AnnaRae Grabstein: 0:05

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Ben Larson: 0:53

Hey everybody, welcome to episode 80, 80 of High Spirits. I'm Ben Larson and, as always, I'm joined by my co-host, Anne-Rae Grabstein, and, as always, I'm joined by my co-host, Anne-Rae Grabstein. We're recording Thursday, March 20th 2025. And we have a great show for you. Today. We're going to be unpacking the current state of the cannabis industry with our friend, Jerry Derevany from Bengal Capital.

AnnaRae Grabstein: 1:18

But before we go there, Anne-Rae it is good to see you today. Aw thanks, ben Good to see you too.

Ben Larson: 1:26

Back from Colorado. Only a slight injury, but happy to be home, happy to be back with the fam and navigating the crazy world that is cannabis and hemp.

AnnaRae Grabstein: 1:38

I know I've been tired all week. I think it's just too much coming at me and just trying to make sure that I'm keeping the boat floating, getting my work done and I've got my husband trying to buy a pinball machine. Oh, pinballs are cool. Pinballs are in. You think so You're voting for the pinball machine.

Ben Larson: 2:00

I mean I actually have a friend that has a pinball machine in their house. I hope your house is big enough where you have a secluded unit where you can just tuck it because they are loud and obnoxious. But it's a great center point for when you're entertaining guests, for sure.

AnnaRae Grabstein: 2:14

We have a real garage kind of speakeasy scene. At night it's the cannabis den, once the kid goes to sleep, but during the day it's where the drums are, and I guess we would be adding the pinball machine there. But but we'll see. And yeah, other than that, I mean the cannabis industry is getting together on both the West coast and the East coast. This week there's a hall of flowers that's going on in Southern California and you can. That's happening in Boston. Me and you weren't neither. We've got other shit to do. What's that say?

Ben Larson: 2:49

about us. Yeah, it's funny. It's like, oh, Hall of Flowers is happening and I think Hall of Flowers for me was always very just California brand centric and I think they've tried to expand upon that. So no offense to anyone that's there, but yeah, it's hard for me to kind of have reinserted it into to a place that I need to find myself at. And then, you know, I think about what is happening in cannabis and I, you know, use different news outlets, like marijuana moment and whatnot, and I it's just a weird state. I feel like things are chaotic but at the same time there's no distinct real news happening across the state, with the exception for one presser. That happened yesterday.

AnnaRae Grabstein: 3:33

Yeah, let's talk about that, because maybe there's not a lot of news, but I think that what happened in Texas yesterday is incredibly worthy of some ranting. Worthy of some ranting there was a press conference that was hosted by Lieutenant Governor Dan Patrick to talk about SB3, the Senate bill that is a widespread ban on THC and also puts in place pretty intense criminal penalties, and it was a press conference that was attended by a bunch of law enforcement and the senator who was also the sponsor of the bill, whose name is, remind me.

Ben Larson: 4:20

Perry, senator Perry. Yeah, perry, senator Perry.

AnnaRae Grabstein: 4:23

Yeah.

Ben Larson: 4:31

It was one of the most intense shows of reefer madness that I have seen, maybe ever in my life. Someone forgot to remind them that they actually have an active CUP program, that you know medical marijuana, and they're sitting here just every other speaker was forgetting that there was a differentiation between the situation that they have with hemp versus cannabis and just a broad brushstroke that cannabis is the devil.

AnnaRae Grabstein: 4:53

Yeah, and so look on a high level. The hemp industry in Texas is considered to be somewhere around $4 to $8 billion of top line retail revenue.

Ben Larson: 5:04

That was actually the first time I had heard $8 billion.

AnnaRae Grabstein: 5:07

Yeah, that came out of a governor, a Lieutenant governor's mouth and and there's 8,300 registered hemp businesses in the state and apparently around 50,000 jobs. With that. I mean I think that we can take a 50,000 foot view and say, sure, at a high level. We know that there's a lot of complication with unregulated product in the market, but what hemp has done in Texas is unquestionably proven that there is a demand for cannabinoids in Texas. Texans want access to cannabinoids in a open, like, readily accessible way, which means that their medical marijuana program that has, I think, only 20,000 patients registered in it as of the last time we checked, which was about a year ago. So maybe there's more now, but is not filling the gap that is the demand for cannabinoids in Texas.

Ben Larson: 6:04

What are they going to do if they shut down an $8 billion market? Like do they think that's just going to go away? Is it all going to flood into the CUP program, Like, what's the plan?

AnnaRae Grabstein: 6:14

The plan is that this is a stimulus program for the law enforcement industry in Texas. What Dan Patrick was saying yesterday is we're coming for you, we suggest that you shut down now, because we will close you down. So people are saying that if this passes there will be fast, steady and aggressive enforcement from Texas law enforcement. When law enforcement is the proponent of this policy and it is just going to put a bunch more money into their pockets and away from the people that are in the space in Texas, do I believe that regulation is necessary in Texas and in general? Absolutely, is prohibition ever the solution, especially in a market that's proven like this now has no way?

Ben Larson: 7:10

um, yeah, yeah it it was. It was disgusting, and just the amount of lies that were spewed during this press conference is astounding and and the unfortunate thing is the the general public doesn't understand that they're lies. But equating cannabinoids to, they were saying that all these products, all these cannabinoids, are equivalent to K2 and Spice and those epidemics, and it's like you're talking about cannabinoids. And then the equivalence of marijuana causing what? 15% of psychosis cases in the state. I'm just like, where are they getting these numbers from?

AnnaRae Grabstein: 7:52

yeah, it's it's really disturbing. And it's it's disturbing on a level because this is the narrative that we don't want to spread.

Ben Larson: 7:59

Um, texas is a very conservative state with someone to tell the cannabis lobbyists that that's not the narrative we want to spread, because I do believe that. You know I'm not going to call out specific names, but I have heard that you know the CUP operators, the MSOs that want to create certain tides across the United States, are the ones that are powering this fear mongering and like, aren't you just like stabbing yourself in the stomach? Like what, while you're, you're having people spread these, these lies about the plan.

