Another day, another set of financials. Inner Spirit Holdings ($ISH) recently reported, and given the state of retail in this country, an aggressively poised outfit with designs to take over the world should be a welcome entrant helping consumers find that thing that makes them part with their hard-earned cash. 

We’ve opined about their financials, their overall good disclosure, about CEO Darren Bondar going tits up a year ago, and about franchising in the world of retail.

One of the ‘new’ features in calculations of warrants/options in cannabis companies is a provision for ‘forfeits’. That is, an estimated number of warrants/options are assumed to be forfeited (due to share price sucky-ness and all), and it’ll end up reducing the liability that needs to be reported. It’s really just an accounting exercise and largely immaterial, but its’ more frequent inclusion in-sector is a new dimension in reporting. Just 6 months ago: I never saw one. Now? 2 out of 3 statements show a calc for it. Like these ones. Simply errata.

A fresh new set of statements has just dropped for Inner Spirit…. let’s have a look at them. 

To the financials!

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• Cash position down to $5MM from $8MM previous quarter. Not good, especially after a raise of $10MM convertibles in June.
• Cannabis segment revenues ~=$400k, $2.5MM in expenses.
• SBC of $300k. Yep. Even that.
• God these financials are depressing.
• WatchIt! on track to do what they’ve been doing for the past couple of years. It lost another $500k this quarter. Guess there’s a positive in being consistent(?)
• Great disclosure. I love these guys for that.

Ok. Note 12 (Segmented Information) is really all these are about, and it’s *still* nothing special to look at. Corporate cannabis stores and franchising still aren’t meaningful in terms of revenue.

Yet there is business insights littered around these statements, like the franchise fee breakdown in Note 9. Some 2 dozen potential stores were sacrificed at the alter of Ontario’s hatred for small business. And a reloading of them (plus some more) in ‘Ontario re-disclosures’ too:

This isn’t to say if those stores opened, $ISH would start printing Benjamins, far from it. Franchises typically end up as an ‘income trust’ sort of structure: dependable, but boring. Unit prices are easily valued, and they exist as a vehicle for cash flow generation and tax planning. Think ‘Old Dutch’ potato chips.

The juice in $ISH is in corporate locations – where they can scoop the margin that franchisees make – rather than just an annual fee. Sadly that juice doesn’t show up here – a flagship store in Canmore, Alberta wasn’t yet online to make these ones.

A cynic might suggest the market is keeping share price right around their strike in optionality, denying further paydays for management until they can actually deliver a payday for shareholders. Boy, wouldn’t that be nice.

Sadly, markets don’t work that way intentionally, but natural ‘resting places’ for share prices do exist. We’ve seen how share prices can coalesce around optionality strikes ($CGC, $HVT, and $FIRE being notable). And $ISH loaded their overhang with $0.20 and $0.10 strikes….the tens are almost gone. And, even if they weren’t, that’s where the share price has found itself.

At the bottom of it, the WatchIt! thing is uninspiring and marginal. A challenge go-forward is to somehow turn it a money maker (or at least not a money loser). But. With a decade under its’ belt, at least one re-organization, and now down to 12 stores (six corporate) from it’s apex at 20, it doesn’t look like it’s going to be a turnaround story anytime soon. The difference is from $ISH disgorging one in the restructuring, and some franchisees turning in the keys and walking away.

And it’ll continue to exist as a dead weight for $ISH as long as it keeps haemorrhaging cash.

Lately, I’ve been looking around at stocks with a cheap price, and good upside potential. $ISH does have a cheap price, and that’s about all it’s got. Without a double digit number of corporate stores open…this dog won’t hunt. And while that might sound dour and/or too confident – doubters should know….franchise fees won’t pay for even half of WatchIt! ongoing yearly losses.

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