For some cannabis industry stakeholders who take nothing for granted under federal prohibition, the possibility of rescheduling represents nothing more than an “I’ll believe it when I see it” uncertainty.
This skepticism comes as the Drug Enforcement Administration (DEA) weighs 43,000 comments on the Department of Justice’s (DOJ) proposed rule to reclassify cannabis to Schedule III under the Controlled Substances Act.
But with the DEA long resisting cannabis rescheduling and having yet to decide on the appropriate schedule for cannabis under the current proposal, questions remain:
- Will DEA Administrator Anne Milgram grant administrative law hearings?
- Will litigation push the process beyond the presidential election?
- Will U.S. obligations under international treaties impact a final rule?
While a celebratory lap would be premature until the entire process plays out, Arizona-based Story Cannabis CEO Jason Vedadi said he remains bullish on cannabis rescheduling coming to life under the current White House.
“I understand why people are completely skeptical and that they think the rug’s going to get pulled out from underneath them,” Vedadi said. “I also can relate to that kind of mentality in this industry, but if you ask me where my true gut instinct is on this, this is kind of a done deal.”
Vedadi is a real estate developer and cannabis industry pioneer who served as executive chairman of Harvest Health and Recreation. He took Harvest Health public in 2018 and was its largest shareholder until the company was acquired in a $2.1-billion megadeal with Trulieve in 2021.
Vedadi reentered the space that same year but with no intentions of building another multistate cannabis company, he said. But that’s precisely what Story Cannabis turned into. The privately held company now has 18 dispensaries, including 11 in Arizona, four in Maryland and three in Ohio, as well as three cultivation facilities. Story Cannabis also plans to open a dispensary in Springfield, N.J., and has several other target markets to enter.
“We’re in markets that we really like, and we’re profitable, and we’re kind of hopeful that we get some incremental reform here,” Vedadi said.
But what would incremental reform via federal cannabis rescheduling mean for various businesses?
For starters, Vedadi said cannabis companies that are EBIDTA (earnings before interest, taxes, depreciation and amortization) positive would have a “tremendously different outlook” on their cash flow and business potential post-rescheduling compared to EBIDTA-negative companies.
EBITDA is an alternative metric representing a company’s cash profit from operations. Public cannabis executives often emphasize this metric during their quarterly earnings calls, mainly because net income is more difficult to come by in an industry burdened by an inability to take standard business tax deductions under Section 280E of the Internal Revenue Code.
In addition to EBITDA, Vedadi discusses myriad other cannabis rescheduling indicators and impacts in this exclusive interview with Cannabis Business Times, including the political landscape in the upcoming election, tax advantages, real estate, banking, loans, capital and more.
Vedadi also discusses his company’s exploration of an Employee Stock Ownership Plan (ESOP) should cannabis rescheduling not happen. Under an ESOP, employees can pay back the company with the business’s profit tax-free, making cannabis companies’ inability to take tax deductions under 280E irrelevant.
Editor’s note: This interview was edited for style, length and clarity.
Tony Lange: The public comment period for the DOJ’s proposed rule to reschedule cannabis concluded July 22—nearly two years after President Biden directed his cabinet to review its classification. What’s your take on where we’re at with the process?
Jason Vedadi: I’m really bullish on the fact that it’s going to happen, and it’s going to pass. I think that generally people are just skeptical because [it hasn’t] happened yet, and maybe I put my foot in my mouth on this, but this process has been going on since 2022, and it’s gone exactly like it was supposed to.
Lange: Does cannabis rescheduling need to happen before the election?
Vedadi: It adds an element of risk if it’s not done by—and I don’t think it’s by the election—it would be by the day that Biden passes the torch if Democrats aren’t reelected. If Democrats are reelected, then I would say there’s zero risk to Schedule III. If Republicans are elected, it adds an element of risk and, I think, some discomfort for people. … If you go back to Trump, he didn’t do anything for four years. He didn’t stop anything. He didn’t prosecute anybody. He didn’t push any agenda. I think it’s just a topic they don’t want to talk about. … But a lot of their constituents and a lot of their supporters don’t like it. And so … it’s hard for Republicans to support it because they have so many donors that don’t like it.
Lange: What do you think is the chance that this rescheduling process won’t get wrapped up before the end of Biden’s term?
Vedadi: It would be pretty crazy to think that this thing goes through a [two-year] process, and they just go bury it to bury it. If they did that, it would have to be the alcohol or pharmaceutical lobby somehow getting in there and impacting it. It’s very possible that something like that could happen, I guess. I just don’t know. It’d be highly unpopular. … We’ll start finding out if we’re actually going to get into any litigation, or we’re going to actually have any hearings, or if they’re just going to expedite it. I have no idea what’s going to happen there. It feels to me like they’re going to expedite it.
Editor’s note: Although the DEA has not yet “made a determination as to its views of the appropriate schedule for marijuana,” according to the DOJ’s noticeof proposed rulemaking, President Biden called on his cabinet to review “expeditiously” how marijuana is scheduled under federal law when he directed Attorney General Merrick Garland to initiate the process in October 2022.
Lange: If the federal government reclassifies cannabis as a Schedule III substance, will that impact publicly traded and privately held cannabis companies differently?
