Ascend Wellness Holdings, Inc. (AAWHU) Earnings Call Transcript & Summary

Vivien Azer will begin in just a minute, once all participants have filtered in. In the meantime, I'm just going to read a quick disclaimer. The contents of this call and the views expressed on it are solely for the use of the clients and invited guests of Cowen and Company. Members of the media are not invited to participate. Any publication, distribution, reproduction, posting, sharing or transmission of this information without the expressed permission of Cowen is prohibited. As a reminder, we are not interested in receiving and you should not disclose any confidential information. In the event that you inadvertently disclose such information, please notify us as soon as possible. Go ahead, Vivien.

Thank you, Carrie, and good morning, everyone. Thank you so much for joining us for our webinar today. I'm delighted to be joined by Abner Kurtin, who's the CEO of Ascend Wellness Holdings; Brett Heyman, who is the founder of Edie Parker and George Allen, the Chairman of Lowell Farms. Good morning, everyone, and thank you again for joining us.

Good morning.

So I thought I'd just kick things off with a little bit of background, just to level set. Abner, I think, for our audience, you're probably best known. But if you could just offer a couple of minutes of background on how you got involved in cannabis and a quick high level on Ascend, just to level set us.

Okay. And the way these stocks are trading, being best known is definitely not a compliment for that at the moment, but thank you. My background because I come from the buy side and Wall Street, I think, similar to George, I got into the space in 2017 as an investor. I spent a lot of time in California throughout the supply chain, including brands, and we really focus on investment on the MSOs, east of the Mississippi, and really invested in that. But found that a lot of the people with licenses couldn't either raise the capital or have the operating background to execute on those licenses. So we kind of flipped the model and said, okay, let's start an MSO. So in 2018, we started Ascend, and we went out and bought licenses. We call ourselves MSO 2.0, because we didn't win these license and put them together, we went out and bought these licenses. So we think we have the best portfolio because we went out and bought the licenses. We're founded in 2018 in Mass and Illinois. We're now also in Ohio, Michigan, New Jersey, as I said, Mass, and we have a pending acquisition of the MedMen assets in New York. So that would be 6 states. We have 18 dispensaries. We have a large grow in Illinois, which is expanding and will be 113,000 feet soon, and we'll talk about what that means for branding, et cetera, going forward. We're probably the third or fourth largest distributor in Illinois. And the investment thesis of the company is basically we're crushing it in Illinois, and we're going to execute that across our other states, as all these other states come line. And we really focus on early rec states, late medical states, and I think that's important for branding, too, which we'll get into that segment of the market. We think that's a really attractive segment to build customer base and for profitability. And so that's really the area we're focused. We're very excited about, obviously, what's going on in New Jersey, we'll probably discuss that as well. So that's Ascend. We went from 3 employees to 1,300 employees, $1 million in revenue to $330 million to $350 million this year and growing from there.

Awesome. That's a terrific way to start the conversation. George, let me turn to you. We've known each other for a while. Lowell is not your first foray into the cannabis world. So offer a little bit of background, please.

Yes. Thanks for having me. I really appreciate it. It's good to see some familiar faces on the Zoom call. I can't wait until we get to do this in person. My background is, I was at Acreage Holdings, spent a lot of time building that business up. And when we entered the transaction with Canopy Growth, I left with a small team to look for something else to do. And I was really drawn to the California market because California was where the consumer was the most advanced in that market because of the sort of natural selection that was occurring in that market. And I was really drawn to it. I got involved early on, took a controlled position in Indus, and I was grateful to consolidate that business with Lowell Herb Co and we turned the combined business into Lowell Farms. So Lowell Farms today is really a two-pronged business. Today, we're focused on being product vertically integrated in California. We grow our own supply. We actually have a fair amount of infrastructure around cultivation, manufacturing and distribution in that state and bringing that product to market in a very competitive market. And then we take that sort of brand equity that we built in California, and we're looking to harvest that brand equity in other markets and we found a fantastic home in Ascend Wellness in terms of being a partner with them in a launch that's been highly successful in Illinois and more recently, as of last Friday, in Massachusetts. So our business is really about the promise of brand and brand equity in the future. For me, it was pretty simple. I wanted to build a business that I felt was really going to survive whatever the sort of transition from pre-regulation to sort of post -- or pre deregulation to post deregulation. And so I saw the opportunity for us to really build brand equity and to extend that brand equity outside California in an asset-light fashion, and I couldn't be happier with the relationship we've had with Ascend thus far. So that's us and I'm really grateful to be here today with you all.

Awesome. Thanks, George. And last but certainly not least. Brett, you're a little bit newer to the wild world of cannabis, but you founded Edie Parker, I believe, 11 years ago. So maybe level set our audience on the origins of Edie Parker and then your foray into the cannabis world.

