Cannabis Lending After Schedule III with Steven Ernest of Chicago Atlantic

On this episode of Higher Exchanges, Jesse Redmond and Morgan Paxhia sit down with Steven Ernest, Head of Originations at Chicago Atlantic, to discuss how cannabis lending and private credit markets are evolving heading into a potential Schedule III world.

Steven gives an update on Chicago Atlantic’s platform today, how cannabis credit has changed over the last 12–18 months, and why periods of industry stress can create compelling opportunities for disciplined lenders. The conversation also explores private credit valuation concerns, collateral structures, institutional capital flows, and what separates stronger operators from the rest of the market.

The group dives deep into the potential impact of Schedule III rescheduling, including whether the biggest benefit is tax relief, improved fundamentals, or the psychological shift that could bring new institutional investors into the space.

Topics include:
- The state of cannabis lending in 2026
- Private credit risk and valuation trends
- Real estate collateral vs. cash-flow underwriting
- Schedule III and institutional capital
- Why cannabis remains a structurally inefficient lending market
- The future of banking and commercial credit in cannabis
- What the market still misunderstands about cannabis credit

A timely conversation with one of the most experienced lenders in the industry.

Higher Exchanges is powered by Flowhub.

Transcript

SPEAKER_01 0:01

Welcome back to Higher Exchanges, the number one independent cannabis investment show, where we break down complex cannabis markets into clear insights of investment. Jesse Redman and Forbacks, welcome back indeed.

SPEAKER_00 0:29

I am Jesse Redman, Chief Strategy and Investor Relations Officer at Leaf Brands, and I'm back with one of the smartest cannabis investors I know. He's the Grizzled Veteran. He's Morgan Paxia. Morgan, how are you?

SPEAKER_03 0:41

Feeling a little grizzly. Uh no, I'm great. I feel like it's been a couple of uh couple weeks. Um, I know we're trying to be like a twice a month cadence, but this break felt like a little longer than we've been doing, so it's good to be back. I'm glad to looking forward to talking to Steve too.

SPEAKER_00 0:59

Did we go three weeks this time? I feel like we might have gone three weeks this time.

SPEAKER_03 1:02

Yeah, I think so too. Yeah.

SPEAKER_00 1:04

Yeah. So we'll still still hit two a month, but sometimes we do back to back. Sometimes we space about over three weeks. But yeah, it does feel good to be back. Plenty to talk about. And we're joined by one of our favorite guys in the space and a long overdue guest for higher exchanges. We should have had you on sooner, but we're excited to have you today. Please welcome Stephen Ernest, head of originations at Chicago Atlantic. Steve, what's going on, man?

SPEAKER_02 1:27

Thank you both uh so much for having me. Uh, excited to be here and uh and chopping up with uh some of the most experienced financial minds in the space.

SPEAKER_00 1:34

Yeah, we're excited to talk. You're some people, Steve, I talk to you more on higher exchanges than I do in real life, and you're the opposite. I think last time I saw you, we were at the Bedzenka conference, and I believe we ate pizza or something, or ate lunch at a red robin together, which was completely.

SPEAKER_02 1:50

That was in Anaheim, that was an Anaheim, California, uh, coincidentally. Yeah, yeah. I've got a lot of friends I see like all over the road in different in different cities, and I just I I I love that.

SPEAKER_00 2:00

Uh and we had lunch with Chris Ball that day from Ball Family Farms, and Chris is an awesome dude, great company, great flower, huge jacked formal former football player. And Steve, I'm sure you are uh Chris, I'm sure you won't listen to this, but if you do, this is all in jest. He he had the funniest lunch order, guys. He ordered a pepperoni pizza, well done, which was not totally weird, but for a huge jacked athlete, struck me as a little strange. And his drink order was a Shirley Temple. Ken and Hart, I guess, you know? I don't know. For some reason that cracked me up. But uh yeah, really good to have you here, Steve. Um, sometimes I'd like to start with a little bit of context, because I think especially for you know guys like us that have been in the cannabis space a while, it's always cool to hear about what what got you into it. Um, because all of us have you know had some reason to come here. And I think maybe even it takes a better reason to hang around, Steve. So kind of what's your how you got here and what's your why in terms of why you're still hanging around the space after this tough run, tough run we've had.

SPEAKER_02 3:01

Uh yeah, okay, great, great question. Uh so you know, I was a banker at JP Morgan and uh some of my clients were some of the earliest investors in uh in GTI and Cresco, right? And some of the big names that are uh still very much around and actually doing pretty, pretty well today. And uh, you know, I was a young young guy uh sitting at my desk at JP Morgan, and you know, some of the folks around me were 85 years old and have been there for 50 years, and I was like, this is kind of a long, a long, uh, you know, tough road to the to the top here. And I kind of just thought that there was a big uh a big delta between the perceived risk and the actual risk uh when it when it came to this plant that I just sort of believed in inherently. And so, you know, the bet was like pretty pretty simple. Was I just had a uh high conviction that this industry was going to be bigger in 10 years than it was than when when uh when I entered it. Um, and that you know, in my 30s, I would be able to be you know sort of an expert on the space, right? And somebody who like you couldn't just come in the room and be like, oh, I've been doing this for 30 years. Like, let me tell you how this goes, right? And uh he's definitely been a windier, tougher road than I think I would have imagined when I got into it. I'm glad future Steve didn't tell me what uh happened, but uh uh yeah, it's uh it's been an incredible journey. I've learned so much uh and just built such a strong community. Uh that's my favorite part is just the people in this in this industry that I think has kind of kept me engaged in um and and in the game. I mean, some of my closest, you know, lifelong friends are folks in the cannabis industry, right? Who we've kind of been at war with, right, for 10 years. And Morgan, one of Morgan's you know, colleagues and friends, Patrick Renee, one of my one of my oldest friends in the space. He was actually my first investment when I got into cannabis was through uh his Canopy Boulder uh structure in 2014. Uh and so um, yeah, and you know, Patrick and I got dinner or whatever last week. And so it's like, you know, those those friendships uh are are really what makes it all worthwhile.

SPEAKER_00 5:02

Yeah, it feels totally different than if you're if you build relationships during good times. You know, we've all been around the block enough. I think I've been around the block the most times of all of you, being a uh man, I can't believe I'm 51 years old, but I was there for the tech rec front, you know, front and center, Steve. And like those kind of drawdowns, I think, are incredible experiences to learn from and form a lot of bonds. Um, you know, I think we've done enough bonding in the space now through these hard times that I'm ready to celebrate some good times with you. I feel like we've been through our adversity together. What what keeps you around, Steve? Like, why not tap out? You know, you have a very diversified background, come from the traditional finance space. You mentioned JP Morgan. You know, you had a strong career, you know, kind of like Morgan and I. Like you started off on a trajectory in finance and took a veer over here to the cannabis side. And even though it's been miserable, man, like, and you know, I won't even go further down that road, even though it's been super hard, you're still here. So why why didn't you tap out three years ago?

