Tahoe Hydroponics Company is a Nevada-based cannabis producer in the process of being acquired by Golden Leaf Holdings (CNSX:GLH) (OTCMKTS:GLDFF) (FRA:9GL). Tahoe Hydro Co-founder and CEO Ray Schiavone notes that the company has a significant presence in cannabis stores in Nevada and is expanding its operations to California, with a combined 120,000 square feet of grow space in both states. Tahoe Hydro’s deal with Golden Leaf enables the Nevada company to expand its offerings from dried flower and pre-rolls to extracts. Schiavone explains how new testing regulations in California have impacted the state’s cannabis producers. Tahoe Hydro is already compliant with stricter testing regulations in Nevada, giving the company a marked advantage when its California facilities begin production.

Transcript:

James West: Hey, welcome back to Midas Letter Live. My guest in this segment is Ray Schiavone. He’s the CEO and co-founder of Tahoe Hydroponics Company. Ray, welcome.

Ray Schiavone: Thank you, James. Pleasure to be here.

James West: Ray, you are in the process of being acquired by Golden Leaf Holdings in a transaction worth $52.4 million CDN, is this correct?

Ray Schiavone: Correct.

James West: Awesome. Okay, so tell me about your operation.

Ray Schiavone: So my partner and I, we’ve been in the cannabis space for a while in Nevada; it’s been about four years now. We distribute to basically almost all the stores in Nevada. There’s I think approximately 60 stores in the State of Nevada; we’re in the majority of all of them. We also have a facility in Sacramento, so we’re expanding in California, and then another 60,000 square feet in Nevada as well. We’ll have about 120,000 feet total between both markets.

James West: Okay, great. And are you selling dried flower, are you selling extracts, or the whole nine yards?

Ray Schiavone: That’s a good question. Just flower and joint pre-rolls for now.

James West: Okay. Are you planning to add extracts to the mix?

Ray Schiavone: Yeah, so, and that’s part of the reason why we’ve joined forces with Golden Leaf. I mean, they’re great at making tons of different products; they have chews, candies, droplets, oils, a number of different products, plus retail stores. So it’s a nice fit for both of us.

James West: And how much revenue do you do currently?

Ray Schiavone: Somewhere close to about $1 million a month – somewhere between $900,000 and $1 million and upwards.

James West: Okay, and what’s your average sale price?

Ray Schiavone: That is a great question. It just, it really depends on the type of flower or, you know, the strain, if you will. Somewhere, you know, on the high side, three, thirty-one, thirty-two, and then on the low side, we have a ton of bulk and somewhere closer to the mid-two-thousand range.

James West: Okay, so what kind of gross margin would you say you’re making there?

Ray Schiavone: It’s pretty good – between 40 and 60 percent.

James West: Okay, great. So are you guys planning to expand into other states as well? You’re in California and Nevada now.

Ray Schiavone: Correct. So we’re in the process of expanding into California, which is where both of us are from – my partner Mark and I. We have a facility in Sacramento, which is where I live, or used to live. So there’s 30,000 feet there, and then we have another 60,000 feet in Sparks. So our current facility, which is in Carson City, is completely built out; we’ve outgrown that, so we’re adding an additional 50,000 square feet in Sparks, which probably breaks ground in a month or two.

James West: Very cool. And so, are you in a position where you’re basically selling everything you can grow?

Ray Schiavone: Yeah, I would say that. We’re actually harvesting every six days now, so it’s kind of hard to stay out in front of it because we’re producing it so quickly, but it’s pretty much, yeah, I would say within a couple of weeks, it’s gone.

James West: Is that right, eh? So what’s the state of supply and demand in Nevada right now? Like, is it a case where there’s more demand than supply or vice-versa?

