Acreage Holdings plans to deploy the proceeds of the short-term, onerous loan toward working capital and general corporate expenses.

Acreage Holdings entered into a short-term definitive funding agreement with an institutional investor for a total of $15M in gross proceeds. The secured note has a maturity date of four months and bears interest at a per annum rate of 60%. It is secured by, among other items, the Company’s cannabis operations in Illinois, New Jersey and Florida, as well as the Company’s U.S. intellectual property.

In the event of default, the Company is further obligated to pay the Lender an additional fee of $6M. Acreage may prepay the note without penalty or premium at any time following the 90th day following the closing.

The near term future must be truly uncertain for Acreage to enter into what seems like, to the casual observer, a usury law violation. It may also be a sign of the times for many struggling multi-state operators.

Cash Crunch in the Cannabis Industry?

Perhaps the biggest challenge facing the cannabis industry right now is constrained access to capital. Very few public companies are generating positive cash flow and the reduction in available capital weighs heavily on the sector.

Companies that have high cash burns and weak balance sheets have seen their stocks fall 80% or more, and investors are realizing that many companies are certain to struggle without raising additional capital or agreeing to "mortgage the farm" under egregious terms like Acreage.

In Our Blunt Opinion

If there is one big takeaway, it has never has it been more important to focus on cash flow and balance sheets. Many companies could struggle to survive if the capital markets remain closed, while fundamentally sound companies with strong balance sheets, minimal cash burns or even positive cash flow could suffer from the sector wide fallout and see their stocks pummeled. Those that can pursue their plans, even if scaled back due to market conditions, will likely provide big returns to their investors once the storm has passed.