SPEAKER_02 5:58

You know, honestly, at Chicago Atlantic, uh, I I found a I found a group of people that I just felt like I could run with uh, you know, really fast and then build really interesting things. Uh and frankly, for the first five years, I figured out uh not every way, but many ways not to make money. Uh and then during the last five years, I really figured out how the economics of cannabis works. Uh, and we've been able to build a pretty impressive track record here uh at Chicago Atlantic. You know, when I started here, we were a couple hundred million dollars and now we've deployed over three billion into the space. And so, you know, although the last five years have certainly been, you know, challenging, uh, you know, I think that we just uh we have the team here to go out there and compete uh and build investor confidence, and investors are continuing to put their dollars with us. So uh, you know, I honestly, if it wasn't for Chicago Atlantic, like I don't know. I don't know if I'd I don't know if I'd still be here, right? But uh yeah, being here has just been uh an incredible seat. I mean, this office is a half a mile from my home where where I live. Uh and so and again, I just I can't say enough good things about the just the team and the people that I get to work with every day here.

SPEAKER_00 7:10

Could one of you turn on uh turn off notifications? There's just a yeah, yeah, thanks. Yeah, no worries, Steve. I should have told I should have told you backstage.

SPEAKER_03 7:17

Yeah, I should have he's a popular guy, he's got a lot of notifications coming up.

SPEAKER_01 7:21

Let's see here.

SPEAKER_00 7:31

There we go. That should be good. Great. And uh before I throw the keys over to you, Morgan, to talk about an awesome dispensary software company. Um Steve, can you give us a little overview on Chicago Atlantic? I know we can look up the public vehicles, but what does that broader plot platform look like these days?

SPEAKER_02 7:48

Yeah, so the the general thesis, you know, we're not uh necessarily a cannabis fund. Uh we invest where risk is misappropriately priced, cannabis being the largest bucket in which we do so. Um yeah, sorry, let me do it. I got a new speaker system yesterday, which I realize is is poor is poor timing for this. Uh oh, you're you're good. But um so yeah, so you know, I'd say 80% plus of the investments that uh that we've made are in the US cannabis industry. So it's like, you know, that three, I think it's like, I don't know, 3.5 or something like that, but over 3 billion now deployed in into cannabis. Uh and we've been growing sort of out outside. Our uh one of the founding partners, Tony Kappel, uh, whose office is right next to me here, uh, you know, brilliant credit investor. And I think that's sort of the backbone in which we've found success in this space because you know, we didn't just come in like thinking about cannabis values and cannabis businesses, we came in thinking about sustainability of cash flows and actual liquidation collateral and uh and operators and and and entrepreneurs. And so uh we've taken that that focus and that skill set and we have spread that across to other industries as well. Um, and so you know, we're that kind of an alternative investment platform, right? Uh, you know, we invest really, it's like where banks won't go, right? Uh, you know, I joke we go in from like vice to virtue is uh is a theme that we that we look for. Uh so so yeah, I mean we've done everything, you know, from private islands to spaceships to electronic dog collars. I mean, uh there's a lot of the other ones that you can look at, but um yeah, you know, where we can kind of drive those uh you know mid-high teens returns uh and feel good about the the senior security position. Uh so yeah, that's where we're expanding.

SPEAKER_00 9:34

Well that's expanding. Morgan, you want to tell us about some great dispensary software?

SPEAKER_03 9:40

I didn't know about that. Sure. Yeah, I'm excited about this. So uh FlowHub just launched uh a pay-by-bank, which is a prepayment option for FlowHub e commerce. So dispensaries can now accept compliant online payment pickup orders directly at checkout. And the why is uh increased order commitment, shoppers are less likely to be ban pickup orders when they've already paid, right? Uh fully compliant, pay by bank runs on the same ACH payment rails used for payroll and other direct deposit, giving low-risk way of offering seamless cashless payments. Um, one hub for online and in-store orders, flow hub POS, online ordering, inventory, deals, and payments all work together in one system. So a couple key data points around this. Cash's share of gross receipts drop from 65% to 59% in a single year. Cash customers are limited by the physical bills in their pockets, contributing to a 7% decline in uh AOV, integrated digital payments, uh, ACH and apps uh represent the highest value tier, nearly double cash at 93.50 average order value. So request a demo today at FlowHub.com.

SPEAKER_00 10:52

Yeah, I remember at 420. I went over to uh our friend Glasshouse to store the pharmacy in town to grab a couple of things. And the first thing I did, Mark, was reach in my pocket and say, oh shoot, I don't have cash. The next thing I did was pay a very high fee for using a debit card.

SPEAKER_03 11:08

Yep. And and I'm uh I'm like a order ahead kind of guy, so being able to pay and then just go grab it is uh that's a huge benefit for me. Um I think that's just makes it that much easier for folks that know what they want, um, which is just great for the storage too, because then the people that don't know what they want, it frees up more bud tender time to help them out. So I think it's great. Um, it's just a more normalization of cannabis, which is uh also a great thing. So go flow hub. Sorry, a little bit uh congested. All right, so let's dive in on some more Chicago Atlantic. Um this year has been an interesting year, just kind of going to a macro level, a lot of discussion around private credit, um, you know, with plenty of things going on in the news around Blue Owl and these other things. And Chicago Atlantic seems to just keep hamming or you know, humming along and getting things done. And so kudos to you guys. But um, you know, and and obviously, or not obviously, but for us finance junkies, um, longtime follower of Jeff Gunlack, and he's been, you know, kind of out there making a lot of noise around this, uh, private credit things. But I don't know if Steve, if you heard this, you know, what Jeff's been talking about, but I was just curious if you have. Uh, what do you think those comments say about the broader private credit market today? And you know, what's kind of driving this? Is this a valuation issue, liquidity issue, credit quality? Like what's kind of going on in private credit?

SPEAKER_02 12:36

Uh yeah, so yeah, private credit um, you know, went from like the darling child to a dirty word in like uh six months, it's it seemed like. But um you know, I don't know, I guess we don't really necessarily think of ourselves as a private credit manager as much as an alternative finance financing provider. Uh and you know, one of the the you know, interesting things about the Chicago Atlantic platform uh is that we have been kind of heavily focused in on the cannabis industry, right? And we're kind of the biggest investor in this niche. And part of what we pitch is that we are uncorrelated to other markets, right? Um, and so I think where a lot of these private credit managers, a lot of the news that you hear, I think, you know, software is a big one, right? The groups that came in and said, Oh, you're trading at 10 times uh ARR for your software. Uh, I'm gonna, you know, put a uh senior secured credit uh facility at five times ARR, and then AI came around and it was like, oh, the ARR is going down, and I wouldn't even pay two times ARR for that. And so there was kind of this, you know, perceived overnight markdown of of those of those types of credits. Um, and so I think that a lot of the news is centered around that, and I don't know. I mean, listen, like obviously, like we've got a great underwriting team here, but like there's I probably a luck component there as well, right? Like we just weren't it, we're not in software. That's not like software is not our is not our niche, right? Um and software kind of covered a lot of a lot of different private credit funds. So yeah, I think there was that. And there's just like I feel like there was like the typical amount of like fraud that you hear in the marketplace that just got highlighted in this private, you know, in this private credit negative narrative uh that that exists. And uh, you know, again, like it's just uh we we've got you know, we have to navigate the cannabis industry, right? Which comes with its its own unique challenges, um, but they're kind of uncorrelated, I think, to what you're hearing in the in the broader market and what Jeff is uh is talking about.

