California Cannabis Market – Deep Dive, Part II (Transcript)

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Rena Sherbill: Hi, again everybody. Welcome back to the show. It’s great to have you listening with us as always. Super excited to bring back Hirsh Jain and Emily Paxhia; Hirsh from Ananda Strategy and Emily from Poseidon Asset Management, two experts in this sector. We had them on earlier this year doing a deep dive on California and they are back. There is nobody better to talk about California cannabis with than Emily and Hirsh and I’m very grateful to have them both back on today.

We get back into California talking about regional politics, regional issues, some of the positive developments since last we talked, but why we still have further to go. We also get into the broader U.S. picture, specifically around the Northeast and why Emily is excited about that region. A great talk about cannabis investing and how California fits into things, things we as investors can learn, but also as consumers, how to think about the developing retail picture, how to think about cannabis as a commodity, a great conversation. Hope you enjoy it.

Hirsh and Emily, welcome back to the cannabis investing podcast. Always a pleasure to talk to you, to listen to what you have to say to gain some more knowledge specifically on California as we’ve been doing, so thanks for coming on. Thanks for joining us again.

Emily Paxhia: Thanks for having us.

Hirsh Jain: Yes, thanks for having us back, Rena.

RS: Yes, pleasure is ours. So Hirsh, last time we started with you getting kind of the deep dive on California, and I still want to catch up, but I thought I’d start with Emily, switch things up, give equal opportunity to everybody. Emily, what do you think about, there’s been some kind of significant bills being passed in California. What are your thoughts on kind of, as we sit here, like maybe half a year later than last time we talked about California and maybe just the sector in general?

EP: Yes, I mean, the pain cycle continued after our last podcast. We saw wholesale prices of especially outdoor or even greenhouse or mixed up cannabis, just cannabis absolutely greater, to lows that I couldn’t believe. And by the way, grade A flower that was grown under the sun here in Northern California and across the state, it was just brutal.

And I know from being involved across the vertical, that there are many operators who have basically either closed their businesses or tapped out on the cultivation side. And maybe when they tapped out, they tapped into the illicit market. We don’t know, but they are no longer participating in the legal market.

Now since then the state has passed to remove the cultivation tax and I’ll let Hirsh really dig in on the specifics on that as he’s still with on these things, but the fear I have, and this just goes back to the fact that we still haven’t gotten banking reform at the federal level, is that operators who are wiped out, decimated, lost money on their last crops, I don’t know that that is actually going to bring them back into the market. And the reason being is that they’re out of resources.

And so in an ordinary market, perhaps they could get some small business lending, some micro loans to get them started up, to get growing again for this cash-on-cash cycle. But I just don’t know how they’re going to pull it off and I’m just wondering if it’s a — I’m very grateful for this with the state. And I have some thoughts about how I’m seeing this flow through the finished goods pricing that I’m seeing in the state, which could be beneficial to the end consumer, especially given our excise taxes. But I am — I’m just worried about what happens next to the small farmers,

RS: Which is, I mean, I think what we talked about last time, this bit of Darwinism that’s going to happen in this state based on how it’s set up, which I guess is playing out exactly as you expected it to.

EP: Yes, yes.

RS: Now I was going to say, Emily if you wanted to follow up with anything, otherwise Hirsh if you want to catch us up on the legal?

EP: Yes, I think the only thing I would say is that I’m all for fierce competition in the capitalist environment where the playing field is somewhat level in that you’re paying the same fees, same taxes, but when you’re competing against illicit markets, burners, distorters like illicit product getting into the legal market, all of these challenges that we’ve had, it’s just, it’s not a level playing field. And so, I just don’t feel like that’s a fair landscape for these craft growers.

HJ: Yes, and I think Emily hit on some of the most salient points. I would just say that I remember last time what we discussed, the three main pain points that the California market was experiencing, the very onerous tax burden first of all. Secondly, just the lack of retail outlets and retail access across the state and third, just the drop in pricing.

So what I would say is, I think we’ve pulled ourselves out of the death spiral in some ways, but we’re not out of the woods yet. So we’re starting to turn the ship around, I think you can say, but California is like the Titanic and so I think the question is, at what pace are we moving now, if we’re moving in the right direction? And what needs to happen for us to accelerate that trajectory?

And if we’re seeing some incremental progress on some of these things like taxes, retail expansion and pricing, the other question is, what parts of the supply chain will benefit from each of those changes, and specifically like where geographically, if you’re just looking at different operators, based on where they’re situated geographically, they stand to benefit more or less. So I think we can unpack all three of those points, but my high level takeaway is, we were in a death spiral. I think there are some signs we pulled ourselves out of it, but by no means are we out of the woods where we can say we’re slowly moving in the right direction as a market.

RS: I mean, the comparison to the Titanic I think is apt in the sense that like, forget about too big to fail, it’s almost like too big to pivot, but now we’ve seen some pivot, some kind of smarter maneuvering. Does that give you more encouragement than let’s say last time we talked like the fact that some movement has pushed through?

HJ: It does and I’ll just start with one of those three things that we discussed last time and that we just highlighted, which is taxes. So as we talked about last time, cannabis in California is taxed at least four, sometimes five or six times before it reaches the end consumer in California. Right? Which is obviously very onerous.

And as Emily just mentioned, the cultivation tax in California was eliminated as of July 1st, and that’s a really big step forward. And I think many people listening to this podcast are sort of familiar with the fact that that was a flat tax, about $160 a pound. So as the price of cannabis just crashed last year down to $200, $300 a pound, it became totally impossible to run a legal cannabis business, cultivate cannabis in California profitably.

So it’s good that that cultivation tax was eliminated. Obviously it’s very good for those cultivators who cultivate a lot because for many of those larger operators, that was their biggest expense. But the rest of the taxes still remain. The excise tax is 15%. There was some optimism that, that excise tax might be reduced. It remains at 15%. Also there’s the 9% sales tax that’s applicable to cannabis. And then there’s sort of the local excise tax and then local manufacturing and distribution taxes.

