Editors Note: This is republished with approval from A Biz In A Box author Jordan Zoot.
Choosing Cannabis Tax Advisors – is one of the most important decisions that the owners of a legal commercial cannabis business must make. We are consistently disappointed by the lack of consideration owners invest in making their selections and abhor the misformation and in some instances criminal conduct by a small number of “tax advisors”. This piece is NOT about our practice, it’s about the selection process. We readily acknowledge that we are not the only skilled and qualified tax advisors out there, they do exist and our goal is to assist everyone in finding one. We have been very careful to divide the piece into distinct parts, the first part is comprised solely of factual information where the source of information will be hyperlinked, or a citation provided. The second part is going to reflect our opinions on the topic, and we certainly accept that “opinions are like a**holes”, everybody has one. The California Board of Accountancy [“CBA”] maintains a Cannabis Industry Information page on its website which highlights its unique status.
Critical Criteria – FACTUAL INFORMATION
The U.S. Treasury – Internal Revenue Service [“IRS”]
The Internal Revenue Service maintains an extensive structure for the oversight, regulation, supervision, and, and if the required discipline of individuals and firms that are involved with Federal taxes. The oversight is divided into several broad groupings and you need to understand the differences between them. They are:
Office of Professional Responsibility [“OPR”] – OPR’s vision, mission, strategic goals, and objectives support effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law. OPR’s goals include the following: (1) Increase awareness and understanding of Circular 230 and OPR through outreach activities, (2) Apply the principles of due process to the investigation, analysis, enforcement, and litigation of Circular 230 cases and (3) Build, train and motivate a cohesive OPR team.
Return Preparer Office [“RPO”] – is a community of professional tax practitioners working with the IRS to improve tax administration with the strategic goals to register and promote a qualified tax rofessional community,improve the compliance and accuracy of tax returns prepared by tax preparers and engage stakeholders to create an environment that fosters compliance and program improvement
Treasury Inspector General for Tax Administration [“TIGTA”] – audits, investigations, and inspections and evaluations protect and promote the fair administration of the Federal tax system and work to ensure that the Internal Revenue Service (IRS) is properly doing its job. TIGTA reports directly to the Secretary of the Treasury and has oversight and review responsibility that extends to the IRS Office of Chief Counsel, the IRS Oversight Board, and the Taxpayer Advocate Service maintains a highly skilled, proactive, and diverse Inspector General organization dedicated to working in a collaborative environment with key stakeholders to foster and promote fair tax administration. TIGTA reports directly to the Secretary of the Treasury and has oversight and review responsibility that extends to the IRS Office of Chief Counsel, the IRS Oversight Board, and the Taxpayer Advocate Service. A maintains a highly skilled, proactive, and diverse Inspector General organization dedicated to working in a collaborative environment with key stakeholders to foster and promote fair tax administration.
OPR is responsible for the top tier of tax “professionals” – attorneys, certified public accountants and enrolled agents who are subject to the provisions of Circular 230 [“Circ. 230”] – Regulations Governing Practice before the Internal Revenue Service.
Certified Public Accountant [“CPA”] Verification – The tools available to perform that task include cpaverify.org a CPA lookup tool populated by official state regulatory data sent from Boards of Accountancy to a central database. The website represents the first ever single-source national database of licensed ‘ and CPA firms. Determine a CPA or CPA firm’s credentials without having to search each of the 55 Boards of Accountancy website individually. The California Board of Accountancy [“CBA”] licensee search is located here.
Enrolled Agent [“EA”] Verification – An enrolled agent is a person who has earned the privilege of representing taxpayers before the Internal Revenue Service by either passing a three-part comprehensive IRS test covering individual and business tax returns or through experience as a former IRS employee. Enrolled agent status is the highest credential the IRS awards. Individuals who obtain this elite status must adhere to ethical standards and complete 72 hours of continuing education courses every three years. Enrolled agents, like attorneys and certified public accountants (CPAs), have unlimited practice rights. This means they are unrestricted as to which taxpayers they can represent, what types of tax matters they can handle, and which IRS offices they can represent clients before. An Enrolled Agent’s credentials can be verified here.
Return Preparer Verification [make sure you understand how they differ from Circular 230 Practitioners]
Registered Tax Return Preparer [“RTRP”] – Program suspended due to IRS loss in litigation read here.
