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Public cannabis companies making headway in maturing Michigan industry

As Michigan’s cannabis industry grows, it’s drawing in more giants of the business: publicly traded companies.

Historically, many public companies and those with complex ownership structures were skipping Michigan or choosing to invest indirectly through licensing agreements, lending relationships or real estate. Getting a marijuana business license here meant turning in piles of paperwork for each owner and public companies, of course, have scores and scores of those. But now that’s changing.

More public companies are looking at Michigan, or going further and staking their claim by slapping their names on cannabis business licenses here. It’s an indicator Michigan’s market is maturing.

Toronto-based Red White & Bloom Brands Inc., for one, has had an under-the-radar foothold in Michigan through distribution and investing. But after a recent acquisition, it’s a fully licensed operator here with full control all the way from grow to brick-and-mortar retail.

“This is the pinnacle of what we were trying to get to for a very long time, with respect to the Michigan strategy,” CEO Brad Rogers told Crain’s.

Rigorous regulations

“Early on the big hurdle was, basically, the way the Michigan law was written, (public companies) pretty much couldn’t participate in the industry,” said Douglas Mains, a partner at Detroit-based Honigman LLP.

Originally, for medical cannabis business licenses, each shareholder in a company was considered an applicant who needed vetting and a background check. That made it essentially impossible for a company with complex ownership to participate.

“When you’re talking about publicly traded companies that’s, one, a ton of people, and two, the people are constantly changing as they buy and sell shares,” Mains said.

The Michigan Marijuana Regulatory Agency has since updated its rules several times, simplifying parts of the background check process. Starting in 2019, for a publicly held corporation, only corporate officers and stockholders with more than 10 percent interest count as “applicants” and require the extensive financial and criminal background investigation.

“So that was kind of the impetus for opening this up to public companies, which, obviously, I think, the regulators wanted because it’s just helpful to have those companies involved in the Michigan marketplace,” Mains said. “They’re large, they’re sophisticated, well-capitalized, generally have a record of regulatory compliance in other states. So I think those changes were something specifically designed to allow those types of companies into the Michigan industry.”

Under one roof

Red White & Bloom’s acquisition of Southfield-based PharmaCo Inc. through its subsidiary RWB Michigan LLC closed Feb. 8. The price was $30.3 million in shares and $30 million in prior loans for a total of $60.3 million.

The public corporation had been a PharmaCo investor since 2018. It invested in the privately held company initially because of the difficulties for public companies looking to set up officially — with their own cannabis business license in their own name — in Michigan.

But now it has exercised an option to buy the company that was part of that previous deal between the two.

“So we really have everything we need under one roof there (in RWB Michigan LLC), to be able to put everything into motion and synergize,” Rogers said.

The corporation’s leadership felt that after it went public, it was the right time to take the “next step” of collecting assets in one of the three highest-potential cannabis states, Rogers said when the intent to acquire was originally announced in July 2020.

RWB started trading over-the-counter, or off-exchange, in 2020. It also trades on the Canadian Securities Exchange. Few cannabis-related corporations trade on the New York Stock Exchange and NASDAQ because cannabis is illegal at the federal level.

With the PharmaCo deal, Red White & Bloom has grown to 185 Michigan employees and taken on 21 medical and adult-use cannabis business licenses. It’s absorbing 10 dispensaries, 30,000 square feet of indoor grow space in two facilities, a 10-acre outdoor grow operation that’s set to start up this year and 22 other properties for future grow or retail space. The company is looking to hire 50-80 people in Michigan this year.

The Michigan subsidiary, which is now fully licensed by the state to operate as a cannabis business, also has a 15,000-square-foot grow, processing and distribution facility it started leasing in January in Warren.

RWB distributes to nearly 400 Michigan retailers, Rogers estimates, including through its recently acquired Platinum Vape brand. It also has equipment to make edibles in Warren and plans to start selling cannabis-infused chocolates and gummies under the Platinum brand, too. RWB also has licensing rights for High Times-branded cannabis products in Michigan. High Times started out as a cannabis magazine and expanded to selling.

Variety of ways to get involved

The licensing process is still burdensome for companies with complex ownership, but there’s been substantial progress, said Travis Copenhaver, an Ann Arbor-based partner with Denver cannabis law firm Vicente Sederberg LLP.

“Where we would before maybe be pulling in 50 people (to go through the application process and background checks), now we’re only maybe pulling in like two or three significant owners and the management team of that organization,” Copenhaver said.