Sure. And I echo George, thank you so much for having me. I'm new to cannabis, but we've been in cannabis for 3 years, so certainly battle tested. I launched a company called Edie Parker in 2010 after about a decade in fashion. I was the Director of Public Relations at Gucci for a while. I worked at Dolce & Gabbana in the press department for a while. So I launched Edie Parker, which is a luxury, accessory and home lifestyle brand. And we, for 10 years, worked with the best partners in retail, bringing product to market, and we have a very devoted following. We've been on sort of every red carpet at every award show since launch in lots of magazines. I've gotten a ton of press. So we really -- we know how to build a brand. And in about 2018, we started talking about what else was a part of our authentic lifestyle that we were living and selling. We're 10 women in the office. And the use of cannabis kept coming up because we all enjoyed cannabis. We enjoyed it recreationally. And it occurred to us that at a dispensary level and at an accessory level, nobody was really selling cannabis or speaking to us. There was nothing that really was considered colorful and appealing. It was intimidating. And while there are great brands and dispensaries, they were typically very masculine or very medicinal feeling. So we started working on our own. We launched in California. We launched Flower by Edie Parker in 2019. And we did it on our own, which was extremely difficult. So like George, we feel incredibly fortunate. We hooked up with Abner and the Ascend team, and we're launching Illinois and Massachusetts this fall. And so what we do is we bring what we're good at. We bring brand building authentic storytelling and beautiful considered packaging and product and the Ascend team is amazing at having the best dispensary [ tours, ] cultivation, obviously, getting product to market, getting product to the customers. So we're really excited to do what we do best and to finally have the right partner in the space.

Awesome. Let me stick with you for a minute, Brett, because I want to talk to each of you guys about portfolio construction, and how ultimately that all fits into the Ascend partnership. But Brett, with Edie Parker, you guys are taking a multipronged approach with the offering and your distribution is not exclusive to Ascend. So talk about the different buckets in your cannabis portfolio, please?

So we launched in California. And as I said, we did it on our own. California, we really -- we echo what Abner says. We think the opportunity is east of the Mississippi. We're in California, like it's a prestige store, like we have a few key accounts there. For -- until George is ready to white label for us. We just -- we're in a few prestige doors so that people know us in California, we have a lot of press in California, and we have a lot of authentic brand relationships in California. We hooked up with SLANG to launch Carts in Colorado because we have a lot of already brand fans and customers in really the mountain towns. That's our focus. So I think because we have a 10-year established brand, we know where our customers are. So we're catering to that women. We're talking to that woman while meeting all these new people and going into these new markets. But that is really our focus.

But in addition to that, you have the cannabis accessories, right? Like so you're selling through Urban Outfitters, right?

Absolutely. So our accessories are a totally separate business. And I think one of our greatest advantages as a company is that we know how to make accessories. We're already in this market. We know how to bring that product to market. So we work with traditional retail like Urban Outfitters, but also like we were great friends with the Cresco guys. We're in all of their sunny side doors with our accessories. So it allows us to really sort of spread our wings.

Got it. Now George, when you joined the Lowell team, Lowell was really well established in the pre-roll category. The portfolio of offerings has expanded some. Maybe Just walk the audience through the portfolio of offerings that are currently [ existable? ]

Well, so when we joined Lowell, it was -- it had been really established in sort of the eyes of the consumer. And frankly, it was one of the first brands that had figured out this sort of idea that cannabis in general, makes consumers feel great after they trial the product. But there was very few brands out there that were working hard to make people feel great about their choice in the product before they try and before they use it. And that was really one of the transitory events. And I really was focused on pre-rolls because I love the category because it's inherently based on sharing. And as I looked at one of the problems when I wanted to go out to California and really build brands was this notion that most of where we consume cannabis today, there are form factors that are really around this concept of discretion. And when you focus on products that are discrete, it's very hard to build brand and brand equity in products that are consumed privately because the only real value that you can touch to the consumer, the really -- the only way you can talk to the consumer is around the concept of utility and price. And those are two hard things to talk about in cannabis because utility most consumers get the same thrill out of cannabis. I mean it's a great product. It's one of the few products in all of history that really delivers on its fundamental promise. So -- but when you talk to a consumer about a product that is -- and you only talk about utility and price, you're really narrowly focused. Lowell, in my opinion, is one of the first products that went way beyond that. It went into where Edie Parker has got such a stronghold here. It's really about the places where consumers are willing to share their choice. And when you go to a place where consumers are focused on sharing their choice in an outward display of their personal taste, that's a whole another world where you can start talking to a consumer in other languages around things like beauty and sex appeal and how you make that person feel about their choice. So I love that product. And our core anchor product in the Lowell brand portfolio is the Lowell Smokes product. And we don't think we're even close to done innovating around Lowell Smokes. In my opinion, when you look at the pre-roll market in general, it's a mere fraction of the consumable flower market. Now the consumable flower market in the United States is growing along with pre-rolls, is growing as the fastest dollar category of growth in cannabis. And I think that's something that's really worth paying attention to because what that's telling you is after all these early forays into these discretion based avenues for cannabis, the consumer is coming back to this smokable product because it's a better experience. And for me, that tells us that we've crossed this rubicon around the fact that I'm willing to share and be hourly using cannabis publicly. And I think that's something that for us is a moment that we really wanted to seize on with the Lowell brand. So from my opinion, I think there's a huge opportunity for us to take share from the packaged flower business into the pre-roll space. I think there's a number of impediments that have blocked that share growth for a while. And I think we're tackling each one of those with both product and marketing messages as we speak. So I'm really bullish about where we're going, our product offering, and we plan on starting in California with our innovation there and then using Abner and his team to help us get that into other markets as well as other license partners.