California Tax Education Council [California Registration Only] – Verify a Tax Return Preparer here [Circ. 230 Practitioner are Exempt]
Annual Filing Season Program [“AFSP”] aims to recognize the efforts of non-credentialed return preparers who aspire to a higher level of professionalism. Those who choose to participate can meet the requirements by obtaining 18 hours of continuing education, including a six-hour federal tax law refresher course with a test. The return preparer must also renew their preparer tax identification number (PTIN) for the upcoming year and consent to adhere to the obligations in Circular 230, Subpart B and section 10.51.
Preparer Tax Identification Number [“PTIN”] – anyone who prepares or assists in preparing federal tax returns for compensation must have a valid 2019 PTIN before preparing returns. All enrolled agents must also have a valid PTIN. The PTIN Directory is located here.
Authorized eFile Provider –the “Authorized IRS e-file Provider” database is a nationwide listing of all businesses which have been accepted to participate in the electronic filing (IRS e-file) program.
Circ. 230 Practitioners are the ONLY group of tax advisors that are permitted to sign extensions of time to file, and represent a taxpayer before the IRS and state tax agencies for the Examination, Appeals and Collection functions Does it make sense to select a tax advisor that isn’t permitted to defend the positions claimed in your tax return, particularly if they prepare the return?
Certified Public Accountants [“CPAs”] are the only tax advisors that may* be permitted to certify financial statements, review or compile financial statements. Enrolled Agents [“EA’s”] are not permitted to provide certification, review or compilations of financial statements. The IRS is prohibited from hiring EA’s as Revenue Agents [the entry-level position for “auditing” tax return unless that possess a CPA Certificate or have completed thirty hours of accounting courses at the college level. The IRS is limited to hiring EA’s that don’t meet the criteria as mail or file clerks.
Enrolled Agents [“EAs”] often state that “EAs are the only federally licensed tax professionals who also have unlimited rights to represent taxpayers before the IRS”. The statement is factually untrue as CPA”s and attorneys have the same rights and obligations when representing taxpayers before the IRS. There are some additional distinctions which need to be made at the state level.
California is one of seven states that requires registration of tax return preparers [Circ. 230 Tax Practitioners are EXEMPT from the requirement. The registration is accomplished through the California Tax Education Council [“CTEC”] and requires continuing tax education and a $5,000 surety bond.
CPA’s may either complete a process known as “reciprocity” and obtain a license in a state other than their state of primary licensure, or they may utilize the procedures developed under the National Association of State Boards of Accountancy [“NASBA”] CPA Mobility Project to obtain a “limited practice privilege“. Once a CPA have completed either of the two steps above they have rights to represent a taxpayer in any location which is the same as an EA.
* – the California Board of Accountancy issues two types of licenses, A and G.
Type A – “Authorized” means the CBA has determined that the CPA completed a minimum of 500 hours of the experience required for licensure in attest work. The 500-hour minimum standard ensures entry-level exposure to attest engagements.
Type G – “Qualified” means that regardless of whether a CPA has met the minimum steps to be authorized to sign reports on attest engagements, they comply with applicable professional standards, which requires the CPA to undertake only those professional services that can be reasonably completed with professional competence, including achieving a level of competence that will assure that the quality of service meets the high level of professionalism required. It is the responsibility of the CPA to evaluate whether their specific education, experience, and judgment are adequate to perform the services being requested. As a result, it important to ask the CPA about their number of years and level of experience, continuing education, and recent peer review, if any.
California CPA’s and CPA Firms that provide attest services are required to undergo a quality control process known as “peer review“.
CPA’s that certify financial statements or provide SSARS-21 attest services for a client are strictly prohibited by “independence rules which can be found under both state accountancy statutes and professional standards from providing bookkeeping or technology services, such as accounting software or POS systems for the same client.
Choosing Cannabis Tax Advisors
Our Recommendations – Opinion
We believe that the optimal combination of tax advisors for a cannabis business would be to have BOTH a CPA with a graduate degree [a Masters in Taxation or “MST”] and a tax attorney with a graduate law degree [an “LLM – Taxation”]. Our rationale for the collaboration of both is detailed in “Legal Cannabis Support – Clarion Call“. You can learn more about the importance of having access to both sets of skills in “CPA Becomes A Cannibal” and “Kovel Accountants Cannabis Industry“
Where your tax advisor went to school is important, and we believe continues to be relevant without regard to the number of years since they graduated. I personally have an undergraduate degree in accountancy from the University of Illinois – Urbana, and an MST from the University of Texas – Austin. Both programs have been ranked no lower than #3 in the United States for the past FORTY years.
