Last week, Curaleaf, one of the cannabis industry’s largest multistate operators by any metric, including international footprint, announced the closure of operations in California, Colorado, and Oregon. The subhead of its press release, “Proactive Exit Will Generate Additional Cash and Improve Margins in Non-SAFE Banking Environment,” implied a connection between the recent failure to pass federal banking legislation and the decision to wind down operations in the three states, which was characterized by CEO Matt Darin as a prudent move by a public company to “improve margins and fortify our balance sheet by controlling what we can in our business.” The company also said it was consolidating “cultivation and processing operations in Massachusetts to a single facility in Webster, resulting in the closure of its Amesbury facility.”

Perhaps anticipating a reaction as seemingly dramatic as the announcement, the company reminded people that the targeted “markets contributed less than $50M in revenue to Curaleaf last year,” adding that it expects the “closures will be immediately accretive to its adjusted EBITDA margins and positions it for robust positive free cash flow generation in excess of $125M this year [2023] as management executes on its strategic priorities.”

Cannabis Business Executive sent Curaleaf a handful of follow-up questions, and the company provided answers to four of them:

The release does not mention retail. Will the Curaleaf retail footprint and operations will stay the same or even expand?  

There are no immediate changes to Curaleaf’s retail footprint as a result of this announcement, and our growth strategy in our core revenue-driving markets will remain unchanged. Curaleaf’s Oregon retail location will remain open as the company seeks a buyer for these assets.

What does the consolidation of cultivation and processing in Massachusetts mean for the amount of product Curaleaf can produce there? Will it increase, decrease, or stay the same, and what does this say about expectations for demand in the state?

Cultivation at our Amesbury facility was already phased out prior to this week’s announcement. Curaleaf has retained all existing cultivation and processing capacity to support overall market demand in Massachusetts. This move allows us to consolidate our production of key product platforms such as pre-rolls, edibles and vapes. We are also working to add new equipment to our Webster facility in order to streamline processes and increase output.

Regarding emerging markets in Europe, which markets will be targeted, and in what way? Building out Curaleaf, operations, acquiring existing operations or retail, or partnerships? 

Curaleaf International is the largest vertically integrated cannabis operator in Europe with a presence across nine countries. Following our majority stake acquisition of Four20 Pharma last year, Germany will be the largest driver of our growth in Europe as the country moves to implement adult-use in 2024. Additionally, the UK currently represents the largest contributor to our international business, and although it’s a medical market still in its infancy, we have a market leading position with year-over-year growth of 320%.

If SAFE Banking had been included in the omnibus, and passed into law, would these moves still have been necessary?  How much is 280E a factor in these decisions? 

These adjustments were based on a number of key factors including market dynamics, price compression, legislative delays, and lack of enforcement of the illicit market.

While the replies we received nominally answered our questions, Curaleaf Founder and Executive Chairman Boris Jordan, in an hour-long Twitter podcast interview by longtime investor, Toby Channabis (@mayortoby), in his inimitable and unfiltered manner, delved more deeply into the reasons why he left the three states, and especially California, and why, unlike California, he will not leave New York. Claiming that state cannabis regulators “violated eight to 10 of their own laws with the launch of this program,” he said Curaleaf continues to talk with New York, but he also assured listeners that he will sue the state “if they don’t play ball and they violate the rules.”

During the far-ranging discussion that streamed the day of the Curaleaf announcement, Jordan also spoke directly to certain criticism of Curaleaf, referring to it as approaching “racist,” he blamed the industry for failing to band together to pass SAFE banking (adding the industry will still get there sooner rather than later), and he took aim at the “more radical social justice warriors” that have “taken this too far in places like California and New York, specifically,” and predicted that a pendulum swing against them is imminent as state budgets dwindle.

Adding context to the answer we received, Jordan explained how the recent failure to pass SAFE banking was one mitigating factor in Curaleaf’s decision to end its investment in the three states and double-down in other markets and abroad, telling the podcast audience, “We had one plan with SAFE and we had one plan without SAFE, and we are now executing on the plan without SAFE.” That plan, he added, had already been underway in anticipation of the legislative failure.

Jordan also was unabashed in his critique of the California market, as well as his concern for the state of many first, second, and even third-tier companies in the space. He spoke to Curaleaf’s strength relative to many of its competitors, and its intent to take advantage of the distress it sees in the market. Introduced as “the leader of the biggest company in the sector and probably the largest investor in the sector,” Jordan noted in the interview, “I believe I am the biggest investor in the sector in terms of dollars invested, so we’ve all lost a tremendous amount of money.”

