HeadMagazine.com Editor and Publisher Charlotte Parker caught up with KushCo CEO Nick Kovacevich for a conversation about the MORE Act, which will be coming to Congress soon for a vote. They discussed the pending legislation, marijuana politics, the business of pot, and how the upcoming election will affect the future of the marijuana business. For the text of their talk, read on…
Charlotte Parker: Thanks for joining us at Head Magazine. We’re going to start by talking a little about KushCo Holdings. Tell us about your company.
Nick Kovacevich: Thank you for having me. Our company is one of the longest-standing cannabis companies. We’ve been servicing the cannabis industry now for almost 10 years. Our 10-year anniversary is in December and we started as a packaging provider. The company was originally called Kush Bottles and we sold bottles to marijuana companies. At the time, it was mostly dispensaries and a lot has changed at 10 years. The marijuana industry has grown tremendously.
It’s become legal for adult use purposes in close to a dozen states and our business has changed as well. If you look at us today, we’re a provider of still packaging and bottles, but we’ve added things like vape pens, vape hardware, batteries, also energy products like gases and solvents that are used in the extraction process. Our target customer is the larger cannabis operators here in the US and Canada that need these products on a regular re-occurring basis. We become a supply chain partner, making sure they have these ancillary goods that they need to go to market.
Charlotte: Tell me about yourself.
Nick: I’m one of the founders of the company. We started, like I said, 10 years ago. I guess for a little bit longer than that, I’ve been an entrepreneur. I’ve started several companies. Right now, I’m still on the board of a couple of those companies, but my main day-to-day role is with KushCo, I’m the CEO. I took the CEO helm in 2014. We went public as a company in 2016. It’s been a lot of work managing a company of well over a hundred employees and not to mention being a publicly-traded company as well.
I love my work. I love what I do and I’ve become a big fan and passionate advocator for the legalization of cannabis along the way, being able to really get entrenched in the industry and the people behind it, and the efforts to right some of the wrongs that have happened with the war on drugs and also de-stigmatize the plants. I’m also a big advocate. I may have been involved in politics as well.
Obviously, cannabis has a big political part to it, which has afforded me relationships, for example, with the current governor of California, Governor Gavin Newsom. I was recently appointed earlier this year by the Governor to the Orange County Fair Board. I actually sit on the board of directors for the Orange County fairgrounds here in California, which is owned by the state. I participate in the monthly board meetings and leading some of the strategy and direction for the fairgrounds and events center here in Orange County.
That’s a little bit about my professional life. Personally, like I said, I’m into the cannabis industry personally as well. I’m also someone who enjoys sports. I was a college basketball player. I played NCAA for four years. As my body has started to fail me, as I get into a little bit older age, I’ve now picked up surfing as a big hobby of mine. I have a wife and a newborn son, who is actually a year old. It’s crazy. I enjoy spending time with my family and spending time doing hobbies that I love and also spending time building businesses.
Charlotte: The MORE Act is scheduled to go to the House for a vote later this month. What is it?
Nick: Well, the MORE Act is the first legislative bill that is going to be voted on by either House or Senate to fully legalize cannabis. That’s exactly what the MORE Act would do. It would remove it completely from the schedule list. You know more than anyone that cannabis was put on the schedule list. It was put on as Schedule I back in the ’70s. That’s the highest classification that an illicit drug can get.
It’s actually higher than drugs like cocaine and meth that are Schedule II. It’s just absolutely insane that it’s even on the schedule list, let alone the highest or worst tier. What the MORE Act would do is remove it completely, which would thereby make it legal. It also has provisions that would expunge records for folks that were convicted of cannabis marijuana crimes in the past.
Now, if being legal, it doesn’t make sense for those crimes to continue to be a burden on their life, so it has a part of it. The acronym is Marijuana Opportunity Reinvestment and Expungement Act. It would expunge records. It would actually create a fund generated by a 5% tax that would go back to be able to help people that were affected by this to get into the industry and help the social equity component of the legal cannabis industry.
Charlotte: Are there any parts of the bill that you don’t agree with?
Nick: Well, I’m sure there’s some parts that I don’t agree with. If I was writing the bill, I would probably have made it a little bit different to try to draw more bi-partisan support. I think, as a nutshell, it hits on a lot of the key things. I think, number one, removing cannabis from the schedule list. Number two, expunging records. Number three, creating opportunity for folks.
