ManifestSeven Archives - Green Market Report

 How does a company raise millions, make millions, but then basically go out of business in just a few years? It seems to happen more and more in the cannabis industry. ManifestSeven is one such company. Too much debt and bloated salaries conspired to bring the company down.

M7 started as MJIC and was one of the original cannabis platform companies. It published the MJIC Marijuana Index, a site that has since been pulled down and hosted some of the first cannabis business conferences. There were big plans for expansion into tech platforms and other cannabis operations. Green Market Report reached out to the company and received no response to our inquiries.

In 2019, the company officially changed its name to ManifestSeven (M7) and embarked on plans to go public. Throughout 2020 M7 went on an acquisition spree buying a dispensary called Healthy Healing Holistic Options (H3O) for $6 million, a delivery business, and a 1-800-cannabis phone number.  Fun fact, M7 paid $300,000 for the 800 number. Everything was looking rosy. 

Raising Millions

Money was also flowing in via various fundraises. In September 2020, ManifestSeven closed on an aggregate of $10.2 million in gross proceeds raised via three private placements of equity and convertible debt in 2020.

 At the time CEO Sturges Karban said, “Today’s announcement is a resounding affirmation of M7’s business model and corporate resilience in the face of economic headwinds, making us one of the few cannabis companies to raise capital in this environment successfully. We are truly encouraged by this level of financial backing from the investment community, which solidifies M7’s position as one of the leading operators in the legal cannabis market. This injection of capital allows M7 to continue expanding our seamless, compliant omnichannel across California, and eventually evaluate other markets in North America as opportunities arise.”

The company began trading on the CSE using the symbol MSVN in September 2020 through a reverse takeover with a company called P&P Ventures. It truly looked like this small company was building something – raising money, making acquisitions, and going public. However, one month after the RTO, M7 noted in its third-quarter earnings announcement in October 2020 that it was on a cost-cutting plan. It could be argued that it was prudent to review the cost structure as the company had gone on a buying spree, however, it also doesn’t make sense to be cutting costs while the company was also in expansion mode. 

Expansion Mode

In November 2020, M7 received another $2.31 million ($3.0 million CAD) from a noteholder in fulfillment of a subscription to the company’s 17.5% Subordinated Secured Convertible Notes. By February 2021, M7 announced the opening of its fully-licensed, multi-purpose facility in Brisbane, California, located directly south of San Francisco. The Brisbane facility marked a significant strategic milestone for M7 as it expanded its cannabis operations.

The following month March 2021, M7 announced that it has more than tripled the size of its fleet of distribution vehicles, augmenting the company’s logistics and transport capabilities of the company’s business-to-business division, Highlanders Distribution. M7 also brought in more funds that month when the company completed a non-brokered private placement resulting in gross proceeds of approximately C$3,314,605 ($2.5 million). 

However, another red flag went up when M7 refinanced the secured promissory note related to the Weden dispensary in Santa Ana, California, extending the note’s maturity date to January 1, 2022, with the ability to extend the maturity date by an additional 12 months upon the satisfaction of certain conditions. To be fair, this was smack dab in the middle of the pandemic and lots of companies were pushing out debt payments. Yet, knowing how this story ends, these signs were pointing to problems. Cutting costs and delaying making debt payments were all signs of trouble ahead.

Sales Decline

As the company moved into April 2021, M7 reported its fiscal first-quarter 2021 earnings. M7 said it generated consolidated revenue of $3.8 million during the first fiscal quarter, which fell from $4.1 million for the same prior-year period. M7 said “This decrease was primarily due to a decline in revenue generated from ancillary product sales due to a disruption in one of the company’s third-party e-commerce distribution channels that caused extended delays in the delivery time of products to customers and was partially corrected following the conclusion of the first fiscal quarter.” At least the company was generating revenue. 

Strategic Review

By July 2021, the party was essentially over not even a year after going public. M7 reported its fiscal second-quarter earnings with revenue of $3.8 million, essentially flat but more importantly, M7 said it had initiated a strategic review. That’s Wall Street talk for things are not going well and we’ve got to figure a way out of this mess. Maximizing shareholder value is code for selling assets. More importantly, the company said it was working with its creditors about making debt payments. So, within 18 months of raising millions, the company was already unable to make debt payments. As of August 31, 2021, the company only had $170,704 in cash. The company had a net working capital deficit of $28,251,574.

Despite the trouble, Sturges Karban, M7’s Chief Executive Officer told shareholders in July, “While we work to maximize the organic growth potential of the regulated infrastructure we have developed across California, the world’s largest and most vibrant cannabis market, we also continue to evaluate potential acquisitions and joint ventures to expand M7’s market share, while also enhancing its bottom line. As we look to the second half of 2021, we see significant opportunities to grow the physical and commercial footprint of our core B2B and B2C operations in California and, eventually, outside of our home state, as well.”

