2 reasons why Verano is ready for the legalization of cannabis in the United States

Veraano Holdings (VRNO.F -4.82%), one of the largest cannabis operators in the United States, appears to be poised to take advantage of federal legalization of cannabis for adult use, based on a few key measures. But don’t get too excited – federal cannabis policy changes still may not be a sure thing. Here are two reasons why Verano could benefit if and when Uncle Sam makes peace with the cannabis plant.

1. Verano has 107 dispensaries nationwide

Verano has grown strongly in the nation’s third-largest medical cannabis market, medical-only Florida ($1.2 billion a year). It now has 53 stores in the Sunshine State, nearly half of its 107 dispensaries nationwide. When Florida becomes legal, these will move directly to adult-only locations.

Its other 54 vertically integrated outlets are located in 12 other states, including the following adult cannabis powerhouses:

  • Michigan ($3.1 billion per year)
  • New Jersey ($2 billion per year)
  • Illinois ($1.5 billion per year)
  • New York ($2.5 billion per year)
  • Massachusetts ($1.5 billion per year)

It also has projects in Connecticut (legal use of cannabis by adults, pending regulation); Ohio (medical, but pending adult passage); Pennsylvania (medical, but pending adult use); and Maryland (small medicine with an adult use initiative on the ballot this fall). Even in conservative West Virginia, the company’s reach includes three dispensaries.

2. Verano has money to burn if federal legalization happens

The company’s most recent financial results make it well prepared for federal legalization:

  • Revenue grew from $120 million in the first quarter of 2021 to $202 million a year later, a 67% year-over-year increase.
  • Gross profits jumped from $54 million to nearly $100 million, an 83% jump year-over-year.
  • In the first quarter, operating profit for the last 12 months reached $109 million, or 13% of revenue. This is an impressive number, given that curafeuille (CURLF -1.77%)the largest cannabis company in the country, has an operating margin of 14%.
  • At the end of the first quarter, Verano had $139 million in cash in the bank.
  • It posted operating cash flow of $53 million in the first quarter of 2022 and free cash flow of nearly $6 million in the same period, bringing Verano’s free cash flow to 12 last months to about $57 million. This type of cash flow will allow Verano to self-finance capital expenditures in the event of federal legalization.

Verano posted a net loss of $7 million in the first quarter of 2022, compared to a loss of $2 million a year earlier, and a net loss in the 12 months ending in the first quarter of 2022 of $19.5 million. The discrepancy between net loss and cash flow is due to a one-time filing fee levied on the company by the Securities and Exchange Commission (SEC) earlier this year.

The company’s $350 million long-term debt, most of which matures next year, will reduce that free cash flow. Paying off this obligation will most likely force the company to refinance its debt, racking up higher interest payments, or sell more stock, diluting existing investors. While neither of these options bodes well for investors, Verano’s debt situation is still fairly normal for a young, aggressively growing company. ,

Why getting legal cannabis through the Senate remains a challenge

Before Verano and other major MSOs can reap the benefits of federal cannabis legalization, that legalization must actually happen.

In mid-July 2022, Senate Majority Leader Chuck Schumer introduced the Cannabis Administration and Opportunity Act (CAOA), which would decriminalize cannabis at the federal level while allowing states to set their own policies by cannabis material. The bill, however, has a long chance in the Senate, where it faces a filibuster and a handful of Democrats, like West Virginia Sen. Joe Manchin, who are already saying they won’t support the bill. law. It’s unclear whether the growing presence of cannabis dispensaries in West Virginia will influence Manchin, and it’s equally uncertain whether the Biden White House supports the new measure. The president has previously supported the decriminalization of cannabis, but opposed full legalization.

Verano’s large footprint in the United States and strong financials make it a company to watch as federal legalization approaches. With its positive free cash flow and cash in the bank, it is poised to move to other markets if federal restrictions ease and more states enact adult cannabis use regulations. Unfortunately, that opportunity may still be years away.

That said, there is no indication that the business will slow down any time soon. Cannabis investors should keep an eye on how they choose to manage their large debt next year, as this decision could affect the company’s earnings and share price.

Lucas Barfield has no position in any of the listed stocks. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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