I’m all about all three of those things. I think it’s a pretty good bill. My only concern is that it won’t be able to get enough support something like the STATES Act, which I don’t think necessarily goes far enough. Something like the STATES Act, which would essentially make cannabis legal only in states that have allowed it, is something that could probably garner more bipartisan support.
Given that one side of the aisle who are the Republicans aren’t as big of fans in general on cannabis, although some of them are, they are proponents of state’s rights. That’s, I think, an angle that if you were looking for broader support across both sides of the aisle that I would personally look at, but a lot’s going to depend on November as well. If the Democrats keep the House and actually flip the Senate, then something like this has a clear path. I think it does cover more robustly a lot of the key issues that folks in the industry want to see.
Charlotte: Who’s leading the charge in the Congress and the Senate for the bill and who do you think is the strong opposition?
Nick: Well, interestingly enough, everyone is piling on in Congress, right? Initially, actually, Kamala Harris is a supporter on the bill, which is great. Congressman Blumenauer has been one of the leading advocates for cannabis reform and one of the first people to get involved with this bill. Senator Cory Booker is big on this bill. Congressman Matt Gaetz is somebody who is a big supporter of legalization of cannabis as well.
You do see a lot of bipartisan support in Congress. Now, moving over to the Senate. As I mentioned, there is Democratic support in the Senate, but anything to get onto the Senate floor goes through Senate leader Mitch McConnell. The interesting thing is McConnell was the architect behind the Farm Bill, which legalized hemp in 2018, and gave a lot of us hope that he was coming around on the cannabis issue broadly.
What we’ve seen recently has been actually a lack of progress even with hemp, which has been a disaster. That was a great initial push to legalize and there was supposed to be this robust industry. It’s completely fallen apart. A lot of the blame is now actually falling back on Senator McConnell. That’s kind of backfired unfortunately because I think there were good intentions behind that. You look at cannabis on the THC side and something as simple as allowing banking. This is something that’s not about cannabis or legalization.
It’s simply about safety. You’re talking about millions and millions of dollars on the streets in cash and not being able to go into the financial system where, not to mention, it’s safer but also something that can be tracked and taxed more easily, so beneficial to the economy. The Senate can’t even get that to the floor to vote on – the SAFE Banking Act. Something that Congress did pass has now been stalled in the Senate. If Leader McConnell wanted it to get to the floor, it would.
That just shows you that if something as simple as getting cash off of the streets and making it safer for the citizens can’t get traction in the Senate, there’s no way in heck that this Marijuana Opportunity Reinvestment and Expungement Act will be able to get to the floor of the Senate as long as Leader McConnell is in charge. That’s why I mentioned all eyes are on November because a bill like this that probably will not get through any traction in the Senate as it sits today could have a very clear path post-November, depending on how the election shakes out. There’s a heated battle over control of the Senate and it’s going to be very close.
Charlotte: A very heated battle. Do you think that Trump, if he loses the Senate, would still be in favor of allowing this bill to go forward or other bills?
Nick: It’s a great question and it’s a really interesting thing in terms of cannabis with Trump. There are people that are close to Trump that do support cannabis. Kushner, for example, and the general consensus, Congressman Matt Gaetz, one of the closest folks in Congress to the President, big supporter of cannabis, but one of the problems is that President Trump has stuck in his mind, a stigma, that his brother who was using drugs and alcohol, unfortunately, passed away.
It’s associated that the President doesn’t drink alcohol or use cannabis himself. I think that’s put something in his mind that legalizing cannabis would not be a good thing broadly. I think he certainly supports medicinal use, but this would be a huge opportunity for him. Something that we’ve been talking about here is the President himself actually warned Republican colleagues to try to avoid putting cannabis on the ballot in November at the state level because it will bring out more Democrat voters.
It’s interesting because if he’s aware of that dynamic and recognizing that cannabis is receiving broad support nationally, the polls show up to 70% of people support for legalizing for adult use, then why would you not front-run that and maybe legalize cannabis yourself? Take it off the ballot in November and garner broad support for doing so, especially with communities of color, because the illegalized cannabis has created a situation that’s been disproportionate to people of color.
