California’s Cannabis Market – A Deep Dive (Transcript)

Editors’ Note: This is the transcript version of the podcast we posted last Wednesday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast embedded below, if you need any clarification. Enjoy!

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Rena Sherbill: Hi again, everybody. Welcome back to the show. It’s great to have you listening with us. As always, super excited for our conversation today. It’s with two experts on the cannabis space, specifically talking about California today with Hirsh Jain, who some of you may have heard on other podcasts, really well informed about the California Cannabis landscape.

He’s the Founder of Ananda Strategy, a consulting firm serving the cannabis and psychedelics industries. He is also the Chair of the LA Cannabis Chamber of Commerce, which promotes interest of cannabis businesses in the Los Angeles County area. He’s also on the Board of Directors of NORML, which is the National Organization for the Reform of Marijuana Laws in Los Angeles. He previously directed Government Affairs at Caliva at MedMen (OTCQB:MMNFF), a wide-ranging wealth of knowledge and insight about California.

Joining him and us is Emily Paxhia, who was on this show a bit ago. She’s co-Founder Managing Partner of Poseidon, which recently launched its own ETF PSDN. Just incidentally, we’re interviewing Noah Hammondm [AdvisorShares CEO] and Morgan Emily’s brother, also Co-Founder of Poseidon on CEO Interviews. Check that out coming soon.

So, Emily is the Managing Partner of Poseidon. She is also the Portfolio Manager of PSDN. We talk about the California industry, we talk about California players. There might be some that we didn’t cover. But we really got to the main players in California what to look for as an investor, what to be thinking about business life in California, what it means to be a business, what it means to own a cannabis business. Some really, really, really great stuff here today, really proud of this conversation and really happy to bring it to you, hope you enjoy it.

Hirsh and Emily, it’s really great to have you both on The Cannabis Investing Podcast. Really happy to have you both on talking cannabis in California. So, thanks for both joining us.

Emily Paxhia: Thanks so much for having us.

Hirsh Jain: Yes, thanks Rena. Great to be here.

RS: Absolutely. It’s great to have you both. Do you want to kind of like start things off maybe Hirsh, because you’re really specified in the California landscape? And just kind of give an overview, like, I know one of the things that we were looking at — well, you know, I don’t want to get ahead of myself.

Let’s start with where you kind of think the California cannabis market is, as we sit here in the beginning of February 2022?

HJ: Yes. What I’d say Rena is, today in the current regulatory environment federally with 280E and just the immense cost of capital in the cannabis space, I think the only way to really be profitable is sort of the limited license model that we see in a lot of Midwestern states, in East Coast states. And if we’re honest, California’s the exact opposite of that. I’m not the first one to say this, but in California, and other states winning the license is the accomplishment. But in California, it’s just the opposite.

And so, I think what you have to say about the California environment is, it’s very different. It’s a very competitive environment by virtue of its licensing structure. There’s also a very competitive illegal market. And then in addition to those two things, there’s a very challenging regulatory and tax environment.

So I guess, the first thing I would say is in the current federal environment, California is very challenging. But the thought that I would add to that is that I think that California is the future. And what I mean by that is, eventually, I think these limited license walls that exist in other states are going to start to crumble. And even in other states that have legal cannabis, we see a lot of legal California brands being shipped over there.

So my high level thought on the California market is that it’s very challenging right now. But it does sort of represent the future. But again, the future is not now, right? So if you’re an MSO, that’s trying to have the most attractive EBITDA margins in 2022 and 2023, and really impress the market, then there’s good reason that you’ve stayed away. And if you’re a retail investor that wants to own a boat in 18 months, like, you’re probably not going to get there by investing in California companies.

And maybe the last thing I’ll say, I don’t want to go on for too long. There’s much more I could say. I will say that the harsh regulatory environment in California gets a lot of attention and properly so, but what it’s doing is it’s kind of facilitating a market rationalization process where a lot of folks are being kicked out of the market, and there’ll be huge cost to that. But that will help restore I think the health of the market, and those folks who survive will ultimately emerges is winner. So maybe I’ll pause there.

RS: A bit of Darwinism.

HJ: Yes, exactly.

RS: Emily, so, I’m curious what your feelings are on the market. I’m really interested in what your feelings are because since you last came on the podcast, and pretty recently you started an ETF PSDN, the Poseidon ETF and not much California exposure. So, I’m curious kind of what your thoughts are vis-a-vis California in general, and also kind of with the fund?

EP: Yes, absolutely. Well, I mean, it goes without stating that I think I agree with Hirsh that, California is the market to watch for the future. And I think that anyone who’s benefiting from the construct of a limited licensed market, East of the Mississippi, where they do, you win these licenses, you have these coveted locations, and you kind of can control the market to an extent.

I would say, looking to California is the future of what will exist as the market conditions in every state, is something that’s really important. I mean, even in Massachusetts, we’ve seen wholesale prices coming way, way down faster than anyone thought except for those of us. Who’ve been in the western states, know what it looks like when capacity comes online.

So, I think that it’s really important to think about the futuristic role of California in this industry. But yes, you’re right, we don’t have a lot of California exposure in the ETF at this time. It doesn’t have to do with some functioning in the market and the sizes of the companies that are public in California. They’re pretty small and pretty illiquid, which is even a stretch to say in our market, which all cannabis names in the U.S. are very, very illiquid, and volatile. So, it does create kind of structural challenges for us to participate in California, doesn’t mean that we’re not bullish on the future of California.

But I would agree with Hirsh that we have ways to go. Because California, not only do we have too few retail locations, we’re hovering around probably a thousand retail locations in the state at this point, considering that California is the fifth largest economy in the world and population size of our state comparative to the rest of the country. It’s extraordinarily limited in the access, but what we do have a lot of access to as illicit market cannabis.

And it’s interesting because I’m already starting to see these pain points trickle eastward where we have someone on our team who’s based in Brooklyn, and they’re in New York, they decriminalized cannabis are preparing to open an adult use market, they’ve just opened up the medical conditions that can be prescribed for cannabis. And along with that, as with every state, you see some bold operators who obviously are not licensed because licenses do not exist for adult use opening stores. But guess what products are on their shelves, California cannabis. So, I think that we’re already seeing how the illicit market is seeping out of California, again, moving eastward.

