The Daily Hit is a recap of the top financial news stories for July 6, 2023.
On the Site
New Cookies Lawsuit Alleges Fraud, Breach of Contract, Other Misdeeds
Global cannabis brand Cookies has been hit with yet another breach of contract lawsuit from a business partner alleging theft and fraud. The new legal action directly piggybacks on two earlier lawsuits that alleged Cookies routinely uses threats of violence and retribution in business dealings. Read more here.
Parallel’s Investor Suit Against Wrigley Allowed to Move Forward
The investor case against Parallel Cannabis’ former CEO William “Beau” Wrigley Jr. and other executives will move forward after a Florida Judge ruled that the investors provided enough evidence of fraud. The case claims that Wrigley and the other executives misled them on the company’s debt and about how their investments would be used. Read more here.
Some California Cannabis Operators Could Feel the Heat from New Tax Law
Santa Barbara County’s Board of Supervisors is pursuing a strict policy to address tax delinquency within California’s cannabis industry. In a recent decision, the board gave initial approval to a law that could shutter any cannabis business in the county if it fails to pay taxes more than 30 days past the due date. Read more here.
Michigan Edibles Maker Fined $100k, Loses Medical Cannabis License
Longtime Michigan edibles maker Sky Labs has been fined $100,000 and had its medical processing permit revoked by the state Cannabis Regulatory Agency after 20 milligrams of its mislabeled gummies were consumed by a four-year-old child. Read more here.
Ending 280E Could be Bigger than SAFE or TSX Uplisting
Many believed that the catalyst to turn things around for the cannabis industry would be the passage of banking legislation like the SAFE Act. However, it could be something as simple as 280e. But as with most things in cannabis, even 280e isn’t simple. Read more here.
In Other News
Cronos Group (Nasdaq: CRON), the Canadian cannabis producer backed by cigarette-maker Altria Group (Nasdaq: MO), reportedly is exploring options that include a potential sale after attracting acquisition interest, people familiar with the matter said. Cronos did not provide Reuters with any comment on the situation. Read more here.
Days after Maryland legalized recreational cannabis sales, Curio Wellness has revealed a $4.1 million fund-raise from undisclosed investors, according to Crunchbase. The Lutherville-Timonium headquartered firm raised $21.4 million in 2021, besides securing a $26 million mortgage deal to expand its growing facility from Severn Savings Bank. Read more here.
Germany’s Health Ministry has unveiled a draft bill to legalize marijuana, submitting it to state officials and the public for review. The legislation would allow adults to cultivate a limited number of cannabis plants for personal use and set rules for the creation of social clubs where they could obtain marijuana. Officials are also planning to introduce a complementary second measure that would establish pilot programs for commercial sales in cities throughout the country. Read more here.
The cannabis industry has been mired in a bear market for at least two years now. Challenges range from plunging prices for flower to excessive debt payments, and sales in mature markets have begun to plateau.
Many believed that the catalyst to turn things around would be the passing of banking legislation like the SAFE Act or even TerrAscend’s approved move to the Toronto Stock Exchange. However, it could be something as simple as 280e.
But as with most things in cannabis, even 280e isn’t simple.
Viridian Capital Advisors recently calculated that eliminating 280e would make a bigger difference than either the SAFE Act or a TSX uplisting.
As a refresher, Section 280e in the Internal Revenue Code forbids businesses from deducting otherwise ordinary business expenses from gross income associated with the “trafficking” of Schedule I or II substances, as defined by the Controlled Substances Act.
Most businesses can take tax deductions on various expenses which helps the company’s profitability, but not cannabis.
After analyzing 13 large MSOs, Viridian found that three companies with negative free cash flow (FCF) would have positive FCF without 280e. The adjustment also would more than double FCF for the five companies on the right side of the graph.
The adjustment would add approximately $700 million to the 2023 FCF of the companies reviewed.
The company collected consensus estimates of 2023 cash flow from operations and CAPEX for these companies to calculate FCF after the impact of paying 280e taxes but before any debt maturities. Six of the 13 companies have expected negative 2023 free cash flow.
