Rare Air with Choice Consolidation Corp. CEO Joe Caltabiano

All right, looks like everybody's starting to file in here. All right, well, hello and welcome. To the latest installment of the Cannabis News Key. I am your host, Jason Klein. I am a partner with Ramone Law in the cannabis law department. I sit in Washington, D.C., and today I'm coming from, uh, to you from Missoula, Montana, with my fantastic guest Joe Caltabiano with Choice Cannabis— Choice, I'm sorry, Choice Consolidation It's back. We're going to be talking about all things choice and all things Joe Caltabiano and his strategy when it comes to cannabis industry. First, as always, I like to orient you around the platform here. We like to do this as an interactive conversation with, with our guests, so we invite you to type in your questions, anything you want to ask Joe, just go ahead and type in the Q&A or the chat bar that you've got there on your screen. You can chat with the whole group if you'd like. You can chat with just me and Joe. I'll be monitoring that as we have the conversation for the next hour, and I'll be taking those questions over over to Joe for you. So go ahead and start putting in your questions so that we make sure we get to the topics that you want, you want to hear from Joe on. We are recording this so that you can watch it later. We're looking at ways to make it as accessible and easy for you to watch and use later as possible. We'd like for you to share this with your friends, with your colleagues. With, you know, your family, with people that you know that may be interested in the topics that we discuss. And we're always looking to bring you useful information about how to run your cannabis business, how to invest your cannabis dollars, you know, what is going on in this space so that you can be the most informed and well-positioned operator or investor in the cannabis space as possible. So if you have ideas about future guests, we're happy to hear those from you and try to get those people on this series. We do this monthly. We aim to do it at the last Friday or second to last Friday of every month. It's always at the same time, noon Eastern time. We spend 1 hour, and, you know, we're always just looking for people who have good, useful, functional, actionable type of information. So if you know anybody like that you think would make a good guest, please go ahead and send them our way, introduce them, and we'd like to, like to talk to them about, about joining for a future event. Okay, well, talking about future events, before we introduce Joe, the October webinar, even though today is October, the late October webinar is going to be a colleague of mine, a gentleman named Steve Kolbe, who's an attorney and a PhD. He is in IP, does patent law, and has a great history of advising early-stage IP— you know, early-stage companies, startups on IP strategy. He's worked with a couple of different cannabis businesses, direct and ancillary cannabis businesses. And we're going to be talking about sort of early-stage IP as a value add and as a strategy for building value at the early stage in the cannabis company. So that's going to be on October 22nd, noon Eastern time. Like I said, you can find that webinar registration on the Ramon page. You can also find it on CBE, Cannabis Business Executive. So go ahead and sign up for that one. If you can't join live, you can always watch the recordings afterwards. So we're looking forward to that and look forward to seeing you then. Okay. So, Joe Caltabiano. Uh, let me do a quick introduction for those of you who don't know Joe. Uh, you should because he's been a guest on webinar series before and is a well-known name in this space. And the reason he's well known, of course, is he was a co-founder of Cresco Labs, which is one of the largest vertically integrated MSOs in the cannabis space. He was president of Cresco until about 18 months ago, 20 months ago now, March of 2020, I think, was when they went their separate ways. And since then, Joe has started up this Choice Consolidation SPAC. So we're going to be talking about his, you know, strategy with Choice today and some of the lessons that he learned from that experience co-founding and leading Cresco to such great heights. So Joe, welcome to the Cannabis Business Key again.

Thanks, Jason. It's always great to see you, speak with you, and, you know, get to connect with your audience. So thanks for having me and excited to be here and kind of share my thoughts and, you know, answer any questions that people may have or, you know, just a spirited dialogue as always. So thanks again for having me and having me on your show.

Absolutely. Absolutely. Well, we're really glad to have you, Joe. So let's just jump right into it. You know, can you just describe— Choice Consolidation is a SPAC, and I know people have heard this word thrown around a little bit. Maybe you can just describe, you know, what are the features of a SPAC and how does a SPAC— what's sort of the general life cycle on a high level of a SPAC?

Sure. Yeah. Yeah. I mean, I think a lot of people aren't that familiar with it. And honestly, probably 3 years ago, maybe or so, I probably wasn't that familiar with it either. So a SPAC is basically a public company. So it operates like a public company. It files quarterly financials. But during the timeframe from when it raises its capital and goes public, it goes out to try to find targeted companies and complete what's known as a qualifying transaction or QT. During that timeframe, it sits on this pile of money that it raised, which in Choice's case, we raised $172 million with a very thoughtful investor base. So that money sits in treasury while we go out and find these target companies. We will ultimately use that cash and our equity to bring those companies public. So you're going out to find private companies that that have strong fundamentals, that have cash flow, less kind of startup and more, you know, operating businesses, bring them under one umbrella and make them become, you know, part of the next MSO or multi-state operator that, that we're very familiar with, with that term. So it's a vehicle to take some companies public. Sometimes it's one company, sometimes it's multiple companies. In Choice's case, we will look at acquiring multiple companies in multiple states, bring it into one transaction, and launch what is again one of the top-tier MSOs in the space that's really rooted in today's fundamentals and looking at bottom-line results and understanding free cash flow and the things that are important to today's investors.