SPEAKER_03 14:31

Yeah, I I think that that's fair for sure. On the we are not correlated, we've been kind of in our own silo.

SPEAKER_02 14:40

Yeah, we are um markets go up, we go down. We the last five years, Jesse was saying, it's like the last five years in the market have been a crazy bull market for everyone. In cannabis, it's been a like a knife fight in the butt. Like, I don't know, the next five years could, you know, I think if we got a whatever recession of any kind, uh cannabis, I don't I don't think it would be that core. Like if you got you know, federal whatever, re rescheduling for adult use in the same year you had a 2008 like crash, like cannabis would probably go up and the rest of the markets would probably crash, right? So, like uh there's some correlation obviously with consumer spending, consumer wall and oil prices going up, average basket size. I'm not saying that we're completely immune to macroeconomic forces. Uh, but anyone who follows, you know, certainly cannabis equities, I don't, I'm not sure. I mean, it's correlated to uh uh the uh regulatory changes, really, right? It's not, I mean, more so than financial performance, right? I mean, it's it ticks up and down a little bit on financial performance, but you know, one tweet from Donald Trump and it goes up 30%. So I'd like um so yeah, I just think that we're you know, kind of uncorrelated to the that broader narrative.

SPEAKER_03 15:54

Yeah. Yeah, that's fair. I mean, for sure, especially software being a big aspect of that. I've I've definitely heard about that impact, you know, where AI is re-rating these things a lot lower. Software, obviously, like if you look at the IGV, it's down massively, and um people are questioning the future cash flows of these things and their ability to manage. But it's also interesting, is that how it doesn't seem like that disruption is really there. So, and you you said the word perceived, and I think that's a is an interesting application here in the talking about private credit, where you know, there's just so to me that's more of a signal of not credit, but credit quality that is, but around around liquidity. And and like you said, there's so much money that was flowing in so aggressively, and they were working so hard. And so, you know, any kind of retreat of that, you know, probably does cause more of like a flow issue than necessarily, at least in the near term, a credit quality issue.

SPEAKER_02 16:50

Yeah, for sure. And like I I think um, you know, we're in this like this AI buzzword world, right? Where I think everyone is, you know, either wildly optimistic or wildly terrified, and like people don't necessarily know where this is gonna go. And like I think that the software architects of those companies are gonna be able to pivot and and find new ways to get to get out of this. So um, so yeah, I don't know. I I think that um I I think it's uh an overblown narrative as it as it sits uh today, and uh I think that AI is probably gonna take longer than people think to actually get implemented and display some of these things. Um so yeah, I think private credit uh in general is stronger than the market perceives. Uh uh and I think that cannabis is basically totally uncorrelated to to that broader narrative.

SPEAKER_03 17:43

So being in our own kind of cycle that we are, uh, where do you see the um the credit quality environment today versus where it was like a couple of years ago? You know, do you see improving um fundamentals with companies you're looking at? Are they still, you know, how are they managing through and how is it how does it look from your seat?

SPEAKER_02 18:03

Yeah, uh I would say absolutely we have stronger credit profiles than we had uh you know years ago. Uh you know, something I like to say is the industry will never be this fragmented again, and it's more consolidated than it's ever been, right? Like those two things are very hard to are hard to argue with, right? Um, and so yeah, the last four years, like you know, we had our own uh boom bus cycle that you know all three of us very much so lived through in this in this space where you know you had uh the you know, I call the Canadian funny money uh came in from whatever, sad maybe like late 17 to 20, kind of, right? Where there was these crazy investments. I mean, big alcohol, big tobacco, which I love when people are like, oh, big tobacco and big alcohol might get in now. I'm like, how soon we forget that these companies already put billions of dollars into this space? We don't have to pretend or like wonder if they're interested. They're interested. They put a bunch of money in and they and they and they lost it. Um and so I think the last four or five years was sort of suffering for the sins of the past and investors saying, okay, now prove to me that they're you know, the uh, you know, the the return on invested capital is is really there. Uh and you know, as someone who's been in this space for over a decade now, I I think you're I think it's the you know lowest valuation, strongest asset time that we've had in the history of the cannabis industry to go out there and and and deploy dollars.

SPEAKER_00 19:32

And and and what and why do you suppose I think I think that's an important statement that you've made, Steve. Um my counter to that personally is I feel a very similar manner, but if I were to be critical of myself or just honest, I felt that before. I didn't feel it as much recently. Like I felt like after Florida fell through, it was we're pretty obviously in a tough, you know, in a tough spot after that, waiting for reform. So I feel a little bit with the boy that that's cried wolf. And so that's why I've just kind of stopped making predictions, period, specifically on the political side. But I do agree, Steve. It feels like Morgan and I talk about that behind the scenes, it feels like there's a lot of great stuff going on. It feels like things are improving. You know, companies like you know, Leaf are doubling their gross profit over the last year, and pretty much no one cares because there aren't you know real investors out there doing the work right now. So I'm curious from your perspective, Steve. Like, why do you feel like you're seeing that set up specifically right now?

