Oct 27, 2022
Cannabis Industry Post Legalization from Investing, 280E, MSOs, M&A & more... w/ Melissa Diaz & Alan Brochstein
- BRT S03 EP53 (152) 10-23-2022
What We Learned This Week
Guest: Melissa Diaz w/ Rebel Rock
- customized accounting solutions, HR, and M&A for the Cannabis industry in AZ
Melissa’s accounting experience as a CPA spans numerous industries, both domestically & internationally, including healthcare, hospitality and, of course, Cannabis. In addition to co-founding and serving as CFO to Rebel Rock, Melissa is CFO and Shareholder for High Rock Accounting, which places an emphasis on utilizing technology to strategically make day-to-day and long-term financial decisions, while pursuing company goals and compliancy. At High Rock and Rebel Rock, Melissa helps companies remain competitive and efficient in increasingly high-pressure and high-stakes environments. Starting in 2016 she started branching out into the Cannabis industry.
Alan Brochstein CFA of New Cannabis Ventures
Melissa Diaz – 1st Half
Melisa, Melissa has a background in corporate accounting. She got involved in the cannabis industry in 2016. AZ – Cannabis for medicinal was legalized in 2014, and in 2020 recreational use was legalized.
Cultivation farming was more profitable back in 2020, while the consumer base increased, but reduction in price, now retail is more profitable
Arizona licenses vertically integrated – 1. cultivation 2. processing 3. retail (sell to consumers), you have the opportunity to lease out rights to use license
There is limited license in Arizona, only a count of estimated 146, so high purchase price possibly 20 mil+ to get a license, vs Colorado, much different, unlimited licenses with 1500+ already license in Colorado, little value, cost around $15K
Cannabis has more supply in Colorado, led to lower prices, it’s a downward push on prices, & puts pressure on the cannabis industry in price per pound, where as in Arizona the price per pound is $1000 - $1500, only $500 in Colorado
MSO stands for multi state operator
M&A activity has lessened in cannabis, as there’s been liquidity restrictions, with interest rates on the rise, and overall just less capital to the industry
Lending has tightened and it cost more to get money, which is good for lenders who want to loan money, but many avoid the cannabis industry because of the risk
Debt is more expensive in cannabis, only state chartered banks in Arizona to get loans. A lot of the banks do not give loans. Usually you have to use 3td party lenders with higher interest rates at 12% and higher on the interest rate.
Before interest rates went up, even with real estate backing, it was 15 to 23% interest rates, in October 2022 could go to equity markets for money
Cannabis companies were up for sale circa 2018 as there was a bubble and they could not pay the debt. In 2022 we could see a repeat of this.
Safe banking act has failed 7x, No federal banking for cannabis.
Cannabis is a schedule 1 controlled substance, no different than heroin. The President has talked of moving it to his schedule three or not schedule at all. This can be done through a congressional act or a recommendation to the FTA, then recommendation to the DEA then it would be re-scheduled to a lower level, but ETA could be 1 to 2 years.
How do you advise companies in the meantime. If they have the 280 E tax code removed if it is a scheduled 3 - There would be less tax burdens and lots of profitability for future cannabis business.
280 E tax at gross margin, can only write off direct expenses. By comparison, to normal business does $1 mil in sales and can write off direct and indirect expenses. This creates a problem for cannabis companies where it looks like they have ‘phantom income’ and their tax on income they did not even receive.
It is very common that business people and investors do not even know about the 280 E problem in Cannabis. Management companies can be used to move some expenses
Cannabis Tax - services and goods in cannabis is more expensive as there is more risk and paperwork, and regulation, overall just more complicated. So it cost the cannabis company more for accounting, insurance, legal, banking etc.
You need a good advisor team & trusted Network for help. You also need aspirin as it cost a lot in business and money to cure problems, hence advisers are like ‘business aspirin’.
Cannabis clients need a white glove service very hands-on.
Random story on cannabis from New York. - Adult use rules are very unclear which creates opportunities for people to sell illegally and not through a licensed authority
Example: in New York, operators are selling through food trucks
Alan Brochstein – 2nd Half
Cannabis currently is in a bear market which creates a purchase opportunity.
Alan Brockstein create a new cannabis ventures in 2015.
Government policies and legal issues currently are crippling the cannabis industry, as they do not know the long term legality and tax policies. One example is safe banking and taxes. Ironically lobbying money in cannabis is low.
Cannabis has 80% tax rate on real profit because tax is on gross profit because of 280E tax code. Cannabis companies may be profitable, but taxed high, so they wind up losing money. Canadian cannabis companies are legal with high tax rates which are normal and in Canada.
WM Tech, Weedmaps, $10 stock down to $1, does big business in California profitable, but trouble collecting money.
Big five top MSO‘s like Verano, Green Thumb, Cresco Labs, Curaleaf and Trulieve
Per Alan, you have 4 Tiers of cannabis companies and stocks.
He believes Curaleaf is too expensive price wise
Tier 2: Ascend, Air Wellness, TerrAscend, Columbia Care.
States like Texas going forward have mass potential for cannabis.
California currently is a very tough market. Illinois has court issues with licenses, Michigan seems to be a state going well.
VC and funding is tight right now with capital borrowing. What you see often with startup companies is a sale leaseback. The lending company buys the asset, and leases it back. Tough to work this out as it’s hard to build cannabis cultivation facilities.
REIT for real estate are popular in cannabis, not just a IIPR (Industrial Properties) TerrAscend got a loan at 6.5% in 2020, and 12.8% floating rate loan in 2022.
President spoke on cannabis early in October 2022. There was talk of federal prison release on low level drug charges as well as the 280 E tax rate in cannabis - this code can only deduct cost of goods nothing else this could change with legislative action or reschedule to 3, minor drug versus schedule 1as a major drug.
This is possible, which would lead to tax breaks, less risk, and companies could list publicly and get better funding
State Level - changes with cannabis has good movement as public sentiment and the majority overall are in favor.
Cannabis started in 2021 well, but by spring of 2021 it’s been down and currently remains down late in 2022. Funding is down, liquidity is tight - with cannabis you have low liquidity plus high risk.
This has created a bear market for cannabis stocks that have been hit hard, but also creates a buying opportunity for investors.
There was a Covid economy with cannabis created lots of demand which has now leveled out post Covid. There’s lots of suppliers, but now with demand down prices are also down.
Less M&A activity because the capital markets are tight. Verano holdings big time MSO had a deal for goodness growth which got called off and the stock went down 66%.
Technical analysis on cannabis stock says they’re oversold the price versus 150 day moving average, so median of 35% down, five biggest stocks in Cannabis are down 62% to 80%.
Cannabis stocks hit high price points in February 2020, & are down 65% year to date in 2022, they were down 25% in 2021 and hitting lows since 2013. Global cannabis stock index can be reviewed at new cannabis ventures
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