Nabis Plans to Deliver More Market Share and More Markets

Founded by Vince C. Ning and Jun S. Lee, California wholesale cannabis delivery platform Nabis has seen steady growth since it first hit the ground driving in 2018 with a model that over time has added helpful services such as ACH payment integration and a two-day delivery guarantee. The result has been a steady increase in market share for Nabis, which focuses its efforts squarely on fulfillment excellence, as well as the sheer number of brands – now over 200 – that it delivers to cannabis retailers throughout the Golden State. Nabis has closed some notable exclusive distributor partnerships lately, including with The Parent Company and Statehouse Holdings, as well as similar deals in the recent past with brands such as Cookies, Pabst, Nug, and Bloom. Ning recently talked to CBE about what it takes to play in a market as large and disjointed as California and why that experience in the hot seat of delivery is such a highly prized skill-set elsewhere in the country.

Ning also talked about a recent LinkedIn post in which he explained changes to tax remittance that Nabis has made in response to the passage of trailer bill AB-195. Among other provisions, as Ning explained in his post, the new law mandates that “… the tax collection /remittance responsibility will transfer from the distributors’ hands to the retailers’ starting Jan. 1, 2023, and all taxes need to be back paid to distributors by retailers by Apr. 1, 2023.” Despite whatever short-term pain is caused during that transfer period, said Ning, the changes should benefit the cannabis tax chain of custody long into the future.

“I think broadly speaking, I felt like I needed to post that just given a lot of confusion around our policy itself, and why we did it, and how much it actually affects the day-to-day,” said Ning. “How we got here was really just with the passage of the new tax reform bill, AB-195. The excise tax responsibility as far as collections and remittance to the state historically has fallen on the distributor’s shoulders, and now we’ll be transitioning to retail. And it did always strike me as odd; I mean, it’s found and is common in other industries but given the excise tax originates from the consumer, is paid to the retailer, and should end up in the state’s pocket, it was kind of odd that retailers should forward it to the distributor only to pay the state.

“I think it was originally set up as one of the distributors’ roles and responsibilities because the state wanted to deal with fewer parties as opposed to every single retailer out there,” he added. “But just given that the state was sort of levying these taxes on distributors upon delivery, and distributors were extending terms on these excise taxes historically, it created this negative working capital cycle for distributors, where distributors would essentially foot the bill for the taxes to the state for years, and if a retailer was late on payments or they went insolvent, it was impossible for the distributor to recoup those funds that they’ve paid already to the state. Now, in practice, I think the state is going to be able to levy more taxes from retailers now that they are doing it directly starting Jan. 1, and retailers will ultimately not have to work through distributors to pay the state. But we are now in this sort of ninth inning of the period when distributors have to pay this tax, so we’re really just not extending terms on the excise tax portion.”

So, they’re just getting caught up before the AB-195 changes go into effect? “Exactly.,” said Ning. “We’re just mirroring the state’s payment terms to us, which is COD, and then we’re just trying to collect COD on taxes from retailers as well, so that way, come time for the transition, we’re basically all caught up.”

Is that a burden for some retailers? Do some of them not have the taxes to remit at that point because they hadn’t sold the product yet or something like that? Has tax collection misalignment been shifted elsewhere or is it just stressed during the transition?

“I want to clarify that, in all my statements, I recognize that it’s not the retailer’s fault, either” said Ning. “It’s like both the distributor and the retailer have kind of been set up for failure by government regulations and tax policies in the past. I do think maybe AB-195 presents a good long-term approach to tax management, and the sort of flow of funds that make its way to the state, but I think a transitionary period does create a lot of tossing and turning complication with retailers. They are very cash strapped, and for them to also pay on COD is hard, but I think the way that we looked at the situation, one of the other legs of AB-195 is that beyond just the tax responsibility transition on January 1, on April 1, the taxes are actually mandated to be back-paid to the distributor for any remaining outstanding balances owed. So, the retailer by regulation has to pay that to the distributors by April 1 anyway, and they will also have to pay the state their new set of taxes for Q1.”

To what extent are people in arrears on their taxes owed? And to what extent are people in arrears? What does that situation look like? “It’s pretty bad,” replied Ning. “I’m reticent to share any numbers but speaking with some other folks in the industry on the distribution level in the brand space – and taxes are 27.25 percent of wholesale value of goods – there’s some aging out there that is pretty bad. I’ve seen some people where over 80 percent of their total aging balance is past due, and 27 percent of that is quite significant. In terms of orders of magnitude of outstanding tax liabilities, to give you a really rough back-of-the-envelope estimate, it’s probably in the mid-tens of millions of dollars at any given point in time. That’s what I would guess is the aggregate balance that is owed to distributors across the board.”

