GLASF - Tremendous Opportunity In Cannabis

2023-05-16 07:00:00 ET

Summary

• Outlining the cannabis industry's Haves (companies that have been able to raise capital) and The Have Nots (no ability to raise capital) with Seth Yakatan.
• All cannabis stocks are basically micro-caps.
• The undercapitalized California market has created a tremendous opportunity.

Listen on the go! Subscribe to The Cannabis Investing Podcast on Apple Podcasts and Spotify .

Outlining the cannabis industry's Haves (companies that have been able to raise capital) and The Have Nots (no ability to raise capital) with Seth Yakatan. The keys to making a deal and raising capital (9:10) Why Seth prefers real EBITDA and revenue to book value (14:00) Glass House (GLASF), 4Front (FFNTF) and California's tremendous opportunity (24:50) Better to be private than public? (38:00) Legal and illicit pricing dynamics (1:00:00).

Transcript

Rena Sherbill: Seth, welcome to the Cannabis Investing Podcast. Really happy to have you on the show. So, thanks for making the time.

Seth Yakatan: Rena, it is my absolute most sincere pleasure to be here. I'm a big fan of the pod and just appreciate you taking the time. I can't believe anybody would want to spend time talking or listening to me. So, you are an echo insulator. Thank you.

RS: We're about to prove you wrong.

SY: We'll see.

RS: We will see. Well, the pleasure is all mine. I'm happy to be talking to you and happy that you're interested in coming on. So, we are both very excited to get this conversation going, I hope.

So, let's get into it. First of all, I think it will benefit our listeners to hear a little bit about your background and what brought you to this glorious industry we find ourselves in.

SY: I like to tell people that I'm just kind of a dumb corporate finance guy. So, I was very lucky to be able to grow up in the household of someone who was born into an orphanage and became a fairly successful serial entrepreneur in the biotech business.

So, from a very young age, I really knew that doing transactions was what I wanted to do. I've been very blessed in life to have a couple of epiphanies. And one of my epiphanies at a young age was that like doing this is what I wanted to do. And I had a great mentor and teacher to do that.

I went and struggled for 10 years to try to find a venture capital fund that would hire me to be an analyst. And finally, I did that for a few years and went back to school and got an MBA in finance and statistics. And then I worked in a large bank as part of a private equity sponsor calling group looking at funding media telecom MA for about 10 years.

And then founded with my dad, a small advisory firm, which is still around called Katan Associates , no pun intended for the Hebrew use of the name. And still around, really focused on emerging growth companies around the world in therapeutics, diagnostics, devices and research products.

A lot of what we did there was helping what you would call smaller or mid-cap companies things kind of from zero, early stage to about $300 million, $400 million in market cap to figure out how to create optionality for themselves. And oftentimes, investors in those opportunities wanted us to create optionality for themselves.

So, in that iteration from 2001 until 2012, I think we were involved in nine companies that exited via a reverse merger or direct listing on to seven different exchanges around the world. So, the notion of public microcap equity markets was my bread and butter, and that's how I came to cannabis.

I got a phone call one day in 2012, for a bunch of guys I had invested in GW, they had invested in GW. And they effectively thought that recreational cannabis was going to become a reality in Canada. And they wanted to create a company focused on therapeutic cannabis. The therapeutic application, FDA-regulated application of cannabis.

Started a company with them, spent about six months in Israel, found a bunch of technology license 3D molecules and ended up raising that company $43 million publicly in Toronto. And all of a sudden, I was, one of the three or four listed CEOs of a public cannabis therapeutics company in the world.

And I kind of wrote that train until about 2018. I got involved with two other companies after that one, which is called the first was called Kalytera; second is called AXIM Biotech; and the third is listed on the NASDAQ now, Enveric Biosciences, ENVB. They've pivoted into a psychedelics company.

And to kind of bring it home, I didn't realize it. But in 2019, I was kind of not really sure what I wanted to do or what I was going to do, and I was circumnavigating the orbit of a company in Southern California called Eaze.

And for anyone who has not heard of Eaze, Eaze is still the largest cannabis delivery service in the world. And Eaze, at that point in time, was an interesting tech company that had a lot of parallels to a lot of the biotechnology companies that I was involved with.

And somehow through the Chief Revenue Officer there, who's become my partner named Nick Fasano. They convince the CEO that I can help the company, and I came in as a consultant. And from 2019 until 2022, I helped the company to raise in excess of $130 million. And I will say without any reservation that myself and two other people in the company were largely responsible for the identification, execution and closure of the Green Dragon merger, which valued that combined entity at about $700 million and created probably the 13th largest MSO in the U.S., and probably the third or fourth largest private MSO.

So instantly, I was no longer a dumb corporate finance guy, and I was the cool cannabis mastermind. And none of it is really true. And that's how I got into the space. So...

RS: So, there we are. Well, I…

SY: So, there we are

RS: Well, I first of all would like to share with the audience and properly convey how much I don't think you're just a dumb corporate guy. Or, much to your point about neither narrative is true, I would like to put out the narrative that you are a very thoughtful, perhaps corporate minded, but very thoughtful and smart person who's been observing the cannabis industry very up close for a number of years, as you just pointed out in the various different ways that you're doing it.

But I want to just convey how thoughtful of an observer, I think, you are. And that's one of the reasons why I'm very excited to talk to you and share this conversation with our audience is because I think that you have a lot of points to articulate, that are not always articulated, certainly in the mainstream conversation.