If I can pick up on the pre-roll discussion because I think that's where it comes in for us. So our foray to pre-rolls is, I could tell you, we had this genius analysis of the market. But really, when we did our first harvest in Illinois, and as anyone who's been in the business knows your first harvest is, if you don't throw it away, a good result, like it's tough to get this stuff dialed in effectively. Our stuff came out with pretty good THC and terps and all that, but it was larf. Larf meaning that the bud construction was not tight, which meant that it wasn't really good for [ jarable ] flower. So we're like, what are we going to do with this weed, which is good weed, but not really good for [ jarable ] flower. And we were like, okay, pre-rolls. And so we started making pre-rolls. This is back in '19 and they're unbranded and they're in a little test tube and they go out to the market. But we started to realize what George realized, which is this was really, we thought the fastest-growing segment and a segment that really could use branding and was very interesting to us. I mean, first of all, the price premium of pre-rolls to loose flower is obviously very, very high. And if you look at the cigarette market, right, it's like 15% to 20% of our users use pre-rolls, but what, 98% of the tobacco users or 99% use cigarettes. And then so we really see the growth in pre-rolls as a percentage, and we see the opportunity for us as a brand. We're probably fighting out with Cresco for the #1 share in Illinois. We're in every store across the state. And I think that's important to our partners, right? We want to be in every store, delivering every week. And we see that as a way to lead in other states. And when we look at the -- when you think about when you go to CVS or whatever to buy cigarettes, cigarettes is pretty much a commodity product, and there's 75 brands all over the place with everything. And I think that speaks to a little bit that people want to identify with something like a cigarette, and people, I think, are going to go in the same direction in a pre-roll. The pre-rolls will have differences. The differences probably won't be tremendous, but they'll be real and brands will focus on them. But it's going to be a lot of branding experience and people identifying with the brand just like they do with a cigarette brand or a liquor brand.

Absolutely. So just to follow up on that then, Abner, talk a little bit about what was specifically attractive to you about partnering with Lowell and Edie Parker as you thought about building out your portfolio of brand offerings?

Okay. Well, so it's a little -- so it's -- I think we're a little different than other MSOs. This is our Ozone brand, and we have pre-rolls. Ozone is the #1, I think, pre-rolled brand in Illinois. But it's a quality for value segment. We play in the good and better. We don't play in the best. So our ozone is good. Our ozone reserve is better. We're not in the best -- like we believe that -- look, someday, we'd love to have some great brands at the best. But for now, we really look at California brands like what Lowell's built. From the very beginning, you go into any dispensary in California and Lowell is the best merchandise kind of pre-roll out there by far. And then what obviously Edie is able to do on the fashion side is nothing like any of us have in cannabis, right? So we really saw that the way to go after the best category was to bring outside brands in, and it was a perfect complement to our quality for value segment. And I think that's different because if you look at some of the MSOs that are going after the best segment, they view this as more of a competitive to their own product assortment and so maybe they're not as committed. For us, we view this as very complementary and are very excited about it. We think when we launched in Mass, Mass is -- there's a fair number of flower producers now. When we can bring people our Ozone product and bring them Edie and Lowell on our trucks, that's going to help everyone sell more product because we're now a better distributor because we've got more to offer to dispensaries.

Absolutely. George, let me get back -- yes, please.

I think I was really pleased to find out Abner. And I think Abner is really an aberration in the space because one of the first MSOs that sort of -- that changed their perspective from the -- we could put anything we want on the shelf and consumers will buy it in a sort of selection-constrained market environment to a -- we see where the future is going and the future is basically even though there's only 10, 15, 20 operators at scale in a marketplace that's still going to create competition, and we need to make sure we're innovating for the consumer in that kind of competitive environment. And I have to say I was super grateful because Abner really is one of the first out there to see it. Now there are other operators who are kind of in the fast follower category who are also trying to do this in other markets. And I think we're just beginning to see it. And I think one thing is, if you look in Massachusetts, the prevalence of out-of-state brands in Massachusetts is really quite remarkable. If you look on the shelves, there's very few brands in the manufacturing product categories that are sort of native California -- I'm sorry, Massachusetts brands. And I think that's -- and I really -- I think Abner has been such a great partner to us because he was one of the few people who saw this early on, and I could tell you from conversations with other MSOs, there are a lot of people who are still very much stuck in this mentality of, it doesn't matter what I put on a shelf if I do -- if I put stuff on the shelf, they're going to buy.

Yes, absolutely. Which I mean goes back to the notion, right, the California really is a great home market for building brands that can travel east of the Mississippi. And Brett, Surely, that helped inform your decision to start in California. I'm curious, California is such a competitive market. Can you talk a little bit about like some of your early learnings and how that informs some of your positioning and pricing decisions?

I'm sorry, speaking to me, Vivien?

Yes.

Yes. Well, as I said, California is not a big market for us. It is really just a prestige market for us because we think it's important to be in California. But obviously, it's extremely competitive. And we didn't have -- I mean, very candidly, we had a lot of false starts in California. I don't think we had the right partner to start. I think we tried to do distribution on our own and learned just how impossible that was. I think the proposition we saw was like everything that we think we're very good at, California is such a mature market already. So having the most beautiful packaging, and we had a high-quality flower, I mean we have outdoor sun-grown organic quality flower. But in California, it just didn't matter as much. It was obviously and still is what's the highest percentage of THC for the least amount of money, and that's just not where we play. And I don't think that's where we'll ever play. And do I think there's opportunity for less expensive packaging in California and certainly is their customer for us? Absolutely. But I think right now it's the way that we look at fashion boutiques. Like there are prestige boutiques that don't move the needle in terms of sales, but they're important for a brand story. So that's how we look at California. We're in great doors in L.A. We're in great doors up north, but they are very few and they don't move our bottom line at all.

So then as you thought about partnering with Ascend and moving towards the East Coast, how did you guys think about your pricing if California wasn't the right reference market for you?

