1 00:00:02,560 --> 00:00:06,360 Speaker 1: Americans have changed their minds about weed. It's estimated that 2 00:00:06,400 --> 00:00:08,719 Speaker 1: demand for recreational marijuana. 3 00:00:08,240 --> 00:00:11,280 Speaker 2: Could be as big as forty five billion dollars a year. 4 00:00:11,480 --> 00:00:13,640 Speaker 2: That's bigger than both wine and chocolate. 5 00:00:14,120 --> 00:00:17,200 Speaker 3: It's no secret marijuana is no longer a budding business. 6 00:00:17,200 --> 00:00:20,720 Speaker 3: It's booming. Sales in North America totaled six point seven 7 00:00:20,800 --> 00:00:25,640 Speaker 3: billion dollars in twenty sixteen and unprecedented thirty percent increase. 8 00:00:25,960 --> 00:00:29,200 Speaker 4: Absolutely, and this is the headline everybody wants to hear. 9 00:00:29,280 --> 00:00:33,280 Speaker 4: The marijuana market could be about to boom big time. 10 00:00:33,600 --> 00:00:36,920 Speaker 4: The new Frontier data says that legal cannabis could expand 11 00:00:36,920 --> 00:00:40,239 Speaker 4: the national market to about twenty one billion dollars by 12 00:00:40,240 --> 00:00:43,400 Speaker 4: the year twenty twenty. That's up from five point seven 13 00:00:43,440 --> 00:00:47,040 Speaker 4: billion dollars last year, and I'm expected seven point nine 14 00:00:47,080 --> 00:00:48,520 Speaker 4: billion dollars this year. 15 00:00:51,400 --> 00:00:53,959 Speaker 2: That was the buzz leading up to twenty eighteen, when 16 00:00:54,000 --> 00:00:56,440 Speaker 2: investors around the world were caught up in the craze 17 00:00:56,440 --> 00:00:59,240 Speaker 2: for cannabis stocks. Pot was on its way to being 18 00:00:59,320 --> 00:01:02,160 Speaker 2: legalized in Canada, and there were rumblings of a similar 19 00:01:02,200 --> 00:01:05,240 Speaker 2: move in the US. Shares of companies like Tilray, a 20 00:01:05,280 --> 00:01:09,000 Speaker 2: Canadian pot company, soared by more than one thousand percent 21 00:01:09,080 --> 00:01:11,959 Speaker 2: that year before crashing down to Earth soon after. 22 00:01:12,280 --> 00:01:14,920 Speaker 5: We will soon have a new system in place, one 23 00:01:14,920 --> 00:01:17,240 Speaker 5: that keeps cannabis out of the hands of our kids 24 00:01:17,560 --> 00:01:22,240 Speaker 5: and keeps profits away from organized crime. Today, I'm also 25 00:01:22,360 --> 00:01:25,960 Speaker 5: pleased to announce that the new recreational cannabis regime will 26 00:01:25,959 --> 00:01:29,920 Speaker 5: officially come into force on October seventeenth of this year. 27 00:01:30,600 --> 00:01:34,120 Speaker 1: In October of twenty eighteen, Prime Minister Justin Trudeau announced 28 00:01:34,120 --> 00:01:38,000 Speaker 1: that cannabis was legalized in Canada. Since then, numerous states 29 00:01:38,000 --> 00:01:40,520 Speaker 1: in the US have taken steps toward legalizing a drug 30 00:01:40,560 --> 00:01:44,280 Speaker 1: that was once vilified literally as the devil's let us. 31 00:01:47,360 --> 00:01:50,320 Speaker 1: But despite all these tailwinds, podstocks are still struggling and 32 00:01:50,360 --> 00:01:53,120 Speaker 1: there is huge question marks over just how the rollout 33 00:01:53,160 --> 00:01:54,840 Speaker 1: of this brand new market is going to go. 34 00:01:55,800 --> 00:01:58,000 Speaker 2: This is our cue to welcome you back to Potlots, 35 00:01:58,040 --> 00:02:01,640 Speaker 2: our deep dive into what's going on the legalized marijuana market. 36 00:02:01,960 --> 00:02:04,400 Speaker 2: In our last episode, we talked about what was happening 37 00:02:04,400 --> 00:02:07,240 Speaker 2: in New York and the tension that currently exists between 38 00:02:07,240 --> 00:02:10,239 Speaker 2: the illicit market for weed and the new legal one. 39 00:02:10,520 --> 00:02:12,680 Speaker 2: On this episode, we'll dive a bit more into the 40 00:02:12,720 --> 00:02:16,480 Speaker 2: business model of legalized marijuana before getting into the efforts 41 00:02:16,520 --> 00:02:19,919 Speaker 2: at creating social equity in our third and final episode. 42 00:02:20,160 --> 00:02:22,120 Speaker 1: It's not every day that you get to witness the 43 00:02:22,160 --> 00:02:24,240 Speaker 1: birth of a new market and all of the pains 44 00:02:24,280 --> 00:02:27,640 Speaker 1: and hiccups and weird logistical and existential issues that come 45 00:02:27,680 --> 00:02:30,280 Speaker 1: with it. And that's what really interests us here. What 46 00:02:30,480 --> 00:02:32,760 Speaker 1: is the state of the New York cannabis industry right 47 00:02:32,800 --> 00:02:35,320 Speaker 1: now and where is it headed? Is it being designed 48 00:02:35,360 --> 00:02:38,200 Speaker 1: in a way that's fit for its purpose? Will legal 49 00:02:38,200 --> 00:02:40,720 Speaker 1: cannabis sellers be able to make money, will be able 50 00:02:40,800 --> 00:02:42,880 Speaker 1: to compete with the illicit market guys who have been 51 00:02:42,919 --> 00:02:44,919 Speaker 1: in this business for a long time, And will investor 52 00:02:45,000 --> 00:02:49,760 Speaker 1: still be interested? Can the market live up to the hype. 53 00:02:53,320 --> 00:02:55,760 Speaker 2: To understand where things are going, we are going to 54 00:02:55,840 --> 00:02:59,160 Speaker 2: begin by checking up on what's happened so far. Remember, 55 00:02:59,400 --> 00:03:02,160 Speaker 2: not that long ago, there was once a ton of 56 00:03:02,200 --> 00:03:05,040 Speaker 2: investor excitement around cannabis. We had a bunch of new 57 00:03:05,040 --> 00:03:09,360 Speaker 2: companies created, several cannabis focused exchange traded funds were launched. 