But we are bullish on the future of California, I think if you can be very intelligent about your use of resources, your selection of retail locations, contemplating within the state of California, you have jurisdictions that are almost like Limited License markets to begin with. So, if you look at the Central Coast are very limited in the townships in terms of how many doors, they’re going to allow to be open. So, they do create moats within this massive state.

And I mean, even like, if you look at Fresno, Fresno has not had adult use stores open, now they’re finally licensed and getting open. That’s a million people within the City Limits of Fresno, that’s not a population to turn away from. And if you look at where the consumption interest is in California, it’s actually not just clustered in LA and San Francisco, which, by the way, are pretty well served in terms of delivery and retail locations. But it’s really if you go down the I-5 corridor through the massive markets in the center of the state that you really are — you find interesting jurisdictions to potentially participate in on a retail level.

RS: It’s interesting you mentioned what’s on the shelves in Brooklyn right now. And it’s kind of like talking about the future is now like, that’s kind of interstate commerce before we actually have legal interstate commerce is kind of showing the trends. But I’m also curious is it I mean, I know that people love California cannabis and California’s the tastemaker of cannabis, and all of these things, and it has the history and all of the culture and all of that. But there’s also like a surplus of supply. So, is that also part of the reason why it’s going eastward? Like, what are your thoughts in terms of how cannabis will spread and how it is spreading?

HJ: I mean, I think that the cannabis that’s going eastward is overwhelmingly illicit cannabis. Obviously, there’s a surplus of legal cultivation, and I would hope that few operators would be playing both sides. I think we hear a little bit about some operators playing both sides. So, my bet would be that the cannabis that’s being sold in the east is by folks who are cultivating it illegally. And that many farmers given the surplus actually refuse to harvest their crop this past fall. So maybe some of that is making its way eastward, but I would think most of it is illegally cultivated cannabis.

EP: Yes, I think it is illicit market typically. And we do know there’s counterfeiting of branded product packaging. So, we know that that goes on, which is challenging for the operators who are more popular and have some brand recognition. But I do think there are some groups who, after just so much frustration of trying to participate in this legal market paying all of the fees and the taxes associated and yet having to compete with a very alive and very present illicit market, that they probably are just trying to grab revenue wherever they can. I’m not condoning that. But I think I have a little bit more sympathy to why people are making choices that they’re making.

And to Hirsh’s point, I think we’ll — this is going to have been a great extinction event in California, which is unfortunate, because we had the opportunity to bring a kind of gray market or illicit market operators into a legal and regulated market.

It didn’t really — unfortunately, it just seemed like it wasn’t balanced and didn’t pay out to participate in the legal market. And instead, I think we’ll see many flips back into the illicit market and or just maybe leave the industry altogether, because it is just too difficult. And it made it so that you actually lose money growing cannabis in the ground under the sun which is pretty amazing to think about in a bad way.

RS: Yes. So, Emily do you feel like as a fund, you’re waiting — you talk about the liquidity issues. Do you feel like you’re waiting for a catalyst that is going to kind of upswing the companies? Do you feel like you’re waiting for maybe consolidation? Or are you waiting for kind of the bigger picture to change? And then some of these thesis will kind of maybe play out a little bit differently than now?

EP: Yes, I’d say it’s a great question, because we’re private investors and we do have pretty significant exposure in some of our private funds in California. And the way we’re talking about it with those operators is like, heads down, focused on EBITDA generation, focus on making your vertical very strong. And the day will come when an MSO or maybe an SSO from another market that is understanding of the way that these market dynamics work in California will want to acquire you.

Because Hirsh said it correctly. I mean, when you’re seeing EBITDA margins, like you’re seeing in the eastern states with the limited licenses, it’s hard to want to dilute that by coming into the market where you have a tighter EBITDA margin, or maybe I’ve seen many, many companies with zero EBITDA in California and are actually just burning money.

And so, it’s a difficult thing to look at. But so, on the private side, we’re giving guidance to the companies just focus heads down, keep opening the doors, you’ve got keep really improving on your operational efficiency, examine each step of your access and exposure along the supply chain, and then just prepare for when these bigger operators do want to come in and grab a stake in California.

In terms of the way I’m thinking about it from the ETF side, yes, we are waiting to see what is going to happen in California to see some of the strength of these companies. Like I mentioned, it is a little bit more about the structural and technical aspects of their public company exposure, set market cap, some of the liquidity, some of those things that make it challenging for us. But when I look at our portfolio, we do have exposure to names who do have stores in California, couple of them already do, quite a few actually. I would say it’s not the focus of their portfolio, but I would say they’ve all wanted to kind of grab a toehold here. And so, I would say the majority of the companies in the ETF do have exposure in California.

RS: So, Hirsh if we can like kind of break down the broad regulatory factors that are inhibiting growth in the California market. I know like one of the things that you talk about and that is talked about is this cultivation tax. That you’ve said that is going to be rescinded at some point this year, and then Newsom didn’t include it in his last — in the last release. Do you want to talk a little bit about that vis-a-vis how it’s going to kind of change the landscape?

HJ: Absolutely. So, I’d say that three main pain points in the California market are local control, bureaucracy, and then the tax structure. So, the first one local control, there’s 482 cities in California, the vast majority of them voted for Prop 64. 342 out of those 482 so, 70% of them have voted for Prop 64. But there’s only a retail cannabis business open in 115 of those cities today. Right.

And so, in many of those cities, elected officials are defying the will of their voters or see more of an electoral threat from the vocal anti cannabis minority in their towns. And so, they haven’t authorized cannabis retail. So, there’s vast swaths of the state where you can’t buy cannabis legally. And that contributes to the illicit market.

I mean, Emily made a really good point about Fresno. When those 21 stores come online in Fresno, that massive cannabis desert that should add a couple $100 million to legal cannabis sales. So, that’s the first one which is local control, which is often talked about.

The second one Rena that is talked about less is bureaucracy. I think the challenges in many of those cities, they’ve voted to authorize retail cannabis, but years later, only a fraction of those stores are open. And that’s really a big challenge. So, you have to obtain approval both from the state and from the locality. And that can take years. And by the time you get to the end of that process, you may not even have the resources to get open.