So, before we get into that, though, specifically around cannabis, because one of the concerns around cannabis is this, well, in every sector really, is this capital constraint and it's a really tough environment to raise capital. And as somebody that has been more successful, I'm curious if you would share with our audience, what you think is of paramount importance in terms of being able to go out and get capital? Is it relationships? Is it the story? Or how do you navigate that? And how would you share that with the investing community?

SY: In any industry that I've been involved with, it usually comes down to, honestly, kind of two or three just gating issues for me, which are very non-quantitative. The first is timing. Where are you at in the cycle of the market vis-a-vis the flow of capital? Is it a difficult market or is it an easier market work very clearly, in a difficult market? Cannabis has been at a difficult market for a long time. And we can go back to the difficulties that constrain cannabis.

The second thing is stage. The later stage that something is, the bigger that something is, the more established that it is, the easier it is to raise money. If we look at cannabis, and you look at just two equities, GTI ( GTBIF ) and Trulieve ( TCNNF ), which we could argue are probably the two largest companies.

They probably raise the most money, they have the most revenue and cash flow, and they have the lowest cost of capital, because they're large. We can get into some metrics around that. But one of the things that I was looking at, as to prepare for today was book value.

Most companies globally, that have a book value of one or lower, are considered to be very good investments or very good value investments. I think looking and I will give a lot of credit to people looking at either the Viridian or the most recent Emerald Park report.

If you look at the upper decile of U.S. listed $0.5 billion market cap companies as a cohort, I think the book value of those companies is like 0.7. So, size makes things just a lot easier. And when you look at things from a traditional quantitative perspective, I think that that the bigger - the company is the easier it is to find capital for.

That also then gets to stage, how early is it? If it's too early, it's usually harder, unless there's some compelling human being associated with it. Or the fourth thing that I tend to look at is, how novel is it? And how sustainable is the competitive advantage for the company?

So, most company, I screened a lot of companies. Last year, I think across the four verticals that we surveyed, we screened 1,200 companies. So - and those are unique deals that came in where they're looking for something. I'm somewhat calloused, but I don't think things are that novel, generally speaking. If they're not that novel, then how much of a sustainable competitive advantage do you have?

You've seen specifically in cannabis; the largest cohort of companies have raised capital on the sustainable competitive advantage of. We're going to pursue licenses in limited license states and we know how to access capital. So, when you ask that question in the context of how I look at things, it's a very difficult market for cannabis capital raising, which again, we can get to.

But I think if you stratify it, and you look at the differences between the haves or the company that have companies that have been able to raise capital, and the have nots, the companies that have been able to raise capital usually have some levels of sustainable competitive advantage, either being access to capital or limited license strategy with access to capital, that are large, there later stage. And that provides them, generally speaking, advantage to others.

RS: This wasn't going to be at the top of my list of questions, but because you mentioned book value as a metric to look at the cannabis companies. And this is a conversation we've been getting into in the past few weeks. And really, since we've started - since I started this podcast, is the notion of what are the right metrics to use? And that's changed, obviously, or perhaps not.

So obviously, as the companies have evolved - as the industry has evolved, would you or do you look at book value as the metric to use for cannabis companies? Is there something else you would use? Would you use that in concert with other metrics?

SY: I tend not to look at book value . I tend to look at real EBITDA and revenue. I think cannabis companies, I lent money to cable companies for a long time. And cable companies for a long time, or free cash flow, like EBITDA, heavy companies, because they spend so much money on CapEx. And I tend to think about cannabis companies in the same way.

So, I tend to look at factors quantitatively other than book value. I tend to look at revenue, cash flow, the spread that they're in, meaning how many states from an MSO perspective are you in? And what are you trying to do? Meaning are you trying to do cultivation, processing, retail and brands? And how good are you at any of those?

Looping back to one of the themes that we can talk about today. Most of your Tier 1 U.S. MSOs and we can probably quantify them as a cohort of, call it, 20 to 25 publicly, have all elucidated effectively the same strategy.

They're predominantly male, managed, and run by people who know how to access capital markets who have pursued a vertically integrated limited license, state by state model. That's awesome for the first five years of an industry.

We haven't yet talked about things like quality of product and capacity to produce flour at scale, and consumer demand and skew mix, and ability to sell product or retail and ability to understand your customer.

We've also not really talked about the black market. So, the front end of the publics in the industry are vehicles that have largely been exceptionally successful at raising capital and creating footprints, that doesn't necessarily mean that they make great product that anybody wants to consume.

Another topic that we can begin to unpack is that other than cannabis, please tell me of another industry where you need to be vertical. Petroleum, you don't need to be vertical; beverage, you don't need to be vertical; automotive, you don't need to be vertical; aerospace, you don't need to be vertical; biotechnology and pharmaceuticals, you do not need to be vertical acceptance except in small cases, I can keep going.

So, I think I don't want to say that the model doesn't work. But I think for me personally outside of, like 10 companies, you don't want to say they're not that interesting, but a lot of them just haven't worked, I think the way that people thought that they were going to work. Because the mechanisms that were created to create them don't necessarily translate into what the market really needed or wanted or wants.

RS: It seems to me also that the companies are pivoting a little bit in their focus, investors are pivoting and what they're demanding of these companies in terms of showing a real path to profitability, not an optically based path to profitability and focused on free cash flow, instead of these expansion metrics that people were looking at up until now.