A fierce and unapologetic defender of the company he founded – and in which he said he has $40 million personally invested – Jordan in this interview worked hard to calm any fears investors might have about a weakened Curaleaf, and directly addressed Twitter “trolls” who “attack the company and lie about it,” especially when it comes to paying its taxes, which he insisted the company does completely and legally every year, once a year. “I want to get rid of all the garbage that’s put out there by uneducated people who don’t understand accounting,” he railed.

Of the announcement, Jordan said it was actually a reallocation more than a moving out, and that they are not the first company to engage in such appropriate decisions, and will certainly not be the last. The implications are clear for the coming year or so, when the rubber will meet the road for many cannabis companies, and the ones that survive will see their market share and profits soar, as well as their stock prices when all this mishigas is behind us. Despite being beset by criticism and “a lot of hate out there for some reason for our company,” as well as investigations into the company’s original funding by Massachusetts and now, possibly, by Connecticut, Jordan, who appears to shoulder these criticisms personally, also appeared to relish a situation in which Curaleaf is the harassed underdog fighting for its rights. What is less up for debate is whether Curaleaf will be one of the industry winners, one of the “$30-$50 billion cannabis consumer-goods companies in the United States” that he says will exist in the near future. As much as he cannot promise it will happen, Jordan, as the unmitigated leader of Curaleaf and its rearmed balance-sheet, seems more than up for the fight to make it so.

Below is a sampling of comments (edited for clarity) from Curaleaf Executive Chairman Boris Jordan from the Jan. 26 podcast interview with Toby Channabis, which can be heard in its entirety here. For anyone interested in leading cannabis companies as they compete in a time of chaos (and opportunity), this interview with one of the industry’s feistier – and yes, controversial and consequential – players is highly recommended.

SAFE Banking

I’m going to say it’s the industry’s fault, not the politicians. Everybody played a role, but as a person who was physically and literally on the ground, the only other person that was as much on the ground was Cresco, which was even more involved than I was. The two of us are leading the charge, but that’s not enough.

We hired one of the most influential lobbyists in Washington two months before the vote was supposed to take place to bring this across the line. He talks to what they call the four corners – the leader of the Senate and the House and the minority leaders of the Senate and the House. He’s lifelong friends with some of these people, particularly Mitch McConnell, and his firm had 30 people working on this, including him. After the vote, he said, ‘Boris, I’m shocked about how little people in Washington actually know about your sector, and how few.’ He talked to seven or eight senators that didn’t even know what the heck SAFE banking is and had never met anybody from cannabis.

The point is that when you want to get real change, the whole industry has to get behind it, and every CEO had to put as much money at a minimum as Cresco and Curaleaf put into that effort. We all had to be there working this together, and the problem was, we weren’t. This is a very immature industry, so we got slaughtered by all the opponents – whether it was pharma or the religious groups and people like that – so the senators weren’t scared of us, and that if this thing doesn’t go through, it’s going to affect them in any way. And on the other hand, they didn’t have a carrot, they didn’t get any money. The money was too small. These people are used to getting millions and millions of dollars. That’s how the American system works, unfortunately.

But we came as close as we’ve ever come to getting this done. I’m very proud of the work that was done, and I believe ironically that we will still get it done. And it’s probably going to be easier this time around, because we’ve brought a tremendous amount of education to Washington on this issue. However, we didn’t have enough pull, we didn’t have enough strength, and in my opinion, the industry has no one else to blame except itself for what happened in Washington.

My position, and I was always very transparent on this, is that I didn’t care what SAFE had in it, I didn’t care that it didn’t solve all the problems. I wanted a piece of legislation at the federal level that recognizes the existence of this industry, and gave it basic protections for banking services. Don’t get me wrong, if you asked me what the priorities in the sector are, regulatory wise, I would say number one is 280E, but I knew that was too big of a reach and we couldn’t get to last year.

Cannabis Negativity Among Investors

I relate to that anger, and I understand. People have lost a tremendous amount of money. I believe I am the biggest investor in a sector in terms of dollars invested, so we’ve all lost a tremendous amount of money. But one thing I’ve learned in 30 years of doing this is that times like this are when you make tough decisions. Actually, the people that come out of this are usually the winners, and I certainly expect us to be a winner and a big one. I’ve got big plans, and Curaleaf was ready for this week. We had two plans when we went into our business planning at the end of last year. We had one plan with SAFE and we had one plan without SAFE, and we are now executing on the plan without SAFE.

The reason we were able to move quickly is because – and I don’t know if everybody knows this – but we were bringing those businesses[down] in what we call the investment markets. All year we [were] reducing them because we knew there was a risk that [SAFE] wouldn’t happen, and we knew we would then have to exit these markets, and so we started reducing.

