The Cannabis Industry is Exploding: Here's Why You Are Not Optimistic Enough ft. Ben Burstein

The Cannabis Industry is Exploding: Here's Why You Are Not Optimistic Enough ft Ben Burstein

Ben Burstein: We're going to have more licenses issued over the next 12 to 24 months than ever before in the history of cannabis, and as you know very well, the biggest predecessor of more sales for the industry is new licenses. Bryan Fields: What's up guys, welcome back to another episode of The Dime. I'm Bryan Fields, with me as always is Kellan Finney. This week we've got a very special guest, Ben Burstein. Ben, thanks for taking the time, how you doing today? Ben Burstein: Everything's great, Bryan and Kellan, thank you so much for having me on. I've been a long-time listener and just cannot thank you enough for everything you do for our industry. You really make a difference and I'm so glad to be here with you. Bryan Fields: Appreciate you saying that, excited to have you here. Kellan, how are you doing? Kellan Finney: I'm doing really well, really excited to talk to Ben, really excited to kind of nerd out today. I know LeafLink has a bunch of different arms in the industry, so I think we're going to get to talk about some really cool things. How are you doing, Bryan? Bryan Fields: Yeah, I'm stoked. I think there's a lot of aspects of data that are fun, but I think the most fun aspect for me is understanding what those trends really mean, and we're going to dive super deep today on some of those fun aspects. But Ben, before we get started, Kellan and I aren't sure where you're located, so could you just tell us — East Coast or West Coast, where are you currently located? Ben Burstein: I'm at LeafLink's headquarters in New York City, so out on the East Coast, but have a lot of appreciation for everything out West for sure. Bryan Fields: Oh, that's a very PC answer for you. So Ben, for those who are unfamiliar, can you give a little background about yourself and kind of an overview about LeafLink? Ben Burstein: Yeah, thanks Bryan. I've been in the industry now for a little over three years. I started on Wall Street covering the industry — I loved cannabis, it just wasn't very easy to do that inside a big regulated financial institution — so LeafLink was able to bring me over. I've been at LeafLink now for around two and a half years. My job at LeafLink is to help manage our M&A process, help with strategic partnerships, and industry research, so really it's to make sure I know everything there is about the industry and be our internal and external expert. I love LeafLink — I think LeafLink is the most valuable tool in all of cannabis. LeafLink is the commerce platform for the industry. We help 3,000 brands sell product into more than 8,000 stores on a monthly basis. More than half of all products sold at dispensaries in the country are sourced on our website, and we help the dispensary purchasers manage those orders, manage the fulfillment of those orders, and help them pay for those orders. We help brands manage all of the back end and reconciliation, so our job is to make any company selling a product or buying a product do it in the most efficient and easiest way possible. I think we make a really big impact for the industry, and I work at LeafLink because I love the product and the impact we have on our customers. Bryan Fields: Yeah, I think the value they're bringing is tremendous, and I'd love for you to give a high-level overview of some of the trend differences — market to market, brand to brand, product to product — and some of the insights on the platform. Ben Burstein: Yeah, absolutely. I love my job because I get to see all this data, and if there's anything you take away from what we're about to talk about, it should be this: trends in cannabis are a lot more positive than the prevailing sentiment. I think a lot of times people aren't optimistic enough about what's to come, and a lot of it has to do with the challenges the industry has faced over the last few years — while some of those are still here, the improvements have definitely come, and we're seeing it throughout the platform. Sales hit all-time highs in June, likely going to be even higher in July. You're starting to see a lot of right-sizing and capacity adjustments in many of the very challenged mature markets — California, Oklahoma, Oregon, and others. We're going to have more licenses issued over the next 12 to 24 months than ever before in the history of cannabis, and as you know very well, the biggest predecessor of more sales for the industry is new licenses. As more stores come online and you get better operational improvements for many of these customers and companies across the country, I think we're going to see big impacts on sales counts and overall profitability and revenue for many operators. Things in cannabis are better than a lot of people think. I have a very positive, optimistic view on what's to come, and we're going to spend the next hour talking about it, but really — things are more positive in cannabis than people anticipate right now. Kellan Finney: Ben, do you think we're potentially in an early moment like when Amazon stock dropped 90%, and Jeff Bezos said he was looking at all the metrics and the company was doing fine — cash flow, all these positive things — they just weren't being reflected in the capital markets and overall public sentiment? And if so, why do you think there's that disconnect? Ben Burstein: That's right. Cannabis is an industry that's going to grow faster than almost any in the world over the next five years. U.S. retail sales are likely going to double, wholesale sales are