Editors’ Note: This is the transcript version of the podcast we posted on Nov 23 (before the SAFE Banking Act was ultimately left out of the broader NDAA Defense Bill). 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. We hope you enjoy!
Rena Sherbill: Welcome again to The Cannabis Investing Podcast, where we speak with C-level executives, scientists and law and sector experts to provide actionable investment insight in the context with which to understand the burgeoning cannabis industry. I’m your host, Rena Sherbill. Welcome to the show everybody. Really excited about today’s episode.
We have Brady Cobb. Brady Cobb, Brady Cobb is known for the legal side of Cannabis has had his hand in some legislative bills, is very much up-to-date on what’s happening in the industry, because he’s really a part of it, the legislative side. He’s also been a part of the investing side. He’s been at the head of a number of companies, including Liberty Health Sciences, which listeners of this podcast have heard of. He sold his company Bluma Wellness to Cresco (OTCQX:CRLBF), he talks about that today.
We really get into the industry, the investing side, the legislative side, the intertwinedness. That’s not a word, but the synergy between the legislation and the investing side of things, how that plays out, how Brady sees it developing, where he would put his money, what advice he gives to investors. A thorough, really interesting, very edifying conversation. Hope you enjoy it as much as I enjoyed having it.
And this week, because last week, we didn’t have an episode, we’ll be having two episodes this week. I hope you get some good listening in on this Thanksgiving holiday weekend. For those of you in the States, I hope everybody enjoys that long weekend and talk to you soon.
Before we begin a brief disclaimer; nothing on this podcast should be taken as investment advice of any sort. I am 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.
Brady, welcome to The Cannabis Investing Podcast, really, really happy to have you on, especially in these heady days of Cannabis Industry Talk. Thanks for coming on. Thanks for making the time.
Brady Cobb: Oh, it’s my pleasure. Thank you for having me.
RS: So, I know that you kind of have your hands in a number of areas in the industry. You sold your company Bluma Wellness to Cresco, you’ve had your hand in some of this legislation that we see before ourselves. Can you talk to our audience about how you got involved in the industry and like briefly explain kind of the different hats you wear?
BC: Sure, my pleasure. A lot of it kind of goes back, family history, as you say my father was a big smuggler of cannabis in the late 70s and early 80s, here in Florida, was indicted, served federal time, broke my family up and I went on, it was obviously tough not having your dad in your life. Went to Florida State as an undergrad, ended up going to law school. He broke the law. It was kind of my vision to go and work and try to change a law. Worked at a big firm here in Florida politically, I was trained by the Senate President had the opportunity to kind of go work in the Governmental Affairs side of law, mostly kind of my practice centered were politics and business kind of intersected and always wanted to get into cannabis.
Was rolling him joints as he was battling cancer and ultimately lost his battle of cancer in 2010. And that’s when I made the decision, it was time to find my way into the cannabis industry. I’ve been a user of the plant for a long time. I’m a big believer in it, probably well longer than my parents liked, and my mom like but that is what it is.
And for me it was jumped back into the space, I had opportunities to go do it out of state. I want to do it here in Florida. So if you follow in Florida at all, we had constitutional amendment in 2014 that missed, in 2016 it hit and I was one of the founders of a company called Liberty Health Sciences, where I was the Chief Legal Officer for about a year. That company was just sold to AYR (OTCQX:AYRWF) last year as well. And then was the CEO of a public investments company called SOL Global, where we deployed right around $150 million to $200 million of capital into the early part — the early stage cannabis market, mostly investing in brands and vertically operated businesses, one of which was in Florida.
I then stepped down from SOL we spun it out and I went and took over and that became three boy’s farms, which ultimately became Bluma Wellness when we took it public. Our focus at Bluma was kind of unique in the space, we focused on doing premium at scale. So really high end flower really high end concentrates at scale.
So we built a ground up cultivation facility here in Florida, got to eight stores, we’re the second highest grossing stores from a volume standpoint in the state of Florida. We definitely own the top end of the market, which ultimately had as we scaled up and went from two stores in the middle of 2020 to eight stores by the end of the year. The MSOs came knocking and we ultimately consummated a transaction with the guys at Cresco.
But throughout this whole history in cannabis, I’ve used my government affairs background and been lobbying DC. So I’ve been active in DC since 2016, engaged the BGR group, which is led by Haley Barbour and my main guy there is a gentleman named Pete Landrum. We first — first thing we ever worked on was, if you remember when Jeff Sessions became the Attorney General, one of his first acts, it was January 4, 2017. He rescinded the Cole Memo and the markets went off a cliff.
Pete Landrum, who was my main guy BGR was a long time, Jeff Sessions staffer, dear friend, so we began working on undoing that problem. And then from there, it’s just been working. I identified and retained to BGR Group, because of their connections into the Republican side of DC. Knowing that I needed to go flip Republicans, we needed to get Republicans sensitized to the States rights issues on cannabis. And that’s what we’ve done for the better part of the last four plus years. And it’s starting to bear some fruit. So that’s kind of me in a nutshell.
RS: That’s a really big nutshell. And very — so many, like important things in that nutshell. I mean, seriously, we’re really watching it bear fruit right now. I want to stay for a second on your father and kind of like the path that you took. I actually I mean it’s not that similar. But, my father who was from Florida actually had some smuggling of his own. I live in Israel, and he back in the 60s and 70s, the family lore is that he would smuggle hash from Jordan into Israel. And there was like a big stamp on it that said, Hashemite Kingdom, it was like a big joke, like, hashed with the Hashemite Kingdom. So…
BC: I love it.
RS: Yes. The path that we find ourselves on going from that place to where we find ourselves now, especially for you like being the real voice in some of these legislative bills, how gratifying is that been? And kind of what’s your feeling around that shift?
