Don't Be Lured By The IAnthus/MPX Merger

by: James V. Baker

The iAnthus Capital Holdings /MPX Bioceutical merger was touted as a first in the cannabis sector.

iAnthus and Mpx limped into the merger with poor financial results.

The pro forma financial statements reveal major weakness.

iAnthus Capital Holdings Inc. (OTCQX:ITHUF) has captured investor attention because of its recent merger with MPX Bioceutical. It has been called a merger, combination, agreement, arrangement and amalgamation; and, regardless of what it is called, it merits investor attention since it may be a harbinger.

The iAnthus Mpx Deal

On October 18, 2018 iAnthus Capital Holdings Inc. announced that it and MPX Bioceutical Corporation had agreed to enter into a Plan of Arrangement whereby they would merge all operations except for MPX’s international operations. The MPX international operations would be spun out to shareholders of MPX.

The deal closed on February 5, 2019. Pursuant to the terms of the Arrangement Agreement, holders of MPX shares received 0.1673 common shares of iAnthus for each MPX share held, representing a premium of 30.6% based on the closing price of iAnthus and MPX Shares on October 17, 2018. MPX became a wholly-owned subsidiary of iAnthus. iAnthus trades in the United States on the OTC under the symbol ITHUF and on the CSE under the symbol IAN. iAnthus issued 75,795,208 of its shares to MPX shareholders.

Each MPX shareholder also received common shares of newly formed MPX International Corporation (MXPI), which holds all of the non-U.S. cannabis businesses of MPX. MPX shareholders received 0.10 shares of MPX International for each MPX share they owned prior to the amalgamation. A total of 45,304,966 MPX International shares were issued. MXPI trades on the Canadian Securities Exchange, CSE, where it closed at C$0.67 on February 10, 2019.

MPX International is focused on developing and operating assets across the global cannabis industry with an emphasis on cultivating, manufacturing and marketing products which include cannabinoids as their primary active ingredient. Initial key assets include Canveda Inc., a Canadian Licensed Producer, Salus BioPharma Corporation agreement with Panaxia Pharmaceutical Industries Ltd. and 50% of a medical cannabis license application in Australia.

Immediately following the amalgamation, iAnthus had operations in 11 states allowing it to operate 63 retail locations and 15 cultivation/processing facilities. The 11 states include Arizona, California, Colorado, Florida, Maryland, Massachusetts, New York, New Jersey, New Mexico, Nevada and Vermont. iAnthus desires to become a full fledged, multi state operator, MSO, with unified national product brands.

Florida Acquisition of GrowHealthy

iAnthus announced on January 17, 2018 that it had acquired through merger and acquisition transactions substantially all the assets of GrowHealthy Holdings LLC and certain related subsidiaries. This transaction marked iAnthus full-scale entry into the Florida medical cannabis market, which it had previously entered in October 2017 when it acquired about 6% of GrowHealthy in a preferred stock purchase.

The January 2018 acquisition included GHIAA Management Inc. a wholly-owned subsidiary of GrowHealthy that holds a 40-year management contract to operate the medical cannabis business associated with McCrory’s Sunny Hill Nursery LLC. This nursery was licensed by the State of Florida as a Medical Marijuana Treatment Center on July 5, 2017 thereby allowing it to cultivate, process and sell medical marijuana. Its 200,000 square foot facility is located in Lake Wales, Florida. At the time of this transaction, 4,000 square feet were being cultivated and 15,000 square feet were being utilized as an extraction lab and commercial kitchen.

As of February 11, 2019 GrowHealthy had two dispensaries open in Florida: Brandon and West Palm Beach. A recent visit to the West Palm Beach dispensary revealed there was only one customer served during a one hour time period.

iAnthus paid $17.5 million cash and $30.5 million in iAnthus common shares (12,103,172 shares) based on a share price of $2.52. At the time of the acquisition, iAnthus was paid $3 million for the 2,925,003 preferred shares of GrowHealthy it owned, so it only had to part with $14.5 million in cash to acquire GrowHealthy.

