Top 5 And Bottom 5 Cash Flowing Companies In The Third Quarter

Participants at the recent MJBIZ conference discussed cash flow far more regularly than growth. A broad range of companies discussed instituting cost controls, tightening working capital management, and adopting stricter capital budgeting. This change of focus makes great sense given the constrained cannabis capital markets, which are the most challenging we can remember.

We reviewed the third-quarter cash flow of the 27 U.S. Cultivation & Retail sector companies in the Viridian Value Tracker database with market caps over $25M. The left side of the graph shows the five companies with the best relative cash flow, while the right side shows the five companies with the weakest cash flow measures. Note that each cash flow measure was annualized 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 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. 

The black line shows the cash flow from operations (the sum of the yellow and orange bars), 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 use of income taxes payable as a borrowing source has become widely debated. The green line shows the cash flow from operations to market cap after adjusting cash flow to achieve a 90-day tax accrual. Some companies like Tilt Holdings TLLTF 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. StateHouse STHZF and TPCO GRAMF have annualized negative cash flow from operations above their market caps, even before adjusting for taxes and subtracting Capex.

Investors are paying more attention to cash flow. Several companies, like Cansortium CNTMF and Tilt, achieved solid cash from operations in the third quarter, while others displayed significant deficits combined with relatively large tax liabilities. 

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.