What Would US Cannabis Rescheduling Mean for Stocks and Investors?

Rescheduling would increase company profitability

In correspondence provided to INN, Michael Teller, chief operating officer at the Panther Group, highlighted the positive implications of rescheduling for both investors and businesses in the cannabis industry.

“Looking at it from an investor's viewpoint, the decision to reschedule cannabis would be a major game-changer. Even as the news trickles down, it starts to bring a sense of comfort and confidence to the investment scene, finally pushing the cannabis industry closer to widespread acceptance," he wrote. "With this impending change, more opportunities like mergers and acquisitions and consolidation will become increasingly available. In addition, businesses struggling to break even can now see a path to profitability, thanks to fewer tax headaches like 280E.”

Section 280E of the Internal Revenue Service Code is a provision that prohibits companies involved in illegal activities — such as the trafficking of Schedule I or II controlled substances — from deducting ordinary and necessary business expenses from their taxable income. Under this provision, cannabis companies are taxed on their gross income instead of their net income. The Boston Globe reported in May that most cannabis companies in the US effectively pay a tax rate of between 60 and 80 percent. For many business owners, obstacles such as Section 280E stand in the way of profits.

Limited access to banking products like business loans and payment services further complicates matters, and many operators have had to make concessions such as raising prices, often driving consumers to the black market.

Initiatives like the SAFER Banking Act would relieve companies struggling to stay open, but that legislation needs more Republican support to pass; at the time of this writing, a date for a Senate vote wasn't set. Jonathan Havens, managing partner at Cannabis Law, recently expressed to Cannabis Business Times that he hopes lawmakers who didn’t previously support cannabis reform might come around if it's placed in the Schedule III category.

Tritt concurred with Teller on the benefits rescheduling could provide for cannabis businesses.

“Companies are going to become more profitable and have more cash because of the 280E improvement. In terms of the trickle-down effect, I think companies that are doing well will start to have a better financial position," he said.

In contrast, those facing financial challenges may be more inclined to sell their assets, particularly if they have the opportunity to engage in transactions with financially secure enterprises. “I think you’ll also see similarly that the struggling people aren't going to really be impacted that much by this change; it's not going to make their business worth a lot more or make a lot more money. I think people will kind of get fatigued and just kind of give up.”

Since cannabis companies that go out of business cannot be considered for bankruptcy protection, acquisitions present a viable exit strategy. In turn, consolidation will pave the way for the emergence of financially robust players.

Better cannabis branding after rescheduling

Rescheduling is also expected to bring other benefits for cannabis businesses in th eUS.

One critical aspect is the availability of trademarks for cannabis brands and products. “With the transition from Schedule I to Schedule III, cannabis brands and products will have significantly more opportunities for federal trademarks and IP protection, thus increasing a brand’s value and relationship with its consumers,” Tritt told INN.

Currently, the Patent and Trademark Office refuses to register any trademark used in connection with unlawful goods or services. Rescheduling cannabis for medical purposes would allow it to be legally trademarked, enabling those in the medical aspect of the industry to obtain brand protection.

“So I think you'll start to see companies developing products and formulations and different things to treat certain maladies (and) effects, and the way that they're going to protect and make sure that what they've created has a brand is by using the normal protections that are afforded to businesses,” said Tritt during the interview. “It just allows the normal course of business to occur, which hasn't been the case for cannabis.”

Impact of rescheduling on medical usage

Until now, research on marijuana’s potential medical properties has been limited due to its Schedule I classification.

However, the few studies that have looked at the medical properties of cannabis have revealed that analysis has been oversimplified. For example, cannabis has been found to relieve pain and nausea, stimulate appetites and is sometimes used to treat sleep disorders and glaucoma. CBD, the non-psychoactive compound found in cannabis, may have even more medical properties than its psychoactive counterpart, THC — it is used to help treat migraines, inflammatory bowel disease and seizures, as well as mental health disorders such as anxiety and depression.

Reclassifying cannabis to the Schedule III category would open the door to opportunities to conduct more thorough research into its benefits and identify further tangible uses.

Richard Shain, CEO of Maridose, a DEA-licensed bulk cannabis manufacturer, told MJBizDaily that he expects demand for cannabis for research purposes to “skyrocket” once rescheduling happens.

However, Tritt highlighted the potential new challenges that could come with this transition.

“The exit for these cannabinoid businesses is to pharma, so we need to understand what they're acquiring and what it takes to get them interested — the studies that they need in order to get comfortable with it. That's what the industry is going to start being faced with," he explained to INN. “Like everything in this industry, I could see it going totally sideways and people going down a path and then not realizing (they) can't even get protection for (something), so it creates a whole other set of challenges for an industry that operators have never dealt with. It makes picking the right team that much more critical at this point than it ever has been, just because now the stakes are getting really serious."

Investor takeaway

Overall, the rescheduling of cannabis is a complex issue with both potential benefits and challenges.

“At the end of the day, having the ability to clearly see where cannabis will be housed for the foreseeable future allows us to have visibility into the medium to longer-term investment horizon,” said Tritt.

“The legal and regulatory shift of cannabis will influence the international community. The US is signaling that cannabis isn’t going anywhere (except higher, pun intended). As such, investors and companies from industries like pharma, alcohol, tobacco, etc., can now begin mapping the industry trajectory and the various implications.”

Only time will tell how it will ultimately impact the industry.