Some cannabis highflyers are stumbling. Could this be the first MSO to fail?

I jumped into the cannabis race full-time in the summer of 2018. By early 2019, I was well into a marathon. That March, I attended NCIA-Boston and ran into Jimmy Young, who had recently launched Pro Cannabis Media. We stood at the back of the main speaker hall and watched as the keynote took the stage. A young good-looking guy (the keynote, not Jimmy) from MedMen strutted out like a rock star to applause, then dumped himself down onto the couch like an award-winning actor visiting Oprah.

I turned to Jimmy and whispered, That guy’s an asshole. He was going to be the Apple of weed. The disconnect is that Apple is a tech company that does cool things. Cannabis, on the other hand, is a plant that has survived thousands of years despite near worldwide eradication efforts. Antagonist Harry Anslinger referred to the plant as something that grows like weeds in a roadside ditch. I listened to about 90 seconds of his bravado and whispered to Jimmy, He’s gonna lose a lot of people a lot of money.

Over the next couple of years, I watched in amazement as MedMen raised more and more money and did dumber and dumber things. Fortune magazine just reported that the “cannabis chain once worth $1.7 billion and called the ‘Apple store of weed’ is now nearly failing.” (In Boston, their shop is across from Fenway Park). With only $15.6 million in cash (versus $137.4 million in debt), the company has indicated it might not be able to survive the year (in business, this is referred to as a “going concern” warning). Their stock has traveled from $8 to 4 cents. Even penny candy costs a dime these days.

Cannabis highflyers are stumbling and failing. The cause of the timing is capital markets and investor rationality. Markets are tight, capital is scarce, and investors are no longer willing to bet on an uncertain future. As a result, businesses that spent with reckless abandon to create redundant national footprints (does an operator really need a $10 to $20 million cultivation facility in every market?) could no longer fund the deficit cash flow. These large operators turned to the federal government for funding by simply not paying their federal taxes (see Green Market Report’s coverage of the Top-10 multistate operators that owe $507 million in back taxes), but that just saves money going out—it doesn’t bring in fresh capital.

With continued overdevelopment of costly and short-lived indoor cultivation facilities (the underlying culprit), markets are now awash in excess inventory driving prices downward and crushing companies that are not at least cash-flow neutral. Furthermore, we are on the cusp of the first wave of interstate commerce becoming reality. Many indoor cultivation facilities will not survive.

A reporter called me the other day and suggested that with the current market turmoil, only the large will survive. When I countered that the largest players could be the first to fall—they have deficit cash flow and lack access to capital—his ears perked up. Last week, the big news story was Curaleaf exiting several western states. What no one picked up on, though, is the double whammy Curaleaf will experience …

Because of cannabis’ illegal federal status, operators have limited deductions for federal tax purposes. Rent for space used to produce a product is tax deductible. Cultivation operations are nearly fully tax deductible—if they are producing. Idle a cultivation facility and the operator still must pay rent, but if there is no production, that rent is not tax deductible. Hence, closing a $30,000 per month rent facility doesn’t just cost the $30,000 of continued rent (landlords expect to be paid throughout the lease term whether the property is used or not), it likely costs substantially more because idle facilities have to be paid with after-tax dollars in cannabis. Weaker operators are about to learn the meaning of the expression, Damned if you do and damned if you don’t.

Barring someone pulling a white rabbit cleanly out of their backside to save time, MedMen may be the first MSO to fail. The beanstalks are falling, and the giants may soon come crashing to the ground.