When people give preference for current money as against future money, it is known as time preference. Why Individuals always has a preference to receive money at present and gives higher value to the current money? Let’s understand this by the reasons for it.

Reasons for the preference of present money:

There are several reasons for the preference of current money:

1. Future Uncertainties: An Investor gives preference to current money as it has certainty, but future money has uncertainty because the other party may become insolvent or fails to pay the amount to the investor.
2. Inflation: The Economy never stables over a period of time as it fluctuates. In the Inflationary situation, the money received today has more purchasing power instead in the future.
3. Reinvestment Opportunities: People have reinvestment opportunities available to them. If they got the money today, they can invest to get better returns in the future. The existence of reinvestment opportunities and urge to earn a return by investing current money seem to be an obvious reason for the preference of present money.

These reasons help in investment opportunities. Now let’s understand what present value and future value of money is.

Future Value (FV) and Present Value (PV):

Present value and future value is the monetary concept use by the investors. These terms used in the financial world to calculate the future and current net worth of money.

• Future Value (FV): It defines as the value of the future cash flow after a certain time period. It derives the value of an investment that will grow over a period of time at a specific rate of interest. It helps Investors on a savings plan for a specific amount in the future and on determining how much taxes will cost them.

• Present Value (PV): It represents the current value of the future value or future cash flow. The present value concept describes what amount should we invest today to get a specific return in the future. Investors can make decisions on the based on the present value whether they should accept or reject the project.

Investors can estimate the future value and present value by the techniques of time value of money.

Techniques of the Time Value of Money:

There are majorly two techniques of the time value of money(TVM):

1. Compounding Technique:

The compounding technique is the method that determines the future value of the present investment after a certain period of time at a specified rate. Compounding technique converts the present value into future value. It is the same concept as compound interest. The future value of the investment can be computed by the formula:

FV= PV (1+R)^N

Where,

FV           : Future Value

PV          : Present Value

R             :   % of Rate of return, and

N             :   Number of years

2. Discounting Technique:

The discounting technique is the method that determines the present value of the future sums of money for a certain period of time at a specified rate. The discounting technique converts the future value into present value or it is a reverse of compounding technique. The present value of specified future amount can be computed by the following formula:

PV =FV/(1+R)^N

Where,

PV          :   Present Value

FV           :   Future Value

R             :   % of Rate of return, and

N             :   Number of years

Conclusion:

The time value of money specifies the value of money changes from time to time. The value of the present money will not be the same in the future and vice-versa. Whenever investors make an investment, they need to measure the present value and future value because both are important for taking crucial decisions regarding investment decisions. So, Investors calculate present value and future value by compounding and discounting techniques. The compounding technique helps to ascertain the future value of the present investment after a certain time period at a specified rate of return. Whereas the discounting technique helps to ascertain the present value of future returns or cash flows at a discount rate. So, compounding is the easiest way to grow investment and discounting is a vital factor in making the decision on whether to invest or not. The Compounding and Discounting techniques both rely on the time factor and the rate of return. Firms and investors assumed the present value and future value can be changed due to risk factors involvement in the time value of money.

Author: Pooja S. – Jr. Analyst

The post What is the Time Value of Money? appeared first on Veristrat Inc.

Marijuana Related Business:  Data

There are about 16,979 entities in 36 states with 31,357 licenses in the United States. The licenses are classified into dispensary, producer, wholesaler, retail and service provider. Majority of licenses are issued and located mainly in five states including:

• California: 39% of licenses and 27% of entities
• Oklahoma: 15% of licenses and 23% of entities
• Oregon: 10% of licenses and 14% of entities
• Washington: 10% of licenses and 12% of entities
• Colorado: 17% of licenses and 11% of entities

(Note:   Sales data for Sunday, April 12, 2020 (Easter Sunday) and Saturday, April 18, 2020 (4/20 holiday in 2019) were omitted. Easter Sunday and 4/20 each fall on a different date in 2019, meaning any comparison of daily sales between dates would be unsound.   Source:  Headset)

Adult-use cannabis sales in California, Colorado, Nevada and Washington State are affected by economic fallout due to the coronavirus pandemic.

According to data from Headset, Adult-use cannabis sales from April 15 to April 17, 2020 were down as compared to the same days in 2019 in Washington State and California. Sales for April 19, 2020 increased by 87% in Washington State and 59% in California against the same day in 2019.

Adult-use cannabis sales from April 15 to April 17, 2020 were down as compared to the same days in 2019 in Nevada and Colorado also. Sales for April 19, 2020 increased against the same day in 2019 in Nevada and Colorado.

 Overview of Marijuana Law in the US

Marijuana is federally illegal, however legal for medical use in 33 states and for recreational use in 11 states.  California considers cannabis retail outlets as essential and Massachusetts & New York consider medical marijuana as essential. Illinois considers cannabis dispensaries and cultivation facilities as essential. At the federal level, marijuana is a schedule I controlled substance and can be punished for engaging in activity related to marijuana. Ancillary businesses can be accountable for assisting in money laundering. There is restriction on use of allotted funds in that fiscal year to litigate against state compliant medical businesses. Department of Justice (DOJ) has not litigated against state compliant marijuana business.

Marijuana Related Business Eligible for “The Coronavirus Aid, Relief, and Economic Security (CARES) Act”

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, a $2.2 trillion stimulus package restricts businesses involved in cannabis-related activity from getting any small business loans. Small Business Administration (SBA) states that marijuana related business are not qualified for paycheck protection program loan as it is illegal according to federal law. Marijuana related business is not qualified for Small Business Administration financial assistance. 

Let us discuss types of marijuana business

• Direct Marijuana Business: grows, produces, processes, distributes or sells marijuana or marijuana products.
• Indirect Marijuana Business: derives revenue for the previous year from sales to direct marijuana businesses, which supports the development and improvement of marijuana.

“The Coronavirus Aid, Relief, and Economic Security (CARES) Act”

Members of Congress are making efforts to include marijuana industry in coronavirus relief.  A letter was signed by 34 members of Congress seeking inclusion of marijuana industry in federal relief packages. The Marijuana industry has 240,000 workers and created about $2 billion in tax revenue in 2019. The Marijuana industry has been considered as essential during COVID -19 in many states in the United States.