58 00:03:09,680 --> 00:03:12,160 Speaker 2: Joe and I recorded a couple episodes on the industry. 59 00:03:12,520 --> 00:03:15,480 Speaker 2: But all that excitement and the share prices as well, 60 00:03:15,840 --> 00:03:18,600 Speaker 2: they seem to have stagnated. Since then, the lines on 61 00:03:18,639 --> 00:03:20,359 Speaker 2: the chart have moved down into the right. 62 00:03:20,639 --> 00:03:22,880 Speaker 6: It's been about a couple of years for the cannabis space. 63 00:03:22,919 --> 00:03:25,880 Speaker 6: You're talking about a lot of operators, a lot of pioneers, 64 00:03:25,919 --> 00:03:28,119 Speaker 6: a lot of entrepreneurs who have been working for four 65 00:03:28,200 --> 00:03:30,000 Speaker 6: or five years have not gotten paid. 66 00:03:30,440 --> 00:03:33,800 Speaker 2: That's Todd Harrison, the founding partner and chief investment officer 67 00:03:33,919 --> 00:03:37,920 Speaker 2: of CB one Capital, an investment firm specializing in cannabis. 68 00:03:38,280 --> 00:03:41,480 Speaker 2: He describes what the mood is like amongst pot investors 69 00:03:41,680 --> 00:03:44,760 Speaker 2: and the big cannabis companies known as multi state operators 70 00:03:44,840 --> 00:03:47,560 Speaker 2: or MSOs after a tough few years. 71 00:03:47,840 --> 00:03:53,800 Speaker 6: For some reason, cannabis entrepreneurs, the MSOs, the pioneers are 72 00:03:53,880 --> 00:03:58,640 Speaker 6: viewed with disdain by some politicians and others in small business. 73 00:03:58,720 --> 00:03:59,920 Speaker 7: It's a bit oxymoronic. 74 00:04:00,120 --> 00:04:03,120 Speaker 6: Right, These are entrepreneurs that figured out and are working 75 00:04:03,160 --> 00:04:08,080 Speaker 6: toward building a US based industrial complex, right, US supply chain, 76 00:04:08,280 --> 00:04:11,640 Speaker 6: home grown, and something that I think we can all 77 00:04:11,680 --> 00:04:14,320 Speaker 6: agree should not be illegal, should not be a reason 78 00:04:14,360 --> 00:04:16,520 Speaker 6: that people are put in jail, and should not be 79 00:04:16,680 --> 00:04:19,760 Speaker 6: something that's used against somebody, whether they want to get 80 00:04:19,760 --> 00:04:22,120 Speaker 6: a job or whether they want to run for office. 81 00:04:22,680 --> 00:04:25,480 Speaker 1: Todd's own interest in cannabis was formed during a big 82 00:04:25,480 --> 00:04:28,039 Speaker 1: moment in New York in US history. He worked on 83 00:04:28,080 --> 00:04:30,640 Speaker 1: Wall Street for more than three decades at Morgan, Stanley 84 00:04:30,720 --> 00:04:33,919 Speaker 1: and Gallian and even Jim Kramer's old firm, and he 85 00:04:34,000 --> 00:04:35,920 Speaker 1: was working on Fulton Street the morning of nine to 86 00:04:35,920 --> 00:04:38,520 Speaker 1: eleven when the World Trade Center towers came down. 87 00:04:42,760 --> 00:04:43,040 Speaker 3: How to do? 88 00:04:45,320 --> 00:04:47,200 Speaker 6: We were a few blocks in the World Trade Center. 89 00:04:47,440 --> 00:04:50,559 Speaker 6: It was really the time after nine to eleven where 90 00:04:50,680 --> 00:04:54,640 Speaker 6: I explored it. After personal use with the PTSD associated 91 00:04:54,680 --> 00:04:56,960 Speaker 6: with nine to eleven, havn't been down there. I really 92 00:04:56,960 --> 00:04:59,640 Speaker 6: did a deep dive into the science, into the history 93 00:04:59,800 --> 00:05:03,039 Speaker 6: and to the benefits, the efficacy, and became fascinated with 94 00:05:03,080 --> 00:05:07,159 Speaker 6: the opportunity and ultimately the market opportunities that it would present. 95 00:05:07,360 --> 00:05:09,760 Speaker 6: And that's really what started this journey sung ten eleven 96 00:05:09,800 --> 00:05:14,640 Speaker 6: years ago. There's such a wide chasm between the popular 97 00:05:14,680 --> 00:05:19,160 Speaker 6: perception of cannabis's advice and history and cultures have demonstrated 98 00:05:19,160 --> 00:05:21,640 Speaker 6: for ten thousand years that cannabis is a wellness solution. 99 00:05:22,400 --> 00:05:26,120 Speaker 2: But even if attitudes towards pot are changing, as evidence 100 00:05:26,160 --> 00:05:28,600 Speaker 2: by the fact that twenty one states have now legalized 101 00:05:28,600 --> 00:05:31,880 Speaker 2: its use, there are main challenges to the actual business 102 00:05:31,960 --> 00:05:35,000 Speaker 2: of legal weed. One of the very things that's driving 103 00:05:35,040 --> 00:05:40,000 Speaker 2: cannabis legalization, the potential for tax revenue, is also arguably 104 00:05:40,080 --> 00:05:41,560 Speaker 2: hindering the industry's growth. 