Great, great. So, so what we're talking about here is that, you know, specific to Choice's strategy with the SPAC, we're not talking about a single target. We're also not talking about bringing together 150 different companies. We're talking about a relatively small number that are being targeted in a relatively small number of markets. Maybe you can just sort of describe on a high level, you know, what you are looking for in these, in these targets, in these potential acquisitions for the SPAC, and how they fit together, what their commonalities may Yeah.

So for me, starting in the Illinois marketplace and starting all the way back in 2013 when I had the idea to start Cresco and really operating in 2015, regulated markets were the driving force for my desire to get into the cannabis space. And looking at, if all things being equal and there's a heavy bar of regulation to overcome, that creates moats, that creates opportunity, and that creates disproportionate value for investors who are able to get behind a company that can operate in these very strict, very difficult regulated environments. Typically regulated environments encompass some level of limited license. So they kind of become synonymous. When you look at states with unlimited licenses, typically the regulatory framework is less intense because there just isn't the ability to regulate at the same level when you're trying to regulate 1,000 companies as it is when you have 20, 30, 50, 100 companies. So for me, it's states like Illinois and Pennsylvania and Ohio are really driving factors behind what we're looking at. Also Nevada, Arizona, markets that have limited licenses, high regulatory framework, and the ability to create an outsized return for your investors because typically there's an imbalance between demand and supply. Because it's so hard to go out and build facilities or hire staff or open up retail stores, that gives us opportunity for an above-average return on invested capital, which is what Choice is really looking to do, is capitalize on our ability to raise capital, deploy it strategically in states that, in my opinion, matter. And not to discount markets like California where certainly the biggest brands will ultimately come out of, and you can understand consumers, but it's a very difficult market to compete in. It's a very difficult market to become profitable in. So for me, it's about driving profitability. And again, looking at those states like Illinois or Pennsylvania, Ohio, Nevada, Arizona, I feel like there is a real opportunity to deploy money in there go after single-state operators. So what I mean by that is somebody who, you know, applied for a license, won a license, built their company based off of knowing the regulations. They know the customers in those markets and they know the employees in those markets, and they've done an incredible job building those businesses. The problem in cannabis that a lot of those companies face is there's only a limited amount of capital. So if you're a single-state operator that has this phenomenal story, but you can't tell it to the world and you can't get access to the capital markets in the same way that Cresco, Trulieve, Cureleaf, GTI can, you're continuing to swim this upstream battle that just becomes overwhelming. So you run these great companies, but you don't have enough access to capital to truly compete on the same level. So that's where choice is going to come in. Identify those companies that are doing well. They're good companies. This isn't a bailout strategy. This isn't going out and finding assets that are in fiscal trouble or aren't functioning. It's going out and finding assets that are great and giving them the supercharge to achieve their goals that they ultimately set out to do. So I feel very excited. We've kicked a lot of tires. We've looked at a lot of targets. And we found some really good opportunities that we hope to ultimately be able to announce a transaction around, but it all revolves around those single-state operators that have put a plan together, executed a plan, but they're just coming up short of their ultimate goals. And typically it's due to financial constraints and the limited access to capital.

It makes great sense. I want to dig in a little bit more because sort of in the list of states, and I know you had Maybe off the top of your head, I don't know how strategic your listing of target states was, but there are some that you didn't mention that I know are very hot and may have fit into that category. For example, there's Florida, there's New York. These are both different levels of regulated markets, but both tightly regulated. There's a place like, you know, like Virginia and other sort of, you know, new, new states and states that, you know, hold a lot of potential. Georgia, for example, Texas, you know, that aren't quite there with the implementation of their programs but would be coming online in the future. When it comes to what Choice is looking at right now, it sounds to me like you're really looking at those established adult use markets, in particular limited license adult use markets. Do I have that right?

