DEA, Virginia & the Future of Cannabis

The cannabis industry may be entering a very different chapter.

In this episode of Higher Exchanges, Jesse Redmond and Morgan Paxhia break down their biggest takeaways from the Benzinga Cannabis Capital Conference in Chicago and discuss why the industry’s long-term outlook may be improving—even as public cannabis stocks continue to struggle.

They cover:

• Why this year’s conference felt different
• Why an uplisting isn’t a magic bullet for valuations
• How DEA manufacturing registrations could accelerate interstate commerce and international exports
• Why exports may arrive sooner than many investors expect
• Virginia’s path toward adult-use legalization
• Vermont’s interstate commerce legislation
• Why low-cost production and scale could become major competitive advantages

Whether you’re an investor, operator, or simply following the evolution of the cannabis industry, this episode provides practical insights into the trends that could shape the next phase of growth.

Higher Exchanges is powered by Flowhub.

Transcript

SPEAKER_00 0:01

Welcome back to Higher Exchange. The number one independent cannabis investing show. We break down complex cannabis markets into clear insights. Here are your hosts, Jesse Redmond or Compact.

SPEAKER_01 0:30

Welcome back indeed. I am Jesse Redmond, Chief Strategy and Investor Relations Officer at Leaf Brands. And I'm back again with the smartest cannabis investor I know. He is the very tan Morgan Paxia. Morgan, what's up, man?

SPEAKER_02 0:46

Uh, I'm doing well. Doing well. Um, maybe from the smartest, I should just be the most tan cannabis investor, you know. But uh yeah.

SPEAKER_01 0:55

How are you? I'm good. I heard a funny story uh when we're in Chicago where we were on with uh Boris, which was you know a great show. And I said his parents named him Morgan Paxia. And Hirsch was telling me, because I I I I look at a I don't look at down at the screen, I look up at the camera. So I don't know, you see the reaction. And apparently, like Boris started cracking up when I said his parents named him Morgan Paxia, which I didn't find that funny, but Hirsch said he thought it was funny too.

SPEAKER_02 1:25

Oh, we got we got some uh astute listeners, they hang on to every word, apparently, which is great. Yeah, Hodgkits a tan, Morgan. Just living the life of San Diego, just living the life, they call it San Diego for a reason. People get real grumpy here if it's cloudy for more than two days. So generally nice, nice weather here.

SPEAKER_01 1:46

So I think it's July 27th. I'm gonna head up to San Diego for my daughter's orientation at San Diego State, and then she's gonna move into the dorms in late August. And my firstborn, beloved, wonderful, amazing daughter, whose name I will not say publicly because I don't want people to be creepy, will be going to San Diego State.

SPEAKER_02 2:08

So cool. Are you guys gonna come down by train? You're gonna drive.

SPEAKER_01 2:13

I think probably, yeah, I was thinking probably drive. Um if it's on the weekends, so hopefully traffic shouldn't be too bad. Interesting. Um, they don't allow cars for the kids at San Diego State the first two years because they don't have enough parking on campus. So uh when you mentioned the train, that that made me think about she'll be taking the taking the train back and forth to Santa Barbara, which isn't too bad. But uh yeah, one interesting feature is no cars for your first two years.

SPEAKER_02 2:39

I think it's smart. I mean, we have Uber. It's easy to get around anyway.

SPEAKER_01 2:47

And they have some cool like um car rental thing on campus. I don't know what it's called. It's not like Hertz or something, but where students can rent a car if they want to like run down to the beach or go downtown. So like four of them could go in and it'd be a hundred bucks for the day or something. So it'd be 25 bucks for each kid and kind of make it work that way, which is cool.

SPEAKER_02 3:04

Yeah, yeah, that's cool. Just wanted to say hi to Brian because he said long time no see. Hi, Brian.

SPEAKER_01 3:10

Or is Brian in uh in the comments? Yeah, Brian's a good dude. We appreciate everyone that interacts. There's uh my buddy 2J's over there. 2J's uh or JJ, whatever it is, he's another good dude, super old. I'm surprised he can figure out his investments. The guy is like 99 years old or something like that, but he's an awesome guy. He lives in Chicago and he gave me some tips uh for going to Chicago, including the boat tour. So shout out to you. That was awesome. Nick gave me some great tips for Chicago. Uh Nickel, Nick Gasovich, he'll be on next week, and he had some uh awesome tips as well. I went up there a little bit early and spent a couple of days with my girlfriend and had a great time. So thank you to everyone that uh gave me some ideas out there. I always been there for business, never been there for pleasure, and Chicago was an amazing, amazing city to spend a week in.

SPEAKER_02 3:56

Yes, a great time of year to be there too.

SPEAKER_01 3:58

Yeah, right. If you went there in January, you probably have a different impression. I grew up in Minneapolis, like six hours away. So I know what the winters are like. So it's a good thing they do the conference in June.

unknown 4:07

Yeah.

SPEAKER_01 4:08

So I want to talk a ton more about Chicago. And Morgan, we have a ton to oh, he says that's Mr. JJTU son. Um, we have a ton to talk about Morgan. But before we do that, why don't you tell me about some awesome dispensary software?

SPEAKER_02 4:22

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SPEAKER_01 5:00

Nice. Yes, thank you very much for sponsoring the show. Good to say a say a quick hello to uh Annie from FlowHub when I was out there in Chicago. So always great to see the team. And we weren't going to spend the whole day interacting with the comments, but I'll interact with one more. John asks, Jesse, are you still reading 10 pages a day? And the answer to that is yes. I had been slacking on my reading. I thought reading on social media was enough, but Micah inspired me in January to start reading 10 pages a day. And I've done that every day since. I think I'm eight books deep and currently reading Play Nice but win by Michael Dell, which I got the idea. Scott Grossman turned me onto that book, and it's uh it's super interesting. So if you guys are looking for a good read, play nice but win uh is fantastic.

SPEAKER_02 5:44

This is my current read.

SPEAKER_01 5:46

Ooh, it's an easy, quick read. I think I read that a long time ago. That's not new, right?

SPEAKER_02 5:52

No. Um this is the 30th anniversary edition, though, if you couldn't see that.

SPEAKER_01 5:56

So there's and uh and and for folks that are not watching, what's the name of the book, Morgan?

SPEAKER_02 6:01

Uh The Warren Buffett Way, uh written by Robert G. Hagstrom. Um, it's quick read. It's an easy read of the Buffett books I've read out there. That's uh so you you could easily blow through 10 pages a day. That's uh it's a good one.

SPEAKER_01 6:16

What I I was out of the farm uh with Micah and the guys over the weekend, and Micah was reading The Intelligent Investor, which made uh my heart warm.

SPEAKER_02 6:24

Yeah. What is it? Chapter 7 and 11 are the two that um Buffett suggests focus on.

SPEAKER_01 6:33

Yeah, I haven't read that one since I was uh in my 20s, so I don't remember, but uh yeah, it's a c it's a classic. Micah's uh a fascinating guy because he's not traditionally educated, but uh he reads, studies, and does everything he can to learn. And I think I think that's been one of those positive changes. I did um the challenge in January was 10 pages a day, 30-minute workout, gallon of water, no sugar. And I think I'm forgetting something else. It was one of those January resets. Oh, no alcohol. Yeah, no alcohol. Yeah, so I went no oh dude, I went no alcohol from December 8th until whenever this freaking conference started in Chicago. And I had planned it. I'm like, I'm gonna, you know, I'm gonna have I'm gonna have some alcohol. Didn't get crazy, but I had two or three drinks for like six, seven nights in a row because I went from there to another event, then I went to the farm, and all the guys were out there and we're sitting around the campfire having a couple of beers. And holy shit, man. I was like, that was uh fun socially, but A, it looks like my face gained 42 pounds. I feel lethargic, I'm more anxious, I have more inflammation. So I said, I am uh now back on the wagon until MJ Biz. Off the wagon, on the wagon.

SPEAKER_02 7:48

Hilarious that we go to cannabis events and we drink. I know.

SPEAKER_01 7:53

I know it's it's weird, but Morgan, it's that that's true. But I've also been to, I went to a dab dinner a while ago with a uh local friend's brand. And if you're just getting power baked and trying to socialize, that's a different vibe too. Like, I don't know if large, like you can smoke a little weed, but if you get too baked, uh, I think those conversations are best kept for smaller groups rather than large scale socializing.

SPEAKER_02 8:14

Yeah, I think it depends on your genetic makeup. Some people are great. Um, I'm I'm in your camp. I can't. Um I'm not extremely social when I'm really high. I get, you know, quiet because I need to I need to like have some introspection.

SPEAKER_01 8:32

Interesting, to show how the world's changing, Morgan. People are trying to get away from alcohol. Um, both nights when I went out to dinner, somebody at dinner turned next to me and said that they ate uh a microduce micro dose of mushrooms before. And so like that's another way to try to kind of catch a buzz, catch a vibe, and you know, that might work work a little bit better for some folks socially. So I think people are increasingly interested in this kind of California mindset, so California sober mindset and getting away from alcohol. But alcohol sucks in general, it's a poison. I hate it, but it sure is fun to uh socialize and have a couple drinks.

SPEAKER_02 9:04

Yeah, I love how I my head feels, I hate how my body feels.

