In this edition of "Rising High," The Fly conducted an exclusive interview with Fabian Monaco, chief executive officer at Gage Growth (GAEGF), a lcannabis brand and operator in Michigan. Here are some highlights:
QUALITY FOCUS: Gage Growth is a vertically-integrated cannabis brand and operator focused on innovating and curating high quality experiences for cannabis consumers in the state of Michigan. The company, which has over 30 different flavors of flower in production, has built and grown operations with federal and state licenses, including cultivation, processing and retail locations. “Our focus is firstly on the product,” Monaco said. “In order to be successful in this industry, you really need to lead with the quality of your product especially in a more competitive market like Michigan.” He said consumers in Michigan have been going to dispensaries for over a decade and in turn, have become very refined. “The consumer is very keen on consuming top-notch product and they’re willing to pay for it as well,” The CEO said. “That’s where we focus. We started in the flower category and Michigan as a whole on a per capita basis consumes some of the highest amount of flower in the whole country, so we excelled in that category.” Gage’s flower sells at some of the higher price points on a per gram basis in the state, he said, and the company has worked to not only bring new variety and flavors to the market, but also to enhance the full experience for the cannabis consumer. “The seed all the way to the smoke experience,” Monaco said. “From the seed standpoint, getting the new variety, pheno hunting, etc. When it comes to growing the product, growing hydroponically, indoor and more importantly really, really honing in on the post-production process. We hang dry everything, hand trim everything and hand package everything.” The CEO added the company also creates innovative packaging for consumers in an effort to create subbrands for strains. “Go on any our menus online or our dispensaries, you’ll see a variety of colorful packaging and brands that are really subbrands of the Gage family.”
COMPETITIVE EDGE: When asked about rising competition in the cannabis space, the CEO said Gage’s quality and variety of product sets the company apart. “In this industry, I think where we’re seeing other companies fail is the thought process that you’re going to simply grow cannabis and someone is going to buy it,” he said. “I hate when individuals out there say cannabis is a commoditized business and it’s like the tomato industry. Unfortunately, that is so far from the truth.” Monaco added the cannabis sector is similar to the wine industry as there are so many opportunities in the process to tweak the end product. He noted how wine can differ depending on what grape is being grown, where it is being grown and how it is being stored. “There are so many various nuances that really bring you to that end product that you and I consume on our dinner table and cannabis is similar,” the CEO said. “Where did you grow the cannabis? Indoor, outdoor, greenhouse? What kind of flavors are you bringing to the market? How does your product look and how have you trimmed that product? How does it feel? How does it crumble? So many factors play into the experience.” Gage will continue to look to create a variety of new products that consumers love, according to Monaco. “It’s that variety that allows us to continue to excel in a competitive market and more importantly gain market share,” he said.
MICHIGAN MARKET: Gage currently operates three licensed cultivation and processing centers in Michigan with a portfolio of 15 provisioning centers throughout the state. “The company was incorporated almost three and a half years ago and at that time the medical market was very strong, the second largest medical market only behind California,” Monaco said. “We knew that the new state medical program was going to be very large and then more importantly, we knew that when adult use came in to play, Michigan was going to be a force to be reckoned with.” Michigan is now the third largest market in the U.S. on a run-rate basis only behind California and Colorado, according to the CEO, and will probably be well in excess of $2B for the year. “For us, we’ve been keenly focused on that market, on being the top player in that market because we think that there is a lot of value there,” he said. “We don’t have a super strong desire to rush out and be a top player somewhere else because we’re in the third largest market.” Monaco added there is no key player in California or Colorado, but Gage has the potential to be that in Michigan. “There’s a lot of value there not only for our shareholders but also as a company in terms of brand recognition,” he said. “Once we have a clear path in executing all that, which we really do feel we’ll have as we approach the end of the year as our contract growers all come to fruition and our actual operating cultivation assets also complete their expansion, we’re going to be in a great, great spot to really dominate that market.” At that point in time, the CEO said Gage may expand to another market like Pennsylvania, Massachusetts, Illinois, New Jersey or Ohio. “It sounds funny to say, but I’d say any cannabis market in the U.S. right now is pretty attractive because the industry as a whole is just growing like crazy,” he said. “We’ve been to about ten or so different states just this year, educating ourselves, trying to learn as much as we can about the other markets. I think you’ll hear something from us over the next six months where we enter another market but we’re clearly focused on trying to be the king of Michigan.”