Yeah, well, not necessarily adult use, but limited license. You know, yes, states like Maryland, Massachusetts, Florida, New York, New Jersey, Connecticut, they all check those boxes as well. There's different reasons that some are what we're targeting in the qualifying transaction and what we're not. Not to get nuanced, but States like Maryland or a little bit, or New York are very difficult from a regulatory framework to transfer a license. So as you're looking at putting together, call it 3, 4, 5, 6 transactions simultaneously, you're trying to do it in a manner that quite frankly doesn't cause me an aneurysm trying to juggle too many targets simultaneously, but also that there's a regulatory framework that you can navigate through in the appropriate timeframes. Because with a SPAC, you typically have about 24 months to deploy the capital. So Choice went live in Q1 of 2021. We have until— we have 24 months to complete these transactions. And while I feel like we're well ahead from sourcing and diligencing targets, I've been a part of transactions that last 12 months in a regulatory world. So you don't want some of that to come into play. So you Yes, there are other markets. And then kind of commenting on the medical versus adult use, we really, I love the medical markets. I love the strong medical markets where there's access to cannabis for consumers that need it. So Florida and Pennsylvania and Ohio are phenomenal medical markets that are also trending towards some step-up function, meaning they're either going to introduce edibles like like, excuse me, Florida did this year, or Pennsylvania probably will in the near term, or they're going to try to get an adult use bill passed. So you're seeing different forms in all of those markets where you're going to see a strong, robust medical program that you can run a business off of. It's not like it has to go recreational tomorrow to become a viable business, but you know, again, looking from an investor standpoint, that there's going to be that step-up function that will increase revenue, that will further create a demand-supply imbalance, that creates price integrity, that creates strong margins, that creates those things that I can build a financial model around, not only in the near term, but looking out 1, 2, 3, 5 years, knowing that these companies are very strong and have this opportunity to create significant free cash flow. So you're right, it's not And in the world today, it's more about markets we're not targeting, which is the Californias and the Oregons and the Oklahomas, and probably a little bit of a wait and see on a market like Michigan. Although you're seeing a lot of activity there, it's something that I'm not comfortable with. It's imperative that a SPAC is able to put together the financial model that works today, but also what it looks like tomorrow and have a high degree of certainty. Because again, We're a public company. Typically the way this works is these companies are private and you have this longer time before they become public. You're now thrusting these companies into a public environment. So it's about hitting quarterly expectations and quarterly earnings. So it's important that you can kind of roadmap that out and again, kind of pave that path forward for the investment communities.

Makes a lot of sense. And I like the way you frame that, Joe. You are looking for that moat, that regulatory environment in that market, in that state that helps you, gives you a little bit of protection, but you don't want that moat to be so wide that it's an ocean, that it interferes with the qualifying transaction process. And it can be maddening dealing with regulators. I know it well. So now that we've talked a little bit about some of those markets that you're interested in, I'd like to hear your thoughts on, you know, the different verticals in the cannabis space. Is Choice targeting one over the other? I mean, you know, we had a recent guest on here, Jonathan Sandelman with Aero Wellness, you know, who's certainly focusing on the cultivation side of things. But maybe you could talk about Choice's approach. Within that.

Yep. And Jonathan and Ayr have done an incredible job that started as a SPAC. They are a benchmark for what a SPAC should try to aspire to. So as I look at the different verticals, I'll take it in two parts, like what the world looks like today, and then my pontification of what the world looks like tomorrow. And we can debate what the timeline is for tomorrow, but As you look at really the 4 verticals, the cultivation side, and then the brand development manufacturing side, the distribution side, the retail side, I think cannabis presents a very unique opportunity to participate in all aspects of the vertical supply chain today. And I think that's really important because supply chains get disrupted in these limited license markets. If you are focused on the brand development or distribution, but somebody's crop fails and you can't get the source material or prices skyrocket, you're limited in the ability to execute your plan. Or if you're a retailer and you don't, again, control your supply chain and somebody comes in and is willing to pay more or there's price compression at certain parts, you may not be able to achieve your financial results. So I think it's important in the near term and again, probably in the next 1 to 5 years of being vertical. It's this incredible opportunity to capture a disproportionate amount of margin. And as I look at the different markets, they all have their different challenges, right? Illinois right now is going to add a significant amount of retail licenses into the space, which is great if you're on the cultivation manufacturing side. But if you're solely on the retail side, you know, chances are your market capture is going to decrease or you're going to see price compression. Or in other markets where there's a surplus of supply, the retailers really be able to capture the margin because they're pressing down prices. So being able to control your own destiny and capturing all of that margin is great because we don't know what the future holds and we don't know when federal legalization comes. We don't know when interstate commerce comes. So I think in the near term, being vertical and as Choice looks to execute On the qualifying transactions, it's important we're really trying to be vertical in the 5 to 7 markets that we ultimately deploy into. Beyond that, I view compression occurring at both ends of the vertical supply chain. So I think cultivation will get disrupted when interstate commerce comes into play and when that product can legally move from California to New York or Florida or wherever. Just like tomatoes and just like watermelon and just like other agriculture products, you will see local cultivation get a lot of pressure on price integrity. The other side is retail. I think you're going to see inevitably Walgreens sell medicated gummies. And as that product becomes available and maybe they don't sell joints or raw flour, but parts of the retail chain will get disrupted, creating price pressure. So for me, the long-term vision for Choice will focus on the middle verticals. It will focus on the manufacturing and brand development side and the distribution side. And, you know, to the listeners out there, I really just equate it to, you know, if I'm looking at the beer industry, I want to be the Budweiser of the world and the breakthrough beverage, the distributor of that product. That's where the majority of the capital or the margin is captured in a mature industry. It's not the hop farmer. It's not like we know what type of hops are going into Budweiser's beer. I think I've been told through commercials that it's the best hops, but beyond that, I don't know the source material and I don't know that I want to own the liquor store on the corner selling the beer. I think that that's a very low margin business. But again, looking back and driving towards the value that ultimately is created on the brand development side. So can you create a product that resonates with the customer and can you get it on the shelves? And that's where the distribution arm comes in. You know, that's where the long-term bets for choice will ultimately be. But again, that's 7 years down the road. I think in the interim, you know, we really focus on all aspects of the vertical. We really fine-tune all aspects. So we know what good source material looks like. We know how to manufacture good products. We know how to get those products onto other people's shelves. And we also understand the retail consumer because you're transacting with them. So that circle provides a lot of value as you're developing brands and understanding customers in the long term. So probably a long-winded way to say all of the above, I guess.