Listings of top undergraduate and graduate accountancy and tax programs can found here for undergraduate and here for graduate and LLM – Tax are here.
Experience with a Big 4 Accounting Firm is important. The level of experience is probably of greater importance – the usual progression is Staff Accountant [“Analyst”], Senior Accountant [“Associate”], Manager [“Director”], Senior Manager [“Director”], and Partner [“Managing Director”]. Big 4 experience at the Partner level is the “gold standard” with fewer than one in thirty Big 4 firm hires becoming partners.
Additional Recommendations – Opinion
Professional Memberships are important, with increased value ascribed to participation in the organization’s Technical Committees increasing their value
State Society Membership – provides development of local relationships and is a stepping stone to AICPA Committee appointed membership. CalCPAcan be found here, and the other state societies here.
AICPA Private Companies Practice Section [“PCPS”] for firms – The AICPA’s
Private Companies Practice Section (PCPS) supports CPA firms in the everyday intricacies of running a practice. PCPS partners with firms of all sizes, creating targeted and customizable practice management resources, networking opportunities and is a strong, collective voice within the CPA profession. PCPS provides content designed to sharpen technical proficiency to best practices in firm practice management.
Locate the Firm’s website and explore it, and investigate the firm’s presence on social media. You are welcome to explore our firm’s digital presence here.
We hope this piece provides insight into the process of selecting a professional tax advisor and welcome your comments, you can email us at firstname.lastname@example.org.
CannaRoyalty Corp. also known as Origin House (CSE: OH) (OTCQX: ORHOF) has signed a binding term sheet to acquire certain business assets of California-based cannabis cultivator, Cub City LLC for total consideration of $7,025,000. The deal is expected to close in March 2019.
Origin House will be purchasing a state-of-the-art craft cultivation facility with an annual production capacity of up to 1,400 kg of an ultra-premium flower. At that price, it would imply a purchase price of $5 per gram of funded capacity.
“This Acquisition was a logical next step for Origin House, led by the needs of our brand partners as we execute on our brand support and acceleration strategy,” said Afzal Hasan, President and General Counsel of Origin House. “Access to bespoke third-party cultivation is critical for new flower brands that want an authentic brand promise from seed to consumption. The existing alternative for brands is to use undifferentiated and mass-produced biomass available on the market. ”
Cub City was co-founded by a team that included Drew and Karen Duval of FloraCal. The facility and team have produced flower for some of the top packaged flower brands in California, as well as a prominent pre-roll brand.
In addition to the premium product that Origin House sought, the facility is located in close proximity to FloraCal’s 62,000 sq. ft. facility. Origin House said that the additional 24,600 sq. ft. cultivation capacity will be focused on third-party cultivation.
The company also said that both current and potential brand partners have highlighted the desire for bespoke exotic cannabis cultivation. This acquisition further expands Origin House’s brand support and acceleration platform and will allow the company to close pipeline opportunities with promising brands in California
Hasan added, “We are excited to continue growing our infrastructure and team to unlock further opportunities for growth that we have been cultivating with brand partners in California.”
Terms Of The Deal
The company statement outlined the following terms of the deal:
Under current Cub City management, the facility is undergoing construction with an estimated completion date of March 31, 2019. Upon the completion of construction, the facility will be composed of a two-story building with 11,000 sq. ft of cultivation space, and 7,400 sq. ft of distribution, processing and packaging space in addition to 6,200 sq. ft of office space, storage, and common area
Within 30 days, Origin House will provide a construction loan facility (the “Loan”) to Cub City in an amount of up to USD$1,700,000. Funds advanced under the Loan will bear simple interest at 12% per annum and mature two years from the date of the first advance. The Loan proceeds will be used for construction and equipment for the Facility
The Loan will be secured by a first ranking security interest on all present and future assets of Cub City and guaranteed by each of the members of Cub City on certain conditions
Some of the key assets, among others, to be purchased in the Acquisition include:
Cub City’s 20-year lease of the 24,600 sq. ft Facility; and
A 5-year local permit to cultivate, process, package and distribute cannabis. On Closing, Origin House will also have access to two state licenses: (a) a cannabis Type 11 Distribution License; and (b) a Small Indoor Cultivation license that may be used for future operations.
