Co-Chairs of the Cannabis Industry Group, Sander Zagzebski and Robert Hoban, sit down to discuss last year's flurry of M&A activity, how the industry navigated the 2022 capital dearth, and some thrilling legal, regulatory, and market predictions that may come to fruition in the New Year.
DISCLAIMER – The views and opinions expressed in the podcast represent the view of the host and guest(s) and not necessarily the official view of Clark Hill PLC. No information contained in this Podcast or on this Website shall constitute financial, investment, legal and/or other professional advice and that no professional relationship of any kind is created between you and podcast host, the guests or Clark Hill PLC. You are urged to speak with your financial, investment, or legal advisors before making any investment or legal decisions.
This podcast is intended for general informational purposes only and does not constitute legal advice or a solicitation to provide legal services. The information in this podcast is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Listeners should not act upon this information without seeking professional legal counsel. The views and opinions expressed in the podcast represent those of the individual speaker only and are not necessarily the views of Clark Hill PLC.
Welcome to the Clark Hill Cannabis Industry Group podcast. My name is Sanders Agsepsky and I'm your host. With me today is the co chair of our cannabis industry group at Clark Hill, industry legend, Bob Hoban, and our member in charge of our Denver office. Bob, nice to see you. Likewise, Sander. It's good to be here with you. And, uh, always good to talk about the industry, but, uh, boy, 2022 was a bit of a doozy and 2023, uh, could be painful. Yeah, I agree. You know, it's hard to, uh, it's hard to spend 2022 as a positive year. I mean, I, I, I note that, uh, the equity markets started poorly and ended worse. Um, not a whole lot of activity on the M& A side. Uh, to the extent you did see M& A deals, they were mostly distressed. A little bit of a silver lining in that. You know, the lending lending in the industry increased, I think, uh, uh, 2022 versus 2021, at least in the first call it eight or nine months of the year, but it was, I think, from my perspective, the first real, um, you know, downturn in cannabis that we've experienced as an industry. What do you think? Yeah, I mean, you know, look at to your point, you know, the M and A and transactions generally speaking in 2022. Uh, there's, there's, there's a, there's a laundry list, certainly. But as you point out, many of them were distressed deals, but we did. We did get shot out of a cannon in January of 2022. We had the, uh, the jazz pharmaceuticals deal. There was a couple of other larger deals behind that, but of course, those were predicated and set, uh, in 2021. They just happened to close in 2022 in January. So, uh, there wasn't a whole lot. And, and, you know, as, as we're sitting here in. in January of 2023. And we look ahead at, uh, at Groundhogs Day. It's beginning to feel a little bit like Groundhogs Day when we prognosticate. We talk about what is going to happen next or, or, or, or what, what, what do we predict is going to happen next? But last year was, was, was a tough one. Now we did see, um, Many things happen internationally, which I think are are exciting and probably lead the way for some of the discussion for 2023. You and I traveled quite a bit in 2022 to to make sure that we were in tune with what was happening globally and so we could serve as our clients in the international marketplace. But I think that that sets the table for what 2023 looks like, because the United States alone. It was more of the same in 2022, and I'm not so sure that 2023 is going to be much better, because as you point out, uh, there's not a whole lot of equity investment. Uh, we see, uh, primarily, if not exclusively, debt investments in the space, and, um, those lenders understand that it is a, uh, it's a, it's a buyer's market in effect, and the folks that are operators that do need capital, that capital is going to come at a cost, and that cost is quite substantial. Well, that's funny you mentioned, because I was talking to one of our lender clients, our larger lender clients a couple hours ago on this very topic, and he was saying the very same thing. I mean, if you can, if you think about it from the perspective of a lender, you know, interest rates are going up, right? So, so that affects their cost of capital, um, on the, on the lender side, even before you start talking about the proper risk adjusted return. For the lender vis a vis the borrower. I would say though, you know, I might be slightly more optimistic. Last year, as you mentioned, we did see a couple of nice deals closed in the beginning of the year. LiveWell Pharmacan closed, for example, in February. That was a significantly large transaction. And of course, Cresco ColumbiaCare was announced back in March. And that's all, you know, that's one of the largest transactions to be announced in this space. But we also saw some deals that broke, right? Uh, send a board of their acquisition of men, men's New York assets. Burano pulled out of the goodness growth transaction, which I've read has resulted in litigation. So, um, you know, the equity markets. Being, you know, continuing to to sort of bounce along the bottom, for lack of a better