Curaleaf Holdings Inc. (CURA) is an American cannabis company listed on the Canadian Securities Exchange. CURA has rallied nicely over the past 3 months in lockstep with political developments in the U.S.. Shares picked up strong momentum when Joe Biden won the Presidency in November and gains continued as the U.S. Senate polls turned to favour the Democratic Party in Georgia. Today as this blog is written, the stock continues to strengthen on the likelihood that the Democratic Party will win both of Georgia’s Senate seats and will control the White House, Senate, and House, and thus have a good path to enacting legislation.
The enthusiasm for the shares reflects the widely held view that a Democrat controlled government will enact the SAFE Banking Act quickly, most likely by mid 2021. There is believed to be sufficient Republican support for the bill to block a filibuster. The bill was passed by the House by a wide margin in 2019, but was then blocked by the Republican Senate. Currently multi-state operators like CURA are precluded from doing business with federally chartered banks (i.e. Citi, JP Morgan, Wells Fargo, Bank of America, etc.) and have to resort to banking with credit unions and small regional banks. Cannabis companies accordingly have had a very high cost of capital (debt capital, at least) and CURA itself was in the marketplace last January with a new 13% $300m term loan facility…obviously exorbitant relative to corporate lending rates offered by mainstream banks. Moreover, dispensaries cannot currently transact via debit card or credit card, as cannabis is federally illegal. As you might imagine, this causes a lot of problems in terms of handling cash, security/theft/robbery, etc., not to mention the fact that people in the current environment seem to prefer contactless payment methods.
Perhaps most notably, under current legislation, cannabis companies cannot deduct many normal operating expenditure items in computing taxable income, because although the activity itself is illegal federally, the proceeds of cannabis sales are nevertheless taxable in the eyes of the IRS, but the business expenses related to the proceeds from an illegal activity are not deductible in computing taxable income. The result is that the handful of them that are currently profitable oftentimes end up paying effective tax rates in excess of 100%, absent some very creative maneuvering by their accountants. For this reason, cannabis companies look very expensive on the surface, but less so when you normalize the tax rates they currently pay.
Passage of the SAFE Banking Act would rectify all of these problems, and although it would stop short of full federal legalization of cannabis, it would nevertheless be a huge win for CURA and other cannabis operators in the States.
