Chit Chat Stocks - Emily Flippen | Planet 13 (PLNHF)

Episode Date: December 17, 2020

On the 17th day of Christmas Emily Flippen gives to you, Planet 13 the cannabis company. Planet 13 is mainly known for its location in Vegas, but Emily explains to Chit Chat Money how slow intentional expansion can play into their favor. Visit our website: https://www.chitchatmoney.com/ Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Chit Chat Money on Twitter: https://twitter.com/chitchatmoney Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to 25 Stocks of Christmas presented by Chit Chat Money. Today we have an interview with Emily Flippen and we're talking about a company that I found really fascinating. It's probably something not a lot of people have heard of, Planet 13. It's in the cannabis space. Yeah, I mean most of the time when I look at cannabis companies, I kind of roll my eyes and I'm like, all right, you guys are hyping up the industry. You guys are doing something that everyone's really doing. You're just trying to flood the market with supply as Emily talks about in the interview, but Planet 13 has a unique model. We go about a half hour talking about it and I think it was fantastic. Great overview for the company. Yeah. And before we get to the

interview, as always, we have a word from our partners. I'm going to take this one. Seven investing, you can get the first month for $7. It's typically $17, but if you use the code CCM, you get it for $7. That's right. We're saving you a lot of money. We went out of our way to try to get that deal done just for you guys and for the kickback, but don't worry about that. Just focus on the deal. But yeah, it's code CCM. You can save 10 bucks on your first month. Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investment. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are not financial advisors. Anything discussed on

Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or a recommendation. Now, please enjoy this episode. Today, we are welcomed by Emily Flippen, Senior Analyst for The Motley Fool. You probably recognize her voice if you listen to... What are all the Motley Fool shows you've been on? Market Foolery. Are you on Motley Fool Money occasionally? I am occasionally on Motley Fool Money as well.

So Market Foolery is one of our daily podcasts. Motley Fool Money, which is our radio show and our Friday show, I'm actually going to be on tomorrow or, excuse me, Friday. We're taping this on a Wednesday. And I actually am the host of our industry-focused consumer goods podcast as well. So a lot of things. Yeah, definitely. And today we're talking about Planet 13, which is a company Brett and I had never heard of.

So how did this come across your radar? Yes. Well, in my day job as a senior analyst at The Motley Fool, I'm also the lead advisor for one of our cannabis investing services. It's not a position without controversy, as you may know, but it is an interesting opportunity because it's given me the opportunity to learn a lot about companies that I otherwise would have never spent time researching. So Planet 13 is one of them. I actually had the opportunity to really dig into the company after visiting Las Vegas, which is where they're headquartered for

MJ BizCon in 2019. It's an impressive company run by an impressive management team and a fun location. So I'm excited to talk about it. Yeah. And what does Planet 13 do? How do they fit into the cannabis industry? Yes, that's a good question. So Planet 13 is what we call a pure play cannabis company, which is a company that actually is plant touching. So they grow the cannabis themselves and they retail it themselves. They're vertically integrated in the fact that they own the cannabis from seed to sale. So that is pretty typical when you think about pure play cannabis companies, especially for those in the United States like Planet 13 is. But what makes them really interesting. And what sets them apart, I think, in comparison to many of the

other pure play cannabis companies, is the fact that they've taken a really specialized approach to how they're expanding their business. They started just in Las Vegas. And instead of putting a store out on every single street corner, like we've seen all the big producers do, right? In Canada, we have Canopy Growth. In the United States, we have MenMen, which notoriously went bankrupt, these companies that expanded really aggressively. Planet 13 just focused on building out its single store right there in Las Vegas and making that a tourist attraction within itself. And the metrics that we're getting from this one store far surpassed those of even the larger cannabis operators. And this is something where it's almost like an experience, right? They want

customers to maybe spend a few hours at this location? That's a perfect description. I've actually heard it referred to as the Disneyland of cannabis. And I don't think I'd go that far. I did get the opportunity to visit. And while it was enthralling, they have a fun light show, they have a bar, entertainment space, a restaurant that serves pretty good pizza, by the way. I would not go as far as to say it's Disneyland, but it is the largest cannabis dispensary in the world. And they have a lot of undeveloped space that they intend on building out, especially if and when counties, especially those in Las Vegas, legalize some sort of consumption lounges. So there's a lot of optionality left in the development of just this