I took the California business from, I forget, a $55 million business to where it was doing $2 million a quarter in the fourth quarter because I understood that if this happened, I had to take that business out. So, the companies that know how to navigate a crisis, and know how to work in them, come out of the situation as stronger companies, and look at the price they’re trading at. Curaleaf is trading at less than two times sales. You name me any company growing at the rate that we’re growing with the numbers that we will be producing this year, that trade at less than two times sales. I don’t think I know a single company in the world that trades at that price.

Layoffs

The hardest thing to do is lay off people if you care about them, and I care about the people that work for me. Between my two businesses, I probably have 15,000 people that work for me, and I really care about each and every person that works for me. It’s a very hard decision, but when you’re in high growth businesses – and I’ve done this for 30 years; I think this is the sixth company I’ve built – you get to go through high growth periods where you over hire, and it just naturally happens because the infrastructure hasn’t caught up to the business. The business is growing so fast, and you can’t build the infrastructure fast enough, and so you hire to plug the holes, and then the infrastructure starts to catch up, and/or you get a slowdown, and you have to shed a certain amount of people. That’s the right prudent decision for the business, and then you go back into growth spurt to start to rehire. Companies do this all the time.

Cannabis went through a massive growth spurt, and all of these companies are going to have to shed. I think you’re going to see a lot of changes and write offs and asset dividers in this fourth quarter report, but what’s going to happen is you’re going to get healthier balance sheets coming out of that going into ‘23 and ‘24. Many companies won’t make it, but the ones that do make it are going to be stronger because of it, and much more profitable because of it.

Departing California, Colorado, and Oregon

Our announcement today was very, very simple. We had this in the works for some time, but the West Coast markets were very different for Curaleaf than the East Coast markets. We were vertical everywhere else. When we started looking at the West Coast – and I spent I don’t know how many hours, days, weeks, and months in California – we couldn’t find a retail business that was making money. It was a whole series of problems. It was the problem with taxes, it was the illicit market, it was a problem with enforcement. It was a problem with overgrowth, too much capacity, lots of different problems, and we couldn’t find a way in.

But I felt that a company of Curaleaf’s stature that I wanted to build – that’s going to be the largest global player – has to be in the biggest market, and so I picked a capital-lite route to go into [California], and we just went in there as a wholesaler. So, we had a $50 million business, but the problem was that business was not producing a return. We would have to go vertical, and we’d have to spend a lot of money to go vertical, there’s execution risk, and you’d still have a subpar return of probably five to 15 percent EBITDA margin in a market where capital is expensive. I’d rather focus on higher producing markets than that, so we made the difficult decision to take the three of our lowest margin markets, all of which we were not vertical in, and instead of investing hundreds of millions of dollars to get vertical without a guarantee that we were going to produce an adequate return on capital, we decided to shut those markets down.

By the way, when I say shut down, we are talking to people that may take our brands and continue to sell them on a franchise or contract basis, so we’re not getting completely out. But we don’t want to dedicate more capital, more spend, to those markets at this point in time. We’ve got some acquisitions in the works, you’re going to see some very creative adding to markets where we have big positions, where there’s synergies, and where we have very substantial margins. Curaleaf is not stopping its expansion, but what Curaleaf is doing right now because of the cost of capital, is only focusing on those markets where we can produce a very substantial return. And obviously, we’re also focusing on cash, because I don’t want to raise or be forced to raise in an environment like this.

I see the move that we made today more as a reallocation than a move out of markets. We’ve decided that we want to invest in markets that produce a higher return on our capital, which at this time is more important than building a wider net. Believe me, I would love to be the biggest brand in California, but I can’t be if I’m not making any money from it, especially in this environment. When you have a lower cost environment, you can do that, but in a capital cost environment, you have to change your strategy, and I pride myself as someone who sees things a little bit earlier. We made this decision, but we’re not the first, and I believe you’re going to see everybody else making similar decisions over the next quarter or two.

Taxes

I know there are a lot of people that like to misrepresent Curaleaf. There’s a lot of hate out there for some reason for our company bordering on, frankly, racism, but we have always paid our taxes. Curaleaf has never not paid its taxes and Curaleaf pays all of its taxes in the year that we incur those taxes, one hundred percent. We don’t carry any taxes over into the following year.

We’ve done that from the beginning. The difference is, I’m a financial services guy and if I can pay that tax once a year rather than every quarter, and pay 6 percent on that, which is cheaper than my cost of funds that I can get in the marketplace, I have to be an idiot not to do that, and it’s completely legal. So instead of paying them quarterly, I accrue it and then I pay it in April, but I’ve been able to use that capital for working capital purposes during that year, and I paid 6 percent for it.

