CANNAINVESTOR Magazine September / October 2016 - Page 53

Because of 280E, retail stores and dispensaries can only deduct their cost of goods sold to arrive at taxable income. Operating expenses including rent, salaries, utilities and advertising can not be deducted. I question whether there is any business in the U.S., in or outside the cannabis industry, that can operate profitably if it has to pay income taxes on its gross revenue minus only its cost of goods sold.

Investing in Service Businesses that “ Don’t Touch the Plant”

Ten’s of thousands of new jobs have been created in states where cannabis has been legalized. While some of these are directly related to growing, processing or retail sales, an increasing number are in peripheral service businesses.

These service businesses include marketing and branding services, packaging design, security, financial services including equipment leasing, and a variety of online and social media related services. A variety of consulting and professional businesses have also sprung up around the cannabis industry. These include consultants to assist with governmental compliance, and lawyers and accountants who are specializing in cannabis businesses.

Service businesses can potentially be very lucrative. It is important for investors to evaluate this type of business by determining whether the business model has worked in the non-cannabis world. As an example, if an online marketing strategy has failed for general businesses, it’s unlikely that it will work for cannabis-related businesses.

Publicly-Traded Cannabis Stocks

A key advantage of investing in publicly-traded stocks is the liquidity, something that investments in privately-held businesses don’t typically provide.

The creme of the crop of publicly-traded companies in the cannabis industry are listed on the Nasdaq Stock Market and are involved in pharmaceutical development.

At the top of the list is United Kingdom based GW Pharmaceuticals (GWPH), the 800-pound gorilla of cannabis publicly-traded companies. GW Pharmaceuticals has developed a cannabinoid medicine, Sativex, for the treatment of spasticity due to multiple sclerosis. Sativex has been launched in fifteen countries including the United Kingdom, Spain, Italy and Germany, and is approved in an additional twelve countries, but not the United States. GW Pharmaceuticals is also developing a treatment for some forms of pediatric epilepsy including Dravet syndrome and Lennox-Gastaut syndrome with its cannabis-based drug, Epidiolex. Epidiolex, which is a liquid formulation of plant-derived Cannabidiol (CBD) is undergoing clinical trials in the United States. GW Pharmaceutical’s stock market capitalization is over $1.8 billion.

Phoenix-based Insys Therapeutics (INSY) is also traded on Nasdaq. The company has a proprietary sublingual spray technology and is developing pharmaceutical cannabinoids. These include a generic version of Dronabinol, which is a synthetic form of THC. Dronabinol is used to treat nausea and vomiting resulting from cancer chemotherapy and is also used to treat loss of appetite and weight loss in patients with HIV. The Food and Drug Administration has approved the company’s Syndros. Syndros is an appetite-boosting drug, which helps patients deal with the weight loss symptoms of cancer and AIDS-related weight loss. Insys Therapeutics’ stock market capitalization is slightly over $1 billion.

Nasdaq-listed and Connecticut-based, Cara Therapeutics (CARA) is in preclinical development with its CR701 formulation. The company describes CR701 as a novel therapeutic approach for neuropathic pain. The company’s stock market capitalization is $145 million.

Zynerba Pharmaceuticals (ZYNE) is also traded on Nasdaq. The company has developed a cannabidiol or CBD gel, CR701, which the company describes as the first and only synthetic CBD formulated as a patent-protected permeation-enhanced gel. It is currently being studied for use in treating refractory epilepsy, Fragile X syndrome, and osteoarthritis. Zynerba indicates that CR701 will provide consistent, controlled drug delivery transdermally with convenient once or twice-daily dosing. Zynerba’s stock market capitalization is $77 million.

In addition to these Nasdaq-listed cannabis stocks, there are nearly 200 over-the-counter traded companies whose business is exclusively tied to the cannabis industry, and approximately 150 other over-the-counter stocks that have some business involvement in the industry.

Many of these over-the-counter stocks have limited liquidity, low stock market capitalizations, and low daily trading volumes. Most are considered to be “penny stocks,” which the U.S.