BC: It’s been just, there’s things I’m proud of, and like obviously, being a dad and raising kids, and that’s obviously paramount. But aside from that, if you were to ask me, if I was more proud of what I accomplished in building and selling Bluma, as opposed to what’s going on in DC, it’s not even close. DC and the policy change that I’ve been able to be a part of, it’s just been the most rewarding thing I’ve probably ever done in my life outside of being a dad.
And to see the change I mean, we used to go have 15-20 meetings a day over a two-day period back and forth, while you’re trying to build a business out and mostly in the beginning, you couldn’t get a meeting with the people that made coffee and some of these Republican offices to see where we are now.
Well Politico runs an article yesterday, and to think about what my dad would say, if he was alive, was able to see this and see it, changing it and have cannabis be a tier one issue that mainstream media is covering now, at least three to four times a week, it’s just astonishing. It really I kind of have to check myself every now and again, because you can get lost in how amazing the progress is, and focus on let’s go get the result.
But it’s incredible to think all those smugglers and everything, everybody that’s had a passion for the plant in one way or the other, that went through a different process to achieve what they wanted to achieve to now see it be something that is going to potentially be legalized across Europe and legalized at some point here in the U.S., it’s fully legal in Canada. It’s just, it’s astonishing.
It’s really such a rewarding thing to be a part of, and for me, it was every time I step in, would throw a suit on and head to DC it was part of part of it was a little bit of a chip on my shoulder to go on or my dad and every other smuggler, there’s plenty of other people in the black market I know here in Florida, always stayed and kept a really close connection to the black market in the black market guys because that’s cannabis and that’s why I’ve always had such a an affinity towards the Humboldt County area up in Northern California.
It’s those are that is, so many of these new cannabis companies are not embracing cannabis culture. I love it. To me, it’s the history, the mystique, it’s, that’s they paved the way and there’s for every for every legal cannabis company, there’s 1000s of black market people that have been feeding their families and helping people find relief in a black market that one day would like to do it in a legal market. And every time I’m in DC, there’s a lot of people I think about including my dad.
RS: Speaking, so you mentioned Germany, which is saying that it’s going to go recreationally legal. Do you feel like that has to do with the bill that’s coming out in the U.S.? Do you feel like those two things are related?
BC: My old saying is always I believe in coincidences. I’ve just never seen one. So you see all these other jurisdictions popping up. You see Mexico’s been grappling with how they’re going to implement it for a period of time. Obviously Canada beat everybody to the punch. It’s all this is like a crescendo, it’s like a building crescendo. I’m a big surfer. It’s like the swell has been traveling for a couple 1000 miles and now it’s getting ready to get close to the shoreline and start to break and it’s starting to happen.
I mean, you see, this was something that wasn’t really talked about at a national level. It was kind of a Tier 2 issue in the U.S. call it three or four years ago, I did some early stage stuff with my time over in Europe. And Israel is really been leading the charge. Kudos to all the research and everything they’ve been doing there. And outside of Israel and a few other jurisdictions, it wasn’t really that much talked about.
But now you’re seeing it really started to build. And I think you got to look at it from a myriad of reasons stay, after the opioid crisis, which was not just an American problem that’s having people look at alternatives, the tax revenue, that governments are figuring out how they can derive tax revenue.
And see, I got to give credit to our friends to the North in Canada, with a full recreational market, if anyone was out there thinking that it was going to be stone zombies falling from the sky, Canada seems to be doing pretty well. And I think that normalization as people are studying and looking at a G7 country that’s doing just fine with fully legal cannabis, it’s like, okay, maybe this isn’t just an Amsterdam isolated thing for tourists, like, maybe this actually can work.
And I think that’s what you’re going to see happen in the US, it’s already happened. When you look at West Coast — when the cannabis movement was isolated out to Oregon, Washington, California, it was kind of like the hippies out west. That was the sentiment in DC. Then it comes to Florida, then it comes to Ohio, then it comes to Pennsylvania, then it comes to New Jersey, then it comes to some Deep South states considering it Alabama, Mississippi, and people to Oklahoma, Arkansas, and people start going, oh, it’s not just a West Coast thing. These are — when you talk about Florida, Ohio, Pennsylvania — those three states that there’s no math that works to get to the White House in the Electoral College unless you carry those three states all have cannabis legal the ones they one way or the other. And I forgot another one in there, Michigan.
So it’s slowly being normalized and now you see it. It’s really just kudos to majority leader Schumer for teeing it up and making it an issue. I wish he would do a little bit more, which we can talk about. But kudos to him for teeing it up is really a big issue once you took the Speaker of the House or the majority leader position in the Senate. Now it’s what are we going to do with all this momentum is where my attention squarely focused?
RS: So yes, let’s get into it. So this bill by Representative Nancy Mace, why do you think she was the one to be the person to get this? You’ve called it a common sense, Bill, I would very much agree. I think a lot of people would, this is like, really close to as good as we’re going to get in this imperfect world that we live in. Why were she the person to do it? Why was the Republican Party? Why couldn’t Schumer get it together? Why did the democrats not kind of win this this victory?
BC: To your last question, it’s mind boggling to me. How this has now become something that they had, they’ve had control of the three chambers the three branches of the federal government since January. Now look, they got to get 10 votes in the Senate, they know that. But they have the 10 votes for the SAFE Banking Act, which could be the first win, which is something I’ve been very outspoken on, take the win, take the first win, just like Canada, take the first win. And it begins to normalize it, gets tax revenue, et cetera.