And so it’s good that one of those five taxes was eliminated. I think that disproportionately stands to benefit those large cultivators for whom that’s the greatest expense, but it will still be hard for the legal market to compete with the illegal market. And we can talk through what seems feasible over the next year or two to bring down those other taxes, but we’ve eliminated one of five, which is good, but obviously is not a silver bullet.

RS: Emily, anything you wanted to add to that specifically?

EP: Yes, I mean, I do think to Hirsh’s point, we looked the gun in the face this year and we really, we saw where it could go. I mean, I’m even seeing wholesale pricing on indoor cannabis coming down quite a bit. So it’s going to — I mean, it’s going to remain competitive for a while and we know there’s more and more legal product available to come online. Like I know there’s cultivation facilities expanding and opening that are indoor based in the desert.

I know that obviously we all watch Glass House (OTC:GLASF) as a behemoth operation and what they’ve got available to continue to put online and they grow good cannabis in a greenhouse. So, I mean, the market is going to remain competitive on the cultivation side. The way that, I mean, that I think about this in California and it’s interesting because this is an industry that’s so complex on every aspect of the vertical, that you would not wish on anybody to have to be a master at cultivation, a master at processing and manufacturing, a master at distribution and a master at retail. But it basically is required because of the taxation along the way and also because we are seeing this kind of forced commoditization.

We all knew cannabis would move toward commoditization, but the rate at which it occurred in California was a pretty, it was dramatic and probably overly dramatic at its clip. But the way that I’m seeing this play through, which is your input, your raw material, which is cannabis into products, like for example, gummies, I’ve seen the pricing on gummies based on my headset dashboard, I saw the pricing on gummies go down on the promotions on 4/20, around 4/20, and it stayed down.

Now the gummies manufacturers, I’m not sure what their setup is and their access to the “raw materials” of the, or the active ingredient, which is the cannabinoid compounds or cannabis, but I have to guess that their wholesale pricing is lower as it has been for everyone, and that they could be seeing improved margins, even if the prices are coming down if they have efficient operations.

I wouldn’t be surprised if we see some things happening there too on competition of smaller brands that maybe don’t have the efficient operations that maybe one of the — maybe marijuana or the wild gummies or Kiva, the ones that I tend to see at the top of the charts all the time. But that’s just one aspect where I’m watching it. And then the other is the category of beverage, which as we know is a tiny category compared to the rest of the market, but we also know it’s ramping. So having lower cost of goods going into the product or lower cost of the raw material or active ingredient is pretty interesting to that product category as well.

And then the other product category, which I think is really interesting to watch, and this actually holds up across the entire U.S. is this pre-rolls category, which is interesting because we’ve seen flower decline as a category for the first time ever, because it has been the biggest and still was growing. Now we’ve seen that kind of come down and we’ve seen pre-rolls as a category, as a rapidly growing and a massive category across the U.S., but especially in California.

And then you see all of these various takes on that, like infused, minis all these things. And to me, that’s the fastest and most cost effective path to creating a product and creating a moat around really flower. I mean, it’s flower. And so, but you’re creating this packaged experience. You’re creating an experience around it, which is what brands are and what brands can do to defend pricing and moat. So I just think it’s an interesting shift we’re seeing on the product categories, but I think it’s a lot of it has been fed by what’s going on in this wholesaling environment.

RS: Yes, it’s interesting. I mean, spending some time in California now, I’ve also noticed that this is a state, I mean, maybe people can point to this in other states, but it seems that there’s a strong sense of that you can be a really strong brand in this state without necessarily being a strong operator. And I think that it’s interesting to see how they can parlay that as things progress, right, as wholesaling, as pricing, as states open up as, you know, all those things, anything that you want to speak to in terms of like that, the sense of like brands versus operators.

EP: I mean, I’ll just say, you know, Pax is a good example. They used to outsource all of their production and do partnerships with just companies like Jetty or Legion of Bloom for their pods. They’ve now shifted to having — they are still doing that, but they’re also now doing their own. And partially because they have access to such high quality, low cost inputs, and it completely changed their business model and added to it in fact.

Another example of that is, we did see it was difficult for the licensed brands. I think Old Pal would be an example of that. I think Miss Grass would be an example of that, where they — Besito back in the day would be an example of that. But those were companies that were just IP and brand building. They were leveraging cultivators and manufacturers do their products. I think that was very difficult for a period of time because it was actually the supply chain was inverted the other way where you couldn’t — the supply couldn’t keep up with the demand, that was about, I think that was like 2019 and early 2020 was when that was a real problem.

But now those brands are — they have a real opportunity to continue to build their brand presence, build out their categories if they’d like, while they have this access to cannabis. That is like I said before, I mean, we’re talking grade A flower as an input into everything. I mean, you can extract it, or you could do whatever you want with it. There was more than enough and I think that that’s a really interesting opportunity for those types of brands that you’re talking about.

RS: Hirsh, do you want to…?

HJ: Yes, I think Emily covered the brand landscape pretty effectively. I’ll just, maybe to state the obvious, I think the one challenge that even great brands continue to run into in California, just the structural challenge is the lack of retail outlets. Right? Just the number of brands that exist exceed the number of retail outlets out there. So no matter how innovative or interesting or compelling of a product you have, that’s a big challenge that you run up against. And oftentimes you have to pay these massive slotting fees even to get into doors.

And the second thing is, by virtue of the operating environment being so difficult, folks have an incentives to stock their own stores with their brands because that’s what allows them to retain those high margins, which again makes it challenging for a lot of very effective brands to get into those stores.

RS: So what is a way to succeed within that? You know, I was saying that I’m staying in Palm Springs in the desert, and I cannot believe how many dispensaries I’m seeing or how many grows there are here. And I’m just thinking, there’s no way there’s enough demand, even if there’s crazy demand for this supply. So like how — is there a lot of money grabs and then people leaving the industry, because I’ve heard that a little bit, like people coming looking for money from LA or wherever, like coming down here. How do you see the sector playing out like regionally and then I think across the state?