AnnaRae Grabstein: 8:32

It's a really complicated time to be navigating this policy because because companies that have been operating in the regulated market do not want to be competing with these unregulated products that are everywhere, that are cheaper, and I understand that, and at the same time, we have to be careful about shutting down a cannabinoid market that is at least out of the closet and happening in the open without an alternative for the consumers to turn to, because they will just go to the illicit market. The worst operators will be the ones that stay in business and push the limits and create illicit channels for people to purchase their product. I've said before during different policy debates on this show that there's no peace action in the pool, right, like there isn't a good way to have somebody pee in the pool and have the pee knock it on everybody else in the pool, right. So this is an example of when the worst actors that are making irresponsible products and marketing in irresponsible ways end up getting that irresponsibility spread on everybody else in the market, because there are good operators that are operating in Texas and trying to do the right thing, but there are also groups that are making edibles that are too potent and putting product into the hemp market.

AnnaRae Grabstein: 10:01

That is probably not hemp and is THC flour. Quote unquote. That is not THC-A flour, it is cannabis and that's peeing in the pool. Stop peeing on me, please Stop peeing in the pool. So okay, should we end this rant enough?

Ben Larson: 10:20

already, I think so, in other news. Company behind Ed, company behind edible arrangements, enters cannabis industry. No one gives a fuck.

AnnaRae Grabstein: 10:27

All right, uh, let's, let's move on with the show okay, well, so, um, we have a great guest today, jerry derevue. Oh, jerry, I'm gonna you Jerry, we're sorry, bring him on. Jerry is an attorney first. He became a cannabis entrepreneur and operator, first at an OG Washington company, then later was the EVP and general counsel at Forefront, a public company, and is now a partner at Bengal Capital, where he is a cannabis investor. A partner at Bengal Capital where he is a cannabis investor and Pontificator. He publishes some great stuff that I have read and followed online, and that was one of the reasons that I wanted to get to know Jerry more. So, jerry, really stoked to have you here. Welcome to High Spirits.

Jerry Derevyanny: 11:17

Hey guys, Pleasure to be here.

AnnaRae Grabstein: 11:19

Tell us again how you pronounce your last name, please.

Jerry Derevyanny: 11:21

Dereviani.

AnnaRae Grabstein: 11:22

Dereviani. Okay, thank you. I apologize.

Jerry Derevyanny: 11:28

No problem.

AnnaRae Grabstein: 11:28

So let's jump in. Will you give us the down low on who is Bengal Capital and what do you guys do?

Jerry Derevyanny: 11:36

So Bengal Capital we invest in, obviously, cannabis companies. We're basically an investment manager that focuses solely on cannabis. It's me and my partner cannabis companies. We're basically an investment manager that focuses solely on cannabis. It's me and my partner, josh Rosen, who is the ex-CEO of Vireo and Forefront and was an equity analyst in a previous life. We got Sanjay, who ran a fund as well, sanjay Tolia and was an early investor in GTI and a couple of other companies, along with his brother Vinay, gti and a couple of other companies, along with his brother Vinay.

Jerry Derevyanny: 12:08

And what we really like to do kind of where our seam is in everything is our investors are pretty hip to the cannabis industry, so in the companies that are in there, so they can go buy GTI if they want to. They don't need us to charge a fee for buying GTI. So what we decided to do was okay, let's focus on you know it's a it's a small cap, micro cap market. Let's focus on the even smaller companies, uh, where really nobody like everybody's ignoring them, uh, except for us, and maybe sometimes roll up our sleeves and help. Um, because some of these small public companies they oftentimes, you know they're really good at their operations but maybe their investor relations or something needed, need a little bit of help. So because of our experience, we were able to do that and that's kind of where we focused on. The fund I think has done pretty well Over. You know, it's almost been five years now 2020. It's yeah, it's gonna be five years this year. And so it's yeah, it's been interesting.

Ben Larson: 13:03

So be five years this year, um, uh, and so it's yeah, it's been interesting so you've kind of earned a reputation of of telling people how it is, and and and being unfiltered, and so how is it? Where are we at, like, what's kind of your, your, your lens on the space right now? Are we hot, are we cold? Are there glimmers of hope? Um, let's kind of like set the stage as far as how you're seeing it.

Jerry Derevyanny: 13:28

Um, I think, we're cold, just being honest like we're cold. Uh, there's no, a lot of cannabis stocks trade off of kind of political excitement. There's no, there's not much political excitement right now, except for the true believers on Twitter. Um, the financial results of these companies has been really quick.

Ben Larson: 13:48

Are there still true believers on Twitter? I haven't spent much time there. Is there an active cannabis community?

Jerry Derevyanny: 13:53

Well, there's a couple that I mean in cannabis there are true believers, uh for sure. Yeah, there there are people that really they take like a little piece of of information or something. They just they just run wild with it because, honestly, I think a lot of it is driven by when you're down 80% in a stock or MSOS or whatever you really want, um, you really want to, like, you want to get that money back and you're anchored and I think that drives a lot of it. Um, but yeah, I think generally it's kind of cold and and there are a lot of reasons for it. Um, but the one that I focus on the most is everyone.

Jerry Derevyanny: 14:46

You know a lot of the people inside of the cannabis investing community and inside the cannabis operations community. They go, okay, we're, we're undervalued, we, we, we deserve to. You know, and I focus on okay, well, what's the fundamental reason? Like, what are these companies actually going to do in the future and what have they done in the past and kind of drawing that line going to do in the future and what have they done in the past and kind of drawing that line and unfortunately, like in a lot of other industries, if you look at financial history. A lot of the early players are not so good at the actual doing of cannabis businesses. They were very good at raising money, getting licenses, but now that advantage has kind of dropped off and they actually have to operate these things and we're starting to see cracks show in a lot of these big names.

AnnaRae Grabstein: 15:35

It's interesting that you focus on this sect of what you called microcap cannabis stocks, because I know that most of your investments are in public companies. But because of the public market performance, there's less and less companies that are going public in cannabis than in 2020 and 2021, because there has been such terrible performance, it's hard to make a good argument of why it would make sense to go public today. Does that mean that you are looking at more private companies companies or are you encouraging private companies to look at the public market? How do you, how do you, navigate those types of issues?

