Leef Brands Inc. ($LEEF)

Ladies and gentlemen, thank you for standing by. Welcome to the LEEF Brands First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jesse Redmond, Chief Strategy and Investor Relations Officer. Please go ahead.

Good afternoon, everyone, and thank you for joining us. Welcome to LEEF Brands First Quarter 2026 Earnings Call. Joining me today are Micah Anderson, our Chief Executive Officer; and Kevin Wilson, our Chief Financial Officer. Please note that today's discussion will include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from what we discuss today. For a full discussion of these risks, please refer to our filings on SEDAR+ and on our website. Our financial results and press release for the quarter are available at leefbrands.com in the Investor Relations section. On today's call, Micah will begin with key operational highlights and what drove the strong performance this quarter. Kevin will then walk through the financial results in more detail. And after that, Micah will return to discuss the exciting opportunities ahead. With that, I'll turn the call over to Micah.

Thanks, Jesse, and good afternoon, everyone. For transparency, I just want to call it out. Kevin and I are both recovering from being sick. So we both sound under the weather. It's not that we're not excited. We are, but I just want to call it out. I'm going to do this one a little different today. I'm going to give you guys the headlines on the quarter, and then I want to spend the bulk of my time talking about where this company is going. The recent rescheduling announcement is the biggest thing that's happened in this industry in 50 years, and I'd like to cover a few ways it may impact LEEF. Kevin will do a deeper dive on the numbers from the quarter, and then I'll share a few thoughts on how the recent announcement could affect our business. As a quick recap of who we are and what we do, at our core, LEEF is a vertical extraction company. We operate extraction facilities in both California and New York, where we produce concentrates for many of the largest companies in the industry. Concentrates as a category makes up over 50% of the addressable market in the U.S., and this number is climbing. In California, we operate one of the largest cultivation sites in the state where we grow input material for extraction at a fraction of the cost from what we can purchase it for on the open market. In 2025, we consumed over 200 acres worth of input material and grew 65 acres of our own 180-acre permit. Q1 2026 was the best quarter in LEEF's history. Gross profit more than doubled year-over-year. Gross margins went from 22% to 49%. Adjusted EBITDA was over $2 million. Plus this is the third consecutive quarter of positive operating cash flow. The Ranch is delivering exactly what we said it would and the model is working. We closed the first $4.5 million of our Mindset Capital financing during the quarter and expect to close the second tranche on May 8, just later this week. This new capital will allow us to complete the build-out of our Santa Barbara farm, complete improvements to our extraction facility and invest into our team by bringing on a few key new hires to help scale -- to help us scale over the coming years. We added Jamie Mendola to our Board. And after the quarter, we announced the acquisition of HIMALAYA, which I will come back to. After receiving the first tranche of capital, we immediately went to work on the farm. We've already been awarded 14 new DCC licenses in addition to what we had last year and are completing planting them as we speak. We will harvest these acres in June and replant them in July for 2 main harvests in 2026. Construction is underway with fencing and irrigation for the rest of the 180-acre local permit, and we intend to add more acres in the coming months to be able to increase canopy size by the summer. As I've stated before, 180 acres is a starting point. We're already exploring ways to expand upon this number to ensure LEEF is able to truly seize the opportunity I believe is coming. LEEF is building one of the largest medical-grade pesticide-free supply chains in a state that has international recognition for cannabis and agriculture. This fits perfectly into the more medical direction it seems the industry is headed and provides optionality for us in the coming years once fully built and at the scale I want LEEF to achieve in California. Our audience on these calls for the most part is investors. people trying to figure out which horse to bet on. If I'm in your shoes, I want to bet on a company that has the ability to scale on the face of what looks like is now coming, can win in the high-quality, low-cost to produce category and most importantly, in my opinion, has a battle-scarred team that can execute and has driven to win. LEEF has all of these. So with that said, I'm going to pass it over to Kevin to run through the numbers from the quarter, and then I'll jump back in afterwards to go over a couple of things I'm excited about and cover where I believe we are headed.