Included In Purchase Price
Forgiveness of the principal and interest accrued under the Loan (the “Loan Balance”);
$3,525,000 less the Loan Balance, in immediately available funds on Closing Date;
$3,500,000 on the one-year anniversary of the Closing Date (“Holdback Disbursement Date”). Cub City will have the option to receive the second payment in cash, shares of Origin House, or a combination of both but not less than 50% in shares.
MPX Bioceutical Corporation (CSE: MPX) reported its financial results for the second quarter ended on September 30, 2018. MPX recorded revenue of CAD$14.7 million, up from CAD$4.4 million in the same quarter during the previous year. The increase in revenue was attributed to wholesale operations and the company’s management of four cannabis dispensaries in Arizona. Gross profits for the quarter rose by 30.1% to $4.4 million.
The company’s net loss for the quarter rose precipitously to CAD$19.2 million, up CAD$3.9 million in the same period during the previous year. The company attributes its losses to general operations, accretion expense of CAD$1.4 million and costs related to the change in fair value for the Hi-Med Facility and convertible loan for CAD$9.2 million.
“For the second quarter, we again experienced strong growth, with revenue increasing $10.3 million year over year, topping $14.7 million, driven by the strong performance of our Arizona operations and much-improved production from our facility in Nevada,” said W. Scott Boyes, Chairman, President, and CEO of MPX. “We continue to execute upon our aggressive expansion strategy, as demonstrated by the successful openings of the Health for Life dispensaries in Maryland managed by one of MPX’s subsidiaries.”
Plus Products Inc.
The California-based edibles manufacturer, Plus Products Inc. (CSE: PLUS) announced its financial results for the quarter ended on September 30, 2018. Revenue rose to $2.56 million, up 60% over the previous quarter. The company’s loss and comprehensive loss rose to $1.79 million, up from $1.21 million during the same period during the last year.
PLUS ended the quarter with a gross margin of $0.38 million (15%) and $11.1 million in cash on hand. Shortly after the end of the quarter, the company went public and closed a CAD$20 million IPO
“We are pleased that as measured by retail sales in Q3, the PLUS brand is now the leading edibles brand in the largest and most competitive cannabis market in the world, and we look forward to extending the brand beyond California in 2019,” said Jake Heimark, CEO of PLUS.
Emerald Health Therapeutics Inc.
Emerald Health Therapeutics Inc. (TSXV: EMH) reported its financial results for the third quarter ending on September 30, 2018. Revenue for the company rose to $321,070, representing an increase of 51% when compared to the same period in the previous year. Likewise, Emerald Health’s net loss also increased; increasing from $1.9 million in Q3 of 2017 to $6.26 million.
Shortly before the end of the quarter, Emerald Health was chosen as an authorized cannabis supplier by the Newfoundland Labrador Liquor Corporation (NLC), and by the last week of November had completed its first adult-use cannabis shipments to Newfoundland; as well as British Columbia and Labrador.
“As we move forward at this pivotal point of commercial production, we expect our Pure Sunfarms joint venture, Quebec facility, and hemp sourcing agreements to result in significant scaling of production and sales from the fourth quarter onward,” commented Avtar Dhillon, MD, President of Emerald Health.
Today, Acreage Holdings Inc. (CSE: ACRG.U) announced its unaudited financial results for the third quarter, which ended on September 30, 2018.
Acreage reported quarterly revenue of $5.5 million, representing a 160% increase when compared to the same period in the previous year. The company’s year-to-date revenue increased by 92% to $10.6 million. The company’s net loss increased from $0.7 million in the third quarter of 2017 to $4 million. The year-to-date net loss was $2.1 million.
Gross profits for the quarter, excluding fair value items, was $1.9 million; up 118% when compared to the same period in the previous year. Year-to-date gross profits were $3.8 million, representing an increase of 76% over the previous year.
During the last quarter, Acreage launched its flagship brand, “The Botanist;” opening a cannabis dispensary in Baltimore, Maryland and increasing the number of dispensaries owned by the company to 16. By January 2019, the company expects to have as many as 23 retail dispensaries opened. Acreage was also awarded the right to receive one of eight total dispensary licenses in the state of North Dakota.
“We are in the midst of a transformative moment for the U.S. cannabis industry and we have been laying the groundwork to fully leverage our unique strategic advantages – scale, operational depth, and financial strength,” commented Kevin Murphy, Founder, and CEO of Acreage. “Our November public listing and private placement equity raise of approximately $314 million gives us the ability to continue to expand our industry-leading footprint beyond the 18 states that we are in. These efforts have laid the foundation for us to roll out the nation’s first truly national brands in the industry. With our operational foundation now in place and the tailwinds of transformational pending legislation that we anticipate will open new cannabis markets in the U.S., we believe we are in a strong position for the future.”