105 00:05:42,000 --> 00:05:44,840 Speaker 1: Pot is still classified as a Schedule one drug at 106 00:05:44,839 --> 00:05:48,200 Speaker 1: the federal level. The DEA defines this as drugs or 107 00:05:48,200 --> 00:05:51,520 Speaker 1: substances with no currently accepted medical use and a high 108 00:05:51,520 --> 00:05:54,359 Speaker 1: potential for abuse. Some other substances that are in the 109 00:05:54,360 --> 00:05:59,039 Speaker 1: same bucket as cannabis are heroin and LSD, but not cocaine. 110 00:05:59,080 --> 00:06:02,520 Speaker 1: Interestingly enough, that's Schedule too, and so that means even 111 00:06:02,520 --> 00:06:05,279 Speaker 1: if you're growing and selling pot legally within a state, 112 00:06:05,720 --> 00:06:08,039 Speaker 1: federal law treats it as an illegal business. 113 00:06:08,240 --> 00:06:08,440 Speaker 7: Yep. 114 00:06:08,600 --> 00:06:12,800 Speaker 2: And Section two ade of the Internal Revenue Code prohibits 115 00:06:12,800 --> 00:06:15,919 Speaker 2: taxpayers who are engaged in the business of trafficking certain 116 00:06:15,920 --> 00:06:20,120 Speaker 2: controlled substances, which in this case includes marijuana, from deducting 117 00:06:20,200 --> 00:06:24,760 Speaker 2: typical business expenses associated with those activities. That amounts to 118 00:06:24,800 --> 00:06:27,640 Speaker 2: an extra tax on the business, even if the state 119 00:06:27,680 --> 00:06:30,640 Speaker 2: says it's legal. Here's todd again, the two. 120 00:06:30,440 --> 00:06:34,000 Speaker 8: Eighty tax code, which paradoxically is going to end up 121 00:06:34,040 --> 00:06:38,080 Speaker 8: hurting the competition for a lot of the US cannabis players, 122 00:06:38,320 --> 00:06:43,080 Speaker 8: because it's going to ultimately create an environment where social 123 00:06:43,279 --> 00:06:46,240 Speaker 8: justice and small business can't compete. Because there is an 124 00:06:46,279 --> 00:06:49,800 Speaker 8: effective tax rate of seventy percent in the cannabis space, 125 00:06:50,080 --> 00:06:53,000 Speaker 8: we don't know if that's going to go away anytime soon. 126 00:06:53,279 --> 00:06:55,880 Speaker 6: There is speculation that it's being addressed. But if it 127 00:06:55,920 --> 00:06:58,680 Speaker 6: does not go away, if strong will get stronger. 128 00:06:58,839 --> 00:07:01,000 Speaker 1: This was something we heard from a lot of investors 129 00:07:01,040 --> 00:07:03,520 Speaker 1: in the space. The combination of the tax code and 130 00:07:03,560 --> 00:07:06,159 Speaker 1: the patchwork of different laws between states and at the 131 00:07:06,160 --> 00:07:08,880 Speaker 1: federal level makes it difficult for players in the pot 132 00:07:08,920 --> 00:07:11,280 Speaker 1: industry to really scale their businesses effectively. 133 00:07:11,680 --> 00:07:14,480 Speaker 2: Emily and Morgan Pasia are a brother and sister duo 134 00:07:14,600 --> 00:07:18,840 Speaker 2: who founded the cannabis investment company Poseidon. As they point out, 135 00:07:19,040 --> 00:07:22,160 Speaker 2: a seventy percent effective tax rate has done some interesting 136 00:07:22,280 --> 00:07:24,680 Speaker 2: things to legal cannabis companies so far. 137 00:07:25,320 --> 00:07:28,320 Speaker 9: When I look at these companies, I see strong fundamentals, 138 00:07:28,440 --> 00:07:31,520 Speaker 9: and there is this thing called twoade is a tax 139 00:07:31,520 --> 00:07:33,560 Speaker 9: code that's applied to this industry, and just to be 140 00:07:33,760 --> 00:07:37,480 Speaker 9: very broad about it, these operating companies see tax rates 141 00:07:37,480 --> 00:07:41,440 Speaker 9: effective tax rates of about seventy plus percent. In spite 142 00:07:41,480 --> 00:07:44,520 Speaker 9: of that, though you're seeing really strong gross margin profiles, 143 00:07:44,560 --> 00:07:48,040 Speaker 9: really strong ebadah profiles, and growth, and so you have 144 00:07:48,080 --> 00:07:51,000 Speaker 9: the fundamentals of these businesses that are almost running in 145 00:07:51,000 --> 00:07:54,080 Speaker 9: a completely opposite direction of their stock charts. So it's 146 00:07:54,080 --> 00:07:57,120 Speaker 9: been a really extraordinary time when you see some of 147 00:07:57,160 --> 00:08:01,760 Speaker 9: the top ten MSOs retraining back to their IPO price, 148 00:08:02,080 --> 00:08:06,200 Speaker 9: and yet these companies have quadrupled in sizes over these years. 149 00:08:06,560 --> 00:08:08,560 Speaker 1: There are ways for states to mitigate some of the 150 00:08:08,600 --> 00:08:12,000 Speaker 1: impact of Section two ADE, and Morgan points to Michigan 151 00:08:12,160 --> 00:08:14,080 Speaker 1: is an example of a state that's building a less 152 00:08:14,080 --> 00:08:17,160 Speaker 1: onerous tax regime even in the face of federal restrictions. 