GDNSF - Where Is The Value In Cannabis Stocks?

2023-03-29 17:00:00 ET

Summary

• Bengal Capital's Jerry Derevyanny moved away from top multi-state operators (MSOs) to find the most value.
• Why EBITDA falls short as a useful metric to measure cannabis stocks.
• 280E tax a dangerous way to underwrite the industry.

Listen on the go! Subscribe to The Cannabis Investing Podcast on Apple Podcasts or Spotify .

Where Jerry Derevyanny, a partner at Bengal Capital, believes we can find the most value from cannabis stocks. (3:35) Why EBITDA falls short as a useful metric for cannabis investors. (8:15) Moving away from the top multi-state operators (MSOs). (16:20) REITs, problematic business models and risks around rent payment. (22:40) AYR ( AYRWF ), Goodness Growth ( GDNSF ) and more (30:00).

Transcript

Rena Sherbill: Jerry, Welcome to the Cannabis Investing Podcast. It's great to have you on the show, after hearing and reading many of your missives over the years. So thanks for joining us.

Jerry Derevyanny: Pleasure to be here. Thanks for having me.

RS: It's great to have you on the show. So catch us up on how you're thinking, about the cannabis industry. Almost everybody I talk to is - it doesn't make them happy when they think about the cannabis industry in this very moment in time. How does it make you feeling?

JD: I try to be a student of stoicism so I try not to let it affect my emotions, but I can't say it makes me happy either. It's a really tough time…

RS: Yes.

JD: I think for the industry, and especially for the publicly traded companies. So I think right now, I kind of mentally and I think in some of the stuff I've written call it an air pocket, where you have a lack of - you got this kind of time where we have kind of a lack of top line growth, because not as much stuff is coming online in terms of new states or growth out of the old states. You've kind of gotten a lot of juice, and now you're starting to see price compression because of competition, and that air pocket things start to deteriorate pretty quickly and I think it's tough.

RS: Yes. How would you - how do you advise investors to be thinking about looking at the industry, how much should they even be paying attention to all the different ins and outs?

JD: I think one of two ways. I think cannabis is kind of unique in this - in some ways, that it's a pretty technical in a difficult industry. So, I think people even need to be kind of all in or all out or not all out, but maybe just look at the top couple of names, buy those, put those in a coffee can and don't look at it for 20 years. Because understanding these companies and for issues that we'll talk about, I think, later in the podcast, it's kind of difficult.

They don't give you a lot to be able to see what's going on in their kind of operations at the level that you would normally be able to see a lot of other businesses. And so, I think investors, it takes a lot of research that goes outside of the financial statements, frankly, and kind of having tenure in the industry is incredibly helpful. So you can see some of the personalities and some of the kind of remember the history of what happened, kind of, to get the company where it is today.

So I think it's - that's kind of what I had advised investors is, first of all, make that choice whether you want to devote a lot of time to it or whether you want to devote relatively little time to it, and there's not really good in between there.

RS: What are some of the things? It's something that we've talked about specifically in the past few weeks about going outside the financial statements and the limitations around the financial statements. What are some things that you would point to for the people that do want to go above and beyond regular due diligence, super, super diligence maybe?

JD: Yes. Well, number one, if you're a patient or user, you should ideally try some of the products if you can, that will - the person putting oftentimes. States sometimes do a really good job of releasing data, Florida in particular, comes to mind, where you can really start to get an idea of, okay kind of market share, what does pricing look like, just looking at their menus, I'm looking to see if menus prices have changed over the last couple of months.

Just kind of roughly taking a look at it, I think would be a good idea. Now honestly, I wish I had that idea some months ago, and I wish I had the time. Because I wish I had something like that to look at, but those are just some of the things that come to mind.

RS: What's - can you point to an example or two of things that you feel like you've done more than the norm due diligence that has served you well? Or things that you think that the industry is getting wrong by not doing their due diligence?

JD: Well, number one, I kind of have an advantage. I think in that I got lucky in - how I got into the cannabis industry was by - I had friends and I'm from Seattle area. I was a lawyer in New York City, and I had friends of mine that were close friends I grew up with - had started a cannabis company. It was a cannabis start-up. And I took the chance and moved back and became General Counsel of that company. And watch it grow from employee number one, was truly to, I think, over 200 full timers at one point.

And just having seen the trials and tribulations and what I think quite a good operation looks like, shout out to my old colleagues and forefront. That gave me, I think the VC guys call it an unfair advantage in looking at some of these companies and understanding, like what - when you see some of the numbers, what it actually translates to on a granular level.

And some of the stuff that I think, people are getting wrong about, the industry, I mean, they're starting to shift away from it now. But the focus on EBITDA is - was always to, really, really misguided in this industry. And I know why people use it. I get that it's an easier number to calculate, but it's a dangerous number in cannabis. And I think, if you don't know how to use it, it suddenly AYR looks like the cheapest company out of all the MSOs, and that can lead you to not realize kind of some of the risks that you're taking.