SPEAKER_02 20:25

Um God, there's a confluence of so many things. Let me break it down into let's put it into three different buckets. Uh the first bucket, which is what is very much within our control, uh, is the fact that you've separated the wheat from the chaff, right, over the last five years. Uh, you know, if you were just uh someone who's like, oh, I love to consume cannabis and I'm at the right city uh council meeting and I want a license, and therefore you're gonna pay me $10 million for this license. Um that's all pretty much gone away, right? Like that that that was very common five five years ago. It almost doesn't exist now. Uh and now we have the real operators who are like, I'm a retail operator, right? Or I'm a you know, I'm a manufacturer, right? Uh like a brand, like a Jeter or a Wild. Um, or you know, I'm a uh diversified retailer who runs a hundred retail stores across the country uh and then vertically integrated in a lot of my in my markets. And so I can go out there and uh and acquire a store for two times EBITDA, put my own products on the shelf, uh, and pay less than a two times, you know, EBITA multiple on a on a go forward basis. So just fundamentally, uh, the operations, the infrastructure and the operators that I see in this industry are much better and stronger competitors than the average operator that I saw five years ago, um, including you guys and including us, right? I'm a better investor than I was five years ago. I've got a hundred reps under my belt that I that I didn't have. Um, you know, and I've and we've we've learned a lot um, you know, as investors and and and operators. So that's sort of the first the first bucket, which is like us evolving as an industry into a stronger, a stronger industry. The other two buckets are on the on the regulatory side. But you know, this industry, as I mentioned before, trades largely on regulatory reform reform. If you look at the you know, the CSE, where the majority of cannabis companies are traded, and you look at the you know the the chart over the last call it five to ten years, the bumps are on regulatory, they're not on earnings, right? It's it's on it's on, oh, we talked about similar, you know, Chuck Schumer tweeted about safe banking, right? It's uh you know, re-rescheduling. Um it's uh the Georgia Blue Wave, but you know, you guys probably remember in 2021 where we're like, oh, we're gonna have a liberal progressive government here. This is good for cannabis. Um and so you know, Sliers are traded on that. And I would argue that we are having the most robust conversation with the federal government as an industry that we've ever had before. And so I think that is fundamentally positive, regardless of how you know the June 29th hearing and ends up. Uh, you know, it seems like we're gonna get, you know, mild from mildly optimistic to, you know, medical cannabis will not be uh subject to 280e, to the very optimistic of, wow, this is really impractical to split up adult use and medical in these states that have dual license share all over the all over the country. Um we're gonna remove 280e and set the foundation for things such as payments, as more as Morgan um described, you know, the death by a thousand cuts that we we face in cannabis, uh uplifting under the Nasdaq, uh, you know, getting real liquidity, real custody. Um, you know, these are the things that are gonna foundationally change uh you know, sort of the headwinds that we've been facing into you know real meaningful tailwinds. Uh and the third bucket, which potentially is to to me the the strongest thing in the near term is turning hemp back into rope. Um and and you know, stopping this well intellectual dishonesty, right? That the 2018 Farm Bill uh intended to sell psychoactive cannabinoids at gas stations. Uh and so I think that reversing that trend, uh, you know, I was with an operator in Cincinnati, Ohio last week, and they said two Hemp Shore stores shut down uh right around their store, and their sales the next month were up by 70%. Now there's other, it was 420, there was April, there were some other other other um things that were moving the needle there, but that's a tangible increase in revenue, and more importantly, a tangible increase in profitability because you don't have to go open a new store to get those sales in, right? You've already paid for all the fixed costs. So that's like real meaningful profitability coming back into cannabis. Uh and you know, another an operator was talking to me the other day and they were like, yeah, you know, it's kind of nice. The hemp industry uh, you know, they paid for our advertising bills for the last five years and they were taking the sales, but those sales are gonna come back into us. And so I was like, yeah, it's an interesting way to way to look at it. But um, you know, I think that that we've got some real tailwinds in the industry here for the first time. I mean, yeah, since uh, I don't know, 2016, and the eight states then went legal and you know, ever and the uh proliferation of cannabis across the United States. So uh I'm I'd say I'm more optimistic than I've ever been uh in this space.

SPEAKER_03 25:27

So two follow-ups on two follow-ups on that. One is um to your point, like consolidation's happening, which is great. I'm a huge proponent of it. To your point, it'll never be this fragmented ever again, which is good and necessary. Um, but we're still in this cycle, as you're mentioning, of like companies getting taken out at two times EBITA, which is largely liquidation value or worse. Um, so these are like basically there's no return for the shareholders, it's largely you know equitization of probably their debt. If they're lucky enough or fortunate enough that they didn't have debt, there would be a little bit of recovery, but it's still extremely low exit values in this consolidation cycle. And it's great for those that are doing it. Kudos to Virio um for putting their foot on the gas and doing this um and doing so aggressively while others are still kind of licking their wounds from past uh challenges in their um MA cycle, but you know, Virio kind of coming with fresh energy and getting shit done, good for them. Um but I'm kind of curious from your perspective, is like when do you think and credit tends to lead equities, right? So, like, are we seeing a cycle where things are consolidating enough where we could start to lift off of the two times floor that we've been in? Um, I think that's great for the whole sector, is if you know things could normalize a bit. And the second part of that question, though, is you know, I'm doing my run through of all the Q1 numbers of the PubCos, the largest PubCos. In aggregate, there's like no growth in these top 10 companies. It's flat outside of Eriel, which is rapidly shooting through the ranks. But otherwise, it's like 1% on average for the top 10 year over year, and their cash flow margins are degrading, you know, continuing to degrade. It's been quarter after quarter after quarter of operating cash flow declines as a percentage. Um, it's something like I don't even I don't have it in front of me, but you know, double-digit declines in operating cash flows. So are you seeing better credit on the private side? Or, you know, how are you when you're talking about like things improving? You know, I'm not seeing it necessarily on the public side, especially because until we know what happens with UTP, their UTP balances continue to accrue massively. And for those uninformed out there, that's the uncertain tax policy where they're just not paying 280e and it's accruing on their balance sheet as this you know ballooning obligation.

SPEAKER_02 27:50

Yeah, I know it's a fair point. And um, you know, I think that the majority of the the Pub Cos who went out there and you know acquired assets, you know, they went public on the CSE when when is it 20 2020-ish or maybe about 2018, 2020, um, and raised a bunch of money, deployed a bunch of money out there, uh, you know, signed up for a bunch of IAPR leases and signed up for you know a bunch of uh, well, just whatever, sale lease backs in uh in general with these escalators at you know, whatever cannabis pricing at the time, which was you know higher than the the the rest of the market. Um and they're they're capped out by uh their license limits. Now they're trying to go above those, but you know, largely the growth in these uh for the top 10 Pub codes were new markets coming online. And now we've hit sort of a level of density in the United States of cannabis where there's you know, again, when I was in California in 2016, there were eight states that passed um, you know, when um Trump was first elected, right? Um the same night Trump was first elected, eight states. Four went to medical, four went to uh from nothing to medical, four went from medical to to adult news. So the growth was obvious, right? But if you're in 15 states and you only have one state coming online, the commoditization of those other states is probably eating up the growth that you're experienced from the, you know, whatever, one state or so that that's coming online. And so that's why I think you see um, you know, groups like Curole starting to invest uh internationally uh for that growth. Uh and although you I think you have seen those uh operating cash flows decline, I think you've seen an uptick in gross margin um over the last few quarters. And I think that's from the forced efficiencies that we've seen, you know. I mean, every every earnings call, every CEO for the last five years, and Jesse knows this from his time at least here, like they're focused on how do I become more efficient, right? And that and that to my earlier comment is I think we're the most sustainable that we've ever been, right? Um you know, you also had groups fall off, right? I mean, like you've got what forefront, pharmacan, uh cannabis, right? You've had these these companies uh you know start to start to fall off. And so I think that those operators going away is ultimately going to help because you know you see this downward spiral of like, oh, I'm gonna fire sale my product, or I'm gonna you know try to get shelf space by discounting my my product and like the operators that exist uh you know and that have survived through this, they know you can't discount your weight of profitability, right? Um and so yeah, I think you're seeing stabilization is what I see more so than like you know, demonstrable declines in these in these companies, and any addressing of the uncertain tax position uh is gonna be you know massive credit uh positive. Now, to your question about public versus private, I mean, yeah, I think in general we do see more opportunity on the private side. Uh, I think the private credits are much better than uh the public credits on the balance, right? Um they have less access to uh to bank to bank debt, smaller balance sheets, they've got uh but but stronger income statements, stronger profit profit margin, um, and they're nimble enough where they can still grow, right? If you're a top 10 MSO, your your growth uh trajectory is just limited by your scale. Um, we're already starting to see it in uh in Illinois, you're starting to see a lot of the big operators spying that second 10 vertical. Um, I don't know if you guys saw in Massachusetts, they just passed the law to go from three to six stores. Um, and so you know, for me, I'm looking at groups in Massachusetts. It's like, hey, if you're doing, you know, it's called $30 to $40 million and 20% even margins in Massachusetts. I think you have an excellent opportunity to go out there right now and acquire three more stores. Uh, I think there's a great, I think there's a great ROI in um in that in that type of investment. Um when I look at groups in like Missouri, right? You got 10 stores, 15 stores, you're going to from you know, into 15 to 20, want to go acquire some more retail, there's real growth, you know, growth prospects there. Uh and so yeah, I think you just have to really understand uh the economics of cannabis and how money moves in and out of this system.

