Let’s look at iAnthus fundamental financial metrics for their December 31, 2019 earnings release. Beware the earnings release with no quarterly financial info.

Molly did a “Structure and Current State” on their December 31, 2019 financials.

The very long overdue iAnthus year end December 31, 2019 statements came out seven months after the audit date.  There are some whacky things happening in the financials (notably, G&A reducing due to a $3.5 million credit) and without a full Q4 stand alone we are using dreaded “plugs” in a few spots to balance to year end audited exhibits. 

Last Q we said:

Cash will be needed and Gotham Green has this by the neck.

This Q:

Yup. Gotham green has moved in and put their feet up on the desk, post Q.

From the MDA:

• Impairment Loss The carrying amount of the Company’s goodwill is tested at least annually for impairment as at December 31st. Given the continued decline in the Company’s stock price and market capitalization, the carrying value of the Company’s total net assets significantly exceeded the Company’s market capitalization at December 31, 2019. As a result, the Company recognized an impairment charge of $234,284 of which $73,591 is attributable to the Eastern region and $160,693 is attributable to the Western region. No impairment charges were recognized for the year ended December 31, 2018. The impairment loss was fully allocated to goodwill, with no amount of impairment allocated to other intangible assets or fixed assets. Further discussion relating to impairment is disclosed in Note 9 of the consolidated financial statements.

Income Statement Drivers & Breakeven: Trend

iAnthus increased sales by 22% to $27 million QoQ after doubling in Q2F2019 on backs of acquistion.  They opened two more dispensary in the Q, and now total 32.

Sales & Gross Margin Table

Both new dispensaries opened in Florida (Eastern) and the region increased 30%.  Western region showed a pulse and sales increased 10%.  No narrative was provided.

Annualized Sales per Property, Plant and Equipment and Goodwill + Intangibles

This is our attempt to try and compare the organic growth companies (eg. TRUL and LHS) with the companies that are going organic plus “roll up” route.  The idea is that when a company purchases another company and instead of getting lots of PPE they are instead paying G/I to get a head start in the market.  That head start should manifest itself in Sales and GM, not necessarily immediately (retail stores yes, a cultivator may take time to launch) but eventually. 

iAnthus sees a bump in this metric, from $0.12 to $0.21 as result of the goodwill impairment AND STILL remains the worst in the peer base.

Income Statement Drivers & Breakeven: Peer

iAnthus is comparable and a ahead of Acreage in Sales and ahead of LHS which is CAD, coming in 9th of 11 in the above Peer Group.

Gross Margin: USA Peer & Trend

GM has increased from 48% to 61%, with Eastern [above Table] increasing from 54% to 55% and Western improving to 70% from 39%. No narrative QoQ has been provided.

I would do Gross Margin by store for each region, but I am totally confused by their arithmetic as to stores QoQ.  And their MDA narrative provides little clues as to the changes.

Gross Margin Annualized per PPE and Goodwill and Intangibles

As per the Annualized Sales version of this graph we are seeing how effective at GM generation the peer set has been. 

iAnthus improved from $0.06 to $0.13 with the impairment of goodwill.  They are third from last behind Cresco Labs and MedMen.

Gross Margin: USA Peer

At 61% GM they are third from top of peer group.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

NOTE: I moved Impairment to Other Expenses in order to keep peer comparisons comparable.

G&A was goofy this Q.   Sept.19 Q G&A was $22 million.  This Q it is $16 million.  It appears $3.5 million is a credit.  Here is the totality of that explanation from MDA:

• The table above shows a recovery ($3,494) under other general corporate expenditures for the three months ended December 31, 2019. Income tax expense and/ or recovery for the years ended December 31, 2019 and 2018, were separately disclosed on the income statement, whereas these balances were included in general and administrative expense for the period ended September 30, 2019 and 2018. As such, this reclassification results in the appearance of a recovery in the amount of general and administrative expense attributable to income taxes for the three months ended December 31, 2019, and 2018.

Income tax included in G&A.  That is a first for me. G&A also includes $3.9 million in professional fees that will not likely shrink given the restructuring.

SBC was negative for the Q.

Depreciation was $10 million for the Q on all assets, even though it is more appropriate to have production related depreciation listed under CoGS.

Total OPEX was $25 million versus $38 million last Q.

SGA & SBC as a % of Sales: Peer

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

To achieve +NOP at current GM% and OPEX$’s, iAnthus needs 54% in incremental sales.

NOP before IFRS voodoo was negative $9 million versus negative $26 million last Q. The +$6 million in GM and expense reduction of $3 million were the reason.

Other Income and Expenses

• Impairment of goodwill of $234 million: $74 million Eastern Region and $160 Western region
• Interest Expenses and Accretion totaled $8 million versus $5.6 million the preceding Q
• Income Taxes move to where they should have been and is a plug of $3 million, which is likely attributable to the whole fiscal period.

From MDA they show a net loss of $258 million for the Q versus a net loss of $15 million last Q.

+Net Operating Profit Quarterly Breakeven Sales: North American Peer

EBITDA Trend & Peer:

Adj EBITDA improved into a positive $0.8 million for the Q from -$11 million last Q.  $6 million came from $GM and more came from moving income tax out of G&A.  I would not trust this figure until we see Q1F21.

They do not provide an adj EBITDA calculation in their MDA.

+EBITDA Quarterly Breakeven Sales: USA Peer

They are at a +EBITDA I think.

But with $8 million in Q interest and $15 million in debt due in the next twelve months +EBITDA isn’t enough.

+EBITDA Quarterly Breakeven Sales: North American Peer

“Waterfall” Trend – Sales, Bio Assets, Inventory, Delta’s

Inventory is a touch less than Q sales

• Harvested Cannabis decreased from $8.9 million to $5.7 million
• Finished Goods increased $3 million mostly on purchases from other suppliers of $2.8 million

“Waterfall” Peer – Sales, Bio Assets, Inventory, Delta’s

Cash Position

Cash is at $34 million an increase of $7 million QoQ despite tapping an additional $33 million in Debt. The increased debt financed PPE of +$11 million and the cash losses for the Q.

The aggregate of debt owed to lenders totals $167 million.  The debt servicing of interst alone for the Q was $8 million and would increase with debt load on the book for the full Q.  50% of GM was absorbed by interst payments alone this Q.

Conclusion

Ice had formed on the wings several Q’s ago.  With capital markets turned off and debt the only avenue of funding, and positive cash flow from operations a distant dream, the ice built up. 

The creditors seized assets and the shareholders are in the process of getting wiped out.

We have now seen MedMen, Acreage, and iAnthus write off overpriced acquisitions that didn’t become accretive in time to support the capital structure of the firm.  I am cautious that the other leading MSOs with substantial goodwill and intangibles will see similar fates, similar to what we saw with Canadian LP’s and LATAM assets.

I don’t know how long I will include iAnthus in the peer group going forward.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in IAN and will not start one in the next five days.