We cover many fundamental questions in this deep, broad and colorful conversation with two terrific SA authors and investors in the cannabis space: James V. Baker and Julian Lin.
Why there is time for current MSOs to build a moat, importance of passing MORE Act, descheduling the plant and why getting rid of 280E gives the industry life.
Fallacy of free cash flow, MSO rollups, generating profits without economies of scale. Thoughts on Green Thumb-Trulieve rumors and why momentum investors will get shaken out.
Editors' Note: This is the transcript version of the podcast we published last Wednesday with James V. Baker and Julian Lin. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy!
Rena Sherbill: Welcome again to The Cannabis Investing Podcast, where we speak with C level executives, scientists and law and sector experts to provide actionable investment insight and the context with which to understand the burgeoning cannabis industry. I'm your host, Rena Sherbill. Hi, again, everybody. Welcome back to the show. Great to have you listening. I hope everybody is healthy.
Really excited about today's episode. I speak a little bit about it in a few minutes about how this episode came about, but two authors on Seeking Alpha, James Baker and Julian Lin, Julian, a newer investor, in general also in the cannabis space, James Baker, an established experienced investor in the cannabis space, multi-decade long investor and investment banker and he'll get into all the accolades and experience he has. A real philosophical discussion of what it means to be a cannabis investor, why we are investing in this space, what to look for -- what looks good. We talk about the rumors between Green Thumb (OTCQX:GTBIF) and Trulieve (OTCQX:TCNNF), and what that may look like if it's feasible, if it's reasonable.
We speak about the MORE Act that's coming up in the Senate -- sorry, coming up in the House, unlikely to pass the Senate but let's see if it passes the House first. We get into conversations about 280E and why that's the most important thing to get rid of in the industry, how much destruction and havoc, it wreaks on companies in this sector. We get into the states, how it will be legalized eventually. What the thoughts are from James and Julian about that, and what that may look like. Why James, in particular is bullish on Trulieve and the Florida market including Liberty Health (OTCQX:LHSIF).
And then discussing some of the questions that started the reasons for this episode, which are questions Julian has about the industry. Questions like why companies are issuing debt instead of issuing shares to raise more cash. James and Julian get into a number of philosophical, strategical, really important and fundamental questions about investing in the cannabis space, what they like what they don't like; the good, bad, the ugly, if you will, because there is some of all of that. The fallacy of free cash flow, why a lot of the cash flow that we think is there, is really miss-defined. And the MSO space in particular, why James specifically avoids Canada. And a lot of other great, resonant topics about investing in the space.
Hope you enjoy this one. I think this is a great one, a really actionable one for investors. I hope you agree. Let me know in the comments, let me know in the reviews.
And before we begin, a brief disclaimer. Nothing on this podcast should be taken as investment advice of any sort. And in my model cannabis portfolio I'm long, Trulieve, Khiron, GrowGeneration, Curaleaf, Vireo Health and Isracann BioSciences. You can subscribe to us on Libsyn, Apple Podcasts, Spotify, Google Play and Stitcher.
Julian and James, welcome to The Cannabis Investing Podcast. I'm really happy to have you both on the show. Just as a brief background, I was in touch with Julian and he was asking me some questions about investing in cannabis stocks. And we were get -- we are in the midst of a fruitful conversation back and forth about it. And it got me thinking that a lot of what we were talking about is philosophical, and also I think could be really beneficial; A, if you talk to somebody like James who has a much richer financial background than I do. And I think this could be really beneficial for our listeners. So James and Julian, I really appreciate you both taking the time. Thanks for joining us.
James Baker: Nice to be here.
Julian Lin: Yeah, thanks for having me on.
RS: So briefly, if you could first, if you could each start and let me know your journey to the investing world, and to being interested in the cannabis sector specifically. James, you want to -- you can start.
James Baker: Very quickly, a PhD in Finance, Professor Chair, Banking, went into commercial banking, started my own investment banking firm. It's still in business, very successful firm nationwide. I had my own family of mutual funds. My own brokerage firm as I said. Claims to fame include the one time I was known as the Father of Asset Liability Management and Banking. I wrote the original articles, the original book had no footnotes, it's all original thought. The other claim to fame was that in my mutual fund, in October of '87 it was basically 100% invested in stock some three days before the crash of '87. I liquidated at all and went into cash at 100% cash. They had a crash, I was the only fund on the Wall Street Journal that reported, net asset value was up. Everyone else had Zs, Xs, Bs, Ds, no one could get their value to jump.
And then I started -- just looking at marijuana. And back in -- my first foray into it was in 2014. I was an original investor in Tweed, and in Bedrocan, which Tweed bought. So I've been in it since then. And I've been monitoring it, and then decided to dig more deeply into it because of what I saw. That's how what -- that's what led me here. And now I'm invested, I would say heavily in the space. And I have a number of friends who tagged along too.
RS: Well, those are some great claims to fame. I like that. I also like that reference to tagalong investors. That's great. Julian, you want to go ahead?