Well, I think it's a fascinating thought exercise that you're going through right now because Oftentimes, newly public companies are obviously required to predict the future, right? I mean, it's a big part of what you do, trying to guess what's going to happen, what the consumer demand is going to be or where the market's going to take it. Most companies don't have to deal with so much uncertainty with regard to the law and the regulatory environment. Now, sure, there are certain companies that have changing regulatory landscapes. But when it comes to cannabis, and maybe we can jump in from here on your thoughts about what's going on in DC, your thoughts about federal legalization, SAFE Banking Act, and other efforts to further liberalize the laws around marijuana or just marijuana generally. In the United States. You know, I've been in this industry for a long time, and in 2012, 2013, 2014, I would tell people that marijuana was, you know, end of federal prohibition is going to come in 2022. Well, it ain't happening. I was wrong, uh, and I knew I was wrong 3 or 4 years ago, you know. I mean, 7 or 8 years ago, that's— that, that was the trend line that I saw. But, you know, in the last, you know, 2 or 3 years, it's become apparent that at least the change was going to happen much slower than what was predicted a decade ago. And that doesn't necessarily slow down or stop the growth of the industry, but it certainly affects it. And you need to have good, strong predictive powers to try to estimate where this is going to go. So this question, Joe, I mean, Gosh, it sounds to me like you do not have a lot of optimism with regard to the end of federal prohibition happening anytime soon, or really any Safe Banking Act, for example.

What I would say is, for the people who know me, I am an incredibly optimistic person. When it comes down to the operation aspect of the industry, I am incredibly optimistic. You are seeing a lot of the companies really hit their strides. You are seeing strong earnings, you're seeing growth. And outside of kind of the world dynamics of maybe some employee shortages or difficulty hiring, you know, companies are doing well and the cannabis industry is growing every single day and it's maturing, which is wonderful. So, you know, I couldn't be more confident in the businesses themselves, but the flip side is having been in this industry for a while now, I couldn't be more pessimistic on the Washington side of the equation. I think the states are doing a good job of battling their way through their Republican-Democrat issues and working towards social equity change and working towards getting adult use passed in various really important markets, Illinois, New York, some of those states you've seen incredible strides and really neat things occur. But in DC, It's a logjam and it continues to be a logjam. And cannabis is, to some extent, a pawn. I mean, I think you saw Schumer come out recently and talk about making sure senators aren't supporting the SAFE Banking Act, which is ludicrous and it's frustrating because as I walk into a coffee shop today and they don't take cash, it helps their business be cleaner, It helps the efficiency of the business. You're not changing hands with quote unquote dirty dollars. It creates efficiencies. It's able to track, you're able to pay taxes cleaner. To force an industry to be a cash-based industry in today's day and age is archaic, especially an industry like cannabis that's doing billions of dollars in transactions month over month or quarter over quarter. But it's the reality. You're not seeing the movement. It's too much horse trading going on in DC of, "I'm not going to let SAFE happen until this happens." Being a business person who tries to accomplish things by taking one step at a time, right? You try to go out and get investors to say yes or employees to say yes or believe in small things before you make global changes. That's the way the business world works. The way DC seems to work is this all-or-nothing attitude, and we'll shoot for the moon and work our way backwards. And it's a very frustrating thing. So, you know, again, a long way to say that I don't think you're going to see a SAFE PASS anytime soon. I don't think you're going to see any material cannabis reform under this administration. I think the, you know, and then you have to look at, you know, different cycles of when the Senate, you know, potentially can change hands again, or when the House is going to change hands, or the presidential election in '24. What I do think, and as I look at my timelines, I think you're going to see every Democrat president from now on going forward will be a supporter of decriminalization and federal legalization of cannabis. I think you maybe have one more Republican cycle of not having that same view. So depending on who the next Republican opposition is to the Democrat incumbent presidency, they're not going to be supportive of federal legalization. Beyond that, I think that the next round of Republicans that come up will have to be supportive of legalization. So I think realistically, we're probably in a time frame where 6 years, you're probably not going to see much change unless there's some significant streamlining of DC, which I don't think that's any of the senators' or congressmen's best interests. They're there to get reelected and just kind of keep chipping away at nothing. So I'm not optimistic of any major changes. But with that being said, I think you're seeing the opportunity set still continue to develop for operators. Who are able to access capital, who understand that the federal prohibition creates opportunity, not obstacle. And it continues to drive those moats that make it a possibility for someone like myself to develop a multibillion-dollar company in a circle that really none of us belong, right? This should have been driven by the pharmaceutical industry. It should have been driven by the big beverage, big alcohol. Or big tobacco or big food, but it gives entrepreneurs this incredible opportunity to come in and the word gets used too much, but really disrupt that industry and really create this billion-dollar niche that shouldn't have been there. It's a fault in an inefficient system that created opportunity for— I feel blessed to be able to have navigated my way into it and really exploit that weakness in the federal government from their inability to pass something that should have been done, to your point, now. We should have been talking about breaking out the champagne and celebrating significant changes in the modern day, and it's still DC, and it's still a tough place to get even the most makesense things done. We got a lot of other things to worry about in this world, and for cannabis still to be a opposition point is just ludicrous.