one dispensary itself. But the real value proposition is creating or taking what was really successful in Las Vegas, this one big experiential superstore, and building out that success in other tourist locations across the United States. And are there any other locations they're planning on? I think I saw they were doing one in Santa Ana in California. How many do they want to go have in the United States? Yeah. So over the short term in 2021, they're focusing on building out a second store, the second Planet 13 Superstore in Santa Ana, California. They've identified a handful of other opportunities and what they deem to see as tourist attractions across the U.S. None of them are in development though, but you can imagine places like Nashville,

Florida, New York City, places that would normally attract a lot of tourists are opportunities for Planet 13. But over the short term, management has been really focused. They want to ensure that the unit metrics of any stores that they're building out are just as successful as their superstore in Las Vegas. So for now, over the next year or two, the focus is really going to be on if they can create a Santa Ana location right there in California, not too far away from Las Vegas, that is as successful as their Las Vegas Superstore. And you mentioned management briefly. Do you want to dig into them a little bit more?

You said you like them. Can you kind of expand on that? So the management background, this is a company that's run by two co-founders and two co-CEOs, not exactly what you would expect for the cannabis industry. One's a former lawyer, a former mayor of Henderson, Nevada. So business people by trade themselves would otherwise make you kind of question and scratch your head to ask, well, what got these people interested in cannabis? But it was really the close connection that these two businessmen had with leaders in Los Angeles when they saw the opportunity that some sort of legalization in the county offered them to open up a cannabis business. They understood the location. They understood the tourists. They understood what they would want, which was an experience, a clean, exciting, attractive experience, which they simply weren't getting from other cannabis operators, not just in Nevada, but across the United States.

So they started Planet 13 back in 2018. It's now the single largest holder of market share in terms of cannabis sales across Nevada. So they've been really successful in part due to management's relationships from, like I said, once the former mayor of Henderson. So they have relationships in place that have helped their expansion. But what I really like about this management team is less about their background and more about how they've run the company, especially in comparison to some of their other pure play cannabis peers. Both of these co-founders are highly invested. Between the two of them, they own more than 40% of the company's shares outstanding. So they do have essentially control over the company. But when they think about expansion, they talk in the form of shareholders, which I always like to see. For instance, when the pandemic hits, they immediately pulled out of their lease or negotiations in the Santa Ana location because they realized with the world being in a dramatically different place than it was a year ago, that they could get a better deal on expanding into Santa Ana. So they did, and it saved them around $5 million to $6 million worth of shareholder money by renegotiating. And they always talk about how they spend money and where they invest in the form of, we want it to be accretive on the share level.

We are the biggest shareholders of this company. We want to get our money's worth, and we want you to get your money's worth. I like the way that they talk about the company. It adds a level of thought for the average retail investor, which are the poor people investing in cannabis companies that I simply don't see with other industries. Right. And with the cannabis space in general, there's been a lot of hyped up companies. There's been a lot of companies that have maybe overexpanded. So you see them as kind of the opposite of that? Somewhat. I think that management can be overly aggressive with expansion opportunities. When they talk, they have big dreams. I mentioned places like New York City, Dallas, even Florida.

These are big expectations, hard areas to expand into. I like the fact that they're taking it one at a time. I do think that sets them apart, but I don't think that makes them immune from the hope and desire that every cannabis operator has to be the place to visit. That being said, when you look at their finances, and we could talk about that in more detail if you want, but you can tell that the way they're running their business is intending to keep the company both operating cash flow positive and free cash flow positive, which in my opinion is a big differentiator in comparison to cannabis companies that I like to call growth at any cost companies. Planet 13 wants to grow and it could not work. It could easily fail, but they're not growing at any cost. They're growing

