Largest Cannabis MSOs Are Sending SOS Signals

At a time when many Canada centric cannabis companies are shifting from hellbent expansion to survival mode, it seems worthwhile to examine the health of multi-state operator, MSO, cannabis companies in the United States. It is not the intention of this article to highlight the problems in Canada, since I addressed those issues in a previous article. Instead, this article focuses on companies in the USA that are engaged in the medical and/or recreational marijuana business in more than one state.

The article begins with a cursory examination of differences in state laws affecting cannabis consumption, which dictate the boundaries of the playing field for MSOs. It then explores the MSO companies which have market capitalizations in excess of $500 million. That size was arbitrarily selected as the cutoff to limit the length of this article. Interestingly, there is a significant difference in the market capitalization of 8th ($523 million) and 9th largest MSOs ($278 million).

State Laws Regarding Cannabis Consumption

At the state level, the legal status of cannabis in the United States can be divided into four categories: states that prohit any consumption, states that allow consumption of low-THC/CBD, states that permit only medical marijuana, and states that permit recreational consumption. A helpful interactive map of the legal status of cannabis consumption by state is available here.

The following listing shows there are now 11 states and the District of Columbia that permit recreational marijuana. Illinois is included since its law becomes effective on January 1, 2020. There are 22 states that permit medical marijuana but not recreational use. Of the other states, 8 only permit consumption of low-THC/CBD; while 9 states do not allow consumption of any cannabis.

State Regulation of Cannabis
Recreational Medical low-THC/CBD Illegal
State State State State
Alaska Arizona Georgia Alabama
California Arkansas Indiana Idaho
Colorado Connecticut Iowa Kansas
District of Columbia Delaware Kentucky Mississippi
Illinois Florida North Carolina Nebraska
Maine Hawaii Tennessee South Carolina
Massachusetts Louisiana Texas South Dakota
Michigan Maryland Virginia Wisconsin
Nevada Minnesota Wyoming
Oregon Missouri
Vermont Montana
Washington New Hampshire
New Jersey
New Mexico
New York
North Dakota
Ohio
Oklahoma
Pennsylvania
Rhode Island
Utah
West Virginia

Regulatory Imagination

Suffice it to say that states impose unique approaches to implementing their cannabis laws. Each state has therefore developed its own bureaucratic structure to impose rules and regulations affecting cultivation, processing and dispensation. As a result, a publicly held MSO cannabis company must have an army of lawyers and lobbyists to stay abreast of developments in various states. To complicate matters, states generally allow counties and municipalities to impose their own cannabis ordinances including preventing companies from establishing facilities within their boundaries; therefore, legal staffs must be equally aware of state, county and municipal laws and ordinances.

The myriad cannabis regulations conceived and imposed by law makers are mind boggling. Even though Colorado was in the forefront of cannabis legalization its imposed laws preventing out of state ownership. New legislation in Colorado will allow out of state public company ownership.

In Florida, and most other states, legislators decided that only feed-to-sale or vertically integrated companies would be allowed to operate in the cannabis industry. Florida went so far as to state that licenses would be awarded to only nurseries that had been in business continuously for at least 30 years. Recipients of Florida licenses, which are officially called Medical Marijuana Treatment Centers - MMTCs, have to grow, process and dispense their own medical marijuana products.

You do not have to be a mental giant to realize the ability to grow plants is vastly different than the knowledge of chemistry needed to safely process plants into consumable cannabis product which then have to be marketed to legal users. Furthermore, propagating crops and converting them into consumable product requires extensive knowledge about marketing.

Every state looked on cannabis as an industry that would shower it with revenue from application fees, licensing fees, renewal fees and sales tax while providing gainful employment. Within states, the Departments of Health vied with the Departments of Agriculture for control while the legislatures vied with both to assert its dominance. While the internal wars may not have reached Chicago gangland proportions the quest for territorial control by branches of state government remains unresolved in many states. In Florida the courts have ruled that legislators and the Department of Health have by imposition of myriad rules thwarted the will of the people who voted to permit medical marijuana.