Would you A, agree with that? And B, feel like when companies are more focused on what you just talked about things like quality of product and other factors come into play a bit more? Because when you say we haven't talked about it, I think a lot of companies haven't talked about, "Hey, what's our product like? Do people want it? What are your thoughts there?

SY: I think what you're seeing is the MSOs are being forced to look at that, which is why they've done innumerable numbers of deals. I think when you look at, kind of, let's call it the upper decile of players, the metric has become operating cash flow.

I think of them, again, and I'm going to keep talking about them. I think Trulieve and GTI are probably the two most dominant for different reasons. And with complete respect to Kim and Ben, I don't believe it's because of their products. I think a lot of it has to do with their footprint and their people.

So, I think you're seeing the move. And let's talk about the two reasons behind the move. The first reason behind the move is the fact that regardless of how much veneer we're going to put on the public equity capital markets side of this industry, they're all micro-cap stocks, every single one of them, because none of them trades, not one of them trades on a major U.S. exchange.

And we could talk about reams of data about the sea change that will occur when that happens. But they're all basically micro-cap stocks. And the problem with most micro-cap stocks, and unfortunately, I have embedded years of PTSD in toxic convertible reverse mergers. You don't have a lot of liquidity.

So even if Kim Rivers and Ben Kovler overperform analysts' estimates for what they're going to give for guidance, there's not really a significant amount of institutional aftermarket or hedge fund support, that's going to move that stock price.

So going back to what we were talking about - before about technical metrics, like yeah, I can look at book value. And I could tell you that if you have the correct horizon, you should basically buy as much equity in the 10 largest public cannabis companies as you can now and just sit on it for 10 years. Because it's probably going to go back to where it was in 2021 and you're going to be up 60% or 70%, but you need that horizon.

But until you have market segmentation from a capital flow perspective to be able to allow one of the bigger companies to be rewarded for performance, I think you're still stuck in this circular reference.

As an example, okay, if you take a look, and I'm going to cite the visualcapitalist.com . And if you look at the global share of stock market activity, NYSE and NASDAQ, as of October 2022, had something on the order of about $40 trillion of market cap, okay, across about 7,100 companies. Shanghai, Euronext, Japan, Shenzhen, Hong Kong, Stock Exchange of India, LSE and Toronto combined, aren't that big.

And the Toronto Four Board Stock Exchange with 1,500 companies is a $2.7 trillion aggregate market cap. 90% of all capital publicly that's been raised in cannabis has basically been raised to Canada.

So, you have a capital market, one exchange, that's 10% the size of the U.S. capital markets, and it's fueled the entire industry, just think about the logarithmic effect that would occur if that becomes unlocked.

So, you have kind of this institutionally binding constraint on the industry that people don't really talk about. The CEOs of major corporations will talk about it. But I think that's one of your biggest inhibitors to full technical analysis, and that's got to change.

And when it does change, and I believe it will change, and I don't know what the horizon for that changes. Timestamp this please, when it changes more capital is going to flow into the cannabis vertical market from an institutional and a public equity perspective than has ever flown in to a vertical market in the history of humans - in the recorded history of human time on this earth. It'll be unlike anything anyone has ever seen.

RS: So, you're putting that at uplisting? And do you think that that is connected to federal legalization or not necessarily?

SY: It's federal, re or descheduling. If you have in the capital markets $40 trillion of money that could potentially invest in cannabis, that can't, let's just say 1% of its allocated, it's probably as much money as ever that has been raised in cannabis to date.

So yeah, well, I'm not smart enough to tell you that, if that's SAFE banking , or if that's safe banking and the scheduling of that safe banking and unscheduled. But once the limitation of U.S. investors not legally being able to invest in cannabis is removed, it's game over.

RS: Yeah. It's one of the reasons why on the podcast so many people talk about the necessity of having a long-time horizon when you're talking about investing in these companies or in the industry. So, let's maybe peel it back to closer to setting up the conversation about how things look. Would you share with listeners how you're looking at specifically California , that's a state you're in, that's a state that you are mostly looking at?

California, and then maybe extend it to the broader states, how you're thinking about the investment picture and maybe set up what it looks like in that state.

SY: Well, everyone's complaining about how difficult it is in California. I live here, I work here. I'm involved in probably seven or eight companies here, and I'm along California. Fundamentally, Rena, I am a capitalist. I donate money to charitable contributions, and I tried to donate a fair amount of money to charitable contributions, but I'm good at making money.

And that's what - so I do not have a benevolent view to capitalism. If I just break it down by the numbers for a minute, talk about the aggregate flow of capital that's gone into cannabis as a percent of aggregate market cap in Canada as a percent of aggregate market cap of global U.S. capital markets, California is the eighth largest economy on the planet.

It will be bigger than Canada as long as I'm alive and as long as my children are alive. And let's just - and I don't have the statistic, but let's just say that 25% of the amount of cannabis capital has flown into California that has flown into or have been put into Canada. So, if you have, let's just call it one to two times more capital for the same market. I think the market in California has been undercapitalized.

California is plagued by problems that you don't have in other states. It's not a limited license state. So pretty much anybody can get a license. You have no major, no single major MSO that has put up 10 stakes here. Probably because of that constraint, they couldn't build a strong enough moat to justify the investment.