Jerry Derevyanny: 16:12

We, really we, we are looking at private companies. We, we continue to look at you know we'll look at anything and we'll give fast answers. What we really look for now are very strong, what we feel like are very strong operators that are undervalued. We think that that, you know, and some of those are private. Some of those honestly are. Sometimes it's even just a guy or a team that you know has done really well at a certain business. Wasn't maybe like decided to leave, has been jumping around doing their own thing, but like that team has know-how that if you applied it, you know.

Jerry Derevyanny: 16:50

The simplest example right is Grown Rogue is probably our best known investment in the fund, which was like a 10 million, 15 million market cap company, canadian when we invested and is now over a hundred. It's what we saw was that, hey, these guys can grow and make a little bit of money in oregon, toughest market, in one of the toughest markets in america. They're going into michigan, they're already in michigan and they're going to grow and everybody is, you know, whining about michigan prices coming down. And to these guys, you know people are whining that oh man, it used to be 2000 a pound, now it's 1500. And these guys from from Oregon are like I mean, it's 800, 900 in Oregon. This is gravy, are you kidding me? Like you know, 1200 a pound is amazing, and so what we, you know, the very simple idea that we had right, is that know-how of growing a good craft pound for X and being able to sell it for Y and having some cat like making money that's worth a lot more in other States, while we have this kind of like balkanized system. And so let's work, let's, let's take a position, let's start helping these guys get into a state like New Jersey, which is where they're at now.

Jerry Derevyanny: 17:58

Um, so I think you know, and there are private companies that that I think are are doing a good job that we're watching. There's always kind of a valuation. We try to be pretty disciplined on valuation and stuff like that. One company I'd call out that we're not invested in, but I, frankly, was really impressed with meeting with these guys and I wish them all the success in the world and kind of watching is a company called Fernway. If you guys have heard of them. I really like that team. I think they're great. I think there's also some private companies that didn't go public because at some point the public markets. Like you know, there was no excitement anymore and at some point the public markets just kind of shut down, but almost for good reason, because it's almost the worst companies that ended up not going public, and you know the companies that were probably even weaker operators than some of the big companies that we have now. And I think you could start to see a hint of that with Pharmacan and what's going on with Pharmacan, right?

AnnaRae Grabstein: 18:56

Well, and so Fernway and Grown Rogue are both examples of non-vertical cannabis companies and most of the largest public cannabis companies, or all of them. Most of the largest public cannabis companies, or all of them. All of the largest vertical cannabis companies. Top five are vertical and I'm curious of how you see verticalization.

Jerry Derevyanny: 19:16

So I think it's nuanced. I think a lot oftentimes people make the mistake of thinking verticalization is is like the be all end all because it, you know, it helps margins or whatever. But if you, if you take a deeper look, what ends up happening, kind of in the worst case right? So a lot of cannabis opinions, I think right, traditional alcohol, that no verticalization whatsoever, and so we have a really, really competitive wholesale market and maybe a slightly less competitive but still pretty competitive retail market and when you come into one of our stores it looks like a real store. There's a ton of products from all these different you know, and that I have a strong opinion, that that's what consumers want. Consumers demand choice. They don't want to be forced into your like, put it your product, your store brand or whatever, especially when oftentimes companies are either they're not as good on the wholesale side, so what they try to do is they're already, you know, they have this big facility, they're trying to get more money out of it. So they produce a product, they put it on the shelf and they start to like, try to push it to the customer and they end up losing sales. That way people start going to other retailers.

Jerry Derevyanny: 20:33

So I think verticalization can, especially in early markets, can be really powerful Because, yeah, you want that access like there's. You know, you're not sure if you're getting a shelf space Like, and if you create a decent product at wholesale, it can be a huge advantage to have decent flour at a decent price. In these early markets, like in Ohio, people that are able to execute this are going to kill for, you know, a year, two years, three years, whatever, whenever high prices last, right, but it's certainly not necessary to a good business and, as a matter of fact, sometimes the worst case is what I think is happening sometimes now in some of these markets is that one side of the business becomes an instrumentality of the other, where, where you're basically, the retail side of the business is starting to support the wholesale side and ends up losing sales and it basically you get a worse retail business and what ends up being a much weaker wholesale business in the long term. If that makes sense, Does that make sense? Yeah?

AnnaRae Grabstein: 21:37

It really does, and I could talk about this all day, because I think that what you're highlighting is that what has been happening is that people have been building business strategies based on regulatory capture, which is what verticalization represents as the business opportunity as a result of being allowed to own it all, as opposed to being anchored on the consumer, which is what we're seeing in some of these more competitive places, and the future is that we're going to have to be anchored in the consumer, and it's becoming more and more obvious as the knife fight unfolds. So, yeah, I hear you and I agree, and I think those are really, really interesting points.

Ben Larson: 22:15

Yeah and Jerry, in your quarterly earnings report or your report to your shareholders, you highlighted, you know, one of the biggest problems is kind of the missed expectations of a lot of these operators setting forecasts and missing them by on the healthy side, 30% if not 50%. And so finding these smaller companies and investing them and taking them into new markets like how do you set reasonable expectations when, knowing that a new market like New Jersey can be so volatile in pricing of product and all that and I know what a lot of the MSOs we're guilty of we're setting prices and then not adjusting them over time for their forecast. And so when you're working with a company like Grown Rogue and you're anticipating going into Michigan, new Jersey and so forth, like how do you really set reasonable expectations for your forward-looking earnings?

Jerry Derevyanny: 23:15

So one of the things that we do and that we try to and I think Grown Rogue is on board with this is being honest with investors about hey, we are going to over earn for a couple of years in this market. Prices are high. They will go lower, right? Grown rogue generally, um, the you know for craft scarcity is is a part of it. You don't want to have like 5,000 pounds that you have to move every month. So they kind of shoot for 1,000 to 1,500 pounds and so at some point it's like okay, when the price goes down, you're not selling any more pounds and so, yes, the revenue will go down, the EBITDA will go down, we are going to over-earn for a couple of years. Let's just be honest about that. Okay, we're going to farm higher prices, we're going to give people better value for those higher prices.