going to triple. That's growing faster than basically any other CPG category in the U.S., including Zyn, alcohol, and some of your other fast movers — it's growing at 7 to 8 times the rate of general CPG. Cannabis has a really strong future ahead of it. One of the reasons people miss out on all the changes in the industry is that while you have about $30 billion of total national sales, it's really the aggregation of 38 different state markets, each with completely different regulations and places in the maturity cycle that impact total national sales. Your largest market, California, does a little under $5 billion in sales, Michigan is at $3.5 billion, Illinois a little over $2 billion, Florida a little over $2 billion, and others. You have 11 states doing over a billion dollars in sales, and 23 doing over $100 million. So tracking across all those different states and markets, it becomes really challenging to see the bigger picture. If there's anything to help you understand the changes in each of these states, it's market maturity. Every single state in the history of legalization, from California starting medical sales in '96 through Colorado starting legal sales in 2014 through to today with 26 states having adult-use sales, has basically gone along the same path: you have your supply side — total cultivation capacity, how many plants are in the ground — and your demand side — total retail accessibility, how able consumers are to actually go to a dispensary and buy product. Over the life cycle of a market, those two trends interact with one another and change rapidly. In a medical market, operators are building out both supply and retail — retail is easier to build, so it grows quickly and total sales expand and prices get really high. As the market matures, cultivation supersedes retail demand in-state, prices collapse, markets get challenged, margin compression sets in, and operators aren't profitable — we've seen that in basically every market that legalized more than two or three years ago, like California, Oregon, and Oklahoma. So when we think about total national sales, it's all about how the states contributing to that mix are maturing along that curve. States like Missouri and Maryland, which just went through their adult-use conversion, and soon Ohio, are probably three of the healthiest markets in the country right now — I think the regulations are great and set the markets up as best as possible — but as we're seeing in LeafLink data, prices are starting to collapse there too as cultivation supersedes retail demand. It's going to happen in all these markets. Prices in Missouri and Maryland have been cut in half over the last year. You even see it in states that legalized a bit earlier, like Arizona — one of the healthiest markets in the country until this year. Over the last 12 months, Arizona pricing has fallen the most of any state, not because of regulatory issues, but because operators build cultivation facilities as big as possible to get the cheapest price per gram, which causes big challenges meeting total demand. So things in the industry are good, bad, and medium depending on where you are on that maturity curve. Your most mature markets, like California and Oklahoma, are starting to see major green shoots. States that did well recently, like Arizona, Florida, Massachusetts, and Michigan, are starting to face challenges. The next set of maturing states will continue to see price compression, but overall people are figuring out how to operate in this industry, and over time these markets will shed unneeded capacity or add retail capacity. Kellan Finney: I think what you said at the end is the most important part — the shedding of assets that just aren't right. Early on everyone rushed into certain states and said 'I don't care what it costs, build a facility,' and now they're realizing their payback period is 10 years, then prices plummet and it's 25 years, and they'll never get a return. What I wonder is, how complicated is that for operators from a risk-profile standpoint with these variable wholesale prices going up and down in certain markets? How difficult is it from an early investment standpoint to say, 'Maryland's price was here, now it's here — is it still a good time to go in?' How are companies thinking about those decisions? Ben Burstein: It's a great question. We've had about five years of institutional capital coming into the industry, and the same mistake everyone makes is underwriting a price that's not realistic long term. You saw it with the first huge capital infusion in 2017 and 2018, when investors poured into legacy markets like California, Oregon, and Oklahoma and built as much cultivation as possible — those collapsed in 2019 and 2020 when pricing fell, and many people lost their money. You then had the next big capital wave in late 2020, early 2021 in states like Massachusetts, Illinois, and Arizona, and those are starting to turn over. Now you have a third big capital wave where basically all capital raised in the industry over the last year went into a handful of states like Ohio, Missouri, and Maryland — those three markets are going to follow the same trend where pricing turns and margins go negative for many companies. So as an investor, it's all about finding the right time on the maturity curve and finding your best operators. Another big challenge the industry faces is there's no good communication across the supply chain from upstream to downstream — cultivation facilities have no idea what total retail demand is, and retailers have no idea how much cultivation capacity exists. Without good structured data sets and