It may be time for a reckoning in cannabis. Although it is still a state-by-state industry, the rapid growth of legal markets in adult-use, medical, and hemp-based products has caused financial pressure for businesses, and confusion for policymakers. 2024 is expected to bring continued challenges and change to the landscape; while some businesses will thrive, others may find it difficult without federal reform, operational improvements, or other interventions.

In a recent webinar, we brought together cannabis business advisors to discuss a host of business, regulatory, and legislative issues facing the market. We heard perspectives from:

• Michael Harlow, Cannabis Practice Leader, CohnReznick
• Gail Rand, CEO-Founder, Grand Consulting, LLC
• Matthew Schweich, Executive Director, Marijuana Policy Project
• Beau Whitney, Chief Economist, Whitney Economics

Read on for highlights from the conversation, to gain a deeper understanding of where the cannabis industry may be headed – and how you can navigate the evolving landscape. You can also access the webinar in its entirety on demand.

Cash flow and debt servicing are big challenges

Delinquent accounts receivable and debt are major challenges for the cannabis industry. In fact, many operators have more in delinquent accounts receivable than monthly revenues – which impacts not only their ability to service debt, but also their ability to pay taxes, which is often a condition of licensure. Given these challenges, many vendors may not survive to see federal rescheduling. And, given difficulties with cash flow and debt management, lenders and other service providers may pull back from the cannabis industry. While this trend may put further pressure on industry profitability in both the short and longer terms, it may also encourage businesses to “do more with less” to improve margins and become more operationally efficient… not necessarily a bad thing for the industry as a whole.

Operators are taking greater tax risks

Investors and operators have expressed frustration at not seeing rescheduling or other federal reform. Now, with a challenging interest rate environment and the ability to raise capital adversely affected, operators have been taking risks on tax strategies that they would not have taken just a few years ago. For example, ESOP (employee stock ownership plan) conversions are being seen more often, a strategy that can open up a host of IRS, Labor Department, fiduciary, and retirement concerns. And many operators are filing amended returns asking for refunds, claiming that they’re not subject to Section 280E – a risky strategy for those who have never paid taxes, as it could wind up costing them big in terms of penalties, interest, back taxes, and potentially their businesses.

Federal rescheduling can change the face of the industry

If federal rescheduling occurs – which could happen before the end of 2024 – there are differing views on what operators may do with additional cash flow from no longer having to pay 280E taxes. In addition to paying down debt and prior tax liabilities, it’s expected that companies would shore up operations, investing in marketing/branding and technology in order to stimulate greater demand, grow margins, and increase profitability. Still other businesses expect rescheduling would spur greater M&A activity.

When interstate commerce for cannabis is allowed, it will have a major impact on licensed cannabis businesses by increasing competition across state lines. While this prospect makes some cannabis providers uneasy, industry experts are predicting consumer benefits: Not only will the “best products win,” but prices will normalize across the country, rather than there continuing to be regional differences.

Rescheduling cannabis at the federal level could help arguments for state-level reforms, but may not significantly impact public or elected officials on its own. However, by alleviating financial pressures on the industry, it may help spur donor contributions among market participants. (At this point, philanthropic donors have generally moved on to other interests, such as psychedelic reform.)

State-level initiatives are likely to continue, albeit at slower pace

State-level cannabis reform initiatives and legislation may continue this year, but at a slower pace. 2024 is expected to have fewer initiatives on state ballots compared to previous presidential election years due to a double-whammy of more funding constraints and fewer blue-initiative states remaining. However, there is significant progress in Florida, where adult-use cannabis is expected to advance to the ballot, as well as in South Dakota and Arkansas. There’s also encouraging news on the legislative front in New Hampshire and Hawaii. At the same time, there is a large untapped market for medical cannabis, especially in states like Idaho, Nebraska, and Wyoming that could easily pass medical programs with only a few million dollars in funding.

The hemp-derived market needs more clarity

Hemp-derived cannabinoid products, such as delta-8 THC and CBD, are a huge market: A recent Whitney Economics survey put the total addressable market in excess of $28 billion in the U.S., $20 billion of that coming from states that allow legal cannabis sales. Given the wide distribution in these states through grocery stores, smoke shops, and other retail outlets, as well as online sales in states without legal cannabis programs, the industry is calling for greater regulation, including age-gating, testing, and labeling. The industry is also encouraging increased education among legislators, as they often don’t understand the differences between hemp-based and other cannabis products, and as a result are seeking to ban retail sales in certain states. Still another issue clouding the cannabis waters is the regulatory and legislative delineation of intoxicating vs. non-intoxicating hemp products, which has left negative impacts on industries that use hemp-based products.

At the same time, recognizing the potential economic benefits for growers and product manufacturers, some industry participants are calling for the legal adult-use/medical market to leverage the hemp-derived distribution model. Although it would be disruptive to the dispensary market, there might be opportunities for cannabis “superstores,” which could lessen illicit activity as well as offer consumers greater choice and more favorable pricing.

In conclusion

28 years after California was the first state to legalize medical marijuana, the regulated marijuana industry is at an uncertain crossroads. Congress has yet to pass any meaningful reform while the industry waits for a rescheduling decision from the DEA. Increased interest rates, federal inaction, the rise of competition from intoxicating hemp derivatives, a thriving illicit market, and a lack of new investment have created a very challenging year for the state-regulated cannabis industry. All in all, 2024 is shaping up to be a make-or-break year for many operators.