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StaffStaffSeptember 17, 2019
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It’s time for your Daily Hit of cannabis financial news for September 17, 2019.

On The Site

CBD & FDA

According to the U.S. Hemp Roundtable,  Majority Leader Mitch McConnell (R-KY) introduced language on the Agriculture Appropriations bill that would require the FDA to issue formal “enforcement discretion” on the sale of hemp CBD products.  The FDA had suggested it would take them 3-5 years to decide on rules and regulations for CBD.

The group’s website posted that the US Senate Appropriations Subcommittee on Agriculture will “mark up” language submitted by Senator McConnell that would require the FDA to formally stand down on any enforcement of its troublesome anti-CBD guidance.

PLUS Products

Plus Products Inc. (CSE: PLUS) (OTCQX: PLPRF) is kicking off a nationwide launch of its 100% hemp-derived CBD line and entertainer John Legend is partnering with the company. The celebrities joining the cannabis industry are getting bigger and brighter by the day.

“I have been a believer in the benefits of CBD for some time,” stated Legend. “I was drawn to the PLUS team because they’re an innovative, family-run company, and they use science to deliver a consistent, high-quality product. I appreciate that they’re committed to setting a high standard within an industry that has to date been fairly unregulated.”

TerrAscend

TerrAscend Corp. (CSE: TER)(OTCQX: TRSSF)  has closed on its previously announced acquisition of Pennsylvania-based Ilera Healthcare, one of five permitted vertically-integrated cannabis cultivator, processor, and dispensary operators in the state. The company also reaffirmed its 2019 guidance of revenue in excess of C$141 million, which includes a contribution from the Ilera transaction and pending disclosed transactions, as previously announced on August 22, 2019.

“As one of only 5 holders of Super Licenses in a limited license state with approximately 13 million people, Ilera is an ideal partner for TerrAscend to enter the Pennsylvania market with,” said Matthew Johnson, President of TerrAscend Corp., and TerrAscend USA, Inc. After the close of this acquisition, TerrAscend’s licensed cannabis footprint expands to four U.S. states, in addition to its global reach into Canada and Europe.

 


Debra BorchardtDebra BorchardtSeptember 17, 2019
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According to the U.S. Hemp Roundtable,  Majority Leader Mitch McConnell (R-KY) introduced language on the Agriculture Appropriations bill that would require the FDA to issue formal “enforcement discretion” on the sale of hemp CBD products.  The FDA had suggested it would take them 3-5 years to decide on rules and regulations for CBD.

The group’s website posted that the US Senate Appropriations Subcommittee on Agriculture will “mark up” language submitted by Senator McConnell that would require the FDA to formally stand down on any enforcement of its troublesome anti-CBD guidance. The notes are as follows:

  • Within 90 days, provide Congress a report outlining its efforts to develop an enforcement discretion policy on hemp CBD;

  • Within 120 days, issue its formal enforcement discretion policy on hemp CBD;

  • Keep the enforcement discretion policy in effect until the agency has implemented its final regulatory process; and

  • Ensure that going forward, CBD manufacturers would be able share safety data through existing FDA notification procedures to be fully compliant with federal law and policy.

The group also added that the bill will be marked up by the full Senate Appropriations Committee on Thursday, and could go to the full Senate soon. The Hemp Roundtable said that last week, Reps. Chellie Pingree (D-ME) and James Comer (R-KY) sent all members of the US House of Representatives a “Dear Colleague” letter, asking them to co-sign a letter that urges the FDA to issue formal “enforcement discretion” on the sale of hemp CBD products.

One of the biggest complaints following the passage of the 2018 Farm Bill that legalized hemp was that the product remained in a legal quagmire. Some states have outlawed hemp-derived CBD products, while others have no problems. Banks aren’t sure how to address CBD customers and even e-commerce has struggled with the issue. Shopify only just announced on Tuesday that it began working with CBD merchants, while Google refuses to allow CBD advertising.

The letter said, “However, FDA’s current regulatory approach on CBD has created significant regulatory
and legal uncertainty for participants in this quickly evolving industry. FDA maintains that food products
containing CBD remain illegal under the FDCA because it is the active ingredient in an epilepsy drug,
Epidiolex, that is undergoing clinical trials. Although the agency is exploring alternative regulatory
pathways, the FDA claims that a rulemaking process could take the agency anywhere between 3-5 years
to complete.”

 

 


Debra BorchardtDebra BorchardtSeptember 17, 2019
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Plus Products Inc. (CSE: PLUS) (OTCQX: PLPRF) is kicking off a nationwide launch of its 100% hemp-derived CBD line and entertainer John Legend is partnering with the company. The celebrities joining the cannabis industry are getting bigger and brighter by the day.