And by the way, you also have a lot of people who aren’t sophisticated and don’t understand the difference between income taxes payable and deferred income taxes. Income taxes payable for Curaleaf at the end of the third quarter were $167 million, or around that, and that’s what we need to pay in April, But the deferred taxes are an accounting entry that comes out of M&A amortization and depreciation, and it’s never going to be a tax that’s cash payable. It comes off over time as depreciation and amortization comes off, so Curaleaf taxes are $167 million, which it will pay on time as it does every single year.

On $125 million in Free Cash Flow

On the free cash flow, I can detail some of it, I can’t detail all of it. I am 100 percent confident hitting that number, and I don’t say that lightly, and you can probably understand why I’m saying it, because I think we’re going to do better. So, we picked a number to put out there that I know we’re going to hit. Where’s that coming from? That’s coming from the fact that we’re reducing our Capex next year to substantially below $100 million, and we will break that number out on our earnings call. We also saved $60 million on cost-cutting, and we saved another almost $20 million in states that got rid of 280E. We also moved our security expenses out of SG&A up into COGS.

That is the same thing GTI did at the beginning of last year when their gross margin dropped to 46 or 47 percent. They got an opinion from their auditors that they can move those costs up into COGS, and therefore you could write them off. And we’ve substantially reduced our SG&A, our payroll. So, those aspects plus the reduced capex plus the growth in the business and the efficiencies that we’re driving by shutting down the markets where we’re bleeding our cash easily puts us into that place. I always told everybody I could shut those markets down and I could become profitable, and you’re now going to see it. I shut them down. I’m not happy about having to shut them down. It was a hard decision, but I had to do it because the cost of capital is too high to invest in markets that are not going to produce an adequate return.

I’m incredibly comfortable with our cash position,. We’re going to meet all of our obligations, and we’re actually got some M&A that we’re going to use some cash for. We’re going to end the year very, very strong. You have to understand, we built a very large enterprise and it’s now at scale, and it’s now becoming a lot more efficient. With Matt coming in, our focus is on efficiency and the quality of our products. We substantially improved quality; we used to grow for volume, now we grow for quality. So, just as an example, we used to grow three plants per light, and now we grow one plant per light, and then the whole idea is to grow for quality rather than for quantity. So, we are improving the quality of our product dramatically, we’re seeing that across the board in customer reviews and things like that.

Access to Capital

We have access to capital any time we want. The one thing I can say about Curaleaf is we have never had a problem with capital, for many reasons, but I’ve always invested in every single debt deal we’ve done, and every single equity deal Curaleaf has done. I personally hold over $40 million of Curaleaf debt, so I am a believer in our business, and I invest in the capital stack across the board.

But I don’t want to raise capital now, nor do I feel that I need to raise capital now, because we have a good balance sheet. It can be better, of course; balance sheets can always be better, but I think it’s a well-balanced balance sheet with a good healthy dose of leverage, which you need to create better returns for your investors. The biggest problem isn’t the balance sheet; the biggest problem in this industry is that you’re not getting paid for what you do. Investors aren’t paying companies for what they built. That’s the real problem.

Stress in the Market

Next week, I’ve probably got three meetings with tier two or tier three companies. There’s a tremendous amount of balance sheet stress in those companies, and the problem is that once they become impaired and literally start defaulting, it gets very difficult to do a deal because there’s no legislation in the US like Chapter 11 for cannabis companies, so lot of these companies are literally falling by the wayside. We tried to do a deal twice with one of those companies and we couldn’t do it because the creditors are fighting with the equity people, and there’s no structure to get these companies to a good point, and so they’re slowly dying away.

Some companies will just disappear, and other companies that are smart enough to understand that they can survive on their own will try and do deals. And they’ll have to get away from price sensitivity if they want to save something and have upside, and when you do relative value deals for shares, these people will be smart enough to do these deals, because at least then they’ll be able to make their capital back being a part of a much bigger company that will someday revalue as the reform changes in the country.

I think there’s a tremendous amount of stress. Even tier one companies – and I don’t talk about I don’t mention names of companies – but they say they’re borrowing at 12 percent, or 13, or 14, but they’re really borrowing at 17 and 18 percent after you add in the fees that are paid and the refinancing costs. So, it’s very good to be a lender now in this industry, but the issue is that these balance sheets are getting encumbered by very, very expensive debt. And even if they’re not paying for that debt today, they’re going to be paying for it at maturity because of the way they structured those debt deals. So a lot of companies are going to be under stress because of their capital costs.