at reasonable cost. Whereas I see lots of competitors essentially using shareholder money as if it were free and throwing it straight down the toilet. Right. And how has the income statement held up during 2020? Have they seen a total fall off because their places have been closed or limited? How has that changed? And do they have any plans or like guidance for what 2021 and 2022 will be like? I'm so happy you asked that. And if you let me go on, I will talk your ear off about it. First, I'll talk about how they've handled 2020. As a location in Las Vegas, their core plan was to really expand based off tourism. They did not want to target the local market at all. They saw it as a market that lacked the lucrativeness of tourists flying

into Las Vegas and being willing to spend lots of money to get that premium cannabis, to get the premium experience. During COVID, that fell off a cliff. I mean, their core audience, right, the core customer went from 100 to zero virtually overnight. So they had to pivot their entire business model. And the one thing that they did immediately was, first of all, they took their restaurant to serve homeless and needy people who had lost their job, which I respect, again, goes back to management. But they turned into a delivery-only business. They shut down the superstore. They started heavily targeting the local market and essentially did 24-7 cannabis delivery. And even during peak pandemic periods, they talked about their business. And you could

see based off of not their income statement, but their cash flow statement, they were cash flow neutral. So they could have continued on without any sort of tourism and not lost money, which is something that I think is extremely impressive. Now, as tourism has somewhat come back into the area, obviously that is the market that they still want to target. But the amount that they've retained of the local demand is pretty impressive. And they plan to keep some sort of delivery service for the foreseeable future because of the customers they've acquired. So even during peak pandemic, this was a business that was not as heavily affected as one may assume. And business has largely turned back to normal, even considering the decrease in tourism. But what's worth noting

about cannabis companies, and I can't say this enough for investors, is don't look at the income statement. And that might sound really counterintuitive, but it goes down to weird accounting for cannabis companies. For cannabis companies that report under IFRS versus GAAP, and most cannabis companies, even those in the U.S., are technically listed in Canada, so they report under IFRS, there's adjustments made to the gross margins, to the cost of goods sold, to account for the changes in the fair value of biological assets. So income statements, depending on how much a company is growing, can look really positive most of the time. They can look profitable, when in reality, they actually haven't sold a lot. They have essentially negative

cost of goods sold because of how many plants they're growing. And unless the company is able to sell through those plants, it doesn't actually show up in revenue over the long term. So when you're looking at an income statement for a company, it may look really great. The gross margins may look really impressive. But reality is, is that lots of those gross margins, you have to back out the changes in the fair value of biological assets. To be frank, it's a pain in the butt. It's my least favorite thing about investing in the cannabis industry. So when I look for great companies, I look less about are they making a net profit on their income statement, but are they actually generating a positive operating cash flow and more importantly,

a free cash flow? So I think I saw that metric that you're talking about there, the changes to biological assets. Is that sort of just a fancy way of saying cannabis depreciation for like the plant? Not depreciation necessarily. It's a weird rule, and I can get into the details with you. Essentially, IFRS acknowledged that for a lot of these agricultural companies, think about coffee plantations, for instance. It takes years for coffee plantations to actually grow beans and sell them through. So what they're acknowledging was, hey, you made this big upfront investment, but your income statement doesn't look like anything for a number of years up until the point where you get to sell the coffee beans through.

So we'll let you acknowledge the change in the fair value of the biological asset over time on the income statement with the expectation that you'll be able to sell, say, this coffee at some point in the future. Now, here's the problem. Cannabis only takes maybe 12 weeks or so to grow. It doesn't take years. But under IFRS, companies that are cannabis companies have to record the changes in the fair value of the biological assets on the income statement. Now, this leaves a lot of discretion for management. They come out and they say, okay, well, my plant is, say, 25% grown. Similar products that I expect this plant to make in the markets that I sell to are selling for, you know, let's say $5, $6 a gram, 25% of that. I make the

adjustment on my income statement. So, this is what we call a level three adjustment. There's no real market for this stuff. Managements are making their own judgment about the fair value of the assets that they're growing, and auditors have no insight into what the actual fair value is. So this adjustment is solely up to the discretion of management for the most part. And I don't mean to imply that I think management of cannabis companies are trying to make these adjustments to make themselves look better. I'm just saying they have no clue what the market for cannabis for that particular plant is going to look like in 12 to 16 weeks. So they're doing their best to make an estimate, but we as investors and even management don't have the