RS: Can you talk about just briefly, we've also discussed this, but can you share your opinion about why EBITDA falls short as a metric?

JD: Absolutely. So first, let's take a look, let's take a step back about like, where did EBITDA come from? Like, who created this measure? Where did it gain popularity? It was John Malone, his famous for his kind of - became a billionaire through his workings in the cannabis, in the cable industry, another C name and the original purpose was to reduce their cost of funds for cable development by showing the raw cash flow power of the business not to common equity, to debt.

It was to sell bonds because kind of fairly, if you're a bondholder and you're thinking okay, how much money does this company make to be able to pay me back? Well in the 1980s and to some extent, still today, look at it, okay, “Well, I get paid before taxes. I'm a cost. So I get paid before - my interest gets paid before taxes, before depreciation, before all this kind of stuff. Okay, this is how much cash I can take out of the business.

If your equity, especially in cannabis, first of all, the taxes are very real cost to you and they're overstated. So that - to the extent that EBITDA was supposed to approximate cash flow, already you have a very wide gap. And then I think people are going to start to see this. There is maintenance CapEx to these buildings. People think that you put $100 million into the ground and then you never touch it, that is not the case.

These facilities, especially some of the first-hand facilities, are going to start to see, I think, major retrofits in the coming years. And some of them honestly might need to be shelved completely and be written off some of the facilities in Canada. So on both of those scores, you have two major things that start to throw off EBITDA's usefulness as a - it's a - proxy for cash flow.

And then it also kind of glosses over some of the cost of capital differences between the companies, which in more mature sectors aren't - they're kind of not usually as material as they are in cannabis. So those are the three that is enough? Do you want more?

RS: That's pretty good.

JD: I can rant. I'm good at ranting, so I - can continue to rant.

RS: I think that's a good place to start. Would you say that the reason that people are starting to move away from EBITDA as a metric is, because they're understanding. I think if I may lead you to the - if I may lead the question a little bit, but tell me if you disagree with this? Is the understanding of how much the 280E is affecting things, but I think also looking at the stocks that haven't shown up the way that they thought they would and are being shown that it's kind of been limited.

JD: I think so, on the actual business performance side where I think that 280E - so I have a kind of a bone to pick with, I think people use it as a way of kind of explaining a way of bad performance. Sometimes, oh well, 280E. If 280E didn't exist, they'd be making so much money. Yes that's a - I think again, that's a dangerous way to underwrite the industry. Because the odds are, I think that if 280E gets taken away, you get a federal excise tax that gets put in its place that whether or not it matches 280E isn't the point.

It's probably going to take a pretty big chunk of whatever savings you are going to get. And so to just imagine that cash flow flowing down to the bottom line, I think, is really dangerous. Sorry, what was the second part of what you were saying about?

RS: I guess just why you think that investors have become a bit more savvy in understanding the limitations of EBITDA?

JD: Oh, I think part of it is because they just have seen the wide divergence between operating cash flow and EBITDA numbers. Suddenly, like, these numbers are way off. And to be clear, there are sometimes very good reasons why they would be off.

And an MSO is not quite a black box, but like a company like Curaleaf ( CURLF ) that operates in 18 states, that up until a couple of quarters ago operated in 21 states. You've got all these mix of mature markets and investments that are being done.

And when you're looking at the cash flow statements, it can be really hard to see kind of parse out the performance, said, “Okay, what were the growth investments? What's the kind of the continuing? What's kind of steady state? What's the - where are the margins falling? So there are sometimes very good reasons why you would see divergences from this, like when a company is making legitimately good growth investments.

But I think investors are now starting to be understandably skeptical of management. I hope - actually, I hope to get more so. When management tells you that, "Hey, look at our EBITDA, it's so great.” And the investors are starting, “Okay, wait a second, where did the cash go? And why is there a lot less of it than two years ago?” I thought that you were making all these great growth investments. And maybe there's no responses to that and maybe there aren't.

RS: So what do you think investors should be focused on in terms of looking at companies today?

JD: I think and this is kind of what we've had at this point, but operating cash flows is definitely one of the biggest ones, and you need to adjust out for taxes. If they are paying their taxes or if they aren't, I think that is - that's a critical one. I think now you want to look at net debt, you're going to want to look at debt maturities, when are they coming up, kind of start to ballpark.

If you can start to look at, okay, what are the bonds trading at? Because that will give you an indication of if they refinance what that interest rate was going to be now to the extent and you're assuming capital availability, which I think is a pretty safe assumption in the top tier MSOs. Like if they wanted to refinance, I think, they're someone who would, it would just be pretty expensive.