So, a city like Pasadena that passed an ordinance to great fanfare, but only two of those six doors are open. West Hollywood, a city that wanted to be the Mecca, the Amsterdam of the cannabis industry, of the 40 licenses that issued three and a half years ago, five of them are open.

And that’s kind of telling a city that wanted to lean into cannabis still can’t get its businesses open. And so, I think that’s an even bigger problem than local control. What makes me optimistic about California is we’re seeing so many cities opt in last year, this year, et cetera. But you’re left wondering, is it going to be until 2025 when those stores open. So that’s both the positive and negative way to look at the market.

And then the final thing that I’ll note is just the tax structure, cannabis is taxed at least four times, sometimes five times before it reaches the end consumer. I mean, I’ll just kind of tick through it real quickly. First is the cultivation tax, because the cultivation tax is a flat tax, as the price of cannabis has dropped precipitously, it’s gotten so much more onerous. So, it’s $160 a pound $161 a pound of cultivation tax. And when cannabis in the wholesale price was $1,500 a pound that was onerous, but still manageable. But when it drops to 500 that becomes a 30% tax.

So again, just to tick through it, there’s the cultivation tax at the state level. There’s oftentimes a local cultivation tax as well. And then there’s both a state and local excise tax. So, the state tax is 15%, the local excise tax can range between 8% to 10%. And then there’s the sales tax on top of that, which is another 9%. So that tax burden added up is at least 50% and that doesn’t account for the cost of testing, the cost of metric and other such things. So those are the main challenges, that’s it.

EP: It’s truly extraordinary.

RS: Yes, it’s extraordinary. And in light of that, like extraordinary regulation, is there a chance for any smaller business to succeed? We talk about like social equity and small business funding and trying to get in smaller players. Is there even like a way — even if they get kind of to the first part, is there a way to succeed in that kind of environment?

HJ: My answer here what Emily thinks, I think the answer is no. I mean, I think what you’ll see in California is a lot of lip service about the importance of small operators and equity, but the regulatory environment is structured so that you can only survive if you have an access to a lot of capital. And I think by the way, we’re likely to see this in many states that sort of like pass laws with great fanfare, but the structural regulatory environment makes it very difficult for those operators to succeed. And so, we have to ask questions like, is it enough to pass a law that says, you care about these things? Or do you have to set up a structure that allows those folks to succeed?

EP: Yes, I mean, I say that all the time around my apartment around our office is like, spare me the lip service. It’s all about action to me. And when I think about it, it’s like even for me, when I am shopping online or going into a store, the sticker shock of like, the taxes to me is passed along as the consumer too. And I’m a dedicated legal cannabis consumer, I could see how other people might bounce out of the legal market too on the consumer side because of the taxation that goes on.

But when I think about what it takes this — and I would actually even zoom out and say California has a small business issue in general. I’m in San Francisco, I watched a number of small businesses closed that will never come back. And by the way, they were long running small businesses during COVID. They went away, I don’t see why they would come back. There’s no incentivizing this business to come back. And it’s just too expensive. And I don’t understand how it’s actually feasible to do it.

And I think about look, I grew up in Buffalo, New York. I know what it looks like when business pulls out because of taxes. And I think California has to like zoom out and really think about this because we could lose and see a massive extinction of small business in general, not even just cannabis. And so, I think we really have to get a little bit smarter about how we’re going to manage this as a state. And I hope that they will, because I do think it’s a great state. It’s a great market. There are great things here.

And I think cannabis — we’ve always had great craft beer, we’ve always had great, beautiful wine. I think cannabis would be like the next great pillar industry for this state to have alongside of course, the fact that we’re the fruit basket of the country. I do think it would be great to see it being more nurtured here. And even though I know all of the layers of taxation, just hearing Hirsh talk through it. Again, it’s just so it’s so poignant, so staggering to think about what it’s like to try to operate a business in this environment.

And to his exact point, it’s like you have those taxation elements to it. But you also have the cost of doing business in cannabis which is higher, because our insurance is higher. If you can get it, banking costs are higher, even the fact that we can’t transact with using credit cards and things like that. And so, all of those transaction costs are higher, even B2B or B2C. There’s just so many elements to it that do make the cost of doing business so much higher in our industry.

And I often say this when I talk about California, I think about it like California is an endurance athlete that’s training at altitude. And if you can train at altitude, and you can make it and win here, everything is going to be just like a downhill with Sprint with the wind behind you if you get into other markets. So, I’m very pro the state and I’m very pro those who can make it through but I do worry that we do just lose small business just because it’s functionally not possible.

RS: Hirsh coming from the kind of regulatory bureaucratic, even activist side, what are your thoughts there? And how California can kind of write this a little bit?

HJ: I am cautiously optimistic that we’ll see progress in the medium term. And I see that the two main pain points of — yes, cautiously and it’ll take a while. But two big pain points as we’ve been discussing is lack of retail access and taxes. So on the taxes point, obviously making bets and politics is always a dangerous game, but I’m cautiously optimistic that the cultivation tax will be eliminated this year.

And so, in May Governor Newsom has the opportunity to add this back into his budget. You’re right Rena that he didn’t propose it initially. But sometimes what the governor does is he puts out a budget. He has four months to see how people react to it. And then there’s something called the May Revise where he can add additional things to the budget.

And so, there’s a state Senator named Mike McGuire, who will soon introduce a bill to eliminate the cultivation tax. And because the cultivation tax has really been very punitive for small farmers that are a really sympathetic group, that’s sort of gaining more traction.

And so, I think it is likely that Governor Newsom includes the cultivation tax in his budget in May, and if that takes place then the cultivation tax would be eliminated by July 1st. There’s also another path. If Governor Newsom were to not include it in his budget, it could still potentially pass as a standalone bill, and then it would take effect in October. So that’s just kind of the mechanics.

And I’ll say, we have to acknowledge that the California cannabis industry has tried to get a tax cut the previous three years and has failed each time. And that’s because the Democratic supermajority in the legislature thinks of tax cuts as something that Republicans do. That’s what a leading Democrat in the state said to me recently, and the constituencies that rely on cannabis tax revenue are very powerful.