term, not really, it's not a whole lot further. They can go down if we're being blunt about it. Um, you know, that's really sort of, in my view, set the tone. What I do think is somewhat positive, maybe in a perverse way is we didn't see what many people predicted, which was yeah, action at the federal level during the lame duck session of Congress, right? A lot of people, um, predicted that SAFE or SAFE Plus, which might have included parts of the CLIMAX, would, would pass, uh, uh, the House and the Senate, re sign into law during the lame duck session. That did not happen. My view, though, is that is actually a positive thing because it forces people who were perhaps waiting on the sidelines to to see or hear better news, forcing those people now to, to, uh, to to do something just based on the status quo, right? Because again, most, most operators can't afford to just sit around and wait any longer. I think to the extent people were then, you know, the lack of movement is basically telling industry, Hey, yeah, You're going to need to have to survive in this environment for a little more, you know, a little longer, but to be, to be honest, cannabis has been surviving this way for as long as you've been involved, what, for 14 years? It's not like things are getting worse. They just haven't gotten as, as much, you know, they haven't gotten as better as certain people want it. Well, and this stuff tends to balance itself out right as well. You're going to break industry where. Um, I would suggest that never have I seen so many hundreds of millions of dollars invested in an industry or equity with such little due diligence in my life, um, as I've seen in the cannabis. So you had all of these dollars going into equity. He's done, you know, this notion that there's only so many finite, a finite number of assets out there and, uh, and, you know, just acquire them and make them work, uh, and, or if you build it, they will come and, or this fear of missing out type notion, because, uh, the subsets of the economy where those equity dollars came from, we're not institutional investors necessarily. They weren't banks. They weren't, uh, What I would call mainstream investors many times. So now we see the exact opposite of that, or at least the other end of that, that spectrum with the, with the debt focus of investment. And if you look at the interest rate, combined with some of the other economics behind a loan in this space. You're looking at 30 percent sometimes, if not more, some entities are lending at 30 percent specifically, and we did see in 2022. We saw a large, largely debt deal with Tilray. If I'm not mistaken, if I recall correctly, that had extremely, extremely high interest rates as well. And, you know, I think that acreage was involved in large part in some of that financing as well. But my point being, we kind of see this. Thank you. This balance itself out from equity to debt. But, you know, a lot of this was also bet on the fact that federal law will change. And while we haven't seen, you know, real movement towards outright ending federal illegality, or maybe another way to say it is we haven't seen the federal government meaningfully indicate that it's going to legalize cannabis and what that looks like, except to say that there have been some efforts, substantial efforts, yeah, Um, but as you point out the Safe Banking Act, uh, and then perhaps even even more so the Climb Act or the act that would allow access to capital markets. Those were on the table and meaningfully considered. Of course, the safe banking had made it through the house multiple times. I think five, if not six times. Uh, so it did end. With stipulation that it was gonna happen during the lame duck session, but didn't happen. Uh, and that's in part, as I understand it, and I think perhaps as, as we understand it, because, uh, uh, senate majority leader McConnell, uh, was, was not in favor of including anything cannabis related, uh, in some of those end of year pushes. So, so it's puzzling because. I, you and I know, or at least would, would, would make a serious bet if we were betting men that, um, if you enact the safe banking act, let alone if you put, um, access to capital markets in that, or as a, a side bill, uh, the amount of money, even in a downturn in the economy, that would. Uh, enter into those northeastern U. S. Stock exchanges, and the banks generally would be would make what happened in Canada four and five years ago. Look small in my opinion. Um, yet federal legislatures either don't understand that they don't care to understand that or they pretend to continue to pretend that this industry doesn't exist. Because remember, of course, it's federally illegal from a marijuana standpoint. So where do we go from here? That's Well, you know, it's, it's interesting you say that, right? Because it feels, you know, I'm a, I'm a capital markets guy, as you know, and, and, uh, I look at the, at the, um, cannabis stock indices. Uh, and it's very easy to track. I mean, the near term high. Is, uh, February of 2021, you know, after the, uh, uh, after the 2020 election and in particular after the Georgia special election, which gave the Democrats control of both the white house and all in both houses of Congress since then, that those indices are down. Over 80%. Right. And again, they've just, there, there've been a couple of attempts to sort of kickstart him, but