And I think they need to be mindful of those metrics. They could be ideal metric, the ideal thing that investors would be able to see is return on capital metrics. But those I think are uniquely difficult for the reasons I said, like you have 18 states combined into one box, really tough to see the ROIC on different investments in different states. So I think investors kind of have to triangulate using other measures, so operating cash flow.

And I think one of the others is even the biggest MSOs oftentimes can't control the price in the market regardless of what some people on Twitter will tell you. They're price takers. They're not price makers as a general rule. And even in some limited license states, you're not going to have high prices forever. I think in those - if you cannot control the pricing, well, what can the company control? What can you direct them on?

Well, you can judge them on their general and administrative costs. I think at least to some extent, you should be watching what is their kind of, call it, corporate overhead look like versus their revenue base versus kind of other measures? And to see if they are arguably being efficient? Because you start to see differences pop out pretty starkly, frankly, between the MSOs.

Even the top MSOs when you start to do this analysis and you start to go, “Okay, well, maybe one of these companies or two of these companies aren't quite run like the other companies, and what's going on?”

RS: What would you say to that? How are you looking at the top MSOs, let's say?

JD: So our funds at Bengal, we specifically kind of made a decision to not look at often really move away from the top MSOs, partially for risk reasons, partially for okay, “Where do we think we can find the most value?” We're a little bit unique in the sense that we have operating and investing skills in space. And so, we can actually help to hopefully create the returns that we want to see by being helpful to the companies that we invest in. And frankly, companies, the big MSOs, we couldn't really be helpful to them. They wouldn't listen to us even if we called. So…

RS: Helpful. Sorry, helpful in terms of kind of strategy or helpful in terms of...

JD: Strategy.

RS: Okay.

JD: Strategy. We are effectively private equity in how we look at this without the leverage. We really - we're fine at taking liquidity risk. We're fine at taking the duration. We don't - some of our positions are public and we - and actually all of our positions are public now that, I wrote the letter and we made the letter public. And if you kind of take a look at how we own of a company like Grown Rogue ( GRUSF ) and try to figure out how many days it would take for us to sell it, it would take probably over 100 days. So effectively, we're - we do that for Warren Buffett thing of trying to look at ourselves as owners.

RS: Okay. I interrupted what you were going to say. You were saying that kind of what you are looking at if you're not looking at the MSOs?

JD: Oh, yes. So we do - we look at smaller companies, but specifically, they usually fall into a couple of different types. A lot of these companies should never been public in the first place. There was this weird dislocation, right, where you can't be public effectively in the United States. The Canadians - this is my personal pet theory somebody can definitely tell me if I'm wrong, but if you look at, we have a venture capital ecosystem in the United States. How do these start-ups get funded?

Okay well, this is private funding around. There's these VCs looking for asymmetric returns. Then you get kind of the next stage of VC, then you eventually go. You couldn't do that for cannabis, that didn't really exist. It was very limited. Well, what you have in Canada was you have a junior exchange system where you have a lot of penny stocks that are almost all of them are now there's blockchain and everything, but historically, it was mining and oil and gas, exploration companies.

And you had this distribution infrastructure that allowed all these companies to access, kind of a public market in Canada that - and you have this sales force and distribution that was already tuned to selling these kinds of stories. So this is really interesting kind of way. Well, a lot of these stories depend on continual excitement, not just BS press releases, but you just need to have always some kind of flow of events. It's very hard for these kinds of investors to be told, “Hey, I need you to – okay, thanks for becoming shareholder.

I need to sit quietly for three years while we execute on the business plan. And we think you're going to like, what happens then. I can't control a multiple, but we're doing really well in the business. That's like I mean - that's like kryptonite to them. So then you get what's called a bust, what we call busted story, where people are really excited. They thought they were going to grow so fast and didn't really hit its marks even if the business is doing okay, they just don't want to be part of it anymore, because it didn't really meet their expectations on what it was.

And so you have these busted stories that now create kind of structural and price - mispricings where, “Okay, you look at and this is a company like BAMM, for us, Body and Minds ( BMMJ ), where you look at and you go man, “Okay, I understand why shareholders are disappointed. But if you kind of dig through the business a little bit, it's doing well and it has a couple of assets that don't seem to be priced in. They're Illinois stores.

They're in the great locations. They seem to be doing really well. Illinois really underserved. They're fairly good retail operators that's strange. But why does that mispricing exist? We think it's because you had this busted story. Grown Rogue is a little similar. So you have these places where these smaller operators are systemically undervalued. And it's combined that with, “Okay, what companies can we be helpful?” On strategy and potentially more capital.

So, for example, Body and Mind, we were able to do an SPD offering to lead an SPD offering to kind of finance the build out of the Illinois stores that closed for the end of the year. And that's - those are kind of the things that we look for in the cannabis market right now where we can generate the most value.

