Higher Exchanges
Higher Exchanges is the number one independent cannabis investing show. Hosted by Jesse Redmond and Morgan Paxhia, the show features candid conversations with top CEOs, operators, and capital allocators shaping the future of cannabis. We break down complex cannabis markets into clear insights you can actually use.
Higher Exchanges is powered by Flowhub and features original intro music by Chris Otchy.
Higher Exchanges
Operator Spotlight: TerrAscend With Jason Wild and Ziad Ghanem
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Higher Exchanges this week kicks off with a listener question about whether Schedule III is enough to kick off a lasting bull market. After going around the horn, Jesse, Morgan, and Toby agree that a combination of growth, cash flow, and greater access will meaningfully move share prices.
TerrAscend's Executive Chairman Jason Wild and CEO Ziad Ghanem join the show 20 minutes in. Jason shares his thoughts on what conditions may lead to a lasting move. We then transition to talking about returning to growth and progress on potential M&A in Ohio. Ziad shares updates on Michigan and Pennsylvania and then explains how they've assumed the top position in the profitable New Jersey market.
It wouldn't be cannabis without discussing political progress, and Jason gives his perspective on Schedule III, Trump, and updates us on the Boies lawsuit. He hopes the Boies case may be heard by the Supreme Court as soon as the second half of 2025.
The episode concludes with a classic Ask Grok that involves Morgan singing!
Cannabis Market Growth Discussion
Speaker 1Welcome back to Higher Exchanges. I'm your host, jesse Redman, head of the cannabis sector at Watertower Research. The Tricone Trio is back and we also have two great guests this week. First up, he's the co-founder of Poseidon. He's been doing the cannabis investing thing for a decade and he is merely one half of the most powerful sibling duo in cannabis. He's Morgan Paxia Morgan, how are you?
Speaker 2I'm good. I'm good Feeling a little fruity today, a little precursor for my grok later on, but doing good.
Speaker 1Yeah, you sound pretty good this week, both in terms of your voice and your spirit.
Speaker 2Oh, good yeah good.
Speaker 1And next up, he is the mayor of Chronicville. We call him El Toro in Spanish. He's Mayor Toby. Toby, how are you? I'm good.
Speaker 3I'm good, Morgan. Why are you feeling fruity? Did you have one of those select fruit sticks?
Speaker 2No, I have my grok. I was inspired this morning by a phone call I was on with Emily and she was going on a rant and it reminded me of a of a song. So I uh asked grock to uh rewrite the song, uh, with a canvas and rescheduling lyrics. Um so it's pretty fun.
Speaker 3So that's that's got me excited yeah the little wins right yeah, I hope it's gonna be more fun than the uh elon trump spaces earlier this week yeah, fruit is all the rage in terms of flavors.
Speaker 1Uh, in the in the market I did a quick survey between fruit, floral, earthy and fuel to see what people preferred, and 46 preferred fruit. So almost half like the fruity, fruity flavors and cannabis, and I think that's even way higher.
Speaker 3In vape cards it seems like fruits tend to really dominate the vape cards when I hear to talk about vapes, but it seems like all in one plus fruit is the recipe of the day I'm gonna tell you I actually voted earthy on that one and I I thought that earthy was going to win out and it was like the minority, um, and I was super surprised to see fruit up there.
Speaker 1Yeah, 63% between fruit and floral earthy at 11%, and then fuel which was my vote at 25%, and in about a half hour we'll have or not a half hour closer to 20 minutes. We'll be joined by Jason Wild and Ziad Ghanem from TerraSense. So look forward to that. But let's jump right in here, guys, starting off the top. There's many things we could discuss, but, morgan, you had a good listener question last week. We've been getting more questions. I've been getting more DMs with feedback on the show. So always feel free to ping me, ping one of us. If you have feedback, leave it in the comments. Always helpful, always trying to get better and always looking to answer questions people are curious about. So, morgan, why don't I turn over the?
Speaker 2floor to you. You can tee up this listener question and we can have a quick conversation about it. Great, yeah, appreciate the questions we get out there, gang. I don't respond to a lot of them because I don't, frankly, feel like I have something to respond about. But this question from William.
Speaker 2Jonathan asked this question after last week and so I wanted to have a discussion with you all here. So William asked I was wondering what your thoughts are on the market. Do you think when 280E goes away, it will start a bull market, or will we just see a bump up and then back down until growth can reemerge again, or do we need uplisting to see real movement? But I thought that was a good question, so I really appreciate it and I've been trying to think about it, you know, just to you know what really can get things moving again. I mean, you know, I think a lot of folks here have heard me, heard all of us really talk about the lack of growth as something that's been potentially an input, and, and so I I still remain that growth and I actually will note one of the best performing cannabis stocks of the last couple of years has been glasshouse and they've had incredible growth right. So you know way above everybody else. I mean I know they're just catching up from a revenue perspective, but the growth has been real and the stock has done quite well, and so growth certainly seems to matter to folks.
Speaker 2But how do we get more growth sector wide? I think is a bigger question. To get more of the stocks moving. Not just. You know single stories and you know the benefits, obviously, of 2EE.
Speaker 2Going away means more cash flow for these companies, not just going to the uncertain tax position in their balance sheets, companies not just going to the uncertain tax position in their balance sheets. But the question also then comes to what does that cash do for these operators? Does that just mean we see more continued price normalization? Does that mean more consolidation, so that more economies of scale and leads to businesses that are just more bulletproof, I'd say, and so that they would get a higher valuation? What might it be? Or could it be something that we're not thinking about that could unlock growth, right? Maybe that could be something such as reform around the Farm Bill that could bring more growth back into our sector. That's not really something that's in my dance card, so to speak, because I don't see Congress doing anything, but maybe the industry is more effective in moving things in that direction. I don't know, but that's something that would bring more growth to the space.
