10-Q/A: Planet 13 Holdings Restates Q1 2023 Financials Due to $22 Million Misappropriation

Planet 13 Holdings has restated its first quarter 2023 financials due to a believed misappropriation of approximately $22 million by its former investment advisor, El Capitan Advisors.

Summary

• Planet 13 Holdings has filed an amended quarterly report (Form 10-Q/A) to restate its financial statements for the quarter ended March 31, 2023, and the comparative period of 2022.
• The restatement is due to a believed misappropriation of approximately $22 million of the company's funds by El Capitan Advisors, an investment advisor.
• The company has secured a partial settlement of $3.4 million of the misappropriated funds, with approximately $2 million still in the possession of the Sheriffs Office pending litigation.
• The remaining $16.5 million is believed to have been misappropriated by El Capitan, and the company has initiated a lawsuit to recover these funds.
• The restated financials reflect a $2 million provision for misappropriated funds in both the first quarter of 2023 and 2022.
• The company's internal controls over financial reporting were deemed ineffective as of March 31, 2023, due to material weaknesses that contributed to the restatement.
• Net revenue for the quarter was $24.9 million, a decrease of 3% compared to the same period in 2022.
• The company reported a net loss of $8.48 million for the quarter, compared to a net loss of $4.06 million in the same period of 2022.

Sentiment

Score: 3

Explanation: The document reveals significant financial and operational challenges, including a substantial misappropriation of funds, ineffective internal controls, and a decrease in revenue and profitability. The company is facing legal action and has material weaknesses in its financial reporting, which creates a negative outlook.

Positives

• The company secured a partial settlement of $3.4 million of the misappropriated funds.
• The company is actively pursuing legal action to recover the remaining misappropriated funds.
• The company has implemented enhanced policies and procedures to address the identified material weaknesses in internal controls.
• The company's premium cultivation facilities were operating near capacity during the quarter.
• The wholesale flower market in California is stabilizing, with increases in demand and prices for premium indoor-grown flower.

Negatives

• The company experienced a believed misappropriation of approximately $22 million by its former investment advisor.
• The company's internal controls over financial reporting were deemed ineffective due to material weaknesses.
• Net revenue decreased by 3% compared to the same period last year.
• The company reported a net loss of $8.48 million for the quarter, compared to a net loss of $4.06 million in the same period of 2022.
• Gross profit margin decreased to 43.7% from 50.2% due to increased sales incentives and higher wholesale revenue.
• General and administrative expenses, excluding non-cash share-based compensation, were 41.6% of revenue, compared to 44.5% in the prior year period.

Risks

• The company faces the risk of not recovering the remaining misappropriated funds.
• The company's internal controls over financial reporting are ineffective, which could lead to future misstatements.
• The company is subject to Section 280E of the Internal Revenue Code, which prohibits deductions for businesses trafficking in controlled substances, resulting in higher tax liabilities.
• The company's operations are subject to local and state regulations, and failure to comply could result in fines or loss of permits.
• The company's assets could be subject to asset forfeiture due to the federal illegality of cannabis.
• The company's access to financing is uncertain, and there is no guarantee of continued access to equity financing.

Future Outlook

The company believes it has adequate liquidity to fund its planned capital expenditures and expansion plans over the next 12 months, including the build-out of operations in Florida and Illinois. The company anticipates that margins will trend upward if and when tourist customers return to Las Vegas and through the ability to produce its brands in California.

Management Comments

• Management confirmed that the material weaknesses described in the Form 10-K/A continue to be material weaknesses as of the time of the reassessment, and that these same material weaknesses contributed to the Restatement.
• Management believes it will be able to raise equity capital as required in the long term, but recognizes the risks attached thereto.
• Management believes it has adequate liquidity in the form of cash on hand to fund all of its planned capital expenditures and expansion plans as well as to continue to fund its operation over the next 12 months.

Industry Context

The cannabis industry is subject to evolving regulations and market conditions. The company's performance is affected by factors such as competition, pricing pressures, and regulatory changes. The company is also impacted by the federal illegality of cannabis, which creates risks related to banking and asset forfeiture.

Comparison to Industry Standards

• The decrease in revenue and gross profit margin is concerning, as it indicates potential challenges in maintaining profitability and competitiveness.
• The company's gross profit margin of 43.7% is below the average for mature cannabis companies, which typically aim for margins above 50%.
• The reported net loss of $8.48 million is significant and highlights the impact of the misappropriation and operational challenges.
• Compared to other multi-state operators (MSOs) in the cannabis industry, Planet 13's performance in Q1 2023 appears weaker, particularly in terms of revenue growth and profitability.
• Companies like Curaleaf, Trulieve, and Green Thumb Industries, while also facing challenges, have generally shown stronger revenue growth and better control over operating expenses.
• The material weaknesses in internal controls are a significant concern, as they indicate a lack of robust financial oversight, which is critical for a public company.
• The company's reliance on a single superstore location in Las Vegas makes it vulnerable to fluctuations in tourism and local economic conditions, unlike MSOs with more diversified geographic footprints.

Management Changes

Corporate Governance

Legal Proceedings

• The company initiated a lawsuit in Santa Monica, California against El Capitan, its founder and CEO, Casa Verde, and related parties seeking approximately $16.5 million in compensatory damages and other relief.

Related Party Transactions

• Prior to March 15, 2022, the Company was the sub-lessee of approximately 2,000 square feet of office space and purchased certain printed marketing collateral and stationery items from a company owned by one of the Company's Co-CEOs.

Stakeholder Impact

• Shareholders are negatively impacted by the restatement of financials, the misappropriation of funds, and the decrease in revenue and profitability.
• Employees may be affected by the company's cost-cutting initiatives and the uncertainty surrounding the company's financial stability.
• Customers may be affected by changes in the company's operations and product offerings.
• Creditors may be concerned about the company's ability to meet its financial obligations.
• Suppliers may be affected by changes in the company's purchasing patterns.

Next Steps

• The company will continue to pursue legal action to recover the misappropriated funds.
• The company will continue to implement enhanced policies and procedures to address the identified material weaknesses in internal controls.
• The company will continue to monitor and evaluate the effectiveness of its internal control over financial reporting.
• The company will continue the planned build-out of its operations in Florida and Illinois.

Key Dates

Keywords

restatement, misappropriation, internal controls, financial reporting, cannabis, Planet 13, El Capitan Advisors, revenue, net loss, wholesale, cultivation, dispensary