SPEAKER_01 9:09

Yeah, yeah. So let's jump in, Morgan. Man, it's it's been a first of all, it's been a while since we did a podcast. Apologies for that, guys. Morgan had some travel, I had some travel, so we're gonna shove a couple in here late in the month. Today is Wednesday, June 24th. We'll be back next Tuesday, June 30th for episode 100, which I'm pretty excited about. I don't think we're gonna be doing crazy for episode 100, Morgan, but like a big theme in my life is just being consistent and showing up. Just keep showing up, just keep showing up. And um, you know, we'll talk about it more, you know, next episode. But I think that's kind of been the mantra of the podcast. Like, there's been some good times, there's been some bad times, there's been times when engagement's been higher, there's times when engagement has been lower. There's times, man, when each of us haven't necessarily wanted to show up, but we kept going, and here we are, episode 100. Couldn't think of a better guest than Nick. Nick is such a level-headed reset on the industry that I think it's gonna be a great show. So looking forward to that.

SPEAKER_02 10:04

And if people are wondering, we certainly did plan this 100 episodes ago that our hundredth episode would be on the dawn on the eve of the ALJ hearings. We we knew this was gonna happen.

SPEAKER_01 10:15

Exactly. Yep, yep, yep. Well, let's talk a little bit about Chicago, Morgan. Um, you were not out there. Um, I didn't think your sister was gonna be out there too, but I was on the architectural boat tour with our man TJ uh TJ's recommended to me, which was a fantastic two-hour boat tour around Chicago checking out the big buildings. And I get a text from your sister. She says, Hey buddy, are you gonna be at the conference? And I said, Yeah, are you? And she's like, Heck yeah, I'm on a plane out there. So it was so cool to uh see Emily. I'd not uh I had not seen her in a while.

SPEAKER_02 10:50

Yeah, yeah, she was out there. Um, yeah, definitely um, you know, she is just uh makes her appearance and has a jam-packed time and keeps on going. Um Patrick was there too.

SPEAKER_01 11:06

Great to see him.

SPEAKER_02 11:07

Yeah, yeah. So I feel like Poseidon was uh there in force for sure.

SPEAKER_01 11:12

Yeah, you you guys were. It was a great event, man. Um, like I said, I was out there for the weekend uh with my girlfriend, spent a couple of days checking with the different neighborhoods, doing the tourist things, eating some deep dish pizza, and then rolled over to um the opening cocktail hour on Sunday. And Patrick's event was kind of next door. So went over to Patrick's CEO mixer, and that was a great time. Man, just good to reconnect with people, Morgan. Um, who was I talking to? I guess we were talking to Patrick earlier. We were on a you and I were on a call of Patrick, and he was saying he thought attendance might have been down a little bit. Don't quote me on that. I couldn't really tell. It seemed packed to me, but it always kind of seems packed to me. I don't care if there's 450 people there or 550 people there. I care that the right people are in the room. And that's kind of what you and I talk about with higher exchanges sometimes, Morgan. Like sometimes an episode will do, you know, more views than another, uh, more listens than another. But with higher exchanges, it's like cool that everybody's there, but we really care that we get the people that really love the space and we consider the partners that are future there. And I think that's the way that the conference felt this year. Um, it had a better energy to it. You know, some of the past years have been freaking miserable, man. Like, you know, it's been a tough slog. We don't need to go go through that part. I think everybody understands it. Sometimes it showed up and you know, there's no money in the room, everybody's looking for money, and it felt kind of like a funeral where we were just commiserating, like, oh man, this is so hard. Oh, yeah, man, it's so hard. We're gonna make it through, right? Yeah, we're gonna make it through. And you know, you would, you know, kind of kind of move forward with things. And this year it felt you know better energy. I think the federal reform optimism is certainly helping. You know, we're having these up listings which we can talk about. We got the ALJ hearings coming up, we've got Schedule Three. There's a bunch of interesting things happening. DEA licenses was really my focus. I don't know if that was I can't tell sometimes like how if my world is everybody's world, but for us, it was really about export partnerships, interstate partnerships. So that was a big conversation. And yeah, I just walked away, like really, really pumped up. Um, you know, Kevin came out there, who's our CFO, and we did all the meetings together, and we were uh we were hugging it out on the way out. We were both uh he was heading back home for a little bit, and I was heading out to the ranch, and we were just like, Yeah, man, this was this was fucking great. Like, you know, we've been here, you know, for the last four or five years. Some years have been, you know, more productive than others, but this year was an absolute home run. So um shout out to Patrick, Elliot, the whole team. Um, they always do a fantastic job and kind of like us, like they just show up all the time. And sometimes it's easier than others, but for those guys, it's really hard sometimes. But those dudes just keep showing up and you know have moved forward and hopefully they're starting to see some of the fruits of the labor, fruits of their labor. But uh big shout out to them. I always appreciate uh their hospitality. And I think they uh killed it this year.

SPEAKER_02 14:00

Awesome. What do you think? You know, and and I it's a good point about, and I don't want to rob from later on too much, but do you think if you're a sign of probability or how much waiting is it that um some of this federal movement with medical rescheduling, potentially adult use, we're we're heading into that. Is that the big changing factor that's getting companies more open to actionable things? And action can be anywhere from MA to your point about partnerships. Like, what what has been the the thing that's finally said, like take your head out of the sand and let's do some stuff? Is it Virio, who's just been a relentless machine of doing transactions? Like, is it a combination of things? Like, what do you any is any insight around what is kind of waking people up?

SPEAKER_01 14:52

Yeah, so I've said it a hundred times on the show, so say it 101, which is the conversation with the small cap manager. What was it, fall of 24? And he said it were coming into um potential Florida adult use, and we're hoping to get some clarity on schedule three back then. And uh he said, Jesse, I'm interested in investing, but how can I play the game if I don't know the rules? And I think that applies to some of these other conversations with, you know, Jesse, I'm interested in MA. Jesse, I'm interested in you know just straight acquisitions with cash, but how do I play that game if I don't know what the rules are gonna be? Are we gonna be schedule three? Is it gonna be just medical? Is it gonna be just adult use? Is there a chance for uplisting? You know, what does that mean to the liquidity profile of these companies? Um and so I think we're starting to get a little more clarity. I'd say one thing, Morgan, that was a c was a topic of conversation a few times was UTP forgiveness. And so in some of these cases, you have firms, the big ones with hundreds of millions on UTPs. And, you know, if we get S3 this year, obviously, you know, that would, you know, uh 280 E would not apply to 26. But what happens with 25, 24, 23, and even further back, and what happens to medical versus adult use? There seemed to be increased optimism, which I've seen shared publicly on some social channels, I think specifically on X, about potential UTP forgiveness going back. You know, I don't want to be specific about things I heard, but you if you want to say something, you can. But potential UTP forgiveness going back a few years, um, initially applying to medical with adult use. And so if you're one of these big MSOs with, you know, a few hundred million of UTP and you figure out, I don't think those firms have like, well, we know they haven't kept all that cash on the sidelines, right? Like it's not like if you have a $500 million UTP, they're keeping $500 million in cash. No, they're kind of treating that as a you know affordable loan and going out and doing doing other things. But if I told you you didn't have to pay half of that back for certain just to make it up, you know, or you know, you didn't have to pay 75% of it back, um, it would change your attitude about money that you could invest into other things. So I think it's just getting clarity on the rule set. Um, I would say, Morgan, but also maybe getting a little change in your pocket if we get this UTP forget this, which in most cases isn't actually change in your pocket, right? Like because most people didn't pay except for GTI, but um, it would at least be a change in mindset. Like I don't actually owe that money. So now I can go do some cool things with it.

SPEAKER_02 17:21

It's certainly the industry is I've heard this so much now. It's becoming the industry truth that the assumption is UTP forgiveness to your point. Back a couple of years, it's back long enough that it is substantially the meat of the balance, the material amount of the balance that's been accrued has been accrued over that period of time. Um but it's it's not setting itself up in a U-pod kind of situation, you know, because they're they're just going all the way. There's I have not been able to get any kind of confirmation that the IRS is gonna say and and POTUS is gonna say, you know what, we're good on that call three billion dollars that the industry owes. And it's and it's not just that, it's it's then also are the is it is the federal government gonna hand out more refunds to those that did pay if there's gonna be forgiveness. So that three billion could explode to, I don't know, four um that the the government is no longer collecting. And so to your to the point of like if it's somewhere in the middle, like from a U-pod perspective, wouldn't you be like kind of hedging a little bit and saying like maybe 50% forgiveness? And then if for some unknown reason we got the full amount, then it would be a really nice surprise. But instead, I feel like there's just so much over promising potentially without having any knowable like the IRS has not said that, so we don't we don't know that yet. Maybe they maybe maybe the powers that be do know that this is going to happen. Um, but if you're the administration, would you be happy knowing that the industry's out there saying they're gonna give give us this big uh forgiveness? Uh you know, like it kind of feels like when there was some front running of rescheduling happening, seemed to ruffle some feathers. I don't know. I just I am like I obviously be great, but I just think there's and and maybe I'm coming from a position of just being in this industry for so long that I can't help but think, and then what and what kind of negative potential aspects there could be. Like, I don't, you know, I just I would be surprised if there was forgiveness and there weren't lawsuits around it, and that's gonna put a lot more uncertainty back in the space because opposition's gonna say this is a bailout for big weed, or if um you did pay and then you're like, well, now I want that money back, and then all the money that I did not have to go invest, like these other companies did that didn't take it. So I'm you know, to me, this is like gotta be one of the biggest uh issues, not exchanges, um not you know, some of these other things. I think UTP, and I've I've said this for a while, I've said this to policy groups. I'm like, this is like a big matter that we need a good resolution for that is you know industry wide, like it can't just disproportionately benefit few. I think that just puts us in a in a pretty tricky spot. We'll have to say that. But it's interesting that that was a conversation because I have heard that too. It's a gating issue around MA. Um so that would open up more MA, obviously, getting clarity on this, which we need. You know, we need more of these transactions to happen because these balances matter.