Thanks, Micah, and good afternoon, everyone. Apologies again for sounding terrible today. I really am excited for this quarter despite not sounding like it. Building on the success of the latter half of 2025, Q1 was the quarter where the strategic transition that we've been executing on for the better part of 2 years started to show up in the financials in a real way. Net revenue for Q1 was $9.4 million, essentially flat against the $9.4 million we delivered in Q1 of 2025. On the surface, that looks like a quarter where nothing moved on the top line. However, underneath that flat headline, our 3 core extraction lines, which are the manufacturing platform that we built our wholesale concentrate strategy around grew unit volumes by approximately 60% year-over-year, with revenue from those lines up roughly 15%. The gap between the unit growth and the dollar growth reflects the pricing environment in the California wholesale market, which remains compressed into which we've spoken about before. To put a finer point on the variance, our largest production line is our ethanol extraction line, and it makes up approximately 48% of revenue in the quarter. And average selling price on that line was down approximately 32% year-over-year. So the units we're moving through that line are working harder for every dollar of revenue. That makes the gross margin expansion all the more meaningful because we delivered it through the headwind, not around it. So flat at the top is masking real growth in the core and intentional discipline in the rest of the portfolio. Gross profits are where the quarter really differentiates itself. Gross profit was $4.6 million, up from $2.1 million in Q1 last year. Gross margin came in at 49% compared to 22% in Q1 of 2025, a 27 percentage point expansion in a single year. This is a direct reflection of the impact our internal cultivation at Salisbury Canyon Ranch has had. Building on the momentum in Q4 of 2025, this quarter was almost fully fueled by internal biomass production on the main ethanol line. A year ago, we were buying that same input from third parties at market prices. Today, we're growing it ourselves on land we control. That shift more than anything else we've done is what's driving the cost of sales improvements and the margin expansion. What I'd emphasize is that we delivered this margin expansion against the backdrop of continued price compression in the California wholesale market. This isn't margin coming from a favorable pricing environment, it's margin from a structural change in our cost basis. What's exciting about this is the opportunities that are arising from rescheduling and what that could mean from a sales price perspective as things unfold here shortly. Operating income for Q1 was $1.3 million compared to an operating loss of $1.9 million in Q1 of 2025, a $3.2 million favorable swing. Adjusted EBITDA was $2.4 million compared to a negative $730,000 in Q1 2025, a $3.1 million favorable swing. That's now multiple consecutive quarters of positive adjusted EBITDA, and it reflects the operating model we've been building towards. The GAAP net loss for the quarter was $426,000 compared to net income of $266,000 in Q1 of 2025. I want to be clear about what's driving that change because that uptick is misleading. The swing is entirely attributable to a noncash $3.9 million unfavorable change in the fair value of the derivative liabilities related to warrants and certain convertible instruments. That number moves with our share price and actuals inputs and has nothing to do with the operating performance of the business. Strip it out and the operating trajectory is what that I just walked you through is what's actually happening. We ended the quarter with $5.8 million in cash compared to $2.2 million at the end of 2025. We finished Q1 with a working capital surplus of $5.9 million compared to a working capital deficit at year-end. The principal driver of that improvement was the $4.5 million equity raise we completed in March, but it's also worth noting that we generated $395,000 of cash from operations during the quarter, a $2.2 million favorable swing from Q1 last year and the third straight quarter of positive operating cash flow. We achieved this despite heavily investing in this year's cultivation in the first quarter, which includes almost $1.2 million in licensing and other seasonal start-up costs. We've also continued to clean up the capital structure. The convertible debentures that sat on the balance sheet at the start of last year were fully resolved in '25, and the net debt is materially lower than it was a year ago. Looking forward, there's a few things to play for the rest of 2026. On SCR, what we delivered in Q1 was built on a biomass-led product mix from the prior cultivation cycle. We have the option this year to lean into higher-margin fresh frozen production, and we expect that mix optionality to be a contributor as this year develops. The point I want to leave you with is that the 49% gross margin we just delivered was achieved with the lowest margin version of our cultivation output. So there's room to build on that. As you are aware, we closed on our acquisition of HIMALAYA VAPOR on April 27. So it isn't in the Q1 numbers we're discussing today. Integration work is now underway, and we expect to begin to see the impact through the P&L, specifically the margin impact in Q3 as we bring production together and to see it more fully in Q4 as we start to realize the impact of SCR on the brand's products. One thing I do want to flag, Q2 margins will compress. We're between harvest right now and processing third-party biomass until our own crop comes in this summer. This is seasonal and it's temporary, and it's the last time we expect it to happen as we continue to scale the ranch. Our first 2026 harvest hits in June and meaningful volumes will be running through the extraction facility in early Q3. To summarize, in Q1, our 3 core extraction lines grew unit volumes by 60% and revenue by 15%. Gross margins nearly doubled to 49% as SCR became the primary biomass source. Adjusted EBITDA was $2.4 million, and we had positive operating income and positive operating cash flow. With that, I'll hand it back to Micah for closing remarks, before we open it up for questions.

