Supply & Demand - Cannabis Pricing Pressures

The legalized cannabis industry is incredibly exciting, and is the fastest growing segment of economy.  That being said, incredible amounts of supply capacity are coming online which will put further pressure on marijuana wholesale pricing.  There is not a week where I don't hear about  10-12 groups wanting to either start a new production site, or increase the capacity of an existing operation.

We have seen this across the country personally over the last two years, especially in WA, OR, and CO states, and the WSJ in its article further talks to this issue about the strong pressure on pricing, and this has clearly impacted profitability for many of these operators.  For some, the "Green Rush" of profits have never come for the growers, and many are looking to sell and move on with their lives to something else.

For us, there will be a select few cultivators that will win, and which will include those with unique genetics, those that are vertically integrated, those that have developed strong brands, and of course, those growers who can most efficiently cultivate quality product at a highly competitive cost.    Most operators coming into market will either be too small to grow and produce at scale or will ultimately be under-capitalized and lack the talent to produce efficiently when they companies compete not only within their states but across the country, and ultimately with international players as barriers and restrictions come down.

For Salveo Capital, with this phenomenon which happens with other commodity products, we become very interested in companies and innovative technologies that address the following:

  • increased yield technologies and services
  • novel genetics
  • proprietary formulations for processing flower to meet unique conditions
  • powerful branding with strong value propositions

By 

Jacob Bunge

Aug. 30, 2017 8:00 a.m. ET

208 COMMENTS

After decades of dodging law enforcement and fighting for legalization, U.S. marijuana growers face a new challenge: low prices.

From Washington to Colorado, wholesale cannabis prices have tumbled as dozens of states legalized the drug for recreational and medicinal uses, seeding a boom in marijuana production.

The market is still tiny compared with the U.S. tobacco industry’s $119 billion in annual retail sales, but the nascent cannabis business has grown to more than $6 billion a year at retail, according to data from Euromonitor International Ltd. and Cowen & Co.. 

For marijuana smokers, the price drop is sweet news. Recreational users and those prescribed cannabis for health reasons have seen prices decline as wholesale prices have fallen, though some retailers have pocketed part of the difference, according to New Leaf Data Services LLC, which researches the U.S. cannabis market.

At Hashtag Cannabis, a Seattle-based retailer running two dispensaries, co-owner Jerina Pillert said wholesale price declines show up on the plastic vials holding green-and-tan nuggets of “Super Silver Lemon Haze” marijuana produced by Longview, Wash.-based Bondi Farms. A gram sells for about $10 currently, down by a third from the $15 a gram it fetched in September 2015, she said. 

But for growers—ranging from high-tech warehouse operations to back-country pot farmers gone legit—the price drop has been painful. 

Since peaking in September 2015 at about $2,133 a pound, average U.S. wholesale cannabis prices fell to $1,614 in July, according to New Leaf. That is the sort of market decline that hit Midwestern corn and soybean growers in recent years after a string of record-breaking crops.

“There is an increasing recognition, on the part of the industry and those that grow and dispense, that this market is a commodity,” said Jonathan Rubin, New Leaf’s chief executive. 

 

Marijuana grows in a greenhouse at the Los Suenos Farms facility in Avondale, Colo., last year. PHOTO: MATTHEW STAVER/BLOOMBERG NEWS

In response, some producers are taking a page from the food industry, where farmers and food companies increasingly appeal to health- and environment-conscious consumers. Growth in organic food products for years has outpaced conventional grocery sales, and products made without genetically modified crops, gluten and artificial flavorings can command premium pricing and shelf space.

Stephen Jensen, who secured a state license to grow cannabis in Washington in 2015, has yet to turn a profit. He is promoting what he described as natural growing methods.

“We needed to give people a reason to select us,” said Mr. Jensen. He said his Green Barn Farms eschews synthetic pesticides and relies on natural light over high-powered lamps, which he said helps his cannabis stand out among more than 1,100 other Washington farms.

 

Because cannabis remains illegal under federal law, growers can’t get their crops certified as organic, a label that can only be bestowed by the U.S. Department of Agriculture.