State Reform Efforts Delayed

COVID- 19 has postponed Cannabis legalization in many states in the United States. The State Reform Efforts have been delayed due to shut down and social distancing. States including Arizona, Montana, Missouri and Nebraska have suspended efforts to gather signatures to legalize marijuana. COVID-19 has delayed New York’s efforts to legalize cannabis through the legislature. The reform advocates are making efforts to get legal consent for e-signatures campaigns.

Let us look at the future of marijuana

• COVID-19 is a short term hindrance to the state and federal reform efforts.
• Alcohol prohibition lifted in 1933 to generate revenue during the depression. There is economic pressure due to COVID-19 to look for new sources of revenue. Marijuana is a major contributor to the US Economy.
• Discussion regarding Marijuana eligibility for The Coronavirus Aid, Relief, and Economic Security (CARES) Act and if considered as “essential business”.

Financial institutions approaching Marijuana Related Businesses (MRB):

The Survey received responses from 60 US based compliance professionals from different levels of seniority from National Banks (26%), Regional Banks (28%), International Banks (18%) and other financial institutions (28%). Survey included questions regarding: Views on the regulatory environment, procedures of the institutions and screening methods. 63% responded to the survey that they do not facilitate transactions that include proceeds from US marijuana sales and 5% responded that they do so without any constraint. 26% responded that implemented FinCEN’s guidance and 23% responded that they have no policies at all. 53% responded that they have internal mechanisms for screening and 27% responded that they do not have an effective tool for screening.

Conclusion     

The Cannabis industry is expanding at a fast pace and has generated billions of dollars of revenues in the United States. The US Cannabis industry is valued at about $56 billion in 2020. The prospects of Cannabis industry are bright as more states are legalizing cannabis. It is generating economic and employment opportunities. The Cannabis sales have increased recently, mainly due to increasing consumer demand.

There are certain risks involved including cannabis is federally illegal, inspection by federal regulators, subject to enforcement & fines by federal authorities, seizure of assets, taxes and managing supply chain.

Author: Rabia J. – Sr. Analyst

The post Assessing Legal Risk When Financing the Cannabis Industry appeared first on Veristrat Inc.

Uber went IPO on May 10, 2019. They have a vision of the future in which labor will be allocated out by systems that match supply to demand in real-time. Workers will move fluidly between engagements, untied to traditional jobs. And at the same time, the market for transportation of all kinds will become unrelated from large asset purchases—such as cars—as well as public services. The new urban paradigm will be private, shared, on-demand services through which you call a ride, hop on a bike, or rent a scooter. In cities across the world, this will prove appealing and spread to other forms of logistics such as trucking, food delivery, shipping, drone delivery. Uber will take an ever-larger percentage of the total number of miles travelled rather than ride-hailing market share.

Some of the most recent funding that uber has raised are $500 million and $2.0 billion in funding in April 2019 and October 2018, respectively. This brought up its total capital raised till now to $24.7 billion. As of March 2020, the company is standing at a market cap of approx. $48.2 billion. The Company is ahead of iconic carmakers General Motors, Ford Motor, BMW, and Honda Motor in terms of valuation while almost catching up to other giant carmakers like Volkswagen and Tesla.

*Numbers are billions                                                                                                                                   Source: ycharts.com
**Figures are as of March 31, 2020

According to the Statista research report, “Automotive Industry – Statistics and Facts,” Global sales of passenger cars are forecast to fall to 60.5 million units in 2020, down from a peak of 79.6 million in 2017. The reason for the downfall of the automobile industry is because of many reasons like big cities are too crowded, too many back-to-back changes in the industry, the share-based cab services etc. From the consumer perspective, the automobile industry is facing strong competition from the cab service providers as these are becoming more convenient, affordable, flexible, provides round the clock service, and have a variety of options to choose from. Also, many venture capitalists are betting their money on the cab service companies like Uber instead of carmakers due to the various advantages such as low fixed investment, fast revenue growth, high customer outreach, low operating cost, etc.

Keeping in mind all of the above-discussed factors, we can see a shift in the preference of travelling by people all around the globe and this is what Uber is now capitalizing on, making it more valuable than carmaker companies.

Author: Sandeep V. – Analyst

The post Why Uber worth more than Ford? appeared first on Veristrat Inc.

Legalization of recreational cannabis is a major development in Canada and few states of the US, grabbing the attention of many mainstream investors as cannabis stocks have shown exponential growth, outperforming major indexes and other sectors from 2016. Legalization in the cannabis industry also presents enormous opportunity for large players to capture a meaningful share in the global market through mergers and acquisition. The cannabis industry is ripe for sizeable consolidation, and the pickup we have experienced in last years is probably only the beginning. Ever escalating M&A has placed increased importance on transparent and robust business valuation in this industry.

There is gamut of complications and complexities that exist in business valuation in cannabis industry including limited operating and financial history of many cannabis company, uncertainty around regulatory environment, and continuously shifting industry fundamentals. There are three approaches that are majorly used to value a cannabis business valuation.

Let’s discuss valuation approaches to be used in cannabis valuation:

1. Asset Approach

An asset-based approach also sometimes referred to as cost- based approach is a valuation methodology that focuses on adjusted net asset value which is determined by subtracting fair market value of the business’ assets and its liabilities. There are two methods under asset-based approach, namely Net Liquidation Method and the Net Asset Value method.

• Net Liquidation method calculates the value of the business based on the expected proceeds to be realized at the time of liquidation of the company’s assets as a part of company’s dissolution. The method is often used when business is continuously unprofitable and best value can be realized by selling the underlying assets.

• Net Asset Value method is when all assets and liabilities of the business are adjusted to their fair value or “economic value” and their difference is determined. A valuation analyst can also use the cost of producing or replacing the asset, less an allowance for obsolescence and physical deterioration.

Within cannabis business, asset approach is most appropriate in the following situations:

• the company is going concern;
• the company’s value depends significantly on the value of its tangible assets;
• the company has little or no identifiable intangible assets;
• the balance sheet reflects all the company’s assets
• a business operating at a loss with expectation of continuing losses in the future.