They get arrested, on average, three and a half times more likely in the US for cannabis than white people do. I think this could be a phenomenal political play for the President, but I don’t see him doing it. I think the hang-up is something, from long ago, a personal stigma against cannabis. If this bill were to get through the Congress, the House and the Senate, and get to the President’s desk and let’s assume President Trump were to be reelected, I don’t know. I think people do believe that he would sign it. Other people think that he might not sign it.
One reason that he might not sign it is simply because he might be in protest with a House and Senate that he disagrees with. It might be something where he just doesn’t want to cooperate. We can speculate. I think, certainly, Biden would sign this if it came through. I think the possibility of Trump signing it is 50% or greater. I don’t think it’s dead on arrival by any matter of means. Maybe it’s something that needs to get reworked more to the President’s liking that he would sign it, something along the lines of states versus the federal government because I think he is a proponent of states’ rights.
Charlotte: Considering that Kamala Harris was the sponsor of the bill in the Senate, what do you think her role is now?
Nick: Again, it’s interesting. It’s disappointing that we have people that have a stance on things. When they get tied in with the parties and the powers to be, they shift that stance to better align with the party slogan. I think we’re seeing a little bit of that with Senator Harris where she was out in front, initially, obviously, somebody who put people in prison for cannabis. My dad was a prosecutor and a judge. He was the same way.
That was the letter of the law back in the day in the war on drugs, but Senator Harris, to her credit, shifted from having a draconian mindset when it comes to cannabis as a prosecutor to being an advocate and actually sponsoring this bill and others, which is tremendous. Now that she’s aligning with Biden, Biden is not so progressive on cannabis. We’ve seen her walk back a little bit and focus more on the decriminalization side versus the legalization side.
I think she’s trying to find a healthy balance there between fighting for something that she’s advocated for recently versus aligning with somebody that, obviously, she’s trying to get into office with a future potential President Biden. It’s interesting. I don’t know exactly what will happen, but I would imagine, and I think the industry believes, having Kamala Harris on the ticket and potentially coming into office is a net positive for cannabis in general. Not exactly sure on how it will shake out, but we do believe it is a net positive.
Charlotte: How do you think the bill would affect the current marijuana industry should it pass?
Nick: Yes, another great question. There’s certainly going to be a lot of speculation on how the industry will evolve. One of the interesting things is by removing it from the schedule list, it essentially becomes something that is not illegal. Like other products that are not illegal, it certainly will probably still be regulated. How will it be regulated? Will it continue to be left up to the states to regulate as they see fit or will the federal government take over the regulation?
I think long-term, it will be the federal government, but for how long do the states have a run? The other thing is the economics at play. Right now, the states are hurting very badly. The Fed is able to print money, the states are not, and the states have sought relief from the federal government. Trump has been significantly opposed as is Leader McConnell to Democratic states, especially getting what they would call bailout.
With the absence of that, these states are going to have to figure out ways to generate tax dollars. Cannabis is the greatest tax generator, an economic generator, dollar for dollar than arguably any other industry in the United States and, certainly, at the state level. The reason why is because any other industry is able to import products from other countries around the world, whether it’s tequila coming in from Mexico or whether it’s gin coming in from the UK.
Even domestically, other industries are bringing products across state lines. Cannabis, 100% of the products sold in that state are produced in that state, let alone domestically. They’re all produced domestically, but they’re all produced in that state. When Florida has a robust medical marijuana program, they’re generating, obviously, tax dollars for the state and the sale of those products, but they’re also generating thousands and thousands of jobs in the state of Florida because their product has to be grown in Florida.
It has to be manufactured and baked or modified in Florida and it’s got to be retailed in Florida. It’s Florida residents that have to have those jobs. You can’t get a job in the cannabis industry if you’re not a resident of the state that you’re operating. It’s generating so much economic impact to these states. Are they going to want to give that up, turn it over to the federal government?
Is Florida going to want to say, “Hey, let’s shut down all of our cultivation assets and lay off all these thousands of people so that we can import cannabis from a state like Oregon”? Absolutely not. They’re not going to want to do that, but they may legally be required to do that. There’s a legal clause called the Dormant Commerce Clause that may come into effect.
That’s a case that basically said that a certain state couldn’t give preference to in-state vendors. I think it was honestly for dairy or something like that and that’s now precedent. How long will all this play out? That’s the question. I think most people assume that it will remain as-is for some period of time. Whether that’s one to two years or whether that’s five or six years, we’ll have to find out. We’ll have to wait and see.