Acreage on the Move
Over the last month, Acreage has made a number of property purchases and acquisitions to strengthen its portfolio. Most recently the company close the acquisition of Michigan-based Blue Tire Holdings LLC, entered into an agreement to acquire the intellectual property rights of one of the world’s largest and diverse libraries of cannabis genetics, and has agreed to purchase a third Connecticut cannabis dispensary. The latest purchase in Connecticut will give Acreage three of nine dispensary licenses in the state.
The New York Stock Exchange (NYSE: ICE) is delisting self-described cannabis company India Globalization Corp. (NYSE: IGC). In a short statement, the NYSE said that trading of the common stock would be suspended immediately.
The statement said that IGC has “Engaged in operations which, in the opinion of the Exchange, are contrary to the public interest. Section 1009(a) (ii) of the Company Guide states that it is necessary and appropriate for the protection of investors to immediately suspend trading in the Company’s common stock.”
The NYSE also said that “The issuer has substantially discontinued the business that it conducted at the time it was listed or admitted to trading and has become engaged in ventures or promotions which have not developed to a commercial stage or the success of which is problematical.
The Green Market Report recently highlighted the ways India Globalization Corp. claimed to be a cannabis company, but in reality, was earning money from legacy trading operations. Other outlets like MarketWatch have also dived into the company’s filings to uncover bad behavior. Mostly that IGC pretends to pivot its company to whatever new trend is moving the market, while not actually doing so.
On a positive note, Aphria Inc. (TSX: APH) said that its common shares have been approved for listing on the New York Stock Exchange and will begin trading at the open of markets on November 2, 2018. The new symbol will be APHA and the company said that it was changing its Toronto symbol from “APH” to “APHA.”
The shares that are currently trading on the OTCQB will move over to the NYSE. Shareholders will not need to do anything other than making sure their brokerages reflect the change in exchanges.
“Listing on the NYSE provides Aphria with access to the largest equity market in the world, with increased exposure to a vast array of US institutional and retail investors. This strategic move aligns directly with our growth ambitions as we enter an elite peer group of respected, high-profile corporate brands listed on the NYSE,” said Vic Neufeld , Aphria CEO.
Mr. Neufeld added: “We are excited to usher in a new era with the recent legalization of adult-use cannabis in Canada and as we aim to further expand our footing in exciting markets such as Latin America , the Caribbean and Europe . Aphria is well-positioned to capitalize on this fast-growing industry.”
What is the economic impact of adult use cannabis? In many U.S. states, that is a difficult question to answer. Hoping to divine the answer, the Nevada Dispensary Association (NDA), which represents approximately 80% of cannabis dispensaries in the state of Nevada, commissioned a report by RCG Economics to find out; and the results were surprising.
To fully ascertain the scope of the cannabis industry’s economic effect on Nevada’s economy, RCG implemented several strategies. To start, RCG electronically sent out a survey to NDA members; requesting information such as tax collections, gross sales, wages, benefits, and employment.
Next, RCG ran an economic benefits analysis (EBA) and compared the data to existing figures. An EBA typically involves analyzing direct benefits, indirect benefits, and induced benefits. Finally, RCG prepared a fiscal benefits analysis, which examined statistics such as state-level excises taxes, retail sales taxes, and the payroll tax.
After collating the data, RCG found that legalized cannabis will have a tremendous effect on the Nevadan economy.
Currently, adult use cannabis sales account for 63% of all cannabis sales in the states, while medical makes up the remaining 37%. Between 2018 and 2024, the state’s adult use cannabis industry is expected to generate an estimated $8 billion of economic activity.
Additionally, the industry is expected to support approximately 67,000 jobs in the same period. Cannabis regulations are also forecasted generate roughly $3.6 billion in direct, indirect, and induced labor income.
Direct spending in the cannabis industry is also projected during this period to have a multiplier effect of 1.63; which means that for every $1 spent on retail cannabis, another $0.63 will be generated throughout the state economy.
The retail cannabis industry is expected to produce approximately $989.7 million of total output activity in 2018 alone; representing roughly $60.7 million in sales. By 2024, that total is expected to rise to approximately $1.2 billion. Similarly, the industry is projected to support around 8,300 jobs in 2018, but by 2024 that number is expected to grow to 10,200.
