CANNAINVESTOR Magazine October / November 2016 - Page 51

51

Starting at the top:

280E Tax Compliance:

Con - We are subject to Tax Code 280E Compliance. This means that cannabis companies are disallowed from deducting any expenses that do not qualify as direct cost of goods. Any money spent on sales, marketing, advertising and so on are non-deductible and this has a significant impact on our revenue profile, reducing our margins and our profitability.

Pro - 280E is what I like to call a binary externality. By that I mean it is a factor, with a significant impact on valuation, that will change, pretty much overnight at some unknown time in the future as a result of the inevitable rescheduling or de-scheduling of cannabis. That change will have a strong positive impact on the revenue profile and tax risk associated with any cannabis company regardless of what that company has accomplished or not accomplished up to that point. In short, cannabis companies will become more valuable when they are no longer subject to 280E compliance. This will be a win for investors who put money in prior to this change. Evidence of this dynamic is highlighted by Viridian Capital Advisors “Cannabis Deal Tracker”. It shows a significant uptick in cannabis investment leading into the November election with the expectation that a Democratic president will improve the prospects for exercise of binary externalities such as 280E elimination.

Interstate Transit:

Con - We are prohibited from shipping our products across state lines, and as such, we are confined, in the absence of a multi-state supply chain, from addressing a national market for our products. In effect, we cannot so much grow into other states, as duplicate our companies in each state in order to source and sell cannabis products in the state where they were produced. This is more expensive and does not offer the economies of scale associated with a more traditional growth strategy.

Pro - Interstate transit is also a binary externality and, once again it comes down to valuation. Most cannabis startups are appropriately valued as a function of proposed market penetration and current market size. The important thing to note here is that the market size applied is that associated with the home state of the company. A tech company would never defer to a local market to establish a valuation and, as such, those valuations tend to be much higher. This only impacts companies that are touching the plant or creating products that include THC, but amongst them investors will find some of the shortest pathways to revenue, and some of the most promising consumer brands. A state based valuation ahead of an inevitable shift to a national marketplace is a very good opportunity for an investor.