MJBiz - November/December 2023 - 82

SECTOR SNAPSHOT
MSOs Stand to Save
Millions Without 280E
Tax bills for 13 of the largest multistate operators
would fall $700 million if marijuana is rescheduled
By Frank Colombo, Viridian Capital Advisors
T
he U.S. Department of
Health and Human Services'
recommendation to move
marijuana to Schedule 3 of
the Controlled Substances Act
produced a sharp uptick in cannabis
equities, with the MSOS ETF
rising approximately 85% in the
subsequent three weeks.
Prices have drifted lower because
of negative macroeconomic news
and stalled legislative progress
created by a vote to remove Kevin
McCarthy as speaker of the U.S.
House of Representatives. Yet prices
remained about 45% higher in October
than before the rescheduling
announcement.
Rescheduling would have wider
financial impacts than potential
passage of the Secure and Fair
Enforcement Regulation (SAFER)
Banking Act. For one, it would be
a regulatory action that doesn't
require action from a dysfunctional
Congress. More importantly, it
would directly impact the cash flow
of cannabis companies big and
small through elimination of IRS tax
code Section 280E.
Viridian Capital Advisors estimated
the tax savings of 13 of the
largest MSOs at approximately
$700 million per year. The orange
line on the graph " Tax Savings
From Eliminating 280E " shows the
current tax expense as a percentage
of revenue. The percentage ranges
Tax Savings From Eliminating 280E
14% -
12% -
10% -
8% -
6% -
4% -
2% -
0% -
Annualized Tax Savings
Sources: Viridian Capital Advisors, FactSet, Company Filings
from around 4% to more than 13%,
whereas post-280E tax expense
for a company with 30% EBITDA
margins and 2X Debt/EBITDA would
be around 3%.
The 280E tax burden, the heavy
capital intensity of the cannabis
industry and the high-interest
expenses from overleveraged balance
sheets severely compromise
the ability of marijuana companies
to internally finance growth.
Rescheduling would have a dramatic
impact on internally supportable
growth rates but would have
other significant impacts as well.
By increasing free cash flows, the
intrinsic value of companies would
rise, allowing for the delivery of
stressed balance sheets. The change
likely would also reignite cannabis
capital markets by enticing more
institutional investment to the
industry.
Frank Colombo is the director of
data analytics at Viridian Capital
Advisors, a New York-based capital,
M&A and strategic advisory firm.
Sign up for Viridan's Deal Tracker
at viridianca.com by using code
MJBIZVDT.
Tax as % of Sales
- $180
- $160
- $140
- $120
- $100
- $80
- $60
- $40
- $20
$0
Sign up for
Viridan's
Deal Tracker
by using code
MJBIZVDT
82 November-December 2023 | MJBizMagazine
AAWH
CCHW
MRMD
CL
TER
GTII
ACRDF
AYR_A
PLTH
VRNO
TRUL
CURA
JUSHF
Tax Expense as a % of Revenues
Annualized Tax Savings In Millions
https://www.viridianca.com/ http://www.viridianca.com
MJBiz - November/December 2023

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