David Abernathy appears on Investor’s Business Daily about Federal Legalization

Cannabis stocks continue to spark investor interest as the industry continues to chew away at legal barriers. How will the growing push for federal legalization shape the market in the coming year?

How The Push For Federal Legalization Could Change The Industry

Video Transcript:

Alexis Garcia:

Marijuana stocks continue to spark investor interest as the industry chews away at legal barriers. How will the growing push for federal legalization shape the market in the coming year? Can leading pot players inch closer to profitability? And what growth opportunities are out there for new industries and investors? Joining me to discuss all this is David Abernathy, he’s the vice president of research and consulting at The Arcview Group. So David, it’s so great to have you here, and kind of the thing we heard out of the 2020 election was that the real winner was pot. And as we kind of look at this growing push for federal legalization, what do you think this means for the cannabis industry?

David Abernathy:

I think it means a lot that federal legalization is certainly plausible within the next couple of years and that will really dramatically change the landscape, for uh, legal cannabis. Legal cannabis has existed in this very strange regulatory space in which the federal government maintains that it is 100 percent illegal, but many states, I think 36 states now plus Washington DC, have legalized it for medical use, and um, 15 states for just general adult use. This creates a big conflict in the law that makes it very difficult for companies to operate. It also has created this really siloed artificially siloed marketplace, in which each state is completely separate from every other state in terms of its cannabis supply chain. So, it’s created some unique market and economic dynamics. And some of that is likely to continue post legalization, and some of that is likely to very dramatically change. So looking at how legalization might affect that tells you a lot about what businesses are likely to do well and and what businesses are likely to struggle. 

Alexis Garcia:

Right and you know you mentioned this gray market. So what areas do you think will change? I know banking’s kind of been a huge issue uh with some of these companies we’ve seen a lot of mergers and acquisitions. uh so what do you think the biggest change might be? 

David Abernathy:

Sure, so there are a few things where we have quite a bit of good information about what’s likely to change and there are some areas where there’s still quite a bit of uncertainty. You mentioned banking, that’s a huge one a lot of cannabis businesses still have trouble getting uh basic banking services bank accounts merchant services, uh things like that that really makes it quite difficult to do business. It also has created these opportunities for cashless payment transactions and all sorts of other niche financial uh technologies that you wouldn’t see in most markets. One way or another, federal legalization is likely to resolve those banking issues. Um, whether it gets resolved through a standalone uh banking bill like safe banking, or cannabis just gets moved off of the the controlled substances act drug schedule, uh banks are likely to very quickly start just doing business, with uh, with cannabis businesses. One of the areas where there’s still quite a bit of uncertainty under some new federal legalization regulatory regime is: is cannabis allowed to be transported across state lines? This will have an absolutely enormous effect on the industry, as i mentioned right now every state has its supply chain from cultivation to processing to manufacturing to sales completely siloed within each state. If cannabis is allowed to be shipped from state to state, then you start to see opportunities for states like california and washington and oregon, which produce a huge amount of high quality cannabis at relatively low price to out-compete states that produce less have a higher cost of production and just might not be able to compete with the scale and experience of of some of those large early western states. 

Alexis Garcia:

Do you see maybe profitability potentially happening soon if there can be a little bit more certainty around, uh, the legal issues in this industry? 

David Abernathy:

Sure there are several things that play there. First, there are quite a few cannabis companies that are already profitable. the biggest ones, the big publicly traded ones a lot of them are not um some of that has to do with sort of missteps by management, some of that has to do with strategic investments in growth. Some of that has to do with things like 280e. There’s an IRS rule called rule 280e which was a largely symbolic role put on the books, um I think in the 80s, that the IRS promptly forgot about. It basically says that if your business is uh selling illicit drugs you’re not allowed to take normal business tax deductions. This was of course largely symbolic because most drug dealers weren’t declaring their income anyway. But when cannabis dispensaries started to come along and pay their federal taxes a few years later the IRS found this rule and came back to them and said “hey thanks for paying your taxes, by the way you’re not allowed to take any deductions” and they started hitting companies with huge bills for back taxes and that remains an issue today. Cannabis plant-touching cannabis businesses cannot take tax deductions, so payroll tax deductions and property tax deductions are all the deductions that normal businesses rely on for solvency. They can subtract the cost of goods sold because of a technical loophole, where that’s a subtraction and not deduction, but it has a huge effect on the bottom line. Um, to give you an idea we did an analysis a couple of years ago where we looked at the finances of a bunch of dispensaries of different sizes and operating in different states, and built sort of an archetypal dispensary that represented a sort of happy medium. When we ran the numbers we found that the average dispensary was operating at less than a one percent margin. Uh because of 280e with 288e removed that margin jumps up to 12% overnight. Uh, so that’s a huge um a huge issue and it will be interesting to see what potentially new federal taxes do um to offset that. One of the big challenges with legal cannabis businesses is they’re often competing against unregulated businesses. So if governments create a tax burden that’s too high, it really makes it tough to out-compete the unregulated market. 

Alexis Garcia:

David, thank you so much for your insights today. 

David Abernathy:

Yeah, thank you.

Alexis Garcia:

And for more of our coverage head on over to investors.com for investors business daily I’m Alexis Garcia.


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Cannabis Stock Trends How The Push For Federal Legalization Could Change The Industry

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