Right. Well, I mean, we just -- obviously, we see the opportunity. We're a New York-based fashion brand. And obviously, there's just less price resistance in these new markets that we're entering. And we took the Ascend learnings and really followed their lead. I mean we -- they have access to great flower. Obviously, they're great cultivator. So we're just -- we're providing what we can and we're following their lead and doing the dispensary [ tours ] with them but letting them lead on price.

Got it. So then Abner to you, please, how do you think about price gap management in particular as you onboard these new partners?

I'm looking down because I'm looking at my various pricing sheets because I knew you were going there. So we look -- Illinois is really our home market. And so we kind of take, let's say, Cresco as, let's say, they're kind of the biggest player in the market. They're kind of a mainstream brand. Let's take them as the base and let's say that's $10 for a gram pre-roll, right? We really see that as the base. That might be where Ozone, Ozone reserve is. Ozone might price down at the $8 price point closer to the value segment. And we see the premium branded products paying basically 20% above. So let's say, that's $12 a gram. I mean obviously, there's different form factors that's that, but in just a rough sense. That's kind of where we're -- it's going to develop over time, but that's where we're starting to see it. We previously had a relationship with cookies. That's kind of what we did. The only, I think, high-end pre-roll brand [ don't buying ] MSO is Dogwalkers by GTI. That plays at about the same kind of premium. And so that's kind of how we feel. But this is anecdotal. There isn't enough data at this point to know if that premium will hold or if that premium should be higher. I think this is a good starting point. It feels right. It seems consistent with all the other players in the market are doing. It segments out the brands from more commodity-like products, and we'll take it from there.

[Operator Instructions] So I do have one from the audience. And this is really for anyone who cares to comment, whether you could offer your thoughts on platforms like Weedmaps and Leafly, given marketing restrictions on traditional and social media platforms to what extent? Are any of you looking to utilize platforms like Weedmaps and Leafly to get in front of consumers and educate them on the product and establish that brand customer relationship? George, maybe I'll start with you. Do you have any thoughts you'd like to offer?

Yes. Vivien, I only know it anecdotally because I spent a fair amount of time looking for platforms to give us an advantage. And obviously, California is so competitive that we're doing everything we can. I will generally say, what we've found is Weedmaps is about people searching for dispensaries and that search is the most valuable search right now in sort of the cannabis landscape. And that's why Weedmaps in terms of price per traffic or revenue per traffic -- per visit is so much higher than someone like Leafly because Leafly's content is focused on searches that are germane to like specific cannabis strains or specific cannabis brands. Now I think Leafly has a chance over time as brands spend more money marketing and trying to differentiate in terms of the search box for the consumer. But right now, where you see the most value. I don't spend a fair amount of money on either one of those platforms because Weedmaps is most likely to get most of their revenues from dispensaries. Leafly is attempting to do the same although it has more a brand platform behind them. There are other platforms where we've seen some success. I Heart Jane is one that I'm particularly a big fan of. They allow us to elevate our brand in terms of digital menus on dispensaries, which I think is a powerful tool for us to use. I think -- but it is really -- it's a great question, and it brings in this other issue. And I think this is why Brett and that team is so smart for trying to take a brand that is a noncannabis brand and transition it today into a cannabis brand because once deregulation occurs in this country, I think we're all under the illusion that things are going to get so much better for us. The reality is the competition that's going to come in, in terms of ad dollars that are going to be spent to maintain mind-share and ad dollars that are going to be spent by people who are trying to capitalize on a noncannabis brand moving into cannabis is going to be pretty vicious. So my view is we need to make as much hay now and create as much brand recognition in the era where there are these spending, these sort of spending caps, so to speak, these arbitrary spending caps on marketing dollars in the industry because when that -- when deregulation occurs, it's going to be a sort of a sprint to spending enormous amounts of capital to maintain mind-share in what is going to be a sort of a very busy marketing message. So I think the work that Brett is doing is really sort of an indicator of where we're seeing this market, and it's going to be fast and furious as we see it come down the pike. I think for someone like Leafly, that is ultimately the future that they see for their business. I think today, it's a little harder for them because the digital consumer is most likely on the search box, looking for a store, and that's where Weedmaps really makes hay.

Yes. Look, we agree. We're not -- we use Weedmaps for location. We're not huge believers in the benefit of the digital platform ads at this time. We see it really as a push business. This is old school, the budtender is your customer, not the end consumer at this point, particularly when you're getting into new states and new brands. And that we spend our money with brand ambassadors, budtender giveaways and really trying to educate the budtender on the brand, the product, the experience. We think that is -- by far, your best bang for the buck. And think about liquor, right? Think about liquid. For years, these were distributors, giving away hats, working with the individual tavern owners like that went on for a long, long time before you saw the Clydesdale horses on TV, right? So we really think that, that is by far your best bang for the buck. And I think not a lot of brands are doing it. Most importantly, we think that the test and this should be the test for any partner that these brands work with, should be we get you on a truck to every dispenser in the state every week. And that it seems like an obvious point, but there's very, very few people that are capable of doing it in any of these states. And the problem is if you're going to spend the money on a brand launch, you're going to try to build your brand, to be exclusive, to be in [indiscernible] of the doors like that doesn't really work. It doesn't get you there. So I think one thing we offer as a partner is, we're like let's get you into every door in the state. We kind of have the target model, right? So when you go into a target, clearly, you can get your Apple, you can get your brand, your Nike, you can get some branded products. But at the end of the day, they want to sell in the mid and bottom 50% of your basket, and that's their highest margin. And so we employ that. Like let's build these brands and let's build them to bring in the customers and then let's use that to build our overall baskets.