JL: Yeah, it'll be tough to match, to follow-up those credentials. I've been investing for just over five years. I'm from a tech industry background. So I had to teach myself finance and investing. I worked through some accounting textbooks as well as the books from legendary investors like Peter Lynch, Pat Dorsey or Warren Buffett. I have a very fundamental analysis-based grounded philosophy.
I've been writing on Seeking Alpha for three years. I've been pretty active. I have about 300 articles in the past three years. And as for cannabis, I mean, at first glance, I would be the last person that would be open to invest in cannabis, because my younger brother actually died from an overdose of drugs two years ago. And for him, cannabis actually was a gateway drug.
But so for many years, I had -- I've been -- blamed cannabis for a lot of the issues. But then given time to think about it, I realized that. So cannabis was a gateway drug for him, but that wasn't because of cannabis inherently. I think the fact that cannabis was illegal had a lot to do with it. For example, when cannabis is illegal, you're going to buy the cannabis from an illegal drug dealer. Those illegal drug dealers, they're also going to sell some other illegal drugs with it.
So perhaps the fact that cannabis was illegal made it a gateway drug, but if cannabis was not illegal, and if you were buying cannabis from a dispensary where everything's regulated, everything is not illegal, you did not make that leap to buy something illegal then it may not have been a gateway drug. So after I came to terms with that, I mean, you realize that this is a huge new economy. It's definitely worth a lot of investigating in.
RS: Wow, first of all, Julian, thank you for sharing that. I think that it's such an important perspective to bring to the podcast. It's not one that we've had on the show - somebody talking about their experience with cannabis in that way, that you looked at it as a gateway drug and how you've come, kind of evolved your position. I'm sorry about your brother. I also have addiction in my family. So I know what that is like. I'm sorry for your loss.
But speaking of cannabis, I feel like it's such an important point to make. We talk about this a lot on the show, what is a drug? And I don't think of cannabis as a drug. I think exactly what you're saying is so true, and such a salient reminder of why it's so important that we keep legalizing and we keep pushing for more regulation so the industry can serve its patients who I really feel like are all its consumers, are patients. So thank you both for sharing, really interesting and important stuff to start out with.
So staying for a minute on the broad strokes of investing in the cannabis industry, can you both give your -- and James you can start, can -- will you give your kind of overall thesis on what you see in the cannabis industry, maybe what you like, what don't like. Maybe what you think has been hyped, yeah, if you could go ahead and give us your broad sense of things.
JB: I'm continually dazzled by -- when I listen to conference calls, and the analysts then that begin the conversation. Congratulations on a great quarter. And I am stunned. I am continually stunned by that observation. I think the investment banking community, they're almost like -- they look on the cannabis space as a group of serial issuers. As a former investment banker, I can tell you that the investment -- that cannabis sector is like a dream. Here are people that will never have enough cash, that none of them currently have enough cash. A number of them think they do, but none of them have enough cash.
So they're going to be serial issuers, ad infinitum, just like we saw in Canada, with the exception of Canopy (NYSE:CGC), that got Constellation Brands (NYSE:STZ). I always admired the Sands brothers. And when they went into Constellation -- when they went into Canopy I said, wow, these are really bright guys. Well, they screwed up on that one big time. And they lost their magic touch. They must have been consuming too much of their own Constellation Brands' liquors or must have been smoking too much when they made the decision. Wow, that will go down in the annals of history as one of the worst. That will be a Harvard case study. It's got to be. So…
RS: You think they just overpaid or you think they shouldn't have gotten it at all?
JB: Oh, I think that it was a blunder in so many different ways. It was unbelievable. If you could screw something up anyway, they did it every possible way. And I was stunned. I'm continually stunned.
RS: Give me the top three reasons why that was such a bad deal.
JB: Well, at one conference call, as a participant in the conference call, I asked Bruce Linton and his CFO, I said when can we expect Canopy to show a profit and produce a positive cash flow? The mic went dead for about 5 or 10 seconds. And he responded, well, they're like Amazon. Amazon doesn't have a lot of profit. To look on Canopy, you've got to look on them as Amazon. I said wow. I hit the bid the next day. I said it was a dream. That was just a bad day. The Canada market is insufficient. I mean, there's 30 million people, hell we got 21 million people in Florida. And so those guys start going into Uruguay, not Canopy, but the other ones going in there, and what a mess. If it says Canada I won't touch it.
RS: Because of the numbers?
JB: I think it was a pattern. I go back, I'm old enough to remember Canada. I remember the uranium play in the 60s. I remember the gold and silver plays. I remember the oil sands plays, everything that came out of Canada and out of the Badlands up there turned to garbage. It was just more investors have been fleeced out of there than anywhere. I'm just dazzled. And these are just like the second or third generation. They just stink.
RS: Fair enough. Okay, so moving on from that, what's your view of -- let's say the U.S. sector?