So, you probably have 10 fairly large single state operators that have spent $100 million to $300 million each to try and create the leader. None of them have been successful yet, which I think continues to foster questions around the state. And then you have a very dysfunctional payment cycle in California, which almost has no real relative level of enforceability.

So, producers and brands and distributors and retailers are caught in this constant kind of payment loop. So, it's a difficult market. I think it also creates a tremendous amount of opportunity. I think one or two of the existing single state operators will emerge as dominant, maybe one or two because of retail, maybe one or two because of delivery, maybe one or two because of their ability to produce biomass in greater quantity and cheaper than anyone else.

And I think once those - once you have two single state operators in California that are profitable, I think they're going to dominate the landscape. And I think they're to become extremely valuable. And I think that's when you see an MSO probably want to step in and buy it.

I think California has also been plagued by a lot of people who have raised a lot of money and just haven't executed on the plan. And you just don't have a deluge of capital available. And when you look at some of the assets that are here, and how much capital has been invested, and they're still not working, it really makes it difficult for incremental capital to flow in, so.

RS: So, the companies that you're looking at that you like, would you share what you like about them and what makes them quality names to you? And in terms of the players that you mentioned that, that haven't executed well on plans.

And I think followers of the podcast, followers of the industry know - can think with Eaze about a few players that come to mind in terms of not executing. Would you say it's lack of experience, a really tough market? What would you attribute kind of the things that companies have going for them and the things that they didn't do well, that other companies didn't do well?

SY: Well, let's maybe break that up into two or three packages.

RS: Okay.

SY: So, this is the Cannabis Investing Podcast. And we largely on your show, talk about publics. So, to do service to your branding and your audience, let's talk initially about Publics. I think we can then go to privates, and then we can talk about what's interesting to me, okay?

I think in California, and please correct me if you think I'm wrong, but I think you probably have three or four known publics that are in this box, right? You have 4Front ( FFNTF ), you have MedMen ( MMNFF ), you have Glass House ( GLASF ), you have StateHouse ( STHZF ), you have The Parent Company ( GRAMF ), and we did have Unrivaled. So that's six, right? I will definitely put Eaze in that box as a private, but let's just focus on the six publics.

I think 4Front has probably the largest manufacturing facility in cannabis in California. And outside of that manufacturing facility, they seem to be focused and doing really, really well on a couple of other states. So, I think for them, California is maybe a legacy asset that, they bought the guys from Ireland who I really, really like and I'm close to. And I think they're trying to make a play. But it's been fueled by the fact that "Hey, we're really successful in Illinois, and we're really successful in Massachusetts, and we'll come and unpack this."

I think MedMen has been a series of disappointments. It was a disappointment when Mr. Bierman ran it into wherever it went to. I know several people who have invested in every single layer of the debt capital structure, they have been largely disappointed. I believe you met a gentleman named Aaron Serruya, who is one of the brothers at Serruya Private Equity, which is one of the larger private family offices that's invested in the space. And they principally bought it.

And depending upon what news feed you read, either it's being turned around and it's marginally successful, or it's a disaster. And I - let's just call it somewhere in the middle. So, you have already kind of two or three big names that haven't worked.

I'm just going to tell you, I can't understand what The Parent Company is doing. I'm not trying to disparage anything that's happened there.

I think management is good. I think ownership is good. I think they've just done a series of things that haven't worked out, the predecessor asset that they put into that was not widely held as being either a well-run or a good quality product. Most, if not all, most, I won't say not all, but 99% of celebrity branded deals that we see in cannabis don't work. All props to Jay-Z.

What people don't understand about people like Snoop Dogg and Jay-Z is they want to smoke the weed that Snoop Dogg is smoking. They don't want to snoop - smoke Snoop Dogg's weed, right? And that kind of if you look at how much was paid to Jay, and the kind of deal that he did, and the unwinding of it, it just didn't work, right?

So, you've got a big pile of money. I think they're trying to figure it out. I've listened to the podcast, I know you've invested in that company. I don't think anybody who's invested in that company is happy. And I don't have a solution.

You have State House, which is the combination of Urbn Leaf, Loudpack and Harborside.

I knew the Urbn Leaf guys really well. They were one of the dominant, if not the dominant player in San Diego. Their main store, I haven't looked at data on it. But up to a year ago, it was probably one of the two or three biggest stores in the state.

The Loudpack legacy guys are people that I've known since 2014. I personally have several of my investors who have historically invested in almost every single layer of that debt capital structure. So, I've been well versed in that deal.

Harborside, for a long time, had the largest store in the United States forever. Matt Hawkins , who's, I think probably one of the longest and in my opinion, nicest and maybe one of the most intelligent investors in the space, put that together and as the Chairman, it's still struggling. At the end of the day, if you put $130 million of debt on something, you have $130 million of debt on something irregardless of how good you're doing, they brought in a real, real quotes CEO. It still doesn't seem like they're getting what they want out of it. And they're probably in the 25 26 stores now.

So, we can talk about Glass House full disclosure. I consult for the company. I've been inside of there for probably two quarters now. I think if Kyle executes on his plan, and I don't want to elucidate any non-public information. But I think if he elucidates on his plan, he could be one of the most dangerous players there. He's got 600,000 square feet of greenhouse under canopy now. He's publicly stated that he's growing at for $118 pound. He's publicly stated that he's going to turn on his second greenhouse, and he's going to write a check to do that.