2. Income Approach

Income based approach is built on the theory that the intrinsic value of a business is based on expected future benefits or earnings, discounted at an appropriate rate of return reflecting market rate of return expectations, market conditions, inherent risk and opportunity cost of investment. Income-based valuation method requires the following inputs;

• Net cash flow projections: Financial projections of amount of cash produced by business after paying for all operating expenses and capital expenditures.
• Discount Rate: It refers to cost of capital/rate of return used to determine the present value
• Terminal Value: It is value of the business at end of the projection period.

Two methods under income-based approaches that are primarily used are Capitalized Future Earnings methods and Discounted Future Benefits method.

• Capitalized Cash Flow (CCF) method involves determining the value of the business by dividing a single period cash flow stream deemed representative of the future by the capitalization rate (cap rate).
• Discounted Future Earnings method involves using projections for the earnings of the firm and discounts these back to the present using an appropriate discount rate.

Application of income approach in the valuation of cannabis business requires certain considerations which we will discuss below in detail.

Future Projections

Cash flow projections forms a key part of a discounted cash-flow method based on which value of business is derived. The cannabis industry is at embryonic stage; therefore, it is marked by constant change and high growth rates which makes it difficult to predict earnings for a longer period. Another major challenge in forecasting is that future cannot be predicted with absolute certainty due to lack of historical financials. When preparing projections, it is crucial to perform thorough analysis of financial and non-financial information, external and internal factors. 

List of Factors to Consider in Financial Projections

Normalization

Financials of a company often involves one-time gains/losses, income/expenses and other unusual that are not a part of regular business operations. Normalization adjustments remove the effect of such discretionary, non-recurring and non-operating items to show true financial position of the company.

List of Items requiring Normalization Adjustments

Discount Rate (Cost of Capital)

Income approach uses a discount rate which represents level of risk associated with an investment and it is used convert expected future benefits into the present value. Computing a correct risk-adjusted discount rate is a major challenge when using income approaches in the valuation of cannabis business. A valuation analyst incorporates various risk considerations in the risk assessment phase.

3. Market Approach 

Market approach involves determining the value of a business based on pricing and Enterprise value multiples derived from the business and sale of companies similar to the subject company. There are two major types of market approaches used by valuation analysts: Guideline Transaction method and Guideline Company Method.

• Guideline Company method compares subject company with similar publicly traded companies.

Applying market approach in the valuation of a cannabis business presents several challenges for valuation analysts as limited market data is available in the cannabis space. Although, market data has begun to emerge in the market as cannabis industry has grew over the last few years but is still far from becoming a mature industry. Also, there are significant jurisdictional differences inherited in the cannabis industry such as tax burdens, licenses, sociopolitical environment, and state and local regulations. For example, in some states of the United States, both medical and recreational marijuana is legalized whereas in some states only medical marijuana is legalized. Similarly, cannabis is legal in Canada so Canadian business environment is more cannabis friendly than United States.

Most commonly used multiple in market approach is enterprise value (EV) to earnings before interest, tax, depreciation and amortization. The table below illustrates the financials and respective multiples for the 10 largest Canadian cannabis company. There is a huge variability in the multiples as of August 2019, EV/ LTM Revenue ranging from 7.2x to 175.7x and EV/ LTM EBITDA ranging from -13.2X to -186.5x. Most of the comparable companies are reporting low or negative operating profits due to low revenues and high operating expenses. Most of the companies in cannabis industry are at early stage and are making significant operating investments to meet the anticipated future demand and capturing market share. Multiples due to low historical profitability are less indicative of expected future growth from legalization of recreational cannabis and other global expansion opportunities. Therefore, it makes sense to use forward looking multiples in the cannabis valuation, which is price paid today, reflecting expected company’s financial tomorrow. The average EV/forecasted revenue in 2021 is 7.1X, as against an average EV/LTM revenue of 72.7x. Similarly, the average EV/forecasted EBITDA in 2021 is 79.1X as against an average EV/LTM EBITDA of -68.0x. Forward – looking multiples are believed to result in more reliable and logical valuation as compared to use of traditional public company multiples. An alternate approach is to use market multiples of similar but more mature industries that are considered most comparable to cannabis, such as alcohol and tobacco to get a value of a value of a mature market.

A valuation analyst can also use market ratio analysis to build a valuation model for the subject company by determining reasons for the difference in multiples. For example, company X have a market capitalization of $1,000,000 and it has generated $100,000 in earnings, trading at a P/E multiple of 10x. The company y that also have a market capitalization of $1,000,000 but it has generated $200,000 in earnings, presenting a P/E of 5x. There can be several reasons to explain why company Y is cheaper as compared to company X based on price – to -sales multiple, such as differing growth prospects, product pipeline, stage of operations, and pending lawsuits. 

Multiples for Largest Canadian Companies in Cannabis Industry

• Guideline Transaction method compares subject company with the similar companies that have been acquired or merged within a reasonable proximity of the valuation date.

Finding comparable transactions and meaningful market multiples to use in cannabis valuation can be challenging. Similar to the guideline company method, most of the target companies in the guideline transaction method are in growth stage and have low or negative profitability, therefore result either in too high multiples or negative multiples which are not meaningful. In the table below, the average implied EV/ LTM revenue multiple is 400.6x and the average implied EV/ LTM EBITDA multiple is -37.5x.

Implied multiples of Precedent Transactions in the Cannabis Industry

Given many target companies are privately held companies, getting forward looking multiples will be difficult. Therefore, while applying precedent guideline transaction approach, a valuation analyst can evaluate the extent to which the buyer has paid strategic premium for the post-acquisition synergies.

Limitation of Cannabis Valuation

1. Regulatory Issues: Cannabis is federally illegal under the Controlled Substance Act of 1970. Although the federal government currently permits states to self-regulate the legalization of medical or recreational marijuana, the possibility of federal government to intervene and distort the cannabis industry has kept many operators and investors on the sidelines due to the risk of abetting. From the appraiser point of view, it is challenging to measure this risk and incorporate it in the valuation model. 