JB: Well, same problem. Revenue, profits and cash flow. And by cash flow, I mean free cash flow. I mean, generating internally enough money to return to shareholders. It is not free cash flow, if you have to sell off and lease back your property. It is not free cash flow, when you have to sell bonds. It is not free cash flow, when you got to sell stocks. That is not free cash. And all of these guys, all of these companies, there are some rare exceptions. But these roll ups, all of these -- most of these MSOs are a result of roll ups, where people have already cashed out in the roll ups, and there's no meat left on the bone.
And when it finally does go public, the meat has been taken off the bone in trying to generate profits in an uneconomic setting, where you don't have economies of scale. What economies of scale could you have in Massachusetts, where you're limited to a cultivation of 100,000 square feet, and six retail spots, three commercial, three rec and three medical. Tell me what the economies of scale are on that.
And then to do that in eight states or something, the numbers are just horrendous. And then as a part of that, I mean, there's a reason why these guys have to pay 15%, 17%. Cresco Labs (OTCQX:CRLBF) just paid 23% to the Cree Indians. Acreage, 60% for four month funnel. Yuck. And the worse yet, that interest is not deductible under 280E. So the tax laws are against them, the economies of scale are against them, the state laws are against them.
This idea of multi-state operators being -- that's going to be the way of the future, this is not McDonald's. We're not selling franchises. The extremes of the MSOs, but the primary deal most of these are roll ups and they've been -- the meat's off the bone, and just tough to make money, real tough and man, you're losing money and paying Uncle Sam taxes, wow, wow. That's real cash, you're giving Uncle Sam. And then they start screwing around with the accounting.
So they're reporting positive cash flow, however they define them. I define it as cash provided from operations. But then if they don't pay their current taxes, that increases their cash flow. So that's what they're doing now, they're not paying their taxes. They don't have to, get a deferral. And frankly, I don't hold that against them. It's a hell of a lot better than borrowing money from the Cree Nation for 23%.
RS: A lot of what you are talking about here, and you've written some on Seeking Alpha, is so true and salient and a big part of needing to be aware of when you're investing in the cannabis space. And I think also, kind of how Julian and my conversation has started is, hey, why are these MSOs doing this and not this and Julian, I know you're newer to investing, and you're newer to the cannabis space, but before we get started on your questions for James, if you want to just give your kind of two cents, your thesis on the cannabis sector. And then go ahead and if you want to ask James some of the questions that you have about investing in the space, and maybe specifically in the MSO space?
JL: Sure. For the most part, I agree with James on pretty much all points. I view that cannabis, there's a lot of real reason to be excited about this sector. I mean, it's an entirely new economy, I think. For most consumers their first exposure to cannabis probably will be after legalization. I think it was Curaleaf (OTCPK:CURLF) in a presentation that said that cannabis sales at their medical marijuana dispensaries would increase 2.5 times after legalization.
But the problem with a new economy is it's going to be like the wild, wild west. You're going to have a lot of weird companies. You really -- you're going to see some companies that look really cool, but then you have to ask yourself, are they frauds or there's a lot of companies that are ego-driven. I published an article recently on Canopy Growth. And I was astounded that operating expenses are outpacing revenues right now, which -- I mean, it's okay to pretend you're Amazon and you're reinvesting for growth. But at some point, you've to do it in a responsible manner that's not biting more than you could chew.
In regards to the MSOs, I know James is not as optimistic about MSOs because the single-state operators with the real vertical integrations are much more profitable. I think there's also some positive attributes to be an MSO in that, you reduce some of the political risk and just so like if a state all of a sudden changes their guidelines for cannabis, it wouldn't affect the company so much.
But yeah, I mean, I think it's still a really new industry. I think that, that there's going to be plenty of times for the current MSOs or the current leaders to build some kind of moat. I think the longer -- I think the fact that it isn't legalized really helps the moat building, because you got these first movers to have a first mover advantage that could position themselves prior to legalization. Then after legalization their infrastructure's already there.
I think in Canada that we didn't really see that. In Canada, you got a lot of companies that were pretending to be global suppliers of cannabis and they were preparing for something that wasn't really going to happen. But in America, that would be -- that seems to be different.
RS: Yeah, yeah. One of the questions that Julian asked me, and Julian, you can add to this or James you can dive in, was this notion of MSOs issuing debt versus issuing stock. And why they don't issue stock as opposed to issuing debt and especially speaking about the onerous rates that they're taking on. Julian, if you want to -- do you want to add anything to that question?
JL: Sure. Because the way I look at it is, when you got these MSOs taking, like 13% average yield on debt, that's including their sale and leasebacks, which have like 3% or 4% annual lease escalators, it creates a lot of -- a huge downside risk. So like if -- I mean, for example, if COVID-19 -- and COVID-19 helped cannabis operators, right, their business increased. But what if it didn't? What if all of a sudden their business came to a complete standstill for several months? Then they're going to go bankrupt because they're going to have all these interest expenses.