“I have been a believer in the benefits of CBD for some time,” stated Legend. “I was drawn to the PLUS team because they’re an innovative, family-run company, and they use science to deliver a consistent, high-quality product. I appreciate that they’re committed to setting a high standard within an industry that has to date been fairly unregulated.”

PLUS is currently the number one and number two best-selling THC edibles in California, which is also the largest market for cannabis products. The new CBD line will include three distinct products, developed by PLUS’s team of scientists, entrepreneurs and chefs: BALANCE in Blueberry flavor, UPLIFT in Grapefruit flavor, and SLEEP in Blackberry Tea flavor.

PLUS Products Launches 100% Hemp CBD Edible Line

In addition to Legend, PLUS has also teamed with Casper Sleep Inc. to introduce its melatonin- and CBD-infused SLEEP product. “We’re always exploring new ways to improve sleep across the entire sleep arc — from sunset to sunrise,” said Neil Parikh, co-founder, and chief strategy officer at Casper. “Like PLUS, we believe sleep is a key part of the wellness equation. Partnering with their team of experts to introduce CBD sleep gummies brings a new way to relax and rest to those who need it.”

“We established our reputation in edibles by offering customers a consistent and precisely-dosed gummy using high-quality extracts,” stated Jake Heimark, CEO, and co-founder of PLUS. “Our CBD line will build off that expertise, and the earned trust we’ve established while offering a new experience for consumers designed to help them find their just right.”

“Giving the world a simple way to achieve balance has always been our mission, and the PLUS CBD line allows us to expand from California to nearly all fifty states overnight. We are thrilled that John Legend and Casper have partnered with our team to support this exciting new initiative.”

If you would like to learn more about the edible market, check out the new report from the Green Market Report titled, “The Economics of Edibles.”


Debra BorchardtDebra BorchardtSeptember 17, 2019
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Leading e-commerce platform Shopify Inc. (NYSE:SHOP)(TSX:SHOP) has finally opened its internet doors to hemp-derived Cannabidiol or CBD. The company announced new features on its platform to help U.S. merchants sell these products online or in brick-and-mortar retail locations, as long as that state permits such sales.

“Shopify has unmatched expertise in emerging industries, along with the resources merchants need to be successful in the fast-growing market of hemp-derived CBD products in the U.S.,” said Harley Finkelstein, Chief Operating Officer, Shopify. “Shopify’s reliable technology and extensive partner network means that businesses can ride the wave of demand for these products and give consumers more choice.”

Shopify mentioned two CBD companies in the press release. Josie Maran and Cannuka will be able to sell hemp-derived CBD products as a result of the new features.. “This is an exciting time for the CBD skincare industry. Consumers are eager to connect with us and try our Skin Dope products. Until recently, we didn’t have a simple solution to manage and sell our CBD Oil and Hemp Seed Oil assortment online,” said Roger Wason, Director of eCommerce for Josie Maran Cosmetics. “Shopify has helped us focus more on our relationships with our consumers and growing our business.”

Pixel Union is a company that has been working with CBD merchants and note don its website that even though Shopify has now opened its doors, that doesn’t mean the payment systems are all available as well. “Shopify merchants still cannot use Shopify payment gateways, however, the e-commerce leader has partnered with Authorize.netDigiPay, and eMerchant Brokers to provide seamless payment gateways for merchants to use.”

“In the last decade, e-commerce has grown 15% every year, yet it only represents 10% of total retail sales in the US. Pair that with legal CBD related products in the US being valued at $14.7 billion in 2019 and access to a proven platform like Shopify, I’m predicting unprecedented growth in 2020. We look forward to working alongside Shopify in helping merchants sell more,” says Pixel Union CEO, Ben Moore.


Debra BorchardtDebra BorchardtSeptember 17, 2019
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TerrAscend Corp. (CSE: TER)(OTCQX: TRSSF)  has closed on its previously announced acquisition of Pennsylvania-based Ilera Healthcare, one of five permitted vertically-integrated cannabis cultivator, processor, and dispensary operators in the state. The company also reaffirmed its 2019 guidance of revenue in excess of C$141 million, which includes a contribution from the Ilera transaction and pending disclosed transactions, as previously announced on August 22, 2019.

“As one of only 5 holders of Super Licenses in a limited license state with approximately 13 million people, Ilera is an ideal partner for TerrAscend to enter the Pennsylvania market with,” said Matthew Johnson, President of TerrAscend Corp., and TerrAscend USA, Inc. After the close of this acquisition, TerrAscend’s licensed cannabis footprint expands to four U.S. states, in addition to its global reach into Canada and Europe.

