An investigation prompted by a Boston newspaper into Acreage Holdings, Inc. (ACRGF) is finally winding through Massachusetts' regulatory system -- and the results could have an impact on the company's store licences and operations in the state.
Last year, the Boston Globe's "Spotlight Team" ran a story questioning the number of state licenses that Acreage and another company, Tilt Holdings (TLLTF) , had obtained, allegedly by using "complex corporate structures" to gather more store licenses than allowed. Massachusetts caps the limit at three, but both companies were suggesting they had more. When the story broke, the two companies denied any wrongdoing. They were simply helping local operators run their businesses through management agreements, they said.
Acreage said it had no comment for this story.
Now, the Massachusetts Cannabis Control Commission has released a report regarding its investigation of the cannabis licenses for Acreage Holdings, Inc. The question will be going forward whether the commission will approve the licenses that they have applied for. According to the report, "Acreage expressed an intent to reform several provisions that may be construed to establish a controlling relationship with Patient Centric of Martha's Vineyard, Ltd or PCMV."
You've probably never heard of PCMV, but its tangled relationship with Acreage is part of the story.
The report stated that Acreage's retail arm, The Botanist, had submitted applications for licenses as a marijuana retailer in Worcester and in Shrewsbury, Mass. Acreage owns several management companies that provide key services to marijuana applicants and licensees, including High Street Capital Partners (HSCP) and MA RMD SVCS, LLC.
HSCP has certain contractual arrangements with PCMV, while MA RMD SVCS has certain contractual arrangements with Health Circle, Inc. The applications for the Botanist fully disclose Acreage Holding's ownership interest in the Botanist. The applications for the Botanist also disclose the existence of contractual agreements between Acreage's management companies and the affiliates, "but do not represent those contractual relationships as a controlling relationship requiring disclosure" pursuant to Massachusetts state law.
The commission did state that Acreage and The Botanist had fully complied with the investigation. This is the timeline that was stated in the report:
On April 25, 2019, the Commission issued provisional licenses to Health Circle for retail, product manufacturing and cultivation. On July 11, 2019, the Commission sent an Inquiry Notice to Acreage in connection with an investigation into its contractual arrangement with Health Circle, PCMV, and Mass MediSpa, Inc. Acreage responded and attended an investigative conference.
On Sept. 24, 2019, South Shore Bio Pharma, a wholly-owned subsidiary of Acreage, terminated its Master Services Agreement with Mass Medi-Spa. Kevin Murphy, Acreage CEO and Botanist president, executed an affidavit attesting to Acreage and the Botanist's commitment to "continue to conduct their business in full compliance with the Control Limitations, as they have and may be further amended from time-to-time."
Fast forward to Jan. 20, when the commission's enforcement staff found the following relative to control: "Commission staff has determined that the information and responses provided by the company may result in a finding that the agreements, as those agreements are currently constituted and in effect, establish that the Company is in a position to control the decision-making of Patient Centric of Martha's Vineyard, Ltd. and/or Health Circle, Inc."
Essentially, stating that the management agreements gave Acreage control of the company, the commission is delaying its vote on Acreage's recreational Massachusetts licenses for The Botanist.
At Any Rate: New Financing
Last week Acreage announced that it agreed to a new financing arrangement including a $100 million credit facility, with a the first draw down of $49 million. The deal also includes a $30 million private placement of special warrants and an option for an additional $20 million special warrants. The company stressed it would not affect the company's plan with Canopy Growth.
The financing also includes a $50 million private loan with $21 million provided by CEO Murphy. Murphy is lending the money to IP Investment Company, who is lending it to Acreage. Then he will receive $23.1 million at maturity in one year, plus 304,001 Interest Shares. That's approximately an 18% interest rate.
"In a time of limited capital availability for our industry, I am excited to announce these proposed transactions to strengthen our balance sheet, further enabling us to execute our plan to be a leading consumer cannabis company in the U.S.," said Kevin Murphy, chairman and CEO of Acreage in a statement. "In the course of these transactions, we have cemented a relationship with a well-capitalized institutional lender that has the capacity to provide additional credit facilities as necessary."
Acreage stock was falling over 4% in trading on Monday and was lately selling at $5.30.