Speaker 2But I think the through line is however we get more growth. I do think that is important. Obviously, the balance sheets are incredibly important. We are seeing some of the smaller companies' cash balances are getting scarily low and without a means of really doing anything about it, because they can't take on more debt. That doesn't really solve their problem and it certainly doesn't help their common equity that most are participating in. But growth, you know, is kind of a mentality we've had with a lot of companies over the years is growth fixes a lot of things. So I still think growth is important, but how we get it remains a big question mark. So I'll start there and see what you guys think.
Speaker 1Yeah, in my mind, I think there's three pieces that really need to come together for a lasting move, and I think the first one is the thing you're talking about, morgan, which is more growth. Cannabis is a growth story. We're here for growth, we're here for this expanding TAM, we're here for the next 26 adult use markets, and so I think we need top line improvements, and I'd like to bring up the Farm Bill, morgan. That is one that could bring some money back into the space. Then also, of course, it's these adult use transitions Ohio, minnesota on the horizon, hopefully Florida, hopefully PA, pennsylvania sometime next year. So number one is I think we need growth. I think number two is we need better cash flow, and I think we need growth. I think number two is we need better cash flow, and I think this is coming from cost controls found over the last couple of years, plus 280E removal. We're starting to see some of that better cash flow generation, especially amongst the larger multi-state operators, but I think we also need cash flow. And then number three is I think we need better access.
Speaker 1I pushed out a tweet today talking about institutional investment in cannabis and that has not changed. According to the numbers and really anecdotally when we talk about investors, we're seeing cannabis. We aren't seeing a lot of new names yet. I see a lot of people doing the work, a lot of conversations taking place, but those dollars seem to be waiting on a final ruling or waiting on some sort of federal reform maybe Florida as well before they get committed. So if you look at a basket of the top five MSOs, they're still just about 7% institutionally owned, versus if you take the top basket of it's not necessarily the top five, but five widely held tobacco and alcohol stocks those are 77% institutionally owned, so more than 10x institutional ownership. So I think that we need improved access as well.
Speaker 1And I think back to a few weeks ago actually it was in May I had a conversation with somebody that used to be a former top small cap manager who's currently managing his own money in kind of a family office, and what he said to me was quote it's all about free cash flow Once 280E goes away. I'm calling all my institutional relationships and saying it's time this goes from a trade to a three to five year hold and there's an opportunity to clean up. But I am not making those calls until 280E removal is certain. So there's perspective from somebody who would be an institutional investor, could recruit other institutional investors. He's focused on 280E. He's focused on cash flow. I think that's great, but I think along with that, we need growth and we need better access.
Speaker 3Joe what's on your?
Speaker 1mind.
Speaker 3I mean, yeah, I'm obviously going to be repeating myself because I always talk about the. You know I call it the trifecta right as far as the bull thesis for this sector. You need the trifecta you need the first leg is obviously federal reform, which is hopefully a rescheduling announcement in the not too distant future, announcement in the not too distant future. The second thing that you need is growth, which obviously we know is more on a state by state basis. So things like Florida and Pennsylvania and you know we still have more than half the country, half the states in the country have still still do not have an adult use program. So there's still a lot of runway for growth. So there's still a lot of runway for growth. And then the third leg of the stool is, you know, capital markets reform, whether that's something as sort of on the lower end. I would say like safe banking, right, seems like obviously it's been very elusive and you know it's kind of a dirty word in our circle. But you know, I do think there's a good chance that safe banking gets, gets done in the next. You know, call it year or so, all the way to. You know, uplisting. I would say that's all the stuff that kind of goes into the capital markets umbrella. So, yeah, you need federal reform, you need new states legalizing for the growth and you need capital. You know capital access, capital markets reform, and I do think that a lot of those are sort of related right, I think that if we get rescheduling, which would be the first major piece of federal reform, federal policy reform in 50 plus years, I think that's a pretty seismic event that will catalyze other things. And I do think you know, especially you know, ohio just launched it's still super early, but early indications from the sales is it's going to be a very robust market. I think that'll catalyze other Republican states to think about legalizing. Um, I'm pretty optimistic on on Florida. Florida would be huge. Um, so, yeah, I mean you have to have all, all, all three. I think the I think Morgan the reader was kind of asking like hey, is rescheduling enough or do we need to see these other things? And you know I've always thought it's going to be sort of a multi-step process. Um, you know, I I just want to give another kind of 30 second opinion on this. You know, if I just take the rescheduling and the new states alone, you know I've done.
Speaker 3I put math out many times on my Twitter feed. You know kind of running numbers for companies like GTI or Verano. We could take any of the top companies and you look at sort of what their financial profile and what their cash flow could be if we were to see rescheduling and 280E going away and we were to get something like Florida and Pennsylvania and my math puts a lot of these, a lot of the tier ones, at like you know, call it seven to eight times cash flow at that point in time. So even if we don't get the capital markets access which I'm confident we will even if we don't, you know, rescheduling and new states coming online, if the stocks are still trading where they are, which I don't see but even if they are, that is an incredibly cheap valuation. And I actually do think private equity would be sort of a backstop because at that point you know you would expect to see lower interest rates for these companies because their businesses are just a lot healthier without 280E. And I could actually see some private equity firms kind of start doing the math on like, hey, what would a, you know, a buyout of some of these companies be?
Speaker 3Now I don't want to really, really want to see that.
Speaker 3Ideally, I want these companies to stay public and be able to uplist, but I think that there's many different ways to kind of slice and dice this. But I think like, yeah, you need all three ideally to get for a raging bull market for a raging bull market. But you know, the math alone suggests like, look like I, just these companies. You know if, if schedule three and Florida and Pennsylvania pan out like and a company like GTI or Verano or Trulieve's trading at like you know, seven, eight times cashflow, like that's just not going to last forever. You know the companies could ideally then just buy back, you know, so much stock because it's such a good value. And the other thing that we always talk about too is just like, how is rescheduling? What could that actually mean for growth as well? Right, because these companies have been capital starved, and so that'll be a really interesting dynamic to see play out. You know, when 280, 280e drops off, companies have more cash flow, how are they going to, you know, be be investing further into growth?
Speaker 1how do those answers sit with you, morgan?