Cannabis farmers instead have turned to alternative labels such as SunGrown Certified, which requires that growers use sunlight and water-conservation practices. They hope such labels will entice smokers and secure shelf space in the 29 states where marijuana is legal in some form.

Another label, Clean Green Certified, is modeled on U.S. organic standards. It bars synthetic pesticides and emphasizes what the program deems fair-labor practices. In May, Washington State passed a law that would set up a state-level organic-certification program, though it may need to use a label that doesn’t use that word.

That push to differentiate is splitting pot farmers into rival camps.

Indoor-grown cannabis, where climate controls and high-powered lights allow several crops per year, typically is of a more consistent quality, industry officials say. Its dense, often bright-green buds catch consumers’ eyes, often fetch a higher price and can be costlier to produce.

Proponents of marijuana grown outdoors and in greenhouses say indoor facilities rely on synthetic fertilizers and heavily consume electricity. They point to a 2012 paper by University of California Senior Scientist Evan Mills, which estimated that indoor cannabis production accounted for 1% of national electricity use, though some growers have been adopting LED lights, which consume less electricity.

Jeremy Moberg, owner of Riverside, Wash.-based CannaSol Farms and head of the Washington Sungrowers Industry Association, says marijuana smokers will come to care about the environmental cost of their high.

“The socially conscious, premium customer is going to want us because we’re sustainable,” he said. “It only takes me 30 seconds to convert somebody wearing Patagonia and driving a Prius that they should never smoke indoor weed again.”

At Hashtag Cannabis in Seattle, Ms. Pillert said customers occasionally ask for pesticide-free or sun-grown varieties. Smokers’ main fixation, she said, is the potency rating for the key active ingredient, tetrahydrocannabinol, or THC: “They want to make sure they are getting the biggest bang for their buck.”

 

A ‘Bud tender’ stocks packaged marijuana in display cases at the grand opening of The Cannabis Corner in North Bonneville, Wash., in 2015. PHOTO: JASON REDMOND/REUTERS

Many in the emergent industry expect marijuana to eventually resemble the beer business, where pricier craft brews have built followings in the shadow of cheaper mass-market beers like Budweiser and Busch.

While high-quality strains and specialty brands may secure premium prices, more low-quality marijuana will be processed into oil used in vaporizer cartridges or adult-oriented baked goods like brownies and cookies, growers and retailers said.

Mr. Jensen, the Seattle cannabis producer, said he hopes that his sun-grown, naturally produced plants over time will yield a 20% to 30% premium over the average market price.

“I always buy organic products at the store and think there is a future for that in the [cannabis] industry,” said Mr. Jensen. But, he said, “it’s a battle getting that awareness out.”

Write to Jacob Bunge at jacob.bunge@wsj.com

Appeared in the August 31, 2017, print edition as 'High Returns Wither for Marijuana Growers.'

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Colorado Officials Respond to Attorney General Sessions on Marijuana Policy

Looks like states rights are coming on strong, and pushing back on AG Sessions.   The overwhelming benefits that are accruing to states with legalization along with strong public support is a force that the Federal government will hopefully start to better understand, and start prioritizing more critical issues to our country.

https://www.marijuanatimes.org/colorado-officials-respond-to-attorney-general-sessions-on-marijuana-policy/

Colorado Officials Respond to Attorney General Sessions on Marijuana Policy

By

 Joe Klare

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  Aug 30, 2017

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Late in July, U.S. Attorney General Jeff Sessions sent letters to officials in the first four states to approve adult use marijuana legalization: Colorado, Washington, Alaska and Oregon. Officials in all four states have responded, the last of which being Colorado, who did so just last week.

Colorado Governor John Hickenlooper (D) and Attorney General Cynthia Coffman (R) took umbrage with several of Sessions’ assertions, saying he relied on outdated and incorrect information while touting the progress made in their state since retail cannabis sales began in January 2014.

“The State of Colorado has worked diligently to implement the will of our citizens and build a comprehensive regulatory and enforcement system that prioritizes public safety and public health,” the letter reads. “When abuses and unintended consequences materialize, the state has acted quickly to address any resulting harms. While our system has proven to be effective, we are constantly evaluating and seeking to strengthen our approach to regulation and enforcement.”