As states rolled out licenses they created instant wealth for recipients who had little or no knowledge about cannabis. The people who knew the most about cultivating and processing cannabis were those who had been plying their trade in the thriving underground economy. Some of these people decided to come out from under cover, but most adopted a wait and see attitude. They were not trained chemists and didn't particularly want to work behind a counter. Plus, they realized that they would always have a competitive advantage in the sale of dried cannabis (flower), since their sales were not subject to tax.

Vertical Integration Absurdity

A dominant feature of most states' cannabis law is the vertical integration requirement. The origin of that requirement is less important than its absurdity from the standpoint of microeconomics and risk management.

Just imagine if McDonalds could only sell hamburgers in Florida that were made with ground meat it processed from herds of cattle it raised in Florida. It would have to have cow-calf operations, feed lots and slaughter houses in every state in the United States. It would also have to be shipping about 10 pounds of grain for every pound of finished meat to every state. While such vertical integration would be a windfall to the railroads, the price of Big Macs would probably soar due to obvious inefficiencies.

In a similar fashion it would be unreasonable and very uneconomic to require large grocery chains like Publix, Kroger and Whole Foods to grow and process all the products they sell. Imagine the greenhouses that would have to be built in the northeastern states to provide those residents with fresh citrus!

While current Federal law prohibiting the interstate transportation of cannabis encourages vertical integration, it is clearly uneconomic and subject to massive disruption. The dispensaries of most MSOs rely entirely on cannabis plants harvested at their grow facility. If an MSO is unable to propagate, grow and harvest its plants because of disease, infestation or contamination then that MSO's sales will depend entirely on in-house inventory, which might not exist. A retailer's reliance on a sole supplier is hazardous especially when the law prevents a retailer from using another supplier.

Possible Death Star

If interstate transportation of cannabis was permitted, either by Federal edict or some regional compact like the Oregon legislature is considering, someplace in the United States would become the cannabis flower basket, just like the Midwest is considered the bread basket of the nation. That area of the nation would then be surrounded by processing plants efficiently turning out cannabis products not yet dreamed about. Grow facilities and processing plants in the various states would be charged off and left to decay.

MSO executives who aggressively pursue full legalization of cannabis at the Federal level need to carefully examine their position in the food chain. In fact, if recreational cannabis was permitted today at the Federal level and Jeff Bezos embraced such passage, Amazon would probably quickly become the world's largest cultivator and processor and blow away the competition with its aggressive pricing and Prime delivery. Amazon might even be able to mortally wound the thriving underground cannabis industry.

States would try and erect barriers to prevent cannabis sales by out of state suppliers; however once Amazon agreed to charge tax and return those amounts to the state, state legislators would be less adverse. Amazon would probably buy local cannabis operations and turn them into warehouses so it could make almost immediate delivery of product perhaps with drones. Existing dispensaries might then go the way of prior occupants of their retail space.

The Cannabis MSOs

The remainder of this article focuses on MSOs that are publicly traded. In previous Seeking Alpha articles I took a deep dive into some MSOs. I encourage you to read those articles to gain a greater knowledge of Trulieve (OTCPK:TCNNF), Acreage Holdings (OTCQX:ACRGF), Green Growth Brands (OTCQB:GGBXF), iAnthus Capital Holdings (OTCQX:ITHUF), Curaleaf (OTCPK:CURLF), Harvest Health & Recreation (OTCQX:HRVSF), and MedMen (OTCQB:MMNFF).

Largest MSO - Curaleaf

The MSO with the largest market capitalization is Curaleaf with a market capitalization of $2.462 billion. It is headquartered in Wakefield, Massachusetts and has 49 dispensaries in 12 states serving more than 165,000 registered patients. It is the result of a roll-up of private equity interests into a publicly traded company utilizing the reverse takeover model popularized by Canadian investment bankers.

For the three months ended June 30, 2019 it reported total revenues, excluding biological adjustments, of $48.489 million which was up from the $14.644 million reported for Q2 2018. Despite the 231% increase in revenue, Curaleaf reported a net loss of $24.5 million compared to a loss of $4.9 million in Q2 2018. For the six months ended June 30, 2019 it had a negative cash flow of $159.3 million versus 2018's negative cash flow of $12.8 million. On June 30, 2019 Curaleaf had $107.3 million in cash and cash equivalents compared with $266.6 million the prior year. Its Q3 2019 earnings release is scheduled for November 19th.

