Investors can't just rely on quarterly earnings results to assess how well a company's doing. Often it's what happens in between those reports that can offer a key glimpse into how well the business performing. And for cannabis companies, a major area of concern these days is cash.
The two companies listed below have recently made moves that could suggest they're desperate to conserve cash. Let's take a look at why that may be the case and whether investors should be concerned.
Acreage Holdings (ACRGF) announced on June 17 that it had obtained short-term funding from an institutional investor for $15 million. The note matures in four months, and it comes at a hefty annual interest rate of 60%.
The high rate of interest may indicate the level of difficulty the company had in obtaining a short-term loan. It could also signify Acreage's desperation -- it has a relatively modest funding need for a short period, so much so that it's willing to pay a large premium in interest. On June 1, Acreage also entered two other funding agreements that would allow it to raise up to $60 million.
In both announcements, on June 1 and June 17, Acreage said the proceeds would be for "working capital and general corporate purposes."
Based on its recent results, it's clear that money may be a growing issue for the company. Acreage released its year-end results on May 29. In them, the company reported cash and cash equivalents of $26.5 million as of Dec. 31, 2019 -- a sharp decline from the $104.9 million it had a year ago. The company burned through $70.9 million in cash from its operating activities over the past year.
These latest moves suggest that things have gotten much worse for Acreage, and that means that shares of the New York-based cannabis producer could fall even lower. The pot stock is down more than 50% in 2020. The Horizons Marijuana Life Sciences ETF (HMLSF -12.28%), by comparison, has declined by just 21%.
Curaleaf Holdings (CURLF 0.30%) is another pot stock that's recently made a surprising move. On June 22, the company announced that it would be revising its deal to acquire Grassroots, a vertically integrated cannabis operator that has facilities and licenses in several states.
The initial deal was announced on July 17, 2019, and included a transfer of $75 million in cash -- that's no longer required under the revised terms of the deal. The transaction was originally worth $875 million, but with cannabis stocks falling over the past year and the cash component now removed from the purchase price, the deal is worth about $700 million today.
Removing the cash portion of the deal undoubtedly gives Curaleaf a bit more room to breathe. However, when the company released its amended first-quarter results on May 20, there didn't appear to be any signs for concern just yet. With cash and cash equivalents of $176.4 million as of March 31, the company looked to be in good shape. In Q1, Curaleaf used only $1.6 million to fund its day-to-day operations and another $44.8 million on investing activities, which included the purchase of property and equipment.
With the COVID-19 pandemic still in its early stages in March, it's possible that Curaleaf's run into more cash flow issues since the release of its Q1 results. But unlike Acreage, Curaleaf looks to be on much stronger footing given its modest cash burn and strong cash balance.
In Curaleaf's case, the move could be more to do with growth. On June 15, the Massachusetts-based cannabis producer announced that it would be expanding its Select brand into Connecticut. Curaleaf closed the deal to acquire Select on Feb. 1. Select had a strong presence on the west coast, but Curaleaf's been expanding it into more markets, including Michigan and Maryland.
The company initially announced the $948.8 million deal to acquire Select on May 1, 2019.
Shares of Curaleaf are down 11% in 2020.
What does this mean for investors?
The moves these two companies have made in recent weeks underline just how risky the cannabis industry is right now amid the COVID-19 pandemic. Acreage is a stock I'd stay far away from given how aggressive it's been in obtaining funding. It suggests that cash flow is a big problem right now, and that's not something that investors should be taking lightly.
Curaleaf adjusting its deal with Grassroots is also concerning, but the stock doesn't appear to be as risky as Acreage is right now. If nothing else, Curaleaf modifying its deal could be a shrewd way for the company to conserve cash in an acquisition where it doesn't need to spend the money.
Either way, cannabis investors need to be extra careful when buying shares of pot stocks, and cash flow isn't something that they can afford to just gloss over.