full information. So income statement, revenue is a good thing to look at because the revenue is not adjusted by the changes in the fair value of biological assets, but anything below cost of goods sold is. So you'll need to go in. Every company essentially backs out. If you go to their sheets, they'll report a gross margin that's not adjusted for these biological assets. But if you're just looking at the numbers themselves, if you're not making these adjustments, then you get a really misleading picture about a company's profitability. Okay. And should someone, if they're looking at one of these companies, start with revenue and see how much of that they're converting into cashflow? Is that a good way to go about it? That's a great way to go about it.

You'll see companies report adjusted EBITDA. And as much as I hate adjusted EBITDA for so many reasons, for cannabis companies, it can actually be pretty useful because it does back out. Be sure it does, but for most companies, they do back out these non-cash changes. So, adjusted EBITDA can give you some insight into the profitability of the business. I always like to say, though, if a company continues to post quarter after quarter after quarter of adjusted EBITDA, but hasn't had a single quarter of positive operating cash flow, that should lead you, as an investor, to scratch your head a little bit. Do a little bit more due diligence. Figure out why they're not generating positive operating cash flow, because we've seen with cannabis

companies, especially those in Canada, businesses focused so much on how they could build out inventory, make their income statements look really impressive with these changes in biological assets. But when push comes to shove, there's oversupply, the average cost per gram tanked, and a lot of these businesses had to write down their inventory because they couldn't sell it through. Those were the businesses, the Aurora Cannabises of the world, the ones that were not generating any positive quarter of operating cash flow, yet wanted investors to look solely at their income statement. Revenue is a good place to start, but I always like to say, it's a classic investing saying, cash is king. It can't be more true than in the cannabis industry.

Any other questions before we get to the next part? I mean, we kind of touched a little bit on our thesis, but is there anything else that you want to get out there as far as your thesis goes for Planet 13, why you think it might be a good investment? I like cannabis companies that take really unique strategies. So this applies to Planet 13, I see a clear strategy from management that I think can differentiate itself long-term in comparison to the competitors. But I also think it's applicable to anybody who's listening who is considering investing in the cannabis industry. Please ask yourself when you look at these businesses, what about their strategy makes them special? For some companies,

maybe that's having licenses in states that don't issue a lot of licenses. Maybe it's a great management team. But if you're investing in a company that you could, it could be any other company around the corner. It just has the biggest supply, let's say. That's not a sustainable competitive advantage. That's not a strategy. So look for strategy. The reason why I like Planet 13, and this is not to say that this is an overly safe investment. There's a great bear case to be made for the company as well. But the reason why I tend to side in the bull case, why I'm a shareholder is because I see a clear strategy that the management team has, and I see a clear path to execution. I have tangible ways to grade whether or not the company is succeeding in their

long-term plans. So I'd encourage anybody who's investing in cannabis to ask themselves, what do I need to see from the strategy, from management in terms of execution to make this investment plan out? Yeah, I think that's going to do it for the first half. On the second half, we've got a lot questions i have a few clarification questions and maybe some stuff about the strategy and then counterpoints as well but for now we're going to take a quick break cox panoramic wi-fi includes advanced security to help protect all your connected devices you'll get real-time alerts oh like this one so you don't have to worry about malware or when your kid downloads a song from a shady link and now all your computer can play is red color red color where are you

all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply welcome back in next up we have devil's advocate this is for most of our listeners you know what this is but uh if you don't we have provided some counterpoints and we're gonna let emily try to refute them i'll go first um and i i guess this is probably one that's on a lot of people's minds But if cannabis is legalized federally, companies that sort of have an infrastructure already built out or are bigger, then obviously Planet 13 has their one superstore. But the bigger companies are going to be able to scale better or squeeze out competition. So I'm thinking of companies like Kronos or Canopy Growth or someone maybe with like a big backer.