Colorado officials insist that their regulations are effective, citing stats that show youth marijuana use in the state declining by 12% between 2013 and 2016. The state has also seen over $500 million in tax revenue and a drop in marijuana DUIs.

Considering Colorado’s governor was an opponent of Amendment 64 when it was being battled over in 2012, it is a little odd to see him now defending legalization to Attorney General Sessions. That, perhaps more than any other single fact, is a testament to how well legalization is working in Colorado. 

I have opined in writing here and elsewhere that it would seem that Jeff Sessions has enough to worry about without bothering with a legal marijuana crackdown that no one is clamoring for. I don’t see anyone marching in the streets against cannabis legalization. It is not an especially divisive issue, with clear majorities supporting legalization in every poll taken on the subject. 

It has been theorized that Sessions is using this time to feel out how receptive citizens and officials would be to a crackdown; if he doesn’t see the answer to that by now, he never will. Most people and officials in legal marijuana states want Sessions to go away and spend his time on other subjects.

In fact, the message officials in Colorado sent to Sessions tracks pretty close to the message the other 3 states sent him as well. None are calling for federal interference in their affairs; they are calling for quite the opposite.

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Salveo Capital's Michael Gruber Moderates Cannabis Investment Panel at Opal Conference

Salveo Capital Managing Partner Michael Gruber to moderate “Investing in Cannabis” panel at the Opal Family Office & Private Wealth Management Forum in Newport, Rhode Island today, July 19th.

Salveo Capital Managing Partner Michael Gruber to moderate “Investing in Cannabis” panel at the Opal Family Office & Private Wealth Management Forum in Newport, Rhode Island today, July 19th. The panel will discuss cannabis sector marketplace, and explore the various investment options for investors in the sector. More can be found here.

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Salveo Capital To Host Marijuana Investment Summit

This Summit will outline not only the tremendous potential of cannabis, but will also outline the legal and business pitfalls. The Salveo team will spotlight the difficulties of investing in cannabusinesses and will highlight the ways savvy investors are overcoming the hurdles of such a young market. Additionally, representatives from businesses from several sectors of the industry will be on hand to provide a glimpse at the best of the companies fundraising in the marijuana space.

The Salveo Capital Marijuana Investment Summit is an invitation-only event open only to accredited investors. Contact us to inquire about an invitation to learn about investment in the cannabis space.

summit.jpg

The Salveo Capital Marijuana Investment Summit will provide attendees with the knowledge to confidently invest in the next great American industry.

With an astronomical 74% growth rate in 2014 legal marijuana is the fastest growing industry in the United States, and while its current $2.7 billion market value sounds impressive it’s only the beginning. As legalization spreads to new states, as markets begin to open, and as the federal governments eases its restrictions the limitless opportunities of this nascent industry will be revealed.
 
Opportunities to build dominant, national brands; to have a hand in constructing an industry from scratch; to get in before the ground floor is even constructed.
 
As with any investment there are risks and challenges. This Summit will outline not only the tremendous potential of cannabis, but also the potential legal and business pitfalls. The Salveo team will spotlight the difficulties of investing in cannabusinesses and will highlight the ways savvy investors are overcoming the hurdles of such a young market. Additionally, representatives from businesses from several sectors of the industry will be on hand to provide a glimpse at the best of the companies fundraising in the marijuana space.

The Salveo Capital Marijuana Investment Summit is an invitation-only event open only to accredited investors. Contact us to inquire about an invitation to learn about investment in the cannabis space.

 

The Salveo Capital Marijuana Investment Summit

When: August 12, 2015

Where: Salveo Capital HQ in Chicago

Contact for more information

 

Topics will include:

  • A Green Rush? More Like a Green Explosion - The legal marijuana market is ready for an explosion unlike any we’ve seen in our lifetime. From growing and selling the plant to cannabis tech, research, and development, billion dollar ideas are being hatched right before our eyes. Right now there is an opportunity to invest in one of the most exciting and profitable industries of all time, but this opportunity won’t last forever. Even now, the clock is ticking.

 

  • The State of the Marijuana Investment Market: The Good, the Bad, and the Ugly - Think investing in marijuana is easy? Think again. The industry is fraught with bad investments - from entrepreneurs with a lack of business acumen, businesses with unreliable and untrustworthy employees, to an unsophisticated and cash-based infrastructure. In this talk we address the many problems that accompany any attempted foray into the market.