Often in a debt situation, and especially with taxes, a resolution can be met where the state and the debtor will settle on a lower amount and dispense with the debt. Can that happen here? “I’ve actually spoken to Nick Maduros, who’s the director of the California Department of Tax and Fee Administration, and unfortunately, they don’t have the power to make settlements and provide relief unless it’s lobbied for,” said Ning. “That’s something that we’re all trying to see if we can get some relief for. Retailers have the ability to submit for credits, but it credits only for the invoices that they’ve paid to distributors that the government is trying to collect for them on.

“But beyond that,” he added, “there’s not much recourse besides just to pay it, and as a result, going back to the earlier point, instead of waiting for April 1, where the retailer has to pay two sets of taxes, instead of paying two sets, which create a huge ripple effect in the industry, Nabis has decided to have its COD policy for excise tax through Q4, so that it smooths out the cash flow between Q4 and Q1. That way, it’s not such a gigantic hit to the entire retail tier in time for April, so whether it’s a conversation that’s had now or later, we’re just trying to have a less difficult conversation now to get those funds paid off.”

Ning also had mentioned that there were additional changes he wanted to see implemented. “I think with AB-195, it left a lot of this transitional time and what to do with it up to the operators, and we needed to bridge this gap,” he replied. “Long run, I do think with cash flowing across fewer hands and making its way to the government, it’s just, again, this game of telephone, and shorter degrees of separation between cash at the consumer level to the government for taxes is going to be better, and in the long-run provides a more stable structure.

“I think the next big piece is really ensuring that payments are timely no matter who’s selling what to who,” he added. “That’s one thing I’ve been thinking about, whether it’s the retailer paying the distributor, or the distributor paying the supplier, or the brand paying the grower, I think everyone just needs to ensure that the payment comes on time, even if it’s a long time. It’s kind of like inflation; if you don’t tell me that inflation is going to be 10 percent, I’m going to spend my dollars’ worth – a dollar. But if you told me that next year inflation is going to be 10 percent, I will plan my business around that and set up my contracts appropriately. And so, the big thing is really just ensuring payment timeliness so that everyone can plan their cash-flow appropriately to make payroll and to run their business legally.”

Is it not also problematic in the long-term if everyone is dependent upon cash flow? How can you have a mature industry without robust credit, and what is the state of credit in cannabis?

“It’s pretty poor,” responded Ning. “It’s true that you do need credit. I guess my point was that payment on credit just needs to be on time, because otherwise the person receiving the cash, who also needs to run a business, can’t manage their flow of funds appropriately. And so, the state of credit is all over the place, and there’s no sort of additional external capital artificially coming in to save the day, so to speak. So, I think the operators are very much on their own to figure it out within the supply chain, and a lot of the original credit deals that were struck even at the most basic level, with just supplier contracts between brands and retailers, are being rewritten and renegotiated just because everyone just needs a reset. And then no one really has the time or the financial wherewithal to pursue legal suits, and so, at the end of the day, there are only so many operators in the industry, and everyone just needs to reset the board a little bit to help each other survive and keep the cash flowing.

What about better banking? Would something like the SAFE Act improve the situation? “Yes, I would say so,” affirmed Ning. “It would definitely bring a whole lot more capital in at a lower cost from traditional banks, and I think beyond bringing in more cash as a gross amount, it will also decrease security costs, and just any sort of cash management and compliance costs that we estimate in our business. Managing cash actually costs about 10 percent of our revenue. Just thinking about 40 percent of our business operates in physical paper cash, and we have to go pick that up from the dispensary, sometimes make a second trip. It could get hit on the road, there’s also that risk, and we get back to the warehouse, which obviously puts a big target on our warehouse where all of our products are. So, it increases our product coverage insurance too, and then we also have to have a cash management team that goes and counts and processes all the payments. And so, just thinking about the logistical hoops we have to jump through just to get payments made for cash specifically is very costly.”