I know, is it Kronos that has? Kronos has the partnership with Altria Group, the tobacco makers, yeah. Yeah, so I guess they would have an advantage if it were to be legal federally. That's a really fair argument. And I think that we can make an argument that large producers, in particular conglomerates in tobacco and alcohol, could offer some sort of threat to the cannabis industry when it's legal. But the Canadian producers, you mentioned Kronos Group and Canopy Growth, are actually good testaments to why this may not be the case, at least not what we're seeing right now. I'll hearken back to what we saw when Canada legalized recreational cannabis in 2018, the end of 2018.

There was a lot of money that flowed into the space. You mentioned Altria Group with Kronos Group. And then Canopy Growth has backing from Constellation Brands, which is a big liquor conglomerate. These were businesses that saw the opportunity in cannabis and wanted to be part of the future. However, as the cannabis businesses in Canada continued to scale, they spent a lot of money. Shareholders of Altria and Constellation Brands started to get really angry because these ended up being just cash guzzlers, right? They took the bottom line of businesses that had been really profitable, paying steady dividends, and they threatened that. And ultimately, what we saw in Canada was horrible oversupply, really strict regulations, and a market that, to be frank, isn't very lucrative.

So now these businesses are essentially focused on trying to expand internationally. Now, the United States is not one of the locations that they're working to expand to right now because it's not legal under federal law. But they're trying to get into the international medical market. They're scrambling, and their bottom lines are tanking as a result. I would almost argue that businesses like Ultria, like Constellation Brands, may be a little bit afraid right now to be investing too early in this space. Now, what I do think is interesting is, Kronos Group, I kind of ride off, but let's look at Canopy Growth. Canopy Growth last year made an agreement to acquire a U.S.-based licensed producer, Acreage Holdings. a very small licensed producer, but they made an agreement to acquire it if and when the United

States legalizes cannabis federally. And the reason why they have to acquire a company in the United States, as opposed to start operations in the United States, is because of the licensing structure in which states that are currently legal issue licenses for retail stores. So that within itself is probably the biggest move we've seen from a Canadian producer coming into the United States are trying to make headway into the United States. Village Farms has some CBD operations, which is another cannabis producer. But that's it, essentially. Now, I expect if and when we see the United States legalized federally, there could be a wave of M&A activity, but they would need to come in and acquire the licensed producers in the United States right now.

Now, the companies that I think will have some sort of premium offered to them are the companies that have sustainable business models that are cash generating that don't threaten the bottom line of these big conglomerates the way that, say, an unprofitable or Canadian cannabis producer may. So long story short, I agree that there could be some sort of threat in the sense that there could be activity in the future for M&A. But I think that ultimately just ends up benefiting these really strong licensed producers in the United States. I think do not expect for large Canadian producers to try to come into the United States and get licenses on their own without acquiring their way to that point. And I do not expect big conglomerates to come in and try to

start cannabis operations from scratch, having no experience how to grow cannabis. I would expect the best way to tap the U.S. market is to acquire existing producers. So I kind of agree with your assessment there. What I will say as it applies to Planet 13, I don't think, and I'm going to knock on wood, I don't think anybody's going to come in and acquire Planet 13. They don't have the large number of licenses. They don't have the really large retail stores. Planet 13 is a niche play, an experiential play. They're going to be a small-time producer. They're not going to be the place that you see on every street corner in the United States if and when it's federally legal. But I do expect them to have better margins long-term. So that's how I think about the U.S.

market in general, but I don't think it really applies in the case of Planet 13. Yeah, as you were talking there, I started to think about it probably doesn't matter necessarily for Planet 13 since they are more of the Disneyland of cannabis, if you will. They're not necessarily just going for as much market share as possible, whereas Kronos or Canopy Growth kind of have the runway so that they can burn cash because they're backed by those big players. But yeah, what's your counterpoint? Yeah, I guess I have one more question. And is it important that they own the stores and they're fully vertically integrated compared to a lot of other companies that are either just growing it and then selling it to these other stores who, from our experience in Washington, they're all cookie cutter places that really offer the same thing. There's no special differentiator. Does that help Planet 13, you think?

