Last night, Cresco Labs (CSE: CL) made it known to the public that the waiting period for its acquisition of Origin House (CSE: OH) has passed. The waiting period was a result of the second request issued by the Department of Justice related to anti trust laws. However, despite the announcement, uncertainty remains on the status of the acquisition due to wording used by the issuer in its statement.
The expiration of the waiting period under the HSR Act satisfies one of the remaining conditions to completing the Transaction. With the waiting period passed, the parties are now working towards closing the Transaction on terms that will be mutually agreeable to both parties.Cresco Labs, October 22, 2019 news release
Further compounding the problem, is that many investors are becoming aware of the fact that Cresco Labs is facing a significant cash crunch, and the completion of the Origin House acquisition will only magnify the firms cash problems. The unwillingness of lenders to currently enter the cannabis space, mixed with high cash burn rates and numerous pending acquisitions, puts Cresco Labs between a rock and a hard place.
Cresco last reported its financials on August 29, which was for the period ended June 30, 2019. Within, the firm reported a cash position of $61.12 million, plus restricted cash of $7.56 million, for a grand total of $68.69 million. While its a respectable figure, consider the current acquisitions that the firm is set to close or has closed in the near term and their capital requirements.
- VidaCann, in a mix of cash and shares, for US$120 million
- Tryke Companies, for US$252.5 million, $55 million of which is in the form of cash
- Gloucester Capital, doing business as Valley Agriceuticals, which closed in the current quarter for US$32.5 million in cash plus additional shares
- Origin House, in an all stock transaction initially valued at C$1.1 billion
- Hope Heal Health, based in Massachusetts, for an undisclosed amount
While much of the costing related to these acquisitions is in the form of common shares, a still significant portion is to be paid via cash, with totals hitting at least $87.5 million on the low end. Funding issues lead to the firm raising approximately US$56.2 million concurrently with its announcement of the Tryke acquisition, while also selling its Illinois properties in leaseback arrangements with Innovative Industrial Properties Inc (NYSE: IIPR).
Yet these funding transactions don’t amount to enough to cover the entirety of pending acquisitions, let alone the operational deficits being exhibited by the operators. While Cresco Labs is currently running with a negative operational cash flow of -$6.2 million per quarter, this will be further compounded by Origin House’s own negative operational cash flow of -$10.84 million US per quarter. Origin House’s reported US$11.3 million in cash will effectively be gone before the transaction even closes.
Combined, the entity will be burning $17.4 million per quarter, just in operations – which doesn’t factor in the additional assets that are to be brought into the mix which will only further add to operational expenditures. Nor does it factor in the funds that Cresco and Origin House have been applying to expansion, with this years total between the two firms amounting to over $70.17 million as of June 30. There is also the US$48.1 million in Origin House’s current liabilities that will need to be paid in the near term that many haven’t factored in.
The result, is a cash incinerating operation that has no signs of slowing down, similar to many of its current peers in the space. Thus, the terms for the transaction between Origin House and Cresco Labs being modified is of little surprise – the two firms need to find operational efficiencies, and fast, if they want to make the resulting operation work.
Cresco Labs is currently trading at $8.30 on the Canadian Securities Exchange, while Origin House is currently at a price of $5.20.
Upon closing of the transaction, one Origin House share will be converted to 0.8428 Cresco Labs shares.
Information for this briefing was found via Sedar, Cresco Labs and Origin House. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
All Canadian Dollar values exchanges to US Dollars at a rate of USD $1.00 to CAD $1.31 based on today’s exchange rate.
As the founder of The Deep Dive, Jay is focused on all aspects of the firm. This includes operations, as well as acting as the primary writer for The Deep Dive’s stock analysis. In addition to The Deep Dive, Jay performs freelance writing for a number of firms and has been published on Stockhouse.com and CannaInvestor Magazine among others.