So going to a representative Mace, what a champion, I mean, you look at her, you look at her background, you look at where what how she her relationship with cannabis. If you saw her Fox News interview. And as a veteran looking to we’ve always partnered with veteran’s groups, they’re great advocates, because they really want to use cannabis instead of having to take opioids to deal with everything that they have to deal with when they come back from battle.
So how did Nancy Mace get there? I think she’s someone that looked at this and went, Hey, I’m Republicans, the notion that this is not a Republican issue is a bit misaligned, in my opinion, Republicans favorite state, of States rights. That’s one of the main reasons a couple years ago, a bill called the state’s Act was drafted by led by Cory Gartner, who’s no longer in the Senate. But that was primarily I got to be a part of that drafting process. That was primarily it was, hey, look, this is a States rights issue.
States should not be beating the federal government to the punch on this, that you just needed to harmonize that if a state wants it great. If Colorado wants it, yes, Nebraska doesn’t want it, then Nebraska doesn’t need it. And that’s largely Representative May’s bills tracks at very similarly to the States Act. But how did you get there? This is kind of a libertarian/States’ rights based issue that I think was right for the taking.
And from the meetings we’ve been having call it over the last year and change with Republicans, they’ve all begin to warm to cannabis for a myriad of reasons, not least of which have States rights. Secondarily, you got to look at some of these states. I mean, when you’re looking at these Republican controlled states that have now gone legal cannabis by way of constitutional amendments, with big support of the — in Florida, it was 71% of voters supported cannabis, when it passed in 2016.
It’s amending and they’re awake enough that this is something that needs to happen Couple that with the volume getting turned up and having Jeff Bezos at Amazon (NASDAQ:AMZN) pledged his support to go and begin lobbying to legalize cannabis, the Koch Brothers who are Americans for Prosperity, jumping in and giving Nancy Mace the ability to jump out in front of this issue. It’s really incredible to see it happen. It’s something I’ve known was there, there’s been this undercurrent of support. It’s just hasn’t something that mainstream media hasn’t picked up on.
And I honestly think it caught the democrats pretty flat footed as we head into the last part of this year and the last part of the last the tail end of this congressional session. And it’s been — as an observer, it’s been incredible to watch, someone it’s been in the game, it’s been rewarding. And now it’s how do we leverage all of this together to go get a win.
RS: So what’s your opinion on how this plays out? And if it does play out the way that we want it to, like, how does this affect the industry? How does SAFE banking and kind of this passage? How does it change the industry?
BC: From my perspective, I think the first thing you’re going to see is there’s a big push. Representative Mace’s Bill was the first bill filed. It’s the most passible piece of legislation that’s been filed related to cannabis form, in my opinion, ever. It is one that is could garner the votes, the necessary votes in the Senate to be passed, it’s going to have to go through some amendment process as it gets sensitized and shopped around, but it is incredibly well positioned.
And the other thing I think that it does is in the fault in Schumer’s bill, the CIO a why largely kind of fell flat is it was too broad and too all encompassing. It asked for too much. It really was a kitchen sink bill, and you can’t — the federal criminal sentencing and people being in federal prison for cannabis, the federal government can fix that problem. But the federal government can’t go into states and have state in compel states to release people. That’s a big misnomer. And the democrats have kind of hinged — hitched their wagon to we want everyone out of prison. And I want everyone out of prison.
I’m one of the few white guys with a suit on in the cannabis industry that actually has a father that went to prison for cannabis. So I get I want everybody out for prison out of prison to at the end of the day, the federal government can only release federal prisoners and make representative Mace’s Bill accomplishes that. But moreover, what I think is very interesting is there’s been ongoing letters being sent by various different senators and congressional leaders to President Biden requesting that he did the same thing with the stroke of his pen, which he could.
So, if you look at that, and you put that in the context of SAFE in the NDAA, I think you’re — in my humble opinion, I think you’re going to see all of this pressure that’s being put by the Republicans potentially stealing this issue. Moreover, all of the potential for pardons that could come down over the next couple of weeks, which is when they usually happen, I think you’re going to see SAFE, not be included at the Senate version of the NDAA. That’s already in the House version.
And I think in that conference process, that’ll happen sometime in early to mid-December, I believe SAFE will be something that is passed as part of the NDAA. I think that that will pass, and when that passes, it’s a huge moment for the States. Does it fix criminal justice? No. That all, it’s a banking bill. But what it does do is it’s going to open up the credit markets and a lending markets and institutional markets for American cannabis companies.
I think it is also the stepping stone to get these companies listed in the United States instead of these OTC Markets and the Canadian markets, which are incredibly inefficient. And we have that what Danny Moses and Tim Seymour called the plumbing problem where it’s very hard to clear trades and there’s just it’s they’re not optimal exchanges. This is an American story. It’s crazy to me still that if you’re a Canadian company, selling Canadian cannabis to Canadians, you can bank in America and you can trade on the NYSC.
If you’re a U.S. company selling US cannabis and employing US citizens, you have to list them bank in Canada that can’t exist. And I think a lot of folks are waking up in DC to that notion. You’ve seen the head of the IRS testify that he wants to save pass, you have the American Bankers Association saying they want SAFE pass, you’ve got most of the state level Banking Association saying they want SAFE pass and even some most of law enforcement wants it passed because it gets money in the banks.
It also — you’ve got 300,000 employees over — in excess of that number that are now employed in the legal cannabis trade in the US. Every day they’re around a tremendous amount of cash, which is dangerous, that needs to change. These are American citizens that have the right to work in a SAFE workplace in a state legal business and SAFE we’ll achieve that. So it’s going to be a big lift for the space, cost of capital comes down, the ability potentially lists in the U.S., credit card processing and merchant processing comes on the table. This is something that will be a huge first step for the space.