Charlotte: Yes. What would the law need to do to keep small growers and businesses viable?
Nick: Yes, exactly. I think that’s where you look at this MORE Act. If there is 5% going back to the trust fund, looking to be allocated for social equity purposes, how do you wrap in there the craft cultivators? Now, we know in other industries like the beer industry, for example, which is majority controlled by large corporations, there’s still a great niche with the craft beer industry.
Hopefully, free market would allow for some of that. Certainly, because cannabis is a plant and it needs to be grown, you would imagine the migration of the cultivation going more in line with traditional agricultural products. If it’s a state where there’s craft growers or commercial cannabis growers but it’s not an ideal climate for growing agriculture, there could be trouble there.
Charlotte: The taxes are really quite high in California. Do you think that the 5% on top of the current taxes would just be an incredible burden? Do you think California might react and lower some of these onerous taxes on the businesses and growers?
Nick: Yes. Again, another great question and I think there’s a few dynamics at play here. Number one, there’s this dynamic of the legal market competing with the illegal market. Now, you won’t see that in an industry like alcohol or tobacco. The reason why is because it’s been legal for decades, right? That battle takes time to play out. I think the general consensus amongst industry experts is that the states should lower taxes in the interim to allow for the eradication of the illicit market.
Once the illicit market has been eradicated, you can then start to raise taxes again because the commercial companies will have enough size and scale that they can actually compete. I mean, alcohol, for example, even if I wanted to make a beer illegally and I didn’t have the tax or the regulation that Anheuser-Busch does, I wouldn’t be able to compete with them in terms of price because they have so much more scale.
Well, we need to give those commercial cannabis operators time to build that scale to be able to compete and actually get their cost to production much lower, then they can afford a higher tax book, but now is not the time to overtax the industry. I agree with that principle, but the other thing that’s interesting and it’s not being talked about very much, but there is a gigantic tax burden already in place on the cannabis industry vis-à-vis the federal government.
This is the 280E tax law, which prohibits write-offs for anyone dealing with a federally-controlled substance which cannabis, as we talked about, is on the schedule list of Schedule I. Currently, and this is at an income level, companies and proprietors are in a position where they’re paying effective tax rates at the federal level much, much higher than any normal corporation would. That’s a big burden. As a result, these companies need to generate higher margins to be able to support the much higher income tax that they’re going to get.
There’s actually been some instances where companies have lost money, yet still owed the federal government income tax because they weren’t able to deduct simple things like marketing expenses and rent. You eliminate that with the MORE Act because you’re taking cannabis off of the schedule list. This is a giant net positive for cannabis companies. They actually get regular income tax treatment at the federal level, not the onerous 280E tax treatment that they’re getting today.
You then get a big lift there, which, in a sense, would more than cancel out the additional 5% that the MORE Act is looking to impose. All things being equal, the data will suggest that these companies could absorb the 5% in the current tax structures that are in place at the state level like California and still be viable. If you want to accelerate the growth of the industry and you want to fully eradicate the illicit market, then I and many others would agree that you do need to look at the state-level taxes and potentially revise them downward, at least for a temporary time frame.
Charlotte: Well, do you think that Governor Newsom might be sensitive to this argument?
Nick: Certainly. I’ve talked to the Governor about this. He is sensitive that it’s a balance because, keep in mind, taxes and tax generation was one of the big selling points to make cannabis broadly accepted, right? The old adage was Democrats want to legalize cannabis because it’s socially the right thing to do and Republicans want to legalize it because, fiscally, it’s the right thing to do, right? You have the expectation set that this industry is going to generate taxes and economic value.
Unfortunately, the taxes that the state of California has generated have not met the initial budgetary expectations that they set forth. One could argue that the reason being is the illicit market is cut in and the way to combat that is to lower the taxes, but it’s a constant debate. I think the Governor would be open to it, but you have to look at it holistically. I think you’d have to see the data in showing that if you do lower taxes, you actually see an increase in sales.
I think it’s almost putting the cart before the horse because one of the biggest issues in the state of California, you won’t really get the clear data on the ability for the legal market to compete with the illicit market until you get all of the municipalities on board with legal retail. That’s been the biggest issue for cannabis. In California, many people talk about the taxes, but really the bigger issue is the widespread retail distribution. Currently, there’s only 600 to 700 stores in the whole state.