for the most part, it's sort of a slow glide downhill. And, and there isn't really anything to give them a lot of reason to be enthusiastic, but from a policy perspective, like you mentioned safe banking, it's gone through the house multiple times. The Climax was introduced in the summer, which if it passes in any, in, in, Okay. The current form, it would open up, uh, uh, the U S equity markets to cannabis companies, including marijuana companies. Um, one area which we haven't talked about, but I'm, I'm hearing now is under serious consideration is a bankruptcy reform for the cannabis space. And my own view is that a bankruptcy, uh, uh, bill, even on a standalone basis or bankruptcy combined with safe and or climb. Provide a big boost to the industry because it would allow some of these companies, which I kind of, uh, referred to as the walking dead because they're, they're struggling with debt. They really don't have any way of getting, getting out from under their debt. And. They don't have a, and they don't have even a, a very realistic path to fixing their debt problem because they can't go bankrupt and the receivership option and the ABC option doesn't really give them enough firepower to address it in its entirety. You know, these walking dead companies could suddenly find new life and, and suddenly be in a position to compete for new equity, uh, or new, new capital that is call it speaking equity like returns because. Bankruptcy would would would give them that fresh start. I think lenders would like to see a bankruptcy option. Certainly borrowers would like it, and it would it would open up a new way for distressed investors to get into the space where so far they've dabbled. But again, it dabbled without. The, uh, without the, uh, uh, the firepower that they would have in any other industry that was allowed to go bankrupt. What do you think about, uh, uh, bankruptcy? Cause I know you, you put a lot of time and attention into receiverships and your three part series, which I would incur. Any listener of this podcast to, to, uh, Google, uh, Bob's three part series on receiverships in the space to learn more about it. You put a lot of time and attention to it. What do you think, uh, A, what do you think the likelihood of bankruptcy reform is? And B, what do you think would happen to the industry if it were to pass? Well, bankruptcy reform, uh, I, I, I've heard the rumblings as, as you point out. Um, it would be an important piece to this whole puzzle, uh, because it affords Uh, breathing room for lack of a better way to put it. Uh, that breathing room by virtue of a receivership, uh, has to be either stipulated to that's the easiest pathway to get to a receivership versus just going to a court with one party amongst many asking for it. Um, uh, to create that breathing room. And then of course there's, there's a whole lot of work involved with convincing the court for the need, uh, based on those specific elements and, and what an order for a receiver would look like. So having traditional, uh, insolvency protection or, uh, as I'm trying to colloquially, uh, describe it as breathing room, to have that built in at the federal level, I think would, uh, create some opportunities because. You know, you and I talked and have talked about some of the analogies and the parallels, perhaps with the tech boom and the tech bubble and without getting too deep into it. Uh, you know, you had this 90s, uh, tech boom and, and, you know, people were trading and capital markets, uh, to the tunes of pre revenue, if not early stage revenue. That were crazy multiples in the hundreds of millions, if not billions of dollars. Ultimately, when you look at the space as a whole, but it took about 10 years for that marketplace to sort of fizzle out a little bit, or the excitement behind just owning a piece of the industry began to focus towards more. Business fundamentals. How do you make money? How do you keep money? Um, how do you, what is your business model? And, and frankly, that's really where we are in the cannabis industry. When we see, uh, job numbers going down, we see inflation. We see the cost of, of, uh, in the supply chain of cannabis going down. It's very challenging for any of these companies to actually make money. Uh, so they have to look at their assets, their human resource, uh, capital allocation. And they have to look at their business model. And I do think that because of those things, you will see better run companies, but that ignores the fact that there are so many of these, as you point out, walking dead businesses out there, and they're walking dead because they don't have options. And if they had an option that gave them this proverbial breathing room, as I'm trying to describe. Perhaps that makes it easier for a third party on the outside or other aggregators within the industry to look at these as assets that can be accumulated and accumulated for a, a fire sale price, not accumulated at the valuations, which, you know, I think we would both agree in the cannabis industry have been, uh, absurd, perhaps, if not, uh, you know, just off the charts over the last 4 to 6 years, but. Yeah. But by focusing on the company's economic model and the business model, I think that that will bring this around where it will become more efficient, uh, and efficiency and operations leads to, at least, uh, on paper, uh, increased profit margins. And that's