And one thing that can’t be overlooked is for all the social equity licensing that we want to see happen for those communities that have been desperately harmed by the war on drugs, this will be something that offers them the ability to access low cost capital. Because if you’re a startup business, it’s incredibly cost of capital intensive business.
And if you’re a social equity licensee, you need the ability to go get non predatory capital and SAFE banking will allow some of these smaller to mid-size banks to enter the space and to begin to offer that capital financing to these startup businesses, we saw the letters but the governor of New York, Schumer’s Governor wrote a letter to him saying please pass SAFE because it will allow us to actually implement the social equity licensing and funding that you’re wanting us to do.
So it’s all building, I think you see save pass, and it’s a huge moment for the space.
RS: Do you feel like the Democrats have suffered from kind of putting emphasis on optics over actual reform?
BC: Yes, I think that’s a — that’s probably one of the better ways that I’ve heard it said, but I couldn’t agree with that statement more. It’s been a lot of to be quite honest, it’s been a lot of pandering. It’s been a lot of tweets about we’re going to do this and we’re going to do that. And all that’s been done thus far. And almost a year is a draft, a discussion draft was filed. And it was largely replete with an unworkable system. I mean, the CAOA had a 20% plus — 20 plus percent tax on cannabis, in addition to the state level taxes, how is a minority applicant going to do that much less a large multi-state operator going to be able to afford that business.
When you look at GTI (OTCQX:GTBIF) will probably one of the best companies in the sector, their effective tax rate was north of 60%. And they’re still generating positive net income and positive EBITDA. But how is that going to work for a smaller business owner there it had was replete with FDA oversight. And this oversight — it just, you compare that with Representative Mason’s bill, which is very simple bill in the sense that it says if states want illegal, they go to be legal, it’s treated like alcohol companies are treated in all other aspects. There’s a 3% tax instead of a 20% tax. And we’re going to ease our way into this process. This is we got to undo 80 years of bad drug policy here, it’s not going to happen with a light switch flip.
So her Bill, the states — and remember, the states have been doing a pretty good job, you’re not reading in the papers or mainstream media about people dying of cannabis in the state regulated systems, they’re run really well, and let the states keep doing their jobs, because some states may want it just like alcohol. And that’s where I think the genius of Representative Mason’s bill is that let the states do what they want to do.
And that’s something that even the more moderate democrats as well as the libertarian minded States rights minded Republicans, whether they like cannabis or not, they can get behind letting states regulating and respecting States rights. And I think that’s where her bill is going to get a much more reception than the CAOA as far as positivity and something to work on.
And that’s where I think it’s SAFE goes through you’re looking at that will be the bill that will be teed up into the spring as we head into the midterms as a potential compromise bill where maybe insert some social justice, or maybe you don’t have to, because President Biden wakes up and fulfills a campaign promise to get people out of federal prison and or expunge their records, which he talked about in his campaign. He put a few ads out, one of which I retweeted today, but that’s something he was going to do and TikTok and hasn’t happened. If he does that, by the way, that fixes the social justice issue at the federal level. And there shouldn’t be any more objections to SAFE banking going through.
RS: Here’s hoping.
BC: We’re sitting here waiting, but he promised to do it, congressional leaders are sending him letters to last week. I think Elizabeth Warren sent one last week to tell them to fulfill that campaign promise could be a really good time to do it. People are rotting in jail while there’s legal dispensaries in federal prison. That’s not cool.
RS: Is it big pharma that’s preventing it? Is it — like, what is it that’s preventing that from happening?
BC: I can’t even begin to opine on kind of what why that why President Biden or others haven’t moved. I can tell you that you’re not wrong, though. Our natural predators, foreign my alcohol tobacco have been done a really good job over the last 60 years 60 to 70 years and keeping cannabis in on schedule one and using their powerful lobby, but it’s changing.
I mean, it’s we’re certainly knocking down the walls as far as it’s kind of we’re getting to the you can’t beat them join them, which is why you’re starting to see in my opinion, some of these tiptoes by our natural predators into the cannabis sector. You’ve got alcohol companies, distribution companies. Now in the space you’ve got constellation was the first one over the wall with their bed into canopy you’ve got various different biggest distributors in the country are now up in Canada learning how to distribute cannabis up there.
I think Curaleaf (OTCPK:CURLF) just signed with the southern wine, the Glazer family down here to distribute CBD. They’re all getting in position. And I don’t think you can ignore the fact that the representative Mace’s Bill has been treated like alcohol that wasn’t by mistake either. So they’re common. But the crescendo is rising and that’s thanks to a lot of people working really hard the normal of the world the national cannabis roundtables, the U.S. cannabis Council, the Weldon Angelos and his story is incredible.
So as you see all of these folks turning up the volume when you see Jeff Bezos and the Koch brothers jump in, wake up, it’s here.
RS: Yes, absolutely. So let’s say this passes things go according to our plan. What does that do for the valuation of these companies? Like investors are looking at these companies, the top operators, the ones that are doing well, the ones that you want to put your money in. And they have great fundamentals. They’re reporting great numbers, but it’s not being reflected in the reality of their share price.
Does SAFE banking is that the catalyst is uplifting the catalyst that kind of evens that and brings it to an equilibrium where it’s more reflective of what’s actually going on in these companies. Are you of that opinion?
BC: I think it is a catalyst. And I think just the if you look at what happened about a week and a half ago, when Representative Mace’s Bill got leaked out of Marijuana Moment, the stocks ripped for three straight days they were coiled spring. This is a sector that everyone wants to be in. This is a sector that is poised to be a disruptor in the CPG category across the country.