DC is more DC than it ever was right now. If anybody could have predicted that, they would have done exactly what you're doing now, which is to continue to find those opportunities that exist, as you put it, because of, not in spite of, but because of the regulatory and legislative logjam that's going on. So it is creating some, you know, there's certainly a silver lining to this cloud. And I think it would be better if we had a productive legislative branch that could have reached the conclusion that most Americans at this point have reached, which is that cannabis generally certainly should be available to sick people as, you know, in a medical form. But the vast majority of Americans also agree that cannabis should be available in adult use recreational form to adults who consume it, you know, on their own terms for their own reasons. And, you know, it'd be nice if we had a legislative branch that was responsive to that, but we don't right now, at least we don't. And there seems to be a, you know, there seems, it seems to have settled down into a status quo where we have all these different states doing all these different experiments and trying out different programs and creating opportunities for entrepreneurial entrepreneurs like you. And part of the reason, and, you know, there's a great question here from Tyler that I wanna make sure I get to, but before I get to that question, Tyler, and anybody else who's thinking about asking a question, this would be a good time to put this in. To put your question in so we can, we can get to it. But, you know, one of the things you had mentioned, Joe, and I think really relevant from what you were just talking about with the, you know, the status of prohibition in the United States, is that it restricts access to capital. Okay, so you have all these businesses, you have all these, you know, businesses need capital. Like a fire needs fuel, you know, fire needs wood. You gotta have something to burn or you can't keep the fire going. So you need capital. Typically businesses use debt, right? And traditional sources of financing. That's the sort of most common way that businesses get their fuel to start burning and creating a bigger fire. But obviously that is very difficult to come by for cannabis businesses because of the nature of the business and the nature of the laws around marijuana. So maybe you can just give us a, you know, your thoughts on the current state of capital markets, debt in particular. What does it mean for cannabis companies to take on debt and What's healthy debt and what's unhealthy debt from your perspective as a shopper now kicking tires? What looks good? What doesn't look good?