SPEAKER_01 20:41

Yeah, and there's even like more of a bold case that, you know, I this didn't come from any big MSOs, just conversations around the industry, which is that you get forgiveness going back a couple few years, and then you do the state house thing where you settle for pennies on the dollar for the, you know, with the rest. Yeah, I don't know, man. Like there's a lot of these conversations where after you know being in the industry, I guess, a decade and on the investing side since 2020, you sometimes feel like a lot of pressure to know things or to have an opinion about things, especially when you put the put yourself out there publicly and you're sitting here on a podcast talking to people. But honestly, man, I don't know. Like, how the hell am I supposed to know what's gonna happen with UTPs? Like I can aggregate information, more informed people tell me, but I'm not out there talking to the IRS. I'm not, you know, out there talking to the Treasury, I'm not out there talking to the White House. So, like for me to sit back here and you know, doing a sitting in Santa Barbara, doing a podcast with you, and we're like, oh, here's what I think is gonna happen with this thing. It's just like I feel like sometimes people to say shit they don't know anything about. I'm trying to like limit that a little bit more and just be honest about stuff and say, like, that's kind of the chatter out there. Fuck, I don't know, man. Like, that's just really how I think about it. Like, I hope this stuff happens. That would be awesome to go back a few years. That'd be awesome if we applied the medical adult use. That would be awesome if we could settle the rest for 20 cents on the dollar. But yeah, it's completely speculative.

SPEAKER_02 21:57

Yeah. Just one last question on that. What if adult use I mean just playing the speculative fun podcast conversation? What if adult use does not happen? I know. Do you think it's a big deal? Do you think it's not a big deal? Like what do you think? If adult use doesn't happen?

SPEAKER_01 22:17

Oh, I think that's a big deal. Yeah. I think it um has to completely restructure the industry, right?

SPEAKER_02 22:28

And so but it's it's a state-by-state level impact.

SPEAKER_01 22:33

Right. But uh how how if you're a diversified multi-state operator, would that impact your business? If you're you know, do you bifurcate? Does every company have to spin out one portion and you know be left with the adult use portion and treat the medical portion in what manner and treat the adult use portion in one manner? And what happens if you treat Pennsylvania as medical, then that flips to adult use? Does that s I mean a transaction between two entities where you move it over to this one?

SPEAKER_02 23:10

I I mean I that's that's um you know I've heard that sentiment for sure. I I don't think it's a big deal. You don't, okay, explain. We we were born as a medical market, we added an adult use, so we just transition back. States modify their programs, everyone that's buying, you know, they pay a $25 medical card, and everyone is medical. I just I I I think there's a little bit of short term to get the states quickly on board, but look how quickly California just turned it on. Everyone can migrate back over, and you know, the the retailers, I'm sure, would get super savvy on you you come in to buy and you get a medical card to buy, and you know, and so there's two aspects. There's obviously the containment of the 280 exposure going backwards, but then going forwards, you know, you just transition everyone as quickly as you can to bet back to medical. Some states that I mean, what state went? I'm trying to think, and this is a real time, I should have thought about it beforehand. Um, has there is there any state that has gone just adult use?

SPEAKER_01 24:19

I don't think there's been a state that's been a straight adult use launch.

SPEAKER_02 24:22

Right. Yeah. So there's already a framework, they can do it. I mean, obviously it would be because like the whole point about adult use versus medical is purely a state regulatory thing. There's no distinction, you don't like leaf doesn't produce different products, it's the same product, it's just how you label it.

SPEAKER_01 24:39

Right, right, right, right. But what you're saying, Morgan, is just use California. So you've got a thousand doors, just for an easy number, it's probably less, but let's just use a thousand. I don't know what on a percentage basis it would be of people that are purchasing cannabis, but you're dealing with you know millions of people, right? So you're saying you would have to retrain those millions of people that now when you buy cannabis, you have to take on this initial additional burden of getting a medical card. Um and and to them, it just seems like more friction and more hassle and what portion of those people are going to be like, ah man, I'm good. Thanks. I'm just gonna go do the old thing.

SPEAKER_02 25:20

I I I don't I don't know. I don't think it's that big of a deal. I think you take a flow hub and you say, like, look, you what whoever comes in their next purchase, they just click one more button that says, I'm purchasing this as a medical card, boom, it's already registered as a medical patient.

unknown 25:35

Okay.

SPEAKER_02 25:35

You know what I mean? Like, I think technology can make this very efficient. Um, it's just how burdensome the states want to be around it. But I mean, if they understand that they're putting businesses at risk, um, the the better states will quickly just make it very efficient to get them over. And and just like how quickly adult use consume medical exposure in states, then medical will just quickly bring that back over. And um because like if all the benefits that could come with you know, everyone just being under this one system and not this bifurcated system, it's probably better long term if it opens up interstate commerce, like you're um been researching and we'll talk about. But you know what I mean? Like if it just if it just cleans the whole thing up and then we just don't have this weird two by two thing where you know it's treated differently and it's all just one thing, and is that the end of the world? I don't know.

SPEAKER_01 26:27

I don't yeah, I don't think it's a death knell, but do I think it's awesome or easy? Um I'll think of it's more thought. Um yeah, yeah, I'll think of it's more thought, but yeah, it sure seems cumbersome and like you're going the opposite way, right? When you're going adult use, you're making everybody's life theoretically easier. Like, oh, I don't need these cards. Anybody can go open access, then you go back to medical, which I mean we we this is a super long conversation. I start to think about it because what about like qualifying conditions and things like that? Like California is pretty loose, right? But you do have you do have to write down, you know, why you came to see the doctor, and he writes down pain, pain, or anxiety or whatever it is. And that's easier in California, where it, you know, it was a medical market, but anybody could get a card pretty much for any reason. Other markets have stricter qualifying conditions. And so if you rolled back from adult use to medical, I'm gonna make up a state in Maryland, and Maryland had stricter qualifying conditions, then you would pretty much crush your addressable market.

SPEAKER_02 27:20

Yeah, and that's why I say it will come down to the states. Yeah. If they if they are not quickly getting on board with making a nice open program.

SPEAKER_01 27:28

Uh I see what you're saying. They they could put the they would not have to necessarily roll but uh fuck. Yeah, then you think about states you know rolling back into a different medical program with different conditions than it started with, and the legislatation around you know, get changing those laws again. Yeah, I mean, is it the end of the industry? No, but I might I think I would push back on it not being a big deal. I think it's fixable, but yeah, I don't think it's uh necessarily easy.

SPEAKER_02 27:54

Right. No, yeah, but we're we're used to the hard in cannabis. So put them to the task and make it happen.

SPEAKER_01 28:05

Well, you want to jump into some of the heart of the agenda here, Mark? Are you ready to go?

SPEAKER_02 28:11

Uh yeah. So what has happened in the last I mean uh I guess it's it's still within this month. It's just amazing how much has happened. But um, you know, I was uh I think shocked and surprised. Um TrueLeave is now on the NICE on the New York Stock Exchange.

SPEAKER_03 28:36

Right.

SPEAKER_02 28:36

And how they were able to so I mean I think they did that very efficiently. Um and were able to contain so what they did was they basically containerized their adult use business, moved it into their on their balance sheet, so it's an equity position, and no longer will that flow through their PL. And the idea is it's kind of like what Canopy Growth is done with Canopy USA, where until laws allow them, they are not gonna operationalize those. So it's kind of like a a a way that they were able to protect these assets, and for them it was not as big of a part of their business, right? The adult use, I think, was 20-30 percent, maybe if that.

SPEAKER_01 29:27

Yeah, I think if that, yeah.

SPEAKER_02 29:29

Um, and so then they were able to uplist. And um, so they you know, kudos to them. They made it onto the New York Stock Exchange, the first US MSO. Um, maybe we need to call it an MMSO for a medical multi-state operator. Um, but uh, but yeah, they got it done. Um, you know, obviously the market was pretty excited going into it. And uh unfortunately we've experienced yet again a buy the rumor, sell the news, or you know, however you want to call it. You know, we've seen quite a fade since that listing. Um, as you mentioned today, they now you now have options available with True Leave. Um, it'd be really interesting to see how this impacts the uh legacy ETFs in the space, um, where they historically were using swaps. Now they can just do direct. I'm curious if Dan will roll off swaps, you can just go direct, um, or what'll do. We'll have to see about that.