Jerry Derevyanny: 24:03

But I think I think, in terms of how I think about it, I think that it is incredibly difficult to predict. It'll be very interesting to see in like 10 years, when people go back and do really high quality studies on like how prices reacted to licenses and all that, to see if there was any kind of real pattern or how you could predict prices, what the rate of price is going down. I can tell you in washington, wholesale, I remember a quarter where prices went down 40 percent in wholesale. Okay. In massachusetts, prices went down 40 percent in a year and people were crying.

Jerry Derevyanny: 24:41

Okay, illinois, prices have been relatively stable. In Florida, you've seen, you saw a quarter where, depending on who you talk to, prices went down five to 15% or so right In a quarter. Um, so the way that I do it is I give it one or two years where I take the price that I think is the wholesale price today I kind of discounted a little bit. I give it one or two years of like $2,000, $2,500 a pound. I you know, I pretty much know what grown rogues costs are going to be. And then I turn the state into Michigan because Oregon is really, really competitive. So I think Michigan is probably more reasonable.

Jerry Derevyanny: 25:16

I basically, I basically turn it into Michigan and then I see, and then with a company like grown rogue, I go, okay, this is what am I getting kind of at the end. Right, like simple math, grown Rogue puts $10 million into the ground in New Jersey and then one of the things that I look at is when prices normalize, what do I think that facility is going to do in terms of profit produced off of that $10 million investment? What's really strange about cannabis, in a way, is that your profits are very front loaded and so, because the prices are high initially, you go, okay, I'm farming high prices, so you get a lot like if you invest 10 million, a lot of that 10 million comes back very quickly. In that kind of environment it becomes incredibly important how you think management, what they're going to do with that, that 10 million that comes back. Well, that's 10 million they have available for the next project. What are they going to do with it?

Jerry Derevyanny: 26:11

Are they going to expand New Jersey to be like, okay, well, wow, we're selling a lot, let's, let's do, let's get to 4,000 pounds in New Jersey and suddenly the price crashes and you go wait a second like man. I really wish I had that $10 million to go into Ohio. Now you know what I mean, and so I think that's a criticism that I would definitely level at a lot of the big MSOs, like the top five. If you look at their record of capital allocation, right, that's probably one of the biggest things for investors, or it should be. It's not good as a general rule, it is very bad, and so, yeah and anyway sorry to get away from the core question, but like one, the way that I do it is I give it like one or two good years, like one good year, one meh year and then one, and then you're, you're down to think about expansion and ways to do it and how to predict future markets.

AnnaRae Grabstein: 26:57

So it's very reinforcing and I like the perspective. You talked about capital allocation and talked about the MSOs not doing a great job at it. I think you're kind of teasing. What I'd like to talk about next, which is the earnings report rundown. It's been the earnings report season. We've been looking at full year 2024 results, the Q4 earnings, and I'd love for you to give us your big picture. Take on this round of earnings. What stood out to you?

Jerry Derevyanny: 27:40

Sure. So number one, let's just be honest, like we call it earnings, but really most of these companies don't generate any earnings. Number one let's just be honest, like we call it earnings, but really most of these companies don't generate any earnings. The only the only one that does is GTI. So what generally you've seen right for many of these companies is that the that the there is as these companies have gotten big enough, right, each incremental state that's going wreck or that's growing is not actually moving the needle all that much. So Ohio went wreck, and some of these companies have assets in Ohio, but yet a lot of times, revenue is still down from last year and profits are down, gross profit dollars are down, and so the picture that's being painted is that the price compression and competition in their legacy markets is overtaking the growth in their new markets. And what you the picture that is being painted is that, as you continue down this road, that this new market in Ohio, once it matures a little bit, they're not going to be making any money there either, and so what you end up seeing is that a lot of these companies are. So what you end up seeing is that a lot of these companies are well, wow, they really.

Jerry Derevyanny: 28:49

You know we wrote this piece I think last year. It's called Ants and Locusts and basically, you know, ants build a hill and they kind of like, build a business, locusts. They come in, they strip the vegetation and then they move on to the next thing. And so in cannabis, some companies are ants right, they're building a real business and some companies are ants right, they're building a real business and some companies are locusts. They just a lot of people don't want to admit it. And so what I think we've seen I didn't see anything in the earnings reports that that fundamentally't own any of these stocks. In. You know, the top five are Cureleaf, gti, trulieve, verano, cresco, terrasend, topsex I should say right In terms of size, leaving out Glasshouse because it's a single state operator. It's a little bit different. I didn't see anything in the earnings reports that made me think that anything other than GTI was an investable company among those right, and what you're seeing is cashflow generation is stressed, because a lot of the cashflow that's coming from any of these companies is just, they're not paying their taxes, right, they're taking this 280E position that we don't owe 280E we got refunds for 280E like they're uncertain tax positions. For a reason, right, because there's uncertainty. And so when you kind of do all the apples to apples, right, when you, when you start to normalize and go, okay, well, oh, look, there's this cash flow, well, let's, let's just let's, let's talk real numbers. So GTI, I think, was $195 million in cash flow from operations, but they paid their taxes. If you add in the taxes that they paid, it's about 131 million. I think they would have, like apples to apples, they would have generated, you know, 320, 330 million dollars in cash flow in operating cash flow. Right, when you compare that to apples to apples, to like Cureleaf, that's double what Cureleaf does on an apples to apples basis, on less revenue. And obviously that's a factor like Illinois is very, very strong for GTI and so that's going to drive the results and stuff like that.

Jerry Derevyanny: 31:00

But ultimately, you know, some of the thinking that I've been doing is how do you judge these companies? Like these things are, you know, yeah, prices are always going to go down and all this stuff. What I come, what I end up coming back to, is okay, what kind of investments have these companies made over the over? These companies are now like 10 years old, right, at this point they're. They're mature, they've been around for a while. They've made these investments in the first couple of years. These investments that they made either equity or cash they're supposed to bear fruit, right. They're supposed to create profits. They're supposed to create cashflow and to the extent that they're not doing that, right, that tells you a lot about the company and what it's probably going to do in the future, right.

