Bottom Line

Frankly, this is likely to be the messiest quarter iAnthus may ever have.

The company closed the largest acquisition in its history in the quarter, leading to many one-off costs related to the merger.

Once we dug down past the adjustments and pro-forma metrics, the results stack up favourably to peers, but for anyone without a business degree, the results may fail to impress.

Quarter over Quarter Growth

iAnthus is seeing a perfect storm of negative events this spring, creating what could be an attractive buying opportunity in hindsight.

Overall market sentiment is negative due to trade tensions.

Cannabis sentiment is even worse, dragging most stocks down 30%+ in the past two months. iAnthus is down 36% from the recent peak.

Supply bottlenecks in Florida will slow sales and the retail rollout until later in the summer.

Headline financials look disappointing and require a financial degree to cut through to the real results.

However, with expectations now so low, iAnthus is likely to post better than expected results in the second half of the year potentially leading to a snapback in the shares.

Output from the Florida Greenhouse will quadruple in the second half of the year.

Retail rollout accelerates in the last two-quarters of 2019 and revenue growth with it.

Nationwide CBD rollout later in 2019.

New CMO from Monster Beverage leading cohesive nationwide branding push.

Post-merger financials will show much-improved margins catching back up to peers.

These are just a few of the catalysts that will lead to a turnaround in sentiment in the iAnthus story in our view.

Putting aside this quarter’s financials iAnthus still owns a top 5 state footprint, is growing revenue at least 150% in 2019 and trades at a 30% discount to similar-sized MSO’s like Trulieve, Harvest Health, Cresco Labs, Curaleaf, and Green Thumb Industries.

We have always liked iAnthus as a discounted entry into the U.S. cannabis markets. The management team has the longest public history among any other multi-state operator and has proven they can be trusted.

Management grew revenue from $1 million in September to a $25 million run rate in April, giving us confidence growth will remain robust.

We prefer to own discounted MSOs that are executing vs expensive names where any misstep will lead to a big fall in the share price.

iAnthus has the brands, products, and footprint to excel and we are content to wait until the market comes around to our view.

2019E Price to Sales Estimates

Quarterly Review

On a pro-forma basis, incorporating MPX’s revenue on a full-quarter basis, iAnthus generated $18.5 million from operations in 11 states. This was good for a 22% increase over pro-forma 2018 Q4. On a run rate basis, they are on track for $74 million, which would already represent a substantial increase over 2018’s $4.5 million full-year revenue.

Audited revenues were $9.62 million, which would represent over a 380% increase quarter over quarter from $1.986 million. We expect to see this number continue to increase as iAnthus projected April pro-forma revenues of $8.5 million.

iAnthus is on track to generate around $110-$120 million of revenue in 2019, 150% growth over 2018 pro-forma revenue of $50 million.

Revenue in the quarter was achieved on the back of costs of goods sold of $7.4 million once the inventory write-offs from MPX are removed. This left them with an adjusted gross profit of $2.25 million or a margin of 23%. While these margins represent a decrease quarter over quarter, they demonstrate iAnthus is ramping up their operations as they look for significant revenue growth.

As expected with their significant growth in revenues, operating expenses also increased to $23.1 million. This represents a significant increase from last quarter’s $15.7 million, however, if you back out one-time acquisition costs of $5.2 million to find their actual recurring operating expenses, you see they are much less at $17.9 million or an increase of only 14%.

Just like peers, iAnthus will likely need to raise some more cash, but they are getting very close to breaking even, potentially as soon as early 2020.

After removing one-time acquisition costs, they generated a quarterly EBITDA loss of 10.9 million, which is a decrease compared to 2018 Q4’s EBITDA of $6 million. They posted a net loss for the quarter of $18.3 million, or -$0.15 per share.

Their total assets also increased by over 370% to $797.6 million as they acquired MPX, a company with a multi-state presence. This included a $517 million increase to goodwill and a $67 million increase to fixed assets.

Looking at their liquidity, they have $65 million of cash on hand, and at their quarterly cash burn rate of $22 million, they have just over three-quarters of cash remaining.

Just like peers, the company will likely need to raise some more cash, but they are getting very close to breaking even, potentially as soon as early 2020.

2019 Operational Highlights

iAnthus increased their U.S. footprint through the acquisition of MPX, where they nearly doubled the number of states they have a presence in from 6 to 11. This acquisition is expected to contribute significant revenues in the coming quarters.

They are on track to close the acquisition of national CBD brand CBD For Life in early June. This includes a significant retail presence and a new distribution relationship that will let them roll out premium and adult lines.

In April, they announced the hiring of a new Chief Marketing Officer, Neil Calvesbert. He was the VP of Global Marketing at Monster Energy, a soft drink company known for its branding and being the best performing stock in North America over the past 14 years. With this addition to their team, they continue to build a stable of experienced executives with a track record of excellence.

iAnthus also rolled out a new retail brand strategy called “Be”. With this brand, they are taking a very personal approach that focuses on connecting with individual consumers and letting them “Be Themselves”. It’s reminiscent of the recent string of personal finance ads from WealthSimple trying to take a very emotive approach instead of focusing on the product itself.

We see this as a smart move by iAnthus. Brands are expected to capture a significant percentage of the total value in cannabis and it is going to be a very crowded field. Getting an early start with a brand that speaks to consumers on a personal level is going to set them apart,

The first Be. branded store will open in Brooklyn in early Q4. Existing stores will be re-branded afterwards, with flagship stores expected in Miami, Atlantic City, Las Vegas, and Orlando.

As of May 2, iAnthus announced the closing of a private placement for $25 million of unsecured convertible note units along with 1,555,207 common share warrants. The notes have an interest rate of 8% per annum, which can be paid with up to 50% common shares at the direction of iAnthus. In aggregate, the notes are convertible into 4,222,971 common shares at US$5.92 per share.

In the interest of full disclosure, Capital 10X employees’ own shares in iAnthus. More information on the profiled company can be found by reviewing the public filings of iAnthus Capital Holdings Inc. on SEDAR at www.sedar.com. Writers at Capital10X.com are not certified financial analysts or licensed in the securities industry in any manner and the content of this report may not be complete, accurate or current. iAnthus is a consulting client of Capital 10X and though the information contained herein is believed to be the subjective opinion of the author, this business relationship could create a conflict of interest.

iAnthus Capital Holdings was a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.