Ray Schiavone: Yeah, that’s a great question. I mean, and it’s changing rather quickly. So I would have said, you know, maybe five months ago, that demand was so high that we couldn’t produce enough, and now there’s more and more producers coming online that, you know, there’s a little bit of a shift. More guys are trying to enter the market and sell it as cheap as they can just to create revenue. So it’s a combination of, you know, new guys bringing down the price, and then they have guys like us that have a high quality product that are demanding a higher price.

So the State of Nevada just came out with their latest tax survey, so we’re taxed on actually the dollar amount. So what that means is that they set the price of 2800 to whatever the average price per pound is, then they aggregate, you know, 15 percent tax on that. So regardless if I sell for 2400 or 3000, we’re taxed on the $2,800 pound. So I guess what I’m saying is that the State is saying that the average price per pound is $2,800 right now.

James West: I see. And has that come down at all since the onset of regulations a year ago? Or no, it’s just July, wasn’t it?

Ray Schiavone: Literally, yeah, this came out and they just raised it to 2800. So it was 2200 six months ago. So I guess the answer to your question is, it’s actually going up, but it sounds like the market is beginning to compress a little bit. So maybe in six months from now it might go back down a little bit, but it’s actually much higher than it was even last year.

James West: Interesting.

Ray Schiavone: Yeah, it is interesting.

James West: So would you say that the total tax burden to a retailer on top of what your cost is to produce it, is 15 percent?

Ray Schiavone: Fifteen percent is our cost, and then there is an additional tax that is pretty much about the same.

James West: So there’s 15 percent tax on the grower and then the retailer pays a percentage in tax of the retail price that he buys it for?

Ray Schiavone: Correct. And, you know, there’s also a 3 percent for the local authorities, so we actually pay another 3 percent to Carson City, as well.

James West: I see. And what is the sales tax at the retail level?

Ray Schiavone: That’s a good question. I think it’s around 10.

James West: Ten, so twenty-five, so twenty-eight percent is the total tax burden?

Ray Schiavone: Yeah, so that’s a nice number for the State.

James West: Yeah. Okay, the reason I’m asking this is, one of the issues that we’re tracking here, Ray, is, you know, the opportunities for unlicensed black market producers to compete with licensed producers is sort of very relative to the burden of tax that the consumer has to pay in addition. Because a consumer will say, at a certain level, ‘oh, okay, if I’m only paying X percent more, I’ll buy it legally. But if I’m paying more than that, then I will continue to source from black market sources, all other things being equal’.

Now, in the State of Nevada, is it your experience that the illegitimate producers who are unable to get licensed are going to continue to be a serious part of the supply chain, regardless of the tax burden? Or, do you think that most people are going to prefer to gravitate towards legitimate sources?

Ray Schiavone: You know, I mean, these are great questions; I actually never really thought about it as far as Nevada goes, and it’s a huge topic as far as California is concerned. So Nevada, there really isn’t a black market; I mean, there might be a minor one. You know, we do not see, necessarily, any competition in Nevada. I mean, all the tourists come here; maybe some of the tourists might be getting something from the cab driver or, like, bellman or something like that, but it’s not – I don’t think it’s necessarily affecting pricing at all. Not to mention, in mean, in Nevada you have, you know, some of the most stringent testing in all of, you know, in all of cannabis.

So at least those consumers are guaranteed that they’re going to have the highest quality cannabis for what they’re paying for. Now, I mean, if you’re comparing it to California, there’s a significant difference, because there’s so much product available, and the prices are significantly less, that I do see how that could potentially come into play because when you add in the taxes in California, which are fairly similar to Nevada, I mean, it almost would make more sense to go buy it, you know, from your buddy. Plus it’s everywhere; I mean, almost everybody in California has a friend that’s probably grown cannabis or currently growing it, versus in Nevada, you know, it’s regulated so well that it’s really – I mean, you can’t have an outdoor grow, I mean, you know, most likely you’re going to get caught in Nevada versus everybody’s doing it in California.

James West: I see.

Ray Schiavone: …strict in Nevada.