the exercise that we need to go through now. And, you know, it's, it's, it's also a long time coming that this industry. Is focusing on their consumers, not just what the industry operators want to do and want to put out there. And I think that this year will have a major focus on reconnecting the industry to what its consumers actually want, uh, in terms of being, you know, a, a, a very, um, a select group of cannabis country, uh, uh, consumers across the board, uh, which of course varies by state, but. Focusing on the consumer, I think, is one way that a lot of these companies will, um, get out of this mess. Yeah, I, I, I mean, look, I, I certainly agree. Uh, you and I have a problem agreeing with each other a lot, but I would say this, you know, 2023 is certainly, I think going to be an interesting year for the industry. I. I like the analogy you make to tech because I grew up in the first tech bubble. I'm a corporate securities lawyer and I cut my teeth doing.com deals and, and venture capital deals and IPOs and in a timeframe where, you know, the, the view was anybody could make money as long as just change your name to.com and you literally had companies. That were struggling and they just changed their name to old name with a dot com and the end of it and they thought it would it would give them a 10 times multiple in terms of their enterprise valuation and believe it or not for a while. They're correct. It happened a lot. It was really absurd. But just like in the tech bubble where the easy money was made early and then the world kind of caught up to the fact that a lot of these business models aren't actually, uh, sustainable, I think you are seeing similar dynamic in the cannabis space, right? The easy money and cannabis has been made in my view. I mean, maybe, uh, when a new state comes online, if you're You know, run to the front of the line, you're able to get out there. You can make some easy money for a small period of time, but it's a, it's a, it's a harder industry to survive in now. And it requires real skillsets and the, and the real margins for operating in the cannabis space just aren't that aren't that high. And I think what I started to see a couple of years ago, and I'm seeing increasingly now is that, uh, it really requires good operators to. To operate in the cannabis space, um, mediocre operators, frankly, aren't going to cut me, cut it anymore. And, and you, you're going to see, I think, uh, soon a premium, uh, management premium call it for people that, you know, companies that are, that are well managed. Discipline operators that the markets will reward them at the expense of their poorly managed, undisciplined brethren, and that's perhaps unfortunate because some of those poorly managed, undisciplined companies are run by, you know, really good people who um, You know, got in early and sacrificed a lot of, um, time and energy and money in, in building the industry that we have today. Um, but nonetheless, they, if they're not able to operate a real business. Speak out what they can in profit margins and, you know, really, really stay disciplined. I fear they're going to, they're going to suffer and it's going to, it's going to be problematic. But I do think 2023, for me, the silver lining in 2023 is actually the fact that 2022 and 2021 didn't do what a lot of people expected, right? In other words, The Democrats taking over the government and in the 2020 into 2021 didn't result in major federal cannabis reform. We didn't even get safe banking past and certainly don't have climb or or 280 reform, which we haven't even talked about yet or bankruptcy reform. And so the industry has to realize that. It needs to be positioned to survive under the status quo for, I don't know if it's an indefinite period of time, but definitely for a year or two or three longer than they may have anticipated. The federal government's not going to come to your rescue, I don't think, in 2023. And. You know, I would prefer to have a better outlook in terms of policy, but I do think what it means for the industry is, you know, it's time to to, you know, separate the wheat from the chaff, right? The good companies are gonna are gonna emerge from the peloton. And be the leaders and the folks in the end, they're going to be hanging on just to finish the race. Yeah, they are. And you know, and it bears a mention to think about, you know, if you're a company that is doing well, but you know, you struggle with margins in part because of 280E, in part because of price compression, in part because of, you know, consumers have so many more choices right now. And again, prices are generally down across the board as we mentioned. How do you make the case to a lender, um, let alone an equity, uh, investment provider, but a lender that, you know, the right bet is to, um, continue to, to fund, uh, me and my operation for scaling versus going through an enormous exercise of creating efficiencies and trimming down the company, uh, and focusing on operations. It seems like this industry has been in constant growth mode. Quite literally, uh, and figuratively, of course, since its inception. Um, and that will continue, but not at the rapid pace. Um, so then you look at the equity dollars that are available out there, and there are still still some some silver linings and some bright spots, right? I think fintech solutions or technology solutions. Uh, we'll