I think it does. And what's worth noting is that Planet 13 does have private label products. So they do license out to other retail stores that are Planet 13 branded products. Their excess inventory does go out to other locations. So they're not immune from what you just mentioned, which is there's really not a lot of differentiation right now between the retail locations that are selling cannabis. I think Planet 13 maybe is the rare exception there. But what I think is interesting about the vertical integration in the United States, and I cannot stand it when I see cannabis companies pat themselves on the back for claiming we're vertically integrated. Most states require vertical integration.

You can't be transporting cannabis across state lines because it's a federally illegal substance. In states like Florida, if you're going to sell medicinally there, you have to grow it yourself. You have to produce it yourself. You have to retail it yourself. There are regulations that, for the most part, require vertical integration. If those regulations go away, I don't have a strong sense about if companies will retain vertical integration or if there ends up being some sort of wholesale producer who then sells it off to extractors who put a white label or private label to make different products that end up on retail shelves

that could be where the market goes. But as it exists right now, because of the way regulations have shaken out on the state level in the United States, vertical integration is basically the only way to go. Okay. And I'll hit my other counterpoint. It was really about the legalization environment in the United States. You know, I think a lot of people look at cannabis companies and think until cannabis is federally legalized, you know, the industry environment is just going to be too hard to operate in. Each state has their own rules, and you're kind of subjected to the political whims of all these legislators. Now, we've seen that work out well for tobacco, where it's kind of been a winner-take-all. Altria, Philip Morris have been successful,

but do you think that's a concern for a company like Planet 13? That's a perfectly legitimate concern. I actually, I worry less about legislators and the sense of them thinking about the product of cannabis in the sense that we think about tobacco, right, being a really harmful cancer-causing substance. And I worry more about over-regulating. We saw overregulation in Canada, which prevents cannabis companies from having overt branding in some provinces, prevents them from selling anything sweet or anything edible because it appeals to children. And the end result is that the branding offered Canadian cannabis producers is much lower than the branding that's offered to U.S. producers. So I worry about if there's some sort of federal legalization that regulators could go in the direction of Canadian regulators and over-regulate the space, preventing branding, preventing advertisement, preventing things that would drive consumption and brand awareness, brand loyalty from consumers. That's where I think my big concern is. When I think about legalization in general, I think it's a totally fair statement to make that most investors, some investors may not feel comfortable investing in cannabis until

it is, if it is federally legal. That's perfectly fine, right? The risk is much higher right now because it is federally illegal under obviously federal law. I think that that change is only a matter of time before it comes to the United States. I think there's probably a difference of opinion there between different investors, but I'm the first one to say that cannabis does not need to be the place that every single person invests. But I do encourage if anybody's interested in investing, that they do it smartly.

Do you ever get worried that this strategy might not work elsewhere? I'm just thinking about it like a cannabis superstore on the strip in Vegas sounds like incredible product market fit. I just don't know if that bodes well elsewhere. I think that is probably the biggest and most legitimate concern an investor can have about Planet 13. The two co-founders are people who are well-connected in Las Vegas. And while Las Vegas regulations prevent cannabis dispensaries from operating on the Strip directly, Planet 13 is as close as you can get to the Strip. They even have a free shuttle that goes back and forth. There's a lot of things that are working in the favor of Planet 13 in Las Vegas. Now, Santa Ana, let's think about the competitive advantages they

have in Santa Ana. There's none, really. I mean, the market isn't quite saturated in the area. Maybe it's close enough to Las Vegas that the brand awareness from people who travel between California and Nevada will be there to drive traffic. But it's not a tourist location the same way that Las Vegas is. And management talks about, I believe it's Disneyland that's in Santa Barbara, maybe not too far away. I'm not sure if parents bringing their kids out are necessarily going to be dropping by the cannabis superstore, right? Not the same way people on their bachelor, bachelorette parties may be. So I think that's a really fair criticism. I think when I think about the terminal issues that Planet 13 could have as an investor, I really

wonder if they're going to be successful in recreating the same experience that drives customers to pay more when they go to Planet 13 in Las Vegas versus Planet 13 in Santa Ana? I don't know that answer yet. I'm excited to see what it looks like in 2021, though. Okay. So Santa Ana is kind of the big test of whether Vegas is the ultimate product, but whether that customer acquisition cost is going to balloon where it's unsustainable, that's going to be something that investors should probably look out for? Exactly accurate. Yeah. I picture there's very little overlap between the Disneyland goers and the Planet 13 goers, but...

