Paper Chase – Fundamental Hype pops the hood on this MSO Speedwagon

Photo: Chris Phutully.

This one’s for the heads.

When Acreage Holdings (CSE:ACRG.U) kicked this phantom quarterly filings trend off back in March, we expected that the standard financial statements they said they had filed in their “earnings release” would be forthcoming.

More than a month later, the only sniff of the audited financials we’ve seen from Acreage is a notice that they will be furnished May 7th at the company’s AGM in New York (no word on whether or not Brian Mulroney or John Bohener will be there). Meanwhile, Acreage’s peers have decided that this is a pretty great way to go about it.

See, the US Cannabis businesses roll-ups that took over the broken-down resource company shells, jettisoning the spare parts and using the frame to make trading vehicles have modified those vehicles considerably since since the end of December, 2018. They’ve acquired high-performance assets (or are super close to acquiring them!) and would much rather show investors the potential inherent in these assets, and their grand future, than whatever the company was at the end of December. The money they actually earned in the quarter would only cloud your judgement. Better off with a projection.

Plenty to work with on this CSE listed mining company. Wheel it into the shop.

The audited financials of companies with December year ends are due April 30, and there are either hives of accountants working around the clock to beat the deadline, or these companies are straight playing chicken with the Canadian Securities regulators and just flat out aren’t going to file them.

Are they trying to invoke “cure all leaf”? That’s pretty good!

Since it’s easier to find a multi-state operator who that hasn’t filed their financials than one who has, Curaleaf (CSE:CURA) shareholders are just going to have to take our word for it that we aren’t picking on them.

The last time Curaleaf reported earnings that came with the requisite filings was for Q3 back in November. The Nov 26 earnings release tells of a company that grossed $21 million in the quarter, included a pro-forma line for the consolidation of some formerly non-profit Arizona dispensaries, and was generally rich with details that one might look for context on in the financial statements.

Those Q3 Curaleaf financial statements were filed November 29th, three days after the news release announcing them. The statement tells the story of a consolidation of the various american marijuana businesses that were combined and put in the shell, which is pretty exciting! A beachhead in the US market is what we all bought the ticket for, right? But both the financial statements and the MD&A are pretty light on details about how these numbers stack up, and on the numbers themselves. We’re used to looking at MD&As that are a bunch of warnings wrapped around a plan of attack – it’s the part where these things are supposed to get good. Instead, Curaleaf gave us the statements and MD&A for Pallitech, the mining shell that was reverse taken over to form CURA, and nobody cares what they did in the period ending Sept 30th, because what they did was reverse take over Curaleaf and we knew that already.

Still working on it… Photo: Ryan McGuire of Bells Design.

The MD&A and financial statements are the shop manuals for these things. They’re where one might find insight into the difference between “managed revenue” and regular revenue that are outlined in the sales brochure that is their earnings release. Without it, we have no way of knowing why Curaleaf’s Q4 revenue comes in two parts, or why the company feels it’s important to add the $3 million in revenue that they “manage” to their top-line, or where it came from.

Curaleaf press releases have them opening dispensaries in multiple locations in Florida and Arizona in Q3, plus launching a share buyback program, and it sure would be nice to know how that went.


How about a round of applause for iAnthus Capital Holdings (CNSX:IAN) for being the first of these MSOs to release a proper annual report, giving us something to write about and our first bit of insight into what might be going on here with this mass non-release of financial statements.

IAN gave us its earnings treatment in a release April 2nd. That release put the at $2.2 million in “revenue plus other income,” and $14.4 million in pro-forma revenue; in this case, revenue they would have, had their acquisition of MPX Bioceutical Corp (CSE:MPX) occurred during the quarter, plus the managed revenue from Colorado and New Mexico properties.

It laid out an ambitious look at what this organization wants to be. A footprint across multiple states, ambitious expansion plans and a cash balance of $45 million.

1939 Plymouth pickup truck with a Jacobs 757 c.i.d. 7 cylinder radial airplane engine put together by Colorado’s own Gary Corns. Photo courtesy ATOMIC Hot Links

The annual report was released on a Friday, 10 days after the earnings release with no accompanying announcement or fanfare. It’s a dense, well-produced document that is undoubtedly the work of a pro shop. In it, we learn that the managed revenue that tops up iAnthus’ total revenue consists of revenue from the one dispensary / one cultivator operation in Colorado from whom they have bought real estate and intellectual property, which they are prohibited from earning money from by Colorado statute, and from a New Mexico company (two cultivators, six dispensaries) in which they own a 24.6% interest, subject to similar rules.

The segment breakdown for Colorado and New Mexico show no revenue at all from those states, and that $2.2 million in quarterly revenue was the bulk of the $3.4 million that all properties did for the whole year.

“Anybody know where I put that wiring diagram?”

“The Boston show has been cancelled. I wouldn’t worry about it too much, though. Not a big college town.”