HJ: You know, I’ll just make one quick comment, which is Rena you mentioned that you were again in sort of the Palm Springs, right or sort of Riverside County area and there’s tons of dispensaries out there. I think one of the consequences of local control, and we see this in other states like Colorado, like Michigan or Massachusetts that have local control is you see this patchwork develop across the state where a minority of municipalities opt in to legal cannabis and those that do opt and sometimes don’t place constraints on the number of dispensaries that exist. So in places like Palm Springs or throughout Riverside County, you just see a proliferation of dispensaries that are competing for a finite market. And then across the rest of states, across the rest of the state, there are deserts out there. And so I think that just creates a very challenging market.

And we’ve seen some of these other states, I think Colorado being an example, Michigan being an example, there are some municipalities that are 30,000 people and have 15 stores. And then there are other municipalities that lack stores entirely. And so obviously what that contributes to is a persistent illicit market, right? In big swathes of the state. And then other folks are really just struggling to keep their head above water in those cities that have a ton of dispensaries.

So we’ve seen in recent months a bunch of stores close in places like Michigan and in Colorado. And I think the fear is that in cities like San Francisco, cities like LA, cities like Palm Springs or Seaside, it will be very difficult for those existing retailers to keep their heads above water.

On the other hand, I think the, the optimistic way to look at things is, we are now starting to see for the first time cannabis deserts across the state opening up. And I think that the future health of the market will depend upon how quickly we can open stores in some of those deserts that exist across the state that passed ordinances a couple years ago. So I’m sure much more to unpack in your question, but that’s just one quick comment on the sort of regional differences that exist across the state.

RS: Emily, happy to hear your thoughts.

EP: No, I think Hirsh just hit it right on. The way I think about this market is it’s really like boom or bust, you know, you saw like, for example, Santa Rosa, they now have so many retail doors. They were very slow to license and get them open, but now there are so many and so the existing operators are just watching doors open all around them. And it’s very difficult, I think for operators to ascertain and understand what it’s going to be like for their businesses.

I’m just — I’ve become really, really aggressive on really kind of the forward projections in terms of how I think about these things. But then you have a Fresno which just opened and did a limited license approach. And some of those doors are beasts, like what you see more on the east coast. And, and so it really depends. And so we’ve become extremely jurisdiction focused in terms of how it goes.

One of the things that I’ve learned over the years is, you can invest in a state or a jurisdiction and have an expectation for what’s going to happen and then the regulators or lawmakers can make a decision and change it overnight. It happened to us in Washington State where there was a cap on cultivation, and then they blew it open and then all of a sudden commoditization wiped out of it. And by the way in that market, you can’t be vertically integrated technically. So therefore the retailers hold a lot of power over the cultivators, just like similarly what we see here in the California market.

But it is interesting. We do have a bit of a challenge in the state and I think it is that the competition is so fierce in certain jurisdictions on the retail, but yet it’s nowhere near enough. I think we have one dispensary for every 40,000 people in California. Is that right? And so just nowhere near enough. So then you see brands with the most torque behind them, like the Kivas who do have resources, being able to get on every shelf. They’re probably on a 100% of the shelves in California. If they’re not, it’s probably 90% plus.

But then you have the other smaller brands like Auntie Aloha, really cool gummy brand, that’s like an individual brand. They are trying to get on shelves. They are working with different distributors and sales groups to try to penetrate these doors. But the retailers, I think have some resistance to taking up shelf space with a new brand. And I think we have to get beyond that. I think that we’re going to have a really boring cannabis market if every door has all of the same products.

So I was happy to see, for example, that Woody Harrelson, his door is going to be a completely different experience. And maybe he’ll have a couple of the, what I call the table stakes brands on the shelves, like the wild, the Kivas, the Jeeter pre-rolls, whatever the ones, depending on the market. But I think that — I think we can do better to offer up a better consumer experience and provide unique products and interesting experiences for people, so that it’s not, I mean because if you commoditize the brand experience, then what are we doing? So I’m hopeful that we’re going to see a little bit of a shift on that as more retail opens and there’s more of a true retail concept behind what the purpose of that door is other than just to have the top brands on it, on the shelves.

RS: I was going to say, is that, does that start with intentionality from the retail operators? Is that basically what that is about?

EP: 100%. I mean that’s everything that brand building and retail is an extension of brand. And to Hirsh’s point too, I mean the retailers or the vertically integrated groups have their own brands, just like a CVS would. You know, you have your private label brands or you have your retail name branded products and you can do things at different price points around that. So you have your own vertical that you’re capturing. And that’s also pretty interesting if you have a point of view as a vertical operator or even just as a retailer. But I do, I think the intentionality, I think that’s very well said, the intentionality behind it is how are you going to define what your retail experience is versus the store that’s down the street.

HJ: And, you know, just building on what Emily was saying about retail access, as she noted, we have one dispensary for every 40,000 people, whereas we should have one for every 10,000 residents. So California is a state of 40 million people. On a per capita basis we should have at least 4,000 dispensaries. Now we have about 1060. And if we just look back over the past year, what’s good is about 325 of them have come online over the past year, which is pretty significant, right?

So we’ve seen a 50% increase in the number of retail outlets since July, 2021 when the new Department of Cannabis Control took over. But I think you have to look under the hood a little bit. About a hundred of those new retailers are in those jurisdictions that are quite frankly saturated, the San Franciscos, the Palm Springs, and so those will have a pretty negligible contribution to total statewide sales. And a lot of those folks are going to struggle to keep their head above water.

But I, I think the good thing is that a couple hundred of those stores have been in those cannabis deserts. And so the beneficiaries of that will be those operators, right, that are opening up in those new jurisdictions and then obviously the folks that supply those operators, the cultivators and the brands. And so we still have a long way to go, but I think what makes me somewhat optimistic is that going forward, the new licenses that will come online will overwhelmingly come not from the first movers, but from those cities that took a couple of years to pass ordinances.

You know, as Emily mentioned, the Fresnos, the Costa Mesas. And so, I think that is what we can look forward to over the next couple of years. It will be a long game, but we’ll see some of those stores opening up in new jurisdictions. And so as folks just look at different operators, I think the question is; where are they opening and what does that regional landscape look like?

