Cannabis Chart Of The Week: Revenue And EBITDA Beats Are Great, But The Real Story Is Cash Flow From Operations

Third-quarter earnings releases still have about a week to go. Still, eight companies representing over 78% of the total market cap of the fourteen MSOs with market caps over $100M have reported and appear in the graph below. 

• Four of the eight had small misses on revenue, ranging from 0.1% for Curaleaf CURLF to 3.1% for Planet 13 PLNH. The beats were a bit larger and ranged from 2.2% for Trulieve TCNNF to 7.0% for Green Thumb GTBIF.

  • Six of the eight had EBITDA beats that ranged from 1.6% for Curaleaf CURLF to 44.0% for TerrAscend TRSSF. MariMed MRMD missed by 23.8%, while Planet 13 missed by 81.8%.

  • The most frequently mentioned driver for the strong Q3 performance was the opening of the Maryland adult-use market, which drove aggregate sequential quarter revenue increases to 1.5%.

  • Unsurprisingly and consistent with prior quarters, there was virtually no correlation between either revenue or EBITDA beats/misses and stock price changes.

• However, the most striking aspect of the 3rd quarter releases is the Cash Flow from Operations (CFFO) figures in the graph. The blue bar depicts actual Q2:23 CFFO; the orange bar shows consensus estimates of Q3:23 CFFO; the green bar shows actual Q3:23 CFFO; and the purple bar shows actual Q3:23 CFFO adjusted for increases in accrued taxes.

• All eight (except PLTH) had positive operating cash flow that was higher in Q3 than in Q2, and all eight beat consensus projections. 

• We expected tightened working capital via reduced receivables and inventory as significant cash flow drivers in the quarter, but that was not true for most companies. Only Curaleaf and Trulieve produced cash from reduced receivables and inventory in the quarter.

• Instead, one of the quarter's most significant cash flow drivers was the deferral of tax payments. The purple bar shows income tax payable increases, representing 47%, 56%, 59%, and 65% of CFFO for AAWH, MRMD, CURA, and VRNO, respectively. Without this deferral of tax payments, PLTH would have more than twice as big a negative CFFO, and TerrAscend CFFO would turn negative. Verano VRNOF, TerrAscend, and Curaleaf would have missed analyst estimates without the tax deferral.

• Tax deferrals had a minimal (10%) impact on GTII and none on TRUL, but last week, Trulieve announced that they would be accruing but not paying 280e taxes, so we expect this to be a significant driver in future TRUL cash flows.

• Investors should focus on cash flow from operations instead of revenues or EBITDA. However, not all types of operating cash flow are equal. Investors need to discern which elements are ongoing, repeatable cash flows versus deferrals of payments that will represent cash outflows in the future.

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.