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 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, MariMed MRMD, Green Thumb GTBIF, and Verano VRNOF 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.
The Viridian Capital Chart of the Week highlights key investment, valuation, and M&A trends taken from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:
Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors – from Cultivation to Brands to Software)
Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)
Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)
Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)
Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)
Credit Ratings (Leverage and Liquidity Ratios)
Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.