Thanks, Kevin. All right. So let me tell you guys what I've been spending my personal time thinking about. Having 3 good quarters in a row is great, but that's not actually what I'm most excited about. Starting with the rescheduling announcement. This is a big deal for the industry and for LEEF. This is the most significant federal policy change for our industry since 1970. A quick history lesson for you guys. The Controlled Substance Act enacted in 1970 created the federal drug scheduling system, Schedule I through V. Nixon signed it. Cannabis was placed as a Schedule I alongside drugs like heroin, meaning the federal government classified it as having no accepted medical use and high potential for abuse. That single classification made cannabis federally illegal, triggered 280E taxation impossible. Every problem the cannabis industry has dealt with for 55 years traces back to that one decision. With the news on rescheduling, this just went away for medical license holders, and we expect it to soon be going away for adult-use license holders. What does this mean for LEEF? LEEF currently holds both medical and adult-use licenses in California and adult-use licenses in New York. There's interesting language in the recent order that states that if companies hold a medical license, there is a pathway to allow for interstate and international export. We are actively exploring all options regarding this opportunity. To help us navigate the legal process and setting up our DEA licenses for both domestic and international export, we have engaged Shane Pennington, who has been the tip of the spear in fighting on behalf of the industry to force the DEA to allow for these licenses. Most of the licenses we have in California have the medical designation, and we have started the process of adding the designation to the licenses that don't. We have already submitted for a DEA license, so we are fully prepared in the event export is able to take place in the near future. LEEF is now profitable selling our products in a market where the average price per gram is significantly cheaper than every other market in the world. We have done this prior to seeing the full impact of a fully scaled 180-acre cultivation permit and when we are still burdened with 280E taxes. What happens when LEEF turns top MSOs into clients and is able to sell into high-value markets. LEEF is now producing pounds for under $10, and this number will decline over time. Will the large MSOs be able to survive without working with a company like LEEF? I believe that California is going to become very relevant again to a lot of the larger companies that have exited and avoided California or what happens when we are able to start exporting into the international markets? What does this do to our home state of California if a significant amount of the supply chain is now able to exit the state in search of higher margins. If this happens, I believe California will have an increase in pricing across the board and companies who are not positioned for this will be in a tough spot. Does this unlock M&A opportunities for us? Will this unlock less expensive capital in the near future, provide ways for us to further improve our balance sheet? Will we be able to ship directly to our own New York business? Will we be able to ship HIMALAYA CPG products directly into global markets? These are all questions going through our minds, and we are actively working on answering them. Up until very recently, these have all been what-if questions or imagine when statements made throughout the industry, which finally seem to becoming a reality. The thesis we have spent a decade preparing for remains the same, but suddenly, it's happening more quickly. But to be clear, the recent news does not allow for us to do this today, and there are still a lot of unknowns. But I do believe that this is where we are headed, and we are going to do everything that we can to make sure that we are positioned when it does. HIMALAYA. This is also why the HIMALAYA acquisition matters. HIMALAYA is a premium vape brand with real customer loyalty in California. It gives us something we've never had before, which is a branded product platform with a built-in sales and distribution system. This provides a ton of optionality for us in the future. We now own a brand that we can put our own clean concentrates into and sell at retail margins. And when interstate opens up, we're not just shipping bulk concentrates to another state, we're shipping branded finished product. That's a fundamentally different margin profile and a fundamentally different company. HIMALAYA has a great battle-tested team who have done an excellent job navigating a very tough landscape. We're very happy to welcome them to our team and excited about how we can help them build their brand over the coming years. So in closing, 4 years ago, we looked at our business and saw the truth. We had built one of the largest extraction companies in California, but we didn't have the supply chain to sustain it. We were buying biomass on the open market, competing with everyone else, and that's not a business that you can defend. We knew we had to fix it or we wouldn't survive. So we went out and bought a ranch in the middle of nowhere at a time when everyone in the industry told us we were crazy for doing cultivation in California, and it worked. You can see it in the numbers, record gross profit, margins that doubled year-over-year, 3 straight quarters of positive operating cash flow. It's not just a story, it's math. But here's what makes this moment different. LEEF is now profitable and growing in what is arguably the worst cannabis market in the world from a pricing perspective. Think about that for a second. We figured out how to win in California at these prices. So the question becomes, what does LEEF look like when this all changes? What happens when interstate commerce opens up and LEEF can produce superior products at a fraction of the cost of other -- of operators in other states? What types of companies are going to be interested in what we've built. For the first time in the history of this industry, the federal government is moving in a direction that makes what we built more valuable, not less. Pathways to global export are becoming a reality. And we're sitting on 180 acres of pesticide-free cultivation with the lowest cost of production, fully built extraction infrastructure and now a branded product platform to sell it through. For years, this company had to be reactive, thinking day-to-day, surviving quarter-to-quarter. Finally, we have the resources, the team and the runway to go back to thinking in decades the way that we did when we first started LEEF. So if you believe in what we're building, please take a position and stay with us for the long term. I do truly believe that the best is ahead of us. With that, I'm going to turn it back over to Jesse, and we'll open up the lines for questions.