Concurrent with closing the GrowHealthy transaction iAnthus issued $20 million in unsecured debentures due in one year to a private U.S. investment group. The debentures have a 15% coupon and warrants allowing the holder to purchase 10,040,000 iAnthus shares at $1.9928 per share.

Financial Reports

As of September 30, 2018 iAnthus had incurred an accumulated deficit of $66.6 million of which $46.1 million was from the first nine months of 2018. In the September quarter it reported an operating loss of $10.0 million. Its operating free cash flow was a negative $19.0 million for the first nine months of 2018. Its balance sheet showed it had $75.9 million in goodwill and $4.5 million in intangible assets. These two assets accounted for 58.6% of total assets and 80.2% of shareholders’ equity.

While iAnthus’ financials just prior to the amalgamation were awful, MPX’s were just as bad. MPX as of September 30, 2018 had an accumulated deficit of $67.6 million of which $13.4 million was incurred in the September quarter. Its operating free cash flow was a negative $6.5 million for the six months ended September 30, 2018. MPX had $63.8 in intangible assets and $31.5 in goodwill; and, when combined those assets represented 60.0% of total assets and 149.2% of shareholders’ equity.

Interestingly on September 30, 2018 iAnthus showed it had $15.6 million in cash and MPX had $13.5 million. At their pre-amalgamation cash burn rates iAnthus would run completely out of cash within nine months, while MPX might last a full year. Without question, iAnthus lack of cash led it to issue 5,188,800 shares on October 10, 2018 at a price of $6.65 per share for gross proceeds of $34.5 million in a bought deal financing. The syndicate for the offering was led by GMP Securities L.P. and included Canaccord Genuity Corp., Cormark Securities Inc., Beacon Securities Limited, Echelon Wealth Partners Inc. and PI Financial Corp.


The pro forma balance sheet of iAnthus, after the combination with MPX and the spinoff of MPX International, shows cash of $25.2 million, intangible assets of $50.8 million, goodwill of $140.6 million, and an accumulated deficit of $154.2 million. Goodwill and intangibles represent 62.9% of total assets and 98.7% of shareholders’ equity. The pro forma income statement shows that the resulting combined entity would have lost $92.9 million or $0.73 per share for the nine months ended September 30, 2018.

This touted first of its kind merger of two cannabis companies looks like two helmsmen throwing life buoys to each other from separate leaking boats. In fact, iAnthus’ pro forma financials ought to carry a skull and crossbones emoji.

In a press release on February 5, 2019 iAnthus announced the closing of its business combination with MPX Bioceutical. Its press release was filed with Sedar, and in it iAnthus mentioned that it had a 149.6 million share count. On the same date ITHUF closed on the OTC at $5.306, giving iAnthus a market capitalization of $793.8 million. This level of valuation testifies to investors being lured by promoters, lawyers and investment bankers into the cannabis sector under the guise of making tons of money. The CEO of iAnthus cast that very lure at the Benzinga Cannabis Capital Conference in a keynote address on January 16, 2019 when he said, "It's our turn for wealth creation."

The iAnthus dream of being a national brand depends entirely on investors continuing to supply it with limitless amounts of money and that is certain to end once people awaken to its cash burn. iAnthus is just another example of MSO alchemy or a legalized Ponzi scheme, where money is taken from investors under the guise of getting rich.

Investors who believe the above remarks are too harsh should read iAnthus management's own words in Note 2 to their most recent financial statements filed with Sedar, where they state, " These condensed unaudited interim consolidated financial statements have been prepared under the assumption that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. The Company’s ability to continue in the normal course of operations is dependent on its ability to raise capital sufficient to maintain operations and there are no assurances that the Company will be successful in achieving this goal." (Emphasis added)

The financially astute people who concocted iAnthus know how to protect themselves. The question is - do you?

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Update 2/13/2019: I have changed the article to reflect a more accurate market capitalization calculation for iAnthus.