And Vivien, if I can just -- if you don't mind, if I'd just add to that. Both of those platforms, obviously, great to have them being a part of our strategy at all. And I think what our advantages having the legacy product that we do is just getting into publications for free, getting into Vogue, the New York Times. Publications that are not cannabis publications and don't have cannabis restrictions. So I think being able to build a brand that way and get the free press and just not have to focus on platforms that are, obviously, with the owners marketing restrictions that are mostly for dispensary owners has been really helpful for us in building a national brand.

That's great. Thank you all for your thoughts on that. A little bit of a pivot, but I've got a question. George, it sounds like it's for you, but Abner, I've got a follow-up on that. The question is, can you comment on the price deflation that's been well publicized in California and how that's impacting retail pricing?

Yes. So I think California -- I think we all wondered what happened in a marketplace where you've got 3,000 growers and 1,000 retailers in California? How that's going to ultimately shake out? And the reality is, there's a bunch of factors that go into the sort of the supply demand balance in California and the silent hand there oftentimes is the black market. What I'll say is that I think we saw about a year ago or about 9 months ago, we saw this major wave of outdoor cultivation coming into the marketplace. It was really that observation, coupled with the observation that outdoor flower and greenhouse flower have been really fighting for price point for a long period of time and that the consumer potency wasn't paying an enormous premium for greenhouse versus outdoor flower despite being a relatively inherent, more expensive platform to grow in. So one thing that we transitioned in terms of our model is what we wanted to do is, we wanted to capture this wave of outdoor cultivation and utilize it in a way that was asset-light and efficient. We were lucky because we stumbled upon a part of the value chain for outdoor cultivation, which was really, really underserved. You have this massive wave of outdoor cultivation coming online, 100% growth to be specific over the last 12 months. A massive wave of outdoor cultivation coming online, but there was a huge, huge scarcity in the marketplace for places to dry, trim and cure that product. And so what we have found is -- and the state is also a silent hand here in that the regulations that they imposed on spaces for drying, trimming and curing are really onerous. And so it's almost impossible for a farm to actually dry, trim and cure that product on-site. We saw this wave coming, and we saw a huge scarcity of drying capacity in the marketplace, which requires a lot of CapEx and infrastructure to prepare for. And so one of the models that we've sort of been building up against in terms of this wave that's coming is, we built a centralized facility for post-process harvest -- post-harvest processing in cannabis, where we buy the product from farmers wet the day they harvest it and we dry, trim and cure it at our facility. Now this -- if this sounds familiar, it's virtually identical to the way most of agriculture works today. The farmer separate themselves from the product that day it's harvested. Now the alternative for us was going into outdoor cultivation ourselves, which a number of our competitors have chosen to do. The reason why we elected to do this is any single farm you have massive deal event risk. You've got drought conditions, you've got pest issues. For us, it's really about taking what is a network of several hundred to even 1,000 outdoor cultivators and building a network where I don't have to take the risk on any of that because I buy that product the day it's ready for harvest based on the quality that I see in the plant. So for us, we have seen a pretty material decline in product pricing. I'm expecting that decline to extend into the fourth quarter as we see the traditional outdoor harvest come into the fourth quarter. I think we've also heard about a fair amount of crackdown on some illicit product coming in from Oregon. I don't know the veracity of that information or content. But what I can say is that for that pricing decline on sort of whether it's a wholesale market has started to creep into the retail market. And I think it's a net win for the consumer in the retail market, but we've actually -- we've already started to see the strength in response and volume. So I'm encouraged by what we've seen. I'm also encouraged by our positioning in the marketplace. But I think one thing you have to remember in cannabis is, if you're trying to play the marginal cost game, I'm going to have a lower marginal cost than my competitor, it's very difficult in cannabis to play that game unless you have a tremendous amount of patience. Because one thing that you have in this cultivation landscape is eternal hope on behalf of anybody who grows products. So if this product -- if this harvest isn't making any money, next year will. And I think that's not just cannabis, that's actually across pretty much all agriculture. And so for us, it was really about positioning ourselves in what we saw is a real choke point in the industry and making sure that, that gave us access to low-cost product. For us, the strategy is very simple. We take low-cost product behind the best brand, a lot of automation and allows us to put our product at the street that other people can't compete with in terms of price. That's going to be our strategy in California for a long time. I don't see -- I think Brett is absolutely correct about the California consumer being very price conscious, and that's something that we're not going to try to thwart, we're actually going to try to work with.

That's really helpful. Abner, maybe a follow-up for you. The state level data would suggest that a lot of supply came online in Michigan. So if you could maybe talk about the pricing landscape there and any other markets where you're observing any changes in wholesale or retail pricing?