But I guess what makes me optimistic is, this is the first time in California cannabis that all of the different constituencies that make up the industry are united on an issue from organized labor to equity advocates, et cetera. And so that won’t solve California’s tax problems overnight. But I think that cultivation tax will be very helpful.

Unfortunately, it will come too late for the thousands of operators who have been kicked out of the market. But I’m cautiously optimistic, we’ll see that. And on the retail access thing, it’s interesting. We were talking about the bureaucracy. There’s a huge universe of cities that passed ordinances 2.5 years ago that have not yet come online that are finally getting closer to coming online. And so, there are cities like Fresno that are going to have 21 stores open or Tracy that are going to have 11 stores open, right. Or Chula Vista who have another six doors open.

And so, I think what we could see in California is the long tail of growth that we saw in Colorado. So, Colorado started off as a $700 million market. A few years later it hit $1 billion, then it hit $1.5 billion. It’s kept growing and now it’s $2.2 billion. And this year, Colorado Springs, the second biggest city in the state, one of the most conservative cities in the state is finally going to come online and that’s going to add to the market as well.

And so, I think we will see that story play out over the next like four to six years. The challenges California’s bureaucracy means that that story is going to play out very slowly.

And then last thing I’ll say and then and then I’ll pause, we have seen this happening. In 2018, this was a $2.5 billion market. In 2019, it generated $3.1 billion in sales. By 2020, it generated $4.4 billion. And in 2021, we have more than $5 billion in sales. So, we are seeing incremental growth in the legal market. But that’s being lost in sort of a lot of the headlines about folks who are kind of losing their shirts. So anyways, I’m cautiously optimistic about those two things.

RS: Emily, so kind of based on those things first of all, do you have any other points of optimism that you’re looking at? Or are there points of kind of maybe pessimism that you’re looking at vis-a-vis what Hirsh just said?

EP: No, I mean, I’ve had the chance to be in touch with Nicole Elliott, who sits very closely with Gavin Newsom on this issue. And I do believe she’s a massive supporter of the industry and believes strongly and wanting to see it survive and thrive. So, it’s always good to know you have someone that’s an advocate for it in the government. And from what I understand, Gavin Newsom is sympathetic to the industry. So, I’m hopeful that that cultivation tax goes away.

I know, Eric Pearson, one of the groups we invest with he is at Spark up in San Francisco and Sonoma, they’ve been a long running operator. And he worked really closely with Sonoma. I think Sonoma is going to get rid of the cultivation tax. So, I think there’s going to be multiple layers of things that could really improve here. So, I’m optimistic about that. And then also to Hirsh’s point about stores getting open.

But one thing that strikes me about all of this, there’s a lot of talk about interstate commerce. And we want to talk about bureaucracy. This, I mean, I think that California is a harbinger for how interstate commerce implementation could look. And I think everyone should, yes, that would be a great day. By that time, I’m probably going to be off sailing away out of this space, because that means we’ve all done our job, and things are really going to be cranking at that point. And I consider us pretty, like active investors to be the change agents around this.

But I think that everyone should also gird their loins for it to be a complicated and bureaucratic process. Or if we’re looking at this on a federal level, and it will not be just a straight line to getting things open and getting states to approve the movement of cannabis through them from one coast to the next.

So, I just want to — I just thought it’s important to think about California is kind of like that window into what comes next because California is kind of its own country, in its own right. And, and even if you look at the demographics of the state, it’s so different from north to south, even LA to San Diego, very different market. So, it’s just something that I thought I would raise is something I keep an eye on. But I do have points of optimism around the state, obviously very much so.

RS: I think it’s an interesting point about California being kind of a microcosm for the broader United States, especially because just like each city, each county, even though it’s legal, they get to have a say in terms of what comes in and out of their jurisdiction. And same with the states. I think it’s always going to be like that. I mean, the U.S. is that they’re — it’s a cobbled together United States, but each state very much stands on its own in terms of what they want and what they don’t want, which I think we’re seeing over and over again, very much so.

So I’m curious. Emily, I’ll start with you in terms of a couple of companies that we talk a lot about on the podcast have been Glass House (OTC:GLASF) and The Parent Company (OTCQX:GRAMF), and a few smaller players. And I personally am invested in The Parent Company I got in early and we’ve talked a lot about the lessons that so many of us have learned from getting in early and kind of the slow decline or the precipitous decline of those stock prices. And a lot of people are wondering if they’re ever going to ride the ship.

There’s — I still think that there’s a lot to like about, just concentrating on those names for a second Glass House and The Parent Company. But at the same time, there’s obviously a lot of trepidation. I’m curious to know your thoughts from the investing side of things, how you see it going in terms of that narrative there with? I mean, they’re different players concentrating on different things, but kind of what are your thoughts there?

EP: Yes, you’re right. They’re kind of approaching it from two different angles. I mean, I think I know a lot of the folks at The Parent Company because we had known them from the time at Caliva and knew some of the team at Left Coast Ventures which went into that. And I’ve gotten to know Troy, the CEO, I think he’s a tremendous asset to the company. I love his background. And actually, he’s coming on my podcast on Friday. So I’m really excited to talk with him again.

But I think that they’re taking kind of like that brand retail e-commerce forward approach to it. It seems pretty smart. I do think it’s forward looking. I think investors probably struggle with it because of the lack of EBITDA profile, really they’re very low to no EBITDA profile there, I see my dog in the background.

And but I do think people like the brands. I think they like the retail experience. I think they’ve built a really interesting e-commerce strategy and delivery strategy around it. So they’re definitely kind of like more taking that Amazon forward-looking approach to it than just saying, let’s set up the vertical the way everyone else has. And so, they’re either last I checked, they were trading below cash, which they haven’t really rich resource of cash available to them. And cash in this market to do acquisitions of more doors, I think is a pretty great asset to have on your balance sheet.

So, we’ll see. Getting deals done in California, I will say this, obviously we’re in a phase of consolidation in M&A in the industry. California operations are more complex and have more bodies buried in them than most people could even dream of, because of the number of people that have been involved in the organization, the potential tax issues that have occurred, just everything.