systems, it's very challenging to build a business plan with two-, three-, four-year expectations. Licensing changes and operator expectations shifting make it difficult to run a business in cannabis, and that's caused a lot of inefficiencies — inventory mismanagement, operational processes, capital raising and financing. But every state follows a pretty similar maturity path, so if you understand how a state's cultivation and retail demand are going to shift, it makes it a lot easier to set expectations for each market. Kellan Finney: Is there any way to factor in the rise of hemp-derived cannabinoids within these existing markets? There's a pretty standardized script for existing states, but we're also seeing larger companies pivot to more hemp-derived products that compete on some level with dispensary items. Is there a way to track that and implement it into expectation management for companies in these markets? Ben Burstein: That's an amazing question, and you're absolutely right. Today you can go on DoorDash on your phone right now and buy a hemp-derived THC beverage. You're going to be able to do it through Curaleaf with their hemp company too, which will offer options in every major metro. Here's the way I think about that market: Minnesota started the big legal version of that category early last year, and today they're run-rating around $300 million of beverage sales. Total Wine & More started selling hemp beverages in their Minnesota stores and reported hemp beverages made up 10 to 15% of total sales and units sold — that's a lot. So they rolled it out to other stores, starting a partnership with Cann hemp-derived beverages in their California stores, and hemp beverages were again 10 to 15% of sales. Total Wine said, 'I think we're on to something,' and started rolling hemp beverages out to all their stores. Total Wine itself sells $60 to $80 billion of product a year, so that company alone selling 10% of volume in hemp-derived beverages creates hemp beverage sales of $5 to $6 billion right there. On a national level, there are questions whether the hemp market is smaller or larger than the regulated market — I'd guess it's at least $10 billion of sales nationally, and that's only accelerating. When the federal government passed the Farm Bill in 2018, they inadvertently legalized cannabis, in my view. Most consumers today don't know the difference between hemp-derived beverages and regulated cannabis, and because of that most people are very happy and willing to consume hemp-derived THC beverages. You have 10,000 total dispensaries across the U.S. today versus 2.3 million locations where you can consume alcohol — if you're a brand, it's much easier to play with pricing and volume elasticities across 2.3 million locations than 10,000. So it doesn't shock me that a company like Curaleaf, under Boris Jordan, wants to go into the hemp industry — there might be more sales to be had selling hemp products than selling into the regulated industry. We're in the very early days of understanding that impact, and cannabis has only really existed in legal markets for about 10 years, so it wouldn't shock me if hemp-derived sales keep expanding rapidly relative to the regulated market for another 10 years. I actually think the hemp-derived category creates a lot more consumption among non-traditional consumers. More than 90% of dispensary sales today go to people who consume more than once a day, so for brands targeting the soccer mom who buys one cart every six months, or the non-consumer, it's a much easier story selling a hemp beverage in a grocery store than bringing someone into a dispensary for the first time. So I think it will grow adoption for the total industry, though it's definitely a risk to the regulated market — it's very difficult to compete with hemp products since most consumers see no difference. Bryan Fields: Just want to take a second for that Total Wine and Spirits VP of sales — quarterly earnings call, someone's like 'we got a bump of 10%,' 'excuse me, what was the change?' 'Oh, we did this,' 'try another state' — it worked again — 'National, 100%, pedal to the metal.' Let this ride, it's a game changer. What I wonder is: given how chaotic the industry has been from a market, investment, and infrastructure standpoint, and now hemp comes in with the ability to cross state lines — which cannabis operators can't do — how does the modeling work from a capacity standpoint? A consumer like myself used to purchase cannabis and now, with the ability to get hemp beverages I couldn't six or seven months ago, I'll purchase slightly differently. How does that factor into the modeling to get an accurate forecast going forward? Ben Burstein: Such great questions. Within a state, it's a lot easier to think through market expectations — most markets today have under 500 stores, so it's easy to map out where those stores are and your total addressable market from a consumer standpoint. What makes hemp beverages different is you expand total capacity both from an addressable market perspective and a production perspective. Similar to cannabis, there are places where it's much cheaper to grow and process hemp than to sell it. On a national market you can lower production costs a lot more than averaged across cannabis markets — in California, growing an outdoor pound is around $70 to $100 before taxes and compliance costs; in cheap legal hemp-growing places it's like $15 to $20 a pound; in a market like Massachusetts, indoors with high utility and water costs, it's $700 to $800 a pound to grow cannabis, and hemp in some of those states is similarly high. Going forward, you'll get a lot