You never know. Why do you think, I mean, I guess this isn't a question I had on here, but why don't you think that they went with like Hollywood or something more... Or Venice Beach or something like that. Yeah, somewhere around there. That's a really good question. Those markets are really highly saturated

and really expensive. So it harkens back to the way that I think management thinks about investing in the industry. You could almost argue cannabis is going to evolve into very quickly here. what is a distressed industry. The expense of assets when they're looking to expand into California were what management believed to be overpriced. So the value for what they got in Santa Ana was greater on a per square footage basis. I mean, think about how big the stores

need to be to be attractive for the superstore. They needed a lot of space. Santa Ana was affordable. It wasn't already saturated. But more importantly, the number of people that drive back and forth between Santa Ana and Las Vegas, it's much greater than if they tried to go even to Hollywood, arguably less so, but even to states that were much further away. So their expectation was the brand awareness that we've cultivated with Californians, especially those that are traveling to Las Vegas semi-frequently, should build over into California. We shouldn't have to spend as much money to acquire that customer in California as we would in other states. I can see a really great argument that Santa Ana isn't exactly the

tourist destination that Las Vegas is. I think that's my biggest concern. But I like the fact that management was so prudent to think about the expense of opening a store, what the long-term margin for the store could look like. They've thought through pretty deeply about the unit economics of the Santa Ana location. I don't expect for this to be the thing that pushes this company from profitability to cash loss, but will this store be as profitable, be as cash generating as their Las Vegas store? That's where I scratch my head. And do you know, maybe you don't have them on the top of your head, but what revenue is this one Las Vegas store bringing in each year? Yeah, it's virtually all of the company's revenue, and I can pull up their income

statement really quickly here. They technically have a second dispensary that went through some legal battles. It's not really operating. But in the most recent year, so the past 12 months, they pulled in $67 million from this one dispensary and $67 million. That's not a large business. Totally understandable, especially when you see companies, I'll pull out Green Thumb Industries as an example. They did, I think, near $150 million just last quarter alone. So that gives you a sense about scale, about how much smaller Planet 13 is in comparison to the largest U.S. growers. But when you think about the fact that Planet 13 has dozens, or excuse me, not Planet 13, Green Thumb Industries has dozens of retail locations pulling in $150 million last

quarter versus Planet 13's single store doing $70 million over the past year with COVID. It's actually really impressive. Right. Yeah. You could see easily this one store getting $100 million in revenue in a normalized environment. It sounds a bit like, and I haven't been to the Planet 13 superstore but it sounds a bit like uh starbucks roasteries versus like their chain stores i love the fact that you brought that up is that fair it's a completely fair statement uh i am good friends with the former fool dan klein and and dan and i would often talk about the cannabis industry on on motley fool live which is something we do for members and he every single time i mentioned planet 13 would tell me about how it reminds him so much of the starbuck roastery

experience. And I think part of the reason why he draws that connection, and you're not drawing the same connection for the same reason, but you're maybe ahead of yourself here, is because they actually have extraction facilities and potentially long-term growth facilities in the location that can show people when they come in for events, like here's the process from seed to sale. It makes the whole thing just kind of fun and experiential. Now, the big difference is clearly you can go to a Starbucks roastery and sit down and have a cup of coffee. You can't do that right now at Planet 13. Unless you're on Indian territory, I believe, reservation territory, you're not allowed to consume cannabis in any sort of consumption lounge. But again, if those regulations were