RS: And are you only looking at companies that you feel like are kind of in that mid to small – small to mid-tier in the states?

JD: Not just operating companies. We do look at some ancillary companies. So all the companies that we hold right now as was public in the letter are Grown Rogue, which is an operator in Oregon and Michigan; and then Body and Mind, which I just mentioned; then we have urban-gro, which is an ancillary company that it does construction and construction design, that kind of stuff; and then we have XS Financial, which we thought was just added - I could talk to that one, too. We thought it had - it was undervalued and had a great potential developing a real franchise versus some of the other cannabis lenders where we see some of - some issues with their business models; and then Goodness, Goodness Growth ( GDNSF ), which my partner, Josh, is now the Interim CEO, but we thought, it's undervalued when we bought in a while back and continue to think so.

RS: Speaking to Goodness Growth for a second, can you talk about - I also wanted to ask you, remind me if you will, to get back to, well, actually, I might ask you this now. What would you say is the reason why you question some of the lenders’ business model?

JD: Yes. So, number one, you're starting to see it now is that that people assume that the rent was always going to be collectible. They assumed that there was never going to be any distress. But - and this is where it was helpful to have worked in a facility, have paid rent at a facility to understand kind of “Okay, what are costs look like, and start to be able to grow okay, [[IIPR]] lease costs.” Let's see how much IIPR - how much money did they give King's Harvest, let's say, okay? Well, they gave this much to King's Harvest, okay?

When they gave that much to King's Harvest, this is likely what the rent is roughly kind of what the rent is, okay? And then you ballpark what the other costs are that King's Harvest pays, kind of give them some favorable assumptions, and then you add the lease costs which has to be paid right on per pound, kind of roughly approximate what the lease cost per pound. And then you look at the market price in California and you go man, there's not a lot of room there.

That's interesting, and that's becoming more apparent in other markets, that same kind of math is going to occur in other markets. You're starting to see it where these facilities are not able to pay their rent on a four-wall basis. And that is a risk that I think was really not appreciated by the market before I think it's becoming more appreciated now. And in terms of the business model, IIPR - nothing gets IIPR, I think they have a good business that all the - I'm skeptical of the mortgage REITs, the mREITs because they're very different from the sale leaseback. One thing IIPR does have is that its average leases are 15 years-plus, I want to say 14 years-plus.

So they lock in that yield for quite a long time. The mortgage REITs, they have to - they're going to be refinanced in three to five years. So if you think the cost of capital in cannabis is going to go down, which I think is the general assumption over the medium to long-term time horizon, what is the - what's the kind of continuing value of this business? It's going to generate, okay, you're going to generate 16% now. But when you refinance, this same money is not going to be generated.

You're not going to be generating - you're going to be generating 10%. So I think some skepticism of that and some of it’s just arbitrage. They had cheaper money over here. They're lending it more [expensive] here. Where excess we thought was different and we continue to think it's different is that it's in a scene that we think there's demand, but it doesn't make sense for the bigger guys to kind of play there. We think their team is great.

The management team that they have, CEO, David Kivitz and his team, we think are terrific. And really understand the kind of financial business that they're managing. And then there actually is some benefits to scale. We think in equipment leasing, which is what XS does because you could centralize your ordering, you can centralize maintenance, kind of with the leasing company. And there are some benefits to scale there, where they can give value to their customers. And our channel checks said that they were really good to deal with.

So, we think that is the kind of business that potentially has okay, “Well, even if cannabis money gets cheaper, that's a business that potentially just makes sense to continue and people - these cannabis companies will continue leasing their equipment, because it's useful to them.

RS: What happens to the REITs, let's say, or even the mREITs not just IIPR, but also when the tenants stop paying rent?

JD: Nothing good, nothing good. I think what practically happens is the REIT has to make a choice about whether they're taking that facility back or whether they're going to lower the rent or whether they're going to just wait and/or whether they're going to sue, because they almost always - if I remember correctly, they almost always have a corporate guarantee. And ultimately, the question becomes I think oftentimes, it's going to become you have operators that have maybe one or two really good states where they generate cash. And then other states where they borrowed money that they're not generating that much or any cash and they stop paying the rent or they get behind. And now the good state is going to be paying for the bad state. And how long can that sustain itself?

So I think the REITs where I think their need to go is they need to figure out there's no - they can't foreclose on the building and operate it themselves. And there are no kind of operators that they can hand it off, property management company that can come in and start to get some of that money back.

I think they need to figure out a way - some kind of way of - if the tenant truly is, it truly needs to get kicked out and get kicked to the curve to figure out some system where they start to get better operators into those buildings as soon as possible.

RS: Do you have - have you looked at the publicly traded REITs? Do you have an opinion on if there's one better than the other in terms of quality of tenants?