And I think the fundamentals, if you look at these companies, even in spite of a federal law overhang, the top MSOs are generating positive net cash, positive EBITDA. And that’s what having to run businesses that are siloed into each state and also having to deal with a huge federal law tax rate because of 280E and they’re still crushing it.
When the ability to have them potentially uplifted in the U.S. via SAFE and to have cost of capital come down. SAFE banking is that warm blanket on a cold night, I think for most of the institutional capital that wants to be deployed into the space to show some cover fire that federal reforms coming. It’s that first step.
And I use a phrase quite often when referring to DC politics that it’s incrementalism, it’s stepping stones. Think of DC as an aircraft carrier, it doesn’t turn on a dime. I mean, you can’t just flip it around. So it’s a slow turn, so while there’s this call for this gigantic all-encompassing bill, that was the CAOA, that’s not how DC works, you don’t usually get reform that way. It’s usually little bites of the apple along the way, a little stepping stones.
So SAFE is that first federal action positively towards cannabis. That’s not a memo that can be rescinded. It’s a piece of legislation that’s passed. And a huge kudos to Representative Perlmutter for fighting the fight and getting it included in the House version of the NDAA, which is a must pass, which set this entire potential political catalyst up. And he’s been a fighter for a long time and he got it in there.
And I’m confident that in the conference process, he’s going to be able to advocate for it to be included in — have the Senate receipt of the position. And when that happens, it is that first bill that will show the institutional capital in the US as well as the bulk of retail investors that, yes, these companies are real; yes, this is a market that’s investable, because there is a path towards long-term reform.
That when SAFE passes, I think that’s what it demonstrates, and it is the first catalyst and then I think you’re going to see continued catalysts, as we go through the legal as a broader legalization bill. And as these companies become more well known to investors, I mean, if you’re looking at this space, and you look at GTI, Cresco, Trulieve (OTCQX:TCNNF), Curaleaf and probably Verano (OTCQX:VRNOF) and you compare those companies and what they’re doing with a federal law overhang to other companies that don’t have it, they’re crushing it.
And if you’re interested in cannabis, those five plus the MSOS ETF and you’ve got a CPG category that’s coming into the U.S. And the opportunity for retail investors right now to front run the institutions that can’t get in yet. So it’s a really interesting setup to look at.
RS: How do you see the consolidation kind of playing out as we develop? Like as we go through these markers, if they happen that way? How do you see them growing? Like, do you feel like the MSOs are going to grow to the point like they’re going to the kind of the Tier 3 and Tier 2 MSOs or single state operators are going to be consolidated further and further into the bigger ones? Do you feel like they’re going to get bought out by another end? Like how do you see it growing?
BC: I think you’re going to see with the cover fire of legalization coming, I think, as that begins to crystallize, you’ll see the MSOs are going to continue to grow. I think you may see some consolidation, further M&A activity between some of the SSOs or some of the smaller MSOs and the bigger ones which is you see that’s natural as Space has kind of transitioned from a nascent market to a more established market with correct regulations in place. And then you’re going to see possibly some of the Canadians who have already set up their positions, Canopy (NASDAQ:CGC) has got their bet, Tilray (NASDAQ:TLRY) has got their bet via MedMen (OTCQB:MMNFF).
So I think you’re going to see some of those cross border deals be able to be effectuated. And then I think you’re going to see the alcohol tobacco pharma begin to tiptoe into the space and start identifying whether it’s by investment first with rights to acquire more, or straight acquisitions is where I think you’re going to see them coming into the space, but I don’t think you’re going to see those large U.S. alcohol, tobacco or pharma companies be able to meaningfully enter the space until you see a full legalization bill, like the state’s Reform Act, or whatever the final version that’s negotiated, actually passed, they’re going to need that cover fire.
They’re too big, compliance departments are too big. They’re not going to be able to jump in early. So I still think there is a good year and a half to two years of a moat for these U.S. cannabis companies to continue to build value before that moment happens, but it’s common.
RS: Yes. I’m curious specifically about the Florida market. I mean, obviously you’re from there. You were at Liberty Health Sciences. I’m curious A, kind of what your takeaway was, from your time with Liberty Health Sciences, there were some kind of complaints with what was going on over there. Were you bullish? I mean, I assume you were about the AYR acquisition, what are your thoughts there? And then kind of also broader speaking broadly speaking about the Florida market?
BC: Yes, Florida markets near and dear to my heart of, operated two companies here. Obviously, was at Liberty and then go and built up three boys that became Bluma. I think it’s probably the most interesting and attractive market in the U.S. I’m partial, I’m from here. But the reason I say that it is, is you have a huge population, you have a rapidly growing patient base; you have the opportunity for an adult use initiative here coming up in 2024. And we have a largest tourist destination in the world.
You combine all of that with having a vertically integrated market requirement that has limited licenses. And you look at what Kim Rivers at Trulieve, I’ve competed with Kim for now I’ve got since 2017 and she’s crushed it, she’s built a very strong business and I feel similarly about what AYR is going to be able to do, they came in and I think they’re making all the right moves as far as what they’re doing with their cultivation, they’re ultimately going to do with their stores. And I think they’re going to be a force to be reckoned with as we head into Q1 and Q2 next year.
And as we built one plant Bluma, I also think you’re going to have to keep an eye out for Cresco too. We built the backbone, we focused on premium, my focus in this space has been and will always be premium flower and concentrates at scale, which is kind of a not a lot of people are trying to do that, outside of some small single state operators.
My target is to go build an it’s almost price compression proof if you’ve got product that could compete with the black market when I was always asked, do you feel like you’re competing with Curaleaf or Trulieve, in Florida when I was operating Bluma, I said no, I feel like I’m competing with the black market because it’s seven to eight times as large in Florida as it is the legal market.
