DankCan Dispensary: A Comprehensive Cannabis Retailer Turnaround in Michigan
DankCan Dispensary*, after operating since recreational legalization in Michigan in 2018, a once-thriving cannabis retailer in Michigan, they found themselves mired in financial turmoil. As most operators, they experienced success within the first few years of adult-use sales in their dispensaries.
Introduction: The Challenge
The market began to mature, after the first few years of operations, and they were unprepared for what was to come. Market prices for retail cannabis dropped due to competition as many new retail dispensaries opened in their area. Their local jurisdiction issued more licenses than was originally planned in the regulations and moratoriums were lifted. They were at a race to the bottom on their retail prices in an attempt to at least maintain their customer base and keep them from going to neighboring dispensaries. But as their neighbors squeezed the competition with deeply discounted products, they found it hard to keep up.
With mounting federal tax liability due to Internal Revenue Code 280E and state and local taxes becoming increasingly difficult to pay timely as required, their liabilities and penalties were mounting. Supplier payables went unpaid and they found it difficult to honor payment arrangements. Investors were no longer receiving expected dividends and began to grumble. Owner operators were no longer able to pay themselves in attempt to meet other necessary obligations. DankCan Dispensary was spiraling and it seemed there was no way out. They began accepting usurious loans due to limited options for their industry in order to stay afloat.
Because DankCan was new to business markets and cycles in general, they failed to recognize that the market would regulate and the hey days were over. They were at a jumping off point- to either turn their business over to receivership or to find a solution. That solution is both a mindset as well as a financial and operational turnaround.
In this case study, we’ll focus mainly on the initial financial turnaround and steps to effectuate change in order to stop the financial hemorrhage. After these crucial steps and damage control mode hurdles have been crossed, then a rebirth of the business can begin – including hiring proper management oversight and a general change in mindset and goal-setting.
Step 1: Identifying the Need for a Financial Turnaround
When John assumed his role as CEO, he recognized the critical need for expert financial guidance to confront DankCan’s mounting tax issues and the broader financial challenges facing the company. As is often the case with businesses in distress, a fundamental step was acknowledging the need for external assistance. This acknowledgment was a vital prerequisite for a successful turnaround.
Step 2: Partnering with the Right Financial Advisor
In pursuit of the right partner to navigate this intricate path, John explored several options and considered collaborating with a cannabis accounting firm, here we’ll call it 420CPA, a firm renowned for its extensive experience working with cannabis businesses and its track record in helping clients recover from setbacks. Notably, their expertise spanned back to 2009 and founded in California, an era and state that has supported clients throughout the evolving market changes within the industry.
In his decision-making process, John discovered that a substantial portion of 420 CPA’s client base that they were able to help become sustainable and even to thrive in tight market conditions. This finding underscored the importance of selecting a financial partner with specific turnaround expertise, given the complex challenges facing DankCan.
Step 3: Gaining Management Approval for CPA Engagement
Despite initial reluctance from the board, John’s determination to save the company prevailed, with the conviction that a reduction in the cash burn rate, primarily attributed to the looming liabilities, could lay the foundation for DankCan’s revival. Convincing the board of directors to hire 420 CPA was a pivotal step in the turnaround process.
The 420 CPA Approach
420 CPA’s strategic accounting, tax, and management expertise and experience in helping businesses in financial distress set the stage for the pivotal transformation of DankCan. Their initial discussions with the company unveiled their robust knowledge of the industry and their track record in resolving tax issues.
Step 4: Accounting – Books and Records
- Correcting books and records—restatements
- Revenue inventory and cogs were misstated
- Cash logs were missing and not recorded—which meant they were missing deductions
Step 5: Amending Tax Returns
- Reviewing past income tax returns as well as state and local tax filings for potential amendments
- Amend the last three years of income tax returns with restated and corrected books
- Advised on different tax positions that management has not previously been advised of—as well as risks of tax positions
Additionally, the team at 420 CPA evaluated state and local tax filings and determined that they were incorrectly calculated. They worked with State and local agencies to amend tax returns.
Step 6: Negotiating Tax Payment Plans
DankCan faced mounting tax liabilities and penalties unpaid to both the IRS and the State of Michigan. Given the unique regulatory challenges of the cannabis industry, it was imperative to address these tax liabilities strategically. A critical financial step taken by John and 420 CPA was to negotiate payment plans with these government entities.
These agreements allowed DankCan to structure the repayment of its tax debts in a manageable and sustainable manner. They also negotiated penalties after initial principal and interest were paid. This not only relieved immediate financial pressures, but also ensured ongoing compliance with tax regulations.
Step 7: Engaging with Suppliers, Investors and Other Financial Stakeholders
In addition to the tax liabilities, DankCan had financial obligations to investors and other financial stakeholders. Recognizing the need to build trust and secure support from these key players, John and 420 CPA initiated discussions with investors and stakeholders.
They crafted a strategic plan that involved offering lump-sum payments and other incentives to stakeholders. This approach not only facilitated the restructuring of financial obligations but also ensured that DankCan had the support and confidence of its investors, a critical element in any successful turnaround.
Step 8: Strengthening the Financial Team
A crucial step in DankCan’s financial turnaround was the hiring of qualified internal and fractional financial team members.
With the right expertise in place, the company could effectively manage its financial operations, make informed decisions, and ensure ongoing compliance with complex tax and regulatory requirements. Building a strong financial team was an integral part of the company’s long-term financial strategy.
*Note to Our Readers: In this blog post, we delve into a detailed case study of a cannabis dispensary facing significant financial challenges. The facts in this case study are accurate, however, names have been changed to respect the privacy of individuals and companies who are featured in this case study. This allows us to share valuable insights and lessons learned while respecting the confidentiality of our clients.
For more information or to learn more about this case study contact Stephanie Jeffries at info@420cpa.com or contact the editor at HighlyCapitalized@hcnmultimedia.com.
About The Author
Rachel Wright, Managing Partner
420 CPA AB FinWright
Rachel Wright, MST, CPA, managing partner at AB FinWright, specializes in cannabis accounting and taxation for multi-state and multinational entities, advising clients on everything from internal controls to the bottom-line implications of mixed local, state, federal and international statutes of taxation.