James West: Right. So my understanding is that in California, the total tax burden to the consumer on top of what they used to be able to get it for from the black market is 40 percent, and alongside the very tough regulations on the testing side that just took effect July 1st this year, there’s a sort of convergence of this problem where the super-high tax burden plus the fact that 80 percent of the growers going into the testing regime can’t actually get through to the other side because they’re not growing, they’re not following the rules. And so all the dispensaries – you know, I follow them, I go there regularly, I’ve noticed that dispensaries are down to, like, 20 percent of the range of supply that they used to have, and a lot of the patients who are sourcing medical cannabis for very specific medical reasons are finding themselves forced to go back to the black market because there’s nothing available in the dispensary anymore, even at a 40 percent premium. So that problem for California is one where I say, okay, so supply is constrained by, you know, the fact that everybody has apparently being growing weed there forever using pesticides or whatever, and also, you know, the tax burden makes it very attractive to black market producers to continue to supply, especially when legitimate sources can’t get through that testing regime.

Ray Schiavone: Right, I mean, yes. So the consumers are getting hit on two fronts: I mean, one, there’s the demand issue obviously for retail, for legal cannabis; and then, two, the guys that are producing it are scrambling to pass the testing. I mean, it’s something that I’ve been telling, you know, obviously bill of Canadian investors and stuff, and they’re like, oh, the market’s going to be compressed in California; the last year I was telling them, I’m like you know, it’s going to be the exact opposite, because there isn’t going to be any product available because everybody still has to figure out how to pass the tests.

Luckily in California, they haven’t actually rolled that out yet, or they’re not, at least, enforcing those regulations. So we haven’t even really seen it, but you’re right, there is a huge supply issue in California currently, and it’s just about to get worse. And I have friends, actually, in Sacramento that have stores that have maybe one vendor on their shelf. So it’s probably, you know, maybe worse than 20 percent – it could be, like 5 percent of what they had before.

James West: Right.

Ray Schiavone: So some guys are finding workarounds, and other guys just went out and bought a bunch of product from everybody to put on their shelves until the regulations hit; it just depends on how aggressive they want to be with their license. But it is – I mean, I like the opportunity for us, because we obviously have a proven model. We’re all used to operating in an environment with testing, so for us, we’re excited for the challenge. But I mean, our, we use a company called 374 Labs to do all of our testing, and 374 went out last year and did some, they tested about 100 different companies and they all failed. They were just doing some private testing to really see how bad it was, so that kind of gives you an idea of really how bad it is in California, and there’s a few players that are already figuring it out, but it is a moving target. You know, in Nevada, testing changes all the time. So our tests are a little more stringent, because not only are they testing for pesticides, they’re also testing for mold spores, but they don’t even test for that in California.

So realistically, Californians actually have it easier than they do in Nevada. So it’s exciting for us, once we finally jump in, that we know how to do it the right way, and once the guys actually figure out how to even make it work in today’s environment in California, it’s just going to get worse and more difficult for them – then they have to adapt. And so, when you make these changes, I mean, you’re changing the plants and your environment and it takes six months to make the changes. You got to cross your fingers that you’re going to pass. It’s not easy and a huge gamble for the guys that have these, you know, major operations. So it’s going to be really interesting to see what happens once the State actually starts testing for mold.

James West: Right. Okay, Ray, you know what? I could talk to you for a long time. I’m impressed with the fact that you guys are sort of leading growers in Nevada, and I’m going to propose to you that we’re going to come down with a film crew and shoot your operation, if that’s all right with you?

Ray Schiavone: Yeah, please do! We welcome it.

James West: Awesome.

Ray Schiavone: Hope you guys enjoy that.

James West: You bet. Okay, Ray, we’re going to leave it there for now. I’m going to come back to you in three months’ time and see how things are growing.

Ray Schiavone: Awesome, thank you, James. I appreciate it.

James West: Thank you, Ray. Bye for now.

Ray Schiavone: Have a great day. Bye.

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