more legal adoption by non-traditional consumers — more people are willing to try a hemp beverage outside a dispensary than inside one. You also get new opportunities, like Minnesota bars now able to sell hemp-derived beverages on tap — being able to sample a hemp beverage rather than buying a whole six- or twelve-pack drove large sales for big craft beer brands, and I expect a similar trend as hemp beverages get more normalized and become large, developed brands. In terms of modeling consumer expectations, I really think the sky is the limit — we've only just begun to tap into what this market looks like. I don't think you access many heavy consumers this way; those people will keep buying through the regulated market or illicitly. Where you really get the difference is accessing the liquor-type market — total U.S. liquor sales are $270 billion a year, and if you're able to capture 10% of that, similar to what Total Wine is seeing, that's larger than the regulated market already, and that's just in beverage format. People don't appreciate enough the growth tailwinds behind this industry. Kellan Finney: You've made a lot of comparisons to the alcohol industry, referencing companies like Constellation who've made investments — but there's another 500-pound gorilla, like Coca-Cola, with all this bottling expertise, and non-psychoactive cannabinoids. I haven't heard anything recently, but do you think this whole hemp play could end up being a battle of the giants between other entities looking to get into the cannabis industry eventually? Ben Burstein: Yes. Many large publicly traded multinational conglomerates are tipping their toes into the cannabis space pretty slowly — it's a large risk for a federally illicit product, and even hemp itself has complicated legal hair on it, so they're doing it carefully to avoid putting risk on the rest of their businesses. Over time, absolutely, many of these companies are going to want access to cannabinoids, especially the non-intoxicating ones that can benefit their products. I use an analogy from coming out of Prohibition: it was 20 years after the 21st Amendment passed that people were still drinking bathtub gin and making alcohol at home — we don't do that today because it's not the best way to consume the product. I think similarly with cannabis and hemp, over time many large companies will be involved, adoption will expand, but it's a story that plays out over decades, not years. That's one of the challenges with investment in the space — investors want returns in three to five years, but the cannabis story is a lot longer than that. Eventually you're going to have major winners in the space, both on the regulated and hemp sides, and I hope to still be working in this industry to see it, because there's so much more sales accessible for a smaller number of companies than exist today. Bryan Fields: That's my favorite part of this industry — whenever you think it's as chaotic as humanly possible, something like hemp beverages just goes hockey-stick and you couldn't have imagined it. It makes me think about the bigger implications from a D.C. standpoint — it feels like we're moving toward an MSO/big-cannabis-license world versus hemp, and I wonder if big alcohol doesn't want the hemp industry accelerating with these beverages, so maybe they step in and lobby the cannabis industry to try to remove hemp — because at the end of the day this hemp 'enemy' might actually be the enemy of the others. From your standpoint, do conversations in D.C. — the Farm Bill, Schedule III, SAFE Banking — weigh into your modeling process? Ben Burstein: Absolutely. Let's start with the Farm Bill — it's unlikely intoxicating hemp gets banned in this year's Farm Bill, there's just not much political appetite for it. Assuming no federal action there, I'd bet the large beverage companies are more interested in intoxicating hemp than the regulated market, because from a taxation, compliance, and production standpoint it's just a lot easier — so I think they'll side with the hemp part of the market. On Schedule III — there's some hair on it after the Chevron decision and the election process, but I think you do get Schedule III codified at some point before next year. The impact would be huge on operators, and it's an underappreciated part of the market. Today in cannabis you're taxed at your gross margin line — most companies run 40 to 50% gross margins, meaning they're paying 10 to 15% of revenue in taxes even if they don't make a dollar at the end of the day. LeafLink underwrites a lot of companies for our lending products — I looked before the call, and in the last year we've underwritten 570 companies. You know how many of them actually return cash to the bank consistently? Four. Four out of 570. These companies are making cash but still paying tremendous taxes because it's very difficult to shield those taxes with low gross margins. What happens when you get 280E away with Schedule III change — which is very likely — is you introduce a large amount of cash to the industry. By our estimates at LeafLink, 280E going away brings another $2 to $3 billion of cash back to the industry annually — that's more capital than was raised by the whole industry over the last 18 months. Your largest investor in cannabis is theoretically the U.S. government over the next 12 months if these changes go through. There's even upside to companies getting refunds on 280E taxes, as we've seen some MSOs try. We don't know what state-level regulation or agency roles will look like yet, but the biggest positive trend we can hang our hat on is that the tax change will cause a large net benefit