iAnthus – the Dark Horse of the US Cannabis Market

iAnthus is a US Multi-State Operator (MSO) with 21 out of a potential 68 dispensaries open in 8 states. The bulk of those licenses pertain to their Florida operations, and is the primary area of growth that will allow iAnthus to achieve their goal of having 50 dispensaries open, come the close of this year.

This was a very difficult quarter for the average investor to get his or her head around. The reason for the mess and confusion was the fact that the acquisition of MPX Bioceuticals occurred halfway through the quarter. This acquisition increased the company's footprint from 6 to 11 states (including California – however, this is not a retail play; MPX have a range of products in market – primarily under the Mayflower and MPX brands).



iAnthus has grown through acquisition, and one of the collateral effects of this is a number of different retails brands in the market, including Mayflower, Citiva, Grow Healthy and Health for Life. Operating stores under a variety of different names limits the benefits of a national retail footprint.

But this is certainly not uncommon in the US when it comes to the MSO's. How expansion works in the US, is that the well-funded MSO's expand by acquiring existing licenses and smaller cannabis licensees and operators, in order to expand and scale across the US as fast as possible. 

And this is where a national brand becomes important. National branding can enable MSO's to more effectively leverage advertising through traditional media (where permissible) and through online and social media. It's also very effective in the recreational markets, as these markets tend to draw a large number of tourists who may wish to stick to a brand they know or have dealt with before. If this seems unlikely then it's useful to remember how many tourists choose to eat exclusively at McDonalds when travelling overseas.

"Retailers trade at one times revenue, owners, or brands trade at five times. We want to be on the brand side of the equation."

Hadley Ford, iAnthus CEO, Fourth Quarter Earnings Call


To BE or not to BE

At the recent Canaccord Genuity New York Investor event, iAnthus unveiled their new retail brand, Be. iAnthus will begin re-branding its cannabis stores as Be, beginning with the opening of a flagship Be store in Brooklyn in fall 2019.



The brand is meant to be fun, welcoming and comfortable, which is exactly the look and feel and "vibe" they have gone for in the store design and fit out. These stores are designed to provide a welcoming, comfortable environment for both new and dedicated cannabis users.

Be stores will carry both iAnthus brands as well as third-party brands. Stores will be designed to be large and inviting, and will be placed in high-traffic locations in cities around the country, including Boston, Miami, Atlantic City, and Las Vegas. We really like this move,  and feel it can only benefit the company. Ultimately, this is a foundation for brand awareness and recognition. With the US states each operating in a vacuum, the only way for companies to maximise the value of individual state and create synergies is through a national brand.


If you can't beat them, join them.

In March of this year, iAnthus bought their way into the booming CBD market through their acquisition of CBD for Life for approximately $16 million.

iAnthus now joins the fast-paced CBD race alongside other MSO competitors such as Curaleaf, and pure-play CBD companies such as Charlotte's Web, CV Sciences and Elixinol. At the time of the announcement, CBD for Life products was stocked in over 750 retail stores. Recently, iAnthus has announced this number has moved past 1,000 retails stores.

To drive this new retail push into the wellness market, the company made the bold move of hiring Neil Calvesbert to be the new Chief Marketing Officer. He brings a wealth of experience, most notably as the ex VP of Global Marketing at Monster Energy, one of the best performing brands and stocks in the US over the past couple of years! As most of our readers know, we back management more than anything when it comes to the pot stocks, and in this case, the company has added an executive with a proven track record of success!


Q1 2019 Financial Results

Revenue growth looks solid at a pro forma $18.5 million (22% growth QoQ), with the CBD For Life revenue especially encouraging, growing from 13% from $632,000 in Q4 2018 to $714,000 in Q1. The news gets better when you consider the company announced that CBD for Life revenue for the month of May alone would be over $550,000.

Audited revenues were $9.6 million, suggesting an annualised run rate of over $100 million, and representing a 380% increase quarter on quarter from $1.9 million.  As mentioned above, we expect to continue to see this kind of growth, given the April revenue announcement.



The elephant in the room had to be the gross margin. The margin fell to 6% in the quarter, a massive drop off from last quarter's disappointing 32%. But this is not the real story. Revenue in the quarter was achieved on the back of costs of goods sold for $7.4 million once the inventory write-offs from MPX are removed (see why we said this was a tricky quarter?)

This left them with an adjusted gross profit of $2.2 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.

In the MSO world, hyper-growth is naturally associated with an increase in operating cash flow. During the quarter, operating expenses ballooned to $23.1 million, up a whopping 47% on last quarter's $15.7 million. However, on closer inspection, $5.2 million of the costs were acquisition related, primarily pertaining to the integration of MPX Bioceuticals.

Removing these one-time costs from operating expenses brings the number down to $17.9 million. This equates to a 14% quarter-on-quarter growth, which is reasonable considered against 22% revenue growth. The company further noted that they expect operating costs to decrease over time, as synergies from the MPX merger become embedded in the supply chain.

iAnthus spent $18 million in the quarter to generate only $18.5 million in revenue, generating a quarterly EBITDA loss of $10.9 million, which is a decrease compared to the Q4 2018 EBITDA of $6 million. They posted a net loss for the quarter of $18.3 million.


Cash is still king

The company produced a free cash flow deficit of $22 million for the quarter. Bearing in mind this was a partial quarter of MPX results, so it would be safe to assume that with a full quarter, there may be a higher deficit.

With a cash balance (after the May raise of $25 million through a private placement of unsecured convertible notes with an interest rate of 8%) of $65 million and a quarterly burn of $22 million, the company has about three quarters of runway left.

In addition, the company has given aggressive guidance on store openings for the rest of the calendar year. The aim is to get to 50 dispensaries. If the company are to achieve this, it will put further strain on its cash balances. This means that a capital raise is almost certain. This is without doubt weighing on the current share price.


The Bottom Line

Let's be brutal about it – the stock has performed poorly this year. We recently wrote an article wherein we spoke of the opportunistic moment for investors in the cannabis industry. Cannabis stocks are extremely volatile and often create great entry points for investors looking to initiate a position, and for those already invested to dollar-average down.

In this case, the underlying fundamentals have actually improved, yet iAnthus finds itself in a perfect storm. The overall equity markets are in volatile free fall at the moment as President Trump continues to wage trade wars via Twitter. Add to that the fact that cannabis stocks have a higher Beta (in other words when the market goes down, they go down even more).This has left the cannabis markets are even further out of favour, having decreased almost 30% in the past two months alone. The capital raise put pressure on the stock, and finally, this quarter's results require a financial degree to really gain the insights and overall picture.



We strongly believe though, that there are a number of factors and catalysts that could really move the share price in the coming year. Their production output from the Florida Greenhouse will quadruple in the second half of 2019, and will coincide with an aggressive rollout of dispensaries in the state. Then there's the impact that the new CMO, with his contacts and experience, could have on the nationwide CBD roll out. Add to that the increased revenue and margins from the MPX merger, and investors should see significant improvement in revenue and profitability in the coming quarters.


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.

Just this week, GMP Securities put out a BUY recommendation on iAnthus, with a price target of $11. "With the growth iAnthus is experiencing going into Q2/19, the company should be generating annualised revenues at a run-rate of ~$110–120m. This reinforces our view of the company's evolution to a larger tier MSO, which should be rewarded with higher valuation metrics."

We believe that with the above in mind, the current share price offers a very attractive entry point for investors, and remain very bullish on their prospects.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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