're still a young industry and we’re still growing, and we're still figuring some things out and regulations are also always changing. So one day the package might need a THC stamp on it and the next day it might not right. And that you really have no control over. I can imagine some third parties have struggled or had some frustration with the industry because the requests are often changing and it's not because the company doesn't know what they're doing. It's because the company is always trying to adhere to new regulations or adjustments to regulations, and then having to pivot and move at the same time. So I think the risk to third parties is that we lack consistency. This causes all types of issues. 

Seth (19:03):

Given the relative infancy of the cannabis industry, how can companies, especially North American companies looking to partner abroad, evaluate their local partners so they can vet their industry knowledge, or even just partnership suitability.

 Steve (19:19):

It's actually one of the big challenges. And Seth, you set me up for a great opportunity to plug Kaya Advisors. Being here in Portugal and having some great partners helps me support my clients as they navigate the cannabis industry’s challenges. While there are gonna be people there that are more than willing to help and are the right people to help, there’s also people that are just trying to take money from you and kind confuse you and hope that you’re a foreigner that doesn't understand what they're doing and someone who doesn’t know the market who can be taken advantage of. My success is not so much because I'm the greatest advisor, it's because there's just not many people like me.

Seth (20:59):

Is the need for comprehensive due diligence well known across the cannabis industry or are people reliant on advisors such as yourself to bring these issues to their attention?

Steve (21:14):

It's tough to really tell, you know, but from a lot of the mistakes I've seen, I don't think people are seeking this advice. I think a lot of people are trying to move forward with without it. You can see from places like Canada and projects I've seen here in Europe as well, that without specialized guidance, they really struggle, and it's also why in my business. I focus more on the commercial strategy side of things. You see a lot of these cannabis companies didn’t do the due diligence necessary to understand the market or what they're getting themselves into. I think a lot of people just thought, oh, hey, it's cannabis. If I get a license and I can grow, everything's gonna be fine, but it's not the reality at all. A lot of companies are learning this the hard way.

Seth (22:17):

Jumping back to Germany for a minute, I wanna get your take on its supply chain due diligence act. This law is going into effect January 1st, and it involves both third party risk and regulatory concerns. How much attention is this receiving in the commercial cannabis space?

Steve (22:36):

So it's interesting Seth, because when you mentioned it to me, it was the first time I've heard of it. So I went and took a look at what it was and tried to understand a little bit more about it, but in my industry circle, no one's saying anything about it yet. Germany will be an interesting model moving forward because there's a lot of these distributors that popped up in Germany and what they were doing is just trying to purchase cannabis from other producers, whether they were in Canada or Europe already, or Israel or somewhere else, but purchasing already branded products and then just redistributing them in Germany, through their distributor but in very low volumes and the finances behind it just don't make sense. We’ve already seen some of these operations shut down and I think we're gonna see more of that. This could be a little bit of an attempt by German regulators to try to not get into an issue of where you have a lot of money being spent to build out these companies for them just to be closed down a year later.

Seth (24:05):

So are any of your clients inquiring just about being able to conduct like a human rights focused screening or even just supply chain reviews? Are these areas of concern?

Steve (24:17):

No, not yet. I think we're just too early in the industry, especially here in Europe. I think at this point here in Europe, people are just trying to understand the market more. And just trying to understand the industry and what potential there is and then how they can get involved. I think we're still quite a bit behind some of these other issues that you just mentioned. I always look back to the U.S. because in the cannabis industry, we see that U.S. tends to be a decade ahead of Europe in a lot of aspects. I think it'll take more time for the market to develop here in Europe before we start to get into more of those topics.

Seth (25:26):

Have you noticed any differences in risk tolerance between medical and recreational cannabis companies and their investors? Are medical companies more concerned about risk versus the rec side?

Steve (25:41):

I think so. But at the same time, a lot of these companies kind of dabble in both spaces so they look at both markets. In instances where a company wants to play both in the medical space, as well as the adult use space, they definitely see a lot more risk in the medical space. The companies that are just focusing on medical definitely see more risk than companies focusing on the adult use. But again, they're different risks. On the medical side, you're more subject to regulations which we expect to see more of going forward. Regulatory timelines are the biggest risk I believe.

Seth (27:33):

I’ve noticed that in the U.S., certain traditional industries have been a bit nervous to partner with cannabis companies, including banking or even real estate. Is this hesitancy on the part of established industries an issue in Europe when it comes to partnerships?

Steve (27:56):

There's still some hesitation but it doesn't seem to be as bad as it was in the U.S. And I think that in the U.S, this comes back to cannabis being legal at the state level while banks remain subject to federal laws so I kind of understand their argument, but in Europe you see it a bit different. If it's legal at the national level, then dealing with a bank within Portugal is a bit easier, but there’s still questions. And in the banking industry there's still a lot of stigma around the cannabis industry in general so you still get some of that pushback from other companies. 

Seth (29:06):

Just before we wrap up, I wanted turn back to you for a minute. You're a LinkedIn marketing force. You've got nearly 13,000 followers and you're releasing a steady stream of engaging content. Just this month. I've watched you address a cannabis conference in Europe, tend bar and hit the beach so I'm curious, in your experience, what's the best social media platform for engaging with the cannabis industry?

Steve (29:29):

LinkedIn, right. So as you mentioned, you know, I do a lot of work there but it's for a specific reason. Like I do my own work on LinkedIn and, as well as trying to build both my personal and my advisory company there. But one thing I noticed very early on is that LinkedIn is much more cannabis friendly than any of the other social media platforms. So you know, that's both Instagram and TikTok which are the other ones I see being used, as well as Facebook, but again, all three of those have challenges. I've heard plenty of people whose cannabis-related pages have been removed and their posts flagged, or, losing their account completely so there's a lot of risk. Putting out engaging content every day is not easy work. If I woke up tomorrow and lost my LinkedIn access, I'd be pretty upset because I do a lot of my business there. So again, I think LinkedIn is just a great platform for for cannabis individuals as well as cannabis companies, they seem to be much more friendly, much more open. I think that Microsoft is more open to cannabis.

Seth (31:08):

Very interesting to hear, especially about TikTok. You mentioned the other day you were getting involved in TikTok and it really piqued my interest since I’ve never seen it being used in professional context.

Steve (31:19):

You know, it wasn't something I ever was ever looking at as well. But I realized that all these platforms are the same, they have their own algorithms, they have their own rules, different rules and whatnot. At the end of the day, for me it's about visibility. It’s like if I'm trying to grow a personal brand, especially, trying to look for advisory clients as well, I need people to know that I exist simple as that. So, you know, with TikTok, it's like trying to get people to know I exist. I don't talk about cannabis hardly at all over there because I don't wanna lose my account and whatever. And I just started to learn a little bit and just tried to understand how can I use this to then build following and drive people back to my website. Again, it's more visibility and it might not be a client that's following me but maybe they have a friend or a family member or someone else that could then use my services. So it's all about just trying to gain more visibility.

Seth (32:26):

And on that note of visibility, I'd like to encourage everyone to check out Steve's LinkedIn profile and also visit stevearthurgeorge.com. 

Steve, it was wonderful chatting with you.

Steve (32:35):

Thanks again, Seth. I had a blast. Appreciate it.

Editor’s Note: This transcript reflects minor changes to the recorded conversation for reader clarity.