EP: Yes, I think that just one other point to all of this in thinking about brands and retailers is, the rest of the world has moved heavily to omnichannel and you have the direct-to-consumer, the eCommerce, all of these things, but you can access brands or products through these different channels, not just brick and mortar. California does have delivery and people do use that very well. And some brands just have their own, they work with companies like Glassdoor to do direct-to-consumer essentially.

But the challenges I think around that is that it is very costly to do delivery and the way that we do it in California, instead of having like batch delivery or certain things like timed delivery. Those would be probably better at resourcing things, but with the cost of gas, especially in California go, I mean, in LA area, it’s been hovering between $6 and $8, I think, a gallon and up here in Northern California, we’re anywhere from $5 to $7, depending on where you are. I mean, that just becomes untenable from a, you know, when you’re thinking about driving and driving in urban areas with traffic it’s brutal.

HJ: And…

RS: Yes, no, go ahead.

HJ: Just to stick on Emily’s point about delivery. You know, as she noted, it’s very difficult to run a delivery business in California, it’s next to impossible to turn a profit. But on October 1st, what the state is going to do is to expand case pack value. So right now in California, you can have up to $5,000 worth of product in your car. On October 1st, that’s going to increase to $10,000, which allows you to service a much bigger geographic area and because in California, if you don’t receive an order within 30 minutes, you have to return to your delivery hub. You, you can stay out on the road, which means you spend less money on gas. You can carry a greater breadth of products, which allows you to better compete and serve customers.

And so I think someone with a real data science background would be able to best tell how that will boost delivery operators. I think you’d really have to get analytic and look at where the hubs are and and how that will impact your margins. But I think there’s good reason to believe that the delivery business will get easier starting in Q4. And as I think we talked about last time, that’s one of the better ways to compete with the illicit market, because there’s just, you know, longstanding illicit delivery in California.

RS: Yes. I was going to say like, given, you know, speaking to these inflationary, macro changes that are happening, and both for the company side and also the customer side, right? Like driving to these places, I mean the price of everything is going up. So the, the trip itself to the dispensary is going to be more expensive than it was in the past. How do you look at that affecting the retail landscape? I mean, Hirsh and I have talked a bit about these lounges that are opening up in California and that type of retail experience. There’s also like the Planet 13 (OTCQX:PLNHF) experience near these like touristy locations.

And on one hand, there’s like this normalization around COVID that even though the numbers are going up, people are still going out. People are still using public spaces. But on the other hand, things are also starting to kind of change in terms of how pricey things are and a return to fear around COVID. How are you guys thinking about that in terms of the retail consumer experience? Are you still seeing like the lounges as burgeoning type of experience that they’re starting to open up and do well? How are you looking at that kind of private versus public consumption and transactional experience?

EP: Yes. I mean, consumer sentiment is pretty low, but spending has stayed high, right? Like people think they are reducing spending, but you know, and we talk a lot about this summer, summer is an anomaly, right? People had booked trips, many of them probably non-refundable. There is a bit of a YOLO attitude, I think, going on because of the pandemic. Like we locked down for a while and that sucked. So I think people finally were going to get back to it this year. They booked the travel. They’re going to keep doing what they’re doing I think through the summer months.

I think when we’re going to see the rubber hit the road is really in the fall. And the data just came out that people are now officially really living paycheck to paycheck and so that’s going to be very interesting when you look at cash cycles through the month in the household. And you know, Vivien Azer from Cowen has talked about this as it relates to other categories like tobacco and also some beverage, you know, soda. And other categories have gotten really smart about how they merchandise product and push product through the month.

So basically people, for example, in the beginning of the month, when they have more cash in the bank because paycheck has just hit, they’ll make a smart unit purchase decision and they’ll buy the larger bottle of, I’m just going to speak in alcohol terms for a minute, just to draw an analog. You buy this, the bottle of tequila, right? Because actually on a per unit basis, that may be the more affordable thing to do and now you have this large unit. About halfway through the month, you start to run out of that product.

And then consumers will tend to make, not as wise per unit dollar spending decision, but it’s smaller dollar increments because the dollar is getting tighter throughout the month. So then you see things like tall boys being purchased, or six packs being purchased. And so again, like your dollar per your impact of what you’re spending on is not as efficient, but you just have fewer dollars to work with. So you’re going to go with those smaller unit prices.

We see this happen in the snack category. We see this happen in beverage, like soda. They’ll make — a can of soda will all of a sudden probably be a smaller can of soda, but the price per can will be lower. And so, again, it’s not the same wisdom, but it’s a psychological thing and frankly, you are stretching your dollar. In cannabis, and now I’m of course watching what’s going on with the credit cards, because the credit cards are reporting amazing usage of the credit card. People are using that as a cash cycle spreader.

I’m talking about a lot of broader consumer things, but I think that what we’re going to see in cannabis, we have to get really wise to that spending pattern throughout the month, because it is still a cash transaction at the store. People cannot put this on credit yet. There are point of banking solutions, which are allowing people to use debit, but still you’re not spreading your cash. You’re not elongating that cash flow cycle.

So I think these are things that as operators, we’re going to have to get some wisdom around how to do that and we have other categories we can look to. One thing I do think is that the cost of eating out is really expensive. And on top of the cost of food and the pricing of the actual menu items, I notice when I go out, there’s also these surcharges that are being put on at the restaurant. So your whole bill seems to kind of jump up at the end.

I think we could see after the summer months, people spending more time at home. And let’s face it when people were at home during the pandemic, it was a great time for cannabis because of your point about outside consumption, which is really just not that widely available yet versus in the home consumption. And if people are sticking around Netflix and chill, I just think we could see cannabis consumption kind of seeing a little bit of a moment. But it will look different this time. So I just — there’s a lot of factors to consider.

RS: Look different? I just want to — look different in what sense?

EP: Yes, maybe it’s different form factors. Maybe it’s different purchase trends throughout the month. But I do think that there — we could see some of that returning to it with being at home more, if people continue to feel the pinch of the dollar, which looks like they will, I feel they don’t.

