Cash flow has been the talk of investors lately in the cannabis industry, as companies pivot from go-go growth to slow-go strategizing.
Tighter capital management and budgeting come as cash becomes more expensive and harder to grab.
“This change of focus makes great sense given the constrained cannabis capital markets, which are the most challenging we can remember,” Viridian Capital Advisors wrote in a recent report.
Viridian calculated an adjusted cash flow that assumes companies brought their tax liabilities to 90 days’ worth of taxes, as many tax debts have been deliberately left unpaid by companies as a way to use cash to fund operations.
A graph from Viridian’s report partly illustrates the schema:
Viridian reviewed third-quarter cash flow from 27 U.S. cultivation and retail sector companies in its database with market caps over $25 million, showing the five companies with the best relative cash flow on the left side, with the right side displaying the five companies with the weakest cash flow measures. The investment firm annualized each cash flow measure and divided by market capitalization to put all companies on a standard scale.
- The yellow bar on the graph shows each company’s funds from operation, defined as net income plus non-cash charges such as depreciation & amortization, valuation reserves and write-offs, and stock-based compensation. “Many lenders focus on this number because cash used for working capital buildup is, in theory, “self-liquidating’,” the firm wrote.
- The orange bars depict sources/uses of cash from changes in working capital. “We would generally expect these to be uses of cash for most cannabis companies since revenues are generally increasing,” Viridian wrote.
- The black line shows the cash flow from operations (the sum of the yellow and orange bars). The firm said it is the most important single measure on the cash flow statement because “it doesn’t change when companies take write-offs, adjust their inventory valuation, depreciation policy, etc.”
- The green line shows the cash flow from operations to market cap after adjusting cash flow to achieve a 90-day tax accrual.
“Investors are watching liquidity closely as this continues to be one of the most restrictive capital markets we can remember,” the firm wrote in a separate report on Wednesday, adding that the results were “somewhat concerning” for the bottom group with annualized cash flow from operations deficits larger than market caps.
The investment firm wrote, “Some companies like Tilt Holdings (CSE: TILT) would benefit from delaying their payment of taxes. Most other companies, especially those on the right side of the graph, already have more than 90 days of outstanding taxes.”
Significant deficits combined with sizable tax liabilities eventually creep up, such as when StateHouse Holdings (CSE: STHZ) agreed to enter a payment plan with the Internal Revenue Service. The company ended up only having to pay back around $5.8 million out of the $22.1 million it owed in federal taxes, adding the $15.8 million out of the $21.6 million it kept aside during the legal battles back into its sheet as positive noncash accounting adjustment.
Cannabis companies such as Cansortium (CSE: TIUM) oversaw solid cash flow generations during the most recent financial quarter.
Toward the bottom of the list is TPCO Holding Corp. (NEO: GRAM.U) (OTCQX: GRAMF), who had annualized cash flow from operations deficit more than 250% of the market cap, “even before adjusting for taxes and subtracting capex” despite laying off a third of its workforce.
TPCO, which does business as The Parent Company and has rapper Jay-Z in its C-suite, informed investors last month that it may have to dip into its cash reserves when January rolls around if economic woes continue to affect operations.
In a statement, the California-based company warned that, “inflation and consumer softness has negatively impacted the company’s ability to generate cash from operations.”
“As a result, the company may slightly deviate from its objective of maintaining a minimum of $100 million cash balance” at the end of the year, depending on acquisition opportunities, TPCO disclosed.
Overall, total capital raises are down 62.6%, with equity capital raises down approximately 96.3%, according to Viridian.