Jerry Derevyanny: 31:41

Let's pick an example. Let's talk specifics. Let's talk Verano. So Verano has often been painted as like a pretty good operator, but when I looked recently in Pennsylvania, it looks like last year they generated about net. Let me just check my numbers real quick. I think it's about 70 million 71 million in revenue out of Pennsylvania. This year it's going to be less. Did Pennsylvania, did the Pennsylvania market shrink? No, it did not. That means that they're losing market share, right. Why do companies lose market share? Probably because they're not doing a great job.

Jerry Derevyanny: 32:20

How did, how did Verano get into Pennsylvania in the first place? Well, one of the ways they got into it was they made a couple acquisitions let's review, and they could have modified this stuff later, but I'm pretty sure I'm right on this. They purchased a 62,000 square foot cultivation facility for 66 million in cash, 50 million in stock and a potential $32 million in earnouts back in like 2021. They picked up a granum ed $60 million in cash and stock. I think that was three dispensaries, but I think each dispensary gave you potentially another license, so it's maybe a little bit more. And then they also picked up, I believe, the healing center, thc cute, three dispensaries, but again probably opened more. I believe it was $55 million in cash, 55 million in stock. So so this year long payback period this year.

Jerry Derevyanny: 33:13

So, yeah, so let's. So, let's take a look. So this year, right, they um, they took, I think I think they took like a $290 million goodwill impairment on Pennsylvania, and then they've taken impairments on Pennsylvania before. And so you look at that and people often investors go man, impairments are not, it's not cash, let's adjust it out of EBITDA, but it was cash. A lot of it was cash when they took the cash and they gave it to someone. And now, like, if you look at it and you go, ok, let's take 2023, 71 million dollars in revenue, let's apply like a 25 percent EBITDA margin, whatever it is, like you're talking about them buying and it's going down Right, they were buying it at like five X plus revenue, but multiple on multiple years in advance, right, and now the operation is getting more and more stress and going down. Like you look at something like that and go, man, that was a like, that's a problem, that's not very good.

AnnaRae Grabstein: 34:20

It sounds absurd when you break it down like this and this is also you broke down Pennsylvania and Verano's questionable choices in order to get to that $70 million of revenue that, as you're explaining, is decreasing. Cura Leaf also made lots of headlines of reaching a pretty big milestone of a billion dollars of net losses. Is there a coming back from this? I mean, these companies seem like they have nine lives.

Jerry Derevyanny: 34:51

So I think this is again where it gets a little nuanced and I think people oftentimes they take what I say to this like oh so you're saying these companies are going to be dead? No, I think Cureleaf is going to survive. But that's not the question. For people like me and for regular investors, the question is if you buy a share of their stock, are you going to do well or are you not going to do well, especially given the risk that you're taking? Would you rather buy the S& there, right? Yeah, curaleaf's going to probably survive, right, just like a lot of these companies are going to limp along.

Jerry Derevyanny: 35:34

Last I checked, iAnthus has a little sliver of publicly traded equity and I think MedMen is still around somewhere, but that doesn't mean it was a very good investment for the equity holders. For the equity holders Leaving aside the guys, like you know, I think, wolf of Weed Street, jason Satapora, like great trader and knows a lot more than I do about trading, some of these guys will be able to make money on, like the trading or whatever I'm focused on. Okay, if you buy a share of the stock and hold it for a number of years, are you going to do well or are you not going to do well, and what I see for a lot of years are you going to do well or are you not going to do well? And what I see for a lot of these companies is okay, revenue is going down, profits are going down even faster than revenue, cash generation is stressed. You have debt maturities coming up.

Jerry Derevyanny: 36:17

Yeah, I think they're probably going to be able to refinance, but ultimately, what's left for equity is probably getting smaller and smaller and smaller, and what I like to do as an investor is have you know a lot of different ways to win. So, with GTI, which is not a perfect company, there's definitely some issues with GTI, but like GTI, you, because of the buyback I can kind of get, I can kind of create the reality of okay, if the stock goes down really low, at least they're buying it back at a really at a really good price. With these other companies, what, what seems to be happening, is that the only thing they have left is somebody, something happens at the federal level or whatever, and people get excited and then the stocks go up, right, and that's the only way that people are going to win kind of long-term, and that's a really difficult position to be in as an investor, and that's not one I want to be in.

Ben Larson: 37:10

So it sounds like a better title might have been Ant and Locusts companies.

Jerry Derevyanny: 37:28

What's exciting to me like again not to be all negative, nancy, because I think this is I got to reiterate this like we try to make this point but it's usually towards the end of the letter where people are so sick of what we're saying but negative about the MSOs that didn't even get there. What's exciting is that, like a lot of these investments that the MSOs have made that created this infrastructure, the companies that actually the, the guys that know guys and girls that know what they're doing they're going to be able to potentially leverage off of the mistakes of the MSOs and it's going to create like you have these big facilities that you know that parallel walked away from a $50 million facility in Pennsylvania right In the future. I think that $50 million facility like a great outcome is you get a couple of craft growers from California to go in and kind of split that facility up, so it's not like all 50,000 square feet of cultivation is one company and we'll work together somehow and bring their great craft products into the Pennsylvania market by leveraging off of kind of the mistakes of others and being able to get in there. That's going to create a really interesting vibrant market for cannabis. I think cannabis is going to be much more like wine than beer. I think you're going to have fewer really top brands that control a huge portion of sales. I think it's going to be much more fractured and it's going to be.

Jerry Derevyanny: 38:46

I think it's going to be wonderful for consumers. I think it's going to be great. It's there's going to be a weed out period, but what's really exciting is that, man, there's these green shoots of these companies that have been kind of doing the right things quietly for a long time that are now going to have the opportunity, like grown rogue to to enter into the next state, and I think there's a lot of green space there to take market share from MSOs that have been that are now in a position where they're so focused on making their debt payments and everything they've lost focus on the customer and that's you know. I think that's kind of the death knell of the equity for the longterm.

Ben Larson: 39:23

Things that Anna Rae and I've talked about in the past on the show is just if you're going around and you're doing all these acquisitions $50 million acquisition, $100 million acquisition and then you're not actually focused on the integration and creating the value you know post acquisition, you kind of fall into these traps and I don't know if that's what your perspective of Gti and their differentiation is. Are you know, are they putting more effort on that kind of post-acquisition effort?