RS: Yes, yes, indeed. Hirsh, thoughts, thoughts on this topic?

HJ: Yes. I’ll just add on lounges. I think it’s, as you noted, it’s exciting that in jurisdictions across California lounges are starting to open up, but as often said, I think the lounge business model is to this point unproven. And so it will be interesting to observe whether some of these lounges, particularly standalone lounges can remain open. Obviously they serve a great normalizing effect, but I think we have yet to determine whether or not these can be sustainable businesses in the way that other retail cannabis businesses are. And we should find that out sooner rather than later.

RS: And what’s the data pointing to on beverages? Because that’s, I mean, speaking of kind of a new form factor, that’s like a burgeoning form factor.

EP: Yes. So the data on beverages is right now skewing to the higher, like the 100 mg forms seem to do pretty well. That’s a pretty high bang, you know, it’s a pretty good bang for your buck, so to speak. I think the sessions beverages, which are more like the 2.5 mg sizes are seeing steady interest, but there’s definitely pricing sensitivity around that where you see a lot of promotional drives on larger kind of purchases it’s a little bit lumpy.

And you know, I watched the inventory levels too on my headset dashboard and you can see the inventory builds on those different beverages, especially at the sessions level and then you’ll see a promotion inventory. So it’s, it’s completely correlated to the pricing. And I think until they can get their supply chain improved, they’re going to struggle on their gross margins. But the 100 mg, there’s the form factor in California that’s kind of like 5-hour ENERGY drink. I think they’re called quickies is one of them. Those tend to sell pretty well.

And again, it’s just another way, I mean, if you can imagine getting a 100 mg of cannabis in a like basically a shot format, that’s some high potency for a low dollar product. And I don’t even think of that as beverage, frankly, but it does kind of live in that space. But I think that beverage is going to be one of those categories where they’re going to work harder to kind of penetrate into the broader part of the consumer bell curve, which are people like me, like I buy cannabis consistently, but I’m also not the one who’s buying the huge buys all at once, but I buy pricier products, you know, like I do buy the PAX Era pods because I do really like the experience of it. I buy the pretty infused pre-rolls that come in a pretty tin that I share with my friends, you know, like, so maybe a higher margin product, but I’m a lower consumer of it.

So, but that’s where we want to get. Like when you open into the market, you get the high potency consumers, the consumers consuming concentrate flower, the heavy pre-rolls, those kinds of categories are the immediate hit. And then you start to see the consumer based diversify as more and more people start to get involved in the category. And to Hirsh’s point, we’ve got a lot of stores in some areas. We’ve got vast deserts of stores in other areas. So until we can have some better distribution of retail, so people who are kind of curious can get in there and see what they have access to, then it’s going to be difficult.

RS: I was going to say, do you think the increase in the pre-rolls is a reflection of more, I guess kind of curious and it’s kind of an easy product to take and in terms of price consciousness, that also kind of fills that need, would you say those are the reasons why we’re seeing an uptick there?

EP: I mean, I think it’s a, I can’t think of a more convenient form factor. I mean, it comes, it’s basically like a banana, you know, what I mean? It’s like self-contained and so you can take it with you and then you just light it up and go. And it’s kind of like the, I mean it’s OG, lighting up a joint is like the, you know, is a way to roll, but I think that there’s, you know, now all these fresh takes on it that make the experience. It used to be that joints and pre-rolls were just like the grab at the end of the purchase. Like they were kind of a leftover swag or you kind of threw into something and consumers could chuck it in the basket at the end.

But now it’s a purpose driven category and they’ve got all of these different ways that they’re making it a really nice experience. And so I think the consumer experience around pre-rolls has improved, which is one of the reasons. But it may have also just been because during COVID and that’s when you saw the multi packs and the smaller, the minis take off, because it was an individual kind of the dog walkers, like an individual serving of a pre-roll. So that was cool. That was a COVID thing.

RS: Yes. Hirsh, any 2 cents or more to that?

HJ: No, I think I agree basically with what Emily said about that.

RS: Cool. I mean, this is like specifically on California, but I’m curious your thoughts on how the East Coast is opening up. We’ve spent a little bit of time talking about how kind of the slow rollout can be beneficial. Would you ascribe that to what’s happening in the East Coast?

HJ: I think it varies by state, you know, not breaking any new ground here, but I think there are good reasons to be concerned about the New York market. I think anyone who has visited New York City recently just sees the proliferation of unlicensed activity there. And I think that will just make it very difficult for legal operators to succeed. And so although it’s great, the New York is coming online. I think it will probably be some time before that market is stable.

I also think New York sort of crystallizes some of the resentment that can be generated by just average citizens towards a limited license framework. I think if you look at some of the — you know, I think many of the incumbent MSOs, that the 10 medical operators thought they would have first shot at the market and I think you see this maybe in several states. I think there is a resistance amongst elected officials and regulators to give those MSOs a head start.

And so I think one of the challenge with limited licensed states is that many of those incumbent operators that are perceived to have oligopolies, there is either explicitly or implicitly a desire to disadvantage them. So I think that’s one reason to be concerned about New York. Obviously it’s exciting that that New Jersey has come online, but I think that those levels of sales are probably not sustainable over time. And yes, that would sort of be my comments there.

RS: Can I follow up with, in terms of New York, would you say it’s almost because I feel like both sides see it as, I mean, you know, I think the big MSOs feel like they’re losing out in ways that they thought that they would be winning, like you mentioned, but I think also like the advocates for social equity, I mean, I think some people would point to small wins, but I think others would point to not a big enough win.

Do you feel like, and also kind of the slow rollout, as you said, is also, I would say at least one factor behind the proliferation of the illicit market there. Do you feel like it’s almost like a lose, lose, how they’ve set it up or like, how do you, or how would you even advise them to kind of like fix it if there is a way that you see it at this point?

HJ: Yes. I mean, I totally agree that the slow rollout contributes to the persistence of illicit activity and this just becomes muscle memory at a certain point when you normalize that proliferated illicit activity, it’s much more difficult to put that back in the box. And so I think, although there’s often invoking this statement, you know, we want take our time and do it right. I think speed to market is really quite important.