 

  • Risky Business? The Legal Risks of Investing in Legal Marijuana - Is there any risk of prosecution? Seizure of assets? What truly are the risks of investing in marijuana? The Salveo legal team walks you through the state of the law, the latest developments, and the risks (or lack thereof) of investing in legal marijuana.

 

  • To Fund or Not to Fund? The Benefits of Working With an Investment Fund in the Marijuana Market - So you’ve decided you want to invest in marijuana - Now what? In this presentation we discuss the pros and cons of investing in a diversified fund versus an individual company. We will also explore the landscape of different investment vehicles available.

 
Salveo Capital is a noted thought leader in cannabis investment and has been featured as such in publications such as:

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Salveo Capital Joins the ArcView Investor Network

Cannabis-focused private equity firm Salveo Capital has joined the ranks of The ArcView Investor Network. The ArcView Group has been a powerful presence in the marijuana industry from providing detailed market research to advocacy to pairing great ideas with the funding to make those ideas reality. ArcView shares Salveo Capital’s goals of building a modern, professional, forward-looking cannabis marketplace, and we look forward matching our knowledge and experience with that of the ArcView network to build a long-lasting and sustainable cannabis industry.

Cannabis-focused private equity firm Salveo Capital has joined the ranks of The ArcView Investor Network. The ArcView Group has been a powerful presence in the marijuana industry from providing detailed market research to advocacy to pairing great ideas with the funding to make those ideas reality. ArcView shares Salveo Capital’s goals of building a modern, professional, forward-looking cannabis marketplace, and we look forward matching our knowledge and experience with that of the ArcView network to build a long-lasting and sustainable cannabis industry.

The ArcView Investor Network has helped raise over $40 million for 53 companies in the cannabis space. We at Salveo Capital look forward to partnering with ArcView as we work toward our goal of funding the future of marijuana.

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Salveo Capital Sponsors Americans for Safe Access

Salveo Capital is sponsoring Americans for Safe Access, a nationwide medical cannabis organization that focuses on patient education and patients’ rights. The company appreciates the work that ASA has done aiding patients across the country, and supports ASA’s goals of ensuring access to cannabis for therapeutic uses and research.

Salveo Capital is sponsoring Americans for Safe Access, a nationwide medical cannabis organization that focuses on patient education and patients’ rights. The company appreciates the work that ASA has done aiding patients across the country, and supports ASA’s goals of ensuring access to cannabis for therapeutic uses and research.

ASA’s patient-first approach focusing on safety, legality, and responsibility reflects Salveo’s own commitment to building a sustainable, professional cannabis industry. Additionally, Salveo believes in the efficacy of medical cannabis, and in its potential to improve the lives of millions of people in the U.S. living with debilitating illnesses. ASA stands up for cannabis users that need it the most – patients in need of access to medicine – and does it smartly and compassionately.

“We don’t know everything yet about medical cannabis,” said managing principal Alex Thiersch,” but we know that it works.”

Thiersch is a member of the ownership group of Salveo Health & Wellness, a medical cannabis dispensary opening later this year in district 14 serving Fulton, Hancock, Henderson, McDonough, and Warren counties. He recently spoke as part of the Know Your Rights panel at the Illinois Medical Cannabis Patient Summit hosted jointly by ASA and the Epilepsy Foundation of Greater Chicago. He focused on the civil protections available for card-holding cannabis patients granted by the Illinois medical cannabis pilot program. 

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U.S. Tax Code Unduly Burdens Cannabusinesses

In a lot of different ways legal cannabis is one of the sexiest topics of conversation today. From the potential medical breakthroughs to the astronomical growth of revenue in the last few years to legalization campaigns spreading across the country, legal marijuana is a hot topic in media, around office water coolers, and in all corners of the blogosphere. In conversational terms it’s the exact opposite of taxes, which nobody ever wants to talk about unless they are absolutely forced to. The current tax code, however, is one of the more significant hurdles faced by cannabusinesses that touch the plant, such as cultivators, dispensaries, and extraction/infusion kitchens. 