I've heard flower trading in carp as high as 850 to 900 a pound recently, which is as high as it's been ever. For that facility to function, he probably needs to sell it for half of that. So, if he's the largest greenhouse producer in the United States, and he is producing it up below $115 a pound, that's dangerous for a lot of people.

So, we haven't unrivaled. I can't tell you what happened there. I can't even tell you if they're still in business. So, you have six - at this point, you're over six in terms of not having a very clear winner.

RS: Did you leave Lowell ( LOWLF ) out on purpose?

SY: It's an error of omission. I didn't leave it out on purpose. I just forgot about them, I guess.

RS: And I guess that's the commentary.

SY: So, I think, George is one of the smartest people I've ever met, like, I've talked to him a couple of times. And it's a full transparency, I can't understand the deal that he did recently. I think that's again largely been a disappointment. I think some of it has to do with the fact that he just hasn't been able to get enough - not enough capital.

And putting what he put together to within this was he really needed wind in his sails. And he did it at a time when the market kind of went like this, and pricing went like this. So higher pricing will make most, if not all of those people last longer. I don't know that it changes the fundamental metrics, though.

So, when you look at the public equity side of the market, I don't want to say it's hard to make a case for California. But you have, we now have talked about seven or eight companies. I don't think there's one of them that's yet profitable. We're not in biotech. So that's not a good storyline.

If we ship to the one or two privates, you probably have Eaze there, you probably have STIIIZY there. I think Eaze is functioning well, after going through probably a much needed restructuring. Cory has maintained a significant level of revenue in California. And I think they're up to 15 or 20 stores in Florida, and they've turned on their facility there.

So, they're going to make it. I wasn't as optimistic that they were going to make it. STIIIZY is probably the largest private MSO in the United States. There might be - there's a group out of the southeast, which is called Good Day Farm, which might be similarly sized. But STIIIZY is probably out of all of those the largest, the most profitable and more akin to a Curaleaf ( CURLF ), Trulieve, Ascend ( AAWH ), 4Front than any of them. And I don't see them changing that. So, they are a beast, an absolute beast.

RS: Do you think it's more of a benefit at this point to be a private company than a public one?

SY: I do. If - so if we then go into what do I look at, we talk a lot or I hear a lot about the companies in cannabis that -"aren't working." Because they're not making money. I very closely track a cohort of about 40 companies throughout the United States that follow kind of the same theme in about five or six different verticals.

They're usually private. They're usually generating revenue and real cash flow. And if they're not generating real cash flow, they're very, very, very close. They typically have not taken a lot of outside capital. If they have taken outside capital, it's usually non-controlling and non-punitive. So, they're able to service it. If it wasn't for the capital, they'd probably be profitable.

They usually do one or two things really, really, really well. And they don't deviate from that. And most of them are private. So, in California, you have two private companies that are in the branded product space, one, which is called Pure Beauty that has grow product to retail. And Imelda has probably, in my opinion, built one of the two or three most iconic just brands in the business and form factors in the business and are dog walkers.

You have another group out in Northern California called A Golden State, which is put together by two guys named Nishant Reddy and Simmon Saraf. And they probably grow, grow process, send to retail and they actually have one retail store, probably some of the highest quality indoor flower that I've ever seen, and probably the highest quality indoor facility that I've ever seen. They put in a bunch of money. They took in money from one large single silicon valley family office, and they've never done another round.

So, both of those companies are generating revenue, generating cash flow, have capital, don't need capital, executing their plan being pretty judicious. You have several companies that are in what I call the asset-light model. Most of them are either in vape or gummy or edibles.

I won't ever stop talking about two guys out of Arizona, Josh and Rocky at Timeless that are a vape brand that I think are now in five states that usually go into states with an inverse license or a reverse license model and are generating a significant amount of revenue and cash flow. They've been completely self-funded, haven't taken any outside money. I don't see them taking outside money and are doing well.

You have a couple of edibles companies that are doing the same thing. There's a company out of the Pacific Northwest called Botanica or Mr. Moxey's Mints about six states now profitable. He has a company out of the Pacific Northwest that I love and I will not stop talking about called Grön Edibles that has a chocolate a Skittles candy be like product, a gummy product and 100-milligram gummy.

And Christine is the Founder of that amazing, amazing woman hasn't taken any outside capital, generating revenue and cash flow - real cash flow in five states, figuring out what they want do. There's two other edibles companies in California Sunderstorm, which kind of is much bigger, but has generally speaking, the same thesis.

There's a group out of Michigan called M. If I can't ever get it right. It's either MKX or MXK Oil. That's probably the largest vaping company manufacturer in Michigan does the same thing. We definitely see put people on the manufacturing side that are doing well. There's a company in California who manufactures pre rolls under the trade name of Leaflets does very well generates revenue and cash flow consistently year in and year out, probably the largest manufacturer of all in ones. Branded custom all in ones is a group out of Southern California, that's in about five or six other places called 14th Round or Final Bell. They just announced a major manufacturing deal in Canada with cookies. They do amazingly well.

I've definitely seen smaller, vertically integrated one or two state operators do extremely well. The group that owns four retail and a grow in Colorado and three retail and a grow in Massachusetts, generates significant revenue and cash flow.

My partner and I helped put together a similar asset in Maine, which generates revenue and cash flow. There's also a couple of vertically integrated product manufacturing to retail companies, two of them in California that I think are probably the most dangerous pieces on the board. One, which is called Falcon brands.

