The Cannabis Industry Ponzi Scheme - Is a Sale a Sale If No One Actually Pays The Bill?

cannabis industry ponzi schemes

Connecting the dots in the marijuana industry is becoming more and more important as you try to figure out the true size and structure of the market. Who is doing well, who is struggling, is anyone actually making money?

If you noticed the headlines this week, it seems there is a growing disconnect between “accounts receivable” and actual revenue. Accounts receivable are what you sold or billed out, but has not been paid to you, yet. Revenue is the actual payment you got for that bill and is now sitting in your bank account.

The cannabis industry has a big problem with accounts receivable and accounts payable. According to the website NetSuite:

A company's accounts payable (AP) ledger lists its short-term liabilities — obligations for items purchased from suppliers, for example, and money owed to creditors. Accounts receivable (AR) are funds the company expects to receive from customers and partners.

The growing divide between reported sales and paid for sales is becoming a major concern in the cannabis industry, to the point that a Ponzi scheme may be brewing, or scheme called, “beggar thy neighbor”.

Let’s start at the first data point and connect the dots.

If you remember a few eyebrows were raised on Seeking Alpha when money printing giant Weedmaps reported on their public filings that over 500 clients are listed as “delinquent” or non-paying. That was a canary in the coalmine for the marijuana industry because Weedmaps’ clients actually collect cash from customers and have revenue, sell cannabis, and have cash flow. Weedmaps is a crucial part of the retail chain and allow cannabis-sellers to be listed on a map and easily found by someone searching for “dispensary near me” or putting in a zip code to find marijuana in their area. If the guys who actually have sales and cash flow can’t pay their advertising bill, then what hope does the rest of the industry have to become cash flow positive?

Whitney Economics put out a survey claiming that only about 42% of all cannabis businesses are actually profitable, and this is including those not paying excise taxes and vender IOUs.

The second data point more recently is a recent story by MJ BIZ about bigger players in the California cannabis industry forming a coalition to help solve the massive credit and debt problems in the California marijuana industry. According to the MJ BIZ story:

A large group of California cannabis companies have formed a coalition to raise awareness and provide solutions to mitigate a credit crisis that has threatened to upend the local marijuana industry.

Dozens of cannabis brands, wholesalers and producers Tuesday launched Financial Stability for California Cannabis (FSCC) as part of an ongoing effort to confront the complex debt problems facing the world’s largest regulated marijuana market.

“Collections and outstanding debt related to unpaid invoices are key challenges facing cannabis operators of all types across the state, from cultivators to manufacturers, vertical brands to wholesalers, and everyone in between,” Vince Ning, founder and co-CEO of California cannabis distributor Nabis, said in a press release.

FSCC aims to create a more holistic and collective plan to address the debt crisis across the supply chain, rather than individual, operator-led initiatives that have tried to reign in one of the industry’s biggest challenges – unpaid invoices, which affect many California cannabis businesses.

Notice the “unpaid invoices” link? It goes to an MJ BIZ article published a day earlier called, “California Cannabis Companies Hire Credit Group to Monitor Retailers Over Unpaid Invoices”.

If you are catching a theme here, is it that many invoices are going unpaid up and down the California cannabis food chain, to the point that is now a weed credit bureau and monitoring group being established to try and figure out who can pay and who can’t pay their bills.

But wait, there’s more.

Guess who else is getting stiffed? It isn’t just the growers, retailers, and brands, but the government as well, and they are not too happy about it. The Canadian government announced a new aggressive plan to get their missing cannabis excise tax revenue out of cannabis companies. Not to be outdone, California realized they are getting tons of IOUs from cannabis companies as well, and they want to get paid their excise taxes as well.

As another MZ BIZ article called “California Targets Cannabis Business Over Unpaid Taxes “, points out:

California’s business tax collector is ramping up enforcement against unlicensed and licensed cannabis companies, which owe the state nearly $200 million in unpaid taxes.

In the past few months, the California Department of Tax and Fee Administration (CDTFA) has taken a new tack against underground businesses that have undermined the legal market by skipping taxes and undercutting licensed companies.

In particular, the CDTFA has launched raids and auctioned off seized properties as part of heightened efforts to collect unpaid taxes and rein in underground operators. Legal businesses, meanwhile, are facing stepped-up efforts by the state as well.

And the hits don’t stop there. SF Gate made headlines this week with their article called, “California Pot Industry Facing ‘Extinction Event’”. You guessed it, the opening lines are:

California’s pot industry could be on the verge of an “extinction event,” with pot shops going out of business as they miss tax payments and sink under millions of dollars of debt.

Debt problems have plagued the industry for years — a 2022 report estimated that the industry was collectively sitting on over $600 million in debt — but a change in tax law that took effect this year has stakeholders worried the mounting debt bubble will finally become fatal. A San Francisco politician introduced a law this year in the state legislature that would crack down on pot businesses that don’t pay their debts.

State law recently shifted the burden for paying cannabis excise taxes from distributors to retailers, with the first tax payments due May 1. Retailers have historically had the most trouble paying their bills, and it appears that many shops lack the cash to pay their state excise taxes, according to new state tax data obtained by SFGATE.

The article goes on to point out that at least 13% of California’s legal pot shows are deadbeats, or roughly 265 cannabis stores in the state. They failed to make excise tax payments by the May 1st deadline, and now face a 50% penalty on taxes they owe.

This should end well. If someone can’t pay their taxes, better hit them up and make those taxes 50% bigger, because then they will surely be able to pay them.

If you are keeping a running total so far of people getting stiffed in the cannabis industry it is..

1.Weedmaps

2. California government

3. Canadian government

4. Brands, growers, producers, and manufacturers of cannabis products

5. Federal government

Wait, the Federal government? You bet. If you read the Cannabis.net write up of the Benzinga Cannabis Capital Conference, the industry is in dire straits right now and cash is like a drop of water in the desert. Without reading the whole 2,000 words, the message was that without debt financing there would be no cannabis industry left in America right now. Even the MSO’s, yes, the big boys who are publicly traded are stiffing the US Federal government on taxes right now, essentially “kicking the can down the road”. Their hope is that they can go long enough to see Federal legalization and then take the IRS to court saying 280E tax codes are illegal and no longer valid now that marijuana is a legal substance, hence we don’t owe you all those back taxes.

I kid you not, that is their actual strategy. How long does the IRS let unpaid taxes go without serious repercussions is anyone’s guess, but it won’t end well when you over $500 million in taxes with 7 years of interest and penalties on that number.

Do you realize what the MSO earnings would actually be if they paid their taxes to the Federal government on the date they are due just like you and I have to do with our taxes?

With unpaid and overdue debt (with interest), the entire marijuana industry could just be a house of cards, a Ponzi scheme of IOUs and past-due invoices. You can report $500,000 in sales based on accounts receivable and invoicing, but what if you only collect $75,000 of that $500,000 over the next 6 months? The headline sales of $500k are great, but your booked revenue that showed up in the bank account is actually $75,000.

Beggar thy neighbor, Weedmaps or Canadian government?

The invoiced numbers, or billed out numbers, are a complete sham compared to actual revenue and paid bills, and bills included your legal excise tax and money owed from 280E tax rules. It is getting so bad even the cannabis industry is setting up their own credit monitoring services to try and figure out who can pay their bills and who can’t. Wholesale markets are coming up with a grading system, think Amazon or Ebay seller ratings, for cannabis companies so you can see who can pay for that order and who has a history of not paying for orders.

As many speakers at the Benzinga conference stressed, debt financing is the only game in town for the cannabis industry right now, and that game appears to be coming to a brutal end as the lenders are calling in their unpaid bills and notes.