Regarding Inner Spirit Holdings ($ISH), GoBlue said on our podcast recently: “They are dead to me”.

What prompted that was their last financial statements, which had more holes in them than a piece of plywood at a shooting range. Reported year end values didn’t add up to Q3 numbers plus Q4’s operations in many of the line items. That means true-ups (read ‘plugs’) were made by accounting to reconcile the year to date ledger with the accounts.

That’s nothing but bad news for any shareholder, because it means that previously reported margins and costs and sales and such weren’t accurate. Yeah, it’s that bad.

Aside from coddling my inner masochist, I am going to take a look at this first quarter to see if there’s been any lingering fallout/impacts from that year end, and see how sales rates are going. Despite all the flash bang and shiny-ness of the chain, it is looking more and more to me like a mutt that can’t generate substantive earnings.

Our last structure on them detailed some of my reasoning around that statement, and re-reading it over now, boy did I ever unload on them. My perspective hasn’t changed though. $ISH CEO Darren Bondar took his previous franchise folly through CICA proceedings twice, and stuck suppliers and landlords with millions in receivables. All I’ve seen so far in $ISH is a replication of that earlier attempt of running a business, and margin whipsawing over the year end is as dark a cloud on the horizon as one will ever see. One can fuck up many things in business and accounting and be just fine. What one doesn’t fuck up is margin, that’s a hard line for me.

To the financials!

_________________________________________________________

• Revenue at $2.6MM. That’s reporting on no less than 10 corporately owned stores, with sales averaging out to $86k/mo/location. One of the lowest anywhere in current retail pubco’s (aside from YSS, more below).
• Segmentation isn’t presented. They claim a 34% margin on cannabis (I can’t confirm), and interestingly reveal that millwork brings only a 5% gross margin.
• Spirit Leaf MacLeod – the flagship store across from a massive shopping mall, and some 30k cars driving by daily – lost $30k during the quarter. This was mostly pre-COVID (10 of 12 weeks), and may have seen some pantry loading. We only get a view into this because of their partial interest in the store.
• At least that $30k loss is better than the $572k they reported losing in the store during 2019.
• They got 2 raises off in private placements totalling $2.2MM. Both sent shares and warrants out for a dime.
• I’ve mentioned leases before with this outfit. The accounting around them, the subleases, and recognizing income off of them. Note 7 (Leases) is a rabbit warren. I’m not the best person to talk about Right-of-Use accounting under IFRS 16, but, if something negative from the balance sheet is going to blindside a shareholder, it’ll come from Note 7.
• $17MM is noted as ‘system-wide’ sales. It’s used heavily in the statements, and $ISH says about it that “this measure is useful to management and the investment community in evaluating brand scale and market penetration“. Ok.
• It also means that with 48 stores open that sales on a per store basis are at $120k/mo. Looks like most of the franchisees are kicking corporate’s ass in per store sales.
• Like other retailers, they’ve kicked the can as to timing of profitability, saying simply that they’re in build…..and it’ll get there eventually.

Ok. Enough of that. I’ve been running around these financials for a while now, and there’s no improvement apparent in either the business model, nor the corporately run stores. As a comparison, YSS (whose branding makes no-name product labelling look like Gucci) does $80k/mo/store, and most of the locations they run are in small towns and rural settings.

These financials dump everything possible at the reader, referencing 2019’s numbers all over the place. They cite various quarters and annuals over many comparisons, which adds little to describing current operations.

What’s notable is their franchise fees. It’s a quarter of their entire reported revenue in the quarter (~=$1MM), and that’s generated by 38 stores that operate under the brand. So, let’s suppose they have 100 stores franchised – that’d be $2.5MM/yr in franchise fees. That ain’t much of a number for a public company.

My opinion of these guys is low, and I think their business model is terminal. It has all the feel of a hobbyist chasing a living doing the only thing they know. Any money put into this thing might as well be put in a tux and a lily placed on it, because it’s dead. Readers will know I’m usually not that definitive about the future…..things can change after all. And a bold statement can easily come back to bite one in the ass.

If there’s any kind of optimism to find, it’d be in corporate store expansion into Ontario. Challenge there is straight to having enough capital to do it with. $ISH neither has the gross margin nor revenue depth to fund that.

Regarding $ISH, these guys won’t show anything more than a marginally break-even business as-is, even at a 200 stores in-system. Best case scenario is their longer term ROR run-rate will be 7-9%. With 220MM shares out and climbing – that won’t cut it in-sector either as a listed company, nor as an investment.

I don’t think that’s a bold statement. Given what I see in their financials, I firmly believe it.

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 holds no position in $ISH.