A confluence of mostly bad news has confronted Curaleaf over the past few months. In particular, the U.S. Food and Drug Administration or FDA sent a warning letter to Curaleaf on July 22, 2019. The FDA letter stated that the Company was selling several CBD products on its website that were "misbranded drugs," a violation of the Federal Food, Drug, and Cosmetic Act. Based on this news, shares of Curaleaf fell more than 7% on July 23, 2019 and this issue led to a significant number of class action lawsuits against the Curaleaf.

An October 3, 2019 announcement of a 100,000 share CURLF open market purchase by Curaleaf Executive Chairman Boris Jordan at an average price of $8.21 did little to stem the tide. A few weeks later on October 21, 2019 the company announced that its core shareholders representing approximately 75% of the issued and outstanding shares of the Company had entered into an amended and extended lock-up agreement. Since the Company's reverse takeover transaction in October 2018, all shareholders holding individually more than 1% of the issued and outstanding shares had been subject to lock-up agreements.

The Canadian Securities Exchange, CSE, reports that there are 338,609,444 shares of Curaleaf listed and trading. An additional 122,170,705 shares were locked-up. The share overhang ratio (locked-up shares divided by shares actually trading) is therefore 36.1%.

The core shareholders voluntarily agreed to an extended lock-up release schedule, but 15% of previously locked-up shares became immediately available for sale. An additional 15% of the locked-up shares unlock on the last day of each subsequent calendar quarter, with the final 10% to unlock on March 31, 2021. It is likely that fear of insider selling will tend to dampen investor enthusiasm for the next 17 months.

More cold water was thrown on Curaleaf shareholders when MarketWatch analyst Bill Kirk on October 22, 2019 noted that the number of dispensaries in Florida was growing faster than the number of patients. In his opinion that is particularly worrisome for Curaleaf because it has 26 dispensaries in Florida and they generate about 59% of its total retail sales. Kirk rated CURLF a sell with a stock price target of $3.80.

Interestingly, my February 14, 2019 article dissecting Curaleaf revealed that it only owned 75% of its Florida operation. I tried but was never able to identify who owned the other 25%. Maybe that is why it has only increased its Florida dispensaries by 30% from 20 to 26, while the number of dispensaries in the state has increased by 110% from 88 to 185.

It's also possible that Curaleaf is simply unable to grow and process enough cannabis products to meet the demand at its Florida dispensaries. In his note, Kirk did mention customer disappointment that Curaleaf recently did not have any dried smokeable cannabis, aka flower, to sell.

On October 25th CURLF closed at $5.40, which is well below its 52 week high of $11.73. It is, however, up 13.9% for the year since it closed 2018 at $4.74 and it is above its low of $3.88 which it reached on December 4, 2018.

Green Thumb Industries (OTCQX:GTBIF)

Green Thumb Industries (OTCQX:GTBIF) is the cannabis MSO with the second largest market capitalization of $1.782 billion. It manufactures, distributes, and sells various cannabis products for medical and adult-use in the United States. It offers cannabis flower; and processed and packaged products, including concentrates, edibles, and topical and other cannabis products under the Rythm, Dogwalkers, The Feel Collection, Dr. Solomon's, Beboe, and other brands. The company distributes its products primarily through third-party retail stores across the United States as well as through in its own Rise and Essence retail stores.

The company was founded in 2014 and is headquartered in Chicago, Illinois. As of June 30, 2019, Green Thumb had operating revenue in 10 states: California, Colorado, Connecticut, Florida, Illinois, Maryland, Massachusetts, Nevada, Ohio and Pennsylvania. It owned and operated 28 retail stores in those states.

Like most other MSOs it was a roll-up of private equity interests in the cannabis sector that went public via a Canadian RTO. Interestingly, it used the carcass of a long dead Canadian Uranium company, Bayswater Uranium Corporation, whose investors failed to find their dreams of great wealth. Through May 2019, Bayswater showed an accumulated deficit of C$100 million and it was just one of the many Canadian uranium companies from a bygone "strike it rich" era.