Greg Rochlin, CEO of Ilera, added, “By combining forces with TerrAscend, we see clear opportunities ahead for our stakeholders, employees, and patients. We look forward to accelerating the growth of Ilera’s brands and formulations by leveraging TerrAscend’s platform in other markets. I can’t wait to introduce our wholesale customers and patients to the California-born Valhalla and State Flower brands, as well as Haven Street, a leading premium Canadian brand.”

According to the company statement, Ilera currently operates a retail dispensary in Plymouth Meeting, PA, with plans to open two additional dispensary sites in the Philadelphia area within the next six months. The operations include a 67,000 square foot site for cultivation and processing in Waterfall, PA with planned expansion to over 120,000 square feet in 2020. In addition to selling its products in its own dispensary, Ilera distributes its dried flower, concentrates, tinctures, and topicals to over 60 dispensaries throughout Pennsylvania. Ilera’s current revenue run-rate is over US$43 million1, up from total sales in 2018 of less than US$8 million1.

Currently, the Pennsylvania medical marijuana program has more than 180,000 registered patients and 20,000 registered caregivers as of August 2019 and covers 23 qualifying medical conditions including anxiety disorders, cancer, and opioid use disorder.


AvatarHeather AllmanSeptember 16, 2019
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Florida and medical marijuana just aren’t quite meshing right  now, but we’re working on getting it all straight soon:

“A Florida appellate court ruled that the state’s medical cannabis licensing system is unconstitutional, setting the stage for greatly expanded business opportunities in one of the country’s fastest-growing markets. Found unconstitutional were legislative measures that imposed license caps and vertical integration.

The takeaway here is that while the decision will most likely be appealed to the Florida Supreme Court, this opens the door to the possibility of the Florida market opening up to more players, with the barriers to entry being lowered,states Sally Peebles, a cannabis attorney with Vicente Sederberg LLP in Florida and member of the Florida Medical Marijuana Advisory Committee.

Peebles wrote the following in her recent email to Marijuana Business Daily:

If vertical integration is eliminated, it will be less expensive to enter the market, allowing more mom-and-pops to enter the market. In addition, more licenses will be issued if the cap is lifted, before continuing that would create a ‘more competitive environment,’ leading to more innovative products and, eventually, lower prices.”

According to the 2019 Marijuana Factbook, as of July 5, 2019, six vertically integrated MMJ businesses operated 120 of the state’s 142 dispensaries, with a projection:

“MMJ sales in Florida will reach $425 million-$525 million this year, up from $225 million-$300 million in 2018.”

On July 11, 2019, Leanne Winkels elaborated further on the issue of  Florida appeals court rules marijuana regulation unconstitutional:

“The court found that Florigrown adequately meets the requirements to obtain a temporary injunction as granted by the lower court. Florigrown established irreparable harm and inadequate remedy at law based on their being unconstitutionally excluded from the process to obtain a MMTC license. The court affirmed the injunction to the extent that it ‘precludes the Department from enforcing the unconstitutional provisions’ of the regulatory framework, but also provides for a ‘reasonable period of time’ for the Department to ‘exercise its duties.’”

On July 16, 2019, Bobby Caina Calvan reported further on the court ruling in Florida Medical Marijuana Regulations Are Unconstitutional: “A Florida appellate court ruled that the state’s approach to regulating marijuana is unconstitutional, possibly allowing more providers to jump into a market positioned to become one of the country’s most lucrative.

If the ruling stands, it could force the appropriate state officials to lift existing caps on how many medical marijuana treatment centers can operate in Florida.

The July 9 ruling by the 1st District Court of Appeal in Tallahassee was another setback for Florida officials trying to regulate the burgeoning marijuana industry more tightly. It mostly affirmed a lower court’s ruling that the caps and operational requirements violated the voter-approved constitutional amendment legalizing medical marijuana in 2016. Ever since, the law has been a subject of debate in the legislature and courts. It was unclear whether Florida officials would appeal the ruling.

Florida now has more than 240,000 people registered with the state to legally use medicinal marijuana, according to the Office of Medical Marijuana Use. They are served by 142 dispensaries across the state, the majority operated by about a half-dozen medical marijuana treatment centers that grow their own crop, process it and sell it – a business model known as vertical integration.”

Even Florida Commissioner of Agriculture Nikki Fried, the lone Democrat in Florida’s various statewide offices, hailed the ruling:

A victory for openness and the future of medical marijuana in Florida. When 71 percent of Floridians voted for access to this life-changing medicine, they didn’t expect restrictive legislation that stood in the way of progress and open markets.

Florida Courts Rule Medical Marijuana Scheme Unconstitutional, Blaise Gainey acknowledged, but then What’s Next for Florida? The state’s medical marijuana distribution system is unconstitutional, and that could soon force the legislature and the industry to make changes, an issue that was highlighted earlier in 2019 by Florida News Service correspondent Dara Kam.