And you have to be able to grow good enough cannabis and hand trim it and to be able to compete with the black market, the black market price is $50 Ace. And you can walk into most illegal dispensaries here in Florida and people are selling $20 $30 Ace but that’s because their machine trim but it’s of a lower quality. It’s only way they can move it. So our focus always was we hand trimmed everything at Bluma and to go do that. And I think you’re seeing a lot of companies start to do that here in Florida and I think it’s just going to continue to increase the competitiveness of this market as more established operators.
I’m excited to see the jungle boys crew come into Florida, I’m excited to see cookies come to Florida. And we’ll be launching something here again in Florida next year that I’m excited about can’t talk about it yet just to say except to say that we are coming back and I’m excited to jump back into the premium market because it’s still the highest growth market and if you look even in California where there’s price compression right now most of that price compression is on the lower to mid-tier product.
I was just out there last week it’s a premium trim flower, the dispensaries are still able to move it at a good price point. And that just for me that’s always been the focus but I’m bullish on AYR, I am bullish on Cresco. Obviously Kim and Trulieve are they’ve been crushing it for a while you look at the — they’ve been in a price war with Curaleaf for the most part here in Florida for the better part of a few months and Curaleaf’s bought quite a bit of market share by doing so.
But I also think you saw Curaleaf’s most recent financials, they had a margin decline of about 4%. And part of that had to be the price war in Florida and I think Trulieve had something similar. So how long is that sustainable? I don’t know. But again, you got to look at who you’re competing against the market where it’s 600,000 plus patients in Florida against 21 million total population.
So you got a lot of people still buying and reading the black market, and the black market price is 45 to 50 bucks, and its good quality. So my plan is to go attack that market.
RS: Yes, it definitely seems like everything that you’re saying is the way that it’s going is this focus on premium seems to me like a smart play. It’s funny I was on another podcast yesterday, and I was telling the story about a brother-in-law, who’s a big cannabis connoisseur. And he was saying that he lives on the East Coast, and he was saying, the only products he buys. He’s a big fan of Live Rosin, and the only one he buys are Cresco products.
And I was thinking that that might be a reason why you sold to them the kind of focus and concentration on higher quality, more premium, better ingredients better process. Was that why you sold to Cresco? Was that part of the synergy there?
BC: Yes, I mean, I’m lucky to call Charlie Bachtell, the CEO and friend, he’s a great guy, he’s built an incredible team. And one of the — we had a lot of MSOs knocking on the door. And one of the things that drew us to Cresco was that focus, and they’ve been one of the other that focus on premium. They’re still early stages and scaling it up, but they’re doing it and it’s an initiative for him. So that was something that was attractive, but also their time and their focus out in California.
I mean, California is the market as much as it’s maligned. It’s still somewhere where once a quarter I go get in marketing, California, just to see what’s happening and check trends out it is I’m a big surfer, California is to cannabis as Hawaii is for surfing from a cultural standpoint, from a product development standpoint, you kind of got to go focus on it. And Cresco has been probably the only MSO that’s been really active out there, in the distribution business in the cultivation business.
And to see that forward looking focus on how we’re going to do this at scale? What kind of products are we going to sell? It made it a very much a symbiotic transaction. And when I left, it made me feel good that it was in good hands. And look, everyone’s going to have growing pains, but I’m confident in what they’re going to be able to do here in Florida, with Charlie’s vision and kind of execution, I see great things for them ahead.
And I also got to pay I’ll give credit where credit’s due, I’ve gotten to know Ben at GTI. And there’s another company that’s focused on doing premium. Ben having tried their products and kind of follow their story and gotten to know Ben, there’s a company that is endeavoring to kind of up their game too and remain authentic to cannabis culture. And that to me is something those are the — there want be pharmaceutical angle doesn’t do anything for me. The wellness angle, doesn’t do anything to me.
And when I say that, yes, cannabis is used for wellness in my household. My wife loves it, too, to help her with sleep. And she’s a yoga instructor to help her deal with pain. But I just think long-term, you’re going to have a hard time convincing people that something that is derived as wellness is a smoke and inhaled in your lungs. Just kind of counterintuitive. Yes, it makes you feel better, it makes me feel better. And it’s way better than having five scotches or three glasses of wine, if you don’t have a hangover the next day.
But it’s just — that whole, let pharma be wellness. I’m a bunch of a bigger fan of cannabis, let’s educate people on what it is and how it will help their daily lives. And they can decide what to call it in their own lives. Maybe it said, maybe it’s said to pubs have a joint instead of three glasses of wine, maybe it’s severe pain, and that’s what they use to treat their pain. And however medium they want to use it, let them use it, we don’t need to define it for because I just have a hard time with the whole wellness thing when 50% of the market is still inhalation.
RS: You don’t think that develops though over time, like the more it gets a part of mainstream society and the less of a taboo it is. And the more foreign factors there are like they don’t have to inhale. It doesn’t need to be kind of a negative health effect. Like it can be a balm or an oil or what have you.
BC: Oh, yes, I see it changing. I see it changing 100%, I don’t think it’s a negative health effect. I just like I like the companies that really focus on treating and honoring the plant, growing it correctly, building the correct facilities, post-harvest procedures, trimming, curing, drying, all the things that are done to preserve and get people flour in the form they need it.
But I also think everyone is completely overlooking the fact of how huge the cannabis beverage side of this business is going to be at some point. Maybe not in the short term, but you don’t see companies like Constellation (NYSE:STZ) go pour $4 billion into Canopy by accident. It’s for a reason. And I think the cannabis beverage from a medium standpoint will often I think that’ll be the biggest disruptor over the next 10 years.