2. Extraordinary Tax Burdens: Every business that earns profit pays taxes in the US, however, different taxable rules apply to cannabis industry as it is illegal at federal level and the taxing department impose additional scrutiny on the cannabis companies. IRC Section 280E mandates that all the cost except those directly linked to the production, processing and storage of cannabis should be treated as non-deductible items for determining taxable burden. This can lead to low profitability for otherwise successful operating businesses. Computing the federal income tax and fulfilling reporting requirements can be a challenge due to complex tax rules and lack of competent professionals to assist in compliance with these rules. 

3. Constant Industry Evolution: Cannabis industry is in flux and is subject to constant change which can disrupt normal business operations. Companies in the cannabis space are making huge investments in establishing high-tech operating facilities and protocols, therefore any change in the industry can impact these investments significantly. 

4. Lack of Market Data: Application of market approach for the valuation of cannabis company is a challenge due to lack of closely comparable companies and transactions to derive market multiples. Most of the companies in the cannabis industry are at the early stage and are reporting low or negative profits, resulting in meaningless multiples. Also, rules and regulations in the industry differ at country, state and jurisdiction level which makes it difficult to compare companies operating in different regions. 

5. Dependence on Perspective Data: The financial projections of expected future cashflows in the income approach to the valuation are developed based on the impact of a range of business scenarios over the several years. Given the limited operating history of most cannabis companies, use of historical data to arrive at expected future cash flow may not give reliable results. Additionally, complex income tax rules applicable to the industry make the projections even more discrete.

Conclusion

The cannabis industry is continuously evolving driven by shifts in regulatory landscape, industry dynamics and increased consolidation in form of mergers and acquisition. The large players continue to push the boundaries of growth by entering in new markets and pursuing strategic acquisition and partnerships. Fundamentals of cannabis industry differ significantly from other mature industries; therefore, traditional valuation methods and metrics are often less meaningful given the industry is still in its growth stage and is highly volatile. The appraisers may place more importance on the forward-looking multiples believing that the industry would witness a noteworthy upside in coming years, which can result in misleading value.

It is important to note that a lot of professional judgement goes into financial projections and determination of discount rate under the income approach and selection of multiples under market approach. For rigorous valuation one must always be aware of evolving landscape, federal and state rules and regulations, market size, and information about operating costs and revenues across the value chain associated with the cannabis industry.

Author: Swati J. – Advance Analyst

The post Cannabis Valuation appeared first on Veristrat Inc.

In this article we will discuss about the methods and steps of valuing an Estate.

Methods to calculate Estate Value

There are two methods of valuing the estate.

Date of Death – This method is used when you are valuing the estate of someone who has died.

Alternate Valuation – This method is used when your valuation date is six months after the date of death as the date of calculation. The “Alternate Valuation” date value is the fair market value of all assets included in the decedent’s gross estate.

Under the Internal Revenue Code, the personal representative is allowed to choose whether to use the date of death values or the alternate valuation date values.

Steps of valuing an Estate

1. Calculate the value of all real property as of the date of calculation – Real property is real estate owned by the decedent, and includes home, business, or rental property. The IRS, require real property values to be determined by a licensed appraiser.

• • Any outstanding mortgage on the property needs to be deducted.
  • If the decedent was contracted to buy real property and died before the deal was closed, that property can be included subject to the contract.

2. Determine the value of financial accounts – To calculate the gross estate you need to add together the values of all the component parts. Determine the value of the financial accounts that are attributable to the estate. In some cases, the whole balance of a financial account may not be attributable to the estate. To decide what part of any financial account is attributable to the estate, following guidelines are used:

• • If the account is owned individually, the whole amount should be attributed to the estate.
  • If the account is owned jointly with a spouse with rights of survivorship, 50% of its value should be attributed to the estate.
  • If the account is owned jointly with any party who has rights of survivorship, other than a spouse, entirely of its value should be attributed to the estate. This may be altered if you can prove that the other party contributed more than half of the value to the account.

3. Include jointly owned property – If the decedent owned a property as a joint tenant with rights of survivorship, in most scenarios the full value of the property will be included in the estate. However, if the surviving tenant wishes to purchase the house in full, the full inclusion can be reduced by the amount he pays to the purchase the property.
4. Determine the value of life insurance policies – Life insurance policies are included in the gross estate if the decedent’s estate is the beneficiary of the policy, they are also included if the beneficiary is legally obliged to use the proceeds of the policy for benefit of the estate. Regardless of who owns the policies, if they are payable to the estate they will be included. The policies are also included if the decedent possessed any “incidents of ownership” which could have been exercised at the time of death.

• • In order to calculate the value of a policy for estate tax purposes, use Internal Revenue Service Form 712.
  • You can use the fair market value of the policy if you are calculating the value of the estate for estimation purposes only.
  • Life insurance paid to a named beneficiary (excluding estate) is not included in estate value.

5. Determine the value of all other property attributable to the estate – Other than financial and property assets, many other things are included in the calculation of the value of the estate. One of the most valuable of these is likely to be any vehicles which are attributable to the estate. Often you can use the value listed in Kelly Blue Book (“the Blue Book”) for vehicles. As with other assets, that percentage of the value of the vehicle included in the estate can vary depending on joint or single ownership. This property could also include things such as household furnishings, artworks and annuities.
6. Calculate all allowable deductions – These deductions include the debts owed by reason of the decedent’s death, which includes funeral expenses, as well as attorney and court fees, and any other fees associated with the administration of the estate. The deductions also include all utilities, credit card accounts, loans, mortgages, medical bills, charitable deduction and state of tax deduction, and any other accounts due or incurred before the date of death or date of calculation.
7. Now, calculate the total taxable estate – You can do this by adding together the value of all assets due to the estate, and then subtracting the total allowed deduction. This can give you an approximation of the value of the estate.

CONCLUSION

A personal representative would choose the alternate valuation date values over the date of death estate valuation option, because the estate tax bill can be reduced, if one or more of the estate’s assets have lost significant value during the six months after death. However, if the alternate valuation date values are used, then all the estate’s assets must be revalued–not just those that have declined in value. If an asset is sold during the six months after the date of death, then the sales price of the asset must be used.