In Medical marijuana: Florida law creates ‘oligopoly’ for pot businesses, court decides, Kam observed:

Florida’s law requiring to grow, process and distribute cannabis and related products created an ‘oligopoly’ and runs afoul of a constitutional amendment that broadly legalized medical marijuana in the Sunshine State, an appellate court has ruled, with the 1st District Court of Appeal’s decision sending shockwaves through the state’s rapidly growing medical marijuana industry, in which licenses are routinely selling for upwards of $50 million.

The three-judge panel’s ruling upheld in part a decision issued last year by Leon Circuit Judge Charles Dodson, who sided with Tampa-based Florigrown in a lawsuit alleging a state law, passed during a 2017 special legislative session, did not properly carry out the amendment.”

Florigrown CEO Adam Elend called the ruling a game-changer:

“It drops a bomb on the current licensing scheme. It’s just changing the whole regime. People are not getting medicine. The dispensaries are out of stock all the time. The products are limited, and the prices are high. That’s what happens in an oligopoly and that’s what we have.”

This is an opinion shared by many throughout the state, across the country, and around the world. One of those such individuals, State Senator Stacy Rudolph agreed in his opinion piece on Why Florida’s Marijuana Business is Unfair. Even international news source Cannabis Law Report published Florida Medical Marijuana: It’s Time To Get Rid of Vertical Integration by Dionne Kellier, Counsel to Hoban Law Group.

Florida’s governor Ron DeSantis Defends Florida’s Medical Marijuana Law, as reported by Shawn Mulcahy: “Gov. DeSantis says he supports the Florida Legislature’s efforts to defend the state medical marijuana law” and he “thinks the legislature acted within its authority when enacting the medical marijuana implementing bill.”

DeSantis says he backs lawmakers, who are continuing to fight the ruling, all the way to  the state Supreme Court, where it currently remains under advisement, and has been quoted as stating, “I have said the way the legislature did it was not exactly consistent with a competitive market. From a constitutional perspective, I think they had the right to set those standards, and I know that a lot of people have relied on that licensing regime.”

As previously discussed in my Florida column over the last few months, the governor has previously expressed concern about the legislature’s ban on smoking medical marijuana, and successfully secured a change to that part of the law this past legislative session.

But Florida One Medical Marijuana Case Goes to State’s Supreme Court: a lawsuit brought by Florigrown to dispute the state’s licensing process will be heard by the Florida Supreme Court “after a split appeals court refused to grant the state’s request for a new hearing,” reported Melissa Schiller on August 30, 2019:

Five judges on the appeals court recused themselves from deciding whether the case should get a hearing by the full court, the South Florida Sun-Sentinel reported, although the judges did not explain the reasons behind their recusals.

In July, an appellate court sided with Florigrown, one of Florida’s medical cannabis businesses, after the Tampa-based company sued the state upon being denied a business license. Florigrown’s lawsuit underscores the tension between a 2016 voter-approved medical cannabis legalization measure and state legislators’ attempts to implement that measure.

Florida lawmakers have instituted a vertical integration requirement and capped the total number of medical cannabis business licenses in the state.

However, crucial language in the ballot initiative approved by voters includes the word “or,” as in a medical cannabis business in the state—called a ‘Medical Marijuana Treatment Center’ (MMTC)—’acquires, cultivates, possesses, processes (including development of related products such as food, tinctures, aerosols, oils, or ointments), transfers, transports, sells, distributes, dispenses, or administers marijuana, products containing marijuana, related supplies, or educational materials to qualifying patients or their caregivers and is registered by the Department.’

After five judge recusals on Tuesday, the remaining judges split 4-4, the regulatory landscape in the state thus remains the same for the time being, the South Florida Sun-Sentinel reported. Now, all eyes are on the Supreme Court to have the final say in the issue.”

What might be Florida’s next move after the impending Supreme Court final ruling on the whole vertical integration issue? Let’s rewind to last year to Jason Perlow on November 16, 2018 to see How the marijuana industry is organized in legal states:

 “State programs can be classified as either horizontally or vertically integrated marijuana industries. The horizontally integrated states are more business-friendly than the vertically integrated ones due to the restrictions typically imposed on marijuana businesses.

In a horizontally integrated program, manufacturing, testing, dispensing, distribution, and transportation are all considered separate business activities. With the exception of testing, a marijuana business can engage in any or all of those. So, a dispensary might carry products from many different growers, as strictly a reseller. Also: For CBD products, legal questions linger.

By contrast, a vertically integrated marijuana program is regulated and licensed by a State Health Department or similar governing agency, which must control all aspects of operation: Cultivation, manufacturing, transportation, distribution, and dispensary, and in many cases, testing. The capital expenditure required to set up shop as a marijuana firm in a vertical integrated state is massive, on the order of tens of millions of dollars.