Next Viridian calculated an adjustment to eliminate 280 taxes by calculating the amount of federal taxes levied on each company based on the 2023 consensus gross profit minus the taxes (if any) that would result from a tax imposed based on pretax profit.
The orange bars in the graph above show the adjustment. The green bars depict the FCF of each company after eliminating the impact of 280e.
Challenge of Ending 280e
Killing a tax code should be pretty simple, right? Congress could just make a change to the IRS.
Unfortunately, there doesn’t seem to be much political desire to go this route. The issue doesn’t drive voters to the polls and taking a stand on 280e won’t affect reelection.
Of course rescheduling to Schedule III of the CSA would immediately remove the tax issue, but as Viridian pointed out in its report, “Rescheduling to level 3 or below has its own issues, including introducing FDA oversight on a limited set of products and continuing state control over others. It will likely take years to draft and approve the necessary regulations and achieve coordination among the federal agencies involved.”
Since the country just celebrated Independence Day, Viridian felt it fitting to state, “Unlike in 1776, there is currently no rallying cry to eliminate ‘taxation without representation.’”
The Daily Hit is a recap of the top financial news stories for April 19, 2023.
On the Site
Cannabis Retailers Can Expect ‘Massive’ Sales Day on 4/20
The unofficial cannabis holiday of April 20 – better known as 4/20 – is tomorrow, and retailers should be prepared for a “massive” sales day, according to tech firms that have tracked sales in past years. Read more here.
Over 100 Employees at Rise Dispensaries in Chicago Set to Strike on 4/20 Eve
Workers at three Rise dispensaries in the Chicago area were set to go on strike Wednesday at 4:20 p.m. — a day before the popular industry sales event on April 20. According to union spokesman Matthew McQuaid, more than 100 employees between Niles and Joliet, Illinois, will participate in the open-ended strike. Read more here.
Blumenauer Makes Another Attempt to Repeal 280E
Oregon’s long-serving cannabis champion in Congress, Rep. Earl Blumenauer, this week again introduced the Small Business Tax Equity Act to exempt state-legal cannabis companies from the onerous 280E section of the federal tax code, which essentially prevents marijuana businesses from claiming standard business tax deductions and costs the industry untold millions per year. Read more here.
New York State Cannabis Tax Revenue Falls Short of Predictions
Cannabis tax revenues in New York state are both up and down at the same time, according to state data. State marijuana revenues were up for the month of March after being flat for most of the prior 12 months, to $1.8 million in tax collections from about $1 million per month previously. Read more here.
Agrify Warns Investors About Unreliable Financial Statements
Agrify Corp. (Nasdaq: AGFY) issued a press release about raising $1.84 million after it slashed the price of its warrants, but the company didn’t issue a release telling investors that its financial statements were not reliable. While shares popped 73% on Tuesday to 30 cents, they were plunging 30% in early trading on Wednesday to lately sell near 20 cents. Read more here.
In Other News
GS Holistic LLC
A California federal judge has awarded more than $151,000 to GS Holistic LLC in a default judgment against the owner of a Los Angeles smoke shop over claims the shop sold counterfeit versions of GS Holistic’s “Stündenglass” bong products. In a judgment filed Monday, U.S. District Judge R. Gary Klausner ordered Andrea Harris — an owner of Hollywood Zaza Smoke & Vape LLC, which runs Zaza Smoke Shop — to pay $150,000 in statutory damages plus $1,166 in costs to GS Holistic after failing to appear or defend herself in the suit. Read more here.
Curaleaf Holdings Inc. (CSE: CURA) (OTCQX: CURLF) determined that it will make certain adjustments to the revenue figures reported for 2021 and 2022 after a review of certain purchases and sales of products through the company’s wholesale channel. Read more here.
Eastern Band of Cherokee Indians
Following more than an hour of discussion capping off months of debate, the Cherokee Tribal Council voted earlier this month to fully fund its cannabis enterprise’s eight-figure startup funding request. Qualla Enterprise will view the $64 million as a loan rather than an appropriation, eventually paying the tribe back. Read more here.
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