continue to generate the attention of the equity investors, which which do exist out there. I think you'll see more and more equity investment in consulting firms, firms that sort of understand the industry fundamentally and have built. And worked in the industry because those firms become the institutional knowledge of the industry. Uh, those consulting advisory firms, which will set the table for what's next. And that is, you know, the introduction of mainstream and CPG companies on a mass scale to this space. I think you'll continue to see new markets. Um, get equity investment. Um, that New York is going to be a grand experiment with their retail use, uh, across the pond. We will see Germany move forward, at least presumably if they don't run into a, a buzz saw that is the European Court of Justice, uh, combined with the, the United Nations tribunal as it relates to the U. N. Convention. Um, so those are some places where I think you'll continue to see equity investment. You lost. You're also going to see roll ups. It is a buyer market. What does that mean? That means that okay, the last six years I value my company at 30 million because that's the trend in valuation. Whereas nobody's gonna give me 30 million for my company or invest pro rata based on that valuation. So how do you navigate that? Um, you, you're going to start seeing groups. We've already talked to them. Several of them are our clients. We've got, you know, a few hundred million dollars put together. We're going to go out there and we're going to talk to as many of these folks. You might think that Your company's worth 30 million. Uh, I put a 12 million valuation on your company and I'll give you four in cash right now and roll the rest into a roll up in terms of equity in a larger piece. I think you're going to see a lot of that. And that's really going to test the metal for the decision makers and the leaders in these companies, because not only. Is there fatigue in the capital markets surrounding cannabis? There is 100 percent fatigue of the operators in this U. S. industry. These people have been scraping ends together, whether they're a multi state operator or a small isolated regional or one off independently owned store. They would scrape together everything that they had to fight in the face of build out. And consumer attraction and to a mitigation and the like, it's just exhausting, frankly, um, you know, as lawyers, we get exhausted, but we also get exhausted where our clients continuously are involved in this rat race and this struggle. And I think that that's what we've seen for far too long. So, so, to me, that has an opportunity. Uh, to really shape what Q three and Q four of 2023 look like in this space, how many of these companies are willing to take pennies on the dollar cash for a roll up strategy that potentially gives them a smaller piece, but a smaller piece of a much bigger pie using that tired old analogy, but I think it's appropriate here. Yeah, I think, uh, I mean, it's interesting you mentioned roll ups, um, you know, roll ups. Going private transactions loan to own these are all the types of transactions that we're expecting to see. And frankly, you ought to expect to see in this sort of a market environment, right? When you have a lot of, uh, publicly traded companies on the Canadian securities exchange that are trading for. For, you know, pennies on the dollar, what they had been trading at, uh, just a couple of years ago. I think you haven't seen a lot of those deals quite yet because the strain, uh, uh, well, I think a lot of the entrepreneurs behind those companies were really hoping to see more action at the federal level. They were hoping that safe or safe plus would pass, uh, in, in 2022 or during the lame duck session. And. We're hoping that federal policy would give a boost to the equity valuation and, and, and kind of give them a lifeline that they, that they don't really have. And now that. The federal government didn't, didn't throw that lifeline to anybody. I think they're going to have to do what you're talking about. They're going to have to think about, okay, do I participate in a rollup? You know, club type transaction. Do I look to, uh, a new sponsor to take me private if I'm a. Publicly traded CSE company and, uh, you know, assume my debts pay off my, my, uh, public shareholders take me out from the public reporting, uh, situation and try to combine with other assets. Uh, that that might be more attractive and and wait to go public again at a time when the markets are better. Um, do people think about going a little more hostile? You know, I, you know, I both remember we were on behalf of a client that will remain nameless. We're looking at a hostile acquisition, which really hasn't happened in the cannabis space to any serious extent because this would have been a hostile acquisition under U. S. Law. Thank you. U. S. Securities laws, uh, didn't happen. We didn't pursue it. The client decided not to take that route. But will you start to see companies taking a more hostile stance in terms of more aggressive stance in acquiring some of their troubled competitors? I think you likely will see that in 2023, right? That is the uh, That is the logical next step for an industry that's dealing with the challenges that the canvas industry is dealing with. Interestingly, though, I think that, uh, you know, the big takeaway for me