And so, you really have to dig in and do the diligence. So, acquisitions will take time and will likely be moving targets as they go. And so, it’s definitely not a slam dunk to just go out and acquire existing retail doors or existing infrastructure because of all the complications and diligence and getting it done and making sure especially as a public company, because it will be under scrutiny what you pay for it and the value it adds to the organization.

So, I think The Parent Company is very interesting on that side. I think that you see Glass House, they’ve taken a different approach where they’re like, we are going to have a massive amount of greenhouse available because I think and based on the discourse and dialogue I see coming out of the company, it’s very clear they have their eyes set on when interstate commerce opens up.

I mean, the amount of glass they have is extraordinary. And I know they’re deferring the cost of that, because they’re still leasing it to other vegetable growers. And so that’s like an — I consider that optionality for the big picture. With the wipe out of — the unfortunate wipe out of growers in California, I think they could be well positioned to funnel their own vertical. It seems as though they’re expanding the way that they’re thinking about brands and I know they’re trying to expand the way they think about their retail footprint to funnel it through.

If you’re intelligent, you’ve got the good infrastructure through the vertical. In California, you should see 25% EBITDA margins. I mean, it should be the case. It just it matters, obviously, you’ve got to get these things going, you’ve got to get it all cranking at scale, and you got to get it going efficiently. So, I think those are the two very different kind of ways that I see those companies approaching it. So, yes…

HJ: You know what I agree with much of what Emily said. On Glass House, I think there’s a few things that are compelling about the story. First is their cost structure so, they’re building this massive greenhouse, and I think they believe at scale, they can cultivate cannabis for $100 a pound. And you compare that to the typical small farmer, that’s like $300 $400 a pound. So, we’ll see if they can build out that greenhouse. But that’s pretty compelling. #1.

I think the second thing that’s compelling is just sort of the ESG angle. They claim that they can cultivate cannabis much more sustainably. We know that’s going to become a bigger issue nationally, and in particular, in California, which tends to be a leader on environmental issues when it comes to things like gas mileage. And so, I think we could see a very similar thing in cannabis.

And then, as Emily mentioned I think there’s both kind of a call option on interstate commerce, right, that they’ll be able to serve the country. But as Emily was saying a little earlier, I think there will be, it’ll take a long time to get there and it’ll happen in a very iterative fashion. And so, I think in the interim Glass House could very well benefit from the retail expansion that’s going to happen across the state. As we were talking about earlier on a per capita basis, California should have 3000 4000 dispensaries. Right now, it has about 870 brick and mortar and then some delivery.

So, as these cities open up, Glass House can be in a good position to serve the state’s market. So, I think those are a lot of the things that are compelling about Glass House. One interesting question is the extent to which they build out their retail footprint, so right now they have four really awesome retail stores that they’ve had for a while in places like Santa Ana and LA and Berkeley, big markets.

They acquired a bunch of dispensaries via Element 7, some of which are being held up in a lawsuit, but they’re in much smaller cities. They’re a very different profile. Cities like Hesperia, compared to their big retail outlets. And so, I think if they can establish retail across the state and be successful in those smaller markets, that’ll also be beneficial to them. So, a lot of interesting things about that story.

And I’ll also say that, in Q3 as prices crashed, their wholesale revenue suffered a lot less than other players such as State House or Harbourside (OTCQX:HBORF), now State House, or a Lowell (OTCQX:LOWLF) or The Parent Company, I think their wholesale revenues fell by like 15% or so, which is pretty good when prices are falling by 50%. So, that’s a good signal.

And yes, I also agree with Emily’s read on The Parent Company. I’ve gotten to know Troy pretty well and he’s a very impressive person, I think. I don’t think the cannabis industry has seen a C-suite like CPG leader like him before. So, I think that bodes well for them. I think one of their challenges last quarter, which was not unique to them was that their wholesale revenue fell dramatically and that’s because prices fell dramatically. And so, I think that’s why the most recent earnings report was challenging.

But I do think they could have some growth drivers ahead of them. As Emily was alluding to, they have a bunch of delivery hubs across the state. It seems increasingly likely that the state is going to be more permissive when it comes to delivery by increasing case pack value, like how much cannabis can I have in my car, which would allow them to service a much bigger geographic area.

So, I think that and then really optimizing these retail assets that they’ve acquired via coastal, there’s just a huge discrepancy in California in how retail stores perform. And they recently hired a woman named Mindi Basha, who I’ve worked with before and it’s just like an amazing retail leader. So, if she can help those stores perform even better, I think that could bode well for them going forward.

RS: Speaking of capitalizing on the retail picture in California, what are your thoughts on Planet 13’s (OTCQX:PLNHF) model of this super store? And kind of pursuing that strategy?

EP: The mega store. Yes.

RS: The mega store.

EP: Yes, I mean it’s — they’ve placed them in really good spots. Being in Las Vegas, it’s all about experience, and just being able to go in there and there’s like drones flying overhead. And same thing was Santa Ana, right by Disneyland. If we were adult use, I bet we see one in Orlando. I think they’re taking a very specific approach to it.

I wonder when — I think that there’s experiential cannabis consumerism. And then I think there’s also like this sharing of it. And so, I wonder when this will shift from just being in a big mega store with a bunch of cool brands and an experience to you want to be able to buy it and then consume it together.

So, like more of that co-lounging that can go on with it. So, you’re consuming more like you’re buying in almost like a winery where you’re like getting the wine, you’re tasting the wine, you’re maybe buying a bottle and hanging out kind of a thing or brewery or a distillery. Those are some of the ways that you can create more experiential consumerism around retail events.

So, but I do think we’ve got some time now well. I mean, even my friends, some of my friends are like, wait. So, when it’s not medical, I can just go into the store. I’m like, yes, you could just go into the store. And so and this is my life’s work for nine years. I mean, so even if my friends haven’t — if that hasn’t like broken into their brains because they live in a market that it’s not legal and it’s like the novelty and the excitement around that is certainly something that I think Planet 13 is capturing. And I think it seems like a fun thing.

But I do — I think when I look at Las Vegas, you have cookies on the strip, which GTI (OTCQX:GTBIF) manages and then cookies are opening the door on Flamingo and near the strip. And those will also be those are very experienced destination retail. So, it’s like when you do something well, then people want to do it with you. And I’m not saying that Burner is the original kind of like destination, come to get your strain drops, all of that.