Between 2018 and 2024, Nevada’s cannabis industry could potentially create roughly $1 billion in fiscal benefits for the state. The largest chunk of that figure is from sales and use tax accounts, which is projected to generate $349.4 million. The second largest contributor is the retail excise tax ($336.2 million) and the wholesale excise tax ($212.3 million).
For 2018, the industry is expected to generate approximately $113.1 million in fiscal benefits. By 2024, that number is expected to swell to $158.7 million annually.
RCG is quick to point out that these figures are only estimations based upon the available data and may change depending on outside economic factors. However, external economic factors or not, one thing is clear for the report, and that is that the legal cannabis industry will have a tremendous impact on the state of Nevada’s economy in the coming years.
Cannabis investing specialist and attorney David Wenger tells Green Market Report why he thinks multi-state vertically structured cannabis operators are a good place for investors. Wenger is the author of The Green Regulatory Arbitrage: A Case For Investing In U.S. Multi-state Vertically-Integrated Cannabis Companies, which is available for download here.
On October 26, 2018, The Green Market Report released its Cannabis Company Index 2018 Third Quarter Summary. After a rocky start this year, the Index has started to pick up steam and is continuing to build up momentum. During the third quarter, the Index rose by 56%; and with the commencement of adult-use cannabis sales in Canada at the start of the fourth quarter, the Index could rise even higher.
After a quarter filled with mergers, acquisitions, and buyouts; several cannabis companies have added to the Index and several more have been removed. Here are the cannabis companies that made the cut this quarter, as well as the ones that didn’t.
Charlotte’s Web(CWEB.CN) – Best known for the creation of a low-THC, CBD-dominate cannabis strain of the same name, Charlotte’s Web has enjoyed considerable success recently. Last year the company took in $40 million in revenue with a 35% EBITDA margin. During the third quarter the company went public on the Canadian Securities Exchange, and since then has seen its stock double in value; making its addition to the Index an easy choice to make.
Tilray (NASDAQ: TLRY) – Ever since going public on the NASDAQ, Tilray has seen an explosion in revenue and its stock value. Initially trading at $17 a share, Tilray is now trading at around $100. Additionally, the company has signed adult-use cannabis supply agreements with seven Canadian provinces and has also signed a deal with Canada’s largest Pharmacy Chain, Shoppers Drug Mart Inc.
Green Thumb Industries (GTII.CN) – It has been a good year for GTI. In June the company went public through a reverse takeover of Bayswater Uranium Corporation, raising CAD$87 million (USD$67 million). Revenue for the company rose by 25% over the last quarter, from $10.9 million to $13.6 million; thanks mainly to its chain of retail stores and wholesale cannabis distribution. The company’s debt is low, approximately $7.9 million, and its assets are high, roughly $230 million (which includes $112.7 million in cash or cash equivalents). All of this combined makes GTI a reasonable addition to the Index.
Sunniva Inc. (OTC: SNNVF) – Although the company’s stock has underperformed this year, in the long run, Sunniva looks like a good bargain. The company owns and operates seven clinics in Canada the specialize in medical cannabis, offers software solutions to customers, and sells vaporizers and related accessories. By the Fourth Quarter, Phase 1 of the company’s cannabis cultivation facility is expected to become operational and will carry the distinction of becoming the first large-scale facility that produces cannabis without the use of pesticides and other contaminants.
Aleafia Health Inc. (OTC: ALEAF) – Aleafia Health has flown under most analysts radar this quarter, but there are several good reasons why the company has been added to the Index. With 22 clinics nationwide, Aleafia owns the most extensive medical cannabis clinic network in Canada; touting over 50,000 patients. The company is also working with Cronos Group (CRON) in a cannabis sleep study and has plans to list its stock on the NASDAQ in the near future.
MedReleaf – After merging with Aurora Cannabis (NYSE: ACB), MedReleaf quit trading its stock; and as such, has been removed from the Index.
Hiku Brands – Likewise, after being acquired by Canopy Growth (NYSE: CGC), Hiku also ceased trading and has been removed from the Index.
Axim Biotechnologies (OTC: AXIM) – So far this year, Axim has performed poorly, and there is little indication that there will be any improvements. Revenue is down, losses are up, and the company has very few products coming down the pipeline. Should conditions change, Axim may make it back on the Index, but for now, it has been removed.