The chief downside in using the alternate valuation date values, is that the step-up in basis which beneficiaries receive is locked in at the lower values, which can affect their capital gains liability, should they later decide to sell their inheritances.

Author: Sandeep V. –   Analyst

The post How to Calculate the Value of Your Estate appeared first on Veristrat Inc.

This article provides information about the Cannabis industry including history, Cannabis regulation, Cannabis reforms, forecasts and challenges faced by the industry.

Cannabis is a plant, also known as marijuana, weed, herb, pot, grass, bud and Mary Jane. Cannabis generates trichomes which comprises cannabinoids including tetrahydrocannabinol (THC) and cannabidiol (CBD). THC utilized for recreational purpose and CBD for medical purpose.

Types of Cannabis plants:

• Sativa: develops lively and full of life experiences.
• Indica:  creates calm and tranquilizing experiences.

Various kind of products that fall into the classification of Cannabis include:  Flower, Concentrates, Edibles, Topical cannabis and Hemp.

History

Scientists evidenced marijuana plants to 12,000 years ago in Central Asia, mainly in the regions of Mongolia and Southern Siberia.

Marijuana mainly utilized for medical, religious and spiritual purposes throughout history. The development and usage of marijuana initiated in the 17th century with the production of hemp to create rope, sails and material for clothing. The first article on the medical benefits of marijuana was written by Shaughnessy in 1839 and Cannabis Indica became accessible in the US Pharmacies in 1850s.

American society considered cannabis as a “fashionable narcotic” at hashish parlors in the 1880s. Cannabis was also famous in Mexico. In the 1900s, issue on the usage of marijuana as a drug turned out to be more widespread as United States had immigration from Mexico.

Federal Cannabis Regulation

The first acknowledged US marijuana law was announced in 1619 in Jamestown Colony, Virginia. Connecticut and Massachusetts also announced related laws.

The first state law disallowing marijuana was passed by Utah in 1915. California and Texas also passed similar laws.

Canada included cannabis to its list of banned drugs in the Opium and Narcotics Act in 1923. The International Narcotics Control Board acknowledged cannabis a narcotic in 1925.

According to the Marijuana Tax Act in 1937, the ownership and transfer of marijuana was illegal, under federal law excluding for medical and industrial usage, by charging an excise tax.

The Controlled Substances Act (CSA) and Control Act of 1970 abolished the Marijuana Tax Act and developed federal drug policy administrating the production, ownership and usage of controlled substances. Marijuana, heroin, cocaine was categorized as Schedule I substances. Until mid-2018, marijuana is illegal under federal law and categorized as a Schedule I drug according to CSA.

Recent Cannabis Reform Efforts

After Uruguay, in 2017 Canada is the second country to legalize marijuana.

California is the first state to legalize medical marijuana under the Compassionate Use Act of 1996. The physicians can advise marijuana for diseases such as cancer, HIV/AIDS, multiple sclerosis and nausea. In the period between 1998 and 2010, eleven states have legalized medical marijuana.

Colorado and Washington have legalized the recreational usage of marijuana at the state level in 2012. Alaska, California, Nevada, Oregon and Washington DC have also approved the recreational use of marijuana in 2017, proceeded by Maine and Massachusetts in 2018.

In the beginning of 2018, 29 states, District of Columbia, Puerto Rico and Guam approved the medical usage of marijuana. Nine of these states have approved the recreational usage of marijuana for 21 years and older. Ninety five percent of the United States population resides in states where marijuana can be approached, this includes the 17 states in which the cannabinoid (CBD) oil is legal.

Cannabis Industry

The attractiveness and public acceptance of the cannabis industry has placed the legalization of marijuana on ballots across the United States. The effect on state and local government is critical and municipalities are concentrating on matters including taxation, zoning, budgeting and arranging resources for law enforcement and administration.

The public opinion regarding cannabis has transformed from 12 percent of Americans favoring approval of cannabis in 1969 to 60 percent recently.

The requirement for medical and recreational marijuana has increased the popularity of the product, the additional services backing the industry, and the requirement for research and development.

Forecasts   

It is forecasted that US cannabis industry will devote approximately $70 billion annually to the US economy by 2021.

Market research firms are forecasting that medical marijuana market will attain a value of $55.8 billion by 2025.

It is predicted that adult use and medical marijuana markets will grow at a Compounded Annual Growth Rate of 31 percent. The Cannabis sales will attain a value of $57 billion by 2027.

Challenges

The cannabis industry is developing and there are different rules at the federal, state, county and city levels. California has approximately 500 local jurisdictions with varying rules, tax rates and zoning laws pertaining to the cannabis industry. California Medical Marijuana Regulation and Safety Act was executed in 2015, necessitating people in the cannabis industry to get local operating permits and state licenses. In 2018 with the adult use market opening, local jurisdictions are making new rules and regulations and people in the cannabis industry are trying their efforts to stay up to date.

Entity Structure

The IRC Section 280E and the Controlled Substances Act of 1970 are important for selecting an entity structure in the cannabis industry. The business can be a growing facility, producer or service giver, it is important to deal with how to legally structure a business. It effects how certain subjects are to be managed including compensation, income reporting, compliance and taxes. The separation of liability for federal, state and local regulatory and law enforcement agencies makes the choice of entity structure even more important.

The three structures are namely:

Sole proprietorships: single owner, business profits are recorded on the owners tax return, taxes are paid by the owner and not taxed at the entity level.

Partnerships: owned by partners, profits are recorded on the partners tax return and partners pay federal and state tax returns.

Corporations: owned by shareholders, pays taxes at the corporate level and shareholder level.

Conclusion

The Cannabis industry is evolving rapidly and mainly used for medical and recreational purposes. The Cannabis industry is attractive and public acceptance is increasing at a fast pace. 

Author: Rabia J. –  Sr. Analyst

The post Introduction to Cannabis Industry appeared first on Veristrat Inc.