Speaker 2yeah, I mean I think, uh, you know that there's also got to be a state's progression in that discussion too, though mean we can't just bank on new states, right? I mean we're going to presumably Florida goes like that's a big, big one. Obviously, ohio is underway, which is already great to see, but what does that really add to? Like the largest operators, ohio is as meaningful as a state, but how much does it really add to growth for the large operators? It really doesn't. It just helps overcome some of the slowness in their other markets. So, unless states are allowing for more consolidation or more licensing or having a larger retail footprint, I think that's a piece of the puzzle that needs to also be getting pushed on. I mentioned last week and I've mentioned it before and I'll mention it again is Massachusetts is a great example. Example the three store cap has got to change. It's just ridiculously low and it's you know. So.
Speaker 2M&a is hard in this space. It's hard to talk about it with a lot of companies because of the overlapping assets. Cash flow is helpful, but they've got to have a place to put it. I mean great companies, you know. Where are they going to put that cash? That will open up more growth if they're already capped out.
Speaker 2So it's a complex puzzle in this industry and certainly you know, a first step of at least improving the cash flow can open up those options more. But it doesn't mean there's a robust set necessarily, other than for them to get in markets that they are not in already. But it's tough to do M&A in this space and I look forward to talking with JW and Ziad about this is like you know, how do you get these deals done without you know, because every new attractive market also brings in a lot of other buyers on the private side that put these valuations kind of out of bounds for a period of time. So they're basically having to wait through that cycle until it makes more good fundamental sense for them to enter into the space. But yeah, but obviously having more cash flow does open up more possibilities that have otherwise been constrained at this point.
Speaker 1And Jason Wild, I see you out there. I sent you. Oh, there you are, Jason. I just sent you an invite to speak. Just wanted to make sure that you got it. Jason, the most popular video clip I have put on X in my three or four years on the platform was a clip from when I interviewed you last year and I said, jason, what would you say to a frustrated cannabis investor? And so I think people always appreciate your perspective on these things. I don't know how much of the conversation you've caught, but we were talking about what's required to return us to growth, and we've been talking about things like schedule three, new states coming online or expanding top line one way or the other and generating more cash flow. When you're out there talking to institutions, what do you? What do you? What are you hearing that they're looking for in order to really put money to work that might turn this into a more lasting bull market?
Ohio Cannabis Market Growth Discussion
Speaker 5uh, hey, yeah, um, I think they're looking for you know, uh, and I and I I listened for the last uh, I just got on a couple of minutes ago I felt like you guys were teeing us up by giving the whole you know sort of case about some of the bigger operators not being able to really grow through M&A. But back to your question. I think that they want growth, they want cash flow and they want growth. I mean, they want to know that the growth isn't just going to go away, you know, at some point in the next year or so, because these markets don't seem to grow beyond you know sort of or at least from a profitability perspective, don't grow much beyond that first year when they flip the switch, don't grow much beyond that first year when they flip the switch. And I think that with our narrower footprint, we can speak to that to a larger extent than some of the other operators could, because we're still small enough, obviously, that we can add something like Ohio and it could be a very material part of our business going forward and drive significant growth.
Speaker 5And I guess the one, everything you guys were saying was music to my ears. I'm not sure exactly who was talking Maybe it was Morgan. The only thing I would disagree with is there aren't a lot of other bidders out there on the market like private bidders? That's the thing that really has struck us about our uh negotiations in Ohio is that there's, you know, we're not competing with another bidder, we're competing with whether that operator decides to just stick it out and, you know, uh, you know, try to make more money over time by, uh, you know, through their own cashflow, but there's really, you know, practically no competitive pension for these level one licenses.
Speaker 1Yes. So let's skip ahead on our agenda a little bit here, jason, at least our internal agenda that we did not share with you but with Morgan Topey and I, and we wanted to talk about growth. We wanted to talk about Ohio, but let's just, you know, jump into it right now, since you brought it up. I think one of the things I see, jason, when I'm looking at Terrasen is we talk about cannabis being a growth story and historically, terrasen has been a leader on the growth side From 23 to 24,. You've been flattish on the revenue side no-transcript places. Can you update us on where you are in Ohio, what you're hoping to do there and what that market is like in terms of trying to acquire assets right now?
Speaker 5Yeah, I mean, there's a lot of good assets available and, you know, like, as I mentioned, not many buyers to go around, so it's we've almost felt like it's almost like a reverse auction where it's like, hey, we've only got, you know, we can only buy one, you know, level one license. We're going to narrow it down to, you know, less options, you know next week or something to that effect. So we think that we're definitely going to get something that's very attractive, has the ability to make us, you know, one of the top market share operators in the state, and I think that it is. I was just talking to Ziad a couple hours ago about this. I think that it is. I was just talking to Ziad a couple hours ago about this.
Speaker 5While the market has been good, we think that there were some of the companies we were talking to. We think that they were sort of like slow rolling things a little bit, possibly to see if this thing is a 5X sort of like Missouri was, uh, and over the, from what we've, from what we've heard, it's more like, uh, you know, uh, a dub, uh, you know, maybe a 2.5X or something like that, which is great, similar to similar to say, like Maryland, uh. But all of a sudden we have a lot of sellers that are now coming back and realizing that while things are, you know, doing pretty well, they're not, you know the sort of the shoot the lights out numbers where they could have kept it themselves and, you know, been better off, you know not doing a deal and Jason, in Ohio it seems like the ideal positioning is what five stores and the tier one grow.
Speaker 1Are you being real picky where you want to jump in and make that maximum splash, or what sort of assets would you like to get in Ohio?
Speaker 5Yeah, the cap, I think, is eight total yeah, five plus three.
Speaker 5Five plus three, right. So we're looking at individual dispensaries as well as level ones that come with dispensaries and we're just sort of trying to put you know. There's, like you know, one thing that we're working on, where they have a lot of the pieces of the puzzle already in terms of, you know, four plus dispensaries, and then there's other ones where it's you know what could be what's you know, on the wholesale side is a really strong operator, but you know they don't even have a dispensary open, or they might have one open. So we're sort of going and looking for other pieces to fit in to try to get to that maximum uh of eight or as close as we can get to it yeah, oh, hi yeah, early numbers.