Yeah. So when you start a business, the typical form of capital is some type of equity, right? It's an equity investment or venture capital investment that gets a disproportionate amount of return because you're taking a flyer on newer companies. As companies start to mature, debt becomes a very viable option once you have a P&L that can support the repayment of debt, because debt lenders are not speculators. In general, debt lenders, they lend you money, they want a rate of return, and they want their money back, and that's it. They're not looking for the pie in the sky, the this is going to be a home run. That's not how debt lenders talk. They just want a coupon. They want to get certainty of repayment. And that's really what debt is there for. And it is to exactly, as you mentioned, turbocharge or grow those businesses. So the cannabis industry obviously had a lot of speculative capital go into it in the equity markets. And you see the volatility in the public sectors. You see the stocks go up when there's good news, you see them pull back when there's bad news. And they typically kind of all trade in a similar thing. The thing with capital is it doesn't disappear. It typically just moves in one form or another. So while the equity markets have slowed or dried up considerably, the debt markets are ripe. You're seeing an incredible amount of debt come available. And quite frankly, some of the people who were maybe $10 and $20 million equity $50 million debt investors. So they've gotten more comfortable in the businesses. They've gotten a little bit more clearance from a regulatory standpoint or their general counsel, whoever got a little bit more comfortable with the debt side of the business than maybe the equity. So you're seeing an incredible influx of debt as recent as, you know, Trulieve yesterday printed up $350 million bond offering at an 8% coupon. That's down 50% from a year ago where people were borrowing money in the mid-teens. So you're seeing top-tier operators be able to access incredibly large sums of money at manageable interest rates. And from people who just want a coupon, these are not predatory lending scenarios. These are legitimate debt funds who are deploying meaningful capital and view it probably as one of the last times they'll be able to get something like an 8% coupon on a company like Trulieve that produces free cash flow, isn't going anywhere, is functioning at a very high level, and it's a great rate of return for them. So with that though, companies do get in trouble with debt. And I think that's something that everyone needs to understand. We as investors look at kind of the headlines of what's the interest rate, how long is the loan, but beyond that, there's 100 pages of a debt document that talks about what an operator can and can't do. And, you know, my background was in lending, so certainly recognizing, um, the covenants that go along with debt packages is way more important than the coupon. What can you do with your business? Can you make tax distributions? Can you buy other companies? Can you grow? Can you deploy capital into, you know, various aspects of your business? What about payments to retain executives? And all of these things go along with it. And sometimes it's very stifling to bring on debt because you are bringing on somebody that you now answer to. And typically in the equity world, they sit below the operating side of the business. And on the debt side, they really sit above the operating side. They really— the board answers to the debt holders. At that point. So it changes the game because you're bringing in a material person or company that can influence how your company looks in a year or 2 years. And, you know, can you execute your business plan? Or what if you have a bad quarter? Or what if something happens? And cannabis is filled with something happening. There's delays, there's regulatory change. Could a state ever go from recreational to not recreational, right? Like, what What are those things? And those are some of the covenants that get brought up in debt. So debt is phenomenal, but debt is scary. And you've seen companies like MedMen and Niantis not be able to live up to some debt agreements. And then now you're in some form of bankruptcy court or whatever it's called in Canada. I think there's a 3-letter acronym. I can't remember at the top of my head, but That's not where you want to be as an operating company. So understanding that, understanding the pros and cons is very important. And then also there's still a significant amount of real estate leverage available. There are sale-leasebacks, there are companies that you're seeing cap rates really press down as well. You know, the, the New Lakes of the world who recently went public, you know, you're seeing them as a very viable opportunity, or IPR, where, you know, the cap rates have pressed down from 12%, 13%, 14% to maybe high single digits or very low double digits. So there's opportunities out there for capital. Companies need to be in a position, why it's important to have your books audited, why it's important to treat these businesses, even the private ones, as businesses. If you're producing the type of revenue that you think it's viable for you to start going and looking at debt, you better be on your financial game. Your CFO better be very strong. Your team needs to understand that no longer is it setting expectation and missing them is okay because debt lenders don't take too kindly to missing expectations either. So it's a maturation, it's good, it will help the consolidation side of the business, which inevitably needs to happen or continue to happen. But The capital is out there. It is for the best of the best operators. And again, why Choice is a really good opportunity for a lot of companies is I've been around, I've secured senior secured debt, I've lived up to debt covenants, I've done various capital markets arranging, whether it's sale-leasebacks or whether it's large equity offerings. So we have a strong capital position now. We're in a position to deploy that and we're able to access additional capital based on the requirements we have for the companies that we're trying to acquire. When you look at debt and what healthy debt means, I guess on the high side in cannabis, it's probably a 1-to-1 ratio between your debt and your actual EBITDA is probably where a good debt number lies. I think most of the top-tier operators are even below that leverage ratio. But when you see 2-to-1 debt, 3-to-1 debt, 4-to-1 debt, That's not the type of company. That's a problem waiting to happen. They're waiting for some event. And those events in cannabis, it just takes longer and longer. New Jersey should have been selling recreational cannabis by now. It's not. New York is still slowly getting through the rollout of an adult use program and it's still a long way to go. So kind of playing that come is a scary thing when you're looking at debt. So overleveraging is something that we're not interested in. We will use debt as an appropriate vehicle as we continue to go. And I feel very fortunate to have relationships and access to debt investors, but you're only as good as your last transaction too. So being cognizant of the fact that debt lenders want to get repaid, debt lenders live up to their side of the covenants. They're going to give you the money and they expect you to live up to the other 100 pages of the documents and understanding that. And hopefully people who are navigating through those waters understand it in a very material way.