again is that. The easy money has been made. As you mentioned, the company, the industry has been in growth mode, really hasn't ever had to try to retrench and think about, okay, what happens in a more challenging environment? And you look at a state like California where I'm in, for example, you know, yes, you have a huge amount. Of a weed right now. It is a saturated market. I mean, you can't throw a stick in California and not hit a cannabis entrepreneur in the head. You know what I mean? They're everywhere. But what does that mean? It's going to be. That the people that have the best management teams, the people that have the best geography, the people that deliver the best consistent product that have the best customer experience that respond to the needs of the customer, the best they will emerge. As, as the leaders in what is the largest legal cannabis market on the planet, right? I mean, California is bigger than Canada. Um, Colorado, where you're from is probably the most mature cannabis market on the planet in terms of just the length of time it's been operating in a wreck legal environment. And you've already seen these issues, right? You've seen. Similarly situated companies that have different performance metrics based on their geographies of where they're located and the human beings that are running the business and the deals they're able to cut and the trust they're able to develop, uh, within their supply chain. So I think for me, that's a big, uh, that's a big part of what. Uh, 2023 is going to look like domestically, but let me, uh, change the subject slightly and talk about something I know is near and dear to your heart. What do you see for 2023? Internationally internationally is perhaps where, um, the most excitement, uh, particularly if you're an investor, uh, will, will present opportunities, uh, uh, in the space. So, you know, Germany has embarked on a long awaited. Adult use program. The draft rules were released several months ago and have been brought to a near conclusion. Although they're not enacted yet. The German government has furthermore been engaged in discussions with both the United Nations to see if there's. You know, some way to get some sort of, uh, waiver or the like, as it relates to Germany's obligations under the U. N. Convention. Uh, and then you're going to see the European Court of Justice, perhaps at the 11th hour, um, step up and have an issue before it. likely prompted by another EU member state to say, Hey, wait a second, Germany, what you're doing, we understand it, but it's inconsistent with the U. N. Convention, and it's inconsistent with European law. Um, and that could, you know, bring that to a screeching halt, frankly. Um, but with that said, There's so much momentum in that market. You've got Germany, then Czech Republic is trying to, you know, examine this very thoroughly and perhaps even beat Germany to the punch, for lack of a better way to put it. You've got the Italian government moving forward, uh, with increased production through its military for cannabis sales. Portugal is perhaps one of the best models, uh, in the world on how you create a, uh, a regulated commercial system. Uh, and it works quite well. Uh, and then all of this, by the way, is against this strange, you know, phenomenon where European countries, Spain, uh, the Netherlands, um, a few other places have historically had consumption, coffee shops and clubs and the like. But none of those things are necessarily included in any of the regulatory models that these nationalized governments are moving forward on. It's almost like we're pretending that the European Union didn't have commercial consumption in any form or fashion, and that we're beginning this brand new. Um, multinational global cannabis economy for imports and exports. Um, but it doesn't necessarily include consumption. But in the United States, I think we'll see consumption take a major step forward, beginning with some of the recent licensees that, uh, That were were issued and awarded licenses in the state of Nevada. Uh, Las Vegas, if any place will do this its own way. And we see consumption and the, the economic models behind it, you know, take, take center stage. But, but going back to your question. Europe is exciting. Uh, international operations are exciting. Thailand legalized cannabis and perhaps made the most What about Asia? Of all places, Thailand, to the point where they gave cannabis plants to every citizen that wanted it, uh, wanted one. And, uh, you know, and then you've got, uh, Australia looking at moving forward with a much more broadly applicable, uh, and more easily accessible commercial regulated model. So the smart money Based on our clients behavior and based on my observation would be to participate in the global economy on. Unfortunately, too many U. S. Based investors don't look at it as it's a real thing. They I've constantly gotten questions. Well, really, do you want to do business in South America? Do you really want to do business in Southeast Asia in this space? And the answer is yes, yes and yes, because what's happening in the U. S. All operates in the face of federal illegality. What happens internationally Is all sanctioned at the highest levels in each of the individual countries. So therefore you have, um, international standards, high levels of consumer protection, uh, protection built in, and true supply chain