For example, California is a horizontally integrated marijuana state, whereas Florida is a vertically integrated marijuaa state. Illinois and Washington, like California, prohibit vertical integration.”

In Marijuana Business Daily’s March 2019 article Jack of All Trades or Master of One, Joey Peña argues that:

Vertical integration can give marijuana businesses tight control over their supply chain and the ability to leverage economies of scale—but is it the only formula for success?

State license types and tax laws also play critical roles in the decision to vertically integrate. Consider Oregon, for example: The state has temporarily suspended approvals for new cultivation licenses because of oversupply. But there’s no cap on the number of licenses the state can award.

If the state lifts its suspension and begins approving new licenses, it could create an even more tenuous environment for a nonvertically integrated cultivation business that doesn’t control its retail destiny.

The ability to leverage economies of scale in a vertically integrated business model is a clear advantage—but experts largely agreed that vertical integration isn’t the model for a business to succeed. A diverse number of successful models exist.”

Vertically Integrated Cannabis Companies on Tour: A New Era of Confidence as Regulations Change as evidenced by Globe Newswire. Either way, vertical or horizontal alike must consider the diagonal shift in The New Generation of Cannabis Consumers [Demographics Research] as pointedly noted on March 26, 2019:

Things are ever changing in this age and at this stage of the cannabis movement. We have watched laws change, industries develop and – perhaps most importantly – attitudes about the cannabis plant itself change.

As the stigma surrounding this plant is slowly lifted, more and more research surrounding the plant and the people who consume it is coming to light. People are increasingly more receptive to the idea that many cannabis consumers are very functional, productive members of society, and now we have some numbers to prove it. Upscale purchasers of brand name cannabis products are breaking stereotypes and changing the marijuana marketplace.”

WeedBlog’s original story from November 30, 2016 astutely pointed out three years ago: A new class of Cannabis Consumers is reshaping marijuana culture. These individuals break the ‘out of it’ stoner stereotype in favor of feeling more ‘present’ and ‘mindful’ while they consume cannabis. They also actively seek out cannabis products that are high quality, high-end and often artfully branded and packaged.”

Yet here we sit three years later, halfway through 2019, and the fact that Trump Administration Wants More Public Input On International Marijuana Rescheduling was reported as recently as August 28, 2019 by seasoned cannabis correspondent Kyle Jaeger.

In more promising news, on September 10, 2019, Marijuana Moment reported that Former FDA Head Hints Feds Should Regulate Marijuana To Protect Public Health:

“The former head of the Food and Drug Administration (FDA) said this week that conflicting state and federal marijuana laws have created an oversight gap that is exacerbating an outbreak of vaping-related lung injuries, and he indicated that federal regulations may be necessary to resolve the issue.

Scott Gottlieb said in a series of tweets over the weekend and in a TV appearance on Monday that he is concerned about permissive state policies that allow for the use of cannabis by adults but at the same time pointed out that current restrictive federal laws are inhibiting regulators’ ability to oversee manufacturing of marijuana products. It remains to be seen what the former FDA commissioner would specifically propose to address the problem legislatively, however.”

September 10, 2019 brought the most eye-opening article yet: Mike Adams prescient Hey, Congress: Marijuana Banking Won’t Stop Americans From Dying Due To Illegal Cannabis Vapes:

There is a bill, however, currently building momentum in the U.S. House of Representatives known as the Secure and Fair Enforcement (SAFE) Act that stands to turn the situation around. The only problem is it has zero chance of going the distance in 2019, and it will do absolutely nothing to remedy the real problem the pot trade is facing right now: Illegal vape cartridges that are putting Americans in an early grave.”

Ultimately, according to Kevin Murphy, CEO of Acreage Holdings, and Charlie Bachtell, CEO of Cresco labs, and former Canopy Growth CEO Bruce Linton on June 8, 2019, these remain the three biggest threats to the medical cannabis industry:

>Black Market, >Regulations and Public Policy, >Consistency and Execution.

– and these are threats for both public policymakers and administrators in the sector and the cannabis industry at large, statewide and federally. .

There’s a common thread between, I think, the three of our answers,” Charlie Bachtell said of his, Kevin Murphy’s and Bruce Linton’s responses. It is incumbent upon cannabis operators to make sure products meet expectations of national and international industry of packaged goods so that we can have quality in the legal market. In addition, there must be safe execution, consistency of products, and availability or access that works for patients without risk. 

If we fail to execute, if there’s not consistency, you’ll have public policy issues,” Linton said in closing.

To sum it all up from a patient’s perspective, if there is not quality and accessibility, then you have public policy issues on a state and federal level. Concerning illicit v. legal markets: the more quickly that states can enact regulated tax frameworks, the sooner the U.S. can convert people from an illicit, black market to a legal market, but this involves legislators and administrators doing their jobs to enact public policy.

