Cannabis cultivation capital constraints in Missouri no surprise to out of state investors

C4 Pharms / Instagram

Grow room workers at Carrol County Cannabis Company (C4) in Carrollton, Missouri, one of the few Missouri cultivators selling legal cannabis today.

Seventy five percent of Missouri’s 60 cultivators are not operational one year after being awarded a license, according to state licensing reports. Yet, the state has 100,000 registered medical marijuana patients and approximately 25 retailers scrambling for product to sell.

Investors and operators queried by Grown In estimate that between one-third and one-half of Missouri’s 60 cultivation licenses are unlikely to operationalize under existing ownership structures. Due to residency requirements that prohibit selling majority ownership stakes to out of state investors, a large number of cultivation license owners are pitching a finite pool of prospective local financiers who are comfortable putting money into startups growing weed.

“Investors start to get deck fatigue,” said Chris Dussold, managing partner of St. Louis-based Avail Professional Services, a finance consultancy that has worked with approximately 50 license-holders in the state. “They all look at the same plans with crazy valuations. This is the Show-Me state. If you are a pre-revenue company, then show me what is different about you versus somebody else.” 

Dussold added that many prospective Missouri-based investors are content with waiting to put money in at a later stage, when there is revenue and perhaps a shorter timeline to potential adult-use expansion of the program in 2022. 

“In any of these buildouts, you need a lot of capital that needs to come in with quick terms and on scheduled timelines,” said John Payne, a founding partner of Amendment 2 Consultants, and who advocated for the passage of the 2018 law. “Otherwise, you are delaying construction as the crews will stop working if they are not getting paid.”

While there are a handful of companies like St. Louis-based BeLeaf that have the capital and industry expertise to build up to 30,000 square feet of indoor grow space, dozens of entities today are at risk of losing their license because they are not yet operational. 

Last month, Missouri’s medical marijuana program director Lyndall Fraker was hoping for “25 to 30” cultivators to be operational by 2021. As of January 21, only 15 Missouri cultivators passed the state’s commencement inspections. Fraker told Grown In in early December that Missouri licensees that did not commence operations by the January 2021 deadline would be reviewed on an individual basis. Currently, there are only four cultivators able to sell grass in the state, leading to inventory shortages at stores. 

“One of the challenges we have had is managing expectations of the timeline set by the regulator relative to how these supply chains are developed,” said Vishal Rungta, co-founder of Ann Arbor-based multi-state operator C3 Industries, which through its connection with Missouri-based QPS Missouri Holdings LLC plans to open five dispensaries and one manufacturing facility in the state

“I understand and appreciate what the regulator is trying to accomplish. But you don’t want to open up a store and get medical patients excited, sell out of product in a day and then be barren for a couple weeks. That doesn’t help anybody,” Rungta said.

Effective January 1 of this year, license holders who become operational are able to sell their businesses. Consolidation of cannabis companies that cultivate, manufacture and sell the product are of particular interest to both in and out of state investors. 

“This is a unique situation where an early start may go further than in other states we have looked at,” says Alex Gastevich, whose Chicago-based family office was an early investor in Green Thumb Industries and Cresco Labs. “Due to the delays in raising capital, residency requirements, and lawsuits over the issuance of licenses, we are looking for operators that are vertically-integrated and can get out ahead early to build customer loyalty.”

Multiple out of state financiers and operators interested in capitalizing Missouri cannabis startups point to the residency requirements as well as proposed legislation that would eliminate licensing caps as factors curtailing investment in the state. 

Mark Toigo, CEO of Pennsylvania-based and vertically-integrated cannabis company Organic Remedies, is suing to overturn Missouri’s residency requirements. Organic Remedies MO Inc., where Toigo is a minority owner, has the license to operate one cultivation site, one manufacturer, and three dispensaries. 

“Most non-resident investors feel handcuffed by the current program,” said Toigo. “This is a capital-intensive industry. Hindering the ability for investors to freely operate within the space will cause system failure.” 

As of January 21, none of the Organic Remedies MO Facilities were commenced to operate by the state. Toigo said he anticipates to be fully operational by the end of March.

Growing pains for cannabis operators in all legal U.S. states are the norm, and Missouri is no exception. Residency requirements today are constraining cultivators from growing, which inhibits downstream manufacturers from processing and dispensaries from having adequate product to meet consumer demand. 

Neighboring Illinois, for better and worse, did not have residency requirements for initial license holders. Today, a small handful of multi-state operators with valuations well into the billions dominate marijuana market share in Illinois. 

The Missouri law, with more limited grow space restrictions and a cap of five dispensaries for any one operator, makes it more difficult to capture market share. But without access to out of state capital and a deeper pool of industry operating experience, it remains unclear if and how the state’s fledgling industry will accommodate ascending customer demand

“When we invested in the early days of the Illinois program,” says Gastevich, “there was a deep pool of experienced business people that had connections to capital that spanned nationwide and were used to operating in highly regulated markets. The residency requirements in Missouri have significantly impacted the flow of capital available to license holders across all verticals and many of the Missouri license holders are local players without the experience or connections to get the ball moving.”