models with baseline and standardized regulations for import and export being enacted, and the U. S. is here sort of twiddling its thumbs figuring out how to Sell cannabis in federally illegal dispensaries and ignoring the fact that the CLIMB Act or the Safe Banking Act would, would actually create a tremendous economic boon in the United States. It's just which political party wants to take credit for it. Speaking of taking credit for it, one thing we haven't touched on really so far is 280E. So why don't I finish with one, uh, possible prediction, um, uh, a little bit of a wind up. We all know if you're listening to this podcast and you've survived the first half hour, you know what's about to eat. You don't need me to tell you about it. Um, President Biden announced a couple of months ago that he was going to direct his administration to study the classification of cannabis. And that resulted in a little bit, you know, a couple of days worth of, uh, uh, you know, positive trading activity. In the cannabis sector before everybody decided, maybe it really isn't that big of a deal. This is the same day. He announced he announced his pardons for for federal can't offender possession offenders again, one that was, you know, initially well received, but in hindsight really didn't say much. But let's talk about 280. Right? If, in fact, the president and the administration administratively reschedules cannabis. From a Schedule 1 to Schedule 3 or below. My understanding is that would automatically take marijuana out of 280E because again, 280E, uh, uh, uh, uh, applies to the traffic, to drug trafficking. And drug trafficking is defined as schedules one and two. So if you're a schedule three or below substance, you don't have to, you don't even, you don't have to repeal 280E. You just, it just no longer applies by its terms. And that's important to people, by the way, because asking Congress to repeal section 280E requires Congress in its pay for rules to find a way to offset The reduction in revenue from 288. On the other hand, if the administration just reschedules cannabis from schedule 1 to schedule 3 or below, not marijuana, not cannabis, sorry, uh, marijuana from schedule 1 to schedule 3 or below. 280E doesn't need to be touched. The pay for rules aren't implicated. So, to me, that's something I haven't heard people talked about very much, but, um, it could be a very big boost to the industry. Do you think the administration is serious about looking at rescheduling cannabis, and could that happen in 2023? Well, I don't, I, I, I don't really think it can happen in 2023. I think that the discussions will become pointed and become more serious, but I don't think that we will see it. But Sandra, I, I also, uh, first of all, your two 80 e analysis, I mean, just from a general, uh, perspective, it, it, it's accurate, right? If you are a Schedule 3 or below, then you don't have this 280E hit. And for the benefit of the listeners, um, and, and I think most of us in the industry understand this, but 280E, uh, effectively suggests that you cannot deduct any ordinary business expenses against your income, which would therefore reduce your federal tax burden, um, if you are. Trafficking in a Schedule 1 or Schedule 2 controlled substance, um, which cannabis, which marijuana, as you point out, rightfully so, is, with one exception, the cost of goods sold. So that the only place that you can deduct these expenses would be. In your production facility when you're producing the goods, uh, that does not apply to retail. It does not apply to marketing expenses, generally speaking, and a lot of your employee burden. So that's a major issue. But if you were to reschedule cannabis at the federal level, it doesn't solve any other problems except for potentially 280E if it is scheduled as low as you suggest, as we talk about where 280E no longer applies, because you're still Uh, you're operating in the face of what a scheduled substance can be just, uh, in the manner in which a scheduled substance can be distributed. If you are a schedule three, four, uh, substance, uh, or something below one or two, uh, you're still looking at an FDA approved dispensation model, an FDA approved, uh, production model, none of those things, Sander, none of those things apply to the cannabis industry and every cannabis industry operator, no matter how clean and how. Well run and how consumer friendly their production facilities are. I don't believe that it would be easy for any, let alone several of those companies to qualify for continued dispensation of those scheduled substances under federal law. If rescheduling was the answer. So rescheduling could eliminate the 280 problem, but it doesn't, um, Legalize or make legitimate these dispensation and this production supply chain, which exists state by state by state. So the answer to protect the existing what I call OTC or over the counter marijuana model, meaning I walk into a dispensary and I could purchase flour or an extract from that flour. or highly concentrated THC oils or edibles or products, uh, that over the counter dispensary model necessarily requires de scheduling or in the event of rescheduling, you're going to have to create a caveat or a carve out that says that these dispensaries can continue to exist even though they don't meet the standards of the FDA under these other Um, you know, three, four, uh, schedule. So my