In a lot of different ways legal cannabis is one of the sexiest topics of conversation today. From the potential medical breakthroughs to the astronomical growth of revenue in the last few years to legalization campaigns spreading across the country, legal marijuana is a hot topic in media, around office water coolers, and in all corners of the blogosphere. In conversational terms it’s the exact opposite of taxes, which nobody ever wants to talk about unless they are absolutely forced to. The current tax code, however, is one of the more significant hurdles faced by cannabusinesses that touch the plant, such as cultivators, dispensaries, and extraction/infusion kitchens. 

U.S. Code 280e states

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.”

This means that businesses operating under state-legal cannabis programs cannot deduct any business costs (rent, operating costs, etc) from Federal taxes. The New York Times reports that this could be the difference between being taxed on 30% of gross income for a traditional business to being taxed on 70% of gross income for a legal cannabusiness – in some cases a difference of hundreds of thousands of dollars.

The code was added in the 80s when a cocaine and meth trafficker went to tax court to argue that the operating costs of his illegal drug trade were tax deductible. In current times, though, it not only punishes businesses operating legally in 23 states, but it also goes against the grain of the federal government’s recent stance to not punish businesses in the marijuana space that are compliant with state regulations.

As of today there are two efforts underway to change the way cannabis companies are taxed in the U.S. A Colorado dispensary is challenging the statute in court with lawyers stating, “While marijuana is a controlled substance … Colorado’s dispensing of medical marijuana is not in violation of the (Controlled Substances Act).” Additionally, the Small Business Tax Equity Act of 2015 has been submitted in both the House (H.R. 1855) and the Senate (S. 987). The bill would create an exemption in 280e for businesses that touch the cannabis plant that are compliant with state laws.

Success in either of these endeavors will go a long way toward easing the onerous tax burdens faced by owners operating state-legal businesses, and will further establish the legitimacy of cannabis business owners in the eyes of the law.

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Alex Thiersch Speaking at Illinois Medical Cannabis Patient Summit

Salveo Capital Managing Principal Alex Thiersch will speak as part of the Know Your Rights panel at the Illinois Medical Cannabis Patient Summit on June 6 at the University Center in Chicago. He will spotlight the civil protections afforded to patients and caregivers enrolled in the Illinois Medical Cannabis Pilot Program.

Salveo Capital Managing Principal Alex Thiersch will speak as part of the Know Your Rights panel at the Illinois Medical Cannabis Patient Summit on June 6 at the University Center in Chicago. He will spotlight the civil protections afforded to patients and caregivers enrolled in the Illinois Medical Cannabis Pilot Program.

Thiersch has been involved in the Illinois cannabis space since the bill for the Pilot Program was being debated in the state legislature, and is now part of the ownership group of Salveo Health & Wellness, a medical cannabis dispensary opening later this summer in Canton, IL. These facts, along with his experience as a lawyer representing medical professionals in matters relating to legal compliance makes him well-suited to weigh in on matters of cannabis law in Illinois.

The Illinois Medical Cannabis Patient Summit is sponsored by the Illinois chapter of Americans for Safe Access and the Epilepsy Foundation of Greater Chicago. The mission of the day-long event is to provide education about the use of medical cannabis, and the specifics of becoming a registered patient or caregiver in Illinois. There will be an additional presentation in the evening geared towards helping veterans navigate the VHA system to treat illnesses using medical cannabis.

Keynote speakers include Dr. Srishti Nangia and Dr. Suzanne Sisley. Dr. Nangia is a Pediatric Epileptologist at Ann & Robert H Lurie Children's Hospital of Chicago and an Assistant Professor in Pediatrics at Northwestern University Feinberg School of Medicine. Dr. Sisley is a specialist in Internal Medicine and Psychiatry and the Principal Investigator in a current FDA clinical study looking at the use of whole-plant cannabis in combat veterans with treatment-resistant PTSD.

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Legal Marijuana's Biggest Growth Is Still To Come

The legal marijuana industry is already the fastest growing industry in the United States.  The revenue projections from both the growing and selling of cannabis, and from the ancillary industry, are truly staggering, and even conservative projections predict that the legal marijuana industry will be valued in the tens of billions of dollars within the next five years. 