JD: I don't have a strong opinion on the tenant book of these guys. Although I would say that from the MSO side, I would be - I would give a discount - excuse me, I would give a discount to any MSOs that have a significant amount of sale leaseback debt. My favorite thing about this stuff was, by the way was - when this stuff became - when it became popular when the sale leaseback started and IPR was just going public, everybody called it non-dilutive debt.

It's not dilutive because they use this definition of dilutive that means well, you're not issuing any shares. I hate to break it to you, but usually dilutive means dilutive to future earnings, right? Are you going to make less per share than you would later? And when you're getting this 16%, 18%, 20% kind of all in debt, like for 16 years on a facility in Massachusetts. I have very good odds that it is dilutive at some point in the future earnings, right. So I loved it when people owe debts it's not dilutive. Well I don't know about that, but I would definitely be skeptical of that on the MSO side.

RS: And who are those companies that are, that are -- that have sale-lease-backs?

JD: I have to go - I have to go double check. But I want to say, I think Curaleaf has used it a decent amount. I think Cresco ( CRLBF ) has used it a decent amount. I want to say AYR has used it a decent amount. I think the only company where you can very quickly see that they manage their balance sheet differently is GTI ( GTBIF ), which has had much more limited use of these kinds of tools.

RS: And going back to Goodness Growth, they had a broken deal with Verano ( VRNOF ). I think there was excitement around New York. How are you looking at that investment? How are you looking at where they're going from here?

JD: I wish I could talk about it more, but because of the litigation that Goodness filed against Verano, I don't want to go off-site on that. But I think, yes I mean, I think Josh is someone I trust a lot to really do his absolute best to create value for everyone for shareholders, debt holders, everything. And so yes, I would leave people with that. He’s my partner and I trust him a lot on this, and know that he's working very hard.

RS: Would you say that he's pivoting a bit from where they were focused on?

JD: I think their earnings are -- well, they're going to be reporting, I think by the end of the month, and I think I would recommend that people probably listen to that earnings call , because Josh is a straight shooter, and I think he will tell -- he will lay out the roadmap of where he sees the company going.

RS: So in terms of looking at some of the companies, you mentioned AYR earlier in the conversation, and that's a company that I think people that many people would call smart analysts booked at and like their story, like what they were doing. I think a lot of people having pause in their bullishness on that. Alan Brochstein was on a couple months ago qualifying their debt saying that the debt put in context isn't that bad. I think people are maybe waiting to see what happens operationally out of them. Do you have something to say about AYR specifically or looking at stocks for the long-term?

JD: I think that on AYR specifically, all I would say is that I think and I have not gone deep on AYR by any means. I think the stock looked fairly priced for the risks that you're taking, not cheap, not super expensive, but like roughly in the ballpark because I think there's some major risks. I don't think, you know, people -- it's not quite priced for bankruptcy. I think it's priced for potentially very dilutive, very punitive raise.

Not to mention the fact that they have an earn out that has a fairly dilutive effect as well. If I recall correctly, they owe 40 million shares or so I think at current prices. So it's significant. In terms of just general cannabis investor or…

RS: Yes.

JD: What was the question again?

RS: No, yes like, I think people are rethinking a lot of things. And I guess maybe we touched on this, but kind of the best way to I guess maybe the changes that have been made in terms of how cannabis investors are looking at the space, yes?

JD: I think, you know, it's interesting because it's hard to know what cannabis investors are thinking. They're not recycling their profits anymore.

RS: Yes.

JD: So, they -- there are not a lot of incremental buyers. There aren't any institutions that [indiscernible] planned states. It's kind of difficult, but the -- and I haven't seen a huge shift from the analysts, at least from when I kind of glance at them they've started to look at more operating cash flow metrics. So that's kind of good. But I think for investors, unfortunately, I think you got to get granular on the details and start to remember some of the things that management told you before and what they're doing now.

So for example, you know, I think this is the fun - this is one of the most difficult problems in cannabis. And I think difficult problem in all of investing is this figuring out this long-term return on capital, which is going to drive your returns in the stock as a general rule unless there's some kind of you know, trading event around safe or something like that, which I can't speak to. That's not my area. I think you started to look at and you go okay, truly it had roughly a 100 million in cash flow from operations in 2020.

Where did that 100 million go, because as of last year it had 12 or something like that. On a normalized basis, the business appears to have gotten worse. So and you go, okay. Well where did that 100 million go? And the reason why that's important is because well, if they make a 100 million next year, they have a dividend then you think. They're not going to - they're most likely not going to issue dividend, but they're not going to buy back stock.

So where is that going to go? And how much confidence do you have that 100 million is being reinvested at a good rate. I think it's really difficult to see. And I think trying to triangulate from what management has done, if you start to get a little bit skeptical of some of the larger MSO management in terms of their ability to redeploy kind of that capital, deploy that capital. So for example, the acquisition of Origin House by Cresco what exactly was purchased there.