Speaker 2So far we're seeing, like, from headset it's uh, it's doing as we thought. Right, it would get going quick, so it's great. And uh, and get to a nice I think was it three plus billion is the expected matured rate, so there still is a nice fit. I think was it. Three plus billion is the expected mature rate, so there still is a nice bit to catch up to that. But just, you know, as you talk, you know it's good context about. You know that there is a lack of bidders but there does still. Or what's your view with some of these transactions reaching completion? Because, like you made a good point that operators, especially if they feel confident in rescheduling happening sooner than later, the feeling is there's more of an embedded call option that they want to monetize relative to what their multiple or their valuation is today. How do you see that landscape from? You know getting deals done.
Speaker 5Yeah, I mean, I think we can definitely get deals done. There's, you know, to me it comes more, more comes down to like dealing with operators who have built a big business and a great business, but they're not that experienced in doing deals. So that is like, you know, that's how much that's a risk to getting a deal done, because you know their lawyer, they might, you know, uh, object to something that's totally normal and market. You know, uh, you know, in any other deal there's there's some people that are like that and then there's other ones that we're talking to that are that are experienced with this Uh and you know, and they've already understand their structure and how, how we would uh, consummate the whole transaction and all of that.
Speaker 5So I don't see any difficulty in terms of being able to close uh on on a deal. I mean, the state is, uh, you know, uh, like you can, you can manage these things through uh, uh, management agreements in the beginning and things like that Uh's really been, you know. It's more just like coming to terms with you know and continuing to, you know, turn term sheets in terms of proposals with some of these companies. But we're pretty close, you know, and then you just got to get a paper that takes another, you know figure four-ish plus weeks.
Speaker 2Right, right, okay. Another you know figure uh, four-ish plus weeks, right, right, okay. Yeah, definitely interesting. About comment about the the range of uh sophistication yeah, there's a something uh akin to cannabis for many years now, but uh I just want to say yeah yeah, uh, hi, zia, glad you're on too. Um, but I'll pass the mic over to uh. Back to jesse.
Speaker 5Yeah, the one other thing I just wanted to add.
Cannabis Market Expansion and Strategies
Speaker 5sorry, j Jesse, the one other thing I just wanted to add in response to that question is that they don't necessarily they're all, and if I was them I wouldn't be super psyched about the multiple that I'm selling the business at. But what they look at, what we pitched and what several of them believe in, is that it's sort of a deal with us would be like, you know, stock replacement for whatever the stock component is, and they feel like you know, certainly our stock has come in and is at a, you know, lower valuation than we'd like as well. They can trade their stock, you know, in a single state operator for stock in a multi-state operator that they feel like is trading at a relatively attractive price. So I think that's where I also feel like we might excel versus some others, because I think people we generally get the feedback from targets that they would be happy to take our stock.
Speaker 1Hey Ziad, how are you?
Speaker 4Good, Hello Jesse, Hello everyone, hey Morgan.
Speaker 1So, ziad, I always like talking to you about the details and I'm curious about a couple aspects, other aspects of your footprint. First, curious about Pennsylvania how things are looking there, primarily on the political side. I know you have strong assets there and you're looking forward to that adult use flip. And after that I have a question or two on Michigan as well. But why don't we start with PA and you can give us an update both on the TerraSense side and also on the broader political side? When do you think you might finally see that market move to adult use?
Speaker 4Yes, we'd love to. So Pennsylvania, as a medical market, continues to be profitable for us. Retail is performing very well. We're punching above our weight from a market share perspective in our retail stores and from a wholesale perspective. We have doubled our wholesale volume year over year. We are fully built in Pennsylvania. We have been opening rooms, flower built in Pennsylvania. We have been opening rooms, flower room in Pennsylvania. We're up to seven flower room today, with nine ready to be open anytime soon.
Speaker 4As we watch the political environment that you have talked about, from a political environment it's hard to guess whether it's at the beginning of 2025, it's towards the middle of 2025. But there's an agreement amongst different groups and experts in the market and law firms and lobby group that we're working with collectively as a market that 2025 should be the year that Pennsylvania flip recreationally. 2025 should be the year that Pennsylvania flip recreationally. And at the other side we sit pretty ready and excited just to turn, you know, four or five months. All our cultivation space and the team and the quality and portfolio that they have in place to do exactly what we did in New Jersey have in place to do exactly what we did in New Jersey. So that's the summary for us internally and when Pennsylvania can go recreational.
Speaker 1The first time I interviewed Jason was shortly after the Gage acquisition and it was with Fabian on the show I used to do on Seeking Alpha called CEO interviews, and you're real excited about the opportunities in Michigan, the scale that you could get there. And then Ziad, I know you did a ton of work in terms of making Michigan a more efficient market and a real contributor. Just curious how things have been going on the Michigan side, if that market's gotten more challenging and if you hope to get more scale there.
Speaker 4Yes, look, we got Michigan and when we started in Michigan our gross margin there was around 22% and we set our goal to get gross margin to almost double, to be above 40%. For the third quarter. We have delivered about 40% gross margin in Michigan and that was to achieve an EBITDA break-even and we turned away. As we were working on that gross margin, we turned away from some unprofitable revenue along the way. So once we felt comfortable with our gross margin, now we're focusing on innovation and product launch. We are also transitioning now with the size of the revenue. We're focusing on right-sizing our OPEC structure to the new revenue structure that we have in combination with the 40% gross margin achieving the EBITDA goal that we talked about. And then we also have plans to create a Midwest region to further leverage our existing structure, as we were talking about Ohio. So now that the fundamentals are right, the gross margin is right, the OPEC structure is right, going deeper in Michigan will make sense on those strong foundations from gross margin.