So the way I see it, if they didn't have that debt, or they had substantially less that you would have lower earnings, because it would be less accretive perhaps. But by removing that really apocalyptic downside scenario, the stocks could justify a higher valuation multiple. And I don't really see it happening a lot in this sector. But I think a lot of the operators are underestimating the ability to use their stock as currency, which is kind of weird to me because it seems like in the U.S. space, especially a lot of the strategic maneuvering seems to be trying to gain a first mover advantage or aggressively taking a market share, as opposed to trying to actively boost your bottom line in the most accurate way.
So if you were able to use your stock as currency you could do -- you could take market share much quicker. So it's a little bit of a mystery to me why they continue to put undue stress on the balance sheet when it seems so obvious that trying to boost your stock price and trying to issue stock and get like a net cash balance sheet and be able to use your stock to fund acquisitions, fund entrances and teach in new markets, that seems to be a much better approach.
JB: You're assuming there's a demand for cannabis stock. Actually, I believe that the demand for cannabis securities probably peaked around the time that Canada legalized and that's when the prices of all Cannabis stocks reached a peak.
And the number of people, investors interested in the space, or the number of people out there to buy this stuff, is I think down. It's not up. And if you own some of this stuff, I think the MSOs now believe that if they pin more flags on the United States, that all of the investment bankers that are there are congratulating them on their increase in revenue are going to just even find even more over them and just promote their stocks, as their revenues rise, along with goodwill and intangible assets and cash goes down.
The MSO deals that are being done now, they remind me of a wallpaper hanger. There's so much paper involved, I said Jesus, who invented that one. I dreamed up one thing last night, I'm not going to reveal it here, but I still haven't figured that one out yet. I said let's see if I can make some bucks off of it.
But it's a bad deal. It's a toxic mixture of what's going on now. The taxes, the sale lease backs, the interest rates being paid on borrowed money, you add that all up, and you're just not getting the bottom line results that you need to generate things. And I am concerned about that. I am concerned that some of these people really believe that they have more cash then they need. And that is a dangerous thought. I have never met anyone that had too much cash.
But I have never met any -- I haven't seen one statement in the cannabis space that has even suggested to me, that they have enough cash. They're all cash poor. And the hope is that people say, well, when the Safe Banking Act comes in. I trained over 10,000 commercial lenders in the United States. I was Chairman of the ABA Commercial Lending division. If any one of my former students made a loan to these guys, I'd be disappointed. Banks aren't going to lend them money. That's not going to help them at all.
The MORE Act if they pass that, now there's a game changer ladies and gentlemen. Just pass the first part of that act, where cannabis is removed from the DEA schedule of substances, controlled substances, remove it entirely. And when you remove that, you also -- the IRS must then allow the cannabis companies to be treated fairly on their taxes.
Just imagine, Cresco that's paying the tribe 23% or whatever it is, and they can't deduct that expense. That's crazy, that's crazy. They ought to be able to deduct that expense. And if they can't deduct it just because it's a schedule, under -- it's a substance. It's one or two, people say well Safe Banking, no, no. We need to get it off of that scheduled substance, we need to get the taxes, to hell with everything else.
RS: Yes, so until that happens there is really no reasonable way of either issuing debt or issuing that kind of making it beneficial for the company until 280E has gone?
JB: Absolutely, Rena look at those -- my one article I was dazzled, Jesus. You see all these companies losing money and paying a fortune in taxes, Curaleaf, Cresco, Green Thumb. Their taxes, they have -- here Curaleaf, net income after taxes, $60 million, lost $70 million last year. They paid $4 million in taxes.
Green Thumb lost $60 million, they paid $10 million in taxes. Cresco, lost $65 million, they paid only $680,000 in taxes. Harvest Health (OTCQX:HRVSF), lost $175 million and paid $4.5 million in taxes. How the hell can that -- that dog won't hunt.
RS: Yes. So tell me what -- I mean, I know you're the most bullish you're on is Trulieve, is that correct?
JB: Yes, that's true. The only two that I own now are Trulieve, and I own Liberty Health. Now I have had a love hate relationship with both of those companies. And I still do.
RS: What do you like about them?
JB: Trulieve hasn't even announced it yet, but they're going into West Virginia. They've gotten approved to build out there, West Virginia. What's it most famous for? Two things. One is the Greenbrier, hell of a resort, great resort. But the population is declining there. The per capita income in West Virginia -- West Virginia ranks 48 out of 50 states in per capita income. They're going into West Virginia. That don't put a flag on the map.
They got their deal out in the Palm Springs. Rivers refers to it as their R&D Center. I refer to it as a dangling participle, get rid of the damn thing.
And Liberty Health, I think they've just got to redesign their plate. I mean, I've gone to their -- I've gone to these dispensaries. I signed up to be a medical marijuana ID holder primarily because I got a bad knee and I go in and get that stuff to rub on it. It still hasn't improved but the 16 shots in it didn't help either. So hell, this is less painful than rubbing on it.