RS: How do you see that? It’s funny, I used to ask this question a lot and I kind of stopped asking it. Your thoughts about the beverage industry? How do you see that growing?
BC: I mean, you got to look at these alcohol companies just kind of got especially the beer companies got caught, it almost blindsided by the seltzer movement, which exploded in 2019 and 2020. They can’t let that happen again. And when you look at a cannabis beverage I know some of the early testing that’s happened in Canada with canopies beverage and constellations beverages, folks loved it, especially if you can develop a beverage that is low calorie, low sugar.
And it’s something that you can use in a sessionable basis have one or two, you have a great night, you even sleep great. You don’t have a hangover the next day, I don’t see people not wanting to use that. I think it could be incredibly disruptive when it’s something that can be socialized, and distributed.
And I think that’s why you see these alcohol companies making these big bets into cannabis solely because they know it’s going to be the next disrupter, it will be the seltzer. I think they have to view that that there’s been a bunch of white papers, there’s been a bunch of articles covering that. I think the cannabis beverage will be the most accessible format for most Americans that don’t want to go smoke a joint or buy a vape pen or buy a rosin pen or a resin pen or that don’t want to go through that experience. But or, Hey, let me try that real quick and I have a great night, I think you’re going to see those people convert to incorporating more and more cannabis and less and less alcohol into their daily lives.
RS: And do you see there being like, like cannabis clubs or like the equivalent of a bar for that? Do you feel like it’s going to be that kind of experience, or it’s going to be more like the seltzer where you’re doing whatever you’re doing hanging out, whatever your social activity is, and the drinks are just there like that?
BC: I think it could be a little bit of both. I mean, it’s, I don’t see, especially if it’s behind the bar, and you can order a White Claw, or you can order a cannabis infused beverage the biggest test that we’ve got to go do as an industry and I think you’re seeing it start with some congressional dollars allocated towards researchers, we had to come up with an impairment standard and an impairment test, which is which if I’m being honest, is a big gating issue for both Republicans and Democrats is we need to go do that. And there was just part of the Biden infrastructure plan included some dollars to go and begin that research process to develop an impairment standard for cannabis.
Once that happens, then I think it’s just it’ll be hammered down on beverage development distribution and you’ll never convince me that constellation of the constellation invested $4 billion into canopy to learn how to grow wheat, I think it was to be able to go to Canada and begin to test and develop how to build, create R&D, and then ultimately distribute a cannabis infused beverage. I think that’s via data, what I think their bet was for I think it was for that as opposed to trying to go sell flower cannabis in Canada.
RS: And as you like, look at the development of the industry, do you feel like it’s futile to kind of think about interstate commerce? Do you feel like that’s so far off, and there’s so many unknowns on the way to that path?
BC: So as I look at interstate commerce, I think it’s an eventuality, but it’s an eventuality with strings attached. And when I say that, I mean, these are going to be largely if I see a path towards federal regulator — federal legalization that’s going to involve a deference being given to the state regulatory systems much the same as you see in it, that’s the most workable solution that can get the votes needed, as you saw on represented that. That’s the framework that’s in representative Mace’s Bill.
And I think you’re going to see in that case Florida for it, let’s just use Florida for example, Florida has a regulatory system that’s a vertically integrated market, and they’re ultimately going to be able to control what legal cannabis products can be imported or exported from Florida or into Florida. So this notion that as soon as some federal legalization happens, cannabis can be packed up in a truck and driven into Florida and sold in Florida dispensaries. State of Florida regulatory system is going to have something to say about that.
And I think that holds true across any of the states, some may enter into interstate compacts, like they’ve done in alcohol where it can be shipped across state lines, some states that don’t want that. So some states are going to protect their own in-house growers and protect their own in-house licensees and want to keep it all within the state. So yes, I think interstate commerce is something that’s a byproduct but it’s not just going to be — you’re not going to see we’d been packed up in California and driven into the legal market in Florida and sold in Florida dispensaries, absolutely State of Florida, saying that’s okay.
That’s just federally it’s kind of like the similar parallel to criminal justice reform. Yes, cannabis can be legalized federally and federal prisoners can be pardoned and or released from prison. But state based convictions have to be dealt with at the state level. The same thing holds true in interstate commerce. Yes, interstate commerce can be permitted. But states still have a say in what comes and goes out of their own regulatory systems. And I’ve tried to make that point.
I don’t think that it’s not coming, I just think there’s a lot of work that’s going to have to go into on a state-by-state basis. What states are going to allow cannabis products to be imported into their systems and where they’re going to be allowed that to happen from what kind of GMP or GAAP requirements are going to be mandated in the manufacturing process to allow that importation into the state system? All those types of little issues are going to take policy development rulemaking. It’s going to take a minute.
RS: And do you feel like were there’s something that the community of cannabis investors or the community of interested parties in cannabis, do you feel like there’s something that we’re not paying attention to that you feel like is coming down the pike or like a trend or something that were not paying attention too?
BC: No, you guys are I mean I follow your coverage, you guys have been doing a great job. I think the two things, the pay attention to federally SAFE banking in the NDAA and the increased leverage, and I would pay particular attention to it. You see President Biden over the next couple of weeks, begin the pardon and expungement process, especially pertaining to cannabis convictions at the federal level, that’s to me is going to be a signal that we’re entering an active phase of potential, whether it’s SAFE or moving something else, it’ll likely be SAFE in the NDAA, that will be a good telltale sign.
I think from a trend standpoint a lot of people are studying in California flower market talking about price compression, I think the biggest thing to pay attention to out there’s less about the price compression at the lower levels. It’s more about how the prices are holding strong at the higher levels. But the other thing I think to pay attention to because I do study it quite a bit is the main issue of facing California is they have too much cultivation, they’ve allowed a ton of cultivation to come online from a regulatory standpoint.