Terra Tech (TRTC) – Unlike Axim, Terra Tech has performed reasonably well this year. However, several lawsuits against the company have curtailed those successes. In a fast-growing industry like cannabis, where more and more companies are going public every day, the Index can take its pick of well-performing companies that don’t have to contend with a slew of litigation.
Namaste Technologies (NXTTF) – Similarly, Namaste has performed admirably over the last quarter, has a robust platform behind it, and was even added to Horizons ETF. Unfortunately, the company has suffered from negative press surrounding accusations that the company is not disclosing related party transactions, and when combined with poor marketing decisions made by the company, removing Namaste from the Index became the right choice to make.
July 1 kicked off the quarter with new regulations on products for sale in the adult-use cannabis market in California. Many brands in California either weren’t ready or decided the new rules were too onerous and left the business. Several dispensaries staged fire sales to clear the shelves ahead of the new rules and producers had to destroy inventory that didn’t meet the new regulations.
There were two other big events that shifted the market into high gear. An almost $5 billion investment by alcohol company Constellation Brands (NYSE: STZ) into Canopy Growth (NYSE: CGC) excited almost everyone in the cannabis industry. Constellation had made an earlier investment in the company late last year and this recent move brings its total ownership up to 38%.
In other beverage news, Bloomberg reported that Coca-Cola (NYSE: KO) was considering doing a beverage deal with Aurora Cannabis. Both firms denied they were in talks but left some wiggle room saying they always look at various deals. Still, the market went nuts about Coca-Cola making a CBD drink.
During the quarter, Tilray priced its $153 million IPO at $17 a share, above its estimated $14-16 range. The stock was listed on the NASDAQ and immediately traded higher, to over $23 a share for a gain of 35%. The stock got as high as $300 (recently trading around $120) and has joined a list of richly valued cannabis stocks.
Other big events during the quarter included the DEA rescheduling the GW Pharmaceutical (NASDAQ: GWPH) drug Epidiolex to a schedule 5 drug. Schedule 5 drugs are considered to have a low level of abuse and include substances like Robitussin cough syrup or Lomotil diarrhea medicine. While the cannabis industry had been excitedly anticipating the rescheduling, it had no larger effect on cannabis products.
Seed-to-sale technology provider MJ Freeway LLC has agrred to a merger with MTech Acquisition Corp.MTEC, -0.48 %, the first US-listed Special Purpose Acquisition Company focused on acquiring a business ancillary to the cannabis industry.
Following the consummation of the transaction, MTech and MJ Freeway will become subsidiaries of a newly-formed holding company to be listed on the NASDAQ (NDAQ) Stock Market. According to the company statement, if there are no redemptions by MTech shareholders in connection with the MTech shareholder vote to approve the transaction, it is anticipated that the combined entity will be debt free and have over $60 million of balance sheet cash to take advantage of strategic growth opportunities.
“We built MJ Freeway to be the technology infrastructure for the cannabis industry,” said Jessica Billingsley, Co-Founder & CEO of MJ Freeway. “With access to public capital markets and additional balance sheet strength as a result of this transaction, MJ Freeway will accelerate its growth and broaden its product offering as we strive to meet the ever-expanding demands of a highly complex and heavily regulated industry.”
Scott Sozio, Chief Executive Officer of MTech, said, “We believe technology solutions that empower operators to efficiently and compliantly run their business, with tools that track the full vertical from cultivation to consumer, are critical to the industry’s long-term success. We believe MJ Freeway provides the most robust seed-to-sale software technology available today, positioning the company for enormous growth as the legalization of cannabis expands throughout the country and the world.”
The company statement said that MJ Freeway equityholders will receive new shares of the newly merged company (“Pubco”) and MTech security holders will exchange their securities of MTech for securities of Pubco. The shares of Pubco common stock to be issued to the MJ Freeway equity holders will have an aggregate value equal to $70,000,000, with each share of Pubco common stock valued at $10.16 per share.
Cash proceeds released from MTech’s trust account, which trust account currently has approximately $58 million in cash, after any shareholder redemptions and payment of transaction expenses and other MTech liabilities, shall remain with the combined company. MJ Freeway equityholders are rolling 100% of their equity into the combined entity.
MJ Freeway is the developer of the cannabis industry’s first enterprise resource planning platform and is the largest global cannabis technology company which has tracked more than $10 billion in sales with clients in Australia, Europe, South America, New Zealand, Africa, Canada, and the United States in 29 states and the District of Columbia.MJ Freeway’s tracking software includes inventory control and grow management applications to streamline workflow and increase efficiency. MJ Freeway’s Leaf Data Systems software solution enables governments to track cannabis plants from seed-to-sale and ensure patient, public, and product safety.