There is certainly room for growth at IAN.

The most developed of the multi states in this operator is Massachusetts. There, the company runs two cultivation and processing facilities and six dispensaries, including one that IAN’s annual report makes as one of two within Boston’s city limits. In five months of having been opened and operating, selling retail bud through their own stores and wholesaling it to to other dispensaries, IAN’s Massachusetts division grossed $1.44 million in Q4. That’s 56% of this company’s revenue in the quarter, and 38% for the whole year. They did it by selling 48 kg of product which, if you’re keeping score (and we always are), comes out to $30/ gram, so it must count for oil and accessories as well.

In any event, they’re going to have to do a whole lot better than that from these assets to keep up with a $975 million market cap (or maybe not), because margin isn’t going to make itself, and we have no idea how it breaks down in each of the states or what it looked like at the dispensaries they acquired from MPX, who hasn’t filed their December financials either, and may in fact never do so.

Trust me; he’s qualified. Photo by julochka

Lost in the fold

The way iAnthus’ counts it in their earnings release, the MPX assets generated $44.8 million in fiscal 2018. Ianthus paid $471 million in stock for MPX, which seems absurd, but (no joke) was probably a really good deal. When the official record last heard from MPX’s accountants, they were making a top-line gross of $4 million on $14 million in Q3, $29 million in the trailing 6 months, and getting ready to file audited statements for Q4. MPX was halted in February pending the iAnthus takeover.

If you’re STILL keeping score at home, the nine months in which MPX is to have earned $44 million – a virtual money waterfall in terms of 2018 MSOs – may never see an audit. They’re now a fully owned subsidiary of iAnthus, who just filed their year end financials for the period. They’re next due to file an un-audited interim report for Q1, 2019, a period that considers MPX’s calendar 2018 income statement ancient history.

Step right up and let me show you how this MPX acquisition works…. Photo courtesy Liva Lopez

It’s called finance, bro. Ever heard of it?

There isn’t any good reason to believe that MPX isn’t on the level, and we want to make it clear that we aren’t pointing fingers. What we are doing is pointing out how the bulk of this MSO money was made to date, because it wasn’t made growing and selling weed, and it wasn’t made by retail investors who bought stock out of the market and held it, long and strong, trusted the process, believed in the vision, etc.

Running at a loss to establish a market position and foster growth is what venture capital is all about, and nobody is under the illusion that these assets are supposed to make money any time soon. Those losses have to be financed somehow, though, and we like to keep an eye on that, because when retail shareholders of growth equities complain about dilution, it reminds us a lot of sports fans who are thrilled their team broke the bank open for a stud free agent, but are aghast at what it costs to go see a game.

iAnthus’ growth is being financed by a series of high yield senior secured notes, custom-written for the lender, special purpose vehicle Gotham Green Partners. The positions are accruing 13% interest as they finance the building of iAnthus as a business. $50M bought Gotham Green 40 million of the senior secured notes, plus $10 million worth of units. Each unit consists of one class A share at $2.57, and a warrant to purchase another share at $3.86. The high-yield notes earned $644,000 in cash on June 29, 2019. iAnthus can force the conversion of those notes to common shares if the stock trades above $5.14 for 20 consecutive trading days, but the clock starts on that conversion July 24th of this year. Until they do, they’re bearing interest – in cash or in kind.

The notes were borrowed to roll-over an unsecured debt of $20 million plus $978k in interest – for notes issued in January of 2018, right when they first purchased those Mayflower assets in Massachusetts. By the time all dust settles on all of this, the Gotham Green special purpose vehicles have effective control over 27.6 million shares of iAnthus. Good for a 20% stake, and counting.

Photo: John Dyer

The golden rule; he who has the gold makes the rules

We’re not bringing all of this out to try and scare anyone out of iAnthus, or to throw shade on the way they’re doing it. We’ve got to hand it to them for being the first of their peers to actually put their rig on the lift and let us have a look around to see how it’s put together, look for weak points. As we keep saying ad-nauseum, these things lose money – they have to be financed.

We’re bringing it up because finance can make or break venture-stage businesses. Deals don’t have a prayer without cash; just ask any one of the beat up mining companies that are being cannibalized by MSOs for their listings! And the organizations that put up that cash, aren’t going to do it unless it’s on their own terms. Investors buying it out of the retail market have to keep a close eye on the structures these entities are creating for themselves, because it’s also going to be on their terms that the listed company seeks an exit strategy.

The financiers have more than one way out of this particular investment, and are ready to call audibles depending on how this market breaks. We would encourage retail shareholders to think similarly, keep an eye on their personal exit strategy, as opposed to the one telegraphed by the business printing the equity.

The thing about show cars is you never really know how they’re going to run. Follow Chris Phutully on flickr.


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About Braden Maccke 74 Articles
Founder and Editor in Chief at Fundamental Hype, a blog about venture stage finance and the media that supports it.