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The Highlights

It was a strong start of the year for cannabis stocks, with the US cannabis MSOS ETF gaining 13.12% and the global YOLO ETF increasing 9.11%. US cannabis continues to outperform Canadian and other global names due to the positive sentiment driven by the potential for the DEA to agree with the HHS’s Schedule III recommendation. This would eradicate 280E, the onerous tax code that applies to plant-touching US operators. There is a basket of companies that historically has outperformed during rallies. This week, Jushi (CSE: JUSH, OTCQX: JUSHF) jumped 34.78%, The Cannabist (NEO:CBST, OTCQX: CBSTF) gained 34.50%, Cresco (CSE: CL, OTCQX: CRLBF) increased 32.03%, and AYR (CSE: AYR, OTCQX: AYRWF) rose 23.89%. Meanwhile, less levered operators that are generating cash flow go up less during these periods historically. Green Thumb Industries (CSE: GTII, OTCQX: GTBIF) was +5.40%, Verano (NEO: VRNO, OTCQX: VRNOF) was +8.93%, and MariMed (CSE: MRMD, OTCQX: MRMD) was +1.89%. While we normally would not read much into four-day trading periods, this may be a continuation of a trend that began last fall. This week’s rally was driven by “news” that the DEA is “now conducting its review” of cannabis as a Schedule I drug. This was reported by Punchbowl News on January 3 and was in a letter dated December 19 from DEA Acting Chief of the Office of Congressional Affairs Michael Miller sent to Congressional Cannabis Caucus Co-Chair Rep. Earl Blumenauer. Those closely following the space realize the DEA likely began its reviewing shortly after the HHS recommended Schedule III on August 29. Agrify (NASDAQ: AGFY) gained 4.98% this week and reported 3Q earnings Wednesday. Y/Y revenue decreased from $7.0 million to $3.1 million, while gross profit increased from a loss of $4.1 million to $1.0 million. Operating expenses dropped dramatically from $27.4 million to $5.6 million. Lower general and administrative expenses drove the reduction. Operating loss was $4.6 million in 3Q23, compared with an operating loss of $31.5 million in 3Q22. “In the third quarter, we successfully negotiated with several vendors, resulting in approximately $1.1 million in reduced payments, exited additional leased properties and conducted several fixed asset sales to reduce future obligations, and completed a legal settlement resulting in a gain of approximately $0.8 million”, said CEO Raymond Chang.