to many companies in the space. Kellan Finney: Do you think that excess capital is going to spur a big M&A frenzy, or more internal investment, stock buybacks — what do you think most of that capital will actually be used for once it becomes available? Ben Burstein: I'd say all the above. A lot of these companies have spent large dollars on capex over the last five years — the big multi-state operators, who by nature of their sales will be the largest dollar beneficiaries of 280E changes, have already invested a lot of capital into their footprint, so there's not much capex requirement going forward, meaning a lot of cash and options. M&A has been slow the last couple years because capital hasn't been available, equity values have been low so people don't want to sell stock to an acquirer at unjustifiable returns, and a lot of mature markets have been too challenging to invest in. That's changing — I've been part of a lot of investment processes where investors are looking to allocate capital into the states that have suffered most over the last few years. California companies are able to raise money again, more money is going into cultivation in core legacy markets like Oregon and Oklahoma. So operators will either reinvest in footprints they exited in states like California, Massachusetts, Arizona, and Florida, where they previously couldn't make money, or they'll invest in the six markets driving most of the growth over the next two years: New York, which is going to issue more than 1,500 retail licenses and almost a thousand licenses upstream; New Jersey, issuing almost a thousand retail licenses and a similar number upstream; Ohio, which already has 110 adult-use stores ready to come on the second the state announces; and upstream cultivation states like Maryland, Minnesota, and Illinois. Over the next two years the total market is expected to add around a billion dollars in total sales on top of roughly $40 billion today, and more than two-thirds of that growth is expected from those six markets. Operators understand that math too, and they're going to invest capital accordingly. Take New York — people are pretty negative on it, and I'm not sure why, because growth is starting to accelerate. In June the state did more than $70 million of sales across 113 dispensaries; two months earlier it was $20 million across 60 dispensaries. New York is now adding two to three dispensaries a week — more than they were adding per month less than a year ago. Here's a hot take: I think New York could easily be the largest market in the country within two to three years if they keep licensing per plan. Each store is doing $3 to $4 million a year on that $70 million across 113 dispensaries; even if you cut sales per store in half as you get to the 1,500-store buildout the state is aiming for, New York would be doing more in sales than California. Within two or three months, New York is probably going to do over $100 million in a month of sales, making it a top-10 market. Kellan Finney: I love all those things, but I've got to push back on the New York aspect — the word 'slow' is the problem. I think everyone knew the challenges going in, and the inability to get out of our own way, opening so slowly while states like Missouri and Maryland just hit the ground running with massive numbers, is part of the frustration. But sure, with the population there, it's likely to be a massive market as intended. From a capacity standpoint, do you foresee challenges as growth booms — will we need a bunch of operators from an infrastructure standpoint, or do you think people will come in to support the market? Ben Burstein: One of the things I love about the maturity curve is thinking about supply — total cultivation capacity — and demand — total retail accessibility — where those two meet is your price in the market. If price is high enough, operators are profitable; if the industry is oversupplied, prices are low and people can't be profitable. What I like about New York today is that stores are coming online a lot faster than cultivation is, so demand is improving for cultivators who've struggled through the slow rollout. New York has definitely had challenges, especially upstream — almost 300 licensed cultivators invested their family's net worth trying to build a legal cannabis business, and it hasn't worked out well over the last year and two harvests. That's changing: last harvest they were selling into 50 to 60 stores, this next harvest they'll be selling into 200 to 250 stores. New York isn't licensing much more cultivation capacity, but significantly more retail capacity is coming online, so supply stays relatively flat while demand grows quickly. That means you need more stores to absorb the excess supply, and wholesale pricing gets a lot better for cultivators that have struggled. I expect the next year of New York cannabis to be a lot better than people expect — a lot of operators very profitable per store, sales remaining very high relative to most other markets — and because it's a state where if you don't pay your bills you're not allowed to keep purchasing on terms, like Washington, that leads to much better collections and AR management, and a healthier New York going forward. Bryan Fields: This is where the interstate commerce ability for a West Coast state with excess product to ship to New York would be perfectly ideal — the three-state pack we used to talk about. If states just had a good head on their shoulders and said, 'instead of standing up all these separate supply chains, let's have some kind of tax-tariff system,' it would be perfect for all parties involved. Ben Burstein: Professor