Current MJ Freeway investor and Senior Strategic Advisor to the Board, Roger McNamee, added, “Cannabis companies that want to be leaders are adopting MJ Platform because I believe it is the only product with the technical foundation to support multi-line and multi-location operations. MJ Freeway prepares customers to manage high growth and complexity as the industry transitions from local to global scale. MJ Freeway’s merger with MTech will enable a smart growth strategy to capitalize on the industry’s continuing growth.”
Aurora Cannabis Inc. (ACBFF) released its fourth quarter and fiscal year-end financial results following the market close on Tuesday. For the fiscal year ending 2018, Aurora reported total revenue of C$55 million versus fiscal 2017’s total revenue of C$18 million. The net income for the year was C$69 million versus the previous year’s loss of C$12 million. Aurora also reported a gross profit of C$43 million for the year versus last year’s gross profit of C$16 million.
For the fourth quarter of 2018, the company reported that its revenue increased 223% to C$19.1 million from last year’s C$5.9 million for the same time period. Fourth quarter net income increased to C$79 million, versus a net loss of C$20 million for the previous year. It was 16% better than the previous quarter’s revenue of C$16.1 million. Gross margins improved to 74% from the third quarter’s gross margin of 59%.
The company said that the increase was primarily attributable to the unrealized non-cash gain on derivatives and marketable securities, which was partially offset by increased finance costs, share-based payments, acquisition, and project evaluation costs.
The cash cost to produce a gram of dried cannabis increased sequentially from C$1.53 to C$1.70 in the fourth quarter but fell 11% from the previous year’s fourth quarter cost. The drop was attributed to improved efficiencies from automation and better yield knowledge.
The average price of the product sold was C$9.20 per gram, an increase of 15% versus the third quarter and 23% higher than last year’s fiscal fourth quarter. The increase was attributed to the amount of cannabis oils sold. The total amount of cannabis sold in the quarter including oils were 1,617 kilograms (kg), a 19% increase sequentially and a 114% increase year-over-year.
“Aurora made substantial progress toward our strategic goal of becoming the global scale and margin leader in the cannabis industry, establishing a vertically integrated company with a broadly diversified product offering with a large global footprint,” said Terry Booth, CEO of Aurora. “With coast-to-coast supply arrangements and our strategic investment in Alcanna, we are very well positioned to capitalize on the significant adult consumer use opportunity in Canada. With reported Q4 revenues of $19.1 million, pro-forma Q4 revenues of over $33.1 million, and production capacity scaling up rapidly, we anticipate accelerated revenue growth during fiscal 2019. We have invested heavily in our organizational capabilities, including sales, marketing,
and corporate talent and capacity, to ensure we will continue to drive strong and sustainable long-term growth.”
Aurora also confirmed that intends to list its securities on a senior U.S Stock Exchange, although it didn’t specify which exchange. The company said that it would file a Form 40-F Registration Statement with the Securities and Exchange Commission (SEC). Terry Booth, Aurora’s CEO added: “Listing our shares on a senior U.S. exchange reflects the level of corporate and business maturity and our high-paced execution. This listing provides access to a broader investor audience who gain the opportunity to participate in our continued success.
Aurora Cannabis has grown tremendously over the past year. It has made 11 acquisitions ( one more pending) and its headcount has jumped from 300 at the end of 2017 to roughly 1,400 by the end of 2018. Following the end of the fourth quarter, Aurora went on to complete its acquisition of MedReleaf, entered an LOI (Letter of Intent) to acquire HotHouse Consulting and ICC Labs, Acquired Anandia Laboratories, and Agropro UAB.
During the fourth quarter and following it, Aurora made strategic investments in Evio Beauty Group and CannaRoyalty Corp. The company already has strategic investments in Hempco Food, CTT Pharmaceuticals, Choom Holdings, Capcium Inc. and The Green Organic Dutchman (TGODF).
The company said that for fiscal 2019, it is going to focus on expanding its capacity and sales growth in all markets, including its international expansion. The company expects to reach a production run rate of approximately 150,000 kg per year by the calendar year end of 2018. It also expects to scale up to 500,000 kg per year through its Aurora Sun and Aurora Nordic facilities.
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