For its Q2 ended June 30, 2019 Green Thumb showed $44.7 in revenue versus $13.6 in the comparable 2018 quarter. During this year's Q2 it showed a net operating loss of $9.9 million versus the prior year's loss of $5.3 million. The company ended Q2 with $135.8 million in cash and cash equivalents; however, it used $46 million along with 1,700,000 shares of subordinate voting shares to acquire Fiorello Pharmaceuticals, Inc., which held a New York cannabis license, assets for one cultivation, one processing and four retail facilities.

An examination of the roll-up transactions and the establishment of Green Thumb Industries via the RTO reveal a tangled web of ownership. Green Thumb's percentage ownership of cannabis operations in Nevada, Florida, Pennsylvania, and other states is not easily discernible.

In addition to significant non-controlling interests there is a large amount of insider shares that have not been converted to tradeable subordinate voting shares, SUB shares. The Canadian Securities Exchange, CSE, reports that there are currently 128,551,982 SUB shares issued, outstanding and trading, while there are an additional 86,981,728 Sub shares that could become available if and when converted. The share overhang ratio is therefore 67.7% and should be expected to weigh on the stock price of GTBIF.

Shares of GTB closed at $8.88 on October 25, 2019 and that was up 10.6% from the end of 2018 closing price of $8.03. In the past year shares have traded as high as $16.56 and as low as $7.55.

Trulieve (OTCPK:TCNNF)

With a market capitalization of $1.12 billion Trulieve ranks as the third largest MSO. Admittedly, I have had a love hate relationship with Trulieve that continues to this day. The first cannabis article I wrote for Seeking Alpha was titled Trulieve Profitably Dominates Medical Marijuana Market in Florida.

It appeared on January 17, 2019 capturing the attention of investors and unintentionally sparked buying interest in TCNNF. The things that impressed me about Trulieve were: (1) it was started by nurserymen who were motivated by the possible health benefits of cannabis, (2) the organizers had been tilling the soil around Quincy, Florida for decades, (3) the founding nurserymen employed some of their own children to create a feel of family, (4) personal experience in the Quincy area suggested Trulieve would have a strong, loyal workforce, (5) the founding nurserymen did not appear to be high roller, get rich quick, gamblers, and (6) Trulieve had a huge first mover advantage.

My primary concern was that success would lead to complacency and Trulieve would become distracted and make unwise decisions. I expressed those concerns in my first article then really featured them in my second article, Trulieve Cannabis Has Lost Its Luster, which was published on April 12, 2019. The primary concern expressed in that article was that Trulieve had somehow been lured into acquiring a meaningless dispensary about as far from its headquarters as possible in Palm Springs, California and pimped into acquiring retail sites in Massachusetts. These purchases suggested to me that dreams of grandeur were taking hold within Trulieve. I expressed my belief that the net positive cash flow generated in Florida would be squandered outside of Florida. My concerns were heightened when Ben Atkins a director and his son, Jordan Atkins, head of retail, departed and Trulieve hired an in-house counsel even though its CEO is a lawyer.

In addition to the Atkins' a number of other people in senior positions have departed and management's explanation that these are normal in a growing organization seems lame. The departed include: COO-Kevin Darmody, Marketing Director-Victoria Walker, Head of Cultivation-George Hackney Jr., Head of R&D-Craig Kirkland, Emily Walker-Head of Social Media and Digital Marketing, Max Sedarat-Head of Batching. Doug Spurgeon-Head of Production, Brian Powers-Cultivation, and Adam Wersman- Cultivation.

At the beginning of 2019 Trulieve had a "Bird's Nest on the Ground," and was able to enjoy cartel like profits, because they had 26% of all operating dispensaries in Florida. Now, Trulieve only operates 20% of the dispensaries in Florida; because, while it increased its dispensary total from 23 to 37, the number of dispensaries in the state increased from 88 to 185.

For Q2 2019 Trulieve reported sales revenue of $57.9 million compared to the $23.3 million it reported in Q2 2018. After tax net income amounted to $57.5 million versus $7.9 million in 2018. For the first 6 months of 2019 it reported net income after tax of $72.2 million or $0.66 per share.