Vedadi: I’m going to try to break it up into a different category for you. The companies that are EBITDA positive—in our industry, we can be EBITDA positive and cashflow negative because we’re overtaxed. That’s how I would depict it. So, all the companies that are EBITDA positive, they’re going to have a tremendously different outlook, because all of a sudden now they have more cash coming to their businesses. They can distribute to investors. They have growth capital. Their lenders are going to treat them differently. For the companies that are running right now that are not EBITDA positive—they’re negative—I don’t know what this does for them. … But for the larger cannabis companies that are EBITDA positive and producing a tremendous amount of revenue, this changes everything for them.
Lange: Will there be cannabis companies that were EBIDTA negative turn to EBIDTA positive in the next couple of quarters?
Vedadi: Well, it depends. If they’re a mature company and they’ve been around for a while, it depends on what markets they’re in. If they’re in markets that are getting better or healing, it could be better for them. Maybe their managing teams are getting better. Maybe they’re in a medical market that hasn’t turned rec and turns rec, and that turns things around. There could be some legacy operators that just aren’t going to survive. I think that’s not unique to this industry. All industries have people who just don’t survive. I do think that after this Schedule III shakeout, though, if the Republicans take office … I don’t think we’re going to get anything else for a while. So, in very short order, you’re going to find out the haves and have-nots post-rescheduling.
Lange: Do you see Ohio’s market going adult use significantly painting a brighter picture for Story Cannabis before rescheduling happens?
Vedadi: It’s a very nice win for us. It’s a good one, and we have incredible locations, and we’re going to have a really good business there. We also think that Ohio is a market that you can look out at the longer forecast, and it’s going to hold on and be a good market for a long time. So, it adds a nice boost for us in 2025 that we didn’t know was coming. So, it definitely helps the overall outlook of the business, but it doesn’t completely change the face of what we are. We’re already in a pretty good spot, but it’s sure nice.
Lange: What do you foresee as the most significant positive impact that cannabis rescheduling will have on Story Cannabis’ operations?
Vedadi: It adds a tremendous tax advantage. It allows us to have greater distributions and more cash flow to expand our business. It doesn’t change whether we can survive or not. So, we survive either way. But it sure changes the outlook. It allows a lot of growth capital that otherwise is going to the IRS.
Lange: What are the potential negative impacts that cannabis rescheduling could have on Story or other U.S.-based cannabis companies?
Vedadi: I don’t see any negative. I’ve heard some rumblings that maybe the FDA can get further involved. I just don’t see it. The FDA could get involved right now if they wanted to, and they haven’t. I personally don’t see that as a negative. I’m not seeing any negatives. I think it’s just a pure positive catalyst, but I’m always open ears if somebody’s got something I’m not thinking about.
Lange: With your background in real estate development, how could cannabis rescheduling potentially impact this industry segment?
Vedadi: What could help on the real estate side is more lending opportunities. I think that some more banks are going to get involved, which would then create more opportunities to get credit, and then it would inevitably allow us to maybe even get lower rents, get lower rates for people. It would have a pretty positive impact in that way. Where it could honestly help more than anything is the ability to get more banks involved. I’m just not totally sure how that’s going to play out. Every step of the way, it seems like more banks start to get involved. They start with deposits, and some will do loans, and some will do loans under certain circumstances. And we think that rescheduling will push another level of lending opportunities and credit opportunities in the space and new investors. So, incremental reform brings in incremental opportunity.
Lange: Do you see that as a positive catalyst for smaller cannabis companies?
Vedadi: Oh, for sure. I think that the big companies have access to money. Some of the small companies literally have no access whatsoever. If you open up the kimono to even 10% to 15% of the banks deciding to enter the space, that could be a godsend for some of these smaller folks that may not be sophisticated in the level of being able to raise money, equity—that’s not that easy. That’s not something you’re just like, “Oh, by the way, I’m going to go create investment docs and go out and raise money from people I’ve never met and put it together so that I have access to capital for my business.” If you could get the SBA [Small Business Administration] involved, or whatever it might be, it would change the climate for mom and pop, big time.
Lange: Is Story Cannabis doing anything right now to prepare for rescheduling?
Vedadi: We were looking at potentially doing an ESOP with our business—it’s basically where you sell the business to your employees. And while the business is an ESOP, the employees can pay you back with the profit of the business tax-free. And so, we’re like, “If we’re going to stay in this inefficient tax structure, maybe this is just the best option for us, and we’re totally fine letting the employees own the business.” And so, we’re kind of sitting on the sideline hoping rescheduling happens, and if not, we would take a hard look at reverting back to continually adding states and eventually selling it to the employees, and instead of paying the higher tax margins, kind of pay yourself back. It’s probably the most efficient business option in the current environment.
Lange: Is that Employee Stock Ownership Plan (ESOP) something that’s common among other cannabis businesses as a 280E workaround?
Vedadi: It’s started to happen. There have been people that have actually done it. There are ESOPs now in cannabis, and there are a couple bankers that are out there specializing in it and walking people through the process. I’m familiar with other businesses that have gone through ESOPs as well. There are grocers. I know there are lots of industries that have ESOPs, so it won’t be directly only benefitting the cannabis industry. But it seems to me, if you really think about the construct of the cannabis industry being the highest-taxed industry in the country, that it would benefit the most from an ESOP. So, the government’s going to dictate to us how we handle our business going forward, but it’s something we certainly will consider if things don’t change.
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Lange: How do you prepare for potential tax matters under rescheduling?
Vedadi: It’s just too many question marks to really prepare: Like, if rescheduling happens this year, do we owe 280E this year? Are we exempt this year? Exempt next year? It’s just too much speculation. And so, it’s kind of day-by-day. It’s a little frustrating when you’re trying to forecast your business several years out, but this is the world we live in.