Now, compare that with 30,000 liquor stores in the whole state, it’s so disproportionate – 600 to 700 stores, not nearly enough to service the population of California. You look at where those stores are located. Well, still, at least two-thirds of municipalities, local municipalities, cities, and counties have yet to allow for cannabis retail to be legal in their municipality. The good news though, is that’s starting to change with COVID because everybody from the federal government to the state to the local governments are facing economic shortfalls.
We now see more local municipalities talking about or putting initiatives on city council ballots, et cetera, to legalize and allow regulating for cannabis retail in their municipality. That’s the starting point. If we can get cannabis broadly spread out across the state and not have areas like Fresno, which is a city of 500,000 people plus, that has zero cannabis dispensaries within a 30 or 40-mile radius. If we can fix that issue, now you have a level-playing field where you have enough legal cannabis canvassing the state to compete with the illicit market, then you can zero-in on the tax issue.
Do I dial down taxes to then see an increase in sales? If that works, then I think any logical person would be a supporter of it because you’re losing taxes on the individual basis, but you’re gaining on the aggregate basis. That’s a winning formulation, but we’re not set up yet to really properly test that because of the lack of distribution of retail in California.
Charlotte: Is there a cannabis lobby at the federal level?
Nick: Yes, there is. Unfortunately, there are actually too many lobbies because I think the resources have been spread out a little bit too thin. I think there’s talk of them potentially aligning to create a unified voice in Washington to maybe be able to get more traction, but there are several organizations. There’s the NCIA. There’s the Cannabis Trade Federation, CTF, and then there’s also, as you’re well aware, the more social advocate groups like NORML and DPA and the like. There’s a lot of activity, but I think the consensus is that the industry might benefit from being able to unify that activity and unify the resources behind it a little bit better.
Charlotte: There have been so many studies over the many years, even from the federal government, showing the positive results of cannabis as a medicine for a variety of different ailments, and yet those things have not been made generally available, the knowledge to the general public. As you say, for the various municipalities and so forth, I think there needs to be a degree of education out there to people so they don’t fear it. I was wondering what your thoughts on that are.
Nick: Well, I have a lot of thoughts on that. I totally agree with you. I think we’ve seen this on a micro level here recently just how bad it can be. I’m going to point directly to the CDC. We have two examples in the last year where lack of quality information reaching the public, consistent information, has created mass chaos. The first was the illicit vaping crisis that started last September where everybody thought, “Oh, there’s this big problem with vaping. It’s a mysterious lung illness. We don’t know what it is.”
We’re looking to the CDC for answers. The CDC said, “Well, we don’t know. We think it might be this, it might be that. We recommend no vaping at all.” Now, you’ve got companies in the tobacco industry that do e-cigarettes and vaping. They’re getting crushed by regulators. Consumers are leaving the category. Turns out it had nothing to do with the nicotine industry whatsoever. It had nothing to do with the legal cannabis industry.
All it was, was a group of illicit dealers looking to maximize profits. We’re adding a thickening agent to the vape oil agent called vitamin E acetate. That was causing people really harmful lung effects and even death. Well, once that got figured out, the whole problem was solved. The issue is the CDC took five months to confirm that. Well, the damage has been done. Our company, we lost a few hundred million dollars of value.
The industry as a whole lost billions of value. Consumers were scared away from the category. We saw the same thing repeated with coronavirus, right? People thought the death rate was 5%. Now, it turns out it’s less than 0.5%. Not having accurate information, and we’ve seen now twice on a national scale with the CDC, not being able to deliver that in a timely fashion has created widespread panic and chaos, shut down industries and economies unnecessarily perhaps.
We need accurate data. That certainly applies to cannabis at a smaller scale. The reason that this product is feared by citizens, they don’t want retail stores. The reason that states have not legalized and created jobs and tax dollars, the reason that the Senate doesn’t want to bring these bills to the floor in my opinion is all due to misinformation and propaganda that was spun up because of the war on drugs.