Robert Mikos from Vanderbilt University is a leading expert on interstate commerce, and the way he frames it is production states versus consumption states — you need to balance producing where it's cheapest with selling where you get the most per unit. It's one of the things that makes cannabis so challenging for operators. California, your largest market by store count, has 1,200 locations to sell into, whereas there are 70,000 liquor stores in California alone — it's impossible for a brand to compete when you're playing with elasticities across only a thousand locations. We're really excited about the opportunity for interstate commerce at LeafLink — who knows when it'll happen, it seems like a long-term story, but the opportunity is very large. Stores need to source product from places where it's cheap, and many brands don't have strong relationships with retailers in markets they're not in. We see ourselves as the discoverability platform for retailers to find brands they wouldn't otherwise know, and once interstate commerce opens up we'd love to help facilitate those sales — we see it as a large opportunity for the company, just very difficult to predict on timing. Kellan Finney: With the 1,500 licenses New York has issued, is there some math behind that — like, we expect this quantity of biomass demand, therefore this much canopy, therefore this many licenses? Is that the math being done to arrive at that 1,500 figure? Ben Burstein: The short answer is no — I don't want to take it away from the regulators, they do think about it, but the way we got to the license totals today is basically that you had about 300 CAURD stores planned to be licensed, which then expanded because of injunctions and lawsuits, and because of those injunctions licensing additionally opened up. What really matters for store count is density and accessibility to consumers across the state — that's key, not just the number of stores. If all a thousand stores were in New York City, sales per store would be very small; spread equally across population centers statewide, the state can support a lot more in sales. Some states think about it well — Minnesota's regulation requires every municipality to allow at least one dispensary for each 12,500 people, coming out to around 600 to 700 dispensaries statewide. If you perfectly balanced density across a state like New York or California, you could support significantly more sales with significantly more stores. We forget that California is uncapped at the state level but very tightly regulated at the municipal level, and more than half of all municipalities in the state don't allow cannabis businesses today — there are places where you can't find a dispensary for 200 miles. Some states have banned municipal bans outright, like New Mexico, where every municipality is required to have a cannabis business. To me, those are the biggest metrics for capacity in a market — the density of stores and how they're spread across population centers, not just a raw per-state number. In New Mexico, for example, you have 600 to 700 stores doing around $45 million of sales — pretty low. On the other end, Michigan does almost $300 million a month across a similar number of stores. It's all about how stores are actually selling to consumers across population centers, not just capacity per state. Kellan Finney: I just wanted to know mentally if there was consideration for managing the supply chain from a cultivation perspective given the inevitability — however long it takes — that we'll eventually have interstate commerce. Did you see our rollout, bro? There's no chance they sat there and planned that out three years in advance, plan A, plan B, seven-plus years — no chance. But it would have been good thinking, the kind of decision-making I could only dream our decision-makers would think through. Ben Burstein: I think a lot of regulators have learned from the mistakes of other markets. You referenced Missouri and Maryland as having very successful rollouts — I wholeheartedly agree, I think regulators in those markets created some of the most successful adult-use launches in the history of cannabis. They learned a lot from markets that had challenges coming online, like New York, where such a large gap between decriminalization and legal sales caused a huge gray market. States like Missouri and Maryland said, 'we're going to launch sales as quickly as possible with the infrastructure already built, in a way that's very accessible to consumers,' and it's been extraordinarily successful. States are increasingly learning from that — it's the same reason Ohio is about to come online pretty quickly too, with stores already selling in the medical market. Historically, many states legalizing adult use didn't have comprehensive licenses like states are rolling out today — you had to start an entirely new store with an entirely new supply chain for adult use versus medical. Today, most markets are consolidating both medical and adult-use supply chains, making it easier for consumers to access product and for companies to sell it. Bryan Fields: I've got to ask about the U.S. Cannabis Market Report Spring 2024 — did I read this correctly, Alaska leads the nation in sales per resident? Ben Burstein: Yeah, the reason is large tourist sales combined with a really small population base, which causes it to be really high — the Alaska cannabis market is driven by tourism. The key one, I think, when you think about retail sales per resident, is Michigan. Michigan is the second-largest market by retail sales per resident, and it's also the market with the highest number of units sold across