Marijuana acquisition will help this Sacramento company build a statewide pot presence

Dec. 31—Sacramento-based cannabis company MWG Holding Group is making a larger play for a presence in California’s growing but fragmented legal marijuana industry.

MWG says the acquisition late this month of a wholesale distributor will enable it to have a much larger presence in the state by increasing marijuana product sales from its 12 Perfect Union locations in Northern California to more than 400 retail shops statewide.

MWG won’t own the new shops like it does for Perfect Union, but the company’s growth strategy is aimed at supplying cannabis to dispensaries with a variety of products including flowers, edibles and concentrates.

OZ only has 12 employees to Perfect Union’s 300, but Perfect Union CEO Denyelle Bruno said the acquisition is a strategic maneuver to build a distribution presence beyond its own shops.

“They are still small,” Bruno said of OZ, “but it will definitely be a great opportunity for us to interact with other retail businesses.”

Bruno said Perfect Union also plans to expand the OZ distribution network to sell cannabis products to more of California’s approximate 900 dispensaries. Perfect Union also operates several dispensaries in New Mexico.

Most of MWG’s employees are based in Sacramento.

MWG wouldn’t disclose how much it paid for Santa Cruz-based OZ, which also produces its own branded cannabis flower and concentrate lines.

It was the second acquisition for MWG in two months. Back in November, MWG announced the acquisition of Bonsai Brands, an infused cannabis manufacturer based in Napa. Bonsai makes beverages and baked goods.

In March, MWG announced it had raised $10.8 million through an equity offering to investors. Bruno said some of the money is being used to fund acquisitions.

MWG is funded by about 90 investors. One of its primary backers, Chris Running, founded Caveman Foods, which specializes in paleo snacks. Running is MWG’s executive chairman.

While marijuana is legal in California, it is still considered an illegal Level 1 drug on the federal level, preventing institutional investment from financially backing cannabis companies.

The state has issued more than 12,000 licenses to various marijuana business since 2018, following a vote two years earlier to legalize the drug for recreational uses. But the business remains highly fragmented, with only several dozen larger players, including MWG.

MWG and Perfect Union don’t disclose financial data, but Bruno said both the parent company and Perfect Union are making money.

The industry overall appears to be highly profitable.based on state taxes imposed on cannabis cultivation and sales.

Tax revenue climbed 26% in the second quarter of 2021 from the prior year, to $333 million from $264 million.

Industry officials, however, said many players are struggling due to overproduction of marijuana, high taxes and a large illegal pot industry in which no taxes are involved.

Legal marijuana sales in California could account for $5 billion in revenue in 2021, but that pales in comparison to a larger illicit trade that could be as large as $9 billion, said Mike Boniello, treasurer of the California Cannabis Industry Association, an industry group.

“The illicit market puts a wretch in the legal marijuana market in California,” he said.

Boniello, who runs an asset management company that specializes in investing in legal cannabis businesses, said it’s about economics.

“When a consumer makes a purchase in a legal dispensary, they’re paying 40% to 50% in taxes,” he said. “In the illicit market you’re not paying any taxes.”

Marijuana industry officials have mounted a publicity and lobbying campaign over the last year, so far unsuccessfully, to convince Gov. Gavin Newsom and legislative leaders to eliminate or reduce taxes, including a three-year holiday for the 15% cannabis excise tax that dispensaries pay to distributors.

The tax, along with another levy on cultivation, is often passed on to consumers on top of state and local taxes.

Industry officials maintain that some marijuana businesses will fail without legislative changes.

MWG and Perfect Union plan to be one of the winners in the competitive California pot arena.

Bruno said her company’s plan for continued profitability is scaling up, getting bigger by buying more companies.

The CEO had extensive retail experience as a top executive at other restaurant and retail operations before taking over the helm of Perfect Union in October.

Her background includes serving as CEO of farm-to-folk restaurant chain Tender Greens as well as being part of the seven-member team that created the Apple store retail experience. She personally opened the first Apple retail store in Southern California in 2001.

“It’s hard to be profitable without scale in any retail business, ” she said. “But it’s even more difficult to be profitable without scale in the cannabis business because the taxes make it difficult to make money. So you’ve really got to have economies of scale.”

Financial data from the largest publicly-traded cannabis company in California offers a window into just how profitable the legal marijuana business can be in the state, particularly with a larger scale of operations.

Harborside, an Oakland-based marijuana manufacturing and distribution company, reported more than $50 million in gross profits in the first-nine months of 2021. Harborside, which also owns four dispensaries, also announced in November that it is acquiring two other companies: Urbn Leaf, a Southern California cannabis retailer and Loudpack, a manufacturer, cultivator and distributor of cannabis brands. Urbn Leaf and Loudpack had gross profits of $45.9 million and $61. 4 million respectively in the first nine months of 2021, meaning combined the three companies would have earned $165 million in the nine-month period ending Sept.30.

Harborside will also have a new brand when the acquisitions are complete: StateHouse Holdings. Despite the name, it will not be based in Sacramento.