153 00:08:17,520 --> 00:08:20,160 Speaker 10: Michigan has I think one of the better tax codes 154 00:08:20,200 --> 00:08:23,000 Speaker 10: we've seen in our industry. So it makes it more 155 00:08:23,040 --> 00:08:25,720 Speaker 10: economical right to build a business like say versus like 156 00:08:25,720 --> 00:08:28,440 Speaker 10: a California that is a very expensive state. It's also 157 00:08:28,480 --> 00:08:31,400 Speaker 10: a lower cost state from a real estate perspective, so 158 00:08:31,920 --> 00:08:35,440 Speaker 10: it allows these businesses to get built and scaled in 159 00:08:35,480 --> 00:08:38,640 Speaker 10: a much more high ROI kind of way, even with 160 00:08:39,520 --> 00:08:42,160 Speaker 10: a lower price point at the flower level. You know, 161 00:08:42,200 --> 00:08:43,920 Speaker 10: that's kind of like a metric we look at for, 162 00:08:44,360 --> 00:08:45,559 Speaker 10: you know, kind of get a sense of where the 163 00:08:45,559 --> 00:08:48,760 Speaker 10: wholesale pricing is, so I think that's an advantage for them. 164 00:08:48,840 --> 00:08:50,920 Speaker 10: One unique thing about their tax code some of the 165 00:08:50,920 --> 00:08:53,560 Speaker 10: other states are doing this too, is at the state level, 166 00:08:53,559 --> 00:08:57,040 Speaker 10: they actually have a two ade offset, so they're trying 167 00:08:57,080 --> 00:09:00,280 Speaker 10: to help limit some of that federal burden. 168 00:09:00,400 --> 00:09:03,120 Speaker 1: That's translated into lower pod prices in Michigan in a 169 00:09:03,160 --> 00:09:03,840 Speaker 1: growing market. 170 00:09:04,000 --> 00:09:06,720 Speaker 10: Michigan is one of the most interesting states in this 171 00:09:06,840 --> 00:09:10,240 Speaker 10: whole journey of the legal the adult use cannabis industry 172 00:09:10,240 --> 00:09:12,280 Speaker 10: in the United States because they've had some of the 173 00:09:12,280 --> 00:09:17,120 Speaker 10: most significant price compressions. So in September twenty twenty two, 174 00:09:17,400 --> 00:09:21,360 Speaker 10: year over a year, wholesale prices were down forty six percent, 175 00:09:21,960 --> 00:09:26,840 Speaker 10: but total adult use sales growth was positive twenty six percent, 176 00:09:26,960 --> 00:09:29,240 Speaker 10: So that tells you how strong the unit growth was. 177 00:09:29,679 --> 00:09:31,880 Speaker 10: But because prices have reached such a low level, we 178 00:09:31,920 --> 00:09:34,200 Speaker 10: think that is a high conversion rate from the illicit 179 00:09:34,240 --> 00:09:36,760 Speaker 10: market coming into the legal adult use market. 180 00:09:36,880 --> 00:09:39,200 Speaker 2: But that isn't the only issue, stemming from the fact 181 00:09:39,200 --> 00:09:43,199 Speaker 2: that pot remains federally illegal. While Michigan's state level two 182 00:09:43,240 --> 00:09:47,760 Speaker 2: ade offset has helped, New York so far doesn't have 183 00:09:47,800 --> 00:09:52,400 Speaker 2: a similar tax code when it comes to facilitating the market, 184 00:09:52,600 --> 00:09:55,360 Speaker 2: there's still a huge question mark over banking services for 185 00:09:55,440 --> 00:10:00,600 Speaker 2: cannabis businesses and also custodying shares of cannabis companies. For 186 00:10:00,720 --> 00:10:04,000 Speaker 2: a normal business, this will be done by big custodian 187 00:10:04,040 --> 00:10:07,760 Speaker 2: banks like BNY Melon or JP Morgan, but since there's 188 00:10:07,840 --> 00:10:11,360 Speaker 2: so much confusion around federal versus state laws for weed, 189 00:10:11,800 --> 00:10:14,920 Speaker 2: there are very few banks willing to provide these services. 190 00:10:15,600 --> 00:10:18,559 Speaker 9: From what we hear from investors, it's the banking laws 191 00:10:18,559 --> 00:10:20,920 Speaker 9: that really need to change, or the banking position our 192 00:10:20,960 --> 00:10:24,600 Speaker 9: federal government takes toward the industry. So this plays out 193 00:10:24,640 --> 00:10:26,280 Speaker 9: in a number of ways. We were just talking about 194 00:10:26,320 --> 00:10:29,320 Speaker 9: the stock action around these companies, and a lot of 195 00:10:29,320 --> 00:10:31,800 Speaker 9: that has to do with the lack of liquidity because 196 00:10:31,800 --> 00:10:34,920 Speaker 9: they're generally on the bulletin boards right they're not on 197 00:10:34,960 --> 00:10:38,200 Speaker 9: the listed exchanges, So not having access to the listed 198 00:10:38,240 --> 00:10:42,040 Speaker 9: exchanges is an incredible limitter. And then there's also a 199 00:10:42,120 --> 00:10:45,280 Speaker 9: lack of custody for these assets, and so that's what 200 00:10:45,440 --> 00:10:48,200 Speaker 9: really keeps the institutional capital on the sidelines. We do 201 00:10:48,240 --> 00:10:52,120 Speaker 9: have a very enthusiastic individual investor or retail investor base, 202 00:10:52,440 --> 00:10:55,240 Speaker 9: and we know there's institutional capital sitting on the