SPEAKER_03 32:14

And just the last one, uh, and then I'll pass over to Jesse was uh on the on the exit multiples. Do you think we're kind of in this environment for a while? Do you see that environment maybe as we lead into our next session with section with rescheduling? Do you think there could be more normalized multiples, or what do you think is a normalized multiple? And I'm sure that's great for you guys too, right? Is is better multiples, it's just better better for credit as well.

SPEAKER_02 32:40

Uh, you know, people are definitely more realistic about their valuations than they have been. Uh, you know, I mean part of the the the almost impossible challenge of investing from 2018 to 2021-22 when the market started to drop was uh I mean, I'll never forget, I did the report, I was working with uh Beridian Capital at the time. It was January of 2019, and the publicly traded Canadian licensed producers were trading at 100 times trailing revenue. Uh and I was just like, I don't know. I was like, I don't, I don't know like how you how this catches up, right? And uh obviously, you know, just wear my like you know traditional JP Morgan financing hat on.

SPEAKER_03 33:23

Um it was more than what Air Canada and Right, exactly.

SPEAKER_02 33:27

Yeah, exactly. Like it's just the the comparisons were were uh were kind of ridiculous. And again, I think that's where we've had success at Chicago Atlantic because we've always just looked at it as a fundamental cash flow. We never tried to predict what something would be worth, we simply focused on what is the sustainability of your cash flows and like will they be adequate enough to service a debt instrument, right? And so and and so we never got into like, oh, your license is worth 60 million dollars, like not part of our underwriting, never has been, right? Um uh and so so yeah, uh, I think that uh multiples I you know, but lately I've been I've been kind of talking about I think that this 2x EBITA multiple, like this the bargain bin, if you will, uh, in the last three years has been overflowing. And so if you're an operator and you're going out there and you say, I'm gonna go acquire an asset, and you see, you know, dozens of of uh you know sellers at two times EBITDA, the strong ones aren't even really in the market. They're like, okay, well I guess I'll just tread water until until something changes. But I mean, I don't want to say the bargain bin's been totally picked through, but I think we're on the other end of that curve now, where again, pharmacan, cannabis, med men, throwback, uh, you know, whatever, eight acreage, um, you know, even like uh true leave, uh divesting from places like Massachusetts and and non-core assets, right? Like we've been going through that exercise, guys, for three to five years. Um, you know, I mean, you know, 2021 was like the first inclination of the stock market dropping and people saying, okay, like what's making money, what's what's not. And so, you know, I think it's I think you acquire as much as you can at these levels, as much as you have the ability to do so, and uh and build the strongest foundational cannabis company that you can. Uh, and I think we wake up over the next, I don't know, I mean, it could be two months, guys. If rescheduling comes back in June 29th and they say, hey, UTP's gone, uh, we've decided it's all about which I get in this the most optimistic, I think, uh possibility of that, of that out of that, uh, of that hearing. Uh, but if you come out of that and and the Nasdaq says, hey, this ruling is enough for us to go up list, I think you're I think you're on the backup swing to it, right? Um, and and you know what I tell folks is like this is a volatile, thinly traded space, guys. Like just as multiples can trade as low as they are now, we've like let's not forget, we've seen the opposite. We've seen them traded a hundred times together revenue. So like it could swing up pretty quick too, right? Uh, you know, it's not like we're a you know multi-trillion dollar SP, you know, industry, right? Uh, it doesn't take a lot of volume to to change the EBITDA multiples uh demonstrably. Uh yeah, well, right, yeah. That's that's it's the only network. Yeah. Yeah, exactly.

SPEAKER_00 36:26

Uh do you think it's fair to say, Steve, that overall Chicago Atlantic has been a bit more conservative? Um, you know, whether I was an analyst or working at Leaf now, I've spoken to you and Dean or the whole team. And first of all, you guys are a class organization, like you guys do real research, you really go through the process. And so I've always always appreciated how thorough you guys are also straightforward with folks about who you're a fit with and who you're not a fit with. And it's another, you know, way a thing I like about the way that you guys do business. But do you feel like, Steve, you've been you that Chicago Atlantic has benefited from being more conservative? And do you think as this optimistic case you've been painting a bit evolves, that it's possible you'll get a little bit more aggressive on the lending side?

SPEAKER_02 37:09

I mean, I would argue that our uh aggression uh comes more in the form of virium, right? Where we're going out there and like voting with our dollars that we do think valuations are are attractive and we're happy to roll up at these at these prices. Now, on the credit side, like I mean, we're super disciplined patient capital. So I would actually say no. I mean, tell us Suzanne, it's just it's just a cat, it's like it's just like um, you know, there's the math component, uh, then there's the, I guess, the art component. Uh, and the art component is just, you know, having guys like me and the team who have been in hundreds of these facilities and talked to thousands of operators over a decade and knowing what it takes and what sort of team I'm looking for that will actually be able to sustain their level of profitability. Uh, you know, not just like hoping and saying, oh, you got a dispensary on Long Island, you're doing 20 million in EBITDA. Uh, I'm gonna underwrite this like it's gonna exist forever. It's like, no, like I just I've got enough scars in my back, I've got uh enough turns through this stuff. Um, I would be very apprehensive to underwrite, you know, a $60 million single door dispensary of any kind. And I would say, okay, if you want a loan on something like that, like pay me off in a year. Like I okay, I like I I can I have confidence that this can exist for a very short tenure. But uh so yeah, I guess to answer your question, like the credit, the credit is I don't want to say conservative. It's just yeah, I I hate when I get I get constantly constant pitches of like, oh, my numbers are conservative, my numbers are conservative. Like, like can we just have an intellectually honest conversation? Just I actually want to know what you think the numbers are gonna be. I don't want them to be conservative, I don't want them to be frothy. I just want to know what you think they're gonna be. And let's have an intellectually honest conversation about where we think they're gonna be, and if they are not there, what we're going to do about it. Uh, and so I think that underwriting discipline is what's allowed us to deploy over three billion dollars in the space.

SPEAKER_00 39:00

And when we look ahead here, you know, we've spent so much time, you know, in our personalized business context, publicly on this podcast, talking about what changes with Schedule Three. And I think it's such a big discussion. And my overall view, Steve, which is me being a leading question answer to the bad interview technique, is that the rebound won't maybe be as sharp as we expected because of how long it's taken to get here. And I think it benefits the space very differently because of the damage that has continued to go on during this period. Like we'll see what happens with the UTPs, but just overall accumulating more debt with declining revenues, margins, suffering. I think there's more and more uninvestable companies out there, but I think it's also more bifurcated where it's getting to be a little bit more apparent who some of the long-term winners may or may not be. So I'm curious, like when you look through this with your lens, Steve, if Schedule Three goes in our favor, and let's just say we end up with medical and adult use by the end of the year, how do you see the cannabis investing landscape evolving?