Speaker 1That's great. And one last question on the footprint, then I'll throw it over to you, Toby. That's great. And one last question on the footprint, then I'll throw it over to you, Toby. Sounds like New Jersey has been going fantastic for you, especially on the wholesale side, where I believe you're number one in flour, vapes, edibles and concentrates. It also sounds like retail has been doing well for you as well. What can you tell us about that New Jersey market, Sian?
Speaker 4Yeah, new Jersey is. I couldn't be happier about the work that the team has done in New Jersey and in the Northeast overall. But to win and to be a leader in market share in a state, we always talk about how you have to win in both retail and wholesale, but there's not a one magic bullet that will allow you to win across the board. It's a combination of multiple things that are done together, that are done continuously and that are done constantly and repetitively that will allow you to maintain that market share. So it starts with a team, and we have a team that is experienced and we have a team that busts their butts every single day to knock it out of the park. Then it goes to a strategy, a strategy that we shared with you a few years ago, a strategy in place that allows us to build a relationship with our customers and patients with both our premium brands and value brands equally. Then the quality our customers in New Jersey and patients continue to give us the highest five possible on our quality, and that's proven in the velocity of the orders that we are seeing. Also, continuing to lead in innovation and product is one of those enablers that allow us to win in market share, your locations being in the right place and offering the right service in our stores, where customers and patients continue to tell us that I can get in, get in and get out quickly with a warm touch, is something that I'm super proud of.
Speaker 4Jason and I were in the field together two or three weeks ago and we do something. Every time we go to a store. We interview 10 to 15 of our customers and patients and we say, hey, look, here's our business card, here's who we are. Tell us what we can do better. How could this retail experience be better? And I can tell you the feedback that we get. We have a hard time getting any feedback because the warmth in the store, because of the layout of the store, because of the service, because of the product, because of the quality.
Speaker 4So all this has helped us on the retail side. But then on the wholesale side, in order to have the recipe for success, you have to have one the ground game that allows you to sell, get into the stores, form the distribution points, get the order size, et cetera, et cetera. So this is the ticket of entry and we have that in place. But then for sustainability, you need the quality and the brand variety and the ongoing innovation that create the customer flow. And we have proven that we can do that very effectively, not only in New Jersey in New Jersey, in Pennsylvania, in Maryland, et cetera, and that is what allowed us to continue to be the leader and market share in New Jersey. Sorry long answer, but just wanted to share all the things together.
Speaker 3No, that's helpful, Ziad. Yeah, I guess I just wanted to kind of transition a little bit into some of the bigger picture questions around just sort of reform. But I know we kind of started this discussion before we brought you guys on with a listener question. As far as, like you know, would rescheduling be enough of a catalyst to start a bull run in the sector? And I guess, like you know, zia JW, you know Jason, I guess you know Jason, you mentioned, like you obviously feel like your stock's undervalued. You just said that a little bit ago. Do you agree? Like rescheduling is the most near-term catalyst and we kind of need it to kind of get investor interest back in the space?
Cannabis Industry and Rescheduling Impact
Speaker 5Yeah, I don't. I'm not sure that we need it, but it certainly is the nearest term, you know, large catalyst for the group. My general view is sort of, you know, like, as long as we can keep going out and finding very creative deals, then if we just keep the same multiple, our stock will go up over time. But you know, that's sort of like the base case. That's sort of like the base case. The better case is having a re-rate in the whole sector, which rescheduling I think would definitely help drive some of that.
Speaker 3Yeah, and you know, like everybody in this sector myself yourself included like we obviously don't have a perfect crystal ball and we've obviously all been disappointed by the the pace of reform. But, like you know, just what are your? I mean, I feel like right now it's kind of the quiet before the storm, right like there's the rescheduling process. The comment period ended like what a month ago. It was overwhelmingly positive. I think right now we're at the stage where the DEA is supposedly reviewing the comments.
Speaker 3Boris was on a show like a couple of weeks ago, was on the Dales Report a couple of weeks ago said 90% of the comments were reviewed, no ALJ needed and obviously we have an election coming up in what? 90 days or so. So, um, just what are your kind of base case expectations here? And and if you want to touch on, like obviously trump had some comments a week ago which, since the stock's up 10, like just what are you, you know, putting all this together into like a big pot to stir, like what do you? What kind of conclusions are you maybe drawing here?
Speaker 5Yeah, I think that the Trump comments last week made me feel a whole lot better because, you know, I don't have anyone who's given me any, you know, accurate insight into how long you know it's going to take for them to issue the final rule, but we're obviously, you know, getting closer and closer to election time, right? You know, getting closer and closer to election time, right, and I think that you know the big worry, at least to some who, if they think it's not going to happen by then is you know, what does Trump think? You know, and if you remember, several weeks ago, trump was much more in the lead and everybody was talking about how you know he was going to be a shoe in or something like that, and everybody was talking about how you know he was going to be a shoe in or something like that. So, I think those comments last week, we've been we've been me and some others in the industry have been working on some of Trump's surrogates and really delivering.
Speaker 5You know the key points and you know many of some, some, some of which he uh, he referred to uh, uh, a week ago, uh, and I think I felt like a hundred percent better about, uh, where things would go if Trump was elected versus. I felt, you know, a few weeks earlier, um, I, I, I'm not sure that. Uh, in, in, in my view, I'm not sure that he would be worse than the Democrats, and the Democrats haven't been so bad, at least on the executive side.
Speaker 3Yeah. So I mean, I think, obviously, I think, rescheduling. I think we all agree that the biggest benefit is 288 right off the bat. You guys have obviously stuck to the not paying 280E for a couple quarters now, right, Despite the IRS. The IRS came out two months ago and basically said companies should pay, but you guys are still taking the position that you don't need to pay.
Speaker 3Uh, correct, okay, um, so what do you? Um? So just any more color around like how, why you guys are so confident in that position? And and I guess the other thing that I was kind of thinking about today is like we've seen some of these democrats like take victory laps claiming rescheduling is done, Um, and I don't know if they're, you know, completely lying, because some of them have a tendency to do that. I don't know if they're foreshadowing. I also don't know if you guys can use that as part of the case Like hey, look like you know your own administration. Your boss is saying that it's been scheduled. Like I don't know if that goes into the sort of decision pool on not paying 280E, but just any kind of thoughts around that.