The concern I expressed regarding Florida cash being wasted in other states became evident in the first six months of 2019 when Trulieve reported positive operating free cash flow of $19.6 million but reported spending $53.2 million on purchases of property and equipment and business acquisitions. That equated to a negative cash flow of $33.6. That is a very significant chunk of change when you realize that at the beginning of 2019 Trulieve only had $24.4 million in cash in the till!

It is easy to see why Trulieve had to borrow $70 million on June 18, 2019 by issuing 5-year senior secured promissory notes. The rate it had to pay, 9.75%, was certainly no bargain. Furthermore, Trulieve had to sweeten the deal by also awarding note holders 3 year warrants to purchase 1,470,000 SUB shares at C$17.25.

Trulieve's need for cash in real and ongoing as evidenced by the October 23, 2019 announcement that it had sold five of the buildings on its Quincy site to Innovative Industrial Properties (IIPR) for $17 million. In return, Trulieve entered into a triple-net lease agreement with the initial annualized base rent equal to 11% of the purchase price. Earlier in 2019, IIP executed a sale-leaseback transaction with Trulieve for a 150,000 square foot industrial facility in Holyoke, Massachusetts for an initial purchase price of $3.5 million (excluding transaction costs), pursuant to which Trulieve is expected to complete tenant improvements for the building, for which IIP has agreed to provide reimbursement of up to $40.0 million.

Trulieve has 35,822,337 shares issued and trading. An additional 74,524,009 are locked-up shares but could become eligible for trading at some future time. Trulieve's share overhang ratio is therefore 208% and should be expected to weigh on the stock price of TCNNF.

TCNNF has traded as high as $16.35 and as low as $6.68 during the past 52 weeks. It has a price earning ratio of 11.1x based on its fully diluted earnings for the most recent quarter. The share overhang ratio obviously concerns investors, but Trulieve has thus far been able to weather the cannabis bear market better than virtually any other company.

Innovative Industrial Properties (IIPR)

Legendary stories abound about merchants making fortunes selling Levis, picks and shovels while gold miners lost everything during the gold rush days. If one applies that same reasoning to the cannabis craze then it raises interesting questions.

At least one company believes it found a way to profit from cannabis without having to cultivate, process or sell cannabis products. That company is Innovative Industrial Properties (IIPR), which is headquartered in San Diego, California. Since all its customers are in the medical cannabis industry, it seems logical to consider IIPR itself as an MSO. As such, it is the fourth largest MSO with market capitalization of $812 million.

IIPR is a self-advised Maryland corporation focused on the acquisition, ownership and management of specialized properties leased to experienced, state-licensed operators for their regulated medical-use cannabis facilities. It was founded in December 2016 and elected to be taxed as a real estate investment trust, REIT, commencing with the year ended December 31, 2017.

A REIT is a corporation that combines the capital of many investors to acquire income producing real estate and enjoys certain tax advantages. To retain its tax advantaged REIT status, IIPR must distribute through a dividend to its stockholders at least 90 percent of its taxable income.

For the quarter ended June 30, 2019 IIPR rported total revenue of $8.6 million compared to $3.3 million from the comparable 2018 quarter. For the first six months, IIPR had revenue of $15.4 million versus $6.1 million for the same perior in 2018. Net income for the first half of 2019 was $6.4 million versus $1.8 for 2018. It had positive operating cash flow of $14.6 million for the first six months, but it required $99.2 million to acquire cannabis properties.

IIPR stock trades on the NYSE and currently shows a dividend of $3.12 and a yield of 4.36% based on its $71.85 share price. As a dividend payer, it stands out in the cannabis sector as a lone wolf. It also stands out because it sports a lofty price earnings ratio, PE, of 66.5x.

IIPR went public on the NYSE on December 1, 2016 when it sold 3,350,000 shares at an offering price of $20.00 per share. In the last 52 weeks it has traded as low as $39.56 and as high as $139.53.

Unlike the merchants who sold the picks and shovels, IIPR is reliant on cannabis companies paying their rent. Accordingly, the long term viability of IIPR is tied directly to the financial health of MSO sector companies. Despite its name, even Innovative Properties would have great difficulty finding new tenants who needed grow rooms and highly sophisticated facilities to extrude chemicals from plants.