SPEAKER_02 40:09

Yeah, and I and I and I kind of love the way that you're that you're framing this. Uh you know, since we're all we're all kind of over a decade long into this, into this thing now. And you know, I just don't view like federal legalization or whatever that even means as like a switch that you merely flip and we're like saved, right? Um, you know, I think about uncertain tax position. Uh I think about this June 29th hearing, uh, seeing what they say, having every cannabis entrepreneur and company take the most aggressive tax position they can based on whatever that is, the IRS coming back out and then telling them no, you this is okay, you can't do this, which you know, based on how gutted the the US government is these days, like it's just gonna take a ton of time, right? And so like I'm in this for the long haul, right? And so, you know, I've kind of already, for better or for worse, dedicated my life to this thing. And I just like, you know, we're not playing for some like I mean big win. I'd say outside of like when cannabis companies can uplist to the NASDAQ, I think will be like the closest you get to like a you know, a jump, like you know, whatever, like some kind of like fast jump in in invaluations just because of the the pool of liquidity. And then once you start to see people actually achieve equity returns uh and actually have a track record of investing money into cannabis and getting money back out, you'll continue to see money, you know, flow flow into the space. And so yeah, I think it's um it's years, guys. Like it's not, you know, it's it's it's I think in in terms of years, not months or or weeks, right? Um, and so I I just view rescheduling as a directional headwind transitioning into a directional tailwind. And so I think over a three to five year period, you'll just see a you know a reversal of the of the negative trend.

SPEAKER_03 42:03

What do you think? Yeah, so sorry, I'm just uh double-clicking on the because this is one thing that just like we bang our heads against the table daily about is and we don't know, but what if the UTCP does not get forgiven? Like what do you or maybe I should say like what how does Chicago Atlantic do you guys treat it as it's going to remain? They're gonna have to pay these things down, or like how do you guys think about what's really gonna happen with UTP?

SPEAKER_02 42:31

Yeah, I mean we underwrite uh our the the uncertain tax position for our uh non-finance nerds uh into our uh into all of our deals. And so, you know, our sort of the top, you know, and we're looking for the top companies, right? We're looking to invest in like call out the top three to five operators per, you know, per any any any given state. And for them, their UTP is typically like a turn of EBITDA, is what we find. It's like on a on a on a steady state, uh, and we make them pay that, pay that down and address that, or we add that to the leverage cover. Um, and so in general, you know, Chicago Atlantic, we try to stay under a two times total debt to sustainable EBITA is like a general metric we talk about uh internally at the firm. And that, you know, the the thesis was kind of like anyone who's in who has you know any kind of scale, right? Yeah. If you're doing 50 grand in EBITDA, like maybe you're probably not worth anything. But like anyone over whatever, seven figures of EBITDA probably is worth two times, right? In even in like a liquidation or fire sale, right? Um, and so that's sort of what we've uh we've we've anchored to. Uh and I want to address the the the the second part of that, which is in my mind, like what is the practicality and likelihood, right? Um and there's I think you know, the there's some there's some forces working in the favor of the larger operators. And I think that my and this is just my thesis, but in the same Way that every large financial institution and every billionaire was protected by the pension funds of every blue-collar work here worker in America in 2008, I think you have to throw every social equity applicant feet first into the wood chipper to cause an ounce of pain to a large publicly traded operator. So when I think about the practicality of the IRS coming in and trying to collect and basically say, okay, if you're a smart because if you say you if you say that your your UTP is 100% owned, and I'm 100% going to enforce that, you pretty much put every, I would say what, every I mean every social equity business goes out of business immediately.

unknown 44:38

Right?

SPEAKER_03 44:38

They face a double whammy because a lot of them are adult use only.

SPEAKER_02 44:42

Exactly, exactly. So if you want to go letter of the law like that, I think that you've got a pretty large political and social equity shield. And yeah, you can push back and say, oh, well, this administration doesn't give a shit about that. They don't care about those people. And it's 2026. The federal government moves in like years. Uh, if you think that the IRS is going to have the task force uh and the determination to go execute on you know the most unfavorable interpretation of this in the next 24 months, then yeah, probably get out of the space. But I don't think uh I don't think we believe that here.

SPEAKER_00 45:19

What is kind of your base case there, Steve, in terms of expectations? You said you don't believe that it'll be worst case, but what's kind of your base case when you look at it?

SPEAKER_02 45:28

Uh I think the base case, you know, let me pull on my cannabis crystal ball here, which is notoriously fuzzy. Um my base case right now is that it's it stays medical, but um you know, anything that anything on adult use is kind of upside to me. And if it does go to medical, most of the companies, certainly in the big 10, you know, publicly traded companies, and most of the companies in our portfolio have either a presence in a medical state uh or a bifurcated license in a place like Illinois or or Ohio. And I think you point to the medical side and say, okay, I'm a medical cannabis company, right? And so I, you know, 280 doesn't apply to me. Like, guys, if we can point to the 2018 farm bill and say psychoactive cannabinoids can be sold at a gas station, I think it's pretty safe to say that cannabis operators are gonna point to saying, I have a medical license, I'm a medical cannabis company, you know, here's uh here's how I treat, I treat taxes, and then the onus is gonna be in the IRS to come out um and stop them. And guys, this is gonna play out over years, right? Like this is not a I mean, the trial itself takes like a month. Like we're the month, it's like there's like three months to the trial. The trial takes a month. Uh, I will guarantee you lawsuits will happen from that trial. Like it's the easiest bet you can make is that there will be lawsuits after this trial by Sam, by advocates. Um, and so it's just gonna take uh it's gonna take a long time. And then I think you're just gonna see people take uh more favorable tax positions uh in the interim. And then, you know, the uh bedtime story I tell myself is that the next president will be younger than the last 12 years of presidents, uh, and that cannabis is an age issue, not a party issue. Um by that time, uh, which again, two years is just it's just not a lot of time, guys. Um, you know, in in cannabis uh regulatory land. And so I think in two years, you get a more, you know, a more favorable outlook towards towards all of us. Um and we just continue to block and tackle and and solve problems and build a stronger industry.

SPEAKER_00 47:41

Yeah, I think one of the challenges, Steve, has been the lack of clarity in the space. You know, markets hate hate uncertainty and investors hate uncertainty. And I've told this story a bunch of times in the podcast, but I remember the year of the Florida vote. Was that 24? Fall of 24? Does that sound right, guys? Yeah, it was the election. So yeah, yeah, fall of 24. There was some serious money looking at the space then because they thought you might get rescheduling, Pennsylvania, Florida, and we could be, you know, off to the races on this rebound. And I was talking to a big small cap growth manager, and he said, Jesse, the problem is how can I play the game if I don't know the rules? And that hit me. It was an obvious statement. I was like, wow, that's a fair question because a lot of us at that time were speculating about the rules. And if you look back to then, we're talking, you know, almost two years later, and none of those things have happened, right? No Florida, no PA, still no Virginia, and you know, no clarity on Schedule Three. So it's clear created this environment where we don't know how it's gonna work out. So it's been harder to bring big capital, serious investors along the along the way unless they want to speculate on that outcome, unless they're really into cannabis and they have a view of how that's gonna turn out. So, Steve, as we get a little bit of clarity here, and I like how you're framing this because we'll get we've got some clarity on medical, we're gonna get some more clarity on adult use. Then we need to address these UTPs. So it's kind of gonna come out in phases. And even on the UTP side, I thought that was smart stuff you were saying about it. That in and of itself may take some time to play out, you know, a number, you know, more years. So when you look at bringing the new investor in Steve, because I view the big challenge here that we have the beat up retail group, which we love you guys, but most of us have doubled down 19 times and are pretty much out of money. Some have some fresh capital going into the space, then the new investors haven't come over the wall yet because a lot of them are looking for improved fundamentals, which you talked about earlier, but also some clarity on these regulations. So as we check some of these boxes, hopefully over the next six months or so, Steve, how do you see interest picking up and some of that fresh capital getting into the space?