But they've got to redesign their deal. If McDonald's had a physical layout like Liberty Health, they wouldn't sell any damn hamburgers. So they're cheap.
RS: Even at this price for Trulieve, because it's gone up quite a bit.
JB: No, no, I didn't say Trulieve was cheap. But they do, they are earning a big profit. And I think they have economies of scale in that. I want you to imagine. They got 1,000,009 square feet of cultivation space in Florida. That's like the old days up in Canada, when Aurora (NYSE:ACB) and Aphria (OTC:APHA) and Canopy were rolling. They had all that square foot. The only trouble there is they couldn't sell that crap. Here they don't have enough of it. And also I'm convinced that they're both Liberty is all purely Florida. Trulieve so on, they can't lose that much money in West Virginia. And now they're ready to click in and start producing some money in Massachusetts and I've -- I submitted an article to SA in which I forecast next year, Trulieve would have revenue of $730 million versus this year $475 million.
So I like the Florida market, the Florida market, and then you got Acreage (OTCQX:ACRGF) down here. They're still trying to figure out how they ought to grow marijuana. They've been here a year and a half. I think they sold the 100 ounces of flower. And they invested $60 some million.
RS: Yes, I think Acreage enjoys a headline maybe more than cultivating a good amount of flower.
JB: Well and then you got Green Thumb. Green Thumb and you got Cresco Labs that basically have the same number of dispensaries they had a year ago, down here. Trulieve has made a stand down here, their presence. Those other guys said, well, we can't make any money and let's go somewhere else. No, no.
So I think that we've just allowed edibles here, that'll add 20% to the revenue. And then, I think rec is on its way in Florida. And let me tell you, we got 130 million people come down here to visit every year. How much marijuana do you think they'll buy? Those are just non -- those are just visitors.
Imagine Planet 13 (OTCQX:PLNHF), the State of Florida, wow. So I could see total revenue this year, I've got Florida producing a billion, State of Florida, $1 billion in revenue. Four years from now, $4 billion. 50% of that give it to Trulieve, that's $2 billion. That's a lot of money. Those guys they will figure out, lot of money.
RS: Yes, there's definitely... Florida is looking very bullish, I think for every reason you mentioned. And speaking of GTI, of Green Thumb, there's rumors that there's going to be a Trulieve GTI merger. A, do either of you have an opinion on that? And B, I know something else, Julian and I talked about and Julian you can expand on this. Green Thumb's auditor being changed last year. Julian, do you want to get into that a little bit more?
JL: Sure. So Green Thumb's auditor, prior to 2019 used to be MNP, that's the current auditor of Trulieve. But they changed the auditor, they said that MNP resigned. They even had MNP issue some letters saying they didn't have any conflict with Green Thumbs' financial statements. But it's always kind of a weird sign when the auditor resigns from service.
I did email Green Thumb. And they did say that the reason that MNP resigned was because Green Thumb was trying to align itself with the GAAP reporting, because it was going to -- it started filing with the SEC this year. But I don't know. I think -- I'm curious your take on that James. And also, I wonder if Trulieve, considering they're going to do the same next year, I wonder if they're also going to move beyond MNP, and if they don't, does that say anything weird about Green Thumb?
JB: Julian, I absolutely agree with you. Whenever a company switches auditors, it stinks. I don't care what the auditor says. It stinks. There better be a compelling reason. I don't see it. Now the Green Thumb, Green Thumb-Trulieve is a match made in hell. As a significant Trulieve -- I have already expressed my view to members of their Board of Directors. And they got to be crazy to even think about that.
Green Thumb has gone head to head with Trulieve in Florida and has lost badly. I mean they have six dispensaries, which is the same as they had over a year ago. Their total sales are 967 ounces of flower. They account for about 1% of the market. They've been here a year and a half. Their intangible assets and goodwill amount to 93% of their equity.
Of its reported the investment bankers are fawning over their congratulating them on their great quarter, said, wow, I mean look at that. They've got $83 million in cash on their balance sheet. $34 million was there because they didn't pay their taxes. The $48 million in cash based on the cash operations that would last them about six months. There's nothing. I would hit the bid so damn fast on my Trulieve, it might knock the stock down to zero. I don't know, I don't think I'd sell at zero.
But God, that would destroy everything that Trulieve is. I can't tell you how bad a deal that is. Other than for the investment bankers that are pimping it. Damn it they got a wonderful deal.
It's just bad. It's just -- it has no -- nicest thing I could say is it has no redeeming features, no redeeming features. Based on what Green Thumb has done in Florida, I think they would love to just get the hell out of the state and get their money back for what they pay for the franchise.
RS: What do you think the likelihood is of it happening?
JB: Of them just getting out?
RS: Or of them doing a deal with Trulieve?
JB: I hope it's zero. Unless they just want to give -- if they want to just give everything to Trulieve, I don't know, that'd be a choice -- I don't even know if I'd accept. I don't know if I've even accepted that. It's like being on the high seas and being offered an anchor. So I don't know if I need another balance.