That's a great in-depth discussion of it, Joe. And it goes to— it sort of ties in with Tyler's question. I want to get back around to Tyler's question. And he's really— his question just boils down to whether Choice is looking at ancillary businesses, ancillary cannabis businesses, as well as direct. But, you know, it ties into that discussion right there because obviously there were, you know, many investors in this space who chose the ancillary route to avoid these difficult issues when it comes to raising money. For example, licensing, crossing state lines, you know, all sorts of— you're able to build a more traditional, on a more traditional pathway to growth if you're in an ancillary business than if you're on the direct side. So specifically to Tyler's question, is there an appetite or an interest on the ancillary side from Choice's perspective?

Bluntly, no. So for Choice right now, and what differentiates me, and I think we talked about this previously, was I come from an operating background. I understand licensed operating plant-touching cannabis entities. And I put myself again in rare air to be one of the people who've navigated through that world. So, you know, I like to— the story with Choice was get capital behind someone who's been there and done that and really use this as a second mover advantage to learn from all of the things that I've done in my cannabis career, good or bad, and applying them to today. And how do you improve slightly? What I know is the operating side of the business. So we're really focused on the licensed operating aspects. It's not to say that post-qualifying transaction, we don't look at tech partners or tech acquisitions or IP or, you know, other things that go along with the cannabis space. I think there's an incredible opportunity there. Personally, I've made some personal investments in non-plant-touching aspects of cannabis. And I think, you know, I think you go back to the pick and shovel side of the gold rush and that's where the money was ultimately made. So I think it's a great strategy. It's not Choice's strategy today. It's not to say when we're a functioning company that we won't look at other things, but I think, you know, from now through the time that we announce a qualifying transaction, we're really laser-focused on the US We're really laser-focused on the markets that, in my opinion, have high regulatory entry or high regulatory framework, limited license, and a disproportionate opportunity to create some strong bottom-line results. But again, that will change. We will be a nimble company. We will constantly be exploring how do we remain cutting edge as we put together various assets. But until the time that we complete that transaction, we're really laser-focused on the operating side of the business right now.

Makes a lot of sense. We've got about 10 minutes left before we're going to wrap this up. So any attendees who want to get Joe any more questions, please go ahead and type them in now. Joe, how can our audience— what can our audience do for you? You know, as far as how can, you know, what are you looking for? Are you looking for deal flow, for opportunities? If people in our audience are looking for an exit and maybe an operator in a tightly regulated market, you know, mom-and-pop or something like that, can they get in touch with you?

Yeah, for sure. You know, we're looking at, again, strong single-state operators that have strong businesses, We're not looking to be a bailout platform. We are looking for good companies that we can help make better. That's the primary focus. And also we're in a hiring mode. Talent is really important. And I've been fortunate to work with some incredibly talented people throughout my career. So understanding the importance of very strong leadership and whether it's C-suite, director level, or beyond, you know, absolutely interested in talking to people who feel they bring value to a public company and understand the environment of operating in a public company. So, you know, I mean, there is a talent shortage in the US as a whole, and it trickles down to cannabis for sure. So, you know, for me, it's continuing to identify targets, continuing to try to put the best possible company together. And until we make that qualifying transaction, I'm absolutely open to looking at new opportunities. And then even beyond, we will be aggressive in the M&A environment post our qualifying transaction, where again, similar to AIR Strategies, you go through the qualifying transaction, but then you fill in other gaps along the way, like their recent acquisition of Liberty. They did subsequent M&A to continue to improve that footprint. I think scale really matters in cannabis. I think that creates more opportunity for better debt, better investors, better institutional capital. Scale will ultimately win, especially if it's directed in the right markets. Gone are the days of just filling in the map. Again, learning from previous experiences, I'm not looking to do a deal in North Dakota. No offense to people from North Dakota, but it's just not the— you don't have to color in every part of the map to become a success story in cannabis. It's really meaningful markets is what's driving our behaviors.

Yeah, absolutely. Scale done well, right? It's not just scale for the sake of scale. It's scale with a purpose and with a strategy. Behind it because scale can scale out of control. It gets out of control real easy and it can be the death of you if you're not careful.

Yep. Yep. And we've seen it in this space. It's too capital intensive of an industry not to be laser focused. And again, just kind of rehashing that second mover advantage strategy. It's really learning from a lot of those types of things and making sure we don't make those same missteps along the way. 'Cause cannabis throws plenty of curveballs at you, even if you're doing everything right. So, you know, not recreating the same things you've done in the past that, you know, created some unfortunate outcome. Those things happen, you know, regardless in this space, there's enough minefields that you've got to navigate through. Don't do anything self-inflicted. So, you know, really learning on our previous experiences, applying it to today and how do we get to the scale we want to be as efficiently as possible in the most prudent capital spending way possible.

