In this edition of "Rising High," The Fly conducted an exclusive interview with Joe Caltabiano, co-founder and former president of Cresco Labs (CRLBF), a vertically-integrated multi-state cannabis operator in the United States. Here are some of the highlights:
Q2 EARNINGS: When asked about the trends he is seeing in second quarter earnings, Caltabiano said the industry is going to see strong topline revenue. “Certainly from the companies, the top tier operators, who set forth a plan that was focused on specific states, wanted to go deep in certain states, not spread themselves too thin and apply capital in intentional manners,” he said. “I think those companies are going to be very well rewarded from a topline revenue standpoint.” He added that the coronavirus pandemic certainly brought awareness to cannabis as it was deemed an essential business in most markets. “The companies that really focused on their core markets are going to have monster Q2 topline revenue,” he said. Going forward, Caltabiano said he believes a lot of cannabis companies are going to hit their stride in the third quarter and fiscal 2021. “You’re seeing things like Illinois be a beacon of what a strong adult user recreational market combined with a very strong and robust medical market can look like,” he said, noting a lot of the headlines report recreational numbers while Illinois is doing around $30M a month in medical sales in addition to $60M in recreational sales. “That continues to grow as more and more patients get aware and as it becomes viable to get a card,” he said. “Same thing in a lot of markets. You’re seeing Florida have explosive growth, Pennsylvania, Maryland, even Ohio is now starting to trend.” Caltabiano said he believes the industry is going to see record-breaking numbers in the majority of states across the country as cannabis continues to become more accepted and more mainstream.
VERTICAL OPERATOR GROWTH: Looking at the U.S., Caltabiano said the companies that will produce topline growth for the foreseeable future are all vertical operators. “The supply chain is still too fragmented especially in the limited license markets like the Illinois or the Pennsylvania,” he said. “If you’re not a vertical operator and able to get your own product on your own shelves, you’re going to have trouble because these limited license markets are still supply constrained.” He added on the retail side, a company may have great numbers but they’re going to get capped out based on the amount of product they’re able to source and on the wholesale side, a company could sell out of all the product they’re making but they’re not going to reap the benefit of $2 of revenue compared to $1 of revenue. “The numbers that are going to be the wow numbers…those are all going to come from vertical operators and companies that have put considerable amount of money in infrastructure both on the cultivation and retail side, but they really live on all aspects of the supply chain right now,” he said. “I think that will remain in effect for the next couple of years until licenses really start to change and you see real capital.”
SCALING OPERATIONALLY: When asked about how public cannabis companies are scaling, Caltabiano said he sees selling, general and administrative expense as a key factor to focus on this quarter. “I think you’re going to see great topline revenue but I also think you’ve got very immature management teams who were in a good place when this was a growth industry, not when it is maturing,” he said. “You can’t just keep throwing money and bodies, you need to get more efficient both on an operational standpoint and on a technology standpoint.” He added it is important companies are not overspending on staffing or marketing but putting the dollars to work to increase supply or open up new stores. “Consumers are going to look for this product,” he said. “You don’t need to reach out to them to the extent that maybe a beer company needs to…There’s limited supply and an excess of demand so you don’t need to spend wildly and I think investors are going to start rewarding the companies that focus on bottomline.” He said investors are going to start looking at bottomline and EBITDA numbers, not adjusted EBITDA. “Adjusted EBITDA allows you to have one-time expense but these companies continue to talk about one-time expense like legal fees, where they’re happening quarter after quarter after quarter,” he said “They really are taking a lot of liberty using this adjusted EBITDA math rather than being a little more transparent…Transparency is of paramount importance.”
DIVERSITY INCLUSION: Caltabiano said he believes diversity inclusion is crucial for all industries. “Getting multiple perspectives on your product, your management style, the way you run and communicate with your employees, you can’t have enough opinions,” he said, “You need someone as a leader who takes those opinions and executes against them but in a C-Suite or in a board or in a management meeting, you need people from all walks of life financially, ethnically, all of the different cases to get a well-rounded picture.” He added the cannabis industry has so many various consumer bases and the person who grew up in middle America suburbia doesn’t understand what an urban consumer wants like somebody who comes from that same environment. “Just at the baseline level, you have a well thought out opinion of ‘How are you communicating with your consumer?’ and ‘How are you communicating with your employees?’” he said. “Those are crucial for the future of success. That’s the baseline of why diversity inclusion is a necessity not an option going forward.”