Speaker 5Yes, I mean generally, we, you know, we have expert advice and opinion that 280E does not, does not apply to our business. So you know, that's sort of it in a you know sort of a top line from a top line perspective. But overall, like the Chevron, you know, deference, you know being thrown out a few months ago, that definitely definitely made the tax case, at least according to the people I speak to, stronger. And yeah, there's other things like the fact that you know people you know are already top level. The Democrats already seem to be talking about it as if it's, as if it's occurred already.
Speaker 5That's a. That's a little, you know, that's a little unnerving as well. When I see things like that, you know when they, when they say things like that, uh, you know when they, when they say things like that. But uh, but overall, uh, we feel, uh, you know, we feel strongly that uh, that two 80 doesn't doesn't apply to us and uh, you know, and we, it's not just uh, you know how we, how we feel and how we, you know, like uh, sort of uh wanting to feel that way. We have, uh, we have expert, uh, expert advice that confirms it.
Speaker 3Yeah, would it surprise you if, like a year from now, cannabis is still schedule one? If a year from now, yeah, it would surprise me what would be the most logical explanation for that, If you know, given what we know now and how the ALJ hearings.
Speaker 5Yeah, an ALJ hearing. And and the fact that sometimes these things take, you know, a couple of years. Yeah, but, but I feel better about that now, with you know. Now, in my view, if Trump is president, I don't think that. Uh, it seems like he's interested in slowing it down where I would have maybe worried about that a few months ago.
Speaker 3Yeah, yeah, that's my last question and it ties back to what we started the discussion with before.
Speaker 3As far as growth in the sector and obviously we talk about Ohio, we talk about Florida, we talk about these discrete state-level catalysts, but just any updated thoughts on it's a little bit of a tricky question but if rescheduling alone could be a growth driver for the sector in the sense that the sector has been capital starved, I think it's pretty common knowledge that a big reason that cannabis prices are elevated, at least against the illicit market, is because of 280E.
Speaker 3So I'm just wondering the push and pull of, you know, if we get rescheduling, 280 e goes away, companies invest more in catbacks. Um, obviously that could be a growth driver in the sense that it, it you can garner a bigger piece of the pie, but with that comes price compression. So that's always been sort of in the back of my mind, like okay, that's rescheduling could be a growth driver, but then you're going to get price compression, which is, I I think, in the longer term a good thing because we want more consumers to be able to access cannabis. But that the push and pull of those dynamics, but just like you know, do you think rescheduling and just further, you know, by dropping to a D, do you think that could lead to longer term growth?
Speaker 5I think you could. But I think that you know, at some point you're going to have more competition. You know that'll also be at some point. I think that'll be when some of the bigger, when the bigger companies come in. I mean, I think part of you know what could help grow this industry also, if we get the rescheduling, is that it'll take us, I think, hopefully one step closer to being able to be listed on a US exchange. Listed on a U? S exchange, uh, and if that happens, then the big companies are going to, are going to come into this Uh, and it'll, I think it'll, grow. The you know the overall uh, you know uh, legal cannabis sales will you know, should be able to accelerate, cause there's been a lot more money being put into it. But but I think you're going to have to have real scale. You know, either join a big company or, or, you know, be one of the biggest.
Potential Impact of Hemp Market
Speaker 1Either join a big company or be one of the biggest, Jason. One wild card that I didn't see coming maybe a year ago was the rise of this intoxicating hemp market.
Speaker 5And you're probably aware.
Speaker 1Yesterday, or was it the day before, on the Glasshouse call, they talked about potentially planting hemp in the new greenhouse and implementing a direct-to-consumer model similar to what Cookies did, selling THCA flour across 21 states. What are your thoughts on that market and the impact that it's having on state legal businesses like yours, and do you have any interest in participating?
Speaker 5I'll answer the second. Actually, I'm going to throw this over to Ziad. Ziad, hopefully you're not moving your son's bed into his room or something. I'm going to throw this over to Ziad. Hopefully you're not like moving your son's bed into his room or something is he?
Speaker 4at college yeah, he's at college moving his son John.
Speaker 5Yeah, today we're moving our older son.
Speaker 4He's our first one who's leaving the nest. We're moving him to here in Baltimore, to Johns Hopkins, so it's been an emotional day, bittersweet, but we're super proud of him and Jason. I gotta tell you everything. For those of you who don't know, jason is not only my executive chairman, he's also my parenting coach. When Jason is not talking about Terrasund or JWAM or concerned about the industry and thinking about the industry, he's thinking about how do we coach our kids of not being entitled and doing the same hard work that we did when we were their age.
Speaker 5So Jason, everything you said is coming through on move-in day for sure.
Speaker 4But from a hemp perspective, yeah, we have performed a comprehensive review and we reviewed that with our board just recently. We have different options on how to enter this market and at which level we enter it. Do you enter it at the farm level, where you're growing the ham? Do you do you get it at the second level, where you are acquiring the raw materials, or do you get it at the manufacturing, manufacturing level? Or do you do it only at the distribution side, whether it's direct-to-consumer, on-premises, whether it's in bars and stadiums or in retail stores?
Speaker 4So we've looked at all this. We have a business case that we're reviewing. We've talked to multiple experts, some that have done the work and some that are in the middle of it. So we're watching what's going to happen in the farm bill in the next couple of months in here and based on that we'll make our decision. But yes, we think it's an industry that could grow. I think it could accomplish what we are trying to do in cannabis of turning it into a federal business, then crossing the borders, especially on the edible side and on the drink side. So that's our view on hemp in general.
Speaker 5Yeah, the only thing I would add on that you guys can hear me right.
Speaker 5Yeah, the only thing I would add is, as we talk about it, like we've sort of come to the conclusion that you know it's not the threat to us, that it is that it is to others, like you know, if we're going to go after this, we're going to go after it for the upside, not as a hedge, because you know we just don't have that same saturation across the countries, especially across the states, that some others have, where it's a major, major issue. You know, fortunately, the states we operate in are. You know they've got their own restrictions, or at least several of them do, and we just don't have this feel like we have this huge base of business that we have to go hedge.