Tight Margins

What about the distributors’ margins? Are there situations here where Nabis could find itself insolvent if its own bills aren’t paid” “Our margins are incredibly tiny,” said Ning. “It depends on when you look at the numbers, but especially with sales volume in the industry dropping, the oversupply in the market is creating a ton of downward pressure on our business. But we recognize that we provide an infrastructure as a service-type business similar to how, if AWS goes down, I’ll bet you half the internet goes down that day, too. So, we feel a sense of operational responsibility to the industry where we definitely need to stay as stable as possible in order for brands and retailers to continue transacting in a streamlined way. Otherwise, if we disintegrate and the distribution tier itself falls by the wayside, then what you’re left with is a thousand brands trying to talk to a thousand retailers every day, and it’s just going to be mayhem.”

Are they essentially too big to fail? “No, I wouldn’t say that’s the case,” countered Ning. “I don’t think the government or anyone else is coming to save us; we’re far from that. We’re not a bank. We serve the state, and that’s the problem with cannabis. It’s that we always serve the same essential roles and responsibilities for the society we provide services to in the community, but we don’t get the aid from the government. When COVID happened and cannabis was deemed essential, hurray, but then did we get any PPP loans, did we get any SBA loans? None of that, so we just have to operate in harsh conditions even though we get granted these weird little exceptions.”

How in God’s name were they able to fulfill the two-day guarantee? Was Ning’s background in programming instrumental? What about the logistical heavy-lift involved in this task, where did that come from?

“The two-day shipping guarantee was actually a tenet of our business, a value prop that we wanted to start offering as soon as we got to market,” he said. “I’d say that’s probably the second thing. The first thing was actually becoming a statewide distributor with statewide coverage, and the second is two-day shipping. And it’s mainly because I think it actually helps generate demand for brands on our platform, because a lot of stores, especially in the not such a cash-rich time, they don’t have that much money to make such gigantic purchases from all sorts of different brands. As a result, you need to sell through, and so, to make smaller purchasing decisions, and then we’ll deliver, and you can make another purchase decision the same week if you’d like, and we’ll deliver it again, and you won’t miss the weekend. That in and of itself helps drive demand and purchasing decisions for brands on our platform, which we obviously make a cut of, so that was a headline value prop for us.

“I would say, given my background, I guess where you connect the dots between programmer and logistical operator is in class,” he added. “When you learn about computer science, you actually first learn about logic and process flows. It’s all Boolean yeses and noes and decision trees, and at the end of the day, whether you’re mapping the real world in a computer language or trying to map an operational distribution network, it’s all just a process. And Jun [Lee], my co-founder, and I take very much an engineer’s mind attitude towards just hammering away and making a very efficient system happen. And it’s constantly a work in progress, like you said, because of the fact that the ground beneath us constantly shifts whether from regulations or supply chain costs, but that’s how we’ve been building our business. And so, whether it’s in the bits world or the atoms world, we generally just try to make it as efficient as possible.”

On the atoms side, how many hubs and trucks do they operate? “We have about 90 vans in our fleet, and they are predominantly Mercedes Sprinters, but we also have a handful of box trucks and tractor-trailers now, too,” said Ning, that last fact a surprise to me. “In terms of hubs, we have three currently, and we’re about to do a little switcheroo with one of them in place of another much larger one. Another way to look at it is currently we sit on about maybe 60-70,000 square feet of space across Oakland and LA. And because there’s some redundancy in LA, we actually want to shut one down, and we’re going to launch a new hub in central California at the top of next year, and that will be an additional 86,000 square feet. So that hub alone will be larger by square footage than our entire warehousing network right now. We serve roughly on a good day about 20 percent of the California market, and by the time this new warehouse comes online, we’re going to be able to serve up to about 35 to 40 percent of the market.”

The company’s numbers are on the upswing. “We fulfill about 100,000 orders a month, and so, given 20 to 25 business days, we process a few thousand orders to 3000 orders a day. There are two ways orders can come in – and the reason why we’re able to service all of it is purely because of the software. I don’t think humans can do all this – one way is through our online wholesale marketplace, retailers can go online, place orders, and it’ll trigger a set of pick, pack, and ship processes, and orders can also come in a second way, which is, brands have sales reps that go and place orders at retail shops, and they go and punch in the orders on their account on Nabis to be fulfilled, and once that order gets entered in, we will pick, pack, and ship against the same inventory, and we do pick up all the pickups from the manufacturers”

It’s easy to imagine how valuable this level of service would be to retailers currently pinched. “Just given how often we go out to most major regions of the state,” explained Ning, “even if an order doesn’t go out the same day, it’ll go out the next day or the day after, so you’re not waiting an entire week for the next trip out.”