But I think that there are other retailers that may be trying to create a destination experience. I don’t know if they’ll take the mega superstore approach or the FAO Schwarz store approach as I often talk about it but we’ll see. But I think it’s they’re doing it and I think they’re capitalizing on an excitement around buying cannabis in a legal door that we haven’t seen before in a spectacle kind of a way.

RS: Yes, I’ll just say Hirsh, I’m interested to hear what you have to say. But I’ll just say vis-a-vis the consumption lounge idea. That was totally where I was at. I remember talking to Planet 13, like before COVID and feeling like that’s the next iteration and then COVID hit and we’re like consumption lounges? People in public? So, I don’t know if like laws have to change for that to be like more widespread, but I agree with you that that’s kind of like the killer application there.

HJ: Totally. And, Planet 13 obviously, a really impressive company, I think their retail asset in Vegas is arguably like the most valuable retail asset in the country, right. It’s pretty interesting, especially when the lounge is added to it, it’ll be compelling.

On the Santa Ana store, I think we’re going to have to wait and see. I think the preliminary information about how it’s performed has been mixed at best. And I think they’ve been doing a lot of construction right outside that Santa Ana location, which may have held it back. And I think another thing to note is where that store is located is right next to another city Costa Mesa that recently authorized retail, and will have like 30 stores coming online over the next year, year and a half. And so that could potentially be a competitive threat to that store and how it might perform.

But I do think their acquisition of next Green Wave, which happened a couple of months ago was really smart and was their effort to get vertically integrated in the state. And I think that could really benefit them. Going forward, Next Green Wave, just a really strong operator in many respects.

RS: Are you both of the opinion that operators like, well what was formerly known I guess as Harborside and Lowell, do you feel like those will be acquired soon like in this coming year?

HJ: I think they’re kind of two different models. I mean, I think what going to become State House right will eventually get acquired, I mean, just listening to Matt Hawkins talk about that transaction, it seems pretty evident to me that the idea is how can we package up a group of assets. So, when MSOs come calling, say in 2023, they want to go with us because it’s a seamless transition into the state. So, I could very well see that happening, maybe not this year but next year.

Lowell I think is playing it a little bit differently. I think, Lowell is one of the few brands that actually has true traction. California is a very crowded marketplace. But Lowell, in my opinion, is one of the few brands that really has a strong cult following. And I think they know that. And so, I think they’re trying to survive in this very difficult operating environment, but they know they have a really strong brand.

And so, before interstate commerce hits, they’re going to try to export that brand into a bunch of different states. And I think most notably, their sort of partnership with Ascend (OTCQX:AAWH), which is a company that really knows brands very well. So, at least, I don’t see them being acquired in the short term, I see them trying to build their brand identity in other states and hopefully do that in advance of interstate commerce.

EP: Yes. Well, I’m on the Board of Ascend and they definitely are a brand focused organization. And I think that was something that they wanted to bring a California brand that had a really cool aesthetic and a bit of a cult following to the Eastern market. And so I think that’s played out pretty well for them based on what I see – and you can see that too in their filings. But ultimately, I’m accused.

But, I think that those two companies are very different, like I do think of Lowell as a brand. I think they stumbled a bit. And what they really needed to do is hitch into a more efficient vertical and that’s what we’re seeing now. I think that Statehouse is an ambitious mission. Full disclosure, I’m an investor there, because they acquired one of our portfolio companies called Sublime not too long ago. I think they’ve just got to focus on getting EBITDA positive.

I think brands are great. Brands are expensive, you got to build a brand. And you’ve got to — first you got to build a brand, and then if you’ve got a following, then you’ve got to defend that brand and then you’ve got to innovate, it was like everyone comes for your launch, if you do something good. You could look at Wana Gummies or Wild is a good example of that. And now the gummy market is super competitive. And you have to be really good about flavors, quality effects, everything. And so, I just think yes, the MSOs do look for brands, they look at them from a licensing standpoint. Do they pay up for them? Is a good question. I think what they will pay for our solid operating companies with EBITDA margins in California.

RS: Thoughts on Green Thumb not directly been in California yet?

EP: They do have a store in Pasadena.

RS: They have a store in Pasadena. Okay. I didn’t think they had a presence in California.

EP: Yes.

RS: Do you feel like they’re trying to keep expanding?

EP: I mean, I think Pasadena did a fantastic job of making it feel really difficult to spend time in California. I mean, that was a real I mean, Hirsh outlined it beautifully. I mean, what a heavy lift. Once you even got the license to just get things going there. And I always think of the graduate when I think of Pasadena.

But I think that yeah, that’s my take. I mean, this Morgan, my brother and business partner always says capital flows to where it’s treated best. I do not think California has treated capital well. I actually said — I shared this thought with Nicole, and she did not disagree.

But I think that if you’re an MSO, looking at where your stocks are trading, yes, you might have a great balance sheet but what are you going to do with those resources? You’re going to focus on spending them where they’re treated best. I don’t think California has been a great place for that yet.

HJ: Yes, and I go by their Pasadena store often, they don’t seem to be investing a lot of time and effort into it. And in addition to that, they actually have a license in Culver City, which is right near LA, but whereas the other operators are making moves to open, Sweet Flower just opened, Jushi (OTCQX:JUSHF) is going to open a store there, and GTI has the third permit. I haven’t seen them move forward on that, which I think suggests that it’s just not a priority for them right now. They’re focusing on Minnesota and other places.

RS: Do you feel like there’s a company that we’re not paying attention to? Or that investors buy and large are missing in terms of the California component? And what you think they’re able to do there?

HJ: I think so, I’ll offer a couple of answers. So first, I think 4Front (OTCQX:FFNTF) is doing something really interesting in California. So they just opened this like incredible manufacturing facility in a city called Commerce, which is right outside of LA. And 4Front has a lot of expertise, we were talking at the beginning of the conversation about how California makes you stronger.

4Front has been in the Washington market, which is really wide open, and they’ve really honed their skills there and have some of the best brands there. And this manufacturing facility they’ve developed is really astonishing. It’s 200,000 square feet of manufacturing space.

