Canadian cannabis company stocks Tilray brands (NASDAQ:TLRY), Canopy Growth Company (NASDAQ:CGC), Cronos Group (NASDAQ:CRON)And SNDL (NASDAQ:SNDL) exploded on Tuesday, rising 41.7%, 67.5%, 15.7% and 24.4%, respectively, as of 3:18 p.m. EDT. It wasn’t hard to figure out why cannabis stocks were surging across the board today: The U.S. Drug Enforcement Administration (DEA) agreed to the U.S. Department of Health and Human Services’ (HHS) historic recommendation to reclassify marijuana as a Schedule III drug, lower as the drug’s Schedule I classification since 1971.
Debt restructuring will bring enormous financial benefits to U.S. cannabis companies. But will these Canadian companies trading on U.S. exchanges also benefit?
A historic day
Marijuana probably should never have been classified as a Schedule I drug. This term is used for extremely dangerous drugs that have no known medical use and significant potential for abuse, such as heroin. A Schedule III drug is a lower risk classification and is equivalent to doctor-prescribed Tylenol with codeine (less than 90 mL), ketamine, or anabolic steroids.
Reclassifying the drug does not legalize marijuana at the federal level, and the DEA recommendation alone does not reclassify marijuana. The White House Office of Management and Budget (OMB) must approve the recommendation and the rule must be subject to public comment before it is finalized. However, the historic recommendation following a year-long HHS study significantly increases the chances that marijuana will be rescheduled.
Why would cannabis re-planning be so beneficial for cannabis companies? It’s largely a tax issue. Cannabis companies already operate in states that have legalized marijuana — even though it was illegal at the federal level — without legal repercussions.
However, there was a significant financial outlay. Cannabis companies were forced to operate heavily on cash and use alternatives to mainstream banks, increasing physical danger to employees and driving up costs. Additionally, U.S. cannabis companies were barred from listing on major U.S. stock exchanges and instead traded over-the-counter. Institutional investors who wanted exposure to cannabis had to buy stocks in Canadian companies like these four that are listed on major U.S. exchanges.
But perhaps the strongest headwind that debt restructuring will eliminate is that (state) legal cannabis businesses will no longer be subject to Section 280e of the IRS tax code. This section states that no business dealing in the sale of a Schedule I drug can deduct business expenses from tax. As a result, U.S. cannabis companies have essentially been taxed on their gross profits, and these tax burdens have made it virtually impossible to generate significant profits or cash flows.
However, if cannabis is redefined, US cannabis companies will now be taxed like any other business, which will have a huge positive impact on their bottom line.
How these Canadian companies will benefit
Although these Canadian companies have not yet directly entered the United States, some have been preparing for this moment for some time. Canopy has warrants that give it the right to buy several U.S. cannabis companies.
Earlier this month, Canopy formed a new U.S.-based holding company, Canopy USA, LLC, to hold these warrants. Canopy will exercise it if one of the major US stock exchanges allows plant-touching US cannabis companies to list.
Back in January, Tilray CEO Simon Irwin told the Wall Street Journal that after rescheduling, Tilray would and would enter the US “fairly quickly,” either entering the US organically or acquiring another cannabis company. And while Cronos now only sells cannabis in Canada, Germany and Israel, it is also 45% owned by the cigarette giant Altria. While Cronos actually exited the US CBD business last year and Altria has been considering selling Cronos, one has to assume that given the debt restructuring, Altria may have plans to attempt a US entry for this subsidiary.
Finally, SNDL Holdings has taken a somewhat novel approach to entering the US. After becoming a meme stock in 2021 and raising over $1 billion in cash, SNDL began buying up the debt of several U.S. cannabis operators through a joint venture called SunStream. Because SNDL didn’t have the equity of U.S. companies, it played by the rules to stay in the market Nasdaq. And SNDL also had unrestricted cash of $195 million last quarter, giving it some dry powder to invest in the US
However, the most immediate benefit from the debt restructuring will go to US multi-state operators (MSOs), which currently trade over-the-counter. As far as the US expansion of these Canadian companies is concerned, it is still in its infancy and it is still very uncertain how successful they will be given the established US competition. Investors may want to tread carefully on these four stocks, especially after these huge rallies.
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Billy Duberstein holds positions at SNDL. Its customers can own shares in the companies mentioned. The Motley Fool recommends SNDL and Tilray Brands. The Motley Fool has a disclosure policy.
Why cannabis companies Tilray, Canopy Growth, Cronos and SNDL got really high on Tuesday was originally published by The Motley Fool