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Business, Public, Real Estate
Innovative Industrial Properties Accused of Misleading Investors on Kings Garden
An investor group is suing Innovative Industrial Properties (IIP)  (NYSE: IIPR) for not doing proper due diligence in its Kings Garden investment.
Investor Michael Mallozzi originally sued IIP in April 2022, when the Blue Orca Capital report came out. He was then joined by investors Alejandro Handal and Stephen Forrester.
They are claiming IIP mislead investors, was incompetent, and broke securities laws.
In December, IIP asked the court to dismiss the case, but the latest brief asks the court to deny that request to dismiss because IIP was aware that Kings Garden was a Ponzi scheme while telling investors everything was OK.
Kings Garden Deal
In April 2019, IIP entered into a sale-leaseback transaction with California-based Kings Garden, led by its CEO and Chairman Michael King. Between 2019-2021, IIPR purchased six properties from Kings Garden at prices far higher than Kings Garden had paid for the properties.
In total, IIP invested approximately $150 million into Kings Garden cannabis farms, which accounted for up to 10% of IIP’s rental revenues. The company also spent money to build out the facilities for Kings Garden.
Due Diligence?
At the heart of the lawsuit, the investors claim that IIP didn’t do the due diligence that it claimed it had. Specifically, the case states that a simple background check would have uncovered that Swiss American Investment Corporation, one of Kings Garden’s investors, filed a suit alleging that Kings Garden had not  paid out promised quarterly dividends.
It also points out “irregular” transactions involving millions of dollars between Kings Garden and its managing directors, multiple related-party transactions between Kings Garden and entities its managing members owned or controlled, and that there was “self-dealing … and a lack of transparency around its financial affairs.”
The court brief also stated, “King had already been involved with 32 lawsuits before January 2019, already had felony charges, and had already changed his name. The information from which IIPR eventually concluded that Kings Garden was a Ponzi scheme with organized crime ties was available in early 2019 with just a few keystrokes.”
Instead, IIP continued to tell investors that Kings Garden was in good shape – up until IIP sued it for lack of payment. At that point, the company said it actually suspected Kings Garden was not being honest.
The investors argue that IIP can’t have it both ways, claiming in one lawsuit that Kings Garden lied to them, but in another lawsuit said they had no idea Kings Garden was lying.
Construction Money
The case uses IIP’s own language saying that it sends its due diligence team to check on construction projects and verifies invoices. But, the lawsuit claims, it wasn’t doing any of that.
“Two of those projects, the San Bernardino and 19th Street properties, had allowances for up to a total of $76.4 million in ‘Draw Requests.’” the suit said. “At the end of the Class Period, IIPR stated that it had paid $49 million dollars in Draw Requests to Kings Garden for work that had never been performed, due to forged Draw Requests and invoices.”
For example, an electrical invoice appeared to be cobbled together with mismatched fonts and text boxes that were added to an old invoice. That document was from an electric company previously owned by Kings Garden’s vice president of operations.
Blue Orca
The lawsuit also brings up an April 2022 report by the activist short-seller Blue Orca that wrote about IIP’s exposure to Kings Garden. The case says that instead of addressing the issues raised by Orca, IIP said that Orca didn’t understand commercial real estate or the cannabis industry.
In the company’s May 2022 earnings call, IIP continued to sing the praises of Kings Garden, saying, “Michael King and his team have one of the best reputations for product quality and consistency and perhaps the single largest cannabis market in the world.”
Just a few weeks later though, the court filing claims that IIP realized the problems. In July 2022, it told investors that Kings Garden had quit paying rent and in August filed a lawsuit against the company for fraud calling it a Ponzi scheme.
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Irwin Naturals Signs LOI to Acquire Braxia Scientific
Irwin Naturals Inc. (CSE: IWIN) (OTC: IWINF) has entered into a nonbinding amended and restated letter of intent to purchase medical research company Braxia Scientific Corp. (CSE: BRAX) (OTC: BRAXF) for a price tag yet to be determined.
Under the agreement, Irwin will pitch a purchase price per Braxia share based upon a valuation of the outstanding $30 million worth of Braxia shares, though the final price per Braxia share and the exchange ratio will be set forth and determined when the agreement is executed.
“We are excited to be building North America’s leading mental health and depression network under the medical expertise of Braxia’s scientific management team, including Dr. McIntyre, the world’s foremost expert in depression and ketamine research,” Irwin CEO Klee Irwin said in a statement. “This combination is a major accelerator and differentiator for Irwin’s network of Emergence clinics across the U.S. as we launch clinical research services for large pharma and emerging biotechnology companies and enhance our capacity with telemedicine capabilities.”
Klee also said the combination would give the company “access to more attractive financing, making this an attractive potential business combination for Braxia shareholders.”
The company said that the purchase price would be payable on closing by the issuance of Irwin shares to each holder of Braxia stock. Based on the closing price of Irwin shares and Braxia shares on the CSE on Jan. 25 of C