I have to say, we were very lucky; through timing, luck, and skill, we were able to execute very, very good financing, and today we have one of the lowest cost of capital in the industry, if not the lowest. I am concerned on the one hand for some of these companies, but I am also excited for those companies that will be able to buy some of these businesses at very good prices and grow on the back of that. The irony right now, and I haven’t seen this many times in my 30- year career, but it is cheaper to buy a business than to grow organically through capex, and that is very, very rare.

Curaleaf Shares

We do trade at a premium, but I believe it’s a deserved premium for our size, our diversity, and our future growth, especially in places like Europe, and we can use that to buy companies. For instance, Curaleaf is trading at an eight forward multiple, and we can buy at a two multiple. These businesses are close to profitability but can’t get there because they need to invest in their vertical. We have the vertical, and we can reduce the cost by merging the two bits together, so these are very interesting transactions for Curaleaf right now. But we’re not rushing, we’re being very diligent, and we will be very transparent on these deals, but there are some interesting transactions out there that I think could add tremendous growth and profitability to Curaleaf over the next six to nine months.

The Pendulum with Swing

I think the pendulum is about to swing a little bit against some of the more radical social justice warriors. We’re all for social justice and recognize that this industry has been built on some pretty horrific stories from the past. But I do think that some of the social justice warriors have taken this too far in places like California and New York, specifically. Literally, the New York authorities are almost promoting illegal cannabis, and lowering testing standards for adult-use over medical and allowing products that should never be sold in the store to be sold just so they can try and keep the MSOs out of the market.

I believe the pendulum is about to swing against these people for a very specific reason. A lot of these social justice programs were started when, under the Biden administration, the states got bailed out, particularly the more liberal states like California, Illinois, New York, Pennsylvania, and New Jersey. They got hundreds of billions of dollars injected into their budgets as a COVID response, and let’s be honest, their balance sheets were messed up not because of COVID., but because they couldn’t fiscally manage themselves for years. Why can Florida and Texas do it, but those states can’t do it? Because Florida and Texas always manage their budgets frugally, and these states spend like drunken sailors, and didn’t. Anyway, they got bailed out, so they didn’t need the tax revenue, and this whole industry was built on the back of [states] needing tax revenues originally. So, they didn’t need the tax revenue, they went off on these programs, and were going to give these assets to felons and people that have two heads and all this kind of stuff.

New York at my last count has violated eight to 10 of their own laws with the launch of this program, so if people take them to court, [the state is] going to lose They’re just going to lose. And they’re open about saying that they’re trying to keep these companies out of the market, and I think the pendulum is going to swing because the states are now all in deficit. Nobody is given free handouts, not anymore, and not for at least I think 10 years. We’ve got inflation issues, and they’re very significant. We need to tighten our belt. I don’t think the economy is going to be as strong as everybody thinks it is even when we come out of the recession of ’23. I think it’s going to be a long recovery.

So many people are fleeing California and New York for places like Florida and Texas that their taxable base is shrinking, and they’re going to need the tax revenues from this business, and unfortunately, the illicit businesses don’t pay tax revenues, so I think that you’re going to get a pendulum swing. It’ll take a little time, but I believe that the states are going to start enforcing some of these rules because they need the money. I mean, California has a $25 billion deficit this year, and they have a rainy-day fund of $25 billion, and they’ll probably use the whole thing this year because nobody wants to cut budgets hoping that next year is going to change. Well, it’s not going to change next year, and so they’re going to have to generate revenues, and they’re going to have to clamp down because this is an industry that can generate a tremendous amount of revenue for the governments.

Suing New York

You have to understand, in New York, I’m fully built-out, so I’m not going to leave New York, and I’m going to fight for the market to be the right way. We have a lot going on. On the one hand, we’re talking to New York, and on the other hand, if they don’t play ball and they violate the rules, we’re going to sue. That’s what’s going to happen, and I’m very confident in our winning that lawsuit because they openly understand that they violated these rules, and all they’re doing is trying to push it down the line.

In New York, I built all the infrastructure vertical, and I have 50 percent of the medical market, so I am not leaving New York. In California, I never built anything dramatic there. I never invested the kind of dollars I did in New York, so for me an exit from California was a lot easier than exiting New York. Plus, in New York, I have a very profitable medical business, so it’s a different issue, but in California nothing we did was profitable because it’s mayhem. I mean, I have found one retail chain with seven stores that actually makes money in California. Outside of that, nobody makes money, and I know because I’ve invested in other businesses as well. Nobody is making money in California, I can tell you that right now. We see every deal that comes out. Nobody’s making money in California.