What does the competitive landscape look like for distributors? In terms of differentiation, it sometimes looks geographic, or people want to be a smaller distributor with only a few brands, or a distro targets a certain sector of the market. Where did Nabis place itself, and at the end of the day is the software functionally similar?

“I think the beauty of our software is that it is actually tied-in with our operations,” replied Ning. “Anyone out there can make any sort of ERP software. I think ours is valuable because it’s rich with data that’s real, accurate, and real-time; and it updates on a real-time basis mainly because we’re hooked into the actual operation. So, talking about a retailer purchasing orders, often they can have ten different marketplaces that they can purchase products off of, but because Nabis, similar to Amazon, stores and ships the products, placing an order on Amazon, you know it’s available, you know they’re guaranteeing the quality of the product, and that it’s going to arrive within two days versus if you purchased a product on, let’s say, eBay.

“No matter what they can do to try to guarantee authenticity of a Rolex watch you buy on eBay,” he continued, “if the seller sells you a counterfeit watch, you’re pretty much out of luck, and you can’t guarantee what the seller’s shipping timeline is either. So, at that point, it is better for the long-term customer experience on the retail side to be purchasing through the Nabis platform versus anywhere else. We’re making money on the fulfillment already, but we’re aggregating this byproduct of all this data around which sales are happening, going to which region of the state, which type of retailers, how much credit is being extended, whether or not it’s getting paid down or not. And so, it gives us a lot of insights into helping our brands be able to make not just any sales decisions, but the right sales decisions actually occur.”

It’s clear how users could benefit from Nabis data, but what about Nabis itself? Are there new revenue streams in there for you guys as well? “There are certainly ways we can take advantage of the data,” said Ning, “but then the consideration is whether or not it’s a short-term gain or a long-term gain for the business. I think a lot of the short-term ways to benefit are just revenue. We could develop a data package that a lot of investors and hedge fund managers really like, and we could build our own brands, and launch them into market because we all know exactly where the best target market is going to be, where the biggest gaps in the brand’s buyers space is, but at the end of the day, we want to stay agnostic, we don’t want to package up other people’s data and sell it, and we don’t want to compete with our own brands. As a result, we’ve always leveraged our data to help our existing brands – not our brands but the brands we work with – grow, because ultimately it’s the partnership and if they’re growing on our platform and making more sales, we also make more money.”

How does pricing differ amongst distributors? “Full-suite distributors – the Kivas and the Herbls of the world – I will say they charge an average of 15 to 20 percent, because they’re doing both sales and logistics,” said Ning. “We’re doing only the fulfillment logistics component, and we charge anywhere from as low as 7 percent up to 12 to 13 percent. So, I’d say it’s roughly about half of what a full-suite distributor charges because sales staff is expensive, taking a percentage commission for every sale they make, so that’s a pretty hefty cost to the business that we don’t have to have.”

Delivering More Than California

Nabis has already indicated that it intends to double its California market share of sales by next year, but it also has plans to expand beyond the state, albeit cautiously. “We’ve been solicited to go out to various markets,” noted Ning, “and frankly, as a curious optimist, I’d like to go and explore new opportunities, but sometimes as a business with limited bandwidth and time and resources, you’ve got to double-down on what you know. And what we know is California, which is the largest single cannabis market in the world. And so, I think we’d be remiss to not think that continued growth in California is the next best option and saying no to the rest, but I think it’s getting harder and harder to continuously say no to the rest of the U.S. market. And so, as a result, New York has been tweaking our curiosity, the market is slowly opening up, and we need to get into market there by next year.

When you say you get solicitation, do they want experienced distributors? Are you hearing the siren calls of demand from other markets? Certainly,” said Ning, “And it’s very true that most markets don’t have as mature an ecosystem as California, and as a result distribution hasn’t grown in other markets. But as other markets become more sophisticated and more complex, distributors do play a larger role. And given a lot of the brands have come from California or are interested in California, or have just worked with the Nabis system before, they want to continue working with Nabis because they like the experience and want to take it out of state with them.

“It is a little slower for us to expand because we have to do all the truck procurement and the warehouse set-up and getting the licenses and hiring the team,” he added. “It’s a bigger upfront cost, so we have to be more careful about where we expand into, but I’d say a lot of the East Coast states – Michigan, Massachusetts, New York – do pose pretty large markets, and so the ROI for the upfront capex investments could make a ton of sense.”