RS: Fair enough. Julian, do you want to follow up with anything?
JL: Sure. I mean, if I could take the other side of that argument, I think -- I mean, for starters, I don't think that deal is very likely just based on my hunch that any MSO management team, I don't think they really want to give up their -- the reins on their company. It seems a little unlikely to me that either -- I think there's only going to be one CEO and one management team. I don't think any of the CEOs really want to give up ownership of the company.
However, I mean, I think there are some positive attributes to a merger between Green Thumb and Trulieve. For one, as James pointed out, Trulieve is much more profitable. And in some sense, if they were to merge a lot of that cash positive cash flow from Trulieve could help fund the acquisitions a bit better.
And I think that -- I mean, kind of returning to my hypothesis that if the stocks were able to issue stock, then their growth will be much better. I think that a Green Thumb and Trulieve merger would boost their multiple. I still think that -- I mean, these are like $2 billion $3 billion companies. I still think that if they were to do it by dilutive equity raise of like $200 million $300 million, it would only boost shares outstanding by like 16%. It would give them a net cash balance sheet, even if they pay off all the debt.
So I think the combination of those two, I mean, obviously, as I said, I don't think they're really going to merge. But if they were going to, let's say they merged and they were able to raise equity to get a net cash balance sheet. And the reason why I really liked that net cash balance sheet is because, you look in Canada and Canopy Growth, who as I mentioned earlier, has operating expenses more than revenues.
They're still trading at like three times valuation as U.S. MSOs. And I think a lot that has to do with the fact that they have cash. They have the cash from Constellation Brands, there might be future cash if Constellation Brands exercises its warrants. So I think that even though, as James said, investor demand for marijuana stocks has peaked in the past, I think there's -- it could actually increase again in the future. And just imagine if Trulieve or Green Thumb, or the combination of the two had $300 million in net cash on a balance sheet. I mean, that would be a huge, a huge incentive for investors to invest in them.
And then they would be able to really fund acquisitions without interest expense. If they were able to issue stocks to enter other states. I mean, perhaps I'm naive, but I think there is, I think a multi-state operator approach could still work albeit at lower profitability levels if they were just in Florida,
JB: Well, I respectfully disagree with you. But that's what makes for a card game. The fact is that under Florida law, you're only allowed to have one MMTC. And so if you merge the two, somebody has to give up their MMTC. And I don't think Trulieve is going to give up its. And Green Thumb paid $60 million for it. So you can write that off. So you can begin this -- this is a case where one on one equals one, not one on one equals two, one and one equals one.
It's just a -- I don't know who came up with the thought but it is a thought -- it's an investment banking thought that needs to go nowhere, absolutely, nowhere.
Important, Trulieve actually believes they have enough cash. I totally disagree with that. In fact, they still have a Shelf Registration out there for $250 million, of which they've issued $130 million in debt, in two tranches, one in June of '19, one in October of '19. Both tranches carried a 9.75 coupon debt, pure debt -- I'm sorry they had warrants attached to it, but at a big premium. That was back when those were issued, the 9.75, those 130 million were issued at a discount to yield over 10%. Those bonds are now trading at a premium. I know because I own some. And within the next month or two, I would be very surprised and very disappointed if Trulieve did not issue another $120 million in debt under that Shelf Registration.
Today, I think they can sell that at 9%. 9%, I think they can raise $120 million in a heartbeat. And they ought to do it now because the Shelf Registration is under the Canada law and beginning in the fourth quarter, they're going to switch to the SEC. And why go through the hassle of issuing and coming up with a whole new Shelf Registration when you got one that's still alive. They got to issue under that Shelf.
It would be irresponsible for them not to sell an additional $120 million in debt. Now Julian you may argue that they had to issue stock. As a stockholder, I would say no, they don't need to issue stock. They've got enough equity. Their goodwill to equity ratio, any ratio you want to run against their equity is okay in that. Because they don't have -- their balance sheet is not reeking yet with that, oxymoron goodwill. That's like airplane food, goodwill. That means you paid too much, sucker.
All of the MSOs, you look at their balance sheets, look at those intangible assets and goodwill. Today, Aurora, beautiful Aurora from Canada announced that they're going to take a charge. They're going to have a goodwill impairment, an impairment of goodwill. That's like they threw up their airplane food. Goodwill, they're going to have an impairment of $1.8 billion, an impairment. That means the goofy accountants finally figured out, they overpaid for all this crap they then bought.
And it's only a matter of time before some of these MSOs in the United States, if they get some legitimate U.S. accountants, the U.S. accountants are going to be looking at some of that goodwill that's on their balance sheets. I think there's a hell of a difference between a company that began as a group of farmers who grew crops and started the company, and a company that was dreamed up by Wall Streeters like Acreage Holdings. All these roll ups, all of the SMOs with some future -- with some difference have been financial types.
They don't know about growing a damn tomato plant, let alone cannabis. They just see it all as a financial transaction.