Public companies would sometimes seek less direct ways to get involved that didn’t entail being a direct cannabis business license holder — and they still do. For example, investing in the build-out of a grow operation and then leasing to the license holder, which is generally a simpler business with less moving parts ownership-wise, he said. There’s also intellectual property brand agreements, management service agreements or a lender relationship, to name some options.

So these companies have to decide whether they want to operate quietly or start to make a bigger splash, like Red White & Bloom. Then not only is their money and influence threaded through Michigan’s $1.79 billion cannabis industry, but they’re increasingly physically present — part of the landscape.

Copenhaver said it’s difficult to know how many public companies have a stake in Michigan’s cannabis industry. He guesses a few dozen, but it could be more. He works with four or five, but did not name them.

“I think the changes (from the MRA) have certainly been effective in getting these types of organizations interested in Michigan projects,” he said. “But if we want to encourage more sophisticated types of organizations … additional understanding and clarification on the types of burdens these organizations have to go through in (the pre-qualification process for getting a state cannabis license) would certainly help.”

One major company to enter Michigan recently is Chicago-based cannabis wholesaler Cresco Labs Inc., whose subsidiary Cresco Labs Michigan LLC opened a 110,000-square-foot cultivation facility in October in Marshall, just east of Battle Creek.

It started with 20 employees and is now up to 100 and aims to hire 30-40 more, said Melissa Wagamon, Cresco’s regional president for the Great Lakes. Cresco, founded in 2013, went public on the Canadian Securities Exchange in 2018. It also trades over-the-counter.

Mains of Honigman also referenced several recent acquisitions bringing more public activity to Michigan: Canadian TerrAscend Corp. acquiring one of Michigan’s biggest marijuana sellers, Gage Growth Corp. — plus the RWB deal. And Curaleaf Holdings Inc. acquired GR Companies Inc., or Grassroots, in 2020 in an $875 million deal that brought Curaleaf into Michigan for the first time.

With increased interest, more of the smaller operators, especially retail, will get purchased — especially as competition for licenses in cities with limited license availability continues to heat up. Mains doesn’t see the same race in the works for other license types, like grow facilities, because it’s still quite easy to find a good place to set up a grow operation oneself.

‘Big fish or little fish’

Public companies are coming into a market that’s dense with small-scale operators. Michigan has more than 800 unique licensees, according to the state.

The industry began very “grassroots,” with individual caregivers growing marijuana after the state originally approved medical use in 2008 and over the years they emerged as sellers as rules changed, said Denise Pollicella, founder and managing partner of Howell-based Cannabis Attorneys of Michigan.

“So you’ve got tons and tons and tons of small, literally mom-and-pop cannabis companies all over Michigan,” Pollicella said. “I like it, I prefer it, I like keeping the business in Michigan … But we do make a concerted effort to educate our clients on, listen, you need to be either a big fish or a little fish and you’re going to need to make that decision very quickly.

“There’s no parking on the dance floor in this industry.”

Many of the small-scale players weren’t started by business-minded folk, Pollicella said. They may not be as focused on planning for the future and they likely don’t have access to the capital needed to scale up significantly. Some are resistant to selling and want to be left alone, while others may be tired and looking for a payout and thinking, “How can I get acquired?”

M&A activity in Michigan cannabis has ramped up in the last year or two and Pollicella expects more consolidation soon.

There’s also, of course, always been a large conversation around corporatization of the cannabis industry.

There’s some criticism among cannabis entrepreneurs — and consumers — of the seemingly ever-looming monolith of big business, Pollicella said.

“I think there’s a lot of push-back in Michigan by small businesses (against larger corporations) … and some of it’s just human nature, ‘We just started our business, let’s not monopolize this industry quite yet,'” Pollicella said. “I don’t want to see all of the manufacturing consolidated in a few companies. I want to see this (industry) sort of mature first.”

There are also some Michigan operators that stand out for their sheer size. Mains said Michigan may just get its first home-grown cannabis IPO this year.

Though he won’t name them, Mains says there are two to three Michigan companies with the potential to go public.

“You’re starting to see some people, I think, position themselves for a going-public transaction, whether that’s just increasing the number of licenses they have or smaller acquisitions,” Mains said. “Or you’ve got some homegrown Michigan companies that I’m seeing are starting to expand into other states … which I would also think is probably a step towards going public.”

Posted By: Crain’s Detroit Business on March 9, 2022.  For more information, please click here to read the source article.

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