Jerry Derevyanny: 39:52

so I don't think so. Gti has not. Um, I don't think they've bought nearly as many companies as some of the other ones I think they mostly build.

Jerry Derevyanny: 39:59

They mostly build although they've bought. So they did buy essence in nevada and you know when I roughed into the numbers they paid, paid, you know, maybe a little bit higher price but it's a cash flowing asset. Like they didn't. They didn't absorb losses and I think there was some. You know, the Essence team was really good and I think there was some. Really there was some good stuff there. They bought Leafline in Minnesota, which you know wasn't the greatest operator from what I've heard. Uh, but Minnesota I think is going to be a great market, um, great setup. Obviously, with Vireo, two licenses there, I think they have an opportunity to really grab some market share there. Um, but other than that, like, they've had a couple of small ones, but they've been, um, I think you know, maybe Bebo is the edibles company can be criticized, but it's pretty small. A lot of what they've done, from what I remember, is organic and they haven't done these big swing acquisitions that are really difficult.

Jerry Derevyanny: 40:57

The funny thing is what integration is there? These setups are all siloed. You're buying, usually, generally speaking, these big acquisitions that are buying new states. So you go in and then you know a Florida operator buys a New York operator. What's the like, the integration oftentimes like you kind of got to either replace the whole other team or there's not. There's just not a lot of crossover and there's not a lot of synergy, and Josh and I have talked about this. But for big MSOs there's almost a diseconomy of scale, which is crazy to say. But the more states you have, the more overhead. Sometimes you seem to need Then a single state operator. If you think about that, even Boris from Curaleaf I think he mentioned it offhand in a call. I don't think people really understood the import of what he was saying, but I think he was talking about colorado or california is like the only people that are making money are mom and pops. Wait, if you, if you as a scaled operator don't have an advantage over a mom and pop, what like?

AnnaRae Grabstein: 42:01

huh, and because they're so lean, yeah, right totally yeah, and it's interesting.

Jerry Derevyanny: 42:06

The crazy thing to me is like you know you put together these little things and when you know they talk about institute. One of the reasons prices are low is because institutions can't invest. They go back through the earnings calls and they see this and they're going to be like wait a second, what's the competitive advantage here? Okay, you guys are early, you guys have some. You know, I'm looking at the comments. Yeah, you have some real estate selection. You know you were first to select some of the better real estate, potentially, Although I would argue that sometimes the second comer actually has a little bit more choice sometimes. Yeah, and you ultimately look at that and you're like man, there are a lot of problems with these companies, so why would they be worth more than whatever they're trading for now?

AnnaRae Grabstein: 42:53

Well, so let's talk about trading and access and sort of a new frontier in hemp In that GTI we've been talking about a bunch.

Jerry Derevyanny: 43:06

Hemp Is that a thing? Hemp is a thing.

AnnaRae Grabstein: 43:08

You heard us rant about it at the beginning.

Jerry Derevyanny: 43:10

By the way, I'm just going to say Dan Patrick. I much prefer ESPN's Dan Patrick to Texas's Dan Patrick. Yes, agreed, I have a favorite. Dan Patrick is not the Texas guy.

AnnaRae Grabstein: 43:22

Thank you for saying that. I'm not a big fan of prohibitionists myself either myself either and it was a big move for GTI to go into Agrify and then to acquire Seniorita in the midst of a lot of the larger MSOs also investing into hemp, but not doing so through the NASDAQ. From when we talked before, it sounds like you guys have not made any investments into hemp. At the beginning of the hour, we clearly talked about a lot of the complexity and risk that's happening in hemp, but one of the things that you have also been talking about is anchoring in the consumer, and I think that one of the interesting things about the hemp space is that in some ways, it has been able to anchor with the consumer in a different way because of the channels of where product is being sold in liquor stores and grocery stores, gas stations and things places where non-cannabis consumers or non-previous cannabis consumers are. Today. I'd love to get your thoughts on how you see, or if you see, hemp-derived THC fitting into the future of the cannabis industry.

Jerry Derevyanny: 44:34

So, first of all, I think there's a big difference between the THCA flower that is going out and the hemp beverage, and I think the THCA flower is competitive with the regulated market. These are people that are, you know, I call it carpetbagging. They're basically just not suffering any of the regulatory load that these companies, that the cannabis companies, had to do. Whether you agree with it or not, like a lot of this regulatory load was necessary for the broader population to be comfortable with a regulated cannabis system and, whether it's smart or not, like, these companies had to bear that cost and now these people are basically free riding off of that in this loophole. And, frankly, the hemp beverage stuff is also kind of riding on the loophole. Where I think it's different is that hemp beverage. Based on the early data that I've seen and conversations with Josh who, at Vireo when he was at Vireo, I believe, they invested in some hemp beverage stuff. They have a little hemp beverage project, so you got really into the sector. I think what the data is showing is that cannabis consumers are not leaving to go to hemp beverage. By and large, it is alcohol consumers that are trying hemp beverage and potentially starting to. You know if they did take 10 drinks a week of alcohol, are now doing eight drinks of alcohol and two of hemp beverage, starting to. You know, discover this product, discover this form factor. To you know, discover this product, discover this form factor. And that, to me, is that hemp beverage angle, is actually a huge benefit long-term a for society. Um, because I drink alcohol, I have nothing against drinking, I love a good bourbon, scotch, anything, Um, but I think, as a broader society, if you're trading alcohol drinks for some cannabis drinks, I think, as a general rule, that's probably going to be better. Uh, long-term um for drunk driving, livers, all sorts of stuff, where I think it's people are kind of missing is that some of these people that are coming in through hemp beverage are going to continue on to potentially other form factors, right, Other edibles, maybe a vape, you know, like a vape that lasts them a year, but still, and that's, I think these might not be your highest value customers, right, Because they don't buy all that much, but they might be premium customers. In any case, I don't think you know. So for hemp beverage, I think it's a really interesting sector when we don't. We have not invested in hemp beverage, partially because here's my view on it. Josh might have a different view.