SPEAKER_02 49:39

Yeah, it's a it's the it's it's a good question. You know, the as an asset manager, my product is my track record, right? I mean, that's ultimately what I'm selling, right? I'm like, hey, here's what I've done before, and with your money, I could do more of this, right? There really isn't an equity track record in the space that anyone can speak to that said, hey, I've been I've invested $30 million a year in the last 10 years in cannabis, and my returns have been uh positive or or can you know consistent of really in in any way. And so uh, you know, what you're describing, frankly, Jesse, is a great environment for entrepreneurs, right? Um, it's folks who are comfortable and frankly happy to navigate risk and ambiguity, right? Uh, and so I think that the entrepreneurs that can continue to build um in this ambiguous time are going to be uh you know rewarded by the investors who start to trickle in. And you know, Morgan's earlier point, like I mean, we're again we're kind of we're voting with our feet here with the Virio platform, right? Like we are the platform who is, I think, starting, we're we're trying to at least you know start the fire a little bit, right? Um and if if uh valuations go from you know, whatever, what are publicly traded companies trading in an aggregate? Six times, Morgan? I don't I don't know what it's at if you look at like whatever, top five, top ten. Um, you know, if we go from six to eight times to ten times, okay, like the stuff that you know we're doing uh starts to look pretty good. The people who have put money into the public markets start to look pretty good on the on the equity side. Uh, if you get some regulatory uh certainty on the on the uh the UTP and how we're gonna regulate this as a as a um on the federal level, uh if you get exports uh over to Europe because we're we're medically legal now, you start to build that case, right? And I start, I think you start to see the capital trickle in, and when you start to see returns, more more money will follow. So again, I don't think there's like a silver bullet, right, where it's like, oh, what's the lever? What's the one thing I have to watch for uh in order to make this successful? I think it's just ground and pound, blocking and tackling, hard work, going out as an entrepreneur, and building a platform that has the ability to sustainably produce profitability. And if you're focused on that, the money will come.

SPEAKER_00 51:57

Yeah, I think that's well said. Last one, Morgan, then I'll throw it over to you because I know we're uh running a little bit late as we always do in higher exchanges. Yeah. Time flies when you're having fun. Yeah. Um is rescheduling, do you think, categorically bullish for you at Chicago Atlantic, Steve? Or do you see any risk on the business side that this brings in more capital, which leads to more competition? Because one of the advantages you can have in cannabis at points in the cycle is you've got money, right? Like if you're coming in fresh to this environment today, you know, knock on wood, that could be a you know great time to be deploying capital because there isn't much capital around, which could be advantageous. So, how do you feel and how do you see competition changing the landscape?

SPEAKER_02 52:35

Yeah, good question. So let's say that the industry gets much stronger and some of the levers we talked about uh come to fruition. Let's say that you you the uncertain tax position, uh, let's say that that does go away. And let's say that uh banks start to come in uh you know in more force than they have historically, that will probably just push us into more like first out, last out structures. Uh, and frankly, we've raised several hundred million dollars of bank debt. And so when a bank comes in and looks at this industry, I mean, I would argue from a credit perspective, a you know, multi-billion dollar publicly traded Nasdaq platform um that's you know well diversified across the space is one of the best credits that you could you could have versus certainly like a uh a single state, uh a single state operator. And as a bank, you should be looking for the most conservative way to deploy your capital into any in any given space uh first. And so I think that A, that capital is likely to move into us to be deployed into the into the industry. Uh, I think that if you remove the uncertain tax position, we can go from two times total leverage to EBITDA uh to three times total leverage to EBITDA. And if one turn of that uh leverage goes from a uncertain tax position into a one turn of bank debt, that's okay. We can kind of maintain our position in our in our in our general uh risk profile because you know, frankly, we consider, as we underwrite today, as the federal government priming us with that UTP. So I would much rather have a bank, you know, priming me and a healthier industry. And so I don't think we sit around like being like, oh my God, it's gonna significantly erode our position. Um you know, I think the question for us is more, you know, how much can we grow? What's the total adjustable market in cannabis for us as an asset manager? And you know, that's frankly why we've uh you know been growing outside of the outside of the space, right? Because we think we're going to maintain, you know, our dominant position as uh as the largest Latin lender um in the space. And regardless of the uh you know ambiguity and changes of the of the future, like I don't really see a future where there's no private credit that fills a pretty big gap for uh you know a nascent vice industry like like the cannabis industry.

SPEAKER_03 54:55

It's interesting about the the um talking about vice and putting cannabis in the vice bucket is is a it kind of I feel like that gives mixed emotions from people when people talk about it as a vice. Uh obviously because vice connotates addiction issues and it takes it connotates people overdosing and deaths and things like that where true vices you know have those implications, but we nonetheless seem to be kind of putting into that bucket. But when you kind of think longer term about cannabis, we've lived in our own bucket. Uh it does feel like there's a bit of kind of bleeding into so we're not you know separate concentric circles, but things are are starting to potentially overlap with other areas. But how do you think about cannabis longer term? Like from your point of view, is it does it kind of stay siloed or does it really kind of start to blend in with other alternative areas? Vice? I don't really know what the right word is because I don't really like calling cannabis a vice sector, but I just know that's kind of like a nomenclature that's being pushed upon us. But sure. Yeah.

SPEAKER_00 56:01

Yeah, I always love to think it's gonna end up in wellness. Like that's the word that I love, but yeah, it's not totally clear.

SPEAKER_02 56:07

I I uh when I first got in this industry, I used to write uh what I call green papers at the time. Uh and one of my earliest green papers was titled From Vice to Virtue. Uh and I do think that cannabis has been in that transition from vice to virtue, right? Uh and when I think about vice, I think about if when I put my credit hat on, I think of it as a positive because uh uh the broader public thinking this is a vice was the opportunity set for me, right? And that was the the the delta I talked about in the beginning of the perceived risk versus the actual risk. And so from a private credit manager perspective, I'm okay with banks thinking that this is a vice, right? It's like it's sort of what gives me uh my window to to to go invest. Now, as a uh you know, a consumer and an advocate, no, I don't consider it a uh you know a vice, a vice at all. I think that there's uh obvious medicinal you know benefits to to patients. And uh I just think it's impossible to, you know, whatever, talk about liquor or tobacco or sugar or you name it, right? And be like, oh, there's like we're gonna tell people what they can and you know can't do with their you know with their bodies. Um it's like a cognitive liberty issue. Um and so yeah, I don't mean it uh certainly as like a derogatory term, right? Um I actually when I say I I think about the opportunity set uh that it's allowed for all the entrepreneurs that work in in cannabis, you know, to come into this industry uh and build uh where other people can sit in the sidelines and frankly, I think be wrong.