Thanks, Micah. Operator, please open the line for questions.

[Operator Instructions] And the first question is going to come from Morgan Paxhia with Poseidon.

Micah, I think I heard in your opening remarks that the funding is potentially closing as of May 8. Is that -- so that's the total balance? Or are you guys even contemplating oversubscription?

Let's see here. First off, Morgan, good to hear your voice. Thanks for showing up. How -- am I legally allowed to answer that question? It's -- yes, the first part here is, yes, it is closing on the 8th. And it is looking very strong. I don't know what I'm supposed to say there, to be honest with you, more than like from a legal perspective. Our goal is to be oversubscribed. I'll say that. That's definitely the goal, and it is definitely closing on the 8th.

And Morgan, we took in the $4.5 million last month, and we're just getting the final subscriptions in for this round, and we should have news out in the next day or 2 on that. But yes, thankfully, the demand has been strong.

Perhaps a question about the oversubscribing interest. Have you noticed any increase in investor interest with all of the news that's been going on?

Yes. I mean we're definitely getting -- yes, short answer is, yes, we have more interest for sure. We're definitely getting phone calls that we weren't receiving for the last 3 years, conversations that we had with people over the years that we're really waiting on some sort of rescheduling announcement to actually happen. And so we've circled back with a lot of those groups, had a lot of people reach back out to us wanting to get an update of where we're going. So I'm not -- I won't say that it's just been crazy to where like everyone is just begging to invest into cannabis, I think for LEEF or even for other companies as well. But it does seem like the sentiment and the mood has definitely changed in that positive direction.

Yes. Morgan, it's Jesse. My observation on the IR side is that it takes a process of telling people what you're going to do operationally like we did with the farm, delivering on those results, we executed the first phase of the build-out, did 65 acres last year and people saw the results. They see the transformation that's happening in the numbers, not just because of the farm, but the farm being a major contributor along with other factors with our extraction lines, the team we have and some favorable trends in the industry. So I think, Morgan, it takes executing operationally and then showing people those results. Now we're in our third consecutive quarter of posting really strong results, pushing 50% margins in a really tough market in California. So I think from my IR lens, we're getting to the point now where we have a compelling story, and it's now being verified by the third consecutive quarter of really strong results. And I think that's marginally increasing interest. As you're well aware, there's been a lot of head fakes in the cannabis industry. And so people have been burned. And so I think people are less reactive to reform news. We think this news is super exciting, not just on Schedule III, but especially on the export opportunities for a business like LEEF. So I think that's added to some additional interest. And I think the last part is, as you also know very well, Morgan, it takes fantastic partners to succeed in this industry, and we've been really fortunate to work with Aaron and the team at Mindset Capital and he has a fantastic network. That's obviously been very helpful to us as well.