Harvest Health & Recreation (OTCQX:HRVSF)

Harvest Health & Recreation (OTCQX:HRVSF) has a market capitalization of $767 million making it the fifth largest MSO. In a February 26, 2019 article I wrote for Seeking Alpha titled, Will Harvest Health & Recreation Become The Most Valuable Cannabis Company On Earth?, I conducted an extensive analysis of Harvest. The title for my article was taken directly from Harvest's stated mission, which is to build the most valuable cannabis company in the world. I encourage you to read that article to gain a more complete understanding of this company.

Harvest is headquartered in Tempe, Arizona and currently operates 34 dispensaries in seven states. It has 10 in Arizona, 7 in Florida, 6 in California, 5 in Pennsylvania, 3 in Ohio, 2 in North Dakota and 1 in Maryland.

For the quarter ended June 30, 2019 Harvest reported revenue of $26.6 million compared to $10.5 for Q2 2018. For its latest quarter it reported a loss of $20.6 million. For the six months ended June 30, 2019 Harvest showed a net operating cash loss of $46.4 million and its non operating negative cash flow was an additional $146.4 million. For the first six months of 2019 Harvest, therefore, used up $192.8 million in cash. On June 30, 2019 it only had $89.9 million in cash and cash equivalents on its balance sheet.

There are 94,531,114 shares of Harvest listed and trading. An additional 194,054,600 shares are reserved for issuance pursuant to the conversion rights attached to Super Voting Shares and Multiple Voting Shares that are issued and outstanding but not listed. The total number of issued HRVSF shares, assuming all are converted into the listed class, would be 288,585,714. The overhang ratio is therefore 205.3% (194,531,114 divided by 194,054,600). The fact that tradeable shares could more than double upon conversion puts considerable downward pressure on HRVSF.

On October 25, 2019 HRVSF closed at $2.69, down 48.8% from its 2018 year end price of $5.25. During the past 52 weeks it has traded as high as $10.85 and as low as $2.04.

Cresco Labs (OTCQX:CRLBF)

The sixth largest MSO is Cresco Labs (OTCQX:CRLBF) with a market capitalization of $740 million. It cultivates, manufactures, and sells medical cannabis and medical cannabis products in the United States. It offers cannabis in flower, vape pens, and various forms of extracts under the Cresco and Reserve brands; precisely-dosed and non-combustible products, including tinctures, capsules, salves, sublingual oils, and transdermal patches under the Remedi brand; culinary-backed and cannabis-infused edibles under the Mindy's Artisanal brand; and fruity confections under the Mindy's Kitchen brand.

It is headquartered in Chicago, Illinois and operates 28 dispensaries in 8 states. It has 13 in Florida, 5 in Illinois, 3 in New York, 3 in Pennsylvania, and 1 in Arizona, Massachusetts, Nevada, and Ohio.

For its Q2 2019 it reported revenue of $29.9 million compared to $8.5 in Q2 2018. For its latest quarter it reported a net loss of $2.0 million. For the first half of 2019 it showed negative operating cash flow of $12.5 million and non operating cash flows of $52.3 million. Cresco, therefore, for its latest six months Cresco had a negative cash flow of $64.8 million. On its June 30, 2019 balance sheet it had only $61.1 million left in cash and cash equivalents.

Cresco has 67,301,470 shares issued and outstanding. An additional 236,470,642 shares are reserved for issuance pursuant to redemption and conversion rights. Cresco's share overhang ratio is therefore a whopping 351.4% and weighs heavily on the share price of CRLBF.

CRLBF closed at $6.55 on October 25, 2019 and was down a modest 3.0% from its year end 2018 close of $6.75. During the past 52 weeks it has traded as high as $40.63 and as low as $0.81.

Columbia Care (CCHWF)

The 7th largest MSO with a market capitalization of $703 million is Columbia Care (OTC:CCHWF) It is headquartered in New York City. From 2012 until becoming a public company on November 1, 2018 it functioned as a private equity firm investing in the cannabis industry.

Columbia Care has proprietary, patent-pending medical marijuana brands named TheraCeed, ClaraCeed and EleCeed which are pharmaceutical-quality and come in a variety of formats, including hard-pressed tablets, suppositories, vapes, and lotions. Columbia Care claims to have handled over 1.2 million sales transactions since its inception.