side, 203 00:10:55,360 --> 00:10:57,800 Speaker 9: but that's really what they're waiting for on two ade. 204 00:10:58,600 --> 00:11:00,880 Speaker 9: The way I view that is if these companies can 205 00:11:00,920 --> 00:11:04,120 Speaker 9: build strong businesses, And Morgan was just talking about it 206 00:11:04,440 --> 00:11:07,560 Speaker 9: with me frequently about how these companies are moving toward 207 00:11:07,600 --> 00:11:09,959 Speaker 9: a free cash flow profile. That's a new thing we're 208 00:11:09,960 --> 00:11:11,880 Speaker 9: going to be looking for going into twenty twenty three 209 00:11:11,920 --> 00:11:14,679 Speaker 9: and twenty four. If they can achieve all of that 210 00:11:14,760 --> 00:11:17,840 Speaker 9: with those tax rates, these businesses are going to look 211 00:11:18,000 --> 00:11:21,320 Speaker 9: tremendous once two eighty egoes away. So I view that 212 00:11:21,360 --> 00:11:23,360 Speaker 9: as just optionality to the upside. 213 00:11:23,480 --> 00:11:25,560 Speaker 10: So we're looking up from a federal perspective, you're talking 214 00:11:25,600 --> 00:11:29,640 Speaker 10: about banking access, which also brings custody and potentially exchanges, 215 00:11:30,080 --> 00:11:33,000 Speaker 10: and then we're talking about social justice. Late in twenty two, 216 00:11:33,120 --> 00:11:36,080 Speaker 10: we did see President Biden make a big step forward 217 00:11:36,160 --> 00:11:39,280 Speaker 10: at the federal level, at the executive level moving forward 218 00:11:39,280 --> 00:11:41,800 Speaker 10: with some of the social justice pieces. So that really 219 00:11:41,800 --> 00:11:45,160 Speaker 10: does help the industry stay very focused with the legislative 220 00:11:45,160 --> 00:11:47,480 Speaker 10: branches to get some kind of banking reform done. And 221 00:11:47,520 --> 00:11:51,160 Speaker 10: if that should be resolved from our perspective, as just 222 00:11:51,200 --> 00:11:54,520 Speaker 10: mentioning about valuations being so low, they're under priced like 223 00:11:55,240 --> 00:11:58,360 Speaker 10: it is structurally at a discount, and if we have 224 00:11:58,480 --> 00:12:02,120 Speaker 10: access to banking and exchanges and more institutional capital. We 225 00:12:02,200 --> 00:12:04,480 Speaker 10: think there's just even repricing just to get it back 226 00:12:04,520 --> 00:12:12,560 Speaker 10: to even a fair value. That is pretty significant. 227 00:12:13,800 --> 00:12:17,160 Speaker 2: Of course, the scaling problem isn't just about the discrepancy 228 00:12:17,200 --> 00:12:20,960 Speaker 2: between state and federal taxes or banking regulation. When it 229 00:12:21,000 --> 00:12:25,080 Speaker 2: comes to growing cannabis legally, each state also has different 230 00:12:25,160 --> 00:12:28,200 Speaker 2: rules and requirements that make it pretty hard for multi 231 00:12:28,200 --> 00:12:31,920 Speaker 2: state operators in general to keep their costs down, since 232 00:12:32,000 --> 00:12:35,480 Speaker 2: each individual state might have its own regulation about everything 233 00:12:35,520 --> 00:12:38,520 Speaker 2: from growing to transporting to selling marijuana. 234 00:12:39,080 --> 00:12:39,360 Speaker 3: YEP. 235 00:12:39,600 --> 00:12:41,960 Speaker 1: This is something that came up back in twenty nineteen 236 00:12:42,040 --> 00:12:44,360 Speaker 1: when we spoke to Craig Wiggins about how the Canadian 237 00:12:44,400 --> 00:12:47,040 Speaker 1: cannabis market was developing and what that said about the 238 00:12:47,040 --> 00:12:49,880 Speaker 1: potential for the US market. Craig has been a close 239 00:12:49,960 --> 00:12:52,400 Speaker 1: industry observer for a long time and ran a trio 240 00:12:52,480 --> 00:12:55,959 Speaker 1: of analyst called the Cannabists, and he contrasts a multi 241 00:12:55,960 --> 00:12:59,360 Speaker 1: state marijuana operator with the classic conglomerate of the consumer 242 00:12:59,400 --> 00:13:01,160 Speaker 1: goods industry, like Coca Cola. 243 00:13:02,160 --> 00:13:05,200 Speaker 7: The regulations that have been brought in, especially in the 244 00:13:05,320 --> 00:13:09,480 Speaker 7: United States, different from Canada. Canada has a fully federally 245 00:13:09,679 --> 00:13:13,360 Speaker 7: legal system, so all the rules are set out. In 246 00:13:13,400 --> 00:13:15,640 Speaker 7: the US, what's happened is it's been a state by 247 00:13:15,720 --> 00:13:19,800 Speaker 7: state battle, usually first for medicinal cannabis and then for 248 00:13:20,160 --> 00:13:24,559 Speaker 7: adult use cannabis. And the problems arise that if you're 249 00:13:24,720 --> 00:13:27,000 Speaker 7: a what's called a multi state operator in the states 250 00:13:27,000 --> 00:13:31,079 Speaker 7: where you're in multiple states, you've had to replicate your 251 00:13:31,120 --> 00:13:35,040 Speaker 7: cultivation in every single state. You're processing in every single 252 00:13:35,080 --> 00:13:38,160 Speaker 7: state as well, So it's very tough to get