And not to sound too hunky-dory here, I think often in cannabis, there’s a morality tale that kind of plays out. But I think a healthy market requires all of these operators to be working in partnership in order for them to benefit. Right? The supply that these large MSOs have is necessary in order for that legal market to be functional.

So on many questions and this makes sense just given the deep immorality of the war on drugs, there’s a lot of suspicion between different actors that are participating in cannabis. And so they see their interest is oppositional and these things as zero sum, when in fact, I think, in order for all of those folks to succeed, they need to be working in partnership. And just one other example I’ll provide of this is up listing, right?

So up listing understandably so is often seen as benefiting the most well capitalized actors that can invest on major exchanges, but investors need that return in order to inject additional capital back into other operators. And so, I think that’s something we need to get past in these cannabis policy debates, which is, kind of rehashing these kind of simplistic morality tales, and just thinking about what creates a functional structural market and I think we’re just really a long ways away from doing that. And I’ll just note that I think some of the most guilty parties in this are oftentimes elected officials who, their electoral interest to play this party against another party and to sort of, virtue signal on a certain issue without really caring what the outcome is there. So…

RS: You’re talking about politics now, really? Emily, I’ll let you give your thoughts.

EP: I know the only thing I would say about, by the way, 110% agree with everything he just said. I mean, the number one thing for me is because people, sometimes I get a little, there’s a notion that MSOs, if they’re dissatisfied with an illicit market thriving that they want everyone to go to jail. I don’t think that’s what they want. I think again, going back to my point about a level playing field, and it’s interesting, Will Yakowicz just wrote a whole article about this. Like there is an economic disincentive to participate in the legal cannabis market.

If you are able to stay open unpenalized as an illicit operator, why would you, why on earth would you? I mean, I would because I’m petrified of stepping outside of my bounds. But I think that this — the way I’d like to see this handled is the way they would handle a coffee shop or a restaurant that’s not following or up to code. They get fined. There are financial penalties to not operating within the legal infrastructure that has been outlined. And these are not legal shops and the product is not tested and it is not safe for the consumer and it is going to be a potential disaster for us.

And so I’m — I really don’t have a lot of tolerance for this, but I think I don’t, I’m not saying anybody should go to prison because we’re so far past that cannabis should not be treated the way that it is. But I just think that if you’re going to generate revenue and income from cannabis, from people who don’t understand the difference between illicit — legal and illicit doors, then you should be fined and forced and should not receive the economic benefit of not participating in the legal market. That’s all I have to say about that. I can’t live it.

And I’m just, when I go to New York, it reminds me of LA in terms of seeing friends of mine who had been by the way, long running medical shop opener, or operators went through the process to become a part of the legal market, paid the fees, paid the taxes, waited to make sure they got their full license, and they have to compete with 10 illicit stores all around them. And you know how they’re illicit? You go onto Weedmaps (MAPS) after the time when the local jurisdiction says the doors are closed and they will be open and you can find them and it is the easiest job in the world.

And it is something I’m — I don’t know if you saw the DCC said they’re going to really focus on cracking down on this. I know Weedmaps says they’re cleaning up in terms of covering illicit operators, but it used to be the way you do it and that’s how you knew if that was an illicit door. But one of many ways, there’s many ways to know, but first of all, they don’t have a license. But I think that New York is in peril if they don’t start cracking down on this. And I’m again, not talking about sending anyone to prison, but there are ways you can take away the incentive to keep doing this.

RS: And, and then also on the flip side, not to mention the legal operators are getting robbed in so many places.

EP: Yes.

RS: There’s, yes. It’s a real, I mean, we say that we’re done with the Wild West, but I think until federal legalization protects these operators, it’s a bit of the Wild West, which I guess what are your thoughts on the — speaking of well, I’ll call it the imperfect political system that we’re a part of, what are your, what are both of your thoughts on where we’re at in the federal process of legalizing cannabis?

HJ: Yes, I’ll share a couple quick thoughts. I think most of us by now are probably, really reluctant to predict anything, just given what we’ve gone through in recent years. I would say though that there was good reason to be guardedly optimistic that something like the SAFE Banking Act might pass in this session of Congress and again, not breaking any new ground here, but I think in recent weeks we’ve seen compromise oriented statements out of some of the folks on the Democratic side for the first time, obviously now that Schumer’s Bill has been introduced, that sort of eliminates one hurdle to the consideration of other measures like the SAFE Banking Act.

Again, I think we’ve all learned that none of us can predict politics. So really we have no idea what’s going to happen. But again, I think you can read into comments made in recent weeks by Senator Booker as providing more optimism that something could get through. And, as you mentioned Rena, in recent months, the number of robberies has not only increased, but it’s gotten additional media attention and so I think that can create the groundwork for change.

The other thing that I’ll note is that, I think one of the best moments for cannabis is every two years, when we have a number of initiatives on statewide ballots and so this year we could have up to five statewide legalization initiatives, many of them in red states like Arkansas, like Oklahoma, like North Dakota. Missouri apparently is still a little iffy. And so, whenever you can get a couple of red states on board with legal cannabis, it forces these senators to evolve. It doesn’t create change overnight, but that just changes the landscape in DC. So still a medium long-term play. I think many of us would say that de-scheduling is still several years away, certainly not going to happen in this presidential term, but those are the incremental wins that I think we can look forward to.

EP: I’ve been pretty skeptical anything would happen this year. I know a little bit of that is probably self-preservation after last year being such a massive disappointment at the federal level. But I’ve shifted to having a glimmer of hope that we could see a SAFE or a SAFE Plus get through. But, I keep just investing and doing business as though nothing will change at the federal level because that’s the only thing you can really focus on is what you can control. So we just focus on working with really good operators and really good teams and allocating as though nothing changes.

And we’re, I mean, we have the ability to do so, because we’re long view. Yes, the public markets is incredibly painful. We feel that in our ETF (NYSEARCA:PSDN) and, but when I look at the portfolio and I look at the companies I’m unwavering in my conviction around the quality of those operations and those companies. And frankly our contribution to our economic impact in the United States, which is critical and these are real businesses.