Making money in business today is not that easy and can be stressful. If often feels like there are 100 things to get done all at the same time. Outsourcing is a business practice to engage or contract an outside service provider to perform company’s business processes. It delegates a third party to execute tasks of the company.

Outsourcing is a fact of life, it always has been. Imagine a life where you are growing your own food, generate your own electricity, build your own home, and weave your own cloth. It will be a hard life to live, therefore, we outsource these activities to companies that specialize in those areas. Similarly, businesses could use strategic outsourcing to grow. There was a time when all business functions including marketing, finance, production, and workforce management and every single task within these functions were managed by in-house people of the company. But now outsourcing has made life easier for businesses as they can now focus on the core activities of the business while delegating support functions to skilled specific third parties.

Successful outsourcing requires four essential steps:

Almost every big company is doing tasks they should not be doing and the easiest way to identify these outsourceable tasks is to ask your team members to work out what their billable rate is. Ask them to make a list of tasks they perform day to day and place them into one of the three categories:

1. Tasks that could be outsourced and done by a third party having a lower billable rate.
2. Tasks that are core business function and are in line with their current chargeable rate.
3. Tasks that take up the most time.

Once you identify the outsourceable task list, next would be to calculate the hourly savings that outsourcing them to third party vendors would give your team each month. Subsequently, it would become easy for you to evaluate how this extricated time could be utilized to the best possible use. Now let’s put more light with the points below on advantages of outsourcing:

• Access Skilled Expertise: outsourcing enables to focus on core functions and accessing skills of outside service providers.
• Cost Effective: outsourcing is more affordable than an in-house team. It will increase the profitability of the organization and reduce operating costs.
• Usage of Time Efficiently: outsourcing accounting services leads to time saving as the organization does not need to keep up with the new policies, procedures, and laws.
• Enhance Work Productivity: outsourcing enables growth in work productivity and handling risk appropriately.
• Flexibility & Scalability: able to meet uncertain demand and dealing with capacity constraints.
• Reduce Fraud: account handling lies with an outside service provider so the possibility of fraud declines.
• Reduces Year-End Work: general ledger and subsidiary schedules are managed by the outsourced accounting service provider; so, the year-end work decreases.
• Better Decisions: outsourcing will lead to improved business decisions by concentrating on core activities.
• Time Zone Benefit: outsourcing to a company in a different time zone, your business is always going on even when you are not online. A collaborative virtual team can work around the clock giving your organization competitive advantage of increased flexibility and productivity.

Veristrat provides a blend of functional expertise and process capabilities that span across diverse portfolio of valuation and financial services. We understand your unique business needs and strategically align processes and delivery to your business goals. Outsourcing tasks to our virtual staff help you save money and time, leading to enhanced profitability. We create client centric collaborative system of people to deliver outcomes that help you stay ahead of the curve. To give you some idea about what we do, here are example of tasks that our usually clients delegate to our team members:

• Performing valuations such as 409A, ASC 820, ASC 805, ASC 350, ASC 718, and ASC 815
• Performing SBA 7a loan business valuation
• Searching guideline comparable companies
• Searching precedent transactions
• Discount rate calculation
• Creating discounted cash flow model
• Applying market approach of valuation
• Creating real estate valuation reports
• Creating valuation model and reports
• Reviewing valuation model and reports
• Preparing narrative reports
• Carrying out primary and secondary industry and market research for reports
• Preparing company profiling reports
• Economic research reports
• Providing transaction advisory
• Buy-side due diligence
• Sell-side due diligence
• Commercial due diligence
• Inventory audit and valuation
• Providing financial data
• Extracting industry data
• Creating pitchbooks
• Creating Confidential Information Memorandum (CIM)
• Reconciling bank account data
• Creating and analyzing financial statements
• Executing account reconciliations
• Preparing financial reports
• Carrying out research, analysis of financial information for financial reporting
• Concluding audit by examining general ledger accounts
• Creating the statutory financial accounts
• Preparing investment reports
• Executing financial modelling
• Executing research for investments
• Updating bookkeeping services
• Maintaining data of customers

Veristrat is a strategic partner to global clients from wide range of industries including agriculture, automotive, capital goods, chemicals, metals & mining, pharma & healthcare, retail & consumer, IT & software, transportation & logistics, industrial products and infrastructure. We provide above stated and other related services to various businesses so that it moves smarter and closer to customers, respond faster than competitors, outmaneuver threats, and harvest opportunities.

Author: Rabia J. – Sr. Analyst

The post Outsourcing Valuation, Advisory and Accounting Services appeared first on Veristrat Inc.

Currency exchange rates are relative and are represented as the relation between the currencies of two countries.

A currency exchange rate is the price of base currency expressed in terms of the price currency. For example AUD/USD = 1.4 means USD (base currency) costs 1.4 AUD.

Base currency is the domestic or accounting currency and Price currency is the foreign currency.

Foreign Exchange Market

The trading on the foreign exchange market is conducted through currency pairs. Common currency pairs are USD/GBP, USD/CAD and AUD/USD.

Direct quote is defined as how many units of domestic currency is required to exchange for one unit of foreign currency.

Indirect  quote is defined as how many units of foreign currency is required to exchange for one unit of domestic currency.

Bid Ask Spreads

Bid price is the price at which a dealer is willing to buy one unit of base currency.

Ask price is the price at which a dealer is willing to sell one unit of base currency.

From a customers point of view, it is opposite of dealer. Sell the base currency at bid rate and buy the base currency at ask rate.

The size of the bid ask spread from customers point of view depends on:

• Bid ask spread in the interbank market
• Size of the transaction
• Relationship between dealer and client

The size of the bid ask spread from dealers’ point of view depends on:

• Currency pair involved
• Time of day
• Market volatility

Cross currency exchange rates

Cross currency exchange rate is the exchange rate between two currencies implied by their exchange rates with a common third currency. For example AUD/CAD cross currency exchange rate can be calculated by multiplying the respective bid and ask rates of AUD / USD and USD / CAD currency exchange rates.