to change, Planet 13 already has space dedicated for a consumption lounge in this huge dispensary, which would make the event space itself a really great potential revenue driver. Think about people renting it out for bachelor parties, even corporate events, these sorts of things. Okay. Yeah, that's interesting. What would happen for you to say, okay, maybe I don't like Planet 13 so much anymore. Is there anything that can motivate you to sell? That's a really good question. So I invest alongside all of our Marijuana Masters members at The Fool. Every company I recommend, I purchase myself. Obviously, Planet 13 is one of them. And I've made the commitment to our investors that will hold these companies for at least five years. So, to be

frank, nothing in the next five years can happen that will make me sell this company. And I made that promise because I know how long it's going to take for this industry to prove out. And that's to temper investors. We're investing for the long-term in good businesses, not to make a quick buck. Now, that being said, it may not take me five years to realize whether or not Planet 13 has really played out on its value thesis. And I think success in Santa Ana is absolutely critical. So investors who are maybe sitting on the fence right now or aren't quite sure about Planet 13, for the next year or so, keep an eye out for the development of the Santa Ana location. It's maybe not going to be fully operating in 2021, but as we head into 2022,

you should start to see margins take up even as they're expanding into Santa Ana. And if that doesn't happen, if they start to lose money, for instance, it's going to be very clear that their expansion opportunities are not as impressive as management believes them to be, and they won't demand the premium that they're getting on the market today. And last question here, if you could have one change, like say you're CEO of Planet 13 for a day, what is one change you'd like them to make? Or maybe, I guess they're kind of in the startup phase, so what's one maybe new move you'd like to see them do? I would love for them to acquire a retail license in an area that is more attractive than where they're operating today. And the reason why I say that is not because I

want them to start building out a second location or third location, I should say, at the same time they're building out a second location. But because I actually think the cannabis markets right now in terms of the cost of these licenses are much cheaper than I think they'll be in a year, especially if we see the Senate flip blue in January from Georgia. There's an opportunity here for the Senate to pass some sort of cannabis legalization or decriminalization, which I expect will move the cannabis industry from distress to suddenly everybody's interested again, we're all going to throw money at it, which will make getting those and acquiring those licenses much more expensive. So if I were them, and maybe they're thinking about this,

I would be interested to see if there's a company out there that I could acquire to get their license, not to operate anything, just to get their license that I can get for pennies on the dollar because they're headed towards bankruptcy right now. That's where I'd be focusing. And are there, so I guess people may not know how these licenses work. Does each state have a limited amount of licenses? And then how much do they typically go for? Yeah, that's a good question. So some states have a limited amount of licenses. Virginia, for instance, is an interesting one. They broke it up into county and then on the county level, local regulators determined how many retail dispensary licenses they'd issue. So the way

licenses work is that they essentially tell you how many retail stores you can open in any given location with the intent being, hey, we don't want every single store corner to suddenly have a cannabis store on it. We're not going to inundate our citizens with that. The way that some states that don't have as many licenses, Colorado is a good example, kind of got inundated with a lot of pot companies very quickly. So some states have been more aggressive with the licenses, which means that once we issue a certain number of licenses, we're not going to issue anymore. And if you want to get into these states, you have to acquire a company that currently owns a license. There's no hard and fast rule for how much these licenses will cost. We've seen

distressed assets, especially last year during COVID. We've seen companies that have licenses that are otherwise distressed, right? Bad management teams, no money, just cash burning. They still have inherent value in the fact that they have a license. They applied for a license from the state government. So it depends. Every single state's different. The value of the licenses are different. Some states are easier to get into than others.

California is pretty notoriously easy. Virginia, I always highlight, is a harder one. I think that's all the questions we have. Thank you for joining us. Hey, thanks for humoring me. I talk about cannabis for a long time, if you let me, so I really enjoyed it. All right, and anywhere people can find you

to find any of your stuff at The Motley Fool? Yes, definitely. You can find me on Twitter, first of all. My handle is Flippen, underscore Emily, F-L-I-P-P-E-N, underscore E-M-I-L-Y. But I also work at The Fool, so you can check out The Motley Fool's website, fool.com. Perfect. Okay, we want to remind our listeners that we are not financial advisors. Anything we say or discuss here on Chit Chat Money is not formal advice or recommendation.

Thank you guys for listening. We'll see you next time. We'll be right back.