Article

WHAT'S THE SCORE?

December 24, 2018

 

 

 

"What a day, top of the 5th with BLACK leading LEGAL 5 to 1 with cleanup hitter TAX DODGER  up, no outs and two on base, second and third. And the pitch."

 

BLACK MARKET        5      10     0                    

LEGAL MARKET         1       3      2

Using California, Oregon, and Colorado as our statistical base, we calculated that 65 percent of the growers ignore state compliance standards and the states failed to adequately  curb  diversions  of marijuana  to drug dealers. Of these black market purchases, 89 percent of consumers reported feeling complete or very satisfied with their purchase, and an equally high 87 percent said they'd be likely to purchase from the same unlicensed source in the future.  Unless significant changes are made on a state and local level the tax revenue for legal purchases will be much less than expected. In California, some estimates made before recreational marijuana’s Jan. 1, 2018, launch suggested it could generate $1 billion in annual tax revenue atop what the industry was already bringing in through medical weed sales. Early indications are that this figure may fall well short of expectations -- and taxation is not the blame. To satisfy the noise, we have considered the tax numbers: In California, a tax of $9.25 an ounce is levied on marijuana flower, along with $2.75 an ounce on cannabis leaves. There's also a 15 percent  excise tax on the price of the product, along with state and local taxes. In total, the tax rate of up to 45 percent and passed along to the consumer.
Meanwhile, the black marketeers can sell below fair value since it doesn't have to buy cultivation permits, pay rent, have significantly less overhead,  or pay exorbitant amounts of tax revenue to the state or local government. Sure, it's illegal and very profitable. Their underground operations can  produce considerably cheaper and better. The idea that competitive legal-weed pricing will drive out unlicensed players is like believing in pigs fly.
The lawmakers did not fully understand the dynamics of the black market in crafting the various rules and regulations. Even Canada that nationalized recreational marijuana in October 2018 has failed to consider the unintended consequences.   The cannabis industry is less than its parts when viewed from the perspective of profits.  The consensus business model was unable to understand our applied conclusion.  As a result, stocks that investors expect to benefit from its growth will fail.  Consensus models do not provide guidance and should be strapped for current events and a workable strategies because stamping out the black market isn't going to be easy.  Why be part a causality during the transition process?

FJC has studied the business models, and operating plans for the major public companies in the cannabis industry since their public disclosure documents are easily accessible and required by law. Our conclusions have been declared many times in our Cannabis News directory.  We determined that the black market is bad news for cannabis stocks. For example, CannaRoyalty’s  (ORHOF) business model depends on the success of California's marijuana industry to drive its results.  Created initially as an investment company, CannaRoyalty has transformed into a niche distributor. With hundreds of brands competing for shelf space in licensed dispensaries, ORHOF as a “middleman”  has acquired small distributors over the past year. The business model is a failure: California growers have overproduced cannabis because the black market was projected to disappear, which it will not in the foreseeable future.  Demand for legal products has compromised the financial equations and made  profitability impossible for companies like CannaRoyalty.

At First Jersey Cannabis we have kept our pounder dry.  The only shots fired were on analytics and using propriety algorithms to establish a succinct overview of what these events mean and how to take advantages of them.  Our business model is based on real vertical integration that (1) classifies cannabis and hemp are commodities, (2) classifies  the black market a significant competitor, and  (3)  profitability meads control of the entire distribution and marketing chain.
 

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