Business

Some Companies Won’t Survive in Their Present Form: Q&A with Joe Caltabiano

avatar Alex Halperin / Mar 9, 2020

After a career in mortgage banking, Joe Caltabiano co-founded Cresco Labs, a Chicago-based multi-state operator that has quietly become one of the country’s largest pot companies, with operations in 12 states. He recently left Cresco to explore new opportunities in cannabis.

WeedWeek caught up with Caltabiano for an exit interview. We got his thoughts on the Illinois market, why he’s excited about distressed assets and whether it was a mistake for Cresco to go public.

This interview has been edited for length and clarity.

WeedWeek:

How did you get involved in this industry?

Joe Caltabiano:

After Illinois passed its MED law in 2013, I ran into a couple friends and said, “Hey, we should explore this.” Lo and behold, when Illinois applications were awarded in 2015, we won three of the 21 cultivation licenses. And that’s how Cresco Labs started.

WW:

Tell me about the Illinois market during the MED period.

JC:

When Illinois started in 2015 there was a Democratic governor, Pat Quinn, who wrote the bill and signed the law. It was pretty cutting edge, especially for a Midwestern state. But then conservative Republican Bruce Rauner beat Governor Quinn in his reelection campaign and he did not make any beneficial changes to the program until his last, really few weeks or months into the office. (Democrat J.B. Pritzker, who successfully championed REC legalization, defeated Rauner in November 2018.– ed)

The Illinois program got off to a very slow start, adding patients by the hundreds, not by the tens of thousands like you see in Pennsylvania or Florida. At Cresco, we really focused on building our brands, understanding who the consumers were and knowing that the consumers weren’t going to all be the same. Everyone’s looking for relief but just in different forms, right? Somebody wants a pill that looks more pharmaceutical and some want smokables and ingestible gummies.

JC:

We grinded through the Illinois market and put ourselves in a position to apply for licenses in other markets. We applied in Pennsylvania where we were successful and it started to almost de-risk our investment in Illinois.

Then we went on a little bit of an M&A tear where we did a multitude of transactions, entering markets like Arizona, California, and Nevada. Ultimately we ended up in New York and Massachusetts and Maryland as well.

WW:

What’s the competitive landscape in Illinois, Chicago in particular?

JC:

What was interesting about Illinois, when Illinois law was passed, the applicants were not subject to the Freedom of Information Act, which was very unique. So people could apply in this industry without fear of their employer finding out at the time. This enabled Illinois companies to raise a lot of capital. Now you have a very sophisticated cannabis market which has enabled some of the biggest operators in the country: Cresco Labs, GTI, Verano, PharmaCann, Grassroots.

There’s a very competitive landscape. Statewide the number of dispensaries is set to grow from 55 to 500 over time. Illinois got up to a very quick start on the REC side. But you’re seeing a market quickly transition from very [restrictive] to very robust. We’ve seen a lot of social equity initiatives come from this and a significant amount of tax revenue starting to be generated from this.

WW:

With the Freedom of Information Act block in place we can’t know exactly, but who do you see as the investors in the Illinois industry?

JC:

It’s all walks of life. The initial seed money for all of the people were friends, family, family offices. Now as you mature, there’s debt facilities available, there’s investment from various hedge funds, there’s Canadian pension funds. As a public company, you’re drawing capital from the entire world that is capable of investing.

WW:

As you said, Illinois has several robust, sophisticated companies, many of which have operations in several states. What do you see as the differentiators between them, and how did you approach that question at Cresco?

JC:

Everyone has a slightly different take on the industry. The Cresco focus has always been the development of brands and the distribution of those brands to all of the stores. It’s less of being a retail focused operator and more about developing a [consumer packaged goods] approach and building a house of brands that resonated.

You have other operators who have a very retail centric approach where their facilities try to supply more product to themselves and they’re less about getting their brand out into the wholesale market. But speaking previously from the Cresco side, we felt the longterm value in the industry, and the highest return for invested capital was on the development of the brands and the distribution of the brand into other people’s stores.

WW:

What are some of Cresco’s brands and what led you to go in the direction you went in with them?

JC:

Cresco, we tried to develop a house of brands that resonated with various types of consumers. The Remedi line is more medically focused with non-combustible products like pills, patches and salves. The Cresco line features more traditional flower, vapes and concentrates. We had a James Beard award winning pastry chef named Mindy Segal who launched the edible line called Mindy’s. We had Reserve, a premium line where it’s truly the tops of the tops. And we recently launched the value brand High Supply. (Cresco also created the retail brand Sunnyside— ed.)

WW:

You went public in December, 2018, was that a mistake?

JC:

No. I think we executed a plan, took the company public and afforded us the opportunity to do additional M&A. I think if you look at the opportunities ahead, it was the right plan of action for Cresco.

WW:

You’ve left Cresco and plan to explore opportunities in cannabis. What are you excited about?

JC:

I think there’s a lot of opportunity where there’s assets that are undervalued. For example, companies with licenses worth more than what the company is trading at in a public market. So I think there’s an opportunity to look at turn around potentials in the industry.

There’s a lot of money that has been sitting on the sidelines waiting to deploy into undervalued assets. That really excites me and I think my skill set lines up with that.

WW:

What’s an unpopular or controversial opinion that you believe?

JC:

Looking for distressed assets is something like that. Typically you’re working towards acquiring assets that people have put a lot of time, effort and money into and it didn’t go the way maybe they had hoped or their investor had hoped. Capitalizing on others, unfortunately the situation isn’t a warm, sunny view sometimes. But the fact is that there are companies that may not survive in their present form. So coming in, deploying capital, restructuring them, that’s exciting for someone like me.

WW:

Why is that more attractive than starting something new?

JC:

Not to rule out starting something new, but I think there are assets that are more valuable that haven’t been monetized in the way they should. Some people, they may have a great license, but have been deploying money towards a part of their company that really doesn’t have the long term value. So you have to look at the core assets that you have within the company and sometimes divest or exit some of the other things. Occasionally from time to time people hang on to the wrong parts of their business or get married to the wrong parts of their business.

Sometimes it takes an outsider coming in and looking at how to monetize a business in a different way. And not to say that every opportunity that I look at will be the one that I move forward with. But I think there’s a lot of companies that have very valuable licenses that have strong inherent value. And maybe there’s a need for some debt restructuring. Maybe there’s a need for additional capital and they just haven’t been able to launch that next dispensary or whatever the case may be, where they don’t know where to find that next dollar.

They have a good team or they have a good license and they have a good brand, but they need a fresh look. I think that’s something that I can deliver.

WW:

Any states you’re particularly excited about?

JC:

My home state of Illinois here is certainly exciting, I think it’s a great market. I think New York has a very strong likelihood of passing a REC bill. Pennsylvania continues to be a phenomenal market. Florida continues to be a great market. I look more towards limited licensed markets [as in many east coast states] than I look towards unlimited license markets like Washington and Colorado.

California, while it’s the most important cannabis market in the world, is very difficult until enforcement out there really ramps up.

 

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Alex Halperin
Editor/Publisher