So, Falcon has some biomass, they process I don't know how many brands they have, call it 12, or 15, they have two or three retail stores, and they self-distribute. Similar company, which doesn't have biomass and doesn't have retailers called Mammoth Distribution, but they basically self-distribute only their own brands.

So, they're the guys who do heavy hitters and do lift tickets and do Amora. Both of those companies generate private equity platform levels of revenue and EBITDA, and pretty much taken neither very limited, or almost no outside capital.

So, when you talk about what's interesting to me, the relentless pursuit of working with companies and that cohort, is what's interesting to me. Because I think long-term, they're going to be the most important, and probably going after the selection of three or four of the public companies that I think can be winners, or what's interesting to me.

To be totally honest, the reason that I went into Eaze was that I thought I could pull off a public liquidity event per Eaze and walk away with it with a bag of goodies. And it was pretty clear, I was able to pull off a transaction, but it's not the pyrotechnics that I wanted to achieve for myself, so.

RS: Do you think that there's a -- or do you see a through line between all those private companies that you like? Is it not taking outside capital? Is it staying lean? Is it having a strong narrative?

SY: The through line seems to me to be very simple. And it is we're going to make decisions that we think are going to generate profit.

RS: It sounds so simple.

SY: It is. In 2011, I sold a research reagents business, based out of Cambridge, Massachusetts, for 9.5x revenue. It's probably - in terms of the aggregate transaction size, it's not the largest transaction I've ever done. In terms of the multiple, it's beyond the largest transaction I've ever done.

But it was founded by one guy and run by one guy. And over the period of 10 years, every decision that he could have made to maximize value of the business, he did. He organized it correctly, he created SOPs and recipes for each single one of his products. He decided to do things that just made the business more profitable.

The fundamental operating thesis that he had was what's going to generate the most cash for me as the owner. And what I find in most of these cannabis companies that have worked, the interesting thing about cannabis to me is that there's not a playbook. Like of all the companies that I mentioned, I don't think all of them started out with the same vision that they have now. It kind of morphed, right? There's not - you don't have a playbook.

But they've all kind of fundamentally made decisions that said, one is this going to make money or not. And the other thing that I would say is uniform across them is they've definitely built and scaled to demand. They haven't built and scaled with the expectation of future demand. And one of the things and I can't take credit for it, because the bad guys at Bengal Capital have coined this term. And I'm just going to draw a line.

But what you see in most cannabis markets is for the first three or four years, this giant parabola of surplus EBITDA, right? Market comes on five, six guys, start to grow. You have this huge euphoria. No one's had cannabis before, and then the market becomes flooded and the price goes down.

And I think none of the people that I've talked about got caught up in the euphoria surrounding surplus EBITDA. They said, here's what we've got, here's our customer, we're going to own them. We're going to figure out how to make money doing that and let's just stick to the knitting.

We don't need to go and build a giant facility or we don't need to do everything. Most of those companies do kind of one or two things really, really, really well because it's a creative. The other thing that we haven't talked a lot about, and I can go back to the Mammoth and the Falcon example is that specifically in California, every time you outsource something, you give up 20 to 25 points of margin.

So, when we talk about someone like Pure Beauty, when she goes to distribute and to package a product, because she doesn't do that herself. She's given up 25 or 30 points a margin. When someone like Mammoth or Falcon goes to do that, they keep that margin.

So inherently, some of these businesses if you're able to control grow, or to control extraction, or to control manufacturing, or to control distro, inherently allows you to give, to be more profitable, because if you have asset-light brand, and I don't - there's a very popular and promoted brand now in California called Jeeter, which is kind of been the leader of the Pre-Roll - infused Pre-Roll manufacturing space. To my knowledge, they really don't do anything on their own.

So, their necessity to make money is going to be or their requirement to continue to make money is going to be based upon expansion and volume. It's not going to be like a Mammoth or a Falcon where they can make it up in some other way, because they have more components of margin to keep and that's something that's, I don't want to say unique to cannabis.

But that's part of the dirty underbelly of the industry, which is this margin erosion or lack of margin capture that a lot of these companies have to give up. And it fuels even further the problems in California.

RS: So well, I get - my follow-up question would be, I wanted to ask a question about the public companies. But I think the follow-up question would be why doesn't a company like Pure Beauty own the packaging and manufacturing?

SY: Because they have a limited amount of access to capital, it's not what they're going to be able to do.

RS: So, like sometimes the necessity of having to navigate the reality of it is not ideal.

SY: Correct.

RS: Yes.

SY: Correct, correct.

RS: So, speaking to things that don't turn out, ideally, which observers of the industry are well familiar with. A lot of, I would say most analysts that we've had on the show that are talking about California cannabis companies that they think are going to do well, Glass House is definitely number one. And I would say 4Front is another one that people tout on this show.

You advise Glass House, so I know you're bullish on them. What would you say would be kind of things that would - that might prick the bullish narrative, in your opinion? What might happen to put a pin in that? And then also, I guess, how would you speak to retail investors, which are the crux of our audience, in terms of navigating these investments?

SY: Let's go back to your second question first. I don't - I'm not a day trader. So, if I buy an equity, I'm buying it because I think it's a value play, or because I think it has a three-to-five-year type of Horizon. In my normal investment thesis, I'm buying like lots of treasuries, that's just how I look at things will get the world.