But I want to say there’s something like under 800 active dispensaries in the state. Compare that with liquor stores in California where you have close to 70,000 liquor licenses, there’s plenty of places to move alcohol products in the state, which is why you don’t see a compression in that sector. But in cannabis, you have a ton of flour being grown but only 800 stores to sell it through. There’s not a lot of channel. And I think as you’re studying other markets it seeing, how does that play out across these states that are rolling out horizontal licenses, it’s kind of a cautionary tale on what not to do. And it’s the disparity that the biggest issue you see in price compression out there is that there’s just not enough places to move the product.
How does that affect the regulatory frameworks that are going to be rolled out in some of these adult use states on the east coast? So they go a different model, having studied California or not, I think to see what’s going to happen in New York is going to be incredibly interesting. I mean, legal, full legal cannabis in New York City is going to be wild. Same with New Jersey, how are they going to roll it out those the question? And I think that’s going to be something to continue to watch because it’ll affect the profitability of the companies that operate in the states.
RS: So what’s something to watch there for New York? Like what does that mean, pay attention to how it plays out?
BC: So how is the regulatory system going to be set up? They’re going through the process, there’s going to be a big focus on social equity as there should be. But how are they going to how many dispensaries they are going to allow? What is the canopy requirements? If they allow too much — too many dispensaries and not enough canopy you’ll have an under supply if they allow too much canopy and not dispensaries, you’re going to have what you have in California right now where there’s a massive influx of flour and not enough places to sell it. So prices get compressed.
So it’s going to be really interesting to watch. I think if you are a New York license holder right now you’re ready for that rec market to get going. And I think it’s whether it happens in 2022, or 2023 is something to pay attention to, if it languishes, I think that’ll hurt some of the operators there. But you look at the East Coast right now you’ve got Pennsylvania playing with recreational potentially you’ve got New Jersey and you got New York, this is going to get very interesting very quickly, because how tightly compacted those states are.
If one goes, it’s kind of like to keep up with the rest of them, the others all have to go. So that whole region could turn on here in the next couple of years. And as that happens, it’s going to those that have an early head start that are there in the medical markets are going to have an opportunity to be very successful.
RS: The other thing I wanted to ask you about you mentioned MSOS, and AdvisorShares came out recently with another, a similar ETF with Poseidon (NYSEARCA:PSDN). Do you have an opinion about that new offering?
BC: Yes, I have studied that, Emily, I’m really proud of Emily and her team protocol, her friend and done her podcast a few times. I think, again, it’s more access for U.S. retail investors and even institutions to begin to dabble in the space. The allocations across the Poseidon ETF are great. I’m a fan of MSOS and how they’ve allocated and what they’ve been able to do. And I think that’s these are the ways if you’re a New Cannabis investor, and you’re not necessarily familiar with the underlying companies and haven’t studied the space that long these ETFs provide a meaningful way to get into the space and take a position across a good allocation of the US companies. The other one also look at is Tim Seymour has got a good one as well. That has a little bit of Canadian coverage too.
So to me these ETFs are kind of a great stepping for the new cannabis investors who don’t want to just go take a bet on an individual company that they may not be entirely familiar with, as they’ve seen more media coverage if you’re looking at the space I think the advisor shares ETF MSOS, the Poseidon which I think is PSDN and then Tim Seymour’s are three good options to look at right out of the gate.
RS: Yes, and that’s Tim Seymour’s CNBS. What would be your advice to a cannabis investor like Brady, what the hell is going on? What should I do? What’s your advice to investors?
BC: If I was investor study that unfortunately study the political process in DC, because as the last couple of weeks have shown that the space isn’t entirely trading on fundamentals just yet, it’s trading on potential for U.S. some type of U.S. political reform to occur to provide cover fire for a broader base rally. But don’t forget, if you’re in U.S., and you’re looking at the U.S. cannabis sector, go look at the — I would pay attention to GTI, I would pay attention to Cresco labs, I would pay attention to Curaleaf, Verano and Trulieve.
And study what those companies have been able to do from in their quarterly earnings from 2020 to present, it’s been pretty impressive in spite of a federal law overhang of huge effective tax rate, and largely very high cost of capital as compared to other CPG categories. So, these are companies that are poised for a breakout with some cover fire, but they’re also businesses that have been built to operate and generate healthy EBITDA and net cash flow, even if that catalyst doesn’t occur until the spring or even later, these are companies that are doing it right now at a very high level.
And I think that’s something that’s often overlooked, it’s so much emphasis is placed on a catalyst and somewhat and not enough is placed on the underlying fundamentals of these businesses is study the businesses and study those five as the leading MSOs. And you’ll see that they are companies that are built for the long haul that are built to make money right now and are only going to get even more profitable with federal law changing.
RS: Yes, I think for the past six months, it almost like doesn’t matter what a company’s done, because they’re all doing so poorly. But it’s like, ultimately, it will matter, it does matter. So yes, good advice. Brady, this has been a really great conversation, I think. I really appreciate you coming on. If we missed anything. I’m happy for you to put that in now. But I really appreciate you taking the time and coming on and I would love for this to be the first of many conversations.
BC: I really enjoyed it. You can count me in as a guest anytime you’re ready for me. And it’s been an absolute pleasure to talk to you.
Thanks so much for listening to the Cannabis Investing Podcast. Subscribe or follow us on Seeking Alpha, Libsyn, Apple podcast, Spotify, or Stitcher and we’d really appreciate it if you would leave us a review on Apple podcasts, 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 firstname.lastname@example.org. Thanks so much for listening and see you next time.
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