The truth, however, is that this industry’s potential, even when compared to some of the great industry explosions in history, is undervalued. Although the “gold rush” and “oil boom” are commonly referenced as comparative markets, none of those industries currently match the immediate growth potential of the legal marijuana market. Given the convergence of medical marijuana, recreational marijuana, and technology we haven’t scratched the surface of how large this “green boom” is going to be.

The legal marijuana industry is already the fastest growing industry in the United States.  The revenue projections from both the growing and selling of cannabis, and from the ancillary industry, are truly staggering, and even conservative projections predict that the legal marijuana industry will be valued in the tens of billions of dollars within the next five years. 

The truth, however, is that this industry’s potential, even when compared to some of the great industry explosions in history, is undervalued. Although the “gold rush” and “oil boom” are commonly referenced as comparative markets, none of those industries currently match the immediate growth potential of the legal marijuana market. Given the convergence of medical marijuana, recreational marijuana, and technology we haven’t scratched the surface of how large this “green boom” is going to be.

Consider these facts.

One: Legal cannabis is headed in two different directions, each with the potential to be multi-billion dollar industries. Comparisons to alcohol after Prohibition forget that, unlike alcohol, marijuana has very real application in medicine. Pharmaceutical companies are already preparing for the inevitable consolidation that will take place once the federal prohibition on marijuana is lifted. The amount of money that will be made from the medical side of cannabis – research and development of new strains and treatments, new delivery mechanisms, extractions of certain components – might very well dwarf the amount of money made from the regulated adult use market.

And adult use will be a massive market. In 2014 legal marijuana sales in Colorado doubled in the first year of expansion from medical-only to full adult use. It is possible, if not likely, that marijuana will be fully legalized throughout the entire west coast by the end of 2016. California and Nevada are almost certainly passing such bills in 2016, with states like Arizona, New Mexico, and Montana considering laws as well. On the east coast, Vermont, Rhode Island, and Maine will have full legalization bills on the books in the next two years with much of the rest of the northeast corridor following suit soon after. 

Two: The federal prohibition on marijuana is ending much quicker than even the most ardent supporters anticipated. Rand Paul, who yesterday announced his candidacy for President of the United States, is the sponsor of a bill to legalize medical marijuana. This makes the legalization of cannabis a legitimate election issue, and not one that a viable candidate can readily oppose. Not when swing states like Ohio, Pennsylvania, and Florida are set to pass comprehensive cannabis laws, and a recent Quinnipiac poll in these states showed over 75% support for medical marijuana. Several other swing states – Colorado, Nevada, Washington – already have recreational or medical laws on the books, and even Ted Cruz and Jeb Bush have both stated that they would not interfere with state marijuana programs.

Three:  Underlying both the recreational and medical marijuana markets is the fast-growing ancillary and technology market. This market (often referred to as the “pick and shovel” market) is growing just as quickly as marijuana itself.  As state laws are passed and prohibition is lifted, new startups are working quickly to fill the vast infrastructure gap left by marijuana’s former illegal status. These firms are offering cutting edge solutions in a landscape with no entrenched leaders, and together these they could develop into yet another billion-dollar industry. 

The legal marijuana market grew by an astounding 74% in 2014, and with legal expansion on the way in many parts of the country that growth is likely to continue. We are receiving funding requests from every imaginable sector – cultivation centers and dispensaries, research labs, pharmaceutical companies, software developers, and the like – as entrepreneurs pair with established business professionals to capitalize on the astonishing opportunity the legal marijuana market presents. In the industry we like to talk about the boom of recent years as a “green rush” but the coming months will show that we haven’t seen anything yet.

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Salveo Capital Exhibiting at Marijuana Business Conference and Expo

Salveo Capital will be exhibiting at the spring 2015 Marijuana Business Conference and Expo in Chicago, IL May 19-21. Managing principals Alex Thiersch and John Dohm will be available to talk about where the industry is going, and how Salveo is funding the future of marijuana. 

Salveo Capital will be exhibiting at the spring 2015 Marijuana Business Conference and Expo in Chicago, IL May 19-21. Managing principals Alex Thiersch and John Dohm will be available to talk about where the industry is going, and how Salveo is funding the future of marijuana.

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