AY YOU’RE IN THE CANNABIS BUSINESS AND YOU FIND YOURSELF WITH EXCESS TRIM. Or excess CBD isolate – better known as shatter – a byproduct extracted from the plant and used to make everything from topicals that can get massaged into sore muscles or added to elixirs or candies for relaxation and pain relief. Conversely, say you’re in the edibles manufacturing business and find you’re lacking sufficient CBD oil to meet the demand of dispensaries clambering for your brownies.
How do you find each other in the midst of this chaotic and still growing cannabis landscape?
Salinas-based Grupo Flor saw the need, and it saw the need through its own expansion – a distribution hub in Los Angeles, a cultivation hub in Pescadero, a retail store in Los Angeles and an office in Costa Mesa, plus an eye on opening 18 new stores in the next 18 months, a combination of acquiring existing stores around the state, or acquiring existing licenses for stores that haven’t opened. On March 4, the company formally launched what’s believed to be the cannabis industry’s first commodity trading desk to connect buyers and sellers.
Grupo Flor CEO Paul Henderson, who formerly led a private banking group at Goldman Sachs and served as Apple’s worldwide financial services manager, says Grupo started doing some brokering informally last year, taking the company’s own materials, including excess trim, turning it into oil and selling it in bulk to other manufacturers.
“We didn’t have much focus on it and nobody was really running it, and then we started to think about it,” he says.
“We” is him and Chuck Drake, Grupo’s chief operating officer who previously worked at Merrill Lynch Equity Capital Markets. They spoke to a trader who told them when he worked in the Chicago Mercantile Exchange, half his time was focused on doing deals, and the other half on the logistics of moving physical product from place to place.
“In California, it’s less about connecting buyers and sellers,” Henderson says. “It’s about how, once you connect the two, how do you transport the product compliantly over the roads.”
Shipping cannabis or derivatives across state lines is currently prohibited under federal law, so all of the trades Grupo facilitates are done in state.
“We can connect a buyer in San Diego to a seller in Humboldt, send the product to testing and then ship it. We handle the cash connections and the payout,” Henderson says. “Farmers and manufacturers aren’t necessarily great at sales, so we’re saying, ‘Do what you do best and we can become your sales arm.’ That was the genesis of it.”
Since launching the trading desk formally this year, Grupo has facilitated between $5 million and $10 million in trades every month. Grupo takes a small margin on each trade.
“The more the word gets out there, the more interest and demand there is,” Henderson says. “We are seeing very steady inbound requests to start working with us, and the numbers get big fast. If we ripped off the bandaid we could grow it quickly, but we face exposure if we hold the inventory.”
Grupo’s desk uses proprietary software, and unlike most commodity trading desks, it’s not regulated by or registered with the Securities and Exchange Commission. Right now, such regulation isn’t necessary, Henderson says, because the company isn’t selling futures or options.
“What we’re doing is bulk cannabis distribution,” he says. “Once we get out of pure movement of physical commodity, I think this will go where there will be options and contracts and buyers know they have a supply, and that will require registration.”
Grupo doesn’t stand alone among local cannabis companies eyeing rapid national and even international expansion.
At Salinas-based Indus Holding Co., best known as a manufacturer of edible products under the Altai and Dixie brands (among others) and as the first licensed cannabis business in Salinas, the company has entered what’s known as the “quiet period” – meaning they can’t talk to the press – as they prepare to file for an initial public offering (IPO) on the Canadian Securities Exchange (CSE).
Why Canada? Because it’s fully legal there.
Last October, Indus announced it had raised $46 million in a second round of financing, following on a $3.5 million first round of financing in 2015. When Indus files its IPO, it will join the likes of fellow cannabis companies True Leaf Medicine International Ltd., MedMen Enterprises and Curaleaf Holdings Inc. in making their public debuts north of the border.
Indus co-founder Rob Weakley, careful to avoid violating the code of silence that surrounds pending IPOs, says that looking forward, any cash infusion will help the company grow its strong-in-California brand to a nationally recognized name.
“We’ve spent the past four years being laser focused on California and we’ve gone from four or five employees to 265 full-time,” he says. “It’s been quite a journey and we’re looking to continue to build brands.”
And the IPO is necessary because cannabis businesses still lack access to traditional banks and loans.
“Any other business can go to a bank and secure a loan to grow their business, but cannabis is different,” Weakley says. “We can’t be a national brand if we’re only in one state, but we do believe brands are built in California. People buy wine from Napa and Sonoma and Monterey County, they buy California agriculture, and I think it’s the same thing for cannabis.”
When Curaleaf debuted on the CSE last October via a process known as a reverse merger (wherein a private company purchases a public company, making its access to capital much faster than a traditional IPO), it did so with a market capitalization of $4.5 billion, more than double the market caps of other prominent cannabis companies that went public last year in Canada, according to investing website The Motley Fool.
Cannabis stock watcher Jason Spotafora, who follows trends and money on his site marijuanastocks.com and leads the investor community wolfofweedstreet.com, says it’s an impressive feat for a Salinas-based cannabis company to raise $50 million in funding.
“You can be an operator and if you spend that wisely, the sky’s the limit,” Spotafora says. “But what you don’t want is something that looks like MedMen, where the CEO and the CFO took a ridiculous compensation package and the voting rights for shareholders is 0.7 percent. I don’t see them surviving.”
Something every new investor needs to consider is the company’s prospectus. And, Spotafora says, investors shouldn’t worry about rushing in.
“I won’t invest in a company positioned in California right now because the black market is still really involved,” he says. “Inevitably, the price is going to go down, but if you’re a public company, the costs are just a lot larger.
“If the U.S. goes legal, once that happens, it’s all of these companies that are going to be diluted because there will be a million of them,” he says. “There’s still a great deal of risk for these companies, and timing is everything.”
His recommendation to investors: “Focus on the ones that are building brands. Those are the ones to watch.”
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