I think it has 10x the capacity of their Washington facility with like one-third of the personnel. And so, a part of the theory in California is you’re going to compete on brands that are competitively priced. And I think they’re in a really good position to service the market. So, I think that’s one that’s interesting.

And the other is Trulieve (OTCQX:TCNNF) and this just doesn’t really get a lot of attention. But they have their Palm Springs store that they’ve had for a while. But by virtue of their Harvest acquisition, they now have a store in Venice, in LA. They also have one of those other licenses in Pasadena that could open at the end of this year. They have a license in Santa Monica that could open at the end of this year.

As Emily was pointing out, some of the Central Coast cities are really limited license, so they have a store at Grover Beach. And so, they’ve built out a pretty decent SoCal footprint, even though we don’t think of Trulieve as a California operator. And given their kind of hub and spoke model like, hey, I’m in Florida, but I’m also going to pivot into Georgia. It’ll be interesting to see given that now they’re the biggest operator in Arizona with like 19 out of the 130 licenses. Do they make a move in Southern California, which has some cultural similarities to Arizona? So, I think that’s another interesting one to watch.

EP: I think that’s exactly right. I mean, you see Trulieve playing like that. We’ve got Jushi, who’s got a few doors in Southern California, you’ve got yes, GTI has that Columbia Cares, taken some bites into the market. And they seem to be one of the operators that’s not as scared of — scared, not as intimidated of these markets like Colorado and California because they’ve got a pretty big stake in Colorado. Now, they’re establishing some bites into California across the northern and southern part of the market. So, you see it here little by little is happening.

But yes, I definitely noticed with the Harvest acquisition that Trulieve did all of a sudden have more exposure. And I do think like, for example, Orange County to like Sedona or Scottsdale, Arizona, like you see, definitely demographic tie-ins. And then if you look into them going to Palm Beach, it’s like to connect the dots to like your target demographic. And if you can learn from what sells well and what drives through in those markets, you can kind of like create more efficiency in terms of merchandising and retailing to the consumers that you know so well.

RS: I have a question I wanted to ask that somebody was asking me, in terms of are you wary of companies that aren’t yet reporting GAAP?

EP: Yes.

RS: Yes. Because they were saying that Curaleaf (OTCPK:CURLF) still isn’t reporting like that.

EP: No, I mean, you have what we — I mean, IFRS creates challenges. I think it’s partially why a lot of folks had a blind spot about what was going on in the Canadian operators and the way that we valued biological assets. And I think that especially in our industry, it’s a really important thing to think about.

GAAP is the standard that we use, we’re GAAP audited firm. I think that these firms do well by being GAAP audited, and I think it’s also who knows when the capital markets will open to the U.S. operators, but we know that they will, the list of exchanges will open to those with GAAP audit as a requirement first. So, you are kind of shutting off an access point to because all you have to do is look at the Canadian names that trade on the NASDAQ versus the U.S. names that by all objective outlook have a much healthier — like a fundamental profile. And you can see how these names trade. And you can see what it means to have access to liquidity and institutional capital.

That’s I mean, it’s just it’s plain as day. So, I think that for me, it’s a concern and I just don’t. It’s a heavy lift, so I don’t underestimate it. But I think it’s a worthwhile thing to do. And I think it’s best practices, and we always like best practices. I mean it is expensive, and there’s no heavy left to do it. But maybe there’s also a little bit of like, you just have to watch the inventory. Like, if you are reviewing companies that IFRS audits, I would just review those inventory levels really carefully. I’d be looking at the aging on things, I’d be looking at a lot of different things. But so, you can and mostly analysts at this point, will like, for example, Matt McKinley from Needham, he’s very careful to kind of call out those things.

For example, I was watching at Trulieve, before Trulieve went through it. Trulieve went through it, now they’re GAAP audited, it was a heavy lift, but I think a worthwhile endeavor.

RS: So, in terms of just to kind of pick at the regulation aspect, as they get to like a major exchange, it’s the law that they need to be reporting in GAAP before they even are considered, or it’s just good practices, because that’s what you need to do once you’re on the major exchange?

EP: No, most of the major exchanges will require that. They require — there’s certain kind of barriers that’s also like board composition, governance reporting, things like that. But GAAP audit is really generally required in order to be able to up list to the exchanges. So, if you’re a U.S. operating business, you can do dual.

RS: Hirsh, do you have any — do you have two sense to add to that?

HJ: No, I think Emily has got the expertise there.

RS: I’m curious what you think Hirsh in terms of like looking at the California landscape and how it’s evolved? And I know that you had some experience working with MedMen back in the day. What are your thoughts in terms of like, we’re talking about brands and especially California brands like, what do you think the lessons have learned, have been learned or should have been learned since kind of those days? And as we are sitting here today, kind of like, how do you think the evolution has grown and how we’ve developed? How we should be thinking about brands existing in the state?

HJ: Yes, I mean, I would say on MedMen specifically, I mean, obviously, probably not the right people were sitting in those seats. And so it was a combination of a really challenging regulatory environment. And the fact that true business people weren’t running that company. And we all know how that ended up. I will say that they haven’t been unique. There are so many different California cannabis companies that have experienced challenges from an ease to Flow Kana to a Lowell to a Harborside. So, it’s almost kind of like a rite of passage in the California market to go through challenges, I would say.

I will see that we are likely to see an exiting of legacy players in the California market voluntarily or involuntarily. And so, there are the well-known stories of farmers who just can’t even afford to harvest and so who are throwing in the towel.

But there’s so many operators I’ve talked to who are just exhausted, who have been working in the California cannabis industry for a decade and are just, even though they might have healthy businesses are looking for a way out. And so, I think that’s really tragic as a California and a lot of our homegrown talent is going to be leaving, I think that’s very sad. And that’s kind of a moral failing on the part of the state. But it is what it is.

And I think a lot of those assets that are distressed are going to be picked up by operators from outside of California that will enable consolidation and allegedly, that’s what California doesn’t want. So that’s unfortunate. So, I think that’s what we’re likely to see in sort of the coming months and years.

In terms of brands, I guess the only thing I would say is it’s just a really, really crowded market. I mean, the brands are amazing. If you go to Hall of Flowers, you see 500 Different brands out there that all have these incredible, seductive, amazing products. But then you think to yourself, how many of these brands are going to exist in a couple of years, right? And that’s really the tragic thing.

