Cannabis finance experts predict rescheduling, consolidation

A bevy of cannabis finance experts gathered Friday at the NECANN Boston Cannabis Conference to share their insights and predictions, top among them being a high level of confidence that marijuana will be rescheduled in the near future.

But what the industry looks like may be different, as panelists expressed the belief that the broader cannabis market will continue to contract as larger players continue on acquisition sprees.

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If rescheduling does become a reality – as nearly every speaker on Friday agreed is likely – the most immediate and obvious benefit will be in the form of tax savings to the tune of more than $2 billion sector-wide, with about $900 million saved by the top publicly traded cannabis companies, according to estimates from Mike Regan of Excelsior Equities.

“It’s a 75% increase in profits,” Regan said. “Cannabis … will not exist long-term with this onerous tax code, and if you take it away, now maybe we’ll have a chance to continue to exist.”

If the proposed move to Schedule III is adopted by the Drug Enforcement Administration, that could also open the gates for new investors and other positive financial developments, attorney Michael Harlow of CohnReznick said.

“Rescheduling – absent any federal legislation – could be the best thing to happen to the existing industry, because we get tax relief without a flood of new competition,” Harlow said, though he clarified that rescheduling is not tantamount to legalization.

What about SAFER?

Several other marijuana industry insiders weren’t nearly as bullish on the SAFER Banking Act, a revamped version of the SAFE Banking Act, which is intended by members of Congress to open up the U.S. banking system to marijuana companies.

“I say, screw SAFER Banking. Give us rescheduling – or better yet, descheduling – and allow us to operate as a normal industry,” said Adam Stettner, CEO of California-based FundCanna, a marijuana industry lender. “SAFER Banking is not going to mean a lot for any of us… We need momentum. But SAFER Banking is B.S., because we already have 800-plus banks that bank us.”

Stettner said that of the 2,000 cannabis business clients at FundCanna, not a single one was without a bank account.

But Steve Ernest, of the Chicago Atlantic Group, countered that if the SAFER Banking Act were to pass, such news would likely result in a “doubling or tripling” of cannabis stocks, only because that would give investors, shareholders, and the industry a tangible political victory.

Ernest also agreed, however, that rescheduling should be the cannabis industry’s primary focus.

“We’re talking about almost tripling free cash flows for the entire industry overnight,” he said of rescheduling and the resulting nullification of 280E. “You’re talking about several billion dollars of free cash flow. That absolutely trickles down. Because folks can pay their bills. Bigger companies can now buy smaller companies.”

Capital woes

Ernest also warned that a lot of larger marijuana companies are currently over-leveraged with debt, with “several billion dollars” worth of debt coming due in the next two to three years.

“If all the debt matured tomorrow, there would be massive liquidation,” Ernest said. “There’s just not enough capital in the space right now to refinance the debt that’s out there, even for groups like us.”

But if rescheduling does happen, it could prove a financial lifeline, said Jordan Tritt of The Panther Group. And that’ll lead to further M&A.

“My crystal ball is, rescheduling will pass, new capital will come in, it will be at a cost that’s more affordable to the cannabis operators,” Tritt said. “Consolidation is the name of the game.”

Frank Colombo, managing director at Viridian Capital Advisors, also gave a data presentation showing that capital raises in the cannabis sector have been essentially “frozen” since taking a nosedive after the COVID-19 sales bump, which peaked in 2021 after months of government checks sent to quarantined Americans.

But there’s reason for optimism, Colombo projected, and said that 2024 is likely to be a reverse of last year, when equity analysts had to constantly revise their performance forecasts downward.

So far this year, Colombo said, the top 10 public cannabis companies have beaten performance expectations, and there are more state adult-use markets poised to open, such as Ohio, Virginia, and possibly even Florida.

Taking that and other market dynamics into account, there’ll be ongoing consolidation in the near future, Colombo concluded.

“The big are going to get bigger, and rescheduling is going to help that to happen,” Colombo said.