iAnthus Capital placed under review at Echelon Wealth

The way forward is looking murky for US cannabis company iAnthus Capital (iAnthus Capital Stock Quote, Chart, News CSE:IAN), says Echelon Wealth analyst Andrew Semple, who in an update to clients on Tuesday moved the stock from a “Speculative Buy” to an “Under Review” rating.

Shares of iAnthus have traded down dramatically of late. The company, which which operates 31 dispensaries across eight US states, has a concentration of business in Florida’s medical market. The company on Monday announced that it has defaulted on its debt by being unable to make the latest interest payments on two of its secured debentures.

The $4.4-million interest payment was on a $97.5 million principal amount and effectively puts all of its $159.2 million principal amount of debt into default.

Management said it has been unable to reach a negotiated agreement with the holders and has so far been unsuccessful in closing a further financing round from either cannabis private equity firm Gotham Green Partners or from other sources.

Citing the overall decline in the public equity markets for cannabis and impacts from the COVID-19 pandemic, the company’s CEO Hadley Ford said it was a difficult decision to make but that the default was in the best interest of the company and its stakeholders where cash needed to be spent on maintaining “the inherent value of our business operations.”

“We have moved aggressively over the past few months to reduce headcount and overhead spend in addition to other cost savings. Our business has never been stronger, and iAnthus is on track to achieve positive adjusted EBITDA and operational cash flow in 2020 as previously planned,” Ford wrote in the press release.

IAnthus has formed a special committee of its board of directors to review strategic alternatives going forward.

Regarding the news, Semple said it now makes it difficult to see a path to raising sufficient capital to sustain operations and fund expansion plans, saying,

“At this point in time, given the wide range of possible outcomes and the subjectivity of modelling assumptions, we find it difficult to derive adequate clarity on the Company’s equity valuation in order to support a price target and rating. Generally speaking, we see potential upside if iAnthus moves past these financing concerns, but are now less confident it will be able to do so without impairing the value to current shareholders, and are unsure of the extent of that impairment,” Semple wrote.

The analyst has now retracted his target (previously C$2.50 per share) and changed his rating to “Under Review,” saying that his prior financing assumptions surrounding iAnthus are no longer valid. Semple opined that a further capital raise through secured debentures or sale-leaseback transactions are not completely off the table, “[however] we see a lower likelihood of the Company completing one of these transactions, and we believe the terms would be far more punitive than previously modelled.”

All that being said, Semple pointed to IAN’s current enterprise value of $190 million, which compares to his previous target EV of almost $700 million and said the difference makes for potential upside to the name.

“That valuation gap is wide enough that we feel comfortable making two assertions: 1) we generally feel there is upside potential to current trading levels if iAnthus moves past the near-term financing hurdles, and 2) there is likely enough of a valuation gap for iAnthus to complete some asset divestitures below fair value or make concessions to its debtholders (e.g., reprice the conversion feature) while still allowing for upside potential to current shareholders,” Semple wrote.