Speaker 2Yeah, it's definitely becoming a very active conversation. I feel like almost every day is what's going on there and so good insights there.
Speaker 2Um, you know, jason, you made a comment about, uh, progress at the federal level has really only come in one form so far, which is executive right. We've seen no action. Legislative. Um. Where I remain most optimistic, uh, remains the judicial path, and you know, talking about yeah, um, but, but being the commerce clause. So you know, talking about shelter, but being the Commerce Clause. So you know, while you're here, is there any updates you want to share with us where we are on that?
Speaker 5I thought you'd never ask. Yeah, thank you. So yeah, just to update everybody, we got a hearing. We filed the case last fall. We thought there was a 90% chance that we'd get thrown out because the government would argue that this has constitutional precedent and the district court shouldn't be deciding on those things. Fortunately, the judge agreed to hear the arguments for why he shouldn't just give them a summary judgment. That was beyond what we expected and it went beautifully.
Speaker 5We got to argue all the main crux of the case. The judge was very receptive and then he ended up delivering a decision which was actually exactly what we wanted, which was he put on the record in his decision that a lot of the points that we made were valid and that the US needs to rethink how they're sort of controlling cannabis. But he said but my hands are tied because there's this constitutional precedent and there's nothing I could do. And he said your remedy is to try to go to the Supreme Court. That's exactly what we wanted, because if he agreed to hear the full case, it would have set us back a year and a whole lot of money, of which we don't have a whole lot.
Speaker 5This keeps everything on track for the timing to work out, like David Boies originally before, which is that we could potentially be before the Supreme Court in the second half of next year. We have our appellate I think the appellate briefing docs are all due in a few weeks and hopefully we get through that relatively quickly that case and go to the Supreme Court land there hopefully second half of next year. That sounded like a really long time ago, a long time away when I was pitching people on joining this case, you know, two plus years ago. But you know we're getting. We're getting a lot closer. It'll be here before we know it.
Speaker 2I know, I remember that when this was all starting and I heard that too oh, it's so far away. But but guess what? We've been waiting 10 years for banking reform and we haven't gotten it. And we're two and a half years into this and talking about that kind of disability is just so kudos to you all for continuing to push on that and the outcome so far, that timeline, though is awesome, that's great.
Speaker 5I didn't realize that already to that point, right, right, and you guys, as a supporter of the case, and you know Emily, you know, completely throwing herself into helping drive this thing.
Speaker 2I mean, if it wasn't for her we wouldn't, you know, we wouldn't, even have this group put together, so she deserves a lot of kudos as well, and you guys as a firm. Well, thank you. It's definitely been cool to see Emily's efforts there, but you know, just it's. This is great to see and I'll share the thanks for her to for the comments. But yeah, I mean you know you just look at the kind of landscape of the court system Like the, you couldn't ask for a better Supreme Court for a state's matter like this right. I mean this is really lining up very positively.
Speaker 5Totally. It is totally lining up positively. And you know the feeling. There was a feeling. You know Emily was at the hearing as well a few months ago in Massachusetts and it was like, and you know, and granted, this was an Obama-appointed judge, so you know you would think he would be somewhat sympathetic to us, but it was like, after dealing with sort of getting you know screwed around with for however many years on the legislative side, going in there and hearing how well thought this judge was and he did all of his homework and he understood a lot of the intricacies of the argument, I mean it just you know it made all of us that were there feel a little bit better versus you know, I think, how a lot of Americans just feel like our government isn't working, at least on the judicial side. It gave me a little bit more hope.
Speaker 2Yeah, that's great, and so you know, for folks that do want to get involved, right, there's an opportunity to get involved and Emily is ready and waiting right For for anyone that wants to talk to us about it. So and there's more to come on that too right, I think we're going to be doing more around that this fall.
Speaker 5Yeah, yeah, yeah, absolutely yeah, we're going to. I think we're going to do something up in Zynga, possibly an event in Chicago.
Speaker 2Yeah, so come to that event. It's going to be a great event. I was just talking with the Lane brothers this morning about it, so it sounds like attendance is really strong and so I'm looking forward to it.
Speaker 1Awesome. Well, I know we're getting up on the hour here, gentlemen, and I think Ziad has a keg party. He's got to roll off too soon. He's ready to go?
Speaker 5drink.
Speaker 1He's going to go drink the clot, anything else we didn't ask about that you wanted to talk about today.
Debt Refinancing and Market Outlook
Speaker 5Yeah, we probably wanted that image out of our heads.
Speaker 1Yeah, let's move on quickly.
Speaker 5What else? No, I mean, we feel good. You know at least company-specific. We got our debt refinancing out of the way that was. You know, that was something that we heard constantly for the last six months, as this market being the way it is. Once we put that to bed, then the market just moved onto something else to worry about. But eventually the good news is and if we continue to grow the company and have good fundamentals, eventually, good fundamentals, eventually, you know the weighing machine will work, the scale.
Speaker 1Yeah, just a quick follow-up on a debt refinancing. Were you seeing much of an improvement there? In terms of the players out there? It looks like the rates haven't been changing too much, or do you think we're going to see more of that impact if and when we get to Schedule 3. We may have lost you there, Jason.
Speaker 4Jason, I almost Go ahead. Ziyad, yeah, can you hear me, okay? Yep, yeah. So, jason, we can't hear you. So, as far as I think, rescheduling will open up the market for sure, but, as we were working on our refin loan, if we do a mortgage loan and they'll move into second lien versus first lien, there's no make-all. So really, we took into consideration the future environment that could be very favorable without being locked in a long-term rate, so we'll be able to replace that pretty quickly. On top of that, in addition to what we refinanced, we had higher interest. We had almost double the interest on our need and we ended up with this group because of the relationship and how easy it was to work with them and how they structure the future and how involved they are with our potential future M&A that we're talking about. So I'm very excited about this partnership.