And the next question is going to come from Aaron Edelheit with Mindset Capital.

You guys are going to -- Jesse, you're going to make me blush. You gave me compliments. But I wanted to congratulate you. I read in the press release that there was price compression. I had no idea that you put up this quarter with 32% -- can you hear me okay?

Yes, I can hear you.

Okay. Great. Yes. So 32% price compression with this quarter. Congratulations to you and the whole team. And it just kind of shows the proof of how important Salisbury Canyon Ranch is. So I kind of wanted to address my questions just to the time line to get all 180 acres. So can you walk me through kind of like quarter-by-quarter? I think I understand that third quarter, you're going to turn on some amount, then there's -- you're going to try to turn on all the fourth -- you're going to finish the farm in the fourth quarter. But when do you expect the full power of the 180 acres to be producing?

Aaron, you broke up pretty bad on my end. Was that -- I'm assuming that question is directed at me, right?

Yes.

Yes. No problem. Yes. So to answer your question just in one sentence, it would be spring of 2027 is when the full power of the farm will be activated. We -- like I said in the earnings call, so we've already got 14 additional acres added. Those are already planted. So we'll be harvesting those at the tail end of June going into July, replanting those immediately and then harvesting them again in October into November. We're in the back part of the ranch right now, which is where we're calling it Phase 2, which is where the rest of the 180-acre permit is. So in Santa Barbara County, the way it works is you have to build out the entire thing, the fencing, the cameras, the irrigation to get sign-off from the building department. So that's all happening as we speak. We will be built and signed off by the summertime. That's the goal at least. And so what we're pushing towards is to have 84 of the licenses activated this year. So that's an additional -- let me do my math here real quick. It's roughly an additional 15 acres that will get activated this year and 2026 in the fall. So we'll get one harvest out of those acres. And then the following year, we will then plant the entire thing in the spring. So the entire permit will be planted, and we'll do 2 harvests next year, so just like we did this year. So plant in the early spring, harvest throughout the summer, replant and then harvest again in the fall.

And you made comments in your prepared remarks that you're looking to expand beyond the 180 acres because this is -- Salisbury Canyon Ranch is 1,900 acres, but 180 are permitted. Can you give some comments of even growing the 180 acres?

Yes, sure. So what we have right now is called a land use permit, an LUP. And that land use permit basically gives us the ability to plant up to 180 acres on the farm. We have more -- it's a 1,900-acre ranch, and there's easily over 100 acres of additional prime ag land that can be planted. And so we're already working with the county right now to go through the conditional use permit process to add to the existing LUP. Now that doesn't guarantee anything. It does need to go in front of the Board. The Board has to vote on it and say, yes, you can do this or no you can't. We feel confident that we'll be able to work with the Board and get them to approve it. And so we'll go through the CUP process at some point in the latter part of this year going into next year and add as many acres as we can. I don't know how many that will be. We've got surveying going on, and we have to do calculations on water and all the rest. So -- but that's the goal. It's like let's -- if we can add another 100 acres, the area that we had designated to the hemp permit in light of what's going on right now with these announcements and the way it looks as if the industry is now headed I think it's going to be a lot more economical or beneficial to the business to not plant hemp, forget the hemp license, let's turn that into a cannabis field instead. So that's 100 acres right there. So my goal is to get an extra 100. If we can get more than 100, that would be great. So that's on our farm. Like that's the plan on our farm. There's a process there. We're working on that process. And then I'm also having other conversations with a couple of other groups that have local permits in the state to expand off of our farm as well. So that way, we've got a couple of shots on goal to make it happen.