Exchange Rate Types

• Floating and Fixed Exchange Rate
  • Floating Exchange Rate is constantly changing and is the rate determined by market conditions.
  • Fixed Exchange Rate is the rate of exchange fixed by the Government and it remains constant.
• Spot and Forward Exchange Rate
• The Spot Exchange Rate is the current exchange rate for immediate delivery.
• The Forward Exchange Rate is the exchange rate that is decided today but the delivery and payment will be at a future date.

International Parity Relationships and forecasting exchange rates

• Covered interest rate parity is an arbitrage condition that must hold when international financial markets are in equilibrium. It holds forward premium or discount should be equal to the interest rate differential between two countries. If it is violated then arbitrageurs can make profits due to mispricing.
• Uncovered interest rate parity links spot exchange rates, expected spot exchange rates and nominal interest rates. Expected currency depreciation should offset the interest rate differential between two countries over the term of the interest rate.
• Purchasing power parity states that the exchange rate between countries should be equal to the ratio of the countries price levels.
• International fisher relation states that the interest rate differential between two countries should be equal to the expected inflation differential.
• Carry trade involves taking long positions in high yielding currencies and short positions in low yielding currencies. It perform well during low volatility periods and if uncovered interest rate parity does not hold.

Warning signs of currency crisis

• Real exchange rate is higher than its mean level during tranquil periods
• FX reserves decline as crisis approaches
• Terms of trade deteriorate
• High inflation in pre-crisis period
• Money supply relative to bank reserves increases
• Nominal private credit grows
• Equity markets experience a boom bust cycle

Conclusion

Currency exchange rates are an important indicator of health of a country’s economy. The currency exchange rates effects trade and foreign investments across countries. The currency exchange rates influences the rate of return on investments.

Author: Rabia J. –  Sr. Analyst

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We apply different valuation approaches to reach the final value, however, it is crucial to consider the nature of ownership interest before concluding the final value. The value of an ownership interest in the private business is affected by many factors, such as control and marketability.

What is Control?

Control is whether or not an ownership interest being valued in the closely held company has significant influence over the actions of the subject company. The controllability over the actions in the company will have a significant impact on the value of the ownership as the controlling interest have some privileges not available to the holder of a noncontrolling ownership interest including the following:

• Select the directors and the management;
• Determine management compensation and other perks;
• Declare the dividends/distributions;
• Set investment policies and business course;
• Acquire and liquidate assets
• Liquidate, dissolve, or sell the company;
• Make Acquisitions
• Borrow funds on the behalf of the company.

What is Discount for Lack of Control?

Given the economics of supply and demand, a buyer who wishes to acquire controlling interest in a subject company may have to pay premium as controlling shareholder enjoys control over company’s action. On the other hand, a non-controlling ownership interest typically lacks above stated privileges, therefore a non-controlling ownership interest in the subject company is usually worthless than a controlling ownership interest, on a per share basis.

There is a price premium for control and the price discount associated with a lack of control which is called Discount for Lack of Control (DLOC).

Let’s understand with the help of an example, the control premium is 25%.

DLOC = 1 – (1/ (1+0.25)) = 20%

So, if the control premium is 25%, the DLOC is 20%.

For determining control premiums, data from the acquisitions of public companies are typically used.

If the valuation methodologies used arrives at the value of a controlling ownership interest, in that case a lack of control discount should be applied to arrive at a non-controlling value.

What is Marketability?

The ability of a commodity to be sold and marketed in the market is called marketability. The concept of marketability in investment relates to liquidity of an investment – that is how readily and certainly an investment can be converted into cash.

What is Lack of Marketability?

For the given investments that are otherwise comparable, market participants may apply a downward adjustment or a discount to the value of the one that cannot be converted into cash quickly at the owner’s discretion. That discount rate is called Discount for Lack of Marketability (DLOM).

There is a marketability difference between ownership interest in the stock of publicly traded company as compared to an ownership interest in the stock of privately held company. The investment in privately held securities is not as liquid and have lesser degree of marketability as compared to the otherwise comparable publicly traded company. A rational investor will pay a premium on price for higher liquidity and will demand a price discount for lack of liquidity. Therefore, if an interest in a firm cannot be easily converted into cash, discount for lack of marketability is applied.

The discount of lack of marketability varies with the following:

• An impending IPO or firm sale would decrease the DLOM
• Dividend payments would decrease the DLOM
• A greater pool of investors/buyers would decrease the DLOM
• Contractual restrictions on selling stock would increase the DLOM
• Greater risk and value uncertainty would increase the DLOM.

There are three ways of estimating DLOM:

1. Restricted Stock Method: In this method, price of restricted (unregistered) shares of a company is compared with the price of its publicly traded shares (registered). The price difference between both units is considered DLOM.
2. IPO Method: In this method, the price of pre-IPO shares is compared to that of post-IPO shares. The percent difference between the two prices is considered the DLOM.
3. Option Pricing Method: In this method, the put option price as a percentage of the stock price is considered the DLOM.

Total Discount

The discount rates DLOC and DLOM are multiplicative as they are applied in a sequential process, so the formula for total discount is:

So, if the DLOC is 25%, and the DLOM is 10%, the total discount is:

Total discount = 1- (0.75 * 0.90)

Total discount = 32.5%

Conclusion

The consideration of discount for lack of control (DLOC) and discount for lack of marketability (DLOM) is very important in any valuation analysis, particularly those involving minority interest in privately held companies. They are generally applicable when controlling equity is converted to a non-controlling and non-marketable value.

Author: Swati J. – Analyst

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In this article we are going to discuss the movement of cash with respect to operations (i.e. Incomes/Expenses incurred for a period) and the effects of such operations on the balances of the various assets and liabilities (operating and non-operating) in the Balance Sheet. To analyses the movement of cash during the period we prepare the Cash Flow Statements. It is fact that net Income/Loss in Income Statement is not only the key parameters for reflecting the increase/decrease of cash balance in the balance sheet. There are other components of operations during the period, which affects the cash balance.

Methods for Preparing Cash Flow Statements:

The cash flows statements are generally prepared by two methods Direct Method and Indirect Method.