Speaker 1Oh great, We'll let you run. Sounds like Jay yeah.
Speaker 5You don't hear me. No oh okay, yeah, zied, you covered it yeah.
Speaker 5Yeah, I heard you guys, the only thing I was going to say is, I think that, while rates are still stubbornly high and part of it for us is because we were refinancing debt where the Fed funds rate was a lot lower at the time we borrowed it, several years ago so, while rates are stubbornly high, because rates are high overall, although they've come in a little bit I think that the demand and you know Zia talked about, like the interest that we had in the loan I mean, we were definitely way you know I don't know if it was technically considered oversubscribed, but we had much more demand we ended up cutting people back significantly. So I would say money's a little looser than it was, say, six months ago or a year ago, but it's still expensive and that's why, as Zia had mentioned, we structured it so that we can, if something like rescheduling happens or rates start being cut which it looks like they might be we will be able to refinance this without too much pain. You know, no make-allhome.
Speaker 3Real technical question, jason, because I'm a lender as well. I think you know that I work with lenders as well for my investment needs the largest lenders in this sector. When I check with them pretty regularly, they're still underwriting 280E. It doesn't matter if the company is not paying it. They're still obviously underwriting it for their own sake, right, obviously, if they're going to be lending. So none of the lenders are assuming rescheduling. They need to make sure that the borrowers can pay even after 280E. Obviously, no lender that I've talked to is saying okay, we're giving the companies the benefit of not paying 280E. Is that the same case with this lender?
Speaker 5Yeah, I think that would be safe if lenders like to be safer.
Speaker 5That's why they're not equity people. They give up some of that return for it, but they're underwriting it as its status quo. I don't think that they mind much whether you're paying it or you're not paying it. I mean, obviously your cash is going to be a little bit better if you're not paying it, but I don't think that they really care either way, and to them it'll just be a bonus if and when rescheduling happens and it goes away. Yeah, that's what I think, and I think that that's a lot. Maybe that's another reason why the money's a little bit looser than it was six months or a year ago, because we weren't as close on the rescheduling.
Speaker 3Yeah, there's definitely a lot of the lenders are seeing a lot of interest. There's a lot of some of the funds have raised a lot of money from, from, from. Yeah, there's a lot of money out there from, even from institutions, so, yeah, so, anyways, I just wanted to say I hope this was the last earnings call, was your last call in a schedule one world, Because I do think the next round of earnings calls could be things could be very different. So fingers crossed.
Speaker 5Yeah, yeah, yeah, I'm trying to remind you to.
Speaker 4God's ears thanks, ziyad well.
Speaker 1Thanks, jason, ziyad. Appreciate you joining us. Ziyad, enjoyed the rest of your college stay, jason. Always good to catch up with you guys and have a good rest of the day. We'll talk to you in a couple months thanks guys be good say hi to Johnny Hopkins bye, bye, man.
Speaker 4It feels like yesterday my dad was dropping me off at Say hi to Johnny.
Speaker 1Hopkins. Bye-bye man. It feels like yesterday my dad was dropping me off at college. I remember my dad told me when he dropped me off he said it's not the school, it's not the classwork that's going to matter, it's the relationships you're going to build here that are going to matter. And while that turned out to be true, I think that gave me too much of a license to party for the first couple of years.
Speaker 2Happens to the best of us, that's for sure. You know, funny story, uh, or not funny story, I mean, I guess kind of sad because of our family history. But, um, emily, uh dropped me off at college, oh yeah big sis yeah, yeah, she broke my bottle of red Hot and she cried on the street. It was an epic first day.
Speaker 1Very memorable. Well, Morgan, it is time for you to shine. It is time for everyone's favorite segment of the week. It is time for Ask Rock.
Speaker 2All right. Well, I'm going to do a little music for just a moment to try to warm up my vocal cords.
Speaker 4I didn't get to do any proper voice, but let's see what we can do here.
Speaker 2All right, so if anyone knows Jimmy Buffett, this is the Fruitcake song, and so I asked Grok to write a fruitcakes version, but for cannabis and rescheduling, and I'll spare you the entire song. But it did actually write the whole song and I'll stop singing. Oh, come on more. Uh, half-baked laws in the making, half-baked minds in control. There's a little bit of progress left in every cannabis soul, the future blazing on, stardate 2000 and more. We're steps from the freedom we seek. That's a true fact. Time to score. So, yeah, if anyone wants the full thing, I'm happy to share it, but it's uh, it's pretty amazing how much. Uh, they did a great job with that, so that is awesome.
Speaker 1Uh, grok never ceases to impress me there, there you go.
Speaker 3I'm glad you're paying for this description.
Speaker 2Morgan, I'll spare you on the singing from now on, but that was. It was just too good. I was just reading it through today and I was like, oh my gosh, there's just, there's so many good lyrics, so maybe I can put it out on the X in our in line for some of these other really good ones.
Speaker 1Yeah, yeah, I've been using it a bit more. Sometimes I forget it's there.
Speaker 1Then I'll go back to it and I'll check on some stuff and yeah it is a cool and worthwhile tool where the whole database or reservoir of information is everything posted to X, so it does have a lot of good real-time stuff. So if you guys do pay for it I think I pay something like $16 a month which gives me this really cool blue checkmark. It gives you the ability to edit tweets I said that sarcastically about the blue checkmark, just so everybody knows and then it also gives you grok as well. So if you're a regular Twitter or X user, as we call it these days, I find it to be a decent value, and if you do it, go directly on X to the website to do it and that you don't pay, whatever the markup is for the Apple store, in my case, it saves you a few bucks.
Speaker 2There you go.
Speaker 1Well, gentlemen, that was a good, a good conversation with the boys at Terrace end. Any closing words before we jump here.
Speaker 2No, I think I'm good.
Speaker 1Well, great, we'll appreciate everybody listening, we'll be back and we'll see you next week. Wtr is an investor relations firm, not a licensed broker, broker-dealer, market maker, investment bank underwriter or investment advisor. All investing involves risk, including the loss of principal. Thank you.