I think there was - I think the only thing that's probably left is one premium California cannabis grower, I want to say GrowFlow, or flow-grow something like that. That apparently has done good work in all their wholesale kind of grows throughout the country. But they paid over $800 million in consideration for that. So if they make $1 billion next year, where's it going to go? What are they going to do with it?

You know, you go through some of the greatest hits of some of these acquisitions. So we talk about Ayr they just sold their - I want to say they sold their Arizona asset for about half of what they paid for. And the management's compensation was quite good during the year that they bought it. So again, it's just these are difficult questions asked. But surely, they exited three states.

Right. They just -- they haven’t entered Colorado all that long ago. They paid I think $67 million for the privilege of entering Colorado when everybody was talking about well, what's your play for interstate commerce? How are you going to prepare for it, oh look well, we're going to Colorado, [indiscernible] Colorado. Okay, then how did that work out? I think the Select acquisition. I think the criticism of Select is pretty well founded, I think and they've pulled out of California and Oregon, which were their home markets, that's where they started.

And there was a lot of money paid for that asset. And now the comeback is, well, you know, we sell Select in all of our different markets. Yeah, surely we’ve put in the money to take them to all those different markets. You -- like, you spent you know you keep they didn't have that already. So I think, again the question is, okay, if you make $1 billion next year, where does it go? And how can I kind of try to figure out what they're - are they going to build yet another big facility somewhere?

Is it going to be kind of a slower, somewhat different, but ultimately a replay of Canada where everybody was trying to one-up themselves on facility sizes? Maybe not. I mean some of these companies, I have no doubt that out of the top 5 MSOs, there's going to be one or two winners. Winners in the sense that they're going to do -- they have a decent return for shareholders and get decent market share. But call me super skeptical about the rest. And I think those are looking at kind of management's track record is difficult, but I think that's also one of the necessary things for investors to do. Does that make sense?

RS: Yes, very much so. And I know that there's maybe not much value in parsing out how we got to this point and maybe some of it is, you know, human nature. But would you ascribe greed as one of the main things in terms of the chasm between, let's say executive compensation and you know, follow through on strategy or you know the appropriate strategy at the appropriate time? Or is it people coming into cannabis that don't know cannabis because cannabis is still somewhat unknowable as it's a burgeoning industry, and they're figuring it out just like we are?

JD: No, I would be careful. I think - I can be sarcastic, but in all honesty, I think it's unless I had really good evidence, I would be hesitant to kind of accuse someone of being overly greedy rather than being overly optimistic, and truly believing what they say and just being wrong. But that said, they're being wrong, it could have been very likely, like the evidence could have been that they should have looked at, should have told them they were wrong way before they figured it out. But I think, you know, that would actually be interesting.

That would be yet another thing interesting just like looking at the menu prices, it would be interesting to look at executive comp and kind of operating cash flow outcomes in some of these because in some of the bad companies, it's been egregious. I mean, Greenrose ( GNRS ), was it called the Greenrose Acquisition ? I mean, it was jaw dropping, managing the comp versus lack of performance in the company. And it was a young company, it hadn't really demonstrated much, it just eased backed and it was just a field day. It was pretty unseemly to me.

RS: Do you think the SPAC kind of craze is - should be judged a bit differently than the rest or do you think it's all kind of companies going public when they shouldn't be?

JD: I think this SPAC thing is a little bit different. And I think you asked a question of how did we get here? How did we arrive at this place? We arrived because people are -- I think the people that started by and large these large cannabis companies were not cannabis operators. They you know, I'm not saying that they were illicit market growers, you don't need to be one of those. They didn't operate, they were very good license acquirers and dealmakers and financiers.

That era, I think, you do not select for good operators in the maturing part of the industry, like in the part - in the time of the industry, when okay, let’s start controlling our overhead. Let's actually figure it out. And it's very different from a company like Grown Rogue where you-- there was never any extra really to begin with, because that's not how he operated. You know, that's not how Obie the CEO operates because he's an operator. So he -- why would we do this extra thing? It doesn't add any value versus kind of top down.

Well, we do all this extra stuff and now hey, look, we've cut 100 million in costs or whatever it was you know, 50 million costs. Well, how did those costs get there? How did you allow this to balloon that much? But I think, you know, in some of these places, there was most likely a pretty big mistake in thinking how long high prices lasted. Because people really focused on oh, licenses are limited. Guess what? There's not that many steel companies and steel is the commodity.

You do not always need a lack of, you know, participants to create really, really competitive pricing environments. And you start to see it in Massachusetts where suddenly people are surprised that the price has gone down 40% in a year. In Washington State it went 40%, down 40% percent in the quarter. Eventually, these dynamics that you can have different speeds they get to the same place.