Safety, consistency, and access improvements and standardization must result in actionable public policy that is directly reflective of the needs of the cannabis industry, the public, the various Departments of Health, and each individual state’s legal cannabis program framework.

But the weak link in this equation is the lack of consensus between these divided groups. These gaps in cannabis consensus need to be filled, however, and a workable compromise reached between these divisions.

All are key players with key roles, but someone threw the script out ages ago when the nation’s cannabis prohibition was in its nascent and formative years. We are still struggling to piece together a national medical cannabis plan that is acceptable to each individual state.

We need for states to enact legal tax frameworks for the cannabis industry so that public policy can be made by legislators that equals market security and safe, consistent access can occur legally and regulated.

We need to have a testing standard globally and for hemp internationally resulting in improved cannabis safety, as agreeable industry-wide standards would result in better market execution.

And finally, we need public policy enacted and executed that works for patients to have access without risk.

For Florida, this remains a complex task and a tall order indeed, if the state wants to proceed lawsuit free in 2020. Hey, that should be Florida’s new medical cannabis slogan for the coming year:

I can see it now: “FLORIDA: LAWSUIT FREE IN 2020!”

Catchy, isn’t it? Let’s hope Congress also “catches” on, before it’s too late and the window for real medical cannabis change closes.


Sean HockingSean HockingSeptember 16, 2019
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If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

Un Pesce Marcisce Dalla sua Testa is an old Sicilian proverb that translates “a fish rots from its head”. The statement appears to be an accurate summary of the present condition of both the private and governmental sides of California’s cannabis industry.

A Los Angeles Times article September 11th that was headlined “Nearly” stated,

‘The audit[1], conducted by the United Cannabis Business Association.[2], found approximately 2,835 unlicensed dispensaries and delivery services operating in California. By comparison, only 873 cannabis sellers in the state are licensed, according to the Bureau of Cannabis Control [“BCC”]

 We were a bit surprised to discover that UCBA is afflicted by the same type of intentional disregard for the statutes and regulations governing not-for-profit corporations, business leagues and mutual benefit corporations as other California cannabis businesses. Most of the organizations that purport to speak for the businesses and individuals that comprise California’s legal cannabis industry are under suspension, never completed registrations, filed erroneous organizational documentation, or have failed to file correct tax returns and reports with the California Department of Tax and Fee Administration (“CDTFA”) or the California Attorney General Charities Division [See Who is Inept? ].

The September 11th article continues,

This year, an industry-backed financial audit projected that roughly $8.7 billion will be spent on unregulated cannabis products in California in 2019, compared with just $3.1 billion spent on cannabis sold by legal businesses.”

If we accept those figures, then the average “black market” cannabis business has annual sales of $3.1MM, and the average “legal dispensary” has sales of $3.6MM. We have created numerous models of the financial revenues, costs and returns for the legal cannabis industry in California [See Allocation – Costs – Gross Profit – Taxes and It’s the Math]. The taxes that California should be collecting are approximately 31% of the gross receipts of cannabis businesses, or $960K for each “black market” cannabis entity, and $1.1MM per legal cannabis entity. The annual total for cannabis taxes for “black market” and legal business should be $3.66B [2,835 *$960K + 857*$1,100K] for the current year.

It is our recollection CDTFA recently announced the cannabis taxes collected for the second quarter of 2019 were $144.2MM[3] vs. $915MM California should be collecting. While we understand there are several contributing factors, we will start by laying blame on CDTFA. CDTFA has proved to be inept, inefficient and lethargic in its administration of cannabis taxes. It also was incredibly poor in its design of its systems and controls for the collection, reporting and remittance of cannabis taxes [See Missing or Uncollected and Taxes – Cannabis – Myth  and Cannabis Taxation – Reality Check].

 

We have commented extensively on the underlying problems. We have described proposed corrective actions CDTFA and the regulatory agencies could take. With rampant abuse of the law by industry associations and experts combining with a perpetuation of “black market” businesses, and death and maiming from toxic vaping cartridges[4], it seems unlikely the California Attorney General, the United States Attorneys for the Districts in California, the Drug Enforcement Administration [“DEA”] will continue for long to treat the stand down from the “War on Drugs”[5] as meaning to become catatonic.

 

There is a place for aggressive law enforcement efforts in California’s cannabis industry [e.g. flagrant tax evasion, circumvention of laws that places the health and safety of the public at risk, and repeat offenders engaging in significant illegal cannabis activity] are warranted. At some point, such individuals need to have the “entire bookcase” thrown at them.