Absolutely. Joe, sort of as a closing question here, if you could sort of snap your fingers and see this regulatory landscape in 5 years, what would be your desired outcome? What's the environment that works best for choice? What's the environment that works best for consumers here in the US. You know, you had mentioned this interesting idea— I don't quite see it happening— but, you know, a state going from adult use backwards, eliminating an adult use program. And we haven't seen that step backwards, we've only seen forward steps. So, you know, really, where do you see the regulatory landscape across the country continuing to expand and liberalize, not on the federal level, we discussed that, but on a state level, you see more states with more medical programs, more states with more adult use programs in 5 years and sort of continued logjam in the federal space?

Yeah, I mean, I think at this point it's just going to continue to become this critical mass theory, you know, where the governors are going to continue to drive adult use. Pennsylvania is not going to be left behind as New Jersey and New York is selling recreational cannabis. It's going to increase the amount of cannabis in their marketplace, and they're not going to generate tax revenue from it. So they're not going to stop it, they're not going to enforce it any greater, um, they're going to come along. And, you know, same thing with Ohio. You're not going to have these states that border large states not ultimately get to the point where you see an adult use program come. So I think, you know, looking to the East Coast, you know, now you've got Florida and Georgia. You know, Georgia did a medical program. It will, it will evolve quickly. Virginia. So that leads to the Carolinas, West Virginia starting to look. Maryland inevitably will, will start to look at, you know, some program improvements. You know, I think the last linchpin is Texas. You talk about the political climate and I can't remember what I heard Texas called, like Texicali now, or with the large influx of California residents moving there. And you saw it in the last federal election of Texas not being a red state, now leaning more towards purple. That drives behaviors as cannabis programs come up. So, I mean, I think when Texas changes, that really sets a new stage for the United States. But I think you're going to see more and more states catch on that the sky hasn't fallen as states have gone from nothing to medical to adult use. They're going to continue to see that. And now you're going to see this windfall of cash in a post-COVID environment where tax revenue is of the utmost importance. What you're doing with that capital, being able to improve under-improved areas within local states and municipalities and areas that have been affected by the war on drugs and letting people out of prison for minor cannabis, those are all positive steps. And the states that aren't doing that are going to be viewed as archaic. And I think you're going to see more and more states catch on. I think that's where we can see meaningful change. And again, if the federal government doesn't catch on for a while, that's their loss. We'll continue as operators to abide by the state and local guidelines. And I think it's gonna get more and more exciting as more and more states come online and you create critical mass at some point. I mean, I hope DC sees it. It's crazy they haven't seen it by now, but you're gonna see more states. I think, again, Ohio, Pennsylvania, Georgia will probably move pretty quickly. I think Maryland will get their act together at some point in the near future. Those are big states that matter. 12 million people in some of those states. Again, that's pushing the majority of the US population into markets that'll have adult use programs now. And to see New York, people are going to be outside of the UN smoking cannabis. It's there. It's the most liberal cannabis program or consumption program in the world now. So it's going to be in the face of the bankers and companies aren't going to be able to hire employees and all the things that we know and see in headlines. Cannabis is here to stay and it's going to continue to grow. And it's not that I think states will go backwards, but again, it was just that you've got to look at all sides of the equation when you're contemplating hundreds of millions of dollars in debt.

You certainly do. I've written enough risk factors to know that. So yeah, you do. And I appreciate that. Certainly, I think you've gotten your message across here today, Joe. It does sound like you're very optimistic about the future of the industry, notwithstanding, you know, the challenges that are certain to exist and continue to exist. It's very significant challenges, but, you know, in the face of all of that, it does, you know, come across very clearly you're optimistic about the continued growth, and for good reason. There's been plenty of challenges in the past with cannabis. We're going to continue to face them, but The industry, you know, as long as it's full of, you know, smart, eager entrepreneurs like yourself and others who are, you know, moms and pops out there starting up businesses, bootstrapping, finding ways to build value in their license, in their market, and to appeal to consumers, it's very difficult to stop even without good access to banking. And even, we haven't said the words 280E during this presentation. I think it's obligatory. We probably have to say it at least once, but we haven't even approached that subject, but it's a rosy outlook that you've got here, Joe. And thanks. For your time. We do have to wrap. So thank you very much for your time. Before we go, I do— everybody who's still on the line with us, please go ahead and sign up for the October 22nd presentation that we're going to do with, with Dr. Kolbe talking about IP and in early-stage cannabis companies as a strategic value. So go ahead and sign up for that one. We'll see you in those 3 weeks. And Joe, we're going to have you back on You know, maybe this time next year that Qualpine transaction will have been in the bag and we'll be talking about a new, you know, stage in the lifecycle for Choice.

Great. I appreciate it, Jason. Thank you again for having me on. Always enjoyable to catch up with you and look forward to talking not only on camera but off camera in the future. So thank you much. Appreciate it.

Thank you, everybody, for joining.

Have a nice weekend.

Thank you. Thank you, everybody. See you soon.