Veraano Holdings (VRNO.F -5.19%), a top US cannabis operator, looks to be ready to take advantage of federal adult-use cannabis legalization, based on a few key metrics. But don't get too excited -- federal cannabis policy changes may still not be a sure thing. Here are two reasons why Verano could benefit if and when Uncle Sam makes its peace with the cannabis plant.

1. Verano has 107 dispensaries nationwide

Verano has been expanding heavily in the third-largest medical cannabis market in the country, medical-only Florida ($1.2 billion annually). It now has 53 stores in the Sunshine State, almost half of its 107 dispensaries nationwide.When Florida goes legal, these will flip right over to adult-use locations.  

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

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

It also has projects in Connecticut (legal adult use cannabis, awaiting regulations); Ohio (medical, but awaiting adult use passage); Pennsylvania (medical, but awaiting adult use); and Maryland (small medical  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 cash to burn if federal legalization happens

The company's most recent financial results make it look very prepared for Federal legalization:

  • Revenue  grew from $120 million in Q1 2021 to $202 million a year later, a 67% increase year over year.
  • Gross profits surged from $54 million to nearly $100 million, an 83% year-over-year jump.
  • In Q1, trailing-12-month operating income reached $109 million, or 13% of revenue. That's an impressive number, considering that Curaleaf (CURLF -4.36%), the nation's largest cannabis company, has a operating margin of 14%.  
  • At the end of Q1, Verano had $139 million cash in the bank. 
  • It posted $53 million in cash flow from operations in Q1 2022, and free cash flow of nearly $6 million in that same period, bringing Verano's trailing-12-month free cash flow to roughly $57 million. That kind of cash flow will let Verano self-fund capital expenditures if federal legalization occurs.

Verano did post a $7 million net loss in Q1 2022, up from a $2 million loss a year earlier, and a trailing-12-month net loss ending in Q1 2022 of $19.5 million. The gap between net loss and cash flow owes to a one-time filing fee levied on the company by the Securities and Exchange Commission (SEC) early this year.

The company's $350 million in long-term debt, most of which comes due next year, will eat into those free cash flows. Paying off that obligation will most likely require the company to roll over its debt, accruing higher interest payments, or to sell more shares, diluting existing investors. While neither of those options bodes well for investors, Verano's debt situation is still fairly normal for a young company aggressively growing its business. ,

Why passing legal cannabis in the Senate remains a challenge

Before Verano and other major MSOs can enjoy the benefits of federal cannabis legalization, that legalization actually has to happen.

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

Verano's large US footprint and strong financials make it a company to watch as federal legalization approaches. With its positive free cash flows in hand and money in the bank, it's set up to move into other markets if federal restrictions loosen and more states take up adult-use cannabis regulation. Unfortunately, that occasion may still be years away. 

That said, there's no sign the company will be slowing down anytime soon. Cannabis investors should keep an eye on how it chooses to deal with its large debt next year, since this decision could affect the company's profits and stock price.