RS: Yeah, definitely. Definitely wise words there and some really great metaphors, James. Julian, do you have any follow up questions or further points to make there?
JL: Sure. I mean, not trying to beat a dead horse. But I was wondering, I mean James mentioned that as a shareholder he doesn't -- he thinks that Trulieve has enough equity and they don't need to issue cash. I guess my view is like, I don't know if they need to issue cash but it's more like it would be nice to issue stock that is to raise cash, more so because how do we justify Canopy's premium to the rest of the sector? It really seems to be due to the excess cash that they have on the balance sheet. And besides sure, if Trulieve were to issue stock instead of debt, it's going to be less accretive for that investment, but it also has other synergies, for example the rest of their -- they might be able to refinance other debt at much lower interest rates or even just take it out.
It seems to be a small cost to -- you increase shares outstanding by, I think it's around 15% for Trulieve, and that would already make them a net cash balance sheet. And I really -- I'm pretty confident that if Trulieve had in that cash balance sheet without debt yielding 12%, it would trade at a much higher multiple, probably closer to Canopy's, considering that Trulieve's financials are much stronger than Canopy Growth's financials. And then that would enable it to -- and again I don't think they should merge with Green Thumb. So I'm sorry, there was any confusion there. But it would enable Trulieve to grow much quicker in other states outside of Florida as well.
JB: Julian, I absolutely agree with you that we're seeing eye to eye, we're just expressing it differently. I would like to see it reach the point where that Trulieve and Liberty Health are generating enough cash, that they've got to make a decision on whether or not they want to give it back to the shareholders or whether they want to spend it going elsewhere. I would like to see a balance sheet that had no debt on it. As a banker -- as a former banker, I would love to see a balance sheet with no debt on it. And that's what you're saying, Canopy has, but Canopy, they just -- they're just wasting through all $4 billion that Constellation Brands put in there.
The Sands brothers ought to just gotten $1,000 bills and start lighting cigarettes with it. They couldn't burn it fast enough. That's just -- and you're right. That's why they're there. They don't have a debt problem. They just don't -- they just can't make any damn money or they can't have a positive cash flow and they are just a train wreck. And they were supposed to be -- they were supposed to be the cream of the crop. They were supposed to be -- and hell they still keep putting them on CNBC, them and Trulieve -- and Tilray (NASDAQ:TLRY), another disaster, Tilray. I'm surprised CNBC doesn't focus on MedMen (OTCQB:MMNFF), and Acreage and some other crap.
But you are right. That if a company reaches the stage where it has no debt and is generating cash flow, then it can say it has too much cash. It has enough cash to do what it wants. But you take a look at Apple (NASDAQ:AAPL). Apple, they don't think they got too much cash whether they got $200 billion or something. You never have too much cash. If you have enough cash and you decide, should we pay off our debt? That'd be something for us to do, or should we just like Scrooge McDuck, jump in the vault and just play with it. It's a lot of fun to do that too. Look how much fun Scrooge McDuck had. Hell there knows Scrooge McDuck in the MSO space.
JL: Well, Canopy might be a good, good candidate there.
JB: I was just looking at the Canopy -- Canopy's numbers. I was looking at them before the call. I mean, these are -- they've actually gotten a lot worse. Their cash flow from operations in the last quarters, minus, these were all negative $130 million, $96 million, $225 million, $158 million, $201 million, $188 million, their latest fourth quarter down cash flow from operations minus $224 million, wow, wow.
But their adjusted EBITDA is better. And that's the other thing people focus on. They're doing good on adjusted EBITDA. As a former banker I've never gotten paid off from adjusted EBITDA. I want, pay me off, give me some cash, that's what I gave you. Now I want cash back. Adjusted EBITDA is up, good, take care of adjusted EBITDA.
Actually, it helps them, all these sale lease backs, the net and all the things they're doing. The adjusted EBITDA deal and the acceptance of it by the financial community actually encourages them to do some uneconomic things.
RS: Yeah, definitely. You've written about that a bit on Seeking Alpha and something I've echoed on the podcast. Kind of winding things down a little bit, each one give your sense of where you see the sector? There's a lot of volatility right now. What's your advice for investors would be kind of looking out for?
And before you answer that question, I just want to say, this has been one of my favorite episodes of the podcast. I think this is like kind of a master class or the first part of a master class in cannabis investing. So I think there's some great things that we've talked about. And before we end, I would love to have you guys on again and continue this conversation. I think it's a great one and that could really -- that would really serve listeners.
JB: A lot of people probably flame you after this, Rena.
RS: Well I can take it, James.
JB: Put the bear -- that put the bull and the bear on.
RS: It's nice to get a chorus of opinions as opposed to just a dialogue. So this is fun and I think really useful. So whoever wants to start and give their sense of where they see things in the immediate present and maybe in the immediate future for cannabis investors?
JB: Julian, you go first.