the entire country, including California — that was big news when people started talking about it, though we'd seen it in LeafLink data previously. What I love about Michigan as a market is the state has done such a good job rolling out stores across rural areas and proper density across major metros — it was only last year that Detroit was allowed to have adult-use stores, and now over 60 have rolled out in the city alone. Michigan is ninth by total population, has pretty good density of stores making it accessible for the average consumer, around 700 total stores, and adoption has grown pretty quickly. So I feel really confident about a state like Michigan on a per-resident basis, though states like Alaska or Nevada, driven by tourism, definitely see outsized per-resident sales. Kellan Finney: Michigan has like 10 million people too, and a really strong middle working class that favors those consumption habits — I like Michigan as a state a lot. Bryan Fields: I mean, it's a fourth of California's population with almost the same sales numbers — they love their weed up there, man. So what happens with a state like Texas? People say Texas is never going to legalize, and then we talk about the fact that they don't need to legalize because they've got a massive hemp market. If I were the state of Texas, I'd be thinking, 'we want tax revenue, and we're not sure how much we're getting from the hemp side.' Do you think internally they decide, 'hey, we've got to put the clamps on this'? How do you think that evolves for a state like Texas? Ben Burstein: It's a good example — the political atmosphere on hemp today is very complicated, and there isn't bipartisan agreement. Florida's a good example, where Ron DeSantis is actually siding with the intoxicating hemp community against legalizing the regulated market — no one expected that. I think Texas is similar; you don't know exactly how the dynamics will play out between intoxicating hemp and a regulated market. What we can say is states want the tax revenue — in states with a robust cannabis program, cannabis taxes make up one to three percent of the budget, which can pay for schools statewide from cannabis alone. Regulators also recognize illicit sales are happening whether they like it or not — Texas is probably one of the largest states by total cannabis sales in the country, it's just all going through the illicit market with untested, untracked, non-compliant product, which creates more safety risk than most states would care to admit. Over time I think you'll get more policy liberalization — regulations are shifting more pro-weed than against, and states like Ohio passed legalization by more than 12 points, one of the largest 'yes' votes ever, with demographics and voting patterns relatively similar to Texas. So there's a world where the population is very interested in legal cannabis, regulators are interested in capturing tax revenue and diminishing illicit sales, and if a state like Texas were to legalize, it would instantly become one of the largest states by total sales just because of its population base. That's how I think about all states long term — it's about where the population centers are, similar to how other traditional CPG industries think about markets, and large population centers like Texas, Florida, North Carolina, and Georgia are going to be many of the largest growth states over time — it's just a matter of when they legalize. Kellan Finney: The reason I brought that up is because we were talking about sales per resident, Alaska and Michigan, and my first thought went to Texas given its sheer size and population — those numbers would probably make it one of the larger markets pretty quickly if they did it the way Ben described, nicely spread across the state. Ben Burstein: One way to think about it: a state like Michigan does $300 to $350 million a month in total sales. Spread that ratio out across the entire country's 350 million people, and you'd have a regulated market that's tripled or quadrupled in size — and that's still just with the regulated structure of today. The main reason sales are going to grow is increased accessibility — as cannabis gets sold in more locations, total sales grow. That's the main catalyst to look for. Bryan Fields: What question do you wish more people asked you? Ben Burstein: What's my favorite brand? Bryan Fields: What is your favorite brand? Ben Burstein: I'll go with Jeeter — it's LeafLink's largest SKU by total sales. The little Jeeter five-packs are the number-one through number-ten best-selling SKUs on LeafLink.com. People love the Jeeter minis. I love Jeeter as a company not only for their management team and effectiveness spreading across the country, but their brand wasn't very large until 2020-2021 — not many brands achieve that kind of success at such a later stage in a market like California. I have a lot of appreciation for their business, I think they make good product, and I enjoy it, so that's my favorite brand on LeafLink. Bryan Fields: Which brand or product category, if it's not a brand, do you think is going to explode over the next 12 to 24 months given current trends? Ben Burstein: Good question. Historically, about two years ago it was mini infused pre-rolls, which became very popular; last year I'd say non-distillate oils became very popular. The consensus answer is always beverages — people want to believe beverage sales will expand — but I'm not as big a believer in the product itself; it's very difficult to have refrigerators in dispensaries, it's expensive for the square footage they take up. If I were to give a less consensus answer, I'd go with value