While we understand the urgency of preventing further loss of life with toxic vaping cartridges, we view the abuses by the organizations we identified in “Who is Inept?” to be equally toxic to the legal cannabis industry. Those who knowingly violate the laws and regulations relating to nonprofit and tax exempt status should also aggressively prosecuted.

On the public side, it is also galling to us when we see local governmental agencies selling licenses to cannabis businesses that will never succeed in order to generate license application revenue and encouraging cannabis businesses based on “social equity” without providing the support and training required for such businesses to succeed. A number of local jurisdictions are as culpable as the abusers of the tax and nonprofit laws with their encouragement of cannabis business investment in the local community for the supposed tax revenue that will be generated.

Greed drives the public side at a local level as hard as it drives the private side.

[1] We note that the term “audit” is being used as a journalist rather than as it would be by the only professionals licensed to perform “audits” or examinations of financial statements – certified public accountants [“CPA’s]. The definition of an audit or examination of financial statements is described California Business and Professions Code, Division 3, Chapter 1, Article 3, Section 5051(c).

[2] United Cannabis Business Association [“UCBA”] is a DBA of a California Nonprofit Mutual Benefit Corporation organized under the name UCBA Trade Association.   The California Secretary of State Corporate No. is: C3857701; the California Attorney General Registry No. is: CT0229633. The Articles of Incorporation state is an IRC Sec. 501(c)(6) organization.

IRC Sec. 501(c)(6) of the Internal Revenue Code provides for an exemption from income tax for business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual. An organization that otherwise qualifies for exemption under IRC Sec. 501(c)(6) will not be disqualified from the exempt status merely because it engages in some political activity. In addition, the organization may engage in lobbying that is germane to accomplishing its exempt purpose without jeopardizing its exempt status.

A business league is an association of persons having some common business interest the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are business leagues. In order to be exempt from income tax, a business league’s activities must be devoted to improving business conditions of one or more lines of business as distinguished from performing services for individual persons.

 

No part of a business league’s net earnings may inure to the benefit of any private shareholder or individual and it may not be organized for profit to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only enough income to be self-sustaining).  The term line of business generally refers either to an entire industry or to all components of an industry within a geographic area.  It does not include a group composed of businesses that market a brand within an industry.

 

[3] See California Department of Tax and Fee Administration Reports Cannabis Tax Revenues for the Second Quarter of 2019

[4] Deaths, illnesses related to vaping cannabis on the rise, health authorities say

[5] Bringing Back The War


StaffStaffSeptember 16, 2019
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It’s time for your Daily Hit of cannabis financial news for September 16, 2019.

On The Site

Cresco Labs

Cresco Labs Inc.  (CSE: CL) (OTCQX: CRLBF) has announced a plan to acquire Tryke Companies including six prime Reef Dispensary locations in Nevada and Arizona, expanded licensed cultivation and process capacity in Las Vegas and Phoenix and entry into the Utah market.

The purchase price is $282.5 million which includes $30 million in real estate assets. The payment is a mix of Cresco Labs shares (approximately US$227.5 million), which will be subject to a nine to 21-month lock-up agreement following closing, and cash (approximately US$55 million). The deal is expected to close during the first half of 2020

Missouri

Recently, in connection with the rejection of many medical marijuana facility license applications as “incomplete,” the Missouri Department of Health and Senior Services (DHSS) issued a Sample Ownership Visual Representation, which is a fancy name for a sample organizational chart, “[f]or assistance with the Ownership Structure Form” included in DHSS’ standard marijuana facility application packet.

The big problem with this Sample is it shows – as a state example of how a Missouri marijuana licensee should be organized – a corporation (GrowMo, Inc.) existing as the majority owner of the licensee, which is an organizational structure unequivocally barred by the plain language of Article 14 of the Missouri Constitution.

In Other News

Jushi Holdings

Jushi Holdings Inc. (NEO: JUSH.B), a globally- focused, multi-state cannabis and hemp operator, has signed a definitive agreement to acquire 80% of the economic and voting interests in Agape Total Health Care Inc (“Agape”), pending applicable regulatory approvals. Through the acquisition, Jushi will acquire a majority ownership in Agape, a Pennsylvania Dispensary Permittee. Agape plans on opening three retail locations in the Philadelphia region, Reading and Pottsville.

“With the closing of the Agape transaction, Jushi will have completed its participation in the maximum number of permitted retail locations in Pennsylvania, a key limited license market on the East Coast,” stated Jim Cacioppo, CEO and Chairman of Jushi. “Upon closing of this transaction, we will operate five retail locations under the BEYOND/HELLO brand with a plan to open four more during the fourth quarter of 2019. All of these locations and the additional six to be opened are located in densely populated, high traffic communities. Quickly achieving a strong presence in a limited license medical market such as Pennsylvania continues to execute our broader retail strategy.”