Jerry Derevyanny: 47:20

The number one it's very difficult for me to see who's going to be a winner ex ante. It's very much an open field. It's very hard, Like a lot of guys are doing, you know, they seem to be doing well, sales are accelerating it's, but it's tough to see, like who's gonna, who's gonna really make a connection with the consumer. You know, it's just, it's just difficult because it's a very wide open field. Versus with cannabis operators, I think we have a better sense of okay, this is what you get. You know, this is your yield per square foot. This is your this, this is your that. Okay, we can kind of start to predict, I think, whether you're going to be successful or not.

Jerry Derevyanny: 47:58

Um, number one. Number two um, yeah, I think. Uh, actually, hemp is really interesting because a lot of alcohol guys went into cannabis and they just took their alcohol playbook and they applied it in cannabis without you know, which is funny, because cannabis is exactly like alcohol, except when it's completely dead. And so you get like this you know, oh, yeah, you have to grow the hops and then do the on the brewery as well, Like that's's not something that you see In hemp beverage.

Jerry Derevyanny: 48:30

I think the alcohol guys have a much better advantage, actually have an advantage. They understand the pipes, they understand the distribution, they understand that that's a huge portion of it and you know I'm happy that you're talking about getting on the shelf. I think that's a critical thing for hemp beverage. Where I think it's interesting is that one of the big cells of hemp beverage investments is look, we can go direct to the consumer. We can sell online. Alcohol has been sold online for a long time and I'm pretty sure a relatively small percentage of alcohol gets sold online. People like to go to these things and see the pretty packages, to try it some variety. There's an experiential. I like going to TotalMind and BevMo. There are some very knowledgeable people there. I learn stuff. It's nice, you know, and so I just I think that some of the companies are really over indexing on the direct to consumer and I don't think the customer acquisition cost and linkedin value actually pencil out.

Ben Larson: 49:24

Can we bring it back to the MSO really quick, because you were talking about the general inefficiency of the MSO model and how scale hasn't really helped them, how they're seeding market share in some of the markets where they were early movers. It is about earning market share and owning the consumer and building brand and a completely different business model of getting on shelves and really understanding the beverage market. So do these MSOs stand a chance to succeed in this new market that they're hedging with?

Jerry Derevyanny: 50:01

There's always a chance. You know it's like dumb and dumber, like one in a million, You're saying there's a chance.

Ben Larson: 50:06

You're telling me there's a chance, yeah the um I, I think.

Jerry Derevyanny: 50:10

To me it reminds me of when we we first took a company called can x public and when I was going to all these cannabis conferences like can accord and all this stuff, and I was watching these presentations of the early lps, like aurora and all that stuff, and they were talking about their big 800 000 square feet it's going to be almost fully roboticized growing cannabis. And I looked over at the guy next to me and I'm like I was about to like bump him and be like this is all bullshit. Like anybody that's been in a real facility knows it's crazy. And these guys were just eating it up, you know, just with a spoon. And it was funny because all the LPs were making these huge claims of what they were going to do. And then you ask if they've ever operated before. And they weren't. And it's like to me it was the equivalent of going hey, you know, a guy coming up to me and going, hey, I'm going to go climb Mount Everest. No, that's awesome. What mountains have you climbed before? None, never even been on a hill, you know. But I'm going to go climb Mount Everest. Like you would never believe. You think the guy was nuts, but these LPs were basically saying the same thing.

Jerry Derevyanny: 51:09

Msos are a little bit better, but like, if you haven't, if you don't, if you have a lot of evidence that you have not built a successful business in anything you've done or most of the things you've done, and now you're entering this totally new space where now you have an excuse to spend a bunch of money on online advertising and, oh look, we're generating losses for growth. Like it's all it's. It's all kind of follow the leader type stuff where you know, purportedly, when Alexa and Siri came out at Microsoft, there were some urgent meetings where the CEO was like, hey, my investors are calling me, like we need to have something. Like, oh, let's, cortana, let's, let's do this. It was a total like follow on, not well thought out project. And and because of all this pressure, and if you look at you know my favorite punching bag, cureleaf like when federal legalization looked like it was, you know that we could have interstate or it was coming safe, whatever there was all this talk about, oh, what's your you know glass house? What's your interstate play? What's your interstate play? Cureleaf went out and bought Los Sueños in Colorado. If people don't remember, I think they paid $60 million plus for it and they just sold off that real estate for like two and a half when they shut it down. Like it's it.

Jerry Derevyanny: 52:14

You know, you look at the stuff and you go, okay, if I have this history of all these different like, oh, you, you kind of rushed in and then didn't do well, like what, why are you really going to do well? To me it's like okay, gti is the highest quality company. If you want to be, if you want the upside from hemp beverage, why don't you just invest in gti? Because it's like okay, you get a decent, pretty good cannabis business. Yes, there are some issues with all of them. Yes, their profits may go down there's, we could talk about it all day long, but if you want the hemp stuff, you're getting it for free, basically right through their position in agri-fi. So why don't you know to me that? That's kind of my thinking on it. But we're definitely watching the space and there's a couple operators, um, you know from what I've heard that are really really good. Um, trail magic. Uh, there's um green street. Um, there's a couple of guys that I think are are really solid, and we're, you know we're, we're watching.

AnnaRae Grabstein: 53:06

Nice. I want to ask one more question before we wrap you. You scoffed at the idea of of interstate commerce being something that we could depend on or even should plan for, kind of laughed at the idea of safe banking. I appreciate that We've all been waiting a long time. We've watched these things just not happen forever. We've watched these things just not happen forever. Is there any federal policy change that you do think will happen in the foreseeable future? Maybe just in this administration? And if so, what is it?