SPEAKER_01 30:29

But um, you know, there's been a lot of let's pause real quick there, Morgan. Because I think if you're you know really deep in this and you would understand what we're talking about there. But MSOS industry leading ETF, I'm guessing 99% of our audience catches that part. But I don't think everybody totally understands how they're getting exposure. So if you take the underlyings until recently, all of those were on the OTC, Kierley, Ferrado, truly, GTI, they have 25 holdings or whatever the number is in MSOS diversified portfolio all on the CSE and the OTC. But somehow MSOS is, is that on the it's on the New York Stock Exchange, right? But somehow it's on the NIC. And so you're wondering, well, how does that happen? How could the underlings be all on lower exchanges and this one's on the higher exchange? Or the reason is because they don't actually own the underlings, they have a counterparty in between. So it's MSOS, a bank, and here's the underlings, and MS and the bank has effectively a total return swap where MSOS invests in the swap and they get exposure to the basket or exposure to the single stock, and the bank in the middle collects a fee. So let's say over here you get a 10% return. Over here, you collect, I don't know what, I don't know what the what the fee is on swaps. It's usually LIBOR plus something. I'm just gonna say 4%. I have no idea what it is. Let's say it's 4%. So you get the return of this minus the price of the price of the swap, then that gets sent back over to MSOS. That's not perfect, but Morgan, is that the kind of the idea?

unknown 31:58

Yeah.

SPEAKER_01 31:58

And so the so it's cool because right, you get a more liquid vehicle. And that's you know, one of the reasons MSOS collects so much money is it's on a higher exchange, so it can get more investors. That's awesome. They engineered something that you know provides a lot of liquidity. The tricky part is that if you invest in MSOS, your exposure is counterparty exposure to the banks that own the total return swap, not the actual stocks themselves. So if you really, really dig in and do diligence, due due diligence on MSOS, you better be comfortable with whoever the counterparty is because that's who you're investing in. So if that's um, you know, JP Morgan, which I don't think it is, but if that's JP Morgan, it has a credit rating, and you're saying, okay, cool, I'm confident that I'll get the value of that swap because you know, dealing with the credible counterparty over here. If it's first bank of Kentucky that has a terrible credit rating, then you'd be a little bit more nervous about getting the value of that swap back. Uh so that's kind of how the how MSOS, the engineering of it works. The point that you're making, Morgan, is now with um TrueLeave, they can actually own the stock because it's nicey to nicy, and they don't have a counterparty risk or the expense of the swap.

SPEAKER_02 33:00

Yeah. I think all that counterparty discussion is is it sounds like you live through the great financial crisis.

SPEAKER_01 33:08

I ran a hedge fund where we ran a leverage portfolio. So we had like 200 million in holdings, and we had another, we had a 2x share class. And so for every dollar, we had an additional dollar of leverage, and we had uh total return swaps with uh a couple of the big banks out there, so help structure those. So yeah, I lived in that world in my former life.

SPEAKER_02 33:29

Yeah, yeah. Because I I don't think most of the uh shareholders today, if they even live through that, if they even experienced what it actually means if that there's potential for a counterparty to go out of business. Yeah, yeah, yeah.

SPEAKER_01 33:45

Which is rare, but yeah, good, yeah, right. It's it's it's rare, but uh every every certain amount of years that shows up.

SPEAKER_02 33:51

But yeah, you're gonna get the okay boomer.

SPEAKER_01 33:55

Yeah, until until it happens.

SPEAKER_02 33:58

Right, right. But yeah, so so it's a good point, though, is they could they could remove that at least that little bit of risk. I mean, true leave is 20 something percent of the fund anyway. So, you know, just to your point about removing that credit risk, you know, they could pivot that and and reduce costs. I don't know what their costs are either. They don't put that's not public, so um however that means, but they could they could certainly do that. And um, but but anyway, so you know, it was interesting because I've I've been talking to brokers and things like that um subsequent to the listing, and I was, you know, how's it going? What's it what's it been like? And you know, one of the challenges has been like it it went out at how you know whatever price per share, I don't remember exactly, but it's down some like 25% or so since it's listed. And you know, and and people are and so I've just been like, what's the demand like? You know, are we seeing demand yet? Um and unfortunately it's you know, it's been kind of muted, which makes sense that unfortunately without the demand side, you know, you've got more liquidity being on an exchange, but where is the interest? Where's the demand? Like this, I know so many people were telling us you and I were not bullish enough about exchange access, and you know, and we were both kind of saying, Well, where's you know, I think there's more than just like this is huge. I'm not trying to downplay getting access to an exchange. We're here on higher exchanges, um, but that's a piece of the process. It's not this like one shot fix all, you get the exchange and everything's great. It's like we still got to kind of get back in and like where how do we get the momentum going and you know, where's their investor interest? You know, talking with investor groups out there about how they're looking at the sector, you know, where is there where is their money flowing interest? Um, some of it is around like more saying, like, oh, there's distressed opportunities and we want to kind of go after that. And it's like, well, that's kind of like the Virio strategy, you know, kind of going after and not no offense to C21, it don't mean any offense to you guys, but just saying like that's kind of the perception of how they're going about consolidating, making transactions, you know, going after distress opportunities. Um, so you know, just trying to pay attention to where the money is flowing. And so, like, if you have a company that's in more decent shape, is that garnering interest? And so far, not yet. Um and I and I, you know, I've got my kind of theory, but just wanted to pause there if you had any thoughts or comments on that.

SPEAKER_01 36:38

No, I mean, this is I mean, this wasn't my expectation that the stock would go down, but it was very much my expectation that timing matters. And when you're entering a more liquid situation, auditioning for a larger investor group, you want to look as pretty as possible, right? If you're looking to get a date for the dance, you want to, you know, go out polished up and you know, be the best dance partner that you can be. And you know, we have these conversations at Leaf. I mean, you know, we're interested in being on a higher exchange someday. We have a little bit of work to do in terms of you know meeting those qualifications, but we also want to enter that through a position of strength. Like we've been, you know, turning the company around is too strong. But with like you know, adding the farm, we've taken a business that did 22% margins up to pushing 50% margins. So we're really proud of what the work that we've done. But man, there's so much more work to do. And when we you know enter that higher exchange, whether it's NASDAQ or New York Stock Exchange, we want to be buttoned up, polished up, and ready to go. And if there's momentum in the sector, all the better. I think True Leave has their act together. I mean, they have a fantastic Florida business, they've got some other things um, you know, waiting for adult use, but you know, it's been you know one of the more solid companies out there. So I don't think that's the problem that TrueLeave is in and of itself not attractive, but there's no momentum in the sector, Morgan. Nobody cares. Nobody cares about cannabis. And it's a slow build back. Like we said, I've said this a number of times, but I don't think we're gonna have that V-shaped recovery that we were once hoping for. It's just been too much damage for too long, and sentiment's gotten too negative, and it's gonna take a while for folks to come back. I do think it does come back, but I think all of this just takes more time. It takes more time, it takes more time. Like over and over, it takes more time. So now we put a pretty good company out there for anyone to buy. And instead, it's an opportunity for more people to cash in and sell in the in the near term. But Morgan, I don't think TrueLeave did this to see what happened in the first couple of weeks or whatever it's been. It's a longer-term play, bigger investors, index inclusion, more liquidity, like every reason in the world, you know, big funds investing in you, right? Like the mutual funds, like just they may be just starting their work on these sort of companies now. The longer this has dragged on, the more catalysts that have failed, the more the big allocators are saying, Cool, I'll take a look at that, but tell me for sure when it's done this time, because I ain't spending you know a bunch of time on something that's uh for something that's not to come to come to come to fruition. I did that three times. I'm not doing it anymore. So call me when it's done. And when it's done, maybe that means medical schedule three and up listing. I don't think so. Maybe it means you know adult use and clarity that you know more of these comp more of these stocks are gonna be going to the to these higher exchanges. So I think it's just gonna be a slower build. I mean, if you're a true leave shareholder and you thought you're gonna get, you know, a 20 or 30 percent pop, and instead it's down 27. MO MSOS is down 16% during the period. So it's been a negative tape, and they fared, you know, 11% worse, down 27 versus down 16 for MSOS. So um disappointing for sure. If you're a true leave shareholder, especially if you bought it thinking this was a catalyst, you know, welcome to the cannabis sector. Stuff doesn't work out when you try and do that sort of stuff. But I don't think, Morgan, that it necessarily means that long term it's not a good move. And one comment I got from someone um I respect very much on the MSO leadership side, it didn't clear his name for this. So I'll leave him uh personally out of it. But he he thought it would have been stronger if a basket of these companies went out, if three or four. So if you had, you know, Kira Leaf, Verano, GTI, True Leave, you know, pick your favorite four out of the top six or so, if those all uplisted together, then if you're a portfolio manager at Franklin Templeton and the growth fund, typically when you enter a sector, this is how we did it when I was at Fisher Investments, is you would try to buy a bastic, buy a basket to get representation of that sector, remove some of the single stock list. So let's say you put 5% in cannabis, you get five names, you do, you know, 1% each, or maybe you put 2% in your biggest name and a little bit less in the other ones. But real common in larger allocators is I want to own a basket. I just can't, you know, stick 3% just in True Leave. Can't make that kind of a bet. And so A, he thought it would have been helpful for them to go all go out together. And maybe once there's three, four, or five of these out there, then that's the better case for the Franco-Templeton small cap fund. Just totally making that up because I worked at Franco-Templeton. Um, not saying they're looking at the sector in case anybody's listening. But um, if you're at Franco-Templet, you could go by you know four names, or if you signed an analyst to it, if you're saying, oh, we want to have Jim go look at the cannabis sector, but there's only true leave it, that's a different ask than, hey, there's four names over there to go check out. Go find the best two. Do you see where I'm going with all that, Morgan?