I mean, we always kind of got lumped in with crypto, which used to drive me crazy. I understand it because they’re both high growth industries, they’re new, there’s risk associated with them. But the complete difference is that we are building tangible businesses that create jobs, that have tax impacts, that really do have societal health benefits.

And you saw the USA Today revised their original opinion around legalization. I love when that happens. I love when someone is opposed to it and then they revise it because of the data and the information that becomes available about it. And so that was like a really great moment just for me that, you got to take the Ws where you can, but we’ve just seen the crypto investments completely eviscerated. It’s gone, it’s up in smoke and that’s because they, a lot of, first of all, it’s so crazy too, because we’re so regulated, we’re hyper regulated in this market and that was just completely running unchecked and now we’re seeing the backlash of that. And it’s just too bad because, if the amount of capital that had flown into crypto had flown into to cannabis, could you imagine what could have been done in the last couple of years?

I mean, so much value could have been created in the United States alone, let alone on a global supply chain standpoint from a medical benefit standpoint. So I’m kind of happy that we’ve kind of broken apart in terms, I don’t hear people talking about them in the same way anymore. And I hear really smart institutional long-term investors really start — they’re like stock performance aside, there’s very interesting things going on in these companies. So that’s a long answer about how I feel about, what I’m seeing at the federal level, but about what I — and how I view them as they are coupled, but also we try to think about what we’re investing in on the long view.

RS: I was going to say, I mean, you mentioned the ETF, the Poseidon ETF, PSDN how are you kind of thinking about that in these terms? Like how do you translate that into your holdings and how you’re thinking about your holdings?

EP: Yes, I think, I mean, for us it’s very much reflected in the majority of our investments are, I think it’s over 70% are in top MSOs. We’re very bullish on the United States, very bullish on select operators. We try to manage the rating of those positions, but the market does move kind of wildly day-to-day with very low volume, very low liquidity and it all depends on what’s happening in the market that day.

So yes, we do really — our portfolio is pretty reflective of how we feel about the opportunity. We’d love to have more ancillary opportunities in there, and I think that will be a bigger part of it as the — as more companies go public and become available on the tech and the ancillary side. But, we watch that very carefully, but you can see we’re very pro U.S., very bullish on the opportunity and those with exposure to the Northeast, especially.

RS: Because of the opportunity that you feel like in terms of the population size?

EP: Yes. Just the unlocking of the tri-state area with New Jersey. I mean, Pennsylvania appears like it’s running a bit on a delayed schedule. New York is, I think we’re all holding our breath to hope that it comes out better than some of us are fearing, but still a massive population. Then you have Rhode Island, you have Connecticut. I mean things — and then Maryland, not too far behind that and that’s another very big market.

And I can’t even, I always forget to mention it, but Ohio is a very interesting market. I mean, so we still have so much unlocking to do, and even within the state of New Jersey, which opened, but now we’re dealing jurisdiction-to-jurisdiction, maybe the doors were approved at the state level, but then it’s, you’ve got to navigate local politics to get these doors opened. So there’s still unlocking going on there, which is very exciting, in our world where there’s friction there’s opportunity.

RS: Yes. I mean, to harken back to Hirsh’s point about like the, maybe bombastic numbers out of New Jersey right now and how those aren’t necessarily sustainable. But I also think that like once more states come online, that’s like a domino effect also. And I’m not like convinced like what the limit is there to New Jersey. Do you have any thoughts on that?

EP: No, what I’ve been encouraged by is that the data’s pointing to a lot of the spending is coming within state, so it’s not a ton of tourism. So that’s kind of an, I mean, yes, you see some cross border things, but we are watching that carefully to see what it would be like. And again, it’s kind of like Delaware and Pennsylvania, their slowness is New Jersey’s benefit right now. Things like that, New York too, as slow as they are New Jersey benefits. But I do think, we do need to watch it. Now in Illinois, they’ve been slow to open more. And the reason, I draw parallels between these states; they’ve been slowed to open more doors, as we all know, and that’s been pretty rough for those who’ve been waiting to get their doors opened.

But in Illinois, some of those big grossing doors unlike the $50 million annual run rate have been holding around there, even if doors have opened in markets adjacent to that state. So it’s just an interesting thing. But then if you look at for example, Western Mass, some of those big doors that were largely traffic coming from Connecticut or New York, going up to Vermont, New Hampshire on ski vacations or summer vacations or even just to do a cannabis run, a little cross state cannabis run, we’ve seen their sales continue to come down as more stores in Massachusetts have opened, but also Connecticut is getting ready to come online. New York will be coming online.

So, I would anticipate, and if I were doing projections for doors in those regions that have had astronomical numbers, just as Hirsh was saying, I would be watching that very carefully. But seasoned operators, I think the way they think about it is, enjoy it while you can, use the cash from that to continue to improve your operations, and just be prepared for competition as it comes.

RS: And do you think, like broadly speaking, this is a question for both of you, how do you think about the catalyst kind of really affecting the investment thesis? Right? Like really pushing it over to reflect like, what’s the fundamentals of some of these top operators? Do you think that it’s one catalyst that’s coming; do you think it’s up listing? Do you think it’s SAFE Banking? Do you think it’s a series of things? Do you think it’s unknowable as much as we like to predict like that it’s an unpredictable catalyst that’s coming? How do you foresee that?

HJ: Yes, I think it’s hard to say, at least it’s unknowable to me not being an investment expert. I listen to people say, hey these exchanges are illiquid. And so when you are able to up list then things will change overnight. I mean, that makes some sense to me, but so many things in cannabis are unpredictable that I’ve learned not to count on any certainty. So that seems plausible, but I think we’ll have to see.

EP: Yes, I mean, if you just look at the Canadian companies, the way they trade that have access to the list of exchanges, and if you look at their fundamentals comparable to the U.S. operators that are on the OTC markets or the CSC it’s night and day, and it’s a total volume in liquidity thing. When these, when we get good news, the Canadian — in the U.S., the Canadian names run even if there isn’t really a relevant aspect to that. But it’s just, people have access to that.