Jerry Derevyanny: 53:50

I think you're. I still think that there's a decent chance that you're going to get Schedule 3, although it is a little know the lawsuit. I don't think village farms would have brought the lawsuit against the da and and thrown kind of gum into the works unless they really thought there was a strong chance that the da was actually going to sabotage it. So that's, you know, a little troubling. But I don't actually put a lot of stock in trump. You know president trump really caring about cannabis, like he tweeted about it once. He's tweeted about a lot of things. I think people are extrapolating way too much about Doge and all this kind of stuff. Like, I think ultimately this process is bureaucratic more than political and it's just going to work its way through. I still think there's a decent chance of schedule three. I think it's probably at this point 2026, if we're being honest that people are always overestimating this stuff. That said, for a lot of big MSOs like, schedule three doesn't really matter all that much in terms of actual cashflow. They're already not paying it. Um, maybe for some of the smaller operators it makes a difference. I also think that it's a good it's. It's clearly like a necessary policies. Cannabis, by all rights should be schedule three or lower, like descheduled, regulated a totally different way, like alcohol or cigarettes or whatever, the. I think that, um, the, the bump in profitability from schedule three is not going to last all that long because it's competitive market, you know, if you saw, remember California, when they changed their taxes and everybody's like, oh, look, how fast did that go to the consumer? Like like that, yeah. So I think you know there's a. If you look at the tax cuts and jobs act and I think 2018, when they cut the corporate taxes right from 35 to 21, and you look at net profitability in a competitive industry like grocery, didn't change because the profits it's competitive profits, you know went to the consumer. I'm not listen.

Jerry Derevyanny: 55:31

Safe banking is, let's be real, right. The reason why safe banking is important is because I think a couple of years ago there was at least one death in a robbery in Washington state of a cannabis store because of the hike. You know robbers understand that there's a high cash load at these things. Okay, because they don't use credit cards. They have to do all these pickups. Um, you know, some of the stores run maybe a little bit too much cash because they're saving money on their, on their armored car pickups, but in any case you had at least one death. I'm pretty sure there were more nationwide. I checked the statistics. There were zero bank robbery deaths that year None, okay, safe banking unfortunately, senator Booker, laying down for safe banking back in the day has probably effectively cost lives, okay, but when you look at why people the MSO say safe banking is important, really it's all about stock price, right, because they, they're all banked.

Jerry Derevyanny: 56:31

It's not like you know they're. They pay a little bit more and then they're like, well, there'd be bank loans available if they're. Well, they already have bank loans right now, right. So, yeah, maybe it might be a little bit cheaper. And there is a big problem with um. You know I, when I, when I applied for a mortgage, I actually got bounced because of cannabis from the first mortgage that I applied for. So luckily there was. You know there were other. You know we went to another provider but it did cost. It's going to end up costing me because the rate was a little bit higher, um, and so, like I've experienced that problem. It is annoying and it is bad for a lot of cannabis.

AnnaRae Grabstein: 57:06

It doesn't fix that stuff. It doesn't. It doesn't turn credit card processing on and force MasterCard into it.

Jerry Derevyanny: 57:12

So yeah, listen, it's nice, but really what the, what people wink, wink, nudge, nudge. What people really are talking about when they talk about safe is is look, we want to get uplisted Like that's the really, that's really what MSso, these msos really want. And now you look at it and you go, oh, you get uplisted, you get more liquidity, you get all this stuff, well, okay. Well, what's? What's the stock actually? Is it going to be? Is it actually worth more? Can some of these companies, can you even uplift? Do you even qualify for uplisting to nasdaq in a couple years? You know, because are you going to be big enough as the market caps continue to fall and like, a lot of the market cap now, a lot of the enterprise value now, is debt? I don't know. So color me skeptical on that stuff.

Jerry Derevyanny: 57:55

Interstate here's my call on interstate. If interstate were legalized tomorrow, the first material interstate shipments would not happen for two years at least, because you would need to harmonize all the different there's. The states have already developed all their own programs. You would need to harmonize all the different states, figure out like, oh, how are we going to track metric versus bio track or whatever, like you know, between Illinois and California. You know figuring out deals between people getting shelf space, the vertical guys being like oh, okay, do I need to like? Are these competitive pressure going to force me to stock glass house now? I think you have at least two years.

AnnaRae Grabstein: 58:32

Okay, wow, so much here. This has been like a college class in cannabis Wow.

Jerry Derevyanny: 58:41

That's. That is sad. A good one. A good one. You're taking me back to like, like my, my last class in undergrad dinosaurs. Like, really, this is, this is a college class. Just like sitting here listening about the Tyrannosaurus. That's what I've been like, thanks.

AnnaRae Grabstein: 58:59

It is time for our last call. So, jerry, what is your final message for our listeners? Advice called action closing thought.

Jerry Derevyanny: 59:07

Well, first I'd encourage, encourage, like we have a free sub stack. Uh, you know bengalcapitalsubstackcom. Uh, I'd encourage people to to, you know, to subscribe, it's free. Like we share our thoughts on the market. Um, if people disagree with me, I'm always happy to like get reason, pushback and debate and get new information. So happy to have people contact me and and you know, I'm always happy to chop it up.

Jerry Derevyanny: 59:33

My last, my last call would be that I would really encourage investors to kind of take a long-term view on this stuff and sometimes the best strategy is to wait, like that's a that's a valid strategy and I think people should really think about that. I think that it's going to be tough for MSOs for a while, but that there will be winners, and I think people need to stop anchoring on who the leaderboard is now. People think it's like you know that it's like the Olympic finals sprint, you know, where there's 10 guys and one of these guys is going to win. That's not what this market is like. There are going to be winners that are not in the top 10 right now, and I think people really need to internalize that. Jerry.

Ben Larson: 1:00:18

Dereviani from Bengal Capital. Thank you so much for joining us. I really appreciate the sober insights. I feel like it was just really really informative and insightful. So thank you for spending the time with us, thanks for having me Real pleasure Awesome.

Ben Larson: 1:00:38

And thank you to everyone that was engaging during the show, during our recording Robert Sean Davis, samit Tool, jamie Campbell, taylor Eileenileen sewell our last guest so many others and this makes it so much fun to know that you guys are watching while we're recording and then listening to us as we upload to apple podcast and spotify. So make sure you download their rate, review us, do all the shares, do all the likes and then engage with us. Continue to tell us who you want to have on the show, what topics you want us to cover, what's top of mind for you as far as the news go, of course, big shout out to our teams at Virtosa and Wolfmeyer, our producer, eric Rossetti. Thank you for pressing all the buttons, getting all the clips out and helping us show up the way we want to show up in the digital world. As always, stay curious, stay informed and keep your spirits high Until next time. That's the show.