SPEAKER_02 41:33

I do. Yeah. I do. I think it's an interesting point. I also haven't thought about a mutual fund in a very long time. So it's interesting to hear about mutual funds. Uh, because I just think about obviously ETFs are lady in the world. Um, question on the sentiment, though, because it's a good point, is like sentiment. Do you and and Brian, you know, thank you for pointing this out because this is important. Is like to truly announce the stock buyback up to 50 million. So they're a bit there. But then you also have CEO, um, you know, and she filed this months ago, um, but didn't change it, um, is selling stock right into the listing um that's been happening. Um, is that a factor? Do you think it's a an impact, or is it just more the sector just feeling frustrated and just, you know, because the stock is going down and she's selling that it's just making people more frustrated. It's just like more of a hit on sentiment that it really is an impact on the on the stock.

SPEAKER_01 42:34

Haven't done the math on the stock in terms of what that impact would be from a volume perspective. So I can't speak about that from an uh in an educated manner. But people like Morgan, insider buying. Like back in my quant days, that was a factor that was a powerful predictor of future returns was insider buying. Um, you know, people if insiders like what's going on at the company and they're buying stock, you know, generally speaking, there's exceptions, especially on the selling side too. Sometimes people sell stock for a whole bunch of reasons. Yeah, taxes could be a you know, a whole bunch of different things. So selling, I think, can be a little bit different in terms of a sentiment indicator, but buying was really a predictive indicator. Not sure if it still is. It might got an arbitraged dialogue, but insider buying used to be a popular uh borrow factor and fundamental equity portfolios. So I think in reality, it's shown that buying is predictive of future returns. But also just logically, um, you know, Kevin, who's our CFO, he just personally bought another 100K in stock. Not a ridiculous number, but to, you know, dudes like us, you know, doubling down to 100K in your own company when you already take a good slug of your comp in uh the equity and you're already all in every day on a business, tells people I'm freaking pumped up, man, and I want more of this stock. I'm doubling down on what I'm not doubling down literally, but I'm doubling down on what I'm doing here. I'm fired up. Let's go. The other side is, you know, Kim owns a tremendous amount of stock. I don't know what the value is. I don't know like what percent of her holdings this is. But if you go public and the first thing leadership does is sell the stock, yeah, man. I mean, like that's her right to do it. And I'm sure she still owns a ton. She's CEO, like she's all in in her own way. I'm not doubting like Kim's commitment to true leave. But if you're just a retail or even a professional investor looking at this, you're saying the first thing the CEO does on the up list is start dumping shares. I just don't think that's uh it's just it's just not a good look.

unknown 44:23

Yeah.

SPEAKER_02 44:24

Yeah. Yeah. And I would say, you know, the point on insider buying, especially CFO, because they're seeing the financials. So if they're happy with what where the financials are going, I mean, that's that's a I think that's a very good sign to see. Um and your to your point, yeah, inside or selling can happen for a whole whole host of reasons. Usually a buying is a very specific reason. Um, but I was going to ask, is is insider buying as big of a deal as Nancy Pelosi buying?

unknown 44:51

Right.

SPEAKER_01 44:52

That would be the ultimate signal, yeah.

unknown 44:54

Yeah.

SPEAKER_02 44:55

Yeah. So well, yeah, I mean, just to wrap this section, then we'll jump on. But, you know, for me, I guess, you know, how I kind of rank these order of importance is um where I see the industry today, especially these large companies, is you know, first and foremost is balance sheet and how this 280E is going to be clarified. I think that is just it has so many impacts on what happens next because of their balance sheet. You know, how how clean is it? Like, what are they gonna do? How much overhang do they have from this tax situation? Will it get clarified? Because my next thing of importance is growth. And I think that is a big deal. We've talked about it ad nauseum here is you know, most of the sector is not seeing growth, very low double, low single digits to sometimes negative year over year. Um, so getting growth back into the space, and I and I balance sheet ties right into that because if they're constrained on their balance sheets, hard for them to grow. Um, you know, the the famous um saying of you can't cut your way to growth, um, you know, kind of where we are. Um profitability, you know, a couple of years ago, I was all about profitability because I didn't know when things would get better. So it was just like you had to be profitable to stay alive and make it through. But I think we're shifting a bit now where growth is is very important. And a lot of these companies have established operating infrastructure where they've been facing reverse operating leverage. So when you get some growth back, that can generate profitability itself. Um, and the last thing is exchanges. I think actually exchanges are the, you know, if I'm rank ordering it, I actually think exchanges are the the least important of those. Because if you've got a good balance sheet, you've got clarity, you're doing next, you're doing transactions, if you're showing strong growth, then you go in an exchange and you're, you know, on that trajectory. And it's kind of like what you were saying with Leaf is like you guys got so much you're doing, like where would an exchange land in your priority stack because there's all these other things you're trying to do.

SPEAKER_01 46:57

Yeah, I like the way you said that. And just to focus on one part of it, which I think you're awesome about, is the balance sheet is table stakes. Because you look at the balance sheet, you say, like, is this a business that can move forward, or is this cap table so upside down? Um, and sometimes it's just how much debt do you have, but sometimes it's like the order of the debt, the covenants, you know, when is the debt due? What are the triggers? We've we've seen those disasters, right? Uh we've seen air, we've seen the cannabis, we've seen forefront. Um, I'm sure I'm missing a you know gold flora and I'm sure I'm missing a few others in there. But yeah, I'd like that, Morgan. Balance sheets are the table stakes. And if you pass that test, then let me look into your growth and profitability and all that other stuff. But sometimes people start on the other side, they get intoxicated with growth, then they free, then they get to the balance sheet. And at that point in your head, you've already justified the investment. You're like, well, I've got some 22% debt that's coming, coming through, you know, coming due next year, but it's growing at 20%. So I think I like this. And I like where you're coming from, which is like start with the balance sheet and then decide if you get to go on to those other factors.

SPEAKER_02 48:03

Well, um, but while we sit here too talking about all this stuff, I mean there's some really interesting things that are going on. Um, and today's title of the show was the next chapter in cannabis. So where where are we going?

SPEAKER_01 48:17

Yeah, so I think these DEA applications are a massive deal. And I'll preface this conversation to say that I'm tainted in that, you know, I'm in California, I'm surrounded by Leaf, of course, where I work. You know, we're close with the Glasshouse folks, they're the NSA Interstore in Palm Desert, friends with all those guys. They're down the road. And I live in a California-centric environment. So I may be distorted. And if you're in a different state um or at a different company that this doesn't impact you, uh I'm gonna say in advance, like my enthusiasm is probably from you know, from the lens through which I'm looking at the situation. But I'm pumped up, man. I think um this is a big deal. I think maybe it's the biggest deal to scaled California operators, lower cost producers. But if you're uh uh you know a higher level brand in California, like the Alien Labs of the world, you know, maybe you know it's a big deal to those folks too. So I don't want to confine it just to the lower cost producers. But I think it's a dis you know for the scaled West Coast, I think I and from my lens, you know, California operators, I think this is a really big deal. And it's a big deal in a couple of ways. Like there's two paths here. So this DEA registration for medical um allows you to potentially export internationally. So think about markets like Australia, EU, UK, you know, just a you know, a host of you know, Brazil, like I can't want to name them all off, but there's a number of global opportunities where we might be able to export cannabis, very similar to what's happening in Canada, but instead of being Canadian products, um, they would be California products, which I think have a little bit more cachet in the cannabis industry. And then there's the second piece, which is which is the interstate piece. You know, could you move license to license? So could um, you know, you were saying true leave before, you know, this is not happening or being discussed, but just for an example, could Leaf send products to Florida and those could go in true leave jars? Probably the worst example I could have used, because Florida is mandatory vertical and might be one of the more the topper states to move, but you guys get the idea. There's 24 adult use markets out there, a bunch of, you know, what is it, 16 more medical markets? You know, is there potential, you know, as we work through these registrations, initially medical, eventually adult use, to use this DEA pathway to you know open interstate commerce. I think export is the first thing that happens, which is initially a bit counterintuitive. Like, why couldn't you move things in the US sooner? But I think export probably happens um more quickly, where you could begin shipping these products to some of these different countries that I mentioned, assuming you have the right certifications to do so. And we can unpack that a little bit if you want to, Morgan. And then I think the longer term path is on the interstate side, where there was news um earlier where Vermont is interested in interstate commerce. Nevada seems more conversational about it. So are there are some states that might be interested in some in that more quickly, then there's some other states, which I think will take more time. And one of the things on my to-do list is um Micah told me this great book about alcohol coming off prohibition. I forget the name of it now, but it's a whole book explaining how alcohol came off prohibition and what that path looked like. And I'd like to study that to see it wasn't like every state all of a sudden started serving alcohol again. It came back on a state-by-state basis. And I think that's the way this happens here. Um, so I'm gonna pause in a second, but I think big picture, the opportunity is if you can do these DEA, you know, you know, license to license transfers in the US with the with you know, across state lines, it could be with a brand, you know, it could be that um Leaf is in California. I'm gonna make up a name here. Kiva is in Illinois, and you could move your California products to Kiva and Illinois. That would be great. There could be bigger, bigger partnerships. You know, could Leaf serve as the concentrate provider for larger MSO, and that larger MSO decides not to be the concentrate business. Um, so I think there's a tremendous opportunity um, you know, on both sides, both on the international and on the interstate for certain companies. So I'm gonna stop there, Morgan. I have a whole bunch more to say, but I'm gonna stop for a moment because Hirsch Jane told me once in a while you need to pause for a moment.