You look at alcohol, something that kills so many people. It adversely affects people around the user more so than the user itself, which is far more dangerous. If you’re a citizen, knowing that people are drinking alcohol, they become violent. They can get in a car and they can kill people. You just don’t have that with cannabis. Typically, if there’s any– people want to say negative effect– Okay, people say maybe there’s a brain effect or it makes you lazy. Well, that’s hurting the individual consumer, not the public at large.
Let’s be honest. There really aren’t that many negative effects for the consumer himself. We haven’t seen anyone ever die from cannabis. The fact that that information hasn’t gotten out there has created a situation in our society where alcohol is generally accepted. I could meet with a politician. I could get on a Zoom call and have a sip of alcohol and everyone says, “Oh, what are you drinking? That’s great.” What would happen if I sparked up a joint? People would go crazy. They’d be so nervous.
There’s really no reason for a difference. In fact, it should be the opposite way if there is a difference at all as I laid out, but what’s going to change that? Alcohol has had 100 years, they’ve had a century. God knows how many billions of dollars they’ve had to educate the public that alcohol is okay when it’s really not. Cannabis has had the opposite effect. They’ve had billions of dollars spent at the federal level educating the public to just say no, that marijuana is bad.
Nick: Well, in closing, I was going to say, how are we going to fix that? It’s going to take a lot of years and a lot of money. Over time, I think it will get done.
Charlotte: That was my question to you is, who do you think is benefiting from this lack of information? The fact is the information is there. Anyone would choose to see it that even the studies done by the federal government themselves show that it’s not only not harmful in many cases but extremely beneficial in certain ways that don’t cause side effects and so forth. I’m wondering, do you think there’s any reason that it’s been kept out of public knowledge? Do you think there’s a force for that? What is your opinion about that?
Nick: Well, I think that if you look at– Sure, there’s all sorts of conspiracy theories or whatever. Number one, I think to some extent, these are good people that are just unaware and they’ve been fooled by information they’ve received. I’ll give people the benefit of the doubt, whoever those people are, whether lawmakers or legislators or people that are in the public eye. The other thing that’s got to be part of it and where I always go is the money.
Who are the biggest lobby groups funding our politicians? Certainly, the pharma industry, the tobacco industry, the alcohol industry. These groups don’t want competition from a plant that anyone can grow and you can’t patent. Certainly not. You’ve got to know that is playing a part in keeping this information from being endorsed by the government and keeping cannabis illegal and keeping the fear factor around.
It’s so funny because one of the most blatant hypocrisies in clear view here is the fact that cannabis is listed as a Schedule I drug, which, by definition, means it’s highly addictive with zero medicinal value. That’s the federal government. The DEA in charge of the schedule, is saying zero medicinal value. You have another branch of the federal government, which is the FDA, that allows for drugs to go through a trial process and eventually be approved and patented.
They approved Epidiolex, which is a cannabis-derived drug for seizures, basically saying, “This went through all three trials and we, the federal government, certify that it, in fact, has medicinal value.” You have one branch saying it has zero medicinal value. The other branch actually approving and certifying that it, in fact, does, and then you even have a patent that’s been filed by the federal government with another branch of the government for the medicinal qualities of cannabis. The government is not aligned. The states are obviously not aligned.
When you think of a lot of these people who are just saying, “Let’s get aligned here,” we know that there’s medicinal value. We’re already saying it with the FDA and with the US Patent Office. “Let’s get it aligned on the schedule list,” right? “We know that states have legalized, let’s get this aligned federally so that the states that have legalized can operate,” right? This lack of alignment has created a ton of issues because banks don’t know what they can do or cannot do with cannabis. Investors don’t know what they can and cannot do. Consumers don’t know if they can buy it or transport it. We need clarity. We need clarity more than ever.
Charlotte: Well, hopefully, we can stay in touch with you, Nick, and see what happens with the votes and maybe just stay in touch after the vote and after the election to circle back with you and get your thoughts.
Nick: I would love to do that. A lot is happening right now. It’s an exciting time. Don’t forget that the good news is July was a record month for legal cannabis sales in virtually every major market. Even though we’re hung up here at the legislative level and looking for solutions and transparency, the individual consumers are recognizing that cannabis is a product that they need/want. They’re showing up and they’re buying it legally and they’re generating taxes and jobs. A lot of good things are happening. Hopefully, we can get more good things at the legislative levels come November. I’d be happy to jump back on the horn with you and discuss any progress or developments that occur.
