The recent news that the Drug Enforcement Administration scheduled an administrative hearing for Dec. 2 to “consider differing expert opinions regarding rescheduling of cannabis to schedule III” put many cannabis companies on edge.
“The cannabis equity market lurched violently downward on the news as it clearly pushed the issuance of final rulemaking to after the election and probably into Spring 2025,” Viridian Capital Advisors said in a recent analysis. “The MSOS ETF closed down 11.61% to $6.32 on Friday, August 30.”
Despite that kneejerk reaction, the firm remains cautiously optimistic: “We believe last week’s panic was overblown, and we are encouraged by Trump’s weekend comments in support of the Florida legalization initiative in particular and cannabis regulatory/legal reform in general.”
What it could do, however, is subject those cannabis firms to another tax year under the 280E provision.
That would check out, if accounting for the Internal Revenue Service’s own announcement in July that all marijuana operators will remain on the hook for 280E unless potential rescheduling of the drug concludes.
“In September 2023, we estimated that the top 10 companies would save around $700 million annually from (a schedule III ruling). Those companies now have an aggregate market cap of about $11 billion. On that basis, a one-year delay in (a schedule III ruling) implementation should be worth around 6% of the market cap.”
A key factor underlying Viridian’s position is the resilience and growth seen throughout the broader cannabis capital market.
Gold Flora Corp. (OTC: GRAM) secured this week’s only notable debt raise, drawing $7.15 million from a new senior loan facility. Despite the fresh capital, Viridian’s report places Gold Flora near the bottom of its peer group in overall credit ranking.
“GRAM ranks 9/10 in this group, in rather rough company between #8 Red White & Bloom (CSE: RWB) and #10 Acreage (OTCQX: ACRDF),” Viridian noted. “GRAM’S ranking is heavily influenced by its 8/10 leverage ranking, driven by total liabilities to market cap of 9.87x.”
Year-to-date capital raises totaled $1.6 billion, up 4.2% from the same period in 2023. That growth comes despite a shift in the debt-to-equity ratio of capital raised.
“Debt as a percentage of capital raised dropped to 51.3% from 63.1% in the previous year on a worldwide basis,” Viridian noted. “The U.S. bucked this trend with 61.9% of capital raised in debt compared to 55.1% in 2023.”
Viridian highlighted the more creative financing approaches companies are employing in the typically capital-constrained sector, such as Gold Flora’s loan structure, which includes potential additional draws.
“The initial draw amortizes over 53 months, and we calculated an (internal rate of return) of 11.68%, surprisingly low even given its one-year maturity,” Viridian wrote.
Overall, Viridian concluded that, “at current levels,” the U.S. cannabis industry – led by MSOs – still has “enormous upside potential” for investors.
The delay, however, likely means cannabis companies will face another tax year with the 280E burden. Read More