Yes. Well, coming from another conference, the topic of the week is Pennsylvania pricing, which isn't really related to this. But I will just say, I think it's indicative of the industry, which is if you think that $4,000 a pound for any quality flower is going to hold in any market, you're out of your mind. I mean this -- we project 15% price deflation in our markets for a long period of time. It's inevitable as the state's supply comes on, you start to get some price compression. And the first thing that happens really is a bifurcation between quality. So when someone says pricing is coming down, that could mean, okay, pricing is coming down for them because there's more choices that maybe their flower is not as good. That -- so the -- and that leads me into Michigan, right? Michigan is the closest market, the only really competitive market with a lot of supply and an outdoor grow similar to California. And what we find is the only markets that have this kind of California thing are ones with big outdoor. Because once you have big outdoor, then you get into more biomass as a whole, lower prices of distillate, the seasonal factor and Michigan has that. Michigan had -- is having a great harvest this year. I think it was last year, they had some frost problems, so there was less biomass coming into the market. So you have a more robust market and you see price deflation. When you see price deflation, the first thing you see is this out premium indoor holds up pretty well because it's still hard to grow. It's still expensive to build these things, and a real price premium. And if you went and saw the flower in Michigan, it's not California. When you go and see those sexy buds out of places like Connected and -- that's not in Michigan. What people are paying for premium, it's still deli-style, it's still small buds. So there's a real opportunity on the premium side. It's a little bit like California, but it doesn't have the quality. Quality will win. And I think it's the same, as we flip back to pre-rolls will be the same, that when you get into a lower-priced market, you have the ability to do much more all nug pre-rolls. Nugs are -- once you use more bud and more flower as opposed to trim in your pre-roll, you start to just have a better burn and better experience. And that's a lot easier to do at a lower price point in some of these more competitive markets. So I think pre-rolls get better and better as price deflation comes in and there's more supply.

Perfect. And I would be remiss if I didn't follow up and ask you to comment on Pennsylvania pricing since apparently that has been very topical.

Yes, we're not in Pennsylvania. But like I said, I think that this is -- we had this in Illinois. It was, we couldn't fill the shelves, you could sell any want. And then all of a sudden, Cresco brought on a great big grow, I think, in the first quarter of this year and supply met demand. And you just -- and you get into more of a normal market pricing holds for the most part. There's some discounting, but you have to -- the weaker products start to have problems, the better products and better operators do well. And I think that's normal. I think that Pennsylvania is going to be a great market. We wish we were there. We think the people are doing great. It's just that initial 6-month year, whatever it is period, when you have demand go like this and supply, taking a year to catch up, that's kind of ending in Pennsylvania. That kind of ended in Illinois, maybe 3 or 6 months ago. And that -- we're going to get it in New Jersey next year. We're going to get it in New York, it's going to be great. We're going to make a bunch of money. But it does end and supply does catch up with demand like any other business.

Perfect. Brett, I've got a question for you, please. The audience member is asking. Can you specifically comment on some of your CBD offerings? The CBD category perhaps hasn't developed as robustly as expectations they have suggested a couple of years ago. So just your thoughts on CBD and your offerings in that subcategory, please?

I mean we're not that excited about CBD either. I think the idea was like how can we reach our customers who we already speak to, who already buy our accessories, who are not in legal rec states. And our focus in CBD, we didn't like -- we don't do a lot of SKUs. We have a CBD pre-roll smoke that we actually do really like that sells well for us that, I think, we'll always continue to manufacture. And then for the other SKUs, our brand ethos and tagline is For a Good Time. So we made SKUs that sort of spoke to that. We have an intimacy spray called Sleepover Spray that I think is fantastic. But certainly, we've had so many issues with our payment processor. We've had to launch a third website. So we had Edie Parker for our heritage accessories, Flower by Edie Parker, Edie Parker Flower for our accessory offerings, and you can't sell CBD on the same website with any smoking accessories. So then we had to launch Edie Parker CBD, which the aforementioned onerous marketing restrictions make it impossible basically for anybody to find. But when they do find it, we love our intimacy spray. We have a Hot Pot Salve that has like a signature scent, it's delicious. And a really high-quality tincture that is tasteless and odorless, unlike most tinctures on the market. So I think our offerings are really strong, but I just think it's really hard to reach the consumer. And we -- it's just not where our focus is. We're a small team, we're lean. And so I think we'll continue to make those SKUs, but we're not investing more in CBD.

Perfect. Abner, I've got a question for you from the audience and really for everyone, but I'll start with you. The question, I was curious on your views on the future for [indiscernible] drinks and how they might approach a partnership with an established beverage manufacturer currently operating outside the cannabis industry?

Yes. So drinks were another hot topic. Everyone sees the benefits based on alcohol of low dose. [ MyFund ] has invested in a company called Cann, which just has a deal with GTI. We're working with a company called [ WINK ] on a partnership. One of the problems for us for drinks versus pre-rolls is, it's a small category. It's topical. We can see it long term, but it's a very small category. It's also a category that requires a fair bit of space usually to do the canning, storage, everything else. Most dispensaries are constrained by vault space as well as manufacturing space. For us, vault space and kitchen space is very valuable, makes it hard to do a small product. And so for us, waiting a few years until the product is bigger and carrying other people's brands in this category is less important. I think it's another category like others where there's an opportunity for beverage companies. But I think you need to be an authentic cannabis brand. I think that is the problem with a lot of brands, hey, let's put a -- you see this in other sectors too. Let's put a celebrity name on it. Let's put this name on it. And it has to be an authentic cannabis brand. Could alcohol companies or other beverage companies do authentic cannabis brands? Sure. Absolutely. But I don't think they can just throw their label on a cannabis drink and be successful as they think.

Yes. I don't disagree with you. I mean I would offer that I think the experience that we saw certainly in California was that there was kind of the first generation of beverage products that didn't really deliver on promise and that really inhibited category development. I do think it's interesting to see some of the next generation of offerings, principally that are either migrating from California to the East Coast or native East Coast brands, those seem to be having a little bit more traction. Moving on, I've got a question around white space opportunities. I really think this probably is applicable to everyone, but the question is posed to you. Abner, as you look for additional brand partners, where do you see the obvious white space opportunities in your business or your portfolio?