Would Nabis have less trouble finding capital that’s affordable because the opportunities are so great, and will they need to raise money in order to expand? “We still have some cash left from our Series B that we closed last year,” said Ning. “It would be difficult to try to go into multiple states at the same time, because you’re going to have to burn money for years in each state to get profitable, and that’s not something we can support if we want to continue supporting California.

“But I do think going into one state or two selectively does make sense,” he added, “and we do have the capital for that. We’re very judicious about how we spend right now given how capital is very expensive. I think there’s still some trickles of capital out there, but we’re not immune to the market and fed rates hiking, and from a capital strategy perspective it’s made us become much more self-reliant rather than trying to go raise capital from the external market and get dinged from an evaluation perspective just because of the time. So, while we’re open to a lot of creative financing solutions, I think the best one is just running a stable business, and that’s what we’re trying to do in California.”

Our time almost done, I asked Ning how imperiled are the remaining small cannabis farmers in California, and whether there will be a market for legacy brands going forward? “I think it’s a complex topic,” he replied. “There should be [a market] in the same way there are craft beer microbreweries in the alcohol market, and I think it’s always good to give consumers more choice while also supporting their local communities to the extent that they can.

“There are definitely a lot who are struggling to exist, and we try to do our part by consistently offering discounted distribution rates for those brands,” he added. “For things like compassion programs, we often do pro-bono work, and basically offer free distribution so that patients can get their medicine. I think at the end of the day not every distributor is in the position that we are, running trucks to every place every day, and we can add another small box onto a truck and it’s no extra skin off our back, but knowing the scale that we have, I think it’s important that we do our part to help the ecosystem.”

Does it pay to have a diversity of products on the shelves, including local product? “I think so,” said Ning. “I would imagine in certain municipalities it drives more traffic to that store. I know in certain municipalities in California, they mandate that already. I believe in San Francisco they mandate a certain percentage of your store shelf space, or at least that you carry certain brands that are social equity owned. I don’t know about craft or locally grown or owned, but certainly social equity is a big tenet of local laws.”

What about the divide between the legal and the black or traditional market? Has the black market won, as many people believe?  “I wouldn’t put it as sensationalized as the black market won, because I don’t think the fight is over yet,” he countered. “There’s been a major tax reform that’s going to lower costs where cultivation tax was zeroed out. Over time, as you know, we work with the state to minimize tax burdens continuously as a percentage of sales, and that will continuously drive more economic demand for legal products. And just for health and safety, I imagine over time, new generations will be more health conscious, and as a result, they’re willing to pay an extra dollar even if it’s more expensive.

“Right now,” he added, “it is a tough argument, because there’s a lack of access in many cities, and when there is access it’s expensive, and because in the illicit market you don’t have to work through all these different parties – the manufacturer, the distributor, the testing lab and retail store – to get your product, sometimes your flower is fresher in the illicit market because it’s coming straight from the farm. It’s almost like a farm-to-table experience. So, it’s definitely an uphill battle, but I think there’s some strong tailwinds if the right domino pieces fall.”

Do you see a strapped consumer trying to survive a recession next year? What will 2023 bring? “I hope that there will be a plateauing of the price of flower, just given all the oversupply in the market,” said Ning. “I hope there’s going to be more tax reform that drops the price of flower as it enters the retail market, and I generally believe that the good operators in the industry will continue to prevail and actually be stronger as a result of it. I don’t know what’s going to happen with capital markets, that’s a mystery to me, but I’m hopeful that a lot of investors who are grasping with white knuckles onto their bags of cash will start deploying some of that next year as they find the good operators that shake out of the rough position.”

Did he say the price of flower will stabilize in California, or is he hoping it will? “I’m hoping it will,” he said.

Before we rang-off, did Ning have any specific ask of the industry?  Did Nabis have a high bar for bringing on a new product or brands? “I have a high bar for the operator,” he said. “For the brand, we have a mentality of, come one, come all. We want to support a thriving ecosystem of brands that translates into widespread, diverse consumer choice.

“And I think it’s still the tip of the iceberg today in terms of the products that are out there,” he added,. “Because it’s federally illegal, a lot of the research hasn’t been done yet on cannabis and all the different cannabinoids that get produced from the plant, and as a result, there can be many different permutations and combinations of those that turn into commercialized products down the road that we haven’t even scratched the tip yet in terms of innovation. So, we’re actually as a distributor trying to lubricate the market and be sort of invisible in many ways and just provide market access. So, we don’t really say no to brands.”