economies 253 00:13:38,200 --> 00:13:42,280 Speaker 7: of scale when the product that you're making can't travel 254 00:13:42,320 --> 00:13:45,880 Speaker 7: outside the borders. Think of Coca cola. A Coca Cola 255 00:13:46,040 --> 00:13:49,520 Speaker 7: in Florida from a seven eleven tastes exactly like the 256 00:13:49,559 --> 00:13:53,280 Speaker 7: Coca Cola in California from that seven eleven. The cannabis 257 00:13:53,400 --> 00:13:56,800 Speaker 7: grown in Florida, the exact same cultivar strain grown in 258 00:13:56,840 --> 00:13:59,640 Speaker 7: Florida and grown in California are not going to be 259 00:13:59,720 --> 00:14:04,240 Speaker 7: the same. So trying to figure out what works in 260 00:14:04,280 --> 00:14:08,400 Speaker 7: your state environment, and Florida's very humian, California isn't. When 261 00:14:08,440 --> 00:14:13,079 Speaker 7: I look at the complexity of it, think of what 262 00:14:13,160 --> 00:14:16,480 Speaker 7: you have to do in a company to change the 263 00:14:16,520 --> 00:14:20,040 Speaker 7: gross margin of a large company when you have thirty 264 00:14:20,040 --> 00:14:25,359 Speaker 7: five different production facilities and thirty five different cultivation facilities 265 00:14:25,400 --> 00:14:29,000 Speaker 7: selling into thirty five different markets with all different pricing, 266 00:14:29,360 --> 00:14:32,600 Speaker 7: it becomes very difficult. You have to steer one state 267 00:14:32,640 --> 00:14:36,160 Speaker 7: at a time to your destination. So what we've seen 268 00:14:36,320 --> 00:14:39,440 Speaker 7: is as these states launched, there's a lot of money 269 00:14:39,440 --> 00:14:43,080 Speaker 7: to be made very early, but the decay starts right 270 00:14:43,080 --> 00:14:43,840 Speaker 7: away as well. 271 00:14:44,320 --> 00:14:47,280 Speaker 2: So because of the patchwork of state regulation around legal 272 00:14:47,320 --> 00:14:50,880 Speaker 2: cannabis use, you can't really have a Coca Cola of 273 00:14:50,920 --> 00:14:54,920 Speaker 2: cannabis because a company can't grow one product for an 274 00:14:55,080 --> 00:14:58,680 Speaker 2: entire country or even a region. Each state is different, 275 00:14:58,840 --> 00:15:01,680 Speaker 2: which means each market it is different. Let's go back 276 00:15:01,680 --> 00:15:03,200 Speaker 2: to Florida and Florida. 277 00:15:03,280 --> 00:15:05,800 Speaker 1: As Craig points out, you have to be completely vertical, 278 00:15:05,840 --> 00:15:08,600 Speaker 1: which means owning every process in the pod supply chain, 279 00:15:08,640 --> 00:15:11,800 Speaker 1: from cultivating to processing and selling only for your stores. 280 00:15:12,200 --> 00:15:15,440 Speaker 7: Even though there's another store down the street that's fully legal, 281 00:15:15,840 --> 00:15:18,920 Speaker 7: you can't ship your product there. So Florida, so this 282 00:15:19,000 --> 00:15:21,040 Speaker 7: is the most extreme one. Florida is the most extreme. 283 00:15:21,080 --> 00:15:23,560 Speaker 7: I think North Carolina is looking to come in like 284 00:15:23,640 --> 00:15:26,080 Speaker 7: Florida right now too, which would be a shame. So 285 00:15:26,120 --> 00:15:31,200 Speaker 7: there's only about fifteen major companies in Florida limited competition. 286 00:15:31,560 --> 00:15:34,640 Speaker 7: Think of the capital you need to not only run 287 00:15:34,680 --> 00:15:37,600 Speaker 7: your own cultivation, but run all your processing and then 288 00:15:37,680 --> 00:15:41,960 Speaker 7: all your stores. And this product, as I mentioned, is 289 00:15:42,000 --> 00:15:45,840 Speaker 7: not homogenious. So you're selling a product in your store 290 00:15:46,120 --> 00:15:49,520 Speaker 7: your competitors selling, say it's blue Dream. You're selling Blue 291 00:15:49,600 --> 00:15:53,000 Speaker 7: Dream in your store that you've cultivated the competitors selling 292 00:15:53,040 --> 00:15:55,800 Speaker 7: Blue Dream in their store. It's not the same Blue Dream. 293 00:15:56,040 --> 00:15:58,360 Speaker 7: And at the end of the day, the amount of 294 00:15:58,360 --> 00:16:02,320 Speaker 7: money you need to fund a fully vertical operation is huge. 295 00:16:02,520 --> 00:16:05,840 Speaker 7: Florida is really an outlier right now. They have zero 296 00:16:06,000 --> 00:16:08,840 Speaker 7: social equity. I don't think there's been a license, a 297 00:16:08,920 --> 00:16:12,480 Speaker 7: vertical license given to a social equity firm. Yet then 298 00:16:12,520 --> 00:16:18,280 Speaker 7: you have Illinois. Illinois has more cultivators, and Illinois has 299 00:16:18,280 --> 00:16:21,160 Speaker 7: been locked in a battle for almost three years to 300 00:16:21,280 --> 00:16:25,200 Speaker 7: get the next set of licenses out. So Illinois went vertically, 301 00:16:25,440 --> 00:16:28,840 Speaker 7: but you could sell your product Polesaley to another retailer. 