Well, okay. So we love George and Brett, and we love their brands. But -- it's not just the brand. Like they have been able to get the job done. Like we -- it's unbelievable the number of brands that cannot execute on a multistate strategy. The number of conversations that we have around brands and they say they want to come to the states, and they don't follow up. They can't figure out how to work through an [ LOI. ] They can't figure out how to make packaging for other states. They can't figure out what's important for their brand to transfer it to other states and what they can leave behind. Because the other states aren't as developed, you don't have the biomass options that you have in California. And so very few brands have been able. There's a way more talk than there is action in the ability of companies -- and you see it in any other sector, the ability to license and to partner and it's a whole separate kind of core competency than it is to build necessarily a wholly-owned brand. And particularly in the cannabis space, you need to make compromises when you leave California because there just isn't the type of biomass and distribution and other things. And so only brands, I think the best brands are going to say, look, we want to be on the shelves today because there's that -- because there is a value to being on the shelf today in the early stage. If we go for the perfect brand experience on day one, it's not going to happen, and that's life in cannabis. It's like let's get on the shelves and let's make it better and better every month, every year and keep getting better. If we wait for it to be perfect to get on the shelves, we don't get on the shelves. And that's what every MSO learned. You've got to get product to the customer and then you got to make it better and better. And that's what we're doing with these brands. I mean, Lowell is a good example. They came from California, you come to Illinois, you've got different packaging restrictions. You've got different child tamper things. We got to work through all those issues and make it work for us and make it work for them. And they were able to do it quickly and aggressively. A lot of brands really stumble on that execution side. That's first of all. And then speaking to these 2 brands, they're differentiated, right? Edie is trying to speak to the female consumer in a way that they are not being addressed really in the market. And Lowell is coming to you with that authentic California branding experience and everyone likes it. But I would say that the people who come to the dispensary will not have been to a dispensary in California for the most part and will not have [ redbow. ] They're coming in fresh, and it's going to be up to us as a distributor and the brands to basically tell that story. The story is great, but it's not -- the brand recognition isn't there that you can just throw it in the stores and walk away. You have to build that brand recognition in these states.

Absolutely.

Can I comment on the real quick, Vivien, because I think that's so keen. And one thing that I was really -- I watched some of the early attempts at licensing in cannabis. And obviously, we all know that the Dixie story and Dixie had moved from Colorado into California. It was definitely a tale of caution from my perspective because what you saw in branding was I think there's an inherent sort of loyalty to a home market and coming in and saying, we're just great because we're from California. I've really cautioned my team. I said, that should not be the message here. Because if we bring that message into Illinois, it's going to offend what is a really important moment for people in Illinois who are smoking cannabis. It has to be that we're not some great brand because we're from California. It's that we're a great brand, and we want to make you feel great. And you are part of our story just as much as California is part of our story. And I think -- that's something that we've been really careful to not offend the consumer in Illinois because just because they got their legalization bill later than the California instead. It didn't mean that they don't love cannabis any less than anybody in California does. And I think we've been really reluctant to try to throw it in their face that it's all about California. And I think this is really all about cannabis. It's all about making cannabis beautiful and making you feel great about your choice of cannabis.

Yes. And if I could just follow up with George. I mean, same for us. We've been making products, not cannabis products, obviously, but we've been making products for 10 years. And our whole ambition is for when women walk into a dispensary, they're not intimidated by our product. They either recognize us and know that they trust us because we've been putting out our product for 10 years or that we're going to give them an experience where they feel safe, they feel good. They're just enjoying it. And so I think that George is right, it's not about where you're from or just that California market for us, it's just about -- and often that is where we've been good partners dealing with counterparties for 10 years. We know how to execute. We're really nimble. And so that's it.

The advantage for these brands is, this is not alcohol, right? If I'm launching a vodka, I don't have to convince people. You have to convince people not to use Cheetos, not to use [indiscernible] brands that they like. You don't have that in cannabis. People aren't loyal to a pre-roll. Maybe a few people are, but most people aren't. So you have a pretty white space opportunity for a brand to come in and say, "You know what, try us, we're different. This is interesting." And people respond to that in a way that they want in a much more competitive consumer product. That is the advantage to these companies coming in early into these states that as opposed to California. You're taking them away from commodity-type local products. You're not taking them away from really well-developed brands.

Perfect. That's super helpful. This has become a very dangerous exercise, but assuredly, I've got questions from the audience about your outlook for the regulatory landscape, Abner. So I don't know if you want to break out your crystal ball and offer some thoughts on federal regulation.