JL: First I agree that it's been a lot of fun. I think it's been very educational. And I think over the next, looking at 12 to 18 months, or at least in the near term, I think a lot of the momentum investors that were investing in cannabis. I think they will get shaken out because stocks are not going up anymore.
But I think my -- I guess my note to investors, looking to invest in the cannabis space is that even though we're looking at several years later in profits, or we're looking at stocks that are typically owned by momentum investors. I really caution against investing in a stock solely based on momentum, or solely based on what this -- the tape is doing. I always support investing, in even good stocks using fundamental analysis. And you got to put some numbers down. You have to have some sort of estimation of what you think the future revenues will look like or what you think the future profitability will look like.
And doing that could really help you time your exits if you must. Because, for example if you set your most optimistic estimation to be a certain amount of money and profitability it could be certain amount, but the stock trades at 1,000 times that number, maybe it's time to sell. That that will give you a good way to know when to sell before the momentum investors tell you to sell.
RS: James, all you.
JB: My advice to investors would be to find a cannabis company -- publicly traded cannabis company that has three or four quarters of earnings, three quarter four quarters of positive cash provided from operations and invest in those, particularly, in states that are growing and to avoid Canada. And if you think that's coming back, then you probably believe in El Dorado also.
I do expect, on a positive note, I do expect that we will have a change in the laws, particularly I see a change here in Florida, which will be very positive. I feel confident and I can forecast earnings in Florida and income and revenue and I don't have that vision in other states. I do believe that change will be to permit -- to remove cannabis from Schedule 1 substance, remove it entirely from the schedule, like the MORE Act. And then so that's a very positive, get rid of that 280E and allow people to deduct, and so that breeds a little life into it.
So that's a positive thing. But a lot of these people need the positive thing just to live another day. So I'm positive on those things. But as far as the majority of the MSOs, in my opinion have no future that's worthwhile, as far as turning into what Peter Lynch would call a five bagger to a ten bagger or something like that. All you have is you'd have a map with a bunch of flags.
But try to find the few out there that are going to do well. In my case, I've picked Trulieve and Liberty. You can maybe find something else. I don't think I've looked at all of them. But I've looked at most of the big ones. And that's what I've ended up with.
RS: I think you both give really great, really salient advice. James, I'm interested, do you think that MORE Act has a chance of passing this month?
JB: Not this month, but I think that early on next year. And this tax year is almost over anyway. But the myopic focus of people in the cannabis sector, in the industry up there, lobbying for the Banking Act in that, that's misguided. They're idiots. They're idiots. That's not going to help them.
What they need to do is just -- all we need -- all we need is to take it - get it out from under the scheduled substance deal, do that. That could..
RS: Yeah. Do you think it involves a change of government? Do you think that that's what's going to come with next year or…?
JB: Yeah, just awareness. Just people, get off the safe Banking Act, get off all these Acts. It can be removed from this substance abuse by just -- it can be de-scheduled by the DEA and the FDA. I think it can be de-scheduled without an official Congressional Act. It can be de-scheduled by the President. Who knows?
But all I know is you get rid of that. And by god, that is a meaningful difference. That is like giving a life to somebody, zombies. That is like giving them life, because this will make, instead of them paying all those taxes, the guys that are hopeful that the bankers are going to lend the money, the bankers I trained sure as hell better not, or I'll revoke their diplomas.
So right now, I mean that would be a major change. So that's a very positive -- that's very positive. And to allow -- and then that way each state will do its thing, just like the liquor laws, but medical marijuana would be allowed around the nation, medical marijuana. Because right now, we've got 30 some states that already approve medical marijuana And I'm not saying that this is dreamland to legalize recreational nationwide. Hell that isn't going to happen. Forget about that.
But allow medical marijuana and let that happen. And then the taxes, they need the tax revenue. People forget, you got all these different states. Recently, I've been looking at what the hell the tax rate is in these other states. Medical marijuana, Trulieve's going into West Virginia, medical marijuana isn't taxable in Florida. West Virginia, medical marijuana you've a tax of 10%, just what those poor people in West Virginia need, raise that price.
The recreational marijuana -- the other thing is it's just really important. I forgot about it. People that haven't even considered, you go into all these different states. You've got corporate income taxes. Corporate income tax in Massachusetts, 8.5%. In a lot of states the corporate income tax is based on the federal income tax. It's a double whammy. So people don't even consider that. And then you need all the lawyers and all the paper. It's just nasty.
RS: Yeah, it's a nasty business. Really strong points, really strong points, if there's any politicians or people of influence or lobbyists listening I hope you're writing some of this down and affecting change in the ways that you can, because I think everybody on this episode and I hope everybody listening can agree that cannabis should not be a Schedule 1 drug.
James and Julian, it's really been a total pleasure having you both on, super edifying for myself, I imagine for listeners as well. And like I said, I'd love to continue this conversation. And thank you so much for joining us. And look out for James and Julian on Seeking Alpha.
JL: Thanks for having us on Rena.
JB: Thank you. Thank you. Nice to meet you, Julian. Take care everybody.