flower. A lot of companies are starting to understand the dynamics that large traditional CPG beer brands understand — building a portfolio of products from value to premium across form factors. It's only recently that large flower brands are coming out with true value flower — I'm not talking about $100 ounces, I'm talking about like $1-a-gram product that someone like Glass House is putting out. If you have a cost-competitive position, you want to price to capture the most consumers. I've seen the number of units sold by a company like Glass House explode because of their value pricing, and when we think about long-term brand building in the industry, it's all about building consumer interest — you don't have major brands with true pricing power in the space yet, and over time you're going to see the development of large brands with real power, especially pricing power, and access to heavy consumers happy to buy a $10 eighth. So as you get more harvest and capacity, I'd expect more value flower to get sold. It's not a consensus answer, but it's one we already see performing strongly in LeafLink data. Kellan Finney: The cannabis tech ecosystem obviously has a ton of challenges on the horizon — what do you think is the biggest challenge right now that the current operator tech stack is facing? Ben Burstein: Thanks for asking — my job is to do M&A in the cannabis tech space, so I've underwritten probably 60 or 70 companies in our ecosystem over time, and I see three big challenges. Number one, there's a huge prevalence of point solutions versus platforms — if you're a retailer today, you rely on six or seven different tech companies for different parts of your business: point of sale, marketing tech, payments tech, banking, and so on, and you have to move data around between them all. It's similar on the brand side. There's no true end-to-end solution in the space, so it's very difficult to manage your data because there's just not consistency or data piping across the different platforms. The biggest trend I've seen in the ecosystem is that operators want end-to-end solutions and platforms that can effectively deliver business insights — people today don't know how much inventory to buy because they don't know how much is in the back room versus on the shelf, and they don't know their best-selling SKUs, because the data from their point-of-sale system doesn't reconcile with inventory or end sales. So it's all about bringing assets together in a way that's effective for operators. The second challenge is that capital availability has been extraordinarily limited — you had some very large capital raises in 2020 and 2021 from companies like Dutchie and LeafLink, and that's declined dramatically since; two years ago in '22 the industry raised almost a billion dollars in cash, last year it was around $300 million — not much. Over time, M&A in the cannabis tech space is going to accelerate as more companies run out of cash and runway and can't raise anymore. So there's good news to come for operators as platforms and systems consolidate, data gets better, and they get told better information about their operations — but today it's just very challenging to understand how your business is doing and what you need to do to improve it, because the tech isn't good enough across many companies to tell you with high accuracy. That's a big priority for us: how do we help you run your business, do it in a way that's valuable with data, and do it in a way that creates more margin dollars. Kellan Finney: Do you think the tools could be better suited for cultivation and manufacturing as a precursor to retail? Ben Burstein: I think the answer is yes. One of the challenges is there still isn't enough maturity in the tooling to effectively implement across systems. Many large commercial cultivators don't use cannabis-focused solutions — some do, some don't — but for the most part they're either underserved by traditional cannabis-focused solutions or by traditional non-cannabis solutions that don't understand the nuances of the industry. Over time you'll get more consolidation in those platforms so they can better serve all the different operators. Large multi-state operators selling on their own shelves love these integrated systems, but I'm thinking about how the small mom-and-pop shop or small brand buying product, processing, and making cool new chocolates people want to buy actually comes together and understands how their business works. If the retailer doesn't know the brand's inventory, it's very challenging to stock appropriately, and if the brand doesn't know the retailer's shelf space, it's very challenging to sell to them. Most other industries have solutions for managing inventory from the brand or retailer side in tandem, and at LeafLink we think similarly — you want integrated end-to-end solutions for huge multi-state operators, but you also want to understand the flows of data and product at a lower level, and we think we're doing a good job building that out. Bryan Fields: I think that's perfect, and I just want to give one last shout out — for anyone who wants to get in touch with you or learn more about LeafLink, where can they find you, Ben? Ben Burstein: Best way is our website, LeafLink.com. Everyone can reach out to me personally at ben@leaflink.com if you have any questions — I'm very happy to answer. Our support team and customer service also does an amazing job helping our customers use the platform the best way and helping new customers coming on board, so please check us out. Bryan Fields: Awesome, thanks for taking the time, this was a lot of fun. Ben Burstein: Thanks, guys.