A few months later in October 2021, M7 told investors that it was in default of certain debt obligations from prior periods and continued to be in default as of the date of that report. The company had total liabilities of $33 million.  The company announced a modification to the terms of the New H3O Note on July 26, 2021. The company did not make interest payments due on the New H3O Note on July 1, 2021. The note was due January 2022 and carried a whopping 18% interest rate. H3O was the dispensary M7 bought in 2019.

Even as the company was saying it was cutting costs, over a nine-month period with revenues of $11 million, salaries were $5 million. Plus, it spent over a million dollars on consulting fees to tell the company how to cut costs. 

In November 2021, M7 reported revenue in the third quarter of $4.2 million, said it was still cutting costs and was still in default on its debts. The company also agreed to sell the dispensary Health Healing Holistic Options (H3O) for $6.7 million to a company called Stachs LLC, a subsidiary of Eaze. This was announced in December and at the time, M7 said it was going to focus on its distribution business. This was also about the time that Hardcar distribution thought M7 might merge or buy the company, but that didn’t happen. By February 2022, M7 said it was also discontinuing its distribution business. 

In March 2022, the company said that the discontinued cannabis distribution operations accounted for $3.32 million of revenue and a net loss of $2.76 million during the three quarters that ended August 31, 2021. “Eliminating these operations reduces the company’s cash needs on a go-forward basis and minimizes the accrual of additional liabilities associated with those operations.“ The company said it would continue to operate its ancillary e-commerce platforms and subscription services, including Rolling Paper Depot, Hippie Butler, and Puff Pack. 

At the end of March M7 said it was in serious financial difficulty. Despite this, it completed the first tranche of a non-brokered private placement of units of the company at a price of C$0.07 for gross proceeds of up to $2,100,000. All purchased by CEO Karban. 

Follow the Money

Green Market Report has reached out to the company to verify some of this information but received no response. The last published earnings were from October 2021 when the quarter ending in August was posted and since then no financials have been provided. The stock was briefly traded on the OTC Markets, but no financials were provided to that exchange either. The third-quarter earnings were announced in a press release in November 2021, but not a formal financial filing. The company’s auditor left in March 2022 and since there have been no financial filings, the stock has ceased to trade on the CSE. 

In April 2022, Dilshad Kasmani tendered his resignation as President and Chief Legal Officer of the company. The company was also suspended from trading in April on the CSE (Canadian Stock Exchange). The OTC Market has the stock designated for Expert Market only meaning the stock is not eligible for proprietary broker-dealer quotations. “All quotes in this stock reflect unsolicited customer orders. Unsolicited-Only stocks have a higher risk of wider spreads, increased volatility, and price dislocations. Investors may have difficulty selling this stock.”

ManifestSeven Holdings Corporation (M7) (OTCMKTS: MNFSF) announced financial results for its fiscal third-quarter ending August 31, 2021, on October 29, 2021, as revenues rose 11% sequentially to $4.2 million from the second quarter’s revenues of $3.8 million. The net loss for the quarter was $1.6 million. Despite this M7 said it is still in default of certain debt obligations. M7 said it is looking at solutions and is working closely with its major creditors, vendors, and landlords as it continues to pursue a range of strategic and financing alternatives.

Revenue Decline

M7 reported revenue of $11,704,450 for the nine months ending August 31, 2021, which represents a decrease of $1,979,802 (15%) from $13,684,252 for the nine months ended August 31, 2020. The company attributed the decrease to a decline in revenue generated from ancillary product sales due to a disruption in one of the company’s third-party e-commerce distribution channels that caused extended delays in the delivery time of products to customers and were partially corrected following the conclusion of the first fiscal quarter.

Can’t Pay The Bills

As of August 31, 2021, M7 only had $170,704 in cash. The company had a net working capital deficit of $28,251,574, however, the financial statements at August 31, 2021, reflect certain notes payable and convertible debentures as current liabilities that are not expected to be repaid within the next twelve months. In addition, the derivative liability is a non-cash balance, the resolution of which is entirely tied to the resolution of the convertible debentures. When excluding these balances, the working capital deficit was approximately $15.9 million.

As a result of the debt woes, M7 said it continues to explore, review and evaluate a broad range of potential strategic alternatives focused on maximizing shareholder value. The company managed to cut some operating expenses as that number fell by 33% to $2.3 million during the fiscal third quarter versus $3.5 million during the second fiscal quarter.

Revenue Streams

During the third fiscal quarter, M7 said it continued to place a greater emphasis on generating revenue from its regulated operations, with regulated product sales increasing by 25% quarter-over-quarter and expected to yield more significant long-term revenue growth. the company also said in July that it entered into a Master Services Agreement with a licensed third-party cannabis distribution company, focused primarily on the rapidly growing beverage product category, to carry out finished goods distribution operations on behalf of Highlanders. “The contract consolidates a client portfolio that includes some of California’s highest-selling beverage products, a database of nearly 400 active licensed retailers throughout California, and a robust fleet of 16 distribution vehicles, allowing for efficient statewide long-haul transportation and last-mile fulfillment of regulated products. The agreement is expected to result in significant operational synergies and maximize the company’s ability to monetize its regulated distribution infrastructure by generating incremental and accretive revenue and optimizing operating margins.”