Video StaffVideo StaffSeptember 16, 2019

1min1000

The Green Market Summit held its first event titled “The Economics of Branding” in Los Angeles, California last week. Sponsors and attendees were both thrilled with the networking and business opportunities the event afforded. Many described the keynote interview between PLUS Products CEO Jake Heimark and CNBC’s Jane Wells as one of the best ever. One attendee remarked, “I’ve gone to so many of these conferences, but I actually walked away from this one having learned something new.”

Green Market Report will be publishing videos of the panels over the next two weeks. Stay tuned for more videos and subscribe to our YouTube channel.


Debra BorchardtDebra BorchardtSeptember 16, 2019
Reef.jpg

8min2380

Cresco Labs Inc.  (CSE: CL) (OTCQX: CRLBF) has announced a plan to acquire Tryke Companies including six prime Reef Dispensary locations in Nevada and Arizona, expanded licensed cultivation and process capacity in Las Vegas and Phoenix and entry into the Utah market.

The purchase price is $282.5 million which includes $30 million in real estate assets. The payment is a mix of Cresco Labs shares (approximately US$227.5 million), which will be subject to a nine to 21-month lock-up agreement following closing, and cash (approximately US$55 million). The deal is expected to close during the first half of 2020

According to the company statement, in 2018 Tryke generated 70.4 million in revenue and $24.6 million in EBITDA making it one of the highest-grossing and most profitable private cannabis companies in the U.S. market. Tryke has established six of the best-positioned retail locations in Nevada and Arizona, including the Reef Dispensary located adjacent to the Las Vegas Strip –  which has produced over $65 million in revenue since 2015 – and five additional operating locations in North Las VegasSparks, and Phoenix, AZ. The Tryke Company said that its North Las Vegas location boasts the highest known daily ticket count in the state of Nevada at 2,300.

“With significant in-state populations and tourist traffic, Nevada and Arizona were key near-term targets for expansion.  Creating the most strategic geographic footprint in the U.S. cannabis industry is not just about the number of states you operate in,” said Cresco Labs CEO and Co-founder Charlie Bachtell. “Rather, our thesis for success in establishing a normalized and professionalized cannabis industry as well as providing the greatest ROIC for our shareholders calls for us to leverage our existing operations in states of significance to rapidly attain material and meaningful market-leading positions.”

Cresco is using the acquisition as a means to quickly expand in Nevada and Arizona. Nevada is one of the largest and fastest-growing cannabis markets in the U.S. with 2019 sales estimates of up to $940 million as per Marijuana Business Daily. Cresco Labs currently sells Mindy’s Edibles n Nevada, which has been one of the top three selling edibles in Nevada in 2019. Arizona is one of the largest and fastest-growing medical-only markets with an estimated 2019 sales of up to $760 million.

“The announcement today is the result of several months of deep interactions between our two groups and I know I speak on behalf of the entire team when I say we are very excited to be joining Cresco and to start realizing significant synergies for both of our organizations,” said Adam Ryan, CEO of Tryke Companies. “We have been consistently impressed by Cresco’s strategic approach to building long-term value in this growth market and its history of delivering what it promises – something that is often lacking in this industry. As the cannabis space has gained national and international attention over the past four years, we have been approached by several operators both private and public, regarding a transaction, but the vision and execution that Charlie, Joe and the team have demonstrated made them the only choice for Tryke.”

The deal will also add 17,000 pounds per year in a strategically-located cultivation capacity along with 1,320 lb. per year of processing capacity. It includes one of eight cultivation licenses recently awarded in Utah.

Reef Dispensary Details

  • The deal adds four (4) Reef Dispensary locations in Nevada in the cities of Las Vegas (2), Sparks and Sun Valley.
  • The deal adds two (2) Reef Dispensaries in Arizona in Phoenix and Phoenix Southeast Valley.
  • Tryke’s flagship Reef Dispensary in Las Vegas is the closest dispensary to the heart of the Las Vegas Strip. To management’s knowledge, on its current 4,800 square foot footprint, it is already one of the highest-grossing dispensaries in the world, with the current highest known grossing dispensary in the world, right across the street. There is no intersection in the world generating more regulated cannabis revenue annually than the intersection of Western Ave. and Desert Inn Rd. in Las Vegas.
  • The Reef Dispensary in North Las Vegas generated $14.5 million in revenue in the year-to-date period to August 31, 2019.

Unit Offering

In addition to the Tryke acquisition, Cresco Labs also announced that it has entered into an agreement with a group of investment dealers, led by Canaccord Genuity Corp. to purchase, on a underwritten basis an aggregate of 7,350,000 units of the company at a price of C$10.00 per Unit for aggregate gross proceeds of C$73,500,000.

 



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The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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