SPEAKER_02 52:47

Well, you know, we talked a little bit about this with Hirsch, about, you know, some of this export potential. Um, and what would be some of the initial markets to target and how much you know it could be obviously huge for a company like uh Leaf. Um I mean it's pretty huge for any one company in the US to have access to do that. Um, even if those markets are not large in their own right, it's just but singularly singularly specific to a company could be very significant. I mean, if you guys were able to export, you know, let's just for fun's sake, you know, $50 million worth of product, that's massively material for Leaf. Is that massive on a global stage? You know, when you think about the total market size, no, but it's massive for an individual company. And I think that's what's the important part of that is not to get lost in the headline numbers, but the company specific. And there is like, you know, uh, you know, Scott Grossman is pretty good about this, about like do the work, understand what you own. And and um, you know, I think in that kind of situation, it is important to understand if there's there are some of these pretty outsized levers, who is it going to impact, you know, with this changing landscape and really who's going to, who's at the front edge to experience that change? And to your point, is you know, naturally you're looking at where what what are the advantages, what's the proposition to have that advantage? And you know, California does, and company like Leaf does have that differentiated situation where your cost structure, your cleanliness, um, you know, it's just vastly different than the rest of the country. So you have that ability to potentially have an outsized benefit when you look at some of these others, they're actually thinking about the reverse situation where they're like, oh my gosh, if if we're able to start contracting a company like Leaf when Interstate does start to happen, what am I doing with all this sunk capital in these facilities and all these employees and all this stuff? Is like it's kind of like uh it gives me a little bit of a rhyme to like the uh textile industry. And like what happened there is like there's there's a little bit of a rhyme there, um, where just cost you know made all those facilities in the northeast, you know, out of business. And so is this is a little bit of a look in the future right here, as like how the deck chairs get shuffled.

SPEAKER_01 55:29

Yeah, and for uh and for a while, Morgan, I had it in my head this was a big win for you know the glasshouses, the leafs and the other some of the other you know, California businesses, but a detriment potentially to the MSO model. And I'm not quite sure I see it that way anymore, but I want to unpack it a little bit with you because yeah, I mean, if you have cultivation facilities that are 40,000 square feet in nine different states, you'd rather have you know a couple hundred thousand square foot facilities or two hundred thousand square foot facilities that feed all those states. You don't want to have inefficient little grows trying to replicate genetics and SOPs across like nine or 10 different states. That's a massive, massive headache. And then you add extraction to that, Morgan. Now not only do you have to grow the stuff, but now you've got to set up an extraction lab. And that extraction lab at Leaf, we have three extraction lines. We have ethanol for distillate, you got to have that, hydrocarbon for things like live resin, liquid live resin for vapes, sugar, batter, shatter, all that stuff from the hydrocarbon line. That's a big piece of businesses. You got to have that. And then solventless is the smallest, but maybe the fastest growing, that making things like rosin, Leaf has that, of course. And we turn, you know, our field and the material we source into anywhere from you know 75, sometimes as many different, a definite different we call fractions, which are types of concentrates on our menu. So one fraction would be like gorilla glue, glue, gorilla glue liquid live resin. Another fraction would be OG Kush shatter. So we'll have a hundred or so, sometimes fifty, seventy-five, depending on what the portfolio looks like, of these things on our menu. Now, if you're an MSO trying to replicate anything like that, that just sounds like a massive headache. Like we're maybe one of, if not the best at it in California, one of the best in the world, man. And if you sat down on their ops calls, you'd be like, wow, this is not easy. Like it's a really fussy thing. So I say that in the context of if you're a larger MSO with a great retail footprint, maybe you're more interested in being in the distribution and the retail business than you are certainly. I don't, I haven't talked to a larger operator that says, hell yeah, I love the extraction business. Usually they say that's kind of a pain in the ass. And even on the cultivation side, like maybe they want to keep a couple of their flagship cultivation facilities, but I think there's a lot of efficiencies to unlock by A, consolidating those. Like, what is it? Terrace End has a great Pennsylvania facility, but maybe Maryland's much smaller and they could find some efficiencies there. And so I think there are some unlocks. I think it's clumsy because it's like, what do you do with these things, especially when they have 20-year leases? Like, does that become a pickleball court or a movie theater, or do you grow vegetables in it? I don't think there's a big you know indoor vegetable market, but maybe someone could you know unlock that niche. But so there's a problem with it in terms of the legacy part of it, like how do you unwind it? But there's a lot of efficiencies that that that um that come from it too. And again, I initially thought of it just from a greedy you know, leaf or glasshouse or alien or whoever example you want to use perspective that we can sell more stuff, Morgan, but more stuff at higher prices. And they're like, hell yeah, that's a huge win. But let me walk through an example. And I think this is going to be hard to stick with, but I put together just kind of an example of how this unboxed value on both sides. So I'll read through it and then Morgan, let's uh let's unpack it a little bit. So Leaf generates about 40 million of revenue, and last quarter we were at 49% gross margins. So let's call it 50 million gross margin just for this example. Uh, unnamed MSO, just an example, generates a billion dollars of revenue at 50% gross margins. 10% of the MSO's revenue, which is 100 million, comes from concentrate. Leaf produces distillate. This is hypothetical, we're a bit cheaper than this, for 50 cents a gram, and we sell it for a buck. I just use easy numbers because that's a that's a clean uh you know uh 50% gross margin on that. And the MSO currently pays $5 for distillate in their current markets. So now let's assume that the MSO purchased $20 million of distillate for Leaf at $2.50. So what they did there, Morgan, was I met in the middle. I said, we're at a buck, you're at five bucks, boom, let's meet at $2.50. Here's what happens Leaf revenue goes from $40 million to 60 million, 50% increase. Gross profit goes from 20 to 35 million. Uh, can't read my number there, 60% increase. And gross margins, Morgan, for our business would go from 50% to 60%. So big pickup on gross margins. That part makes total sense, but the MSO wins too. Let's say revenue remains the same at a billion, their gross profit goes up 20 million, and their margins go from 50% to 52%. And so what you've done is have an unlock on both sides. Leaf sells something at 250. We used to sell it for a buck. Hell yeah. Plus, we've just taken 20 billion in new revenue. Hell yeah. The MSO gets rid of all this stuff that they don't want to be doing in the first place, which will be a little bit messy in terms of winding down those facilities, but they're all of a sudden just ordering off one menu and getting it shipped to their door. And in the meantime, for making their lives easier, they uh increase their gross profit from 20 million to 36 million and bumped up their, I'm sorry, uh, from 500 million to 520 million. They picked up 20 million in gross profit and they bumped up their gross margin by 2%. And these are super small numbers, double or triple the numbers to make it more impactful. But you can see on both sides how this can unlock, you know, a win-win in the interstate model.

SPEAKER_02 1:01:04

Uh yeah. So obviously, in that is the carrying cost if they have to have a fouled facility, right? So it wouldn't show up in gross margin to your point. Um uh, but uh like you know, get the simple math of it for sure. And to your point, as those numbers get bigger, those the benefit, it's almost like they would want to benefit so much that they can overcome that carrying cost as they have to unwind certain things.

SPEAKER_01 1:01:31

Um if you're a billion-dollar MSO, like you're probably, I don't know what the exact numbers are, but you're selling, you know, they're generally about 35% or so products that use concentrates, but then you got to back out the cost of the vape hardware, cost of the chocolate or gummies and the edibles and all that sort of stuff. So the actual oil is like, you know, 10%, let's say 15%, depending on who you are. So if you're a billion dollar MSO, it's $100 or $150 million in revenue. And so if you swapped it all out, the numbers for them start to be a little bit more impactful. I didn't do that here because the leaf example gets stupid. If we take on $100 billion in new revenue, like I'm happy to do that, but I just didn't want to make this sound like super sensational. But plug it in for the flower side, right? Like if you know, there's been you know chatter about you know glasshouse and MSOs having conversations, this makes total sense. You know, if Leafs having conversations with MSOs, of course, Glasshouse is. And if they could plug in, you know, the that that supply chain of you know California sun grown at you know this cost versus producing it for $600 and they could buy it for three or four hundred dollars, again, just making up numbers here. But you get the idea. But I do agree, Morgan, it's not just as easy as that. You have to figure out like what are the other consequences of that. But what I saw in Chicago from you know conversations over the over over those next couple of over that two-day period was like this is opening up. We don't know when, we don't know exactly how, we kind of know how, we don't know exactly when, but this is the kind of unlock that's available. And this is the evolution in the industry that I think a lot of us have been waiting for. Like the state siloed model is so ridiculously painful. I don't think people realize how hard it is, man. Like to run 12 siloed businesses with you know different retail rules, different cultivation rules, different extraction rules, it's just wildly efficient. And to your point's a good one, Morgan, which is it's a bit painful to wind to wind down. And it'll happen over time too, right, guys. Like a state comes on, then another state comes on, then another state comes on. So, like this sort of unlock I'm talking about will take years to happen, but it does show long term what the efficiencies can be. And I think it's gonna be a big unlock from these businesses when they don't have to reproduce every single freaking thing in every single state.

