Cash is at a premium in the cannabis industry these days. For investors, it's an important consideration when investing in a pot stock because those without much cash on hand could be in for a rough ride, especially as the economy struggles.
Here are three U.S. pot stocks that reported less than $100 million in cash in their most recent earnings reports. Let's take a look and see if these companies have enough money given how much cash they're burning through and whether investors should avoid them for the time being.
1. Cresco Labs
Cresco Labs (OTC:CRLBF) released its first-quarter results of fiscal 2020 on May 28. In the report, the company's cash and cash equivalents as of March 31 totaled $68.6 million. That's up from the $49.1 million that Cresco had on hand as of Dec. 31.
But the way the company's been increasing cash has been through debt; during the past three months, Cresco's raised $100 million by issuing long-term debt. The concern for investors here is that the pot producer used $40.1 million in Q1 just to fund its day-to-day operations. It used another $41.7 million to purchase property and equipment. Its high rate of cash burn may mean this latest influx of cash might not last long, and that could mean more debt in the future.
Cresco's long-term liabilities of $276.1 million are nearly double the $143.8 million that it had as of the end of last year. Long-term obligations can limit the flexibility the company has. Not only will interest costs weigh down its financials but future lenders may be less likely to take a chance on it and give it additional capital. It also doesn't help that Cresco reported a net loss of $13.4 million in Q1 despite seeing its top line triple from the prior-year period. The company's interest costs of $8.2 million were up significantly from the $0.4 million that it incurred in the same period one year ago.
Although the sales growth is encouraging, investors should keep a close eye on the Chicago-based company to see if there are any developments that suggest it's in distress.
2. Charlotte's Web
Charlotte's Web (OTC:CWBHF) released its first-quarter results on May 14. And unlike Cresco, the Boulder-based company has seen its stockpile of cash drop over the past three months. As of Dec. 31, Charlotte's Web had $68.6 million in cash. By March 31, its cash and cash equivalents totaled just $53 million.
The good news, however, is that the cannabis company isn't burning through its cash at a rapid rate. During Q1, Charlotte's Web used $14.9 million to fund its operating activities and $1.6 million for capital purchases and investing activities. If it were to maintain that pace, its current cash on hand could be sufficient for three more quarters.
But unlike Cresco, Charlotte's Web isn't experiencing incredible growth. Instead, its top line has run into a bit of a roadblock as sales of $21.5 million in Q1 were down from the prior-year period. For six periods now, its quarterly revenue has been within a range of $21 million to $25 million. And for three straight quarters, the company's also incurred a net loss.
There are some challenging times ahead for this hemp producer, and while Charlotte's Web looks to be in OK shape for the time being from a cash flow perspective, it's still not in great shape heading into a recession.
3. Columbia Care
Columbia Care (OTC:CCHWF) has the least amount of cash on its books of the three stocks listed here. When it reported its first-quarter results on May 14, investors learned the company had just $26.9 million in cash and cash equivalents as of March 31. That's down from the $47.5 million that it reported on Dec. 31.
The company took on $14.3 million in debt during Q1 to help boost its balance. But with Columbia Care burning through $10.4 million from its operating activities and another $22.8 million in investing activities, the company's expenditures during the quarter were just too large to keep its cash balance up.
The good news, however, is that the big chunk of cash burn came from the company's capital spend, something that Columbia Care can more easily cut back on if it needs to get leaner. And if it can keep its operating cash burn at around $10 million, the New York-based company may be fine for at least a couple of quarters.
In Q1, Columbia Care's revenue of $26.3 million was more than double the $12.9 million it generated in the prior-year period. The company still reported a net loss of $20.6 million during the quarter, but that was an improvement from the $25.1 million loss that it incurred in the same period a year ago.
Should investors avoid these companies?
There's a great deal of risk in the cannabis industry right now. While consumers stockpiled cannabis products during the early stages of the COVID-19 pandemic, they could scale back as their budgets tighten up amid a recession. That means it's important for investors to consider a company's financial health, and how well it can get through the pandemic, before investing in it.
The pot stocks listed here are OK for now, but they're still risky investments to hang on to given their modest cash balances. Investors would be better off investing in companies with more money and better burn rates to help minimize their overall risk.