$113,000,000 and Counting in IRS 280E Tax Refunds

In October, Cannabis.net covered the fact that the cannabis industry could be sitting on billions of dollars in tax refunds if the IRS 280E tax code is altered or eliminated for the marijuana industry.

With towns and cities starting to refund excess taxes collected from cannabis companies in the name of “social impact fees”, for things such as extra police work and trash pick up due to dispensaries entering their town, it appears the Federal government is also starting to give back taxes to the cannabis industry.

Trulieve Cannabis Corp, headquartered in Florida, has unveiled its financial performance for the fourth quarter and fiscal year, concluding on December 31, 2023. The reports reveal a dip in revenues and increased annual losses as the company strategically navigates its financial landscape through tax adjustments.

Building on initiatives announced in the preceding year, Trulieve executed amended federal tax returns for 2019, 2020, and 2021, vying for substantial refunds totaling $143 million. Concurrently, the company took steps to address state tax matters, submitting corresponding returns and aiming for an extra $31 million in refunds.

The tangible outcomes materialized in the fourth quarter, where Trulieve successfully secured $62 million in refunds. This significantly contributed to the overall tally, reaching an impressive $113 million in refunds accumulated thus far. However, the company encountered a minor setback as a $1.2 million refund claim was rejected.

The 280E Approach

Trulieve’s tax approach centers around the section 280E tax provision, a move CEO Kim Rivers hinted might be explained if and when they get to a court filing. During a recent investor call, Rivers emphasized the confidentiality of their position, considering it a trade secret tied to the company’s unique standing. She explained the decision not to disclose publicly, citing potential litigation concerns.

In January, an additional $50.3 million in refunds bolstered Trulieve’s financial landscape, stemming from their tax strategy. This infusion notably contributes to the growth of unrecognized tax benefits. However, this bold approach towards tax refunds has inherent risks.

Trulieve, in its filings, openly acknowledged the elevated scrutiny from the Internal Revenue Service (IRS), foreseeing an increased likelihood of audits, mainly targeting cannabis-related businesses. The recent flurry of refund claims, especially for multiple subsidiaries, further amplifies this risk, adding a layer of complexity to the company’s tax maneuvering.

Additionally, the company acknowledged the potential fallout from any ensuing audit, anticipating the emergence of additional tax liabilities, encompassing interest, penalties, and escalated legal and accounting expenses. This ongoing challenge has resulted in taxes being placed in an uncertain tax position, as outlined in the company’s earnings call presentation.

Despite the persisting uncertainty, Trulieve adheres to customary tax payments as a U.S. taxpayer, excluding costs associated with Section 280E of the tax code until a conclusive resolution is achieved. Regulatory filings disclose a substantial amount of $180.4 million designated as “uncertain tax position liabilities,” with a noteworthy portion, specifically $152.1 million, linked to the contested applicability of Section 280E to Trulieve.

Financial Results

In the latest financial update, the company experienced a 4% dip in quarterly revenue, registering at $287 million, down $89 million from the previous period. Remarkably, this exceeded the average expectations of Yahoo analysts by $19 million, constituting roughly 7%. In comparison, the company raked in $298 million during the corresponding period last year, with most sales stemming from its retail operations.

Despite the revenue setback, there’s a silver lining: a net loss improvement. The company reported a net loss of $33 million for the quarter, indicating a significant 57% enhancement compared to last year’s $77 million loss in the same quarter. On a more nuanced scale, the company disclosed an adjusted net loss of $23 million when adjusting for specific financial items.

Reflecting on the fiscal performance, CEO Kim Rivers highlighted the company’s successful execution of a resilience plan implemented last year. This strategic focus emphasized cash generation and preservation, concurrently making investments to fortify future growth prospects.

Positive shifts in consumer trends drove the momentum in the fourth quarter. As they stepped into 2024, the company found itself in a position of considerable strength, significantly as the industry’s growth and reform outlook brightened. Armed with robust cash generation and a well-defined strategy, Trulieve is the prime contender for the upcoming surge in substantial growth catalysts.

Looking at the broader picture, Trulieve’s annual revenue reached $1.13 billion, marking a 7% decline from the previous year’s $1.22 billion. The net loss for the whole year tallied up to $527 million, marking a 114% increase from the $246 million net loss in 2022. Accounting for certain adjustments, the adjusted net loss settled at $70 million, reflecting a 139% surge compared to the preceding year.

Exploring the financial details, the operational cash flow for the quarter surged to $131 million, with a parallel free cash flow of $122 million. By December 31, 2023, the company’s cash and cash equivalents reached $201.4 million, revealing a noteworthy spike of $178.7 million compared to the net cash of $23.1 million in the prior year.

The marked improvement can be attributed to the company’s effective execution of the inventory wind-down strategy, as highlighted in its filings. The impact of income tax accruals, reductions in sales and marketing, and general and administrative expenses further contributed to this positive shift.

On the front of its debt management approach, Trulieve successfully redeemed $130 million of senior secured notes and secured an additional $25 million through a mortgage financing deal. Looking into the future, the company anticipates a cash flow from operations of at least $225 million in 2024.

In terms of operational developments, Trulieve provided insights into opening 17 new dispensaries over the year, expanding its nationwide presence to 192 locations. Simultaneously, strategic decisions led to the company exiting the California and Massachusetts markets.

The company’s push for recreational legalization in Florida this election season, spearheaded by Smart & Safe Florida, has gained significant traction. Trulieve has emerged as the primary financial supporter of the campaign, channeling tens of millions of dollars to bolster the initiative.

The Florida Supreme Court is expected to decide on the ballot placement by April 1, despite staunch resistance from the state’s attorney general. CEO Kim Rivers conveyed to investors that the court’s stance appeared favorable, providing a positive outlook for the campaign.

Conclusion

Trulieve’s recent financial reports indicate a mixed landscape, marked by a fourth-quarter revenue dip and substantial strides in net loss improvement. The company’s strategic tax adjustments and inventory wind-down have played pivotal roles in shaping its financial narrative. Additionally, Trulieve’s proactive debt management and operational expansion underscore a forward-looking approach.

The company’s significant involvement in advocating for recreational legalization in Florida is noteworthy, reflecting a commitment to shaping industry landscapes beyond its financial performance. With potential ballot approval and industry developments, the coming months will be crucial in determining Trulieve’s trajectory.

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