Post Cannabis Rescheduling: What's Next For Marijuana Giants? Potential $1.1B Cash Flow Boost From IRS 280E Removal

Following the recent move on the part of the DEA toward 

reclassifying cannabis from Schedule I to Schedule III, Zuanic & Associates hosted discussions with industry leaders to assess the impact and outline the next steps. The comprehensive review indicates there could be significant regulatory moves and potential financial implications for the cannabis industry.

Regulatory Timeline And Expectations

The Biden Administration is proceeding cautiously with the rescheduling process, ensuring all legal protocols are observed. An expedited review by the Office of Management and Budget (OMB) is anticipated, possibly concluding in the coming days or weeks, contrary to the usual 90-day timeline.

This would be followed by a 60-day public comment period.

The final ruling, expected to be prepared for legal challenges, could be implemented before the upcoming November elections, enhancing its resilience against potential reversals by future administrations.

Industry Financial Outlook

The shift to Schedule III is poised to unlock substantial financial benefits for multi-state operators (MSOs).

Analysts project near-term financial outcomes could include approximately $1.1 billion in cash flow improvements across the sector due to the removal of tax burdens under the IRS's 280e that disalows cannabis companies from deducting normal business expenses.

This represents significant potential for balance sheet strengthening and increased financial flexibility for cannabis businesses.

"We are long-term bullish. Just on the US market alone, we could justify valuations of >$110Bn by around 2030 assuming federal legalization and a much larger TAM (total addressable market) with an expanded wholesale market of $75Bb, 20% share, 25% EBITDA margins, 30x multiples). Right now, the two largest companies have EVs barely above $3Bn. All this without factoring in the sizeable international opportunity," Pablo Zuanic, senior analyst wrote in his latest equity research report.

"MSOs trade at 10x CY24 EBITDA (9.7x) and 2x sales (1.9x). We recognize the significant uncertainty on the regulatory front and realize CPG stocks have more established brands. Still, fast growers like MNST trade at 6x sales and 20x EBITDA. More matured CPG stocks trade at mid-teens EBITDA. We think the greater upside comes from the market growth potential (the US market is at $30Bn legal and $70Bn illicit, and under legalization, we see it at $150Bn) and 280E cash flow relief," Zuanic continued.

Quantifying Changes In 280e

Impact of 280e Removal: Rescheduling allows plant-touching companies to deduct ordinary business expenses previously disallowed under IRS 280e, substantially improving their financial situations.

• Tax Benefits in CY23: Without the 280E restriction, the 22 tracked MSOs could potentially benefit from a $1.07 billion advantage in the calendar year 2023.
• Calculated Taxes: If taxes had been calculated on gross profits at a 21% rate, they would have amounted to $842 million.
• Actual vs. Projected Tax Payments: In CY23, these MSOs paid $575 million in income taxes, less than the $842 million projected if taxed on gross profits.
• Long-Term Financial Implications: The sector would see a significant reduction in tax liabilities, directly boosting cash flows and potentially leading to greater financial stability and opportunities for expansion and reinvestment.

"The tax savings would flow straight to the bottom line. If we take 10x on those savings (the current CY24 EV/EBITDA multiple for MSOs), the upside for most stocks would be significant; in most cases, the value creation would be greater than the respective stocks’ market cap," reads the report.

If you are interested in gaining a deeper understanding of cannabis regulations and investment opportunities, don't miss the opportunity to join us at the 19th Benzinga Cannabis Capital Conference in Chicago this October 8-9. Engage with top executives, investors, policymakers, and advocates to explore the future of the industry. Secure your tickets now before prices increase by following this link.

Catalysts And Market Movements

Key upcoming catalysts include the completion of the OMB review and the subsequent public commentary period. The industry also anticipates potential further legislative actions such as the SAFE Banking Act, which could further ease financial operations for cannabis companies.

The stock market has shown a tempered response to the rescheduling news, with analyst expectations of more pronounced movements post-final ruling implementation.

Zuanic & Associates advises investors to maintain their positions through potentially volatile periods, projecting that the realignment of regulatory frameworks and financial benefits will ultimately support a stronger market valuation for cannabis stocks.

The report highlights that liquidity remains a significant challenge for the cannabis sector, with the bulk of trading volumes captured by three NASDAQ-listed Canadian LPs including Canopy Growth Corporation CGC, Aurora Cannabis Inc. ACB, and Tilray Inc. TLRY, and the MSOS ETF. 

Despite these liquidity issues, the MSOS ETF still trades significantly more volume than the most "liquid" Multi-State Operator, underscoring the disparity within the sector.

The final ruling only becomes effective 30 days after it is published in the Federal Register. “This could mean mid-December. It is unclear to us whether the result of the election would make a difference to this part of the process,” Zuanic wrote.

Now read: Cannabis Stocks Retreat On New Rescheduling Order Developments: What's Going On?

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