Columbia Care is headquartered in New York City and was incorporated on January 29, 2013 as a Delaware limited liability company. It became a public company via a RTO sponsored by Canaccord Genuity on April 29, 2019. It is a vertically integrated cannabis company whose principal activity is the production and sale of cannabis as regulated by the regulatory bodies and authorities of the markets in which it operates. It operate 21 dispensaries in the U.S. Four of its dispensaries are in New York; Delaware, Florida, Massachusetts and Pennsylvania each have 3; 2 are in Arizona, while California, Illinois and Maryland each have 1.

For the three months ended June 30, 2019 Columbia reported revenue of $19.3 million versus $9.6 million it reported for Q2 2018. Its net loss for the first half of 2019 was $58.5 million of which $33.6 million occurred in Q2, Columbia showed net operating cash flow was a negative $42.3 million for the first six months of 2019 and it also used $31.4 in cash for non operating activities. Accordingly, Columbia used up $73.7 million is cash during the first six months of 2019. Columbia's balance sheet showed it had $125.3 million in cash as of June 30, 2019.

As of June 30, 2019 there were 64,147,017 common shares issued and trading. On the same date there were a possible 151,666,100 additional shares that could become tradeable if their underlying proportionate voting shares were converted into common shares. The proportionate voting shares are convertible into common shares at a ratio of 100 common shares per proportionate voting shares. The share overhang ratio for Columbia is therefore 236.4%.

The negative impact of such an overhang surely led to the October 23, 2019 Columbia Care announcement that its founders, the entire executive leadership team, the members of its Board of Directors, certain senior employees and other significant shareholders agreed to amend their existing lock-up agreements with the Company, affecting 116,058,223 of the Columbia Care’s issued and outstanding common shares.

CCHWF's current share price is $3.26. It has traded as high as $7.00 and as low as $2.88 since going public earlier in 2019.

Acreage Holdings (OTCQX:ACRGF)

The 8th largest MSO with a market capitalization of $523 million is Acreage Holdings. I have written extensively about ACRGF in several Seeking Alpha articles beginning with one published on February 1, 2019 titled, Acreage Holdings Inc. Requires Massive Funding To Achieve Its Multi-State Plan.

I have generally been very critical of Acreage. Since writing my February article, Acreage has continued to enrich its insiders at the expense of other shareholders who have been taken to the cleaners.

The deal Bruce Linton and Kevin Murphy concocted whereby Canopy Growth gave $300 million to ACRGF shareholders ($2.63 per ACRGF share) for an option to acquire Acreage in the event such an acquisition becomes possible was a windfall to Kevin Murphy and other ACRGF insiders. Linton decision to align with Acreage proved he had no knowledge of accounting and that alone should have been enough to get him fired as Canopy CEO. The fact that the deal was approved by an overwhelming majority of voting shareholders should provide no comfort to shareholders.

A October 16, 2019 televised round-table moderated by CNBC's Tim Seymour featuring Constellation Brands CFO, David Klein, Acreage Holdings CFO, Glenn Leibowitz, and Canopy Growth CFO, Mike Lee, revealed "Daddy Warbucks" aka Constellation Brands (STZ) had finally decided it was time to focus on profitability and positive cash flow, which Linton failed to grasp. Furthermore, it was apparent from the interaction of the participants that Acreage Holdings needed a lot of help from Canopy on basics such as how to grow and process cannabis into medicinal products. After all, Acreage Holdings had as of October 24, 2019 not sold a single gram of cannabis in Florida even though it acquired a nursery/MMTC for $65 million on January 4, 2019. Perhaps Acreage executives are taking agronomy classes at the University of Miami to find out what they can do with the nearby Natures Way Nursery they bought!

If corporations were given medical diagnosis, Acreage would be diagnosed as a patient suffering from a severe case of hemophilia - it just bleeds red ink! For its most recent quarter ended June 30, 2019 Acreage reported revenue of $17.7 million and a net loss of $33.9 million. For the first six months of 2019 its revenue was $30.6 million and its net loss was $58.0 million. Its operating cash flow was a negative $36.5 million and it had a cash loss of $25.0 million for non operating investments. Acreage therefore required $61.5 million for operating and non operating purposes for the first six months of 2019. On its June 30, 2019 balance sheet Acreage showed it had $84.5 million in cash and cash equivalents.