So when some of these CEOs and management, when they were investing these huge sums of money in some of these facilities, I thought it was - I admit I was wrong on this. You know, I was one of the guys on Twitter that said, I've defended the phrase, generational opportunity. I still think to some extent it is, but I'll take my lips on that one. But because I thought okay, man, of course, they're building up $100 million facility.

I think there's a pretty good, you know, they're going to get a couple years of really, really good profits out of it than some, you know, moderate years and maybe they'll lose money the last kind of 20 years of its life - in or like, the last couple years of the 20 years of his life. Now I think that initial really good years, I think maybe it might be initial really good year in some of these places?

RS: Yes. It is - very sobering. I think the time we're at in terms of looking at this space. Do you have specific companies that you would say to investors, look out for these companies or things that they - I mean, I think you've talked a little bit about ways that investors can be looking at companies to warn themselves, anything you would add to that?

JD: Yes, just on a - relative value basis, I will be one of the people that's, very skeptical of the argument that the biggest deserves a premium because I just don't think that makes much sense. Once you get beyond a certain point of kind of material bigness, I just don't think that unless your financials, your underlying financials are there, it makes sense that the biggest in terms of revenue gets a premium when it certainly looks like some of the companies that are not the biggest, but are still pretty big, have much better kind of financial performance.

RS: It's funny, you know, with all the news coming out of California and a lot of the companies, a lot of the public companies leaving California and a lot of analysts pointing to how many problems there are in the state. Somebody was pointing out to me that the private companies in California, there are some really successful private companies surviving/thriving in California as much as you can?

And I think that that something that's happening now in this shakeout in cannabis is showing that maybe who we thought was going to be or maybe who I thought was going to be at the top of the heap is not necessarily going to be the company at top of the heap. And it could be that these little engines that could do more to maintain their place in the ecosystem than somebody that was doing very extravagant things for a while. A) would you say that there is almost an advantage to being private in this space and well, I'll leave it there for a second? I'll let you answer that.

JD: Yes, certain well run private companies are 100% I think there's a certain advantage in being the noise that public markets create. It's almost worth it you know, people say oh, your cost of capital and everything. Trust me it's, the headache factor in some of these companies yes, I definitely think the private companies are smarter way to go oftentimes. And then, you know, but then to be fair, we're lucky that they didn't -- that some of these companies that are public weren't ever private because we get a chance to buy them.

RS: Right.

JD: At what we think are discounts. And the -- sorry what was the first question?

RS: Well, I was going to ask after that, when you're looking at the space and you're trying to kind of navigate it, would you say that in terms of the company is going public. Do you think that the MSOs aren't going to be the ones to stay at the top of the heap?

JD: No, no. I think that like I said, I think there's one or two that are going to do well. I mean, we can make it specific. I think GTI is probably top of the heap when it comes to the larger MSOs. I really admire, you know, the things Ben Kovler has said and Ben seems to be executing on. And largely, you know, he talks the talk in terms of return on capital. And while it's hard to see because of this lack of data, his financial results seem to bear it out, but I'm not particularly comfortable with pretty much every independent Board member resigning at once for really reasons that really have not been made clear in any material way.

I think that they have a pretty good chance of doing well. But I think if somebody made me a $100 bet right now, I think I take the position that the largest cannabis company, of 2030 as people don't know its name right now. It hasn't been created yet potentially or it's -- where it's very, very small. I think that is I would put my money on that. And I think you had a gentleman on your podcast not too long ago from Pelorus that talked about this, I think.

RS: Yeah. Rob Sechrist .

JD: Yes, if you can't operate in California, you can't operate. I think is one of the things he said. And maybe I wouldn't go quite that far because California really is a dislocated market, but I guess I have two things that to [indiscernible]. If you are getting out of the most competitive markets, and then -- and you are saying that prices will 'stabilize' at some level above those competitive markets in your current markets. I think that's flat wrong. It might take a little bit longer, it might take a little bit shorter, but the lower prices are coming. And these MSOs, the larger MSOs they made a very rational decision I think oftentimes. They didn't control their costs because, okay, you make weed. It costs you 1,500 a pound. Okay, well, let's save $25 a pound. Let's fix this cost wait. What are you talking about? We're selling it for $6,000. Let's just make more pounds. Let's just, you know, what are we talking about cost?

Well, now it's very hard to take costs out of a business where costs where there wasn't cost control or really, really tight cost control and the costs were going in. So yes I think you are going to start to see versions of the, you know, maybe smaller versions of the Colorado, Oregon, Washington, California problem. In Massachusetts, it's going to come first and you know, it's already coming, you know, Pennsylvania.

But for sure, a lot of these Tier 1 MSOs, as the phrase goes, are going to start to reveal that they don't have, like, the greatest operating D&A at their core. They had a really good corporate operating D&A of assembling licenses and stuff like that. And as we move into kind of the second you know, the second quarter of this industry, I think the cracks are going to start to show a little bit.

