• The eventual passage of the MORE Act mitigates several operational risks for cannabis
businesses that touch the plant.
• The uncertainty around the timing of federal reform measures keeps valuations vulnerable to
the impact of 280E as well as ongoing IRS scrutiny.
• The publicly traded Multi-State Operators (MSOs) that generate positive Cash Flow from
Operations (which were in our scope), will pay out 50-60% of Cash Flow from Operations (CFO)
in taxes. This is a more meaningful metric to consider than an effective tax rate (total tax
provision/pre-tax income) because the former excludes the tax effect of non-cash items (e.g.
changes in the fair value of biological assets).
• Firms with negative CFO are also liable for income tax payments and, in some cases, continue to
accrue large balances. For example, MedMen recently reported its tax liability increased to
~$57M at the end of Q3 because no payments were made in FYE 6/30/20 (nor in its Q1 ending
The eventual passage of The MORE Act, removes cannabis from the list of controlled substances and
therein mitigates several existing operational risks for cannabis companies. Arguably, Section 280E of
the IRS Code is the greatest impediment to free cash flow generation for many plant touching
businesses because taxes are based upon gross profit and not net income (and can be on net losses). In
addition, it stands to reason that losses incurred by plant touching businesses are ineligible to offset
future earnings (NOL Carryforward). Other savings come from the elimination of specific bookkeeping
protocols and CPA services related to 280E (as well as accounting for biological assets).
The success of this year’s election (all 5 ballot measures passed to legalize cannabis) coupled with the
recent House vote in favor of The MORE Act, further popularizes support to end federal prohibition.
While the MORE Act will not advance in the Senate during this session, we believe the House approval
sets in motion further consideration by Congress in a Biden Administration.
The MORE Act removes cannabis from the list of controlled substances and mitigates existing
• IRS Code Section 280E will no longer apply to licensed cannabis businesses. This eliminates
costly and complex reporting requirements as well as the potential audit risk of an unfavorable
• Cannabis businesses will be able to maintain bank accounts and no longer be forced to operate
in all cash. The added compliance costs are necessary to monitor and reconcile cash
• Publicly traded plant touching businesses, such as U.S. MSOs that currently list shares on the
CSE will be able to list on major U.S. exchanges such as the NASDQ or NYCE and report financial
results in accordance with GAAP. The CSE reporting requirements follow IFRS that includes
accounting for biological assets which is complex, costly and in our view a meaningless
requirement that adds no value to investors (some of the larger U.S. MSOs have begun
reporting under GAAP, because more than 50% of their shareholders are based in the U.S. –
more will follow).
The uncertainty around the timing of federal reform measures keeps valuations vulnerable to the
impact of 280E. Additionally, the IRS indicates it is stepping up audit efforts of cannabis businesses
which could result in additional tax assessments (and penalties). Acquiring entities need to fully
understand the potential for further IRS 280E assessments and ensure …