In its latest bit of financial alchemy on October 25, 2019 Acreage Holdings and GreenAcreage Real Estate Corp., a supposedly independent REIT, announced the closing of a series of sale-and-leaseback transactions for the sale of certain properties and facilities from Acreage Holdings to GreenAcreage for an aggregate of approximately $18 million to Acreage Holdings and approximately $23 million overall including payments to a third-party seller. The locations funded and closed today include facilities in Massachusetts, Florida and Pennsylvania. Acreage Holdings and GreenAcreage also said they expect to close on additional facilities in Illinois and Connecticut within the next thirty days. The announcement went on to state GreenAcreage has committed to provide up to approximately $43.9 million in additional financing in commitments or funding related to properties in Florida and Illinois. Assuming full utilization of this expansion financing, GreenAcreage’s total investment in the properties will be approximately $77.3 million, with $72.3 million specifically allocated to Acreage Holdings. Concurrent with the closings, Acreage Holdings entered into long-term, triple-net lease agreements with GreenAcreage and will continue to operate the properties as licensed cannabis facilities.

GreenAcreage was specifically formed to provide sale-leaseback financing for an operationally critical property portfolio of cultivation and dispensary assets owned by Acreage Holdings. It claims to be independent of Acreage Holdings; however, a May 13, 2019 news release stated GreenAcreage Real Estate Corp. or GARE is externally managed by GreenAcreage Management LLC, an entity in which Acreage Holdings holds a 20% interest and in which Acreage Holdings CEO, Kevin Murphy, has invested.

My gut tells me that Acreage Holdings attempt to raise money from IIPR or other REITs was unsuccessful so Murphy decided to start his own REIT. It would be interesting to see where GARE got its money to fund Acreage Holdings request. If GARE goes public remember Caveat Emptor!

Acreage has 66,887,217 shares issued and outstanding. An additional 49,008,427 shares reserved for issuance pursuant to redemption and conversion rights could be issued. The share overhang ratio for ACRGF is therefore 73.3% which adds to shareholder misery.

The fact that ACRGF stock now trades at $6.00, down 68.4% from its year end 2018 level of $19.01 is not surprising. In the past 52 weeks it has traded as low as $5.41 and as high as $30. The $2.63 per share gift from Canopy helps to soften the loss in market value but not by much.

Summary

This article has presented the eight largest MSOs in the U.S. cannabis industry. It has shed light on this sector of the cannabis industry at a time that cannabis stocks are under significant downward pressure.

This article reveals that all of the top companies have negative cash flows arising from their operations and their purchases of other companies, property and equipment. The seriousness of having a negative cash flow is compounded by the fact that depressed stock prices in the sector have made sale of equity difficult, interest rates being demanded by cannabis debt investors are high and traditional bank loans are not available. The cash flow problem that now afflicts most MSOs has forced them to re-think their expansion plans and become much more cost conscious.

Some cannabis companies faced with this situation are turning to REITs that specialize in the cannabis sector; however, many of these companies will find the window closed as REITs adopt more rigorous credit standards. REITs themselves must raise more and more funds to accommodate the demands of cash starved cannabis MSOs. In that process, investors in cannabis REITs need to look carefully at a REIT's portfolio of cannabis properties to see that it is properly diversified.

The uneconomic and often absurd state and local laws imposed on cannabis MSOs introduced significant risks. Most notably, the full legalization of cannabis at the Federal level could easily disrupt the MSO sector and destroy vertically integrated companies within states that required feed-to-sale operations.

The easy money has been made in the cannabis sector. Holders of locked-up MSO company shares can be expected to become increasing anxious to convert those shares into cash and not be as generous in extending their existing lock-ups. After all, the cost basis for most of the holders of these locked-up shares were created in the roll-ups is in the pennies. Holders of locked-up shares know that their escape hatch has narrowed considerably.

Persistent pressure on share prices of individual cannabis MSOs should be expected to continue along with losses and negative cash flow at the companies. Investors expecting their MSO shares to return to old highs are certain to be disappointed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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