302 00:16:29,320 --> 00:16:33,200 Speaker 7: So there are more retailers in Illinois than just the 303 00:16:33,320 --> 00:16:37,600 Speaker 7: vertical companies. And one hundred and eighty five licenses have 304 00:16:37,680 --> 00:16:39,960 Speaker 7: been held up in court for social equity for over 305 00:16:40,000 --> 00:16:42,680 Speaker 7: two years. So Illinois has been stuck at one hundred 306 00:16:42,680 --> 00:16:46,360 Speaker 7: and ten licenses for almost two years there. Finally next 307 00:16:46,400 --> 00:16:48,760 Speaker 7: year we should start seeing the opening or maybe even 308 00:16:48,760 --> 00:16:50,840 Speaker 7: this year, the opening of those one hundred and eighty 309 00:16:50,840 --> 00:16:54,360 Speaker 7: five new social equity licenses. But if you can imagine 310 00:16:54,720 --> 00:16:59,120 Speaker 7: the constraints, there's a store in northern Illinois that's disclosed 311 00:16:59,120 --> 00:17:02,560 Speaker 7: through one of the MSL that's doing eighty million dollars 312 00:17:02,600 --> 00:17:06,359 Speaker 7: a year out of one store seventeen miles away from 313 00:17:06,400 --> 00:17:10,439 Speaker 7: the Wisconsin border. Why because Wisconsin isn't legal, so you 314 00:17:10,480 --> 00:17:13,080 Speaker 7: get people rolling down from there. So you have all 315 00:17:13,080 --> 00:17:14,040 Speaker 7: these different models. 316 00:17:14,480 --> 00:17:16,920 Speaker 2: Craig can go into the weeds for each individual state, 317 00:17:17,480 --> 00:17:20,080 Speaker 2: but for many new players in the industry, it's not 318 00:17:20,240 --> 00:17:24,159 Speaker 2: so simple. In New York, for example, retailers must be 319 00:17:24,200 --> 00:17:28,919 Speaker 2: separate from producers, essentially banning vertical integration in the cannabis space. 320 00:17:29,320 --> 00:17:32,000 Speaker 2: We'll get into this more in episode three, but for 321 00:17:32,160 --> 00:17:34,680 Speaker 2: right now, it's clear to see how messy things can 322 00:17:34,720 --> 00:17:37,879 Speaker 2: get for someone trying to enter and navigate the space 323 00:17:37,960 --> 00:17:41,359 Speaker 2: as an operator or a grower. Since everyone's working with 324 00:17:41,400 --> 00:17:45,480 Speaker 2: different laws and regulations, it has been and will probably 325 00:17:45,560 --> 00:17:47,720 Speaker 2: continue to be a bumpy ride. 326 00:17:47,800 --> 00:17:52,199 Speaker 7: So it's really been interesting because each state depending on 327 00:17:52,280 --> 00:17:55,360 Speaker 7: what their REGs are. It's either been a sprint or 328 00:17:55,840 --> 00:17:58,520 Speaker 7: it's sort of been like the Godfather, where you only 329 00:17:58,560 --> 00:18:01,399 Speaker 7: have five licenses and you can do what you want 330 00:18:01,440 --> 00:18:04,960 Speaker 7: as long as everyone plays nice with everybody. So it's 331 00:18:05,000 --> 00:18:08,160 Speaker 7: really been a tough industry as an analyst to take 332 00:18:08,160 --> 00:18:11,439 Speaker 7: a look at. Each state is absolutely different, and because 333 00:18:11,440 --> 00:18:14,359 Speaker 7: you can't scale, if you're doing well in Massachusetts, it 334 00:18:14,359 --> 00:18:17,680 Speaker 7: doesn't mean you're doing well in Nevada. It's really a 335 00:18:17,800 --> 00:18:22,440 Speaker 7: struggle for all these companies to get into the market 336 00:18:22,640 --> 00:18:26,880 Speaker 7: make their money before more competition arrives and the decay starts, 337 00:18:27,480 --> 00:18:30,199 Speaker 7: and the decay usually starts when supply starts creeping up 338 00:18:30,240 --> 00:18:30,760 Speaker 7: to demand. 339 00:18:31,200 --> 00:18:34,119 Speaker 1: Aside from regulation, there's a more technical reason that the 340 00:18:34,200 --> 00:18:36,879 Speaker 1: legal cannabis industry has been tough to crick, and that 341 00:18:36,920 --> 00:18:38,680 Speaker 1: has to do with the actual growing of the weed. 342 00:18:39,200 --> 00:18:42,200 Speaker 2: Now, neither of us have any personal experience doing this, 343 00:18:42,600 --> 00:18:45,800 Speaker 2: but the cliche throughout recent history has been, you know, 344 00:18:46,320 --> 00:18:48,960 Speaker 2: small scale growers in a basement or a closet and 345 00:18:49,000 --> 00:18:51,560 Speaker 2: a set of grow lights, and the plants that thrived 346 00:18:51,640 --> 00:18:54,600 Speaker 2: were the ones most suited to those conditions, and they 347 00:18:54,640 --> 00:18:57,600 Speaker 2: tended to pack the most potency. We spoke about this 348 00:18:57,640 --> 00:18:59,960 Speaker 2: a little bit in our first episode with Jason Wild 349 00:19:00,119 --> 00:19:03,520 Speaker 2: who runs an MSO, and he described how different growing 350 00:19:03,560 --> 00:19:06,399 Speaker 2: locations can create vastly different products. 