point is rescheduling doesn't solve the problem. And this is part of the problem with our industry is even our lobby organizations. While they're they're smart people with lots of education, uh, that's so complex how all of these pieces fit together that you can't. Necessarily settle on whether rescheduling or descheduling will solve the problem, but it's got to be a combination of the two somehow some way if the existing model is going to continue to exist because it doesn't meet schedule 3 dispensation standards or production chain standards. Um, as I've generally alluded to. Yeah, I look, I certainly wasn't suggesting it would be a fix, even a good fix, frankly, uh, to the problem because like we all know, I mean, part of part, you persuaded me that the international market has a lot of potential and I, like many us focused people had just focused on on marijuana and cannabis within the, you know, the 50 states. And so I hadn't really, uh, hadn't really thought about the international market and in seeing it. Yeah. As you point out to me before it, it's very sophisticated and in certain cases far more advanced than the United States in terms of the operators and the quality and the discipline they have in terms of the supply chain. Uh, so it's, it, if you are an investor in the space or an entrepreneur in the space, you should certainly, uh, look outside of the four corners of the United States when it comes to this industry, if it's something you're passionate about. But yeah, I. Fully agree with you on 280E. Fully agree that a rescheduling wouldn't solve the problem and could potentially make even more issues. Look, we could talk a long time on this. I think this is a good place for us to stop and let our listeners catch a breath. So, Bob, I want to thank you for joining us. Us being, uh, the Clark Hill, uh, Cannabis Industry Group podcast. You and I as co chairs of the Cannabis Industry Group. So nice for you to, nice for you to kind of join us and, and talk about it. I want to, uh, remind our listeners. That as always, this is not legal advice. This is just information that that Bob and I are sharing. It's for informational purposes only. It shouldn't be construed as legal advice should not be construed as investment advice. We certainly urge everybody. If they are involved in the cannabis industry to seek independent counsel, or to contact us at Clark Hill for your specific needs, if you want to use us as counsel, and if you're an investor in the space, certainly, uh, seek whatever professional investment advice you need in order to make, uh, your investments in this very risky, but very dynamic and, and interesting industry, Bob. I'll let you have the last word. I was just gonna say it's been an absolute pleasure to talk about these things with you and hopefully our listeners have some value here. But but just I just wanted to sort of just tie with a little bow some of these concepts together, meaning if international investment is the wave of 2023, which remains to be seen, but it's it's the smart bet based on all the things we talked about. And international operators are far more Zach, you're welcome. Um, complex, far more, um, um, astute at navigating international standards and import and export. If those companies get the investment that we would expect, um, in 2023 and those markets begin to open up, coupled with subsequent access to U. S. capital markets, then the U. S. operators are all of a sudden, uh, the, the, um, The second class citizen. While we have access to the most consumers in the space, those operators are not nearly as sophisticated as these international operators because they don't have to be. So money will follow sophistication and money will follow consumers. But if the initial investments on a large scale in 2023 are made internationally, and those dollars come back to roost in the United States. I think that you'll see those international operators and those international funds have a major control dynamic over acquisitions and M and a activity in the United States, because those companies, while they have access, as I said to consumers, they don't necessarily have the level of organization and sophistication to operate in a multinational environment. So that is a trend to watch, uh, that will create tremendous opportunities. Um, the rest is going to be history, and I'm glad to be living it with you, Sander. So thanks for the opportunity. All right. Thanks, my friend. Well, uh, again, Happy New Year. Can't wait to see what 2023 brings for us. Um, thanks to everybody for listening, for joining us at the Clark Hill, uh, Cannabis Industry Group Podcast. Pay attention to your social media for announcements of future recordings and future podcasts. Thanks so much. This podcast is intended for general education and informational purposes only, and should not be regarded as either legal advice. or a legal opinion. You should not act upon or use this publication or any of its contents for any specific situation. Recipients are cautioned to obtain legal advice from their legal counsel with respect to any decision or course of action contemplated in a specific situation. Clark Hill PLC and its attorneys provide legal advice only after establishing an attorney client relationship through a written attorney client engagement agreement. This recording does not establish an attorney client relationship with any recipient.