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Marijuana Stock Report: Black Market Weed Dealers Continue To Build A Better Mousetrap

By Brandon A. Dorfman
May 10, 2018

The North American Marijuana Index made significant gains on Wednesday, despite news out of California that first quarter tax revenue failed to meet expectations nearly derailing pot stocks. According to reports, excise tax revenue for state cannabis sales came in at around $34 million, far less than the $175 million projected for the 2017-18 budget year by Governor Jerry Brown’s office. The numbers complicate an already tricky regulatory framework struggling to compete against black market sales.

California’s 15 percent excise tax on marijuana sales, on top of other state and local taxes, gives black market dealers a reasonably competitive edge when it comes to price competition. Moreover, counties that chose to opt-out of the legal weed business, as well as those slow to award business licensure to prospective entrepreneurs may be responsible for forcing consumers back to their old time dealers.

"The excise tax revenue numbers announced today are abysmally below what Californians were promised when they voted to legalize recreational cannabis," Assemblyman Evan Low told the Associated Press in an interview. "The state must take all possible action to defeat the black market and support good actors, or else our newly established regulatory scheme will surely fail."

The decreased revenue may end up killing plans to lower the excise tax rate, which state lawmakers were hoping to cut to 11 percent. As some reports noted, reducing the rate is no guarantee of increased consumer participation in the legal market, while doing nothing ensures the black market thrives.

More worrisome for the industry as a whole is a new report from Moody’s which casts doubt on just how much revenue there is to be had from legalization. Focusing on early adopters like Colorado and Washington, the report found that legalized cannabis brought only modest revenue gains to each state, far below what many experts predicted. Colorado’s gross revenues were only two percent of their total general fund revenues for fiscal year 2017, while Washington’s was 1.2 percent for the two-year period from 2015-17.

“Markets in the states that legalized early are already showing signs of stabilizing,” Moody’s said in their report. “Also, as more states legalize recreational marijuana, states will face increased competition from their neighbors.”

The Index gained 6.82 points, or 2.83 percent to close out the day at 247.71, with The United States Marijuana Index rising 0.63 percent and The Canadian Marijuana Index jumping 4.22 percent.

Wall Street’s more perverse side came out on Wednesday as stocks rose higher on climbing oil prices due to President Trump’s announcement that the U.S. would pull out of the nuclear deal with Iran. The decision had investors who bet on rising oil prices diving headfirst back into the market, with crude oil hitting its highest level in 3.5 years. In fact, investors who had sat out the market in the days leading up to the President’s announcement returned in droves on Wednesday.

"The rise in oil is helping energy sector, which is expected to be a pretty big growth sector. A lot of analysts are expecting strong earnings as oil rebounds, and that hasn't really played out so much early this year," said Shawn Cruz, a senior trading specialist at TD Ameritrade in an interview with Reuters.

The Dow Jones Industrial Average rose 0.75 percent to close out the day at 24,542.54 points, while the S&P 500 gained 0.97 percent to end Wednesday at 2,697.79. Meanwhile, the Nasdaq Composite added one percent to finish the day at 7,339.91.

The Horizons Marijuana Life Sciences ETF (HMMJ.TO) jumped CAD$0.17 per share, a gain of 1.03 percent, to end the day at CAD$16.72, while the Evolve Marijuana ETF (SEED.TO) rose CAD$0.01 per share, or 0.06 percent to close out the day at CAD$ 16.20.

The Green Organic Dutchman Raises An Additional $17 Million

The Green Organic Dutchman Holdings Ltd. (TSX:TGOD) announced on Wednesday that the company had issued an additional 4.7 million units as part of its recent IPO, raising additional proceeds of over $17 million. In total, the company has raised over $132 million since going public, issuing over 36 million shares of stock. The over-allotment units include one common share and one-half of one common share purchase warrant.

“We are extremely pleased with the markets’ support of our IPO, which is the largest to date on the TSX in the cannabis space,” said Robert Anderson, TGOD’s Co-Chairman and CEO. “The additional funds will support the Company’s plans of becoming the world’s leading brand of organic cannabis. The further investments by Aurora Cannabis Inc. (TSX:ACB) in both the IPO and the Over-Allotment Option bring Aurora’s total investment in the Company to $78,145,562 and further validate TGOD’s business plan and value.”

Marijuana User Report High Rates Of Dependence

In another piece of significant news that may hit marijuana stocks hard in the coming days, a newly released survey suggests that cannabis users may be more dependent on the drug than previously thought. The 2018 Global Drug Survey interviewed more than 130,00 people in over 40 countries, asking them about current and past drug use. Around 50,000 respondents admitted to using marijuana over the past year, with 20 percent of those claiming to have a severe dependence on the drug.

In fact, the survey showed that cannabis, more than any other drug, gave users anxiety over the prospect of quitting. “You’ve got 20 percent of the people who are significantly worried about the impact of their use on their life,” said Adam Winstock, a British addiction psychiatrist in an interview with The Huffington Post. “It’s a measure of subjective worry and concern, but those questions tap into things like how much you use, how often, your sense of control and your desire to stop.”


Source: 2018 Global Drug Survey

Winstock told the site that the results show that despite the drug's safety, politicians and advocates need to address the issue of dependence when discussing legalization. Unfortunately, due to the failure of the War on Drugs, the conversation has gone to the opposite extreme, with advocates of legalization pushing back on any dissenting voices.

“Stop for a moment and think about how you cannot become the tobacco industry or the alcohol industry,” said Winstock. “Be the best you can be, don’t just make the biggest profit. Be the most responsible industry you can, and that means be honest.”

Quick Hits

GrowGeneration Corp. (OTCQX:GRWG) received a $10 million infusion from investors, the bulk of which was a $7.5 million investment from Gotham Green Partners… Cannabis analytics company Strainprint Technologies closed a $3 Million non-brokered, Series A private placement…  Aurora Cannabis Inc. (TSX:ACB) (OTCQX:ACBFF) tripled sales in the third quarter.

Price and Quality Drive Product Selection

Lift & Co., a cannabis information platform, commissioned New Frontier Data to do a study on the patterns of Canadian cannabis consumers. An online survey of 1700 users found that men are the primary users of recreational marijuana, while most use begins before the age of 18. Interesting data in user preferences can be seen in the infographic below:


Courtesy of New Frontier Data www.newfrontierdata.com

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