351 00:19:07,720 --> 00:19:09,919 Speaker 1: If something is illegal, you're not going to really do 352 00:19:10,040 --> 00:19:12,399 Speaker 1: it out in the open. It seems like there's a 353 00:19:12,480 --> 00:19:16,200 Speaker 1: lack of experience and larger growing operation. And while it 354 00:19:16,240 --> 00:19:19,080 Speaker 1: seems hard enough to grow weed in a closet, Craig 355 00:19:19,119 --> 00:19:21,720 Speaker 1: Wiggins points out that the history has had a lasting 356 00:19:21,800 --> 00:19:24,760 Speaker 1: impact on the ability of the industry to scale up 357 00:19:24,800 --> 00:19:26,240 Speaker 1: the actual growing of cannabis. 358 00:19:26,560 --> 00:19:31,040 Speaker 7: Folks often wonder why it has been so difficult to 359 00:19:31,080 --> 00:19:34,800 Speaker 7: scale the cannabis plant, and that's really because for the 360 00:19:34,880 --> 00:19:38,359 Speaker 7: last three decades before it was legal, you had to 361 00:19:38,400 --> 00:19:42,720 Speaker 7: grow cannabis plants fairly clandestinely if you didn't want police 362 00:19:42,760 --> 00:19:46,960 Speaker 7: knocket on your doors. So you had people out there 363 00:19:47,320 --> 00:19:50,800 Speaker 7: growing small batches that they like in a container, in 364 00:19:50,800 --> 00:19:55,040 Speaker 7: a sea can or in a small warehouse, nothing big 365 00:19:55,040 --> 00:19:58,560 Speaker 7: that would attract attention. For decades and decades, the plant 366 00:19:58,560 --> 00:20:02,440 Speaker 7: has had to be grown clandestinely, and the focus of 367 00:20:02,480 --> 00:20:06,800 Speaker 7: the plant has been on producing THHC or CBD, because 368 00:20:06,840 --> 00:20:09,879 Speaker 7: those are the two elements that were desirable for the 369 00:20:10,000 --> 00:20:13,919 Speaker 7: end consumer. So there's another one hundred cannabinoids in the 370 00:20:13,920 --> 00:20:17,600 Speaker 7: plant that really haven't been bred into the plant in 371 00:20:17,640 --> 00:20:20,240 Speaker 7: any meaningful way, and we're starting to see that right now. 372 00:20:20,480 --> 00:20:25,160 Speaker 7: But because of the clandestine fashion, anyone who's good at 373 00:20:25,160 --> 00:20:28,320 Speaker 7: growing is good at growing a certain amount. Now, when 374 00:20:28,320 --> 00:20:32,040 Speaker 7: the greenhouses came along and the bigger facilities, it takes 375 00:20:32,040 --> 00:20:35,840 Speaker 7: at least two years to dial in, Okay, what cultivar 376 00:20:36,000 --> 00:20:38,880 Speaker 7: is going to work in this greenhouse or in this space. 377 00:20:39,240 --> 00:20:42,280 Speaker 7: So you run five crops a year indoor, so you're 378 00:20:42,359 --> 00:20:45,080 Speaker 7: learned five times a year, so it's always an iteration 379 00:20:45,600 --> 00:20:47,600 Speaker 7: and you might have to go back to the beginning. 380 00:20:47,600 --> 00:20:51,080 Speaker 7: If that particular cultivar which was really good in that 381 00:20:51,160 --> 00:20:54,880 Speaker 7: sea can hidden in a forest in British Columbia, it's 382 00:20:54,920 --> 00:20:58,320 Speaker 7: a little different when it's in a million square foot greenhouse. 383 00:20:58,400 --> 00:21:00,720 Speaker 7: It's just not going to react the same way. So 384 00:21:01,000 --> 00:21:05,119 Speaker 7: it's really about genetics, and the genetics were designed to 385 00:21:05,240 --> 00:21:12,160 Speaker 7: breed smaller quantities high thhcrcbd plants until genetics catch up, 386 00:21:12,480 --> 00:21:15,359 Speaker 7: and it takes time for those genetics to catch up. 387 00:21:15,480 --> 00:21:19,520 Speaker 7: Until genetics catch up, the scalability will be very difficult. 388 00:21:23,680 --> 00:21:26,360 Speaker 1: On the next episode of Potlots, we'll take a closer 389 00:21:26,359 --> 00:21:28,840 Speaker 1: look at the illicit market for pot in New York 390 00:21:28,920 --> 00:21:31,119 Speaker 1: and what it means for the states to allow legal 391 00:21:31,160 --> 00:21:34,199 Speaker 1: cannabis sellers and its goal of using those licenses to 392 00:21:34,240 --> 00:21:42,639 Speaker 1: make rights some of the injustices of the past. Potlats 393 00:21:42,680 --> 00:21:45,119 Speaker 1: is hosted by me Joe Wisenthal. You can follow me 394 00:21:45,320 --> 00:21:47,280 Speaker 1: on Twitter at The Stalwart and. 395 00:21:47,320 --> 00:21:49,760 Speaker 2: Me Tracy Alloway. You can follow me on Twitter at 396 00:21:49,840 --> 00:21:50,640 Speaker 2: Tracy Alloway. 397 00:21:50,880 --> 00:21:54,960 Speaker 1: Follow our producer Carmen Rodriguez. She's on Twitter at Carmen Arman. 398 00:21:55,359 --> 00:21:58,840 Speaker 2: Dash Ol Bennett is our associate producer. He is at Dashbot. 399 00:21:58,920 --> 00:22:02,199 Speaker 1: Our sound engineers, Maples Sage Bauman is our head of 400 00:22:02,240 --> 00:22:05,000 Speaker 1: podcasts and Special Things to Moses ad them. 401 00:22:05,520 --> 00:22:08,439 Speaker 2: For more Bloomberg coverage at the legal marijuana industry, you 402 00:22:08,440 --> 00:22:12,120 Speaker 2: should definitely check out The Dose, Tiffany Carrey's weekly newsletter 403 00:22:12,200 --> 00:22:15,639 Speaker 2: about the business of cannabis and psychedelics. You can subscribe 404 00:22:15,680 --> 00:22:17,879 Speaker 2: at Bloomberg dot com. Thanks for listening.