Pre-Public Gage Cannabis Focusing on Regional Dominance

The United States is governed by a patchwork of state-level cannabis regulations under the umbrella of federal prohibition, making it difficult to build a national business in the industry. Interstate commerce is prohibited, meaning that a national operation would need to invest heavily in infrastructure in each state. Advertising limitations make it difficult to build a national brand awareness campaign. Federal banking laws are certainly problematic… the list goes on. In response, some companies have chosen to focus almost exclusively on one of the 37 states with some form of legal cannabis. one of the 15 states with adult-use cannabis laws, or one of the 22 other states with medical cannabis laws. A prime example is Trulieve Cannabis Corp. (CSE: TRUL) (OTC: TCNNF), which has parlayed dominance in the Florida medical market into an approximately $6B market cap.

Gage Growth Corp. (d/b/a Gage Cannabis Co.), currently private with plans to go public in the very near future, has a great start in establishing a dominant position in the Michigan adult-use market. The company is vertically integrated with licensed cultivation operations, extraction/processing facilities, and retail outlets under its banner. Gage has a raft of its own brands, exclusive third party brand rights (including a deal with the industry-leading Cookies brand), and a wide array of product offerings. Here we will take a look at what Gage has to offer in advance of its anticipated go-public event.

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Michigan

It might be best to start with a look at Gage’s chosen market, Michigan. Voters there approved adult use legalization in 2018, and sales started in December, 2019. The state had legalized medical sales back in 2008, so there was already something of a market in place. In fact, Michigan was only behind California in terms of medical cardholders before it legalized adult-use. In December, 2019, the first month of legal adult-use sales came in at $7 million while medical sales totaled $24.9 million. Fast forward to January, 2021, and those numbers are $67.4 million for adult-use with $41.7 million in medical sales. In those 14 months, monthly adult-use sales have grown about 864% from December 2019 to January 2021. In 2020, the state of Michigan posted almost $1 billion of cannabis sales, a staggering 250% increase from 2019. This strong growth trajectory continues in 2021 with $108 million of cannabis sales in January, which equates to $1.3 billion when annualized.

With a total population of about 10 million, Michigan is the nation’s 10th most populous state. As the cannabis industry matures there and more licenses are granted, these sales numbers will likely continue to climb. And Gage is in the middle of it all. The company currently operates seven retail dispensaries, with plans to have 20+ dispensaries open by the end of 2021. At that point, 90% of Michigan’s population will live within an hour’s drive of a Gage location.

It is also worth noting that in Michigan, there is no meaningful presence of any large multi-state operators (“MSOs”). This may be because Michigan is so highly competitive and fragmented (similar to California) that large MSOs would rather focus and spend their capital in other limited license states where there are fewer competitors and more supply constraints. Market-wide success in such a competitive landscape could potentially make Gage a ripe acquisition target.

Gage Has It Covered

Michigan is a lucrative growth market, and Gage operates there. But what differentiates Gage from its competition? A number of factors come into play, starting with in-house high quality cultivation and production. Gage prides itself on premium quality flower products and is consistently able to command high prices. One of the company’s main constraints to growth has been its cultivation capacity as its products often sell out within a week, sometimes within 48-72 hours of the product drop. In response, Gage is expanding its own facilities while arranging with other growers to supply Gage/Cookies strains on a contract basis. Since January, 2020, the company has increased capacity 650% up to 1,500 pounds per month. Gage expects this capacity to increase to 3,000 pounds per month by June 2021. Even with increased capacity, Gage remains committed to its small batch, hand-picked, sustainable cultivation methods that ensure the highest quality and consistency.

In order to sell premium cannabis, a company needs to have commensurate retail locations that provide a positive consumer experience combined with a marketing strategy to engage potential customers. Gage shines in this area, having won awards for retail design and social media marketing from the Detroit Metro Times, Leafbuyer, and ADCANN. As a result, Gage stores outperform much of the competition in terms of store performance. Michigan cannabis consumers average the largest basket size per purchase in the nation at $85.00 per visit. According to Gage, its customers in 2020 averaged almost double that, $164 per visit.

Gage controls its cultivation and retail operations, aggressively expanding both to meet escalating demand. The company also controls its extraction, formulation, and packaging processes to create a diversified range of products beyond premium flower. The Gage stable of products is strong, but the company recognizes the advantages of partnering with other highly visible and respected brands as well. Along these lines, Gage has exclusive brand partnerships with industry stalwarts including Cookies, Lemonnade, Grandiflora Genetics, and Runtz. These relationships expand not only Gage’s product offerings but its marketing reach as well, enabling the company to message a much wider audience than if it chose to go it alone.

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The Cookies partnership in particular bears examination. Gage is the prolific brand’s exclusive partner in Michigan. The Detroit (8 Mile) Cookies location is one of the top dispensaries in the state, despite being a medical only dispensary. Gage has also opened its second Cookies store in Kalamazoo as the state’s first Cookies adult-use location and first in the Midwest, with plans to open two more adult-use Cookies stores in Q2 2021. If any cannabis brand has a national following, Cookies would be it. The relationship is certainly a feather in the Gage cap and only helps the company’s other efforts.

Another differentiating factor is the depth and breadth of the executive team’s experience. The headliner is Chairman Bruce Linton, founder and former Chairman and CEO of the world’s largest cannabis company, Canopy Growth Corporation (TSX: WEED) (NASDAQ: CGC). It feels a bit like burying the lede down here, as we could have easily profiled the company as ‘Mr. Linton’s next endeavor.’ But the whole executive team is impressive, with many years of cannabis industry, capital markets, pharmaceutical, and public company experience to help guide the company’s aggressive growth plans.

In addition to the executive team, Gage has strong institutional support from Jason Wild, a widely recognized premier investor in the cannabis sector. Jason Wild and his $2 billion fund, JW Asset Management, was notably an early investor in some of the largest cannabis companies, including Canopy Growth Corp. and TerrAscend Corp. JW Asset Management has averaged 27% annualized returns for over 20 years.

Cookie Kalamazoo Location

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The Upshot

Gage Cannabis has all the makings of a dominant player in a lucrative growth market. It is vertically integrated, committed to premium quality throughout its operations, partnered with industry leaders, and led by accomplished executives with a demonstrated track record of success. Gage Cannabis is also going public soon. Interested investors are encouraged to keep an eye on this space for further developments.

Disclaimer

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About Robin Lefferts