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 09/15/2023
Viridian Capital Chart of the Week: How Much Will MSOs Save in Taxes from Elimination of 280e?
- One of the most important results of the potential rescheduling of cannabis to Schedule 3 is eliminating 280e taxes. In previous charts of the week, we have shown that 280e significantly negatively impacts cannabis companies by reducing their internally funded growth and limiting their debt capacity.
- The chart explores the second-quarter tax rates of thirteen large MSOs and shows an estimate of the annualized tax savings for each company from the elimination of 280e.
- In most other industries, it would be common to calculate effective tax rates by dividing tax expense by pretax income. However, effective tax rates are impossible to calculate for most companies on the chart, seven of which have positive tax expenses despite their negative pretax income. Accordingly, the orange line shows tax expense as a revenue percentage, ranging from about 4% to 13%. Note: effective tax rates are calculable for Ascend Wellness (AAWH: OTCQX), MariMed (MRMD: OTCQX), Green Thumb (GTII: CSE), and Verano (VRNO: CSE) at 84%, 192%, 65% and 189% respectively.
- Putting the damage from 280e into perspective, a non-280e company with 30% EBITDA margins, depreciation calculated based on 15-year fixed asset life, and 2x debt/EBITDA at average interest rates of 10% would have a tax expense of roughly 3% of revenue.
- We used a straightforward method to estimate tax savings. If a company has negative pretax income, we estimate zero tax expense. For companies with positive pretax income, we applied a combined state and federal tax rate of 28% to their quarterly pretax income. The difference between actual and recalculated taxes was then annualized and shown in the green bars.
- We estimate that eliminating 280e would save the companies on the chart around $700M annually.
- Over the last two years, a tight capital market and the cash-sapping impact of 280e have forced many cannabis companies to forgo acquisitions, reduce capital spending, and trim staffing. Savings from eliminating 280e will go far toward getting the industry back on a growth footing.