So, if you're a retail investor in cannabis, unless you know how to day trade, your thesis needs to be I'm buying and holding for three to five years. That has to be your thesis. And if you're in and you're down 70%, I'm sorry, but unless you want to wait for that to turn around or dollar average down your portfolio and your value, I don't see that monstrously changing. And let's go back to where we started things like book value, right?

I've observed capital markets now and the flow of capital for close to 30 years. I've never seen a capital market that moves as fast and trades on less technical information than cannabis does. And if you just look at quantitatively and candidly the sell off that really happened at the end of last year, when you had a two-to-three-month bump over the summer and a slight rally when you thought that safe was going to happen, and then you had another 25 or 30% sell off and reduction in value when safe was are not going to happen, nothing changed. Nothing changed absolutely in the technical fundamentals of those companies whatsoever. Most of them haven't made more cash flow, but it's very rare that I've seen a market move so drastically.

And I think, if I look at the aggregate kind of market cap based upon combined value of the largest 150 companies that was $30 million, $35 million in the first quarter of last year, $3 billion, $35 billion, it's $15 billion now, it was $88 billion, and $90 billion in the beginning of 2021, not much has changed.

So, if you're a retail investor, I think you got to batten down the hatches and weather the storm. I believe you will be rewarded. I believe you will be logarithmically rewarded, if you can wait a few years. So that's my overall soapbox. I don't see it getting any better from a public equity capital market perspective in the short-term.

If we look at piercing the veil of both 4Front and Glass House, I think that 4Front is a little bit different than Glass House. 4Front operates in a couple of different states. It's bigger if you look at what their system-wide revenue and EBITDA projections are, it's $180 million, sorry, I think their revised 2023 estimates are about $150 million in revenue system-wide and about $45 million, $46 million in adjusted EBITDA.

They are definitely in a good space as it relates to their positioning in Illinois and Massachusetts. They have a gigantic manufacturing facility in California, and the people that run it are trying to sell it. In retail, they've also built a gigantic manufacturing facility that I think will do well. So, I think they're poised because they've kind of underwritten, generally speaking, the same model a couple of different states and will continue to drive revenue in Illinois.

I think that they are going to be hampered if they're going to be hampered, but by pricing, pricing in Illinois, I don't know exactly where pricing is in Illinois. But in Massachusetts, you've experienced the exact same thing you experienced in California, which is kind of the bottom fell out.

I do think that 4Front to the extent that they're able to grab biomass and process it through that facility, we'll have a pretty good opportunity in California, because we're definitely seeing pricing move in a way that we haven't.

Glass House is a little bit different, Glass House, and not to spill any dirty laundry, but Glass Houses making a lot of money in cultivation. They're not making a lot of money in their branded product or in the retail. So, I think for them so long as the cultivation headwinds, so long as the cultivation prices increase, Glass House is very dangerous.

Because I think if you just look at the conversion, if you look at the conversion of the cash cycle of the biomass that they're throwing off versus putting it into CPG, if all they did was sold their biomass, they're going to make money. And they're going to make more money than they are quicker by putting it into their other businesses.

So, when you look at Glass House, I think, again, their estimates for 2023 publicly are something on the order of $150 million of revenue, and probably negative $12 million of adjusted EBITDA. I know that Kyle has publicly stated that he wants to turn on his second Green House, and that will probably be a 14- to 18-month project.

I think that flower, if he raises the money will probably turn on between now and the end of 2023, and he's very dangerous. He's very dangerous if that happens. He's very dangerous, because it has marginal costs to produce. He could conceivably put a lot of people out of business if he wanted to. Because he could just sell flower lower at a lower price than anyone else could and still make money.

So, I think for both of those so long as they continue to execute and they're both very well capitalized, and both have access to capital. So, long as they both continue to execute their plans and so long as they both continue to have positive pricing reinforcement in the wholesale market in California, I think, they're going to be fine.

If you see a rapid decline in wholesale pricing in California, they're both going to be constrained. But I both think - I think that they both have sufficient cash on the balance sheet to be able to weather a two-quarter storm in a way that others might not, so.

RS: I appreciate that color. I know I've also kept you for longer than I said. Do you want to take a few minutes, if you would, and you can say, no? Would you talk about the dance between the price of cannabis and then selling it in wholesale and retail? Can you break that down and unpack it kind of briefly for audience?

SY: Rena, I will talk to you as long as you allow me to board the death out of you. So yes.

RS: Keep going.

SY: Why don't we talk about two things? Why don't we talk about the legal pricing cycle? And why don't we really talk about the illegal pricing dynamic? Because most people are not going to want to talk about the illegal pricing dynamic. As a matter of fact, I don't think anybody in the history of your show has really sufficiently talked about the illegal pricing dynamic.

So, on the legal side, it's very hard to make money. And the reason that it's hard to make money is that, you have, let's call it, four tiers of flower. You have outdoor flower, you have Green House flower, you have some level of Green House plus a light, which is called a light assist, or in some cases, like a light depth flower and then you have indoor flower. And those are your tiers, right?

And it goes from $5 to $8 and $8 at retail for an auto or an outdoor to $60 to $80 for retail up in a tier and the pricing is pretty consistent. And you can correlate it to alcohol in terms of quality. And if you just look at someone like a Don Julio Tequila, each of those staircases is pretty much the same in terms of pricing.