SPEAKER_02 1:03:45

I think an important part of what you were as you're describing this is focus, where you guys are focused, you have a very specific, you know, focus and value proposition. These MSOs have had to build these mega complex, capital inefficient, you know, state-by-state businesses. Some of these production facilities, you know, how much of it is their extraction lab? So it's a really good point, is that there might not be that much of an impact early on if they're just talking about that one aspect, because then if they say, look, we're gonna use these, you know, to your point, these like specific facilities to only focus on producing the high quality flour that we want for our branded product on our shelf. And then we're gonna have partners that can help us, you know, fill in our supply chain in a very, you know, focused way where we have the the trust and and you know understanding of how this is gonna function. That could actually be super interesting, where you know, it might not be as like this kind of idea where it's gonna be so capital destructive right away. To your point, it's gonna be like a burnoff, or you know, it's kind of like uh like craft beer in a way, where it's like, sure, you have these mega facilities in the middle of the country, but then you have tons of craft brews all you know located all in like their regional areas. You could think about that with their specific uh strains they want to grow in those markets. Um so you know, and that would be a really nice path where they still have a nice robust offering. They're more focused on their retail distribution and maybe some high quality um, you know, specific brands that they want to maintain, but they can still do that and do it in a more capital efficient way and not having a break ground on a 500,000 square foot facility in the northeast where power, water, and you know, labor and everything is just brutal. Um so I think that's that's good to see. And you know, I we've been hesitant on capacity in a lot of markets because there's been too much, and we've just always questioned the ROI on it. But we've we've thought you know, retail had staying power, and you know, whether we're calling a medical retail or just retail. Detail. You know, that does seem to be something that will come out of this. And some of this, you know, upstream is going to change a bit. But long term, it's it's much better, you know, instead of trying to do this in every single state. It's just I don't but your point is like how like what is that arc? What's that timeline looking like? I mean, do we have we don't have any kind of visibility yet, right? It's more just you know laying the foundation for it.

SPEAKER_01 1:06:32

Yeah, I think that's fair. I think that um you know there's conversations, you know, going on about interstate packs, you know, there was the Vermont news, there's other, you know, more behind the scenes, less public conversations about the way you know states could work together. Um, but yeah, I think the I think it's going to take time. And you know, maybe it's one of those things where once you ink the first state, the second one's easier than the third state. And maybe new states are easier, Morgan. Like let's say there's a medical market rolling out, and they just say off the bat, I'm gonna allow interstate commerce because they haven't built the infrastructure, so it's not as painful, right? I think the I think the trade-off like on the um for the people in those states is if you're a consumer, you would want an open architecture because you could bring in all this fire stuff. Like if you got you know, uh, I'm a big rosin fan, and like leaf is a scaled cultivator. We grow for $8 a pound, all of that's turned into concentrates, but we don't just make cheap concentrates because we produce lower cost flour. Like we make we grow some really fire stuff at the farm, freeze it, turn it into live resin and rosin. And some of the rosin that we make, you know, rivals you know the best stuff in the legal market and the best stuff even in the California traditional market. So I say that in the context of if you were in um you know Massachusetts and all of a sudden you could get you know super fire leaf concentrates over there for the consumer, that's a big win. Same thing on the flower side, if they could get actual glasshouse or actual alien labs or pick whatever flower you like cut that's from California, not just brand, not just that alien as a partnership and a local grow and all that sort of stuff, but the real, the real deal to the consumer. Hell yeah. And I think what you're saying, Morgan, is totally right. Like they you should be able to get, you know, just like you have, you know, your course lights, your specialty, your specialty brewers. And I could see, you know, the scaled stuff, you know, comes maybe from the West Coast. I think they absolutely keep some of the local indoor grows. Some of those could do some collabs and make some you know great concentrates out of there. So I don't think that needs to go away at all. I just think it's about unlocking efficiencies and allowing everybody to do what they do best. And when I left Chicago, I left there strongly with the impression that the strength and interest of most of the larger MSOs is on that retail footprint. Brands, I should have said this earlier. Brands, Morgan, huge deal. Distribution, huge deal. So could they buy bulk flour, bulk concentrates from California and throw them in their own brands, right? Um, there's a million different things that are exciting on that side. But I think the consumer picture is a huge win at the at the counter if you're a Massachusetts consumer and you get you know 25% of the store's California products. That sounds pretty interesting. The flip side is you make the other case, which is what is this gonna cost in terms of layoffs and you know that facility being shut down and all that sort of stuff. So it's kind of there's yeah, it's a multivariate equation that'll be interesting to see how different markets reconcile it. But I'm curious, maybe, and then we can wrap because we're chasing the clock as usual, but um, you know, at least wrap on this section, is um maybe new states completely rolling out for the first time. Maybe that's the easiest way to plug in medical to medical DEA when they haven't even built the infrastructure yet.

SPEAKER_02 1:09:38

Yeah. Well, yeah, because then they can write the regs right away. So they don't have to go to their legislator and hammer through and blah, blah, blah, blah, blah. Like just do it. Um, and and then they know that how the capital will be deployed will be productive and not have this potential build and and then you know what could happen after that. Um I think it's uh it's you know, it's a great time for you guys. I think it's you know, it's gonna behoove a first mover, like in this situation, a first mover, you know, how the saying is like first one through the wall gets bloodiest. I think the first through the wall here, though, could stand a benefit significantly for a large-scale operator on the East Coast if there was a way to start bringing it in, and all of a sudden your cost structure improves by that much, just by the simple math you're talking about. If it was five dollars and you're taking it down to 250, like they're gonna have so much power in the market, you know, plumbing that through and selling that through in retail, they could it wouldn't have to necessarily go all the way down, but they could undercut all their comp by you know 20-30 percent and have the same margin profile, they're gonna they're gonna do fantastic.

SPEAKER_01 1:10:52

Yeah. And there's a bunch more we could impact down the road in terms of like the export side is non-trivial. I think that's first, but it's non-trivial to get the certifications to do that. So, you know, folks out there scrambling for you know whatever GMP is appropriate or you know, G A C P or whatever you need at your place to get those things done. So um, yeah, there's a lot of work to be done, but um I think it's a big unlock for maybe initially on the export side, you know, that you know, it's the biggest unlock for you know some of the scaled California operators, but I think longer term there's a lot of value creation across the industry as we each get to do what we do best, is kind of the way that I tend to think of it.

unknown 1:11:29

Yeah.

SPEAKER_02 1:11:30

So what do you think of the way we know this industry is not the way it's going to be?

SPEAKER_01 1:11:35

No. And that we've just got this, it's one of those things, like a lot of stuff, Morgan, like the state-led growth story, the political catalyst. Like, we know the destination is over here, but we don't know how long and exactly what that path looks like. Same thing for this DEA conversation. Like, we know interstate and global is gonna eventually end up over here, but you know, how do we exactly get there? And just one more indication that we're early in the formation of what this thing's ultimately gonna look like. Yeah. You want to talk a little bit about Georgia and Virginia, and then we'll get out of here. Yeah.

SPEAKER_02 1:12:06

Um, so just quick on uh Virginia. Um, so the the Virginia lawmakers did end up passing uh or voted on their adult use. So after it was rejected by Spanberger, and they actually were able to get back to the table and hash something out that passed, um, that went to Spanberger's desk for signing. Um, she hasn't signed it yet. There's apparently some more things that they're messing around with in there. Um, they claim it's just cleanup because they were they were moving quickly to get this back in. Um the consequence is the start date has been moved out. So maybe that gives a little bit more time for this cleanup stuff. But you know, they were targeting Jan 1. Now it's next July, so a little more than a year from now. Um, they also gave in to the excise tax um that Spanberger wanted, which is starts at a six percent excise tax and is a graduated up to eight percent after two years. Um you know, I don't know why they need so much time at this point if they've studied so many other markets, but this is kind of typical of old way of thinking of how these markets, when they add in adult use, you know, for whatever reason, they still like to have this amount of lag time. Um I'm not excited about the excise tax. I think, you know, if we've learned anything that overtaxing is stupid, doesn't generate more. Um but uh here we are. So, you know, I just uh unfortunately I feel like this is another scenario where the industry is begged for at any cost to get something done, and this is what happened.

SPEAKER_01 1:13:52

Uh did I see a $10 million fee there, Morgan, to convert to adult use?

SPEAKER_02 1:13:58

Did that survive into the into this new form?

SPEAKER_01 1:14:03

I believe, but people I am not an last thing from an expert at Virginia, but when I was doing some Google research, that did show up. So don't don't uh don't trust me there, but that's a potential one, which seemed uh seemed a little rich, you know? Yeah. Extortion level. Exactly. You've built this whole thing now to participate in the larger one. We would like $10 million. Thank you very much.

SPEAKER_02 1:14:26

Right. And then it begs the question of uh if adult use even happens and gets rescheduling, or if it doesn't, uh does that still create as much incentive to uh pay that fee, pay 280e, pay for all that to have uh adult use sales. Is there an ROI there? That'll be a question. We'll have to see. Um, so yeah, that's kind of the state of there.

SPEAKER_01 1:14:51

Um Georgia, uh just to pause for you because people look listen to the show, Morgan, to make money and bought by buying cannabis stocks. Terms of companies to benefit there, tell me if tell me if I'm on the right track. Your licenses are GTI, chooshi probably disproportionately benefits because of their smaller revenue and market cap. Verano, the new air, which is Mill Street, and what is it, arboretum? Is that how you say that? And cannabis, which now is that also all Mill Street, if I understand correctly?

SPEAKER_02 1:15:23

Yeah, yeah.

SPEAKER_01 1:15:24

Yeah. So go buy Mill Street. Go buy yourself some Mill Street stock if you like Virginia. Um, but yeah, so GTI, Juicy, Varado, the new air entity, and the former cannabis is what I have written down. Yeah. Okay.