And kind of last question, just a simple kind of rule to use is annually like per acre, how much cannabis biomass can 1 acre produce. So when I think about like either 180 acres or an additional 100 acres, what does that translate to in terms of cannabis biomass?

Yes. So I'm going to keep it very simple, and I'm going to speak in dry terms here. So like just for the listeners, it's like the numbers are drastically different. If we freeze everything, the weight is obviously, it's got all the water and it's a much larger number. If you dry everything, it's obviously a smaller number. So in dry terms, I can say that what we did last year was over 7,000 pounds an acre per run. So you would -- if you have 2 harvests, you're going to time that by 2. What we -- our -- in our modeling, our assumptions as we assume that we'll do 5,000 pounds per acre per run. So that's 10,000 pounds of dry material per acre if you're running it twice.

And so if you were to get another 100 acres in your rough math, it could mean an additional 1 million pounds of biomass. Is that the right way to doing that math, correct?

Yes. Yes. You're following.

Great job guys. Keep up the great work.

And the next question will come from Mario [indiscernible] with [ Microcap ].

Micah, you used the term or maybe it was Aaron, full power of the ranch of the farm. So let's say we have full power 1, which is 180, full power 2 with the additional 100 acres. What does the business look like at steady state in terms of revenue and cash flow?

If you're asking if both of those things were to happen, what would it look like?

Yes, like these 2 scenarios.

Yes. I'll be honest with you, Mario. I don't have that number on the top of my head, but I can tell you that it's dramatically more impressive than what we're currently doing now. I think at that point, you're seeing significant top line growth and not just like Q1 was great for us. From a unit economic standpoint, we sold 60% more units than we did the year prior, which is great. But from a top line standpoint, it was relatively flat. But more importantly, the bottom line impact of what we're doing continues to get better and better. So I think like that continues to just improve. There's this -- I keep talking about it, but like not breaking vacuum when it comes to sales momentum is super, super important. And so the more material that we have in our coffers to where we can -- in large blocks of the same material, the easier it is for the sales team to build momentum. And so I think that there's a pathway forward to definitely doubling the size of our business in California once we've accomplished these 2 things. And that's me talking about selling concentrates in California at today's pricing, not taking into account what I do think is going to come sometime in the near future. From the next year or 2, we're talking about shipping into markets where even if we can double the value of what we're currently selling, it makes the -- obviously, it makes the P&L look drastically different and to the positive.

Yes. This is Jesse, Mario. Just to add a bit of color there. In California, for even numbers, distillate is around $1 a gram. It will fluctuate 20% either way, but call it for easy numbers, $1 a gram. That same gram of oil in most markets of the U.S. is anywhere from $2 to $10 a gram and similar in international markets. So what we're doing today, pushing 50% gross margins is in the lowest priced concentrate market in the world. And so you talk about the scale and what happens if we increase the acreage, that would be a big driver. But in addition, there's a lot of assumptions about what prices those products are sold. And we think there's an avenue for higher prices through this DEA export program potentially through interstate commerce, selling to other markets, other operators in those markets through global export to places like Germany, Australia, across the EU, the U.K. And then there's also the other piece where Micah talked about HIMALAYA and adding that brand to our portfolio, where now we can capture higher margins on those pieces of business as well. So personally, I'm excited about the expansion opportunity in more acreage, but I'm also excited about the optionality potentially in what to do with the output from that field and sell it at much higher prices than we have currently today in California.

So how does all of this now impact your national expansion plans? Because I know you wanted to go into different states, but now are you just going to sit in California and wait for you to be able to ship it to other states or other countries?