DIRECT METHOD: In this method of calculation, the actual flow of cash (in payments and receipts) generally identified in the financial statements prepared on cash basis, which is not available in current era. The below is the format for evaluation of closing cash balance after adjusting all the payments and receipts during operations for respective period.

INDIRECT METHOD: This method comes into existence after transferring of accounting system from cash basis to accrual basis. In Accrual Basis of accounting, the transaction (either income/expenses) are recorded at the time of occurrence. It does not matter, whether the cash is received or paid for respective income/expense at the time of transaction. The Accrual method of accounting results in the creation of various payables, receivables accounts to record the balances in the current assets / liabilities in the balance sheet.

In such accrual method of accounting, the statement of cash flows statements is prepared to reconcile the change in cash balance during the period with respect to earnings, non-cash charges, changes in balance sheet accounts (i.e. Working Capital), capital expenditures and other investments (i.e. Non-Current Assets), and transactions with lenders and shareholders (i.e. Debt, Non-Current Liabilities and Equites).

The followings are the key segments categorized in the Cash Flow Statements.

The three main core segments of cash flow statements are categorized for the analyzing the movement of cash as discussed below –

1. Cash Flow from Operating Activities – As discussed above that the net income/losses do not referred as net change in balance of cash during the period. In accrued method of accounting, to capture the actual cash flows with respect to the operations during the period need adjustments for reconciling the actual cash flows. The such adjustments are discussed as below –
   • Non-Cash Charges – There are some expenses which are charged in the income statements, but in actual they are either not incurred or no cash outflows with respect to such expenses e.g. depreciation and amortization, Accrued interest cost, Stock based payments (ESOPs etc.) to employees etc. Such expenses are need to be added back to net income to arrive at cash operating income for a period.
   • Realized gain or losses – In Income Statements there are some incomes/losses which are due to sale of the assets, investments. The difference between the book value and sale value of such assets/investments leads to gain/loss in respective transaction. Considering these gain/losses as a non-operating income/expense we exclude this (by adding back the expenses or deducing the gains (as the case may be) for portraying the organic cash operating profit for the firm/company for a period.
   • Adjustments of other non-operating incomes/expenses – As discussed above, apart form realized gain or loses there are some other expenses which are non-operating in nature like restructuring costs or other non-recurring expenses and impairment gain/losses in the value of respective asset. Such expenses shall also be added back to evaluate the Net Opearting cash flows before changes in the working capital.
   • Changes in Working Capital – This is the final adjustments to evaluate the actual cash flows because of the changes in the current assets (excluding cash & cash equivalents) and current liabilities (excluding short term debt & current portion of long-term debt). Current asset includes Inventory, Account Receivables, Prepaid Expenses and Other Current Assets, similarly current liabilities includes Account Payables, Accrued Revenue and Other Current Liabilities etc.

The methodology used in evaluation of the changes in working capital is –

If there is an increase in balance of current assets (in current period as compared to previous period), this represents that the cash goes out of business for creation of such assets and vice versa. Similarly, in case of current liabilities, it is concluded that the cash is goes out of the business if there is decrease in balance of current liabilities (in current period as compared to previous period) and vice versa.

Working Capital is also referred as Net Current Assets (i.e. Current Assets – Current Liabilities). Hence applying the methodology as discussed above, if there is an increase in working capital in current period as compared to previous period, it will be concluded that the cash has been moved out of the business.

2. Cash Flow from Investing Activities – Similarly as done for change in working capital, the same methodology is followed in evaluation of cash flows from transaction in non-current assets. It provides us the details of cash outflows for capital expenditures, Acquisitions of assets/investments and inflows of cash are arising from disposal of assets, investments, dividend/interest incomes etc.
3. Cash Flow from Financing Activities – In evaluation of cash flows from transaction related to Debt, Equity, and other non-current liabilities the same methodology is followed as discussed above in case of working capital (current liabilities). It provides us the information about cash outflows as Debt repayments, Dividend/Interest payments, other financing fees payments etc. and similarly cash inflows arising from funds raising by Debt or Equity.

The aggregation of the changes in cash across the 3 core segments, discussed above, give us the overall change in the cash (net of inflows and outflows) over the period for a business/firm/company. The aggregate change in cash is added to the cash balance as reported in previous period’s balance sheet. This results in the closing cash balance which is reflected as the cash balance at the end of the current period.

While Analyzing the cash flow statements the two core relationships are discussed as –

• The Relationship between Operating cash flows and Investing cash flows: In this relationship we evaluate the operating performance of the business, whether management is efficient for positive cash earnings from operations and effective disposal of assets/investments for internal funding of required capital expenditures. If management manages to fund the capital expenditure from internal sources (i.e. by cash flows from operations and disposal of assets/investments) then there will be no need to take debt, hence representing sound financials. The excess internal sourcing of finance i.e. cash left after committing capital expenditure, helps the management to either payoff the debt (if any in the books) or to make investments, acquisitions for inorganic growth in future, which is again a positive in terms for sound business operations. The reverse is considered as the business is more dependent on outsider funds (either equity or debt) which is generally not considered as efficient business operations, as outsider liabilities are troublesome in inflationary economic conditions or in down cycle of business.
• The Relationship between transactions with lenders and Transactions with share holders (in Cash flow from Financing): This relationship correlates to the changes in the capital structure of the firm. It comes into existence when management is more concern on funding the capital expenditures for their expansion, where they do not have appropriate cash flows from operations and even cash inflows form sale of assets/ investments. For funding the same management prefers debts as marginal cost of debt (in case there are lower borrowing rates in market) is less than marginal cost of equity. Also in case of positive cash flows form operating and even investing activities, management will focus on de-leverage the balance sheet and opting for returning cash to shareholders through share repurchase or dividends. However, in case of inflationary cycle of economy, where cost of debt is high, management will be inclined towards issuing the shares instead of raising debt at high cost. Also, in this scenario, if there are positive cash flows in operating activities and investing activities, management will also be encouraged towards repayment of debt (if any in their books) to reduce the interest cost for improving net margins.

Author: Paramjit S. – Sr. Analyst

The post Analyzing movement of cash during the Operating Period appeared first on Veristrat Inc.