Adjusted EBITDA May Look Nice But CFFO Is The Real Story

The chart shows the last three years and Last Twelve Months of Cash Flow From Operations (CFFO) for the six MSOs in the Viridian Capital Value Tracker database with market caps between $25M and $100M.

Most companies showed positive adjusted EBITDA for 2021, but only half had positive CFFO. 

What is the difference? The difference primarily relates to two factors: taxes paid (expense minus changes in accruals), and changes in operating working capital (chiefly inventories and receivables).

Investors should pay more attention to CFFO because it is a GAAP number invariant to company choices of depreciation methods, inventory accounting methods, and valuation reserves. It can’t be fudged and tells the real picture of a company’s cash-generating capability.

The companies on the list fall into four groups:

C21 Investments CXXIF and Vext Science VEXTF were the only two companies to have a stable positive cash flow positive over the entire period in the graph.

Red White & Bloom RWBYF and Acreage ACRDF have been significantly negative cash flow over the entire period.

Cansortium CNTMF appears to be a generally improving cash flow company and is the most cash flow positive company during the most recent twelve months.

AYR Wellness AYRWF has shown the most significant downward trend in CFO over the period. Part of AYR’s issue is that working capital has been a large use of cash. We would expect this during a period of significant growth. AYR was positive before working capital changes in all periods except the last twelve months.

The current environment stresses cannabis profitability and liquidity, forcing Investors to sharpen their credit analysis skills. Start by minimizing your use of adjusted EBITDA and concentrating on the fundamental cash flow metric, CFFO.

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.