PROCESSING: Along with the company’s first quarter earnings, Gage said it expected to operate a processing asset in Q3 to allow the company to produce in-house branded extract-based products. “It’s a massive opportunity for us to finally have that processing asset open,” the CEO said. “For us right now, we’re doing very, very well on the flower side of things.” He noted the company’s flower sales are in excess of 50% in terms of gross margins and Gage is performing in line with some of the best operators in the country. “When you take a look at the processing side of things or the extract-based categories of the business, we buy and sell predominantly third-party product,” he said. “In Michigan, for the concentrates market, you’re only really looking at 15%-20% on gross margins if you are selling someone else’s product.” With the processing lab up and running, Gage can create its own distillate, vape carts, vape pens, and concentrates in variety of flavors, Monaco said. “It’s going to be just transformational for us from a margin expansion standpoint,” he said. “As we get that up and running and really start to expand that opportunity, you’re going to see a big, big broad expansion in our gross margins as we get into the end of Q3, the beginning of Q4 and obviously onwards.” The CEO said it is not out of the question to see 40% to over 50% of gross margin on extract-based product that is being produced in-house. “As we have more and more of our own products being sold in that category versus third-party products at our retail stores, a big, big margin expansion will come.”
CORONAVIRUS: The coronavirus pandemic has impacted many companies globally in the cannabis space and Monaco said he believes it helped the cannabis industry immensely. “In a majority of the states we saw that cannabis was deemed an essential business,” he said. “That was a massive, massive win for all of us.” The CEO added the move put the wheels in motion for regulatory change as well as The Cannabis Administration and Opportunity Act, a bill introduced by Senate Majority Leader Chuck Schumer. “Just in terms of consumption, we really saw consumption go through the roof during the pandemic,” he said. “A lot of people were at home, and frankly a lot of people were bored so we saw an increase in a lot of the vices in terms of consumption.” Monaco said he thinks the rise in consumption habits and adoption will remain as more people get vaccinated and more markets open up. “We still see some pretty strong consumption habits and spending habits amongst our consumers,” he said. “Overall it was a very, very positive effect on the cannabis industry.”
DELIVERY METHODS: As technology advances and delivery systems for cannabinoids become more diverse, the CEO said he believes flower will remain “the queen of the categories”. He said Gage’s flower sales accounted for 63%, or roughly two-thirds, of sales in Q2, up from previously being in the high 40% to low 50% range in the previous quarter. “It continues to remain the dominant category,” he said. “These derivative categories, concentrates, drinks, edibles, I think there will be more adoption of those particular categories but if you take a look at the typical cannabis consumer and what they’re spending their money on, it’s flower.” Monaco said the purchasing of edibles, drinks and other derivative products predominantly come from some of the newer cannabis users and those users are not as big on consumption as legacy users. “Those legacy users, they still prefer their flower,” he said. “That category continues to dominate and when you include the flower pre-roll categories across the country, you’re still in excess of 50% of all sales. I think that’s going to remain like that for quite some time.”