I mean I have no competitive advantage here. I open it up to any one. I would say that I think the consensus, and I agree, is that given where the Democrats are, it's hard to see any meaningful federal legislation in the near term. That just seems pretty obvious. Your opportunities are, I think, could you get an executive order, could you get a better letter out of the AG, like a Cole Memo. Could you get lucky in some kind of reconciliation bill where it slips in and Cory Booker doesn't freak out because it doesn't include decriminalization, like maybe, maybe. But yes, at this point, you'd have to get lucky. But I would say -- because I think a lot of people talk from the investment side and from the investment side, people are like, well, until there's federal legalization, these stocks are never going to do anything. And I think that's kind of not true. We just did a debt deal. We raised $210 million at a pretty attractive rate. We had demand for over $400 million. We saw family offices, hedge funds come in. 1.5 years ago, I was struggling to raise money at 15%. The same people wouldn't take meetings from me. What changed? We didn't have federal legalization. And usually, the debt investors are more conservative than the equity investors. I think this completely comes down to custody trading issues, compliance issues. And one by one, we -- this is going to break down. We had -- and people are going to come in to the market and because they see the underlying fundamentals and they're not looking for some kind of near-term federal legislation. And finally, I would say that, look, I would -- do I dream at night of my company trading on the NASDAQ at a much fancier price? Sure. Like who doesn't, right? But -- the reality is my business will be stronger over the next 2 to 4 years without federal legalization, right? And I would say that goes for the brands as well, right? Like we can get things done. We can get bank accounts, we can move product, we can raise capital when other people can't. And that means that when federal legalization happens, we will have stronger businesses than if it happened tomorrow.

Perfect. Brett or George, anything else to add on that front?

Brett? I would just say, I think, Abner said it extremely well. I would generally say, there's 2 sides to this coin. We all have something to lose, something to gain from legalization. Obviously, I've been focused and concerned about it. Coming to California was a bit of a hedge for me in terms of, if I was going to put down cultivation routes and build the stack around supply. California has some real natural advantages. So I think I've got a long-term play there, but I'm not -- I'm not wedded to any sort of Moment Zero event that's going to occur anytime soon. I think we've heard that narrative from a number of cultivators in California. I think it's -- waiting for Washington to make -- to save your business or to create your business, I think, is kind of fools gold. So we're just trying to make hay right now, build the brand as best we can. As I said before, one thing that I view is, building brands and building brand equity with the consumer today is a heck of a lot easier than it's going to be when Facebook and Instagram are open to the platform. And so I'm willing to lean into it as long as we can and hold on to this market.

That's awesome. Thank you. We've got 3 minutes left. I'll squeeze in one more. Sorry, lots of good questions. Thank you to the audience. This one, I think, starts with you, George, but also Abner, if you care to comment. George, you talked about the invisible hand in the marketplace and the illicit market being one of those major factors in the California marketplace. Can you comment at all on changes in enforcement and whether that's improved at all?

Yes. I think it's hard. I think enforcement is one of those things where people expect -- I think there's two different versions of the illicit market in California. The one that I think gets the most attention is sort of the network of dispensaries in California, the sort of the green crosses. And I think that -- I think we are starting to see enforcement crackdown there. It's city by city, county by county. We are starting to see that occur because that really hits California's wallet directly because there's tax avoidance there. I think the other thing that I think about is really important that it's something that I've learned a lot from understanding California cannabis is, the clearing price for California cannabis is fundamentally linked, I believe, to the clearing price for the black market cannabis in this country. Because if you watch the 60 Minutes episode that was on The Emerald Triangle, you understand that a lot of the cannabis that's grown both legally and illegally in California does end up out of the state. So one thing that you can be sure is that as California goes through -- hits air pockets in terms of price or supply-demand imbalance, that product is going to end up being out there and competing in Pennsylvania, competing in Illinois, competing in Michigan with legal product that's out there. We're closer to a legal market because if you think about -- sorry, we're closer to a federal market for cannabis, and I think we all actually appreciate because there is this silent hand out there that is moving product across country. And I don't think that changes anytime soon because the appetite for enforcement is only deteriorating in this country. And I actually think what's very likely to happen is as that appetite for enforcement declines, the friction of moving product across this country is only deteriorating. And therefore, you're going to start to see -- even before deregulation in this country, you're going to start to see pricing start to balance out across this country. I think there's obviously a fair amount of reluctance to go on Craigslist and buy your cannabis. But the consumer, what we know about the consumer in cannabis is that the vast volume of cannabis that is purchased in the marketplace are the hardcore consumers, the consumers that buy an enormous amount and buy on a regular basis, right? There's sort of an 80-20 rule in cannabis. And what that means -- and that hardcore consumer might not be the soccer mom who's in there looking for the beverage to sort of tow theirselves into cannabis. But it is likely to be someone who's willing to buy on the black market. And I think the term black market is sort of a misnomer because as deregulation sort of approaches and this decriminalization concept increases, I think what you're really starting to see is the black markets becoming the gray market and the gray market and the legal market are starting to really merge. And so -- and that's by no action of our own, that's merely an observation, but I think it is something that we're starting to see.

I'll just say quickly, I know we're out of time here. The -- I think one of the benefits of more legalization and federal legalization is going to be much higher enforcement. If there's one thing the government cares about, it's collecting their taxes, right? If you got a truck of cigarettes that are untaxed at half the price, Marlboros or whatever, coming in from another country, if ATF catches you, you are in a lot of trouble, right? And tobacco is not hurting anybody and these are Marlboros, right? This is all about tax collection. And as this tax collection comes up, enforcement will come back. Secondly, it's a quality issue. Like people -- these people will shop at Whole Foods and spend like a zillion for an organic avocado, but yet they'll buy illegal weed that maybe was sprayed with Roundup for 4 months in someone's basement. There is a fundamental inconsistency there. And if you -- someone offer you a homemade vodka at half the price, no one would buy it. So I think this is a legacy issue that is going to change over time as well.

That's great perspective. And thank you all. Brett and George and Abner, really appreciate your time to our audience. Thank you so much for joining us, and I hope everyone has a great day.

Thank you.

Thank you.

Thank you.