CORONAVIRUS: When asked about how the coronavirus has impacted the industry, Caltabiano said the pandemic is such a negative situation but it has had positives for the space. “It’s forced companies to think more,” he said, “They’ve had to advance their technology, they’ve had to understand the consumer behavior on safety and they’ve had to adapt and be able to increase throughput at a time when the rest of the world was limiting the number of people.” Caltabiano said the industry has had to advance five years because of coronavirus, investing in technology and security measures, like curbside pickup. “Those are all big steps forward and it helps from a regulatory standpoint because the regulators can’t have a big void in their tax revenue,” he said. “They had to create a little more latitude for companies to be able to do things like walk the product out or allow additional caregivers or open up delivery.” Caltabiano added that he also thinks states, that maybe didn’t expect cannabis to be part of their annual budget, are paying more attention now. “It’s going to open up new doors as states like Oklahoma are reaping the benefit of large tax revenue,” he said. “Texas is now going to need some tax revenue so they may look at it in a much more favorable light as some of the states that are neighboring them are starting to do well and these are becoming material numbers on the bottomline.” Caltabiano noted Wisconsin and Illinois are in a similar situation. “It’s not that people from Wisconsin aren’t consuming cannabis they’re just missing out on the tax revenue that’s literally driving across the border.” He said.
CHALLENGES: When asked about the biggest challenges facing the industry, Caltabiano said he sees the taxation standpoint at a federal level as a large hurdle for the industry. “280E is just something that has to go away,” he said. “You can’t have companies making the kind of money being generated, paying the bills that they’re paying, paying premiums on everything cannabis companies have to do and then getting taxed without the traditional benefits that a normal company has.” He added that 280E prevents investors from investing more as well as companies from reinvesting more. “I think the biggest thing is 280E is just a massive, massive burden for these companies,” he said.
OPPORTUNITIES: As the cannabis space develops, Caltabiano said he believes the opportunities are going to be in intellectual property. “IP is one that is woefully underdeveloped in the cannabis industry,” he said. “I think very smart people are sitting there at their jobs in pharmaceutical or big beverage and saying I can help create a better widget for that industry because I did this with tobacco or whatever they did. IP is probably the most underdeveloped aspect of cannabis.”
OTHER CANNABIS STOCKS: Other publicly-traded companies in the space include Akerna (KERN), Aleafia (ALEAF), Aphria (APHA), Aurora Cannabis (ACB), Auxly (CBWTF), Biome Grow (BIOIF), CannTrust (CTST), Canopy Growth (CGC), Canopy Rivers (CNPOF), Cresco Labs (CRLBF), Cronos Group (CRON}, CV Sciences (CVSI), Delta 9 (VRNDF), FluroTech (FLURF), General Cannabis (CANN), Green Thumb Industries (GTBIF), Greenlane (GNLN), GrowGeneration (GRWG), Harborside (HSDEF), HEXO (HEXO), Hemp Inc. (HEMP), India Globalization Capital (IGC), Indiva (NDVAF), Indus Holdings (INDXF), Innovative Industrial Properties (IIPR), Khiron Life Sciences (KHRNF), Liberty Health Sciences (LHSIF), MediPharm (MEDIF), MedMen (MMNFF), MJardin (MJARF), Neptune Wellness (NEPT), Organigram (OGI), Planet 13 (PLNHF), Sproutly (SRUTF), Sunniva (SNNVF), Supreme Cannabis (SPRWF), Valens (VLNCF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Vireo Health (VREOF), Wayland Group (MRRCF), WeedMD (WDDMF), Wildflower Brands (WLDFF), YSS Corp. (YSSCF), Zynerba (ZYNE) and 4Front Ventures (FFNTF).
Cresco Labs
+ (+0.00%)
APHA
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Aurora Cannabis
+0.23 (+2.34%)
CV Sciences
+ (+0.00%)
CannTrust
+ (+0.00%)
Canopy Growth
+0.08 (+0.46%)
Cronos Group
+0.02 (+0.35%)
Trees Corporation
+ (+0.00%)
IGC Pharma
+0.53 (+20.54%)
Tilray
+0.23 (+3.33%)
Trulieve Cannabis
+ (+0.00%)
ZYNE
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