And when you have 1000s of brands and only 850 retail shelves, only brands that can afford to pay slotting fees, for example, are going to end up on shelves. Given how difficult a regulatory environment it is, if I’m vertically integrated, I’m going to put my own brands on the shelf, right, because that’s the only way I can make money.

And so, yes, it’s unfortunate, there’s a lot of great ideas out there, most of them will fail. A few of them will gain traction, and I think will be stronger for it in the end. But there’s a lot of people with great ideas, who aren’t going to be able to realize their dream just given the structural dynamics of the market.

RS: I want to end with asking what’s your advice for investors, but before that, I’m curious, just like I mean, you both do work that is pushing an anvil up a hill. It’s like a lot of — you need to have a lot of faith. You need to have a lot of moxie. You need to have a lot of perseverance. What pushes both of you within that?

Is it the thought that you want can — as you said, Emily, to be a thought leader and an agent of change, is that what pushes you? Is that what drives you? Because I imagine like, there’s a lot of points hearing you talk Hirsh and like I know that been through this over the years in all these regulatory — dealing with all these regulatory bodies, it must really stink sometimes. And I’m wondering like how you kind of push through that? What guides you through that?

EP: I mean, I’ll just say, Hirsh do you want to jump in first?

HJ: After you. No.

EP: I mean, so I mean, we were very mission driven investors. We got into this because both our parents passed away from cancer. We believe capital as a change agent. We thought people should have access to cannabis rather than the litany of pharmaceutical drugs that create a number of side effects and actually decrease the quality of life. And that was purely even at a palliative care standpoint.

So, being I think that I’ve seen people come and go in this industry, but if you really believe in and have a mission around this, it helps you to stay in the fight. But I also come from, my father had a small business. I’m a small business person, and I think that I would love instead of just all of a sudden, where the Maxwell House and Folgers industry or the Budweiser and Coors industry, I’d like for us to be an interesting industry that’s more like how we’ve seen coffee in the recent years or wine or the craft beer movement.

Like, I would like this industry to remain cool and for it to be interesting and unique. And I don’t want it to be just this boring duopoly of two companies that offer mediocre products. So, I’m very passionate about this being done well and I knew there was never going to be a way California was going to go out easily. I believe before the passing of Proposition 64, there were roughly 54,000 operators in the California market. And when you hear the number Hirsh just mentioned, I mean, that’s an unbelievable decline in the number of people involved in a market. And I think that we have to just think about how we try to revive the smaller to middle operating businesses. So, I’m very passionate about it. And that’s what keeps me going.

HJ: Yes, and what keeps me going is I’m from California, California was just a really big part of my identity and has been for a long time. I just love the state and grew up going to every different corner of it and experiencing its beauty and its people. And so, California is a big part of my identity. Cannabis has been a big part of my identity, and has been a big passion of mine ever since I was pretty young.

And so, just being very passionate about those two things keeps me going. And it’s such an interesting state. People from outside of California think about it as monolithic, but it has so many different cultural and sort of political orientations. So, it’s kind of fun to go to a city council meeting in the Central Valley and hear what they’re talking about cannabis and seeing how you can sort of package it in a way that that’s palatable. So, it’s definitely pushing, as you said an anvil uphill, but I think it’s for a worthwhile cause.

RS: Yes, absolutely. I mean and props to the fight. I always say, I mean, I live in Tel Aviv, but I always feel like I have a lot of family in California. And I feel like California is a much bigger version of Israel. I feel like each city in Israel corresponds to like cities in California really well. The topography is really similar. So, I also have a — and I love cannabis. So, I have a big soft spot for California too. So in closing, I’m curious how you would each guide or advise investors, maybe specifically looking at the California market but then also kind of looking at the broader cannabis sector as we sit here?

EP: I mean, just main points for me in California is I think it’s about efficiency of capital. I would look at how much money has been put into the company before this point, the structure of it and I’d be looking at what their ongoing estimation around their use of proceeds and capital are going to be. And I think, your most likely return profiles will come from those who do really focus in on operational prudence and efficiency and think about what would be attractive from a takeout perspective, that’s on the private side.

On the public side, if you have a rich balance sheet and you can kind of wait this market out and start making necessary and accretive acquisitions, I’d be watching carefully to see the multiples and the way that they structure those acquisitions, and the ability to actually close on those transactions. Because you can announce LOIs all day long, it’s going to come down to the actual ability to close them and to integrate them into the business. M&A is not easy from any standpoint. And it’s still not easy once the deal is closed. So, it’s all about execution from there.

HJ: I agree with everything that Emily said maybe just the one other thing that I would add for investors to pay attention to is the environmental angle. These companies that you’re investing in, in California, are they positioned to withstand the wave of environmental regulation that we know is going to come in to cannabis?

And in addition to that, have they demonstrated compliance with CEQA? You know, the California Environmental Quality Act. About 20% of the licensees in California have passed that major hurdle, but 80% of them haven’t. And that is the most onerous law to navigate in the history of civilization. And so their licenses are a little bit more tenuous, if they haven’t done so. So, that’s the other thing that I’d pay attention to, regardless of where in the supply chain you’re investing in California.

RS: Good insights. Good advice. I’m already looking forward to part two. I hope you guys will both join me for part two. I really like this little panel discussion. I think it was really insightful and edifying for everybody. I appreciate you both coming on. Thank you very much for coming on today.

EP: Thank you. Great questions and great dialogue. Nice to see you, Hirsh.

HJ: Thanks, Rena and Emily.

Thanks so much for listening to The Cannabis Investing Podcast. Subscribe or follow us on Seeking Alpha, Libsyn, Apple podcast, Spotify, Google Play or Stitcher. And we’d really appreciate it, if you would leave us a review on Apple podcast. It helps other investors find our show and makes us feel fantastic. If you have feedback or questions, we’d love to hear from you at Thanks so much for listening and see you next time.

Nothing on this podcast should be taken as investment advice of any sort. I’m long Trulieve, Khiron, Isracann BioSciences, The Parent Company, Ayr Wellness, and the ETF MSOS. You can subscribe to us on Libsyn, Apple podcast, Spotify and Stitcher.

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