That's a very good question. It's like one of the questions I didn't necessarily rattle off in the -- what we just went over, but it's one of the things that's definitely in our mind, and we're weighing out the options. I think that we have enough -- there's enough of an opportunity for us to win and grow our business right here in California. Again, Mindset and the other groups that came in to help lead this round, I can't thank you guys enough because you guys saw what we saw and bought into the vision. And so if we can double the size of the business and win in our own backyard, that's a lot of an easier lift than it is to move into a new market, get new licenses, basically ground up that restart of a company. I do think that we can be successful in the event that we do go that direction. New York is a great use case, and we can point to it and say, look, we've done it once. We know it can work. But yes, the question does become what happens? Like by the end of the year, if they're like, yes, you guys can now start shipping into other markets, then of course, I think that we would be foolish to -- I think we would plant flags in other states or other markets in a different way than what we were originally thinking. And it's a good pivot to be looking at, but it is a pivot. So it wouldn't make sense for us to go build out tons of cultivation and extraction overhead in one of these markets if you're able to do that in California. And one thing I'll add, this is just something that we have real-world experience in this now is that we can see that 1 acre in New York and 1 acre in California coming out of the field they do not perform the same. There's a reason why all the food has grown in California and why it's not grown in New York. It's the environment that's here lends towards high yield, high-quality, high potent product. And like companies aren't going to be able to ignore that in the future when they're trying to compete. If you're doubling your output just coming out of cultivation as opposed to doing it in one of these other states, you're already -- you're at a 50% disadvantage than the people that are in California. That's a big number to overcome. Then you take that same material and you move it into extraction and the material performs worse because the input material is a lesser quality than what you have coming out of California. So again, you're having another headwind and I think all of that stuff is going to matter at some point in time here in the near future. When it happens? I don't know. But yes, long-winded way of answering your question, I think that it definitely has given us a pause on the sense of like maybe we want to wait a year, 18 months before we start making any serious decisions of like new licenses, new extraction facilities in other markets. Let's just see what happens.

If the focus is for now more and more California, I think many investors have a hard time because there's a certain capacity that you have on your extraction lines. Like how much capacity do you have? Like how much revenue can you generate from that current extraction infrastructure before you need to increase CapEx?

So I think round math, roughly, we're running at about 50% capacity today.

5-0?

Yes. So -- and to be clear, we ran 230 acres close roughly in 2025 through that facility. So we grew 65 acres. So we put a dent in what we went through. But the facility is running at about 50% capacity, and we already ran over a couple of hundred acres worth of product through that facility. So round math, 400 acres could go through that facility at 100%. Now I do think that like between -- somewhere between $0.5 million and $1 million buys us a significant increase in capacity from where we're at today. And I don't think that like running at 100% is smart. There's just too many things that break over time and whatnot, and it's hard on the team. So we would tailor the facility for not a lot of money for what you're going to get out of it and just kind of try and keep the facility as we continue to add acres, we go from 180 to 280 to 380 to 500. This is where I think this is the trajectory of where I believe that we're headed. We're going to keep improving the -- in bite-size chunks, the facility along the way so that we're always in this like 50%, 60% capacity range. And it just works good for the extraction facility, if that makes sense.

Okay. And my final question is about the acquisition, HIMALAYA acquisition. Before you acquired them, were you the supplier of the ingredients to them?

We were one of the suppliers. Yes, HIMALAYA has been a client of ours for close to 6 years now. They bought, I would say -- well, actually, about 50% of their products were purchased from us, and then they were buying other products from other extraction companies. And so now obviously, it's 100%. And yes, so great team. We're already having conversations around what can we do to help you guys to get you guys into even more stores. They're really strong in Northern California, not so strong by way of retail sales in Southern California. And fortunately, we have a lot of these relationships down in Southern California. So we're already talking up to 50 doors that we think that we can get them into relatively quickly.

But if you grow a pound or, let's say, $10 and you resell it through HIMALAYA, how much are you reselling that $10 worth of pound?

That's a good question. I'm going to do the math a little differently than the way you did it just because it's the way my brain works. But let's just say that we're selling a gram of oil for $1 through -- when you're selling that same gram through a CPG product, and man, I should know this off the top of my head, I don't -- I want to say it's $2.50 to $3.50, $2.50 to $3.50 versus $1. So there's a dramatic increase in how much more value you're getting out of that gram of oil.

Thank you. And I'm showing no further questions at this time. I will turn the call back over to Jesse for closing remarks.

Thanks, operator, and thank you to everyone for joining us today. We look forward to updating you again when we report our second quarter results. Have a great evening.

This concludes today's call. Thank you so much for participating, and you may now disconnect.