What Reclassifying Marijuana Would Do to the Industry

The DEA currently meeting in Arlington to discuss loosening federal restrictions on marijuana. Joining us now to explain what rescheduling is and how that would impact the industry is Eric Ross, Chief Financial Officer of District Cannabis. Eric, thanks for coming in today. It's good to talk to you. So first of all, let's define what we're talking about here, the rescheduling versus the legalization. What's the big difference? Sure. So it is important to note that this rescheduling process does not legalize cannabis at the federal level. It doesn't. Cannabis is still illegal at the federal level, notwithstanding it being legal in certain states. What's important about rescheduling and the way, I think, to explain it is to understand how the Controlled Substances Act works. The CSA basically schedules drugs on five different schedules. Schedule 1 drugs have no accepted medical benefit or use and a very high probability of abuse. Heroin and LSD are Schedule 1 drugs. And up until about two months ago, cannabis was a Schedule 1 drug. Schedule 2 drugs have an accepted medical benefit but a very high probability of abuse. Opioids and fentanyl, for example, are Schedule 2 drugs. Schedule 3 drugs have an accepted medical use and a low to moderate probability of abuse. And that's where cannabis is now. So cannabis would go from Schedule 1 to Schedule 3 if this goes through. Now, there's also changes when it comes to the research that can be done on it because right now you cannot do federal research on a Schedule 1 drug, right? So what does that mean or what would that mean for cannabis if it's brought down to Schedule 3? It's huge. The ability to do research like pharmaceutical companies do research on their drugs and controlled studies to be able to target and see how certain drugs or in cannabis how certain strains or cannabinoids treat a medical condition hasn't been able to be done. The government makes it almost impossible to research a Schedule 1 drug. So it's now unlocking the opportunity to look at and really understand how cannabis and certain cannabinoids and strains can help really target and treat certain medical conditions. So that's kind of the big unknown in the future is wondering what can be unlocked because of that. That knowledge is not here at this point because you can't do the research. And we need that research. I mean, one of the real benefits of rescheduling is this is the first time the federal government has come out and actually said cannabis has accepted medical uses and benefits. So one of the other changes that will come out of this is once you fall under this different scheduling, on the federal level, the taxes would drop immensely for people like yourself that are in the business. What does that do overall, though? And this leads to the bigger question I think that some viewers at home might have, which is, does this just mean we're going to see more and more cannabis out in the mainstream, in the community, etc.? What it does is, and I don't think most people appreciate it, but cannabis is a $30 billion industry in the United States, and 75% to 80% of the companies in cannabis are not profitable because cannabis is taxed differently. Our cannabis businesses have basically an effective 65% to 70% tax rate. Most companies in the United States have roughly a 30% effective tax rate. We can't deduct most of our labor costs. We can't deduct our sales and marketing costs, most of our utilities and rent, because it was a Schedule I drug. So unlocking that and making taxation fair allows the cannabis industry to reinvest and to grow and to basically create better medicine. I know you've seen some of the inside workings with the lobbying efforts, etc., as to what's going on this week. Do you see a clear path to this going through, or is there still some hesitancy? What do you think happens? It's interesting because I think most people in the industry expected the federal government to reschedule all cannabis immediately. Instead, what they did is they bifurcated it. They rescheduled medical cannabis immediately in April, but they said for recreational or adult-use cannabis, we have to have a hearing. And they're doing it because they want to do it the right way. The government intends to reschedule adult-use cannabis as well, but today and for over the next couple weeks in Arlington, Virginia, the DEA is having hearings on rescheduling adult-use cannabis. We expect it to get done. We expect it to get done this year. There's never been a drug on the CSA that's ever been on two different schedules. It just makes no sense. It's the same plant. It's the same molecule. And so we expect that adult-use cannabis will be rescheduled as well. So you're looking at the usage being different depending on what they've already rescheduled versus what is being debated this week. Exactly. Well, I appreciate you coming in today. And obviously, we will keep you posted on what is happening in Arlington over the next week or so. And more information about Eric's business there on the screen there if you'd like to learn a little bit more as well. We are going to take a short break. We'll be back with much more. We'll check back in with Tucker in just a few minutes as well. Get a look at your forecast for this Thursday afternoon. We'll see you.