It's difficult to make money because 280E, you basically have about a 45% or 50% marginal tax rate. So, most producers that are larger, you also have to either figure out a way to own or lease your facility. If you own your facility like Kyle does, you need to spend a lot of money to go and buy it.

If you lease your facility, like other growers, like maybe someone like headwaters does, you're not in full control, and you're probably reticent to spend money to upgrade it. So, you're with an inferior installation. Then you have to grow it, then you have to sell it. And if you can sell it at wholesale and you can turn a lot of product and wholesale pricing is strong, you can be very profitable in that business.

If you pick up components of that supply chain downstream like owning your own brand, so pushing some of that product into CPG or owning your own retail store, so pushing your own product and your own brand in the CPG like Kirkland, you can pick up more margin, right, which is why people do it.

Ultimately, though, a flower grower is going to be the dependent upon the wholesale pricing fluctuation in the market. And the wholesale pricing fluctuation in the market is going to be driven by supply and product, demand for product and what I call intangibles surrounding demand.

And what you've seen in most markets, in almost every market is initially there's a great deal of supply and prices go to $2,100 a pound and within two years a bunch of money has been raised and a bunch more facilities come on and the wholesale buyers have the ability to shop pricing and drive pricing down.

In Carpinteria, at the beginning to end of last year, you say a wholesale pricing for Green Houses flower at $300 to $500 a pound, the lowest it's ever been. A $300 to $500 a pound, people are not really making money. It's difficult. When you get that number above six or above eight, those guys make plenty of money. So that's kind of the dynamics around the legal side of the market.

The illegal side the markets much different. And it's much different because of the lack of compliance on the black market, you don't have to pay tax, you don't have to test, you don't have to QC and QA.

So automatically, let's just say, you and I are going to grow 800, let's say you and I are going to grow 100 pounds of weed in an indoor facility, okay? That's probably going to cost us $400 to $600 pound, maybe if we're really good, it's going to cost us $300 a pound to grow it. But that's like fully everything, let's just call it 600 Pound, right?

So, if you're selling that weed for $1,000 a pound or $1,200 a pound, and you pay to ADE on it, you pay your employees and all that, okay, you can make money. If you sell the same weed illegally, and you don't have to pay to ADE, you're kind of making double, if not triple the profit.

So, part of the problem that you have and what people call "black market" isn't really that, you have nefarious operators that are here trying to undermine a legal market, it's that you have somebody who has been growing a product for 30 years, he's figured out how to do it, who has a customer base for it, and is almost penalized economically for growing it legally. So, it's just easier to grow it illegally.

You also - and now I'm going to expose a secret. You've also, in California, have an unenforceable legal black market that exists. So, if you and I had a distribution license or what they call a Burner Distro license, we could pretty much legally go to anybody who wholesales product and buy it. And if we showed up with cash and a valid license, they're not going to ask us any questions about what we're going to do with it.

So, it's my unvalidated and uneducated opinion that you have something like 1,500 to 2,500 Illegal storefronts in New York, that are all selling product and something like six or eight licensed storefronts in New York. Demand for product in California has logarithmically expand and expanded and prices have logarithmically expanded. As soon as New York came online, I don't think that's a coincidence.

So, I think what you're seeing here is you're seeing a lot of weed that's being legally grown in California. It's being purchased legally, that's being transported back to New York, and is being sold through those bodegas. I don't see that changing anytime soon. And those are some of the dynamics that go on in those markets. And they're real, so.

RS: Yeah, this is not a - we talked about the simple nature of how to really be successful. But this is not a simple industry, there are many moving parts and the regulations, it's a very complex place to navigate. I usually say at the end of my conversations that I hope this is the first time, but I know this is only the first conversation we're having.

So, I'm already looking forward to the next one. And anything you would share with the audience that you think is worthwhile for them to know, as investors in this space?

SY: If you do not want to accept the difficulty of this market, don't be in it. I'm a relatively sophisticated capital markets person, go buy Apple (AAPL), General Motors (GM), Chinese multinational mobile, and like go to the country club and chill.

If you want a ride, this is where you need to be, but don't penalize these companies for the fact that they can't realistically access capital. And the first five years, the industry were basically a bunch of Wall Street guys who knew how to raise money. And that's where you're at.

For me, I've been able to witness biotech for 40 years. Cannabis is like 1977 in biotech. You haven't even gotten out of. you haven't even gotten out of spring training. So, if you want to be in the sector, just be aware that it's going to be a minute, and that catalyzing event, it has to be U.S. Federal legalization or U.S. Federal de or rescheduling, that's going to be the mechanism for your return.

And if you really desperately want to get into the sector, try to find yourself mid-stage privates that generate cash flow, if you can, if you can find them. They're there, you just go to look. And if you can get into one or two of those, I think you're going to be long-term, good.

Most people that have raised money, historically in funds, don't have a lot of money. The people who do have money are being extremely judicious in how they're deploying it. And they're looking for things that I would not have thought that they would have historically looked for because of the macroeconomic micro-cap market dynamics that underpin the entire financing thesis for this industry. So yeah, just hold tight.

RS: Hold tight. That's a good advice. Yeah, intense times. Seth, really appreciate you taking the time sharing so much of your insights and energy and really appreciate it. So, look forward to the next one, but thanks for taking the time today.

For further details see:

Tremendous Opportunity In Cannabis