SPEAKER_02 1:15:42

Uh Georgia, though, good news. Um, they had started with a very restrictive medical program, limited in uh THC, limited in form factors, uh, limited in qualifying conditions, um major improvements in their medical market. Um, they originally had a 5% THC cap that's been removed. Um, they now replace it with some milligram, 12,000 milligrams um uh new products now permitted to vape. Edibles, gummies are also included. Um smoking and burning the plant is still strictly prohibited.

SPEAKER_01 1:16:25

Ooh. So how about a dry herbal vaporizer?

SPEAKER_02 1:16:31

I think that would qualify under vape. Okay, but that's a good question. Um, patients 21 or older, um, well, I guess that was what that was, um, expanded the eligibility from where before it was end of stage severe, those have been removed. Doctors can recommend treatment earlier in diagnosis. Um so they and they've added a bunch of qualifying conditions. I won't go through all that. Um here's a cool one out of state medical uh cannabis reciprocity. So if you are visiting, uh you can get a 45 to day supply in in uh in Georgia. So state issued registration cards will now remain valid for five years.

SPEAKER_01 1:17:26

So lower barrier to getting a card and more form factors I can buy. Does that seem right?

SPEAKER_02 1:17:35

Yep. And then I and to your point before about like the kind of the friction of a medical card. You get a medical card, it's good for five years.

SPEAKER_01 1:17:42

Yeah. Well, that all sounds positive. Um is true leave, Morgan, the only public operator in Georgia right now.

SPEAKER_02 1:17:50

Yeah, I think so.

SPEAKER_01 1:17:51

Yeah, yeah, yeah. I came up with TrueLeave, um company named Botanical Sciences, company called Fine Fettle. I hope I wrote that down weird because it sounds weird when I say it out loud. And Trivana Wellness was the other one. Any of those private operators ring a bell to you?

SPEAKER_02 1:18:07

Yeah, yeah, fine fettle. Um botanical sciences. We've we've met a bunch of the uh, or not a bunch, but um some of the Georgia operators. There's some really good business-minded, patient-minded operators there that are like understanding of building a good business and running a good business, understand the pharmaceutical world and like how because they have to sell them in pharmacies. They're interestingly, they're okay to be federally regulated red uh pharmacies selling cannabis. Um, I always wondered how that was going to work. Um, but it did. And now it's and now they're expanding it further. I mean, obviously, being medical now is being rescheduled is is another story, but before all that, you know, a couple of years ago, didn't really know how that was going to work. But um, you know, were they gonna have to pay 280 E and all that stuff? And I don't really know whatever ended up happening with all that. Um, but it seems to be working, and so kudos to them for expanding the program. Um, you know, this is the kind of stuff as I was mentioning earlier about these medical markets, if they just become more open, easier access, you know, it it reduces that dependency on adult use to really add in so much if they just can make it efficient and accessible. Um, you know, usually as we see these barriers come down to on the eligibility, it's usually a one-way kind of chart. It just keeps getting easier and easier.

SPEAKER_01 1:19:33

Yeah. Well, one thing I've seen, Morgan, and probably super biased perspective, but like generally speaking, when people are concerned about providing access to cannabis after they do it, they're like, oh, that wasn't really a big deal. I think where we get into trouble, I hate it. You have looking at this park across the street from my house. I'll be walking on the little hiking trail over there, and there's a little overlook station, and somebody will smoke a pre-roll up there with, oh, like that seems a great idea. Smoke a pre-roll, enjoy the view, no harm there. But goddamn it, man, pick up your trash, right? And if the sign says no smoke in public, like don't smoke next to families at the there's a little playground over there. Like, don't be smoking weed by the families over there. Like, let's be good stewards of this stuff and be good examples and not be out there, you know, causing problems. What I love about cannabis is you're not um, my mom was a just a delivery driver from a dispensary for several years. And people are like, dude, your mom's 70, that's crazy. She's going out there and you know delivering cannabis to people. And it was just the best. She loved it because everyone was kind and friendly, and it wasn't like booze where people are drunk and rowdy and disrespectful. You know, she did, you know, thousands of deliveries, and we I had two issues, and both of them were just people saying something rude that I terminated them as patients immediately, but it wasn't really a big deal, but I just had no tolerance for treating my mom poorly. So we canceled those people, but that was over thousands of deliveries, nothing ever happened. She was never robbed, screened at, you know, any problems. And so I think like as cannabis people, I'm always trying to be like, let's set the example about how to use this stuff responsibly. So we look at these new markets and like this, you know, Georgia thing. Hopefully they have that rollout and they have a little more, you know, a little more breadth to it, a little more depth in the products, and they find out, heck man, that wasn't you know nearly as big a deal as I thought. And then that's a path towards, you know, going towards you know, adult use. And so um, I hope it follows that pattern. And I think that's generally how it works with cannabis, is people maybe it's even more so, these southern states. If I could generalize, maybe there's a little more stigma bit there, maybe it isn't used as widely. And so if you're you know a Georgia Stoner out there, you know, let's do the right thing and make this program work and you know, use this as maybe a lift towards adult use.

unknown 1:21:36

Yeah.

SPEAKER_02 1:21:37

Yep. Well said. And I and I really do it. That was one thing actually in Virginia, they did increase the fine for public consumption. It was like a $25 fine, now it's a $250 fine. And you know, the there was some concern around the um racial implications that could come from that. Um but um I think the the through line or what you were talking about, I think is really important is respect your neighbor. Not everyone likes to smell weed. We all do, we're cool with it, not everyone's cool with it. Yeah. So, you know, if you're gonna do it, like one can you do it, and two, do it respectfully.

SPEAKER_01 1:22:19

Yeah. So well, Morgan, we even toyed with putting another thing on the agenda, and here we are, one hour and 26 minutes into the show. So thank God we didn't do that, but we sure should wrap this thing because nobody wants to hear us talk for 90 minutes.

SPEAKER_02 1:22:34

Yes. Yeah, no, this is great. Uh it's fun to do a solo show. It's been a minute. I know we try to do them one a quarter, but it feels like it's it was a bit since we got to you and I just got to talk. So and I love our guests, it's just but I just enjoy these two.

SPEAKER_01 1:22:48

Yeah, I enjoy it too. With the guests, we kind of each have a piece, but tend to put the spotlight on them and these ones. It's not that I need a spotlight on me, but it just helps to talk through some of these things. And uh, theme of the show is we like to have conversations in public, we'd like to have privately. So this spared me calling Morgan and talking for 90 90 minutes about these the same issues.

SPEAKER_02 1:23:06

So we'll talk in a little bit.

SPEAKER_01 1:23:08

Yeah, I'll call you later. Uh for sure. I'll probably talk to you before then, but uh for sure we're gonna talk again next Tuesday. Um, we do two higher exchanges a month. We'd like to space them out and do one every two weeks, but with travel schedules that didn't work out. So we're slamming two in a week. So today is Wednesday, June 24th, and next Tuesday on June 30th, we will have the level-headed, very smart, very articulate, very well researched Chicago native Nick Gastavitz back on the show for episode 100. So I'm really looking forward, uh really looking forward to that one.

SPEAKER_02 1:23:42

Yeah, for sure. It's been a minute since we've had uh Nick on. So looking forward to it.

SPEAKER_01 1:23:47

Yeah. Well, cool, Morgan. Good chat. Thank you guys all for listening. As I said, the word chat. Thank you guys for participating in the chat. It's fun to have kind of a live audience there kicking things around with us as well. Thanks everyone that listens on YouTube. Um, if you are on YouTube, go ahead and hit that like and subscribe. Maybe ring that bell that will give you notifications. YouTube is up huge for us this year, guys. Like overall, we're up 50% in listens. We're flat on podcasts, we're up on socials, and we're up huge on YouTube, starting from a small base. So let's not get carried away. But that channel is really working for us. And honestly, guys, I'm stoked that um, yeah, we've been able to grow the show 50% already this year. So thank you all for listening. We super appreciate it. And also, last thing, guys, thank you to everyone that said hello in Chicago. We I live in a weird world where I put myself out there a lot on socials and on the you know on this channel, and you don't always know how well it's received. Like sometimes people listen, they don't say anything, they don't like it, they don't tell you anything, and you operate in kind of a vacuum, being like, I'm doing all this stuff. I hope someone cares or listens or likes it, because otherwise that's super uncomfortable. At a Chicago, you know, so many people came up and said, Oh, hey, Jesse, great to meet you. Love the show. I text Morgan when that happens because he wasn't out there, but I sent Morgan a few texts over the over you know a few day period. And so it was really rewarding to be out there and uh just want to say thanks to everyone that uh that said hello because it's super cool to meet the people that are actually uh listening to us. So with that, I will sign off and we'll see you guys again next week on Tuesday at noon. The views expressed this podcast are provided for oh whoa whoa whoa whoa hang on, whoa. Before I do that, I must say thank you very much to FlowHub for making today's show possible. One thing we talked about in the show and in Chicago is that MN MA is heating up, and you need to be beautiful to attract the right dance partner. So start that process by using the best dispensary software out there. Ramp those revenues, get your books in order, make the most of this opportunity at your dispensary. In order to do that, go to flowhub.com and book a demo today. That was bad, Morgan. But I'm gonna recover. 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. We're out of here. See you guys next week.