The legalization of cannabis for adult use in Michigan in 2018 caused an explosion of cannabis businesses opening across the state. The industry was on an all-time high (no pun intended) for the first few years, but the honeymoon phase swiftly subsided, leaving many licensees struggling. Unlimited licensing due to legalization resulted in supply heavily exceeding demand, while unregulated black-market sales brought low prices that licensed businesses could not compete with.
Among the industry challenges today: businesses feel compelled to price their products lower and/or cut corners and skirt state laws to stay afloat. Attracting capital is another hurdle for businesses in the industry. The federal prohibition against cannabis prevents many banks from lending to businesses in the industry. In addition, the U.S. public markets that the SEC regulates are not options for cannabis fundraising. All of this means companies in the industry are almost forced to raise capital from friends and family in the private marketplace — many of whom are now closing their wallets for additional capital infusions until they see better financial results.
As new capital sources dry up and profits erode, many cannabis companies are struggling to keep up with their payrolls. In addition, several cannot, or will not, pay their significant income tax liabilities — based on gross profit for retail operations — with the hope that they can eventually settle with the IRS.
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