So I’m on the capital markets board, or committee of the attached group. And so we are doing a lot of work trying to talk with custodians, trying to talk with the exchanges. I can’t help, but think maybe there’s an opportunity here with what I think we’re going to, I mean, we’ve seen the lowest IPO activity since I think 2017 this quarter.

We know SPACs are returning capital, moving on the SPAC boom for those, for the NASDAQ was tremendous and for the SEC. So those exchanges live on listing fees and IPO fees and I don’t know if people know this, but you buy packages to ring bells, and you can upsell and do all these things. And so there’s all of these ways that the exchanges generate revenue. But if, I mean, when you look at the tech sector and the 70%, the 90% draw downs, some of these companies like Peloton (PTON), I would not be surprised if Peloton gets taken private or gets taken out.

Like, that’s just one of a number. I mean, just yesterday Robinhood (HOOD) just laid off 25% of its workforce. These are things that are going to impact what’s happening on these publicly listed companies and with the exchanges. And I don’t know, maybe it wasn’t worth it to have a conversation about what it would look like to try to figure out the legal path to having U.S. operators on the exchanges, but maybe now it becomes more interesting.

RS: Yes, definitely broadly speaking in the market, it’s really interesting to see where we’ve gone from like last year to this year. I know coming from Israel, it’s something that’s talked about a lot because there was a record number of Israeli companies that went public. And I would say this year, a lot of investors are regretting being a part of that. So I think there’s a lot of return to kind of market stabilization and also just like more realistic expectations about what’s involved with being a public company. So yes, I would agree.

Kind of, as we end up just, just getting your closing thoughts or advice to investors or how we should be thinking about this sector or companies to pay attention to given kind of some of the things that we’ve talked about coming online, happy to get your closing thoughts.

HJ: Yes. I’ll offer one closing thought, which is obviously in the first half of this conversation we focused a lot on just the continuing challenges in California. But I just want to say that I remain optimistic about California over the long-term. I just think this is a long game. This is not a short game. And I think Emily was mentioning, there’s so much room to run in the country. There is so much room to run in California. And there are individual cities that you can point to that should add a $100 million to statewide sales. Fresno should add a $100 million to statewide sales in California, so should Costa Mesa coming online next year, so should Corona.

And so I think there are some other states in the country that are exciting for some period of time and then they plateau and start to regress. We talked a little bit about Illinois. I think a lot of those sales are out of state. I think we’ve seen that in Colorado. But I think California is the place in which over the next decade, you will see just incremental growth in the market. And so again, this is a long game, not a short game and that’s why I remain optimistic over the long-term about the state.

EP: Yes. I mean, I feel like we just came through June, which was, I mean for me, one of the worst months I’ve ever had. I mean, we’ve been investing in cannabis for nine years. That was brutal. And it was just kind of coming down from this whole thing of California has gone through the hurt locker. Adjacent to that there was this distortion of what the industry looked like coming through COVID, pandemic checks, going out, spending behaviors around that, people being home more and kind of a readjustments about that, then there’s been delays in markets opening. So we’ve seen the analysts bring the estimates way, way down. You know, Matt McKinley took an absolute hatchet to it, which I think we all needed.

So now we’ve all kind of reached this convergence point and I feel like we’re now — in the emerging markets which is what we are living in there are these condensed cycles of ups and downs and it’s very different from the longer, more mature market cycles that you see. But, and I was having — in June, I just remember, I was kind of like, I’m having trouble seeing how we are moving out of this, but now is it’s it just like everything else.

You just take it step-by-step and I’m taking it market-by-market, operator-by-operator, data point-by-data point. And now I’m starting to see the clarity of where we’re headed and I’m pretty excited for what I’m going to say is kind of a foundational momentum building second half of this year and then I think 2023 is going to be a very different experience for all of us.

So it’s funny, we don’t, we’re pretty quiet and reserved about our points of view, but I’ve invested — again after doing this for nine years, I’ve invested more of my own capital into this industry and I think it’s just too interesting to not be looking at it very seriously of where it’s heading next, so I’m optimistic.

RS: How do you — I was going to say, and I’ll finish with this, but what kind of encourages you through the down days? Is it like people you work with? Is it your colleagues? Is it — what helps you get through kind of the hellish, the hellish red days?

EP: I think about this all the time for folks who are not in legal states or investing in stocks, but don’t get to have the access we have. I mean, first of all, I’m an investor and I love working with founders through and I love problem solving. I love serving on boards. So that’s what gets me through. I love working with companies and every single day that I hear about employees that are, it’s like everything from employees who work at the companies who, by the way people who are in New Jersey who get to work in a grow facility, they’re like, I am surrounded by cannabis all day. It’s like a dream sequence to people who didn’t have that.

In California we’re so used to it everywhere here, where a part is kind of woven into the tapestry of California riches. And I think when you get to the Eastern market, so you get to see people are getting so excited about being able to go and buy cannabis in a store, being able to participate from an employment standpoint, those are the things that really get me excited. And then, frankly when I get to see the numbers coming out of these businesses, I’m like, oh yes, this is real. So…

HJ: Yes, I mean, just to riff on your last question, I just believe in the power of, like many of us do, in the power of this plan and through the ups and downs where we get to live through this really unique moment in history and so that’s enough to sort of keep me going.

RS: Yes, mic drop. Good place to end. Emily and Hirsh, always a pleasure to talk to you. Thanks for the work that you both do.

Thanks so much for listening to the cannabis investing podcast. Subscribe or follow us on Seeking Alpha, Apple Podcast, Spotify or Stitcher. And we’d really appreciate it if you left 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 rena+canpod@seekingalpha.com.

Nothing on this podcast should be taken as investment advice of any sort along Trulieve, Khiron, Isracann Biosciences, The Parent Company, Air Wellness, and the ETF MSOS. Subscribe to us on Seeking Alpha, Apple Podcasts, Spotify or Stitcher. Thanks so much for listening and see you next time.

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