RS: Do you think it becomes further consolidated and then it becomes a smaller amount of players and they get consumed or you think companies just die off?

JD: I think some will die off, because they really doesn't - there's no company. Some of these companies, there is no company. There's just a couple of assets that people will kind of snipe and then they'll die off. I think there will be companies that survive. I think actually, you know, all the top 5 MSOs you know, and all the large MSOs have a really good chance of "surviving" you know, not going to bankruptcy or whatever or receivership or its equivalent. What I'm talking about is generating good return for common stockholders. So it's kind of a little bit different. I have a lot of skepticism on that.

RS: Do you feel like they can survive and be a successful company while not like, don't you think those play into each other? Don't you think those, in other words, returning real value to shareholders is the same as really surviving as a company?

JD: I think that people will be able to kind of limp along. I think iAnthus ( ITHUF ) and MedMen ( MMNFF ) are still those publicly traded companies technically.

RS: Right.

JD: So I just note that.

RS: Yes, fair enough. Fair enough. Well, these are sobering conversations these days. I don't think there's any way around a sobering conversation when looking at the industry. Do you think that there's something we're missing or something else that you would share with investors?

JD: No, I don't. I mean, I think I don't - I think that there are definitely reasons to be skeptical and really start looking a little bit deeper and more skeptical at these companies. But overall, one of the nice things, you know, people try to analogize it seems like weed and tech. And it's in some ways the opposite. And so there's, like, a good way that it's the opposite of bad way. The bad way is that you make widgets and so when you make widgets, you know, with tech, you have these -- as soon as you make it and then as soon as you get enough customers, you know, your profitability goes, hockey stick up. Here you're making widgets in very different economics. The difference is that you really don't have to prove your market. There is a lot of latent demand and people really underestimate, like if Florida were to flip the switch tomorrow to adult use, I think people really underestimate what the economics of that look like, and they're quite good.

And again, you know, people really focus on margins. If you're looking at return on capital, if you're not really upgrading your facility, if you have the same facility close to that you did in medical and now suddenly it just serves a lot more people. Your margin you know, the amount of dollars you're making goes up quite a bit, and it's incredibly valuable. And I think at the same time that people should be skeptical. They also shouldn't throw the baby out of the bathwater.

RS: Yes, good advice. Good advice. I think we'll leave it there. We can look for your writings that you write for Bengal. Those are publicly --well, they're on Seeking Alpha and they're publicly available elsewhere. I know people can find you on Twitter. Anything anywhere else that that people can find you or your writings and thoughts?

JD: No, just Twitter, Twitter would be great. I'm always amazed that - I'm always amazed that I have even one Twitter follower, but feel great. I'm always happy to -- I'm always happy to say something controversial or try to.

RS: I was going to say you're acting humble, but I feel like you write very confidentially. So don't be fooled. Anything else that you would share that you're looking at for this year as a final word, something to point to investors?

JD: I'll tell you what I'm not looking at, unfortunately I'm not looking it safe. And it's an absolute tragedy because I just saw a news article that a young man was killed in New York. You know, at a robbery at one of these kind of illicit smoke shops. And it's just sad. It's just sad.

RS: Yes.

JD: That it's not going to pass, but I think, yes, that's I'll leave it at that.

RS: Yes. On we go, on we go. Hopefully, next time we talk, I hope there is a next time. And hopefully, next time we talk, we have a bit more positive news to unpack, but happy to have you for a real talk. I really appreciate you taking the time.

JD: It was great to be here. I'm happy to, yes it would be great to talk again in a couple months or I think you just did a panel episode .

RS: We did?

JD: James Baker and [Julian] Lin and I like those guys.

RS: A while ago. I would love to get James Baker back on here. I don't know if he's going to come back on here. But yes, they were talking about the - James was talking about not going for EBITDA way before I heard anybody else talking about it. So yes, there's a - there were some insights.

JD: It's so funny because there's all - I like, you know, all the pretty much all the cannabis guys it's so funny because there's always, like a little that I want to debate with them.

RS: Yes.

JD: And it's just it's with James. I think he's – if he was like unfairly negative on a couple things.

JD: And then looks like Alan, you know, he points to book value a lot in these companies which is - which we should debate that is that I don't think it's a particularly useful measure of anything in cannabis with respect to cannabis companies, but..

RS: Okay good. You want to give a line now why you want to just kind of throw it out there why?

JD: No, I'd have to... listen, when you aim at the king, you best not miss. And Alan, I'm not going to come in unprepared for Alan.

RS: Well said. Well said. A nice quote. All right good. More content coming your way. Really appreciate it Jerry and looks like we've got a lot more to get into. So I'm looking forward to that. But thanks for coming on today, really appreciate it.

JD: My pleasure.

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Where Is The Value In Cannabis Stocks?