Multi-state operators are cannabis companies that span across multiple legal cannabis states. They have many significant advantages over single-state operators within the cannabis industry. Multi-state operators own cultivation facilities, extraction/processing facilities, and cannabis retail venues in some of the most highly populated, affluent cities across the states that have legalized cannabis for medical or recreational use.

These entities are usually structured as holdings companies with separate state subsidiaries that hold state licenses for seed to sale activities. They are often a combination of joint ventures, management/ ownership agreements, and outright opened properties. These companies, while not permitted to bring cannabis and cannabis-derived products across state lines, but they can share intellectual property, equipment, branding, and employees across states.

Green Market Report has compiled a list of some of the largest MSO’s in the country. Many of the companies are in the middle of major acquisitions which haven’t technically closed, which makes ranking these companies difficult. These deals are being recognized for the most part and included in the company statistics. It’s also challenging to define which company is the largest as that depends on the metric being reviewed. Active states versus licensed states or operational dispensaries versus square footage of cultivation.

The valuations are based on figures from Yahoo! Finance.

Curaleaf is the largest based on valuation. Acreage Holdings is the largest with regards to the number of states it has licenses with. MedMen has the most retail licenses at this time, but Harvest Health has the most open dispensaries at this time. Licenses though aren’t a guarantee that an actual business will open.

MSO Advantages

Advantages for multi-state operators include the ability to react to market trends, avoiding and mitigating problems based on experiences from other states and developing brand recognition at the national level. The most significant advantage is in acquiring state licenses due to having already established licenses and standard operating procedures. States like to see companies that look experienced and have a track record of following compliance requirements. Thus, big established companies have a leg up on local small players when it comes time to award licenses.

However, all this expansion comes at a cost. Seaport Global Securities analyst Brett Hundley wrote, “Most MSOs are operating in the red today while having to access capital on secondary OTC or Canadian stock exchanges.”  He went on to say, “All of the U.S. MSOs have been running around grabbing the best real estate in the U.S., setting up vertical operations state-by-state and cornering the market!” Hundley recently initiated coverage on the group and he had more buy ratings than neutral. He wrote, “We see two large U.S. market opportunities coming into play, with the dispensary recreational market potentially being worth $36B and the medical/ingredient market potentially being worth $58B.”

Investor Checklist

Green Market Report talked to attorney and investment specialist, and author of The Green Regulatory Arbitrage: A Case For Investing In U.S. Multi-state Vertically-Integrated Cannabis Companies David Wenger about investing in multi-state operators.

“The investor should have a second look at those multi-state plant touching companies,” says Wenger, “That’s where a lot of the value is going to be added and driven from in this industry because everyone else is trying to get a piece of that pie that is being basically earned at dispensaries.”

“I’m very positive overall about the multi-state model but especially in the limited license restricted states, but I caution investors,” explains Wegner, “Especially over the last few weeks we’ve seen certain players come to the market say that they’re multiple-state operators and what they are is just an investment fund that holds minority holdings in multiple states. I just caution people to do further digging to make sure you investigate things from multiple sources and make sure that they’re corroborating what you’re hearing from the company.”

Indeed, things can get complicated within multi-state operators; Many acquisitions get announced with great fanfare, but then if the deal goes cold, it is usually quietly brushed under the rug. The cannabis industry is becoming famous for its whirlwind marriages and shotgun divorces. Look for the announcement that says a proposed acquisition actually closed.

Another thing that can be confusing to investors who are trying to make investment decisions is the high expense levels for the MSO’s at this time. Many of these companies are in the empire building stage and that can be very expensive. Plus due to onerous rules and regulations, cannabis businesses can often take months to generate revenue as the companies wind their way through various hurdles.

“It takes money to make money,” said Acreage Holdings Inc. (ACRG.U) President George Allen. He noted that the company is deep in the process of expansion and that doesn’t come cheaply. However, a successful MSO will be one that spends its money wisely. Acreage recently acquired the California dispensary Kanna for $11.5 million, but Allen said that a similar business located not very far away had a price tag that was several times that amount. So while the company wants to grow it will only do so if the price is right.

The Membership of Net Losses

“There’s always strength in size, but that doesn’t always mean they are profitable,” said Gary Rosen of Marcum Advisors.” Right now, that is certainly the case. Most of the MSO’s are reporting net losses. Normally that would cause an investor to worry, but at this stage, the cannabis industry is an emerging one. These companies are spending a lot to get established. Acquiring licenses, setting up cultivation facilities and even making the right hires are all expensive steps.

It may be months, if not years before MSO’s can be analyzed in the way of quarterly comparisons since each quarter is vastly different from the preceding one. However, if some MSO’s continue their high cash burn rates before the revenue can catch up, they will be forced to either raise more money, sell off assets or begin layoffs. After only 12 weeks of business, Cannabis NB was forced to lay off 60 employees. Demand for the product wasn’t the issue, but a lost crop and a lack of proper licensing sent the company into a fast downward spiral.

The Big Get Bigger

There were protests recently at the SXSW festival in Austin, Texas against “corporate cannabis” as small operators are increasingly forced out of the industry.  They don’ have the deep pockets to weather the long runway to profitability that the larger companies have. The larger MSO’s can afford high tech solutions and the latest software to analyze sales and inventory data. They can afford the latest technology in cultivation processes. Small single state businesses are finding it harder to compete and even harder to decline acquisition offers in the millions.

The MSO’s believe that when the country fully legalizes, a national footprint will be the key to becoming an industry leader. The small operator may not survive in the short term. It could follow the pattern of the beer industry, which was initially known for local beers and breweries. Then for years, major brands were the only beers for sale. It’s only been within the last 10 years that craft beers have made a comeback. Craft cannabis will have to fight to hold its place against corporate cannabis.

This article originally appeared on Green Market Report.