OUR 9TH YEAR OF PROVIDING PROPRIETARY CAPITAL MARKETS INTELLIGENCE ON THE CANNABIS / HEMP / PSYCHEDELIC SECTORS
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Chart of the Week
Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Week ended 02/21/2025
Viridian Capital Chart of the Week: 4th Quarter Consensus Cash Flow From Ops Estimates are Positive but There is a Catch
- The Viridian Chart of the Week shows optimistic consensus estimates of 4th qtr 2024 cash flow from operations (indicated by the green line) for ten of the twelve companies on the graph. We see this as a remarkable achievement given the punishingly high tax rates the industry operates under and the operating challenges presented by cost inflation with simultaneous ongoing wholesale price compression.
- The one catch, however, is that it is not clear how much of the 4th Qtr CFFO estimates are derived from increases in “uncertain tax liabilities,” the long-term account that many most of the companies on the chart are using to accrue 280e taxes that they are not currently paying.
- To gauge the impact of not paying 280e taxes on the cash flow, we took the total 9 months of cash flow from operations and subtracted the portion attributable to not paying 280e taxes. The orange line is the cash flow before the positive impact of accrued taxes divided by 3 to make it comparable to the 4th quarter estimates.
- Six of twelve companies had negative average quarterly cash flow from operations after subtracting out the added cash flow from not paying 280e taxes. This suggests that the analyst estimates are likely to include some positive tax adjustments.
- We will be looking closely at the cash flow statements and tax footnotes to strip out these tax accruals from the actual numbers and see what cash flow would be if taxes were paid on a current basis.
- It will be interesting to see if the indefinite delay of rescheduling and the changed political climate implied by the appointment of anti-cannabis hard-liners to important DEA positions will have any impact on tax policy by the MSOs. We doubt it. After all, they have paid significant sums for sophisticated legal opinions under which they justify not paying their 280e taxes. And it’s kind of too late to get conservative now! Shoot the Moon!
- Meanwhile, Viridian will continue to consider these excess tax liabilities as debt in our enhanced leverage and valuation metrics.