One of the company’s products, The Marijuana Index has been offline for some months saying it is being reengineered. Though it seems the company is more focused on supply chain businesses.

Following the close of the market on Friday, ManifestSeven Holdings Corporation (OTC: MNFSF) reported its financial results for its fiscal second-quarter ending May 31, 2021, as revenue fell from last year and was flat sequentially. The total revenue for the quarter was $3.7 million, which dropped from last year’s $4.9 million for the same time period. It was flat from the first quarter’s revenue of $3.8 million. 

The net loss for the quarter increased from $1 million in 2020 to $1.7 million in 2021. M7 said it continued to optimize its cost structure, resulting in operating expenses of $2.7 million during the fiscal second quarter, representing a decrease of 23% from $3.5 million during the first fiscal quarter.

During the second fiscal quarter, M7 said it continued to place a greater emphasis on generating revenue from its regulated operations, with regulated product sales increasing by 4% quarter-over-quarter and expected to yield greater long-term revenue growth. The company’s gross profit margin increased from 30% during the first fiscal quarter to 33% during the second fiscal quarter, with gross profit margin for the company’s regulated segment increasing from 30% to 34% quarter-over-quarter.

Sturges Karban, M7’s Chief Executive Officer, said, “M7’s launch into 2021 demonstrated that our commitment to integrating our B2B and B2C operations into a singular, statewide cannabis superhighway has yielded a reliable, scalable, and frictionless commercial platform capable of supporting the legal cannabis industry’s increasing demand for distribution, retail, and delivery solutions. In this most recent quarter, M7 continued to build upon its focused strategy by further developing Highlanders’ distribution capabilities and strengthening the business processes and practices across the Company’s integrated regulated operations.”

Going Concern

The company also stated within its earnings release that it will need to raise additional capital during the next twelve months and beyond to support current operations and planned development. At the time of the filing, M7 only had $644,000 in cash on hand. “These factors indicate the existence of a material uncertainty that may cast significant doubt as to the Company’s ability to continue as a going concern. Management intends to finance operating costs over the next twelve months with cash on hand and proceeds from a financing done
prior to the Merger.” The company said in a statement that it has initiated a strategic review process to explore, review and evaluate a broad range of potential alternatives for M7 focused on maximizing shareholder value.

M7 also reviewed its inability to make its interest payments due on the New H3O Note on July 1, 2021. “The Company announced that it has modified the terms of the New H3O Note to (a) clarify the rights of the parties thereto, (b) provide for additional security in consideration of the lender’s deferral of its right to immediately foreclose upon the pledged collateral, and (c) to amend certain other provisions of the New H3O Note to add the lender as a regulatory owner on H3O’s applicable cannabis licenses and escrow all documents required to completely transfer ownership of H3O over to the lender in the event of a subsequent default under the New H3O Note.”

“As consideration for this modification, the New H3O Note will accrue interest at the pre-existing default rate of 25% per annum from June 1, 2021, until paid in full pursuant to the terms of the New H3O Note (as modified). No payment of principal or interest shall be due before the maturity date, which shall remain January 1, 2022. In accordance with New H3O Note, the Company shall be entitled to prepay the principal amount, all accrued and unpaid interest, and costs plus a prepayment fee equal to the lesser of two additional months of interest or the amount of interest that would accrue between the date of prepayment and the maturity date.”

Despite revenue and going concern issues, in April 2021, M7 approved the issuance of 14,360,789 restricted stock units, 2,187,826 of which vest in October 2021 with the remainder vesting in April 2022. Stock-based compensation was $152,333 in the quarter versus $14,606 for the same time period last year.

Problems

As M7 tries to make strategic moves, it seems each attempt is thwarted. The company is in litigation over its acquisition of the cannabis delivery firm DPH. The value of the deal was $645,000. In July 2020, DPH claimed M7 failed to pay the money due to DPH and get regulatory approvals. DPH wants to cancel the agreement. M7 filed a countersuit in August 2020 and claimed DPH didn’t cooperate with M7 to get the approvals. The claims have not been resolved.

The company conducts, or, in the case of the Sacramento facility, plans to conduct, operations out of these facilities through certain of its wholly-owned subsidiaries, or, in the case of the Long Beach and Oakland facilities, through certain affiliated entities owned by the company’s CEO and director and controlled by the company by way of a management agreement. The company initially funded security deposits on these facilities, including the Long Beach and Oakland facilities. One location has apparently not worked out. M7 had placed a deposit of $65,000 on a facility in Monterey, but due to a change of operations and the assessment that it was not recoverable, the company has determined this deposit to be uncollectible and recorded a full write-off on the amount during the year ending November 30, 2020.