SPEAKER_03 57:37

Yeah. Yeah, and we talk about this with like portfolio companies that are as you know, similarly are starting to reach out, and what they're exploring is other highly regulated industries. So not whether they don't it doesn't matter if it's vice or not, it's just highly regulated and by nature has more fragmentation and weird nuances and things like that, where you know we can kind of we're very comfortable doing that, right? We're very comfortable living in this weird space, and there's we're not the only ones that have these kind of characteristics. And so yeah, highly regulated. That was the word I was trying to, or the phrase I was trying to end up.

SPEAKER_02 58:13

Yeah, I like that I like that. But like guys, like that's the opportunity set uh, you know, that that we have here, right? Uh when you know, when we do like remember in 2020, you know, things are trading so you know, so frothy, like there wasn't an opportunity. I would argue like right now is some I I think when you look, you know, look back in hindsight to the rearview mirror, you're looking at 2026 thinking that would have been a great time to you know to start to make some bets uh in the you know in the in the cannabis industry.

SPEAKER_03 58:41

Yeah, and I agree with that. I mean it's the classic investor behavior. It's money comes in at the top and money's scarce at the bottom. I mean, you know, I'd say you guys are probably uh an outlier in that, and kudos to you for the platform you guys have built. It's truly been incredible to see it come, you know, from the very beginning, basically, and now it's you know substantial. And and there are groups that are raising capital. Kudos to Leaf and Jesse, they just raise an oversubscribed equity round, it's fantastic. So there are pockets where money is working and moving, starting to move more. But to your point, it's like there's for those that can act, they are just having a field day, you know, versus the others that are just still sitting on the sidelines. And by the time they come in, it's gonna already will maybe we'll be into that eight to ten times EBITA. Um, you know, the two to three times are are gone, and you know, they've missed it, and that's a huge amount of return that is being left for the few that will do it. So uh yeah, yeah. So not really a question there more, but just the statement.

SPEAKER_02 59:45

Yeah, yeah, it's like the blood in the streets that analogy. I mean, you guys, we're all capital markets guys here, right? But it's like, you know, when when you buy is like one of the most important things in any investment in any asset class, right? And so I think if you're in any industry and you see your ability to buy assets and you can buy sustainable EBITDA for two times, I mean, not outside of the industry going extinct, in which case, like you shouldn't be here in the first place, right? Like you said, uh who was I talking to? It's uh you know, it doesn't uh it doesn't hurt so bad to fall out of the basement, right? Right. Like how much lower can you could you even could you even go, right? It's like after two times, then it's like the assumption is your business is extinct. And I don't think I don't think there's many folks who believe that can't the cannabis industry um has lost ground in the last 10 years.

SPEAKER_03 1:00:36

Yeah. Well, Jesse, I'll pass it back to you. Just keep an eye on the time here. So okay.

SPEAKER_00 1:00:42

No, I think that I think everything you're saying is really great, Steve. I think you know things might be starting to improve. I think Morgan, I liked your counterpoint that we're not seeing that in the data of the larger operators yet. But I liked the way you framed things initially, Steve, when I gave you the round of applause in terms of a bit of the bifurcation, the improvements, and some of the fundamentals that we're seeing, the cost discipline, like it's year of the core for what, the fourth year in the row or something like that. And I say that somewhat sarcastically because you know Cresco talked about year of the core, and I think it was 23 or 4. But they were right, man, right? And everyone followed them and everyone's got leader and meaner. You know, we even dropped our operating expenses 16%, one six, not six oh, year over year, while doubling our gross profit. And those are the sort of things that are happening that people just aren't paying attention to. And it's not just about leave, but across the industry. Try and, you know, look for some nuances about where you're seeing those types of improvements and then be mindful of the things that Steve was talking about, like that conversion from hemp. You know, what could schedule three do for us? Could that, you know, lead to Morgan? I can't doubt it my hand on the screen button, but safer banking, you know, could there be some momentum there? And it's not clear, guys. Like it's I don't think we can categorically, you know, we all have the right to pound the table and say, in my opinion, this is how I, Steve said his murky crystal ball is playing out. But I think there are cases out there now. There's a case to be more bearish if you don't think things are gonna change. If you don't think UTPs and Schedule three are ever gonna happen, then your views can be very different than someone that that's optimistic about schedule three and UTPs. Throw in that hemp conversion, but that's state by state, right, Steve? Like some of that's gonna help some folks more than others. And I think you need to be able to dig in a little bit to be able to understand is there exposure to you know the hemp conversion for Texas probably doesn't benefit PubCos that much, but maybe you know, Ohio, that's kind of a big deal. So uh, you know, our friend Scott Grossman always talks about doing the work. And I think this is you know a time in the industry where doing that extra work can really be helpful.

SPEAKER_02 1:02:34

Yeah, yeah, absolutely. Uh I think this is a great, a great time to be building uh in this industry. Uh and again, I said at the beginning, the industry will never be this fragmented again. Uh it's the strongest this industry has ever been. Uh it's the weakest this industry will ever be. Uh, and so the people who are in here doing doing the hard work to serve cannabis consumers, uh, you know, I think it's gonna be long-term rewarded. Uh, I think it's hard to time, right? Um, I'm not a timing guy. Uh I'm an operator and an investor. And so, you know, if you continue to build, uh, you know, eventually the tide's gonna come back.

SPEAKER_00 1:03:10

And if people want to keep track of you, Steve, and Chicago Atlantic, what's the best place to give you and the kind of company a follow to keep track of things?

SPEAKER_02 1:03:17

Uh, my LinkedIn page, uh Steve and Ernest, uh, and then ChicagoAtlantic.com. Uh, we've got a lot a lot of information out there about some deals we've done and how we operate. And uh, you know, happy, happy to chat. So reach out anytime.

SPEAKER_00 1:03:30

Well, great. Well, thank you again for to FlowHub for making today's show possible. Read the recent earnings report, guys. Cannabis retail is really hard. You need every edge possible to win. So you better have the best dispensary software. And that's FlowHub, period. If you run a single store, you run a whole chain, go to FlowHub.com, schedule a demo, and see what is possible. So thanks to Kyle, FlowHub, and the whole team for helping make making higher exchanges possible. And Steve, this was awesome, man. Like I said, it's been too long. It's been too long to have you on the show. You didn't disappoint. So I hope you'll come see us again sometime. Yeah, absolutely. Thanks. Uh, thanks for having me on. And Morgan, you know I love you listeners. We know we we we love you guys too. So we'll see you guys back here, same time, same place in just 14 days. The views expressed in this podcast are provided for informational purposes only. Nothing we said should be considered research nor recommendation. All investing involves risk, including the loss of principle.