LEGALIZATION: When asked about the potential impact of the Biden-Harris administration on the industry, Monaco said the change has been quasi-disappointing in terms of cannabis reform. “There was a lot of talk and excitement when those two particular individuals were put into power about the possibility of cannabis reform happening quite quickly,” he said. “Admittedly maybe it was a bit of a scenario of wishful thinking.” The CEO said the transition has not been quite as positive as people were anticipating, but the introduction of The Cannabis Administration and Opportunity Act is a good start to move reform forward. “We’re still going to be in a scenario where we are waiting at least a year into this new administration for something concrete to happen,” he said. “I thought things would be happening a little quicker but with that being said regardless of timing, we love to see movement finally on that front.” Monaco said while the bill is in a very preliminary form, it includes positive attributes and is a transformational event for the industry. “I can’t emphasize enough how many investors are on the sidelines in terms of investing in the sector because of the various issues that the U.S. has created in making it an illegal substance,” he said. “Once that kind of falls away, some of the difficult tax issues we need to deal with such as 280E will be resolved.” Regulation will also give operators the ability to list on a recognized exchange and have access to proper banking, the CEO said. “The ability to really reduce the reliance on cash is going to be also equally important,” he said. “Lastly there is the cost of capital that is going to be driven down in this industry because of these new rules. It’s just a massive, massive opportunity with this new bill.”
CHALLENGES: When asked about the largest hurdles facing the industry, the CEO pointed to the illegality of cannabis in the U.S as the biggest challenge. “Having it removed from being on the controlled substance list is just a game changer,” he said, noting the change will result in tax reform, regulatory reform, reduced cost of capital, the ability to list on a recognized exchange and a load of investment flowing into the sector. “Those five factors all will really, really help fuel this industry and take it to another level once that all comes to fruition.”
OPPORTUNITIES: As the cannabis space develops, Monaco said he expects opportunities to continue to arise in the flower category as well as in markets with an actual market size. “Places like California, Colorado, Michigan and some of the other larger markets with big populations,” he said. “There’s only a few of them that are over 10M in terms of population and Michigan is one of those states.” The CEO added some of those markets are already full adult-use markets and he believes that’s where the growth is going to be. “These states with the larger populations, I think are really going to be the big growth drivers of this industry as a whole.”
OTHER CANNABIS/PSYCHEDELIC STOCKS: Other publicly-traded companies in the space include Acreage (ACRHF), Akerna (KERN), Aleafia (ALEAF), Aurora Cannabis (ACB), Ayr Wellness (AYRWF), Body and Mind (BMMJ), CanaFarma (CNFHF), Canopy Growth (CGC), RIV Capital (CNPOF), Clever Leaves (CLVR), Columbia Care (CCHWF), Compass Pathways (CMPS), CordovaCann (LVRLF), Cresco Labs (CRLBF), Cronos (CRON), CV Sciences (CVSI), Curaleaf (CURLF), CURE Pharmaceutical (CURR), Delta 9 (DLTNF), Emerald Health (EMHTF), Fire & Flower (FFLWF), FluroTech (FLURF), General Cannabis (CANN), Greenlane (GNLN), Green Thumb (GTBIF), GrowGeneration (GRWG), Harborside (HBORF), Hemp (HEMP), HEXO (HEXO), High Tide (HITI), IM Cannabis (IMCC), India Globalization Capital (IGC), Indiva (NDVAF), Inner Spirit (INSHF), Innovative Industrial Properties (IIPR), Khiron Life Sciences (KHRNF), Lowell Farms (LOWLF), Lotus Ventures (LTTSF), MediPharm Labs (MEDIF), MedMen Enterprises (MMNFF), MJardin Group (MJARF), Neptune Wellness (NEPT), Thermic Science (ENDO), Organigram (OGI), Planet 13 (PLNHF), Skye Bioscience (SKYE), SLANG Worldwide (SLGWF), Sproutly (SRUTF), Stem Holdings (STMH), Sundial Growers (SNDL), Sunniva (SNNVF), TerrAscend (TRSSF), Tetra Bio-Pharma (TBPMF), Tilray (TLRY), Trulieve (TCNNF), Valens (VLNCF), Village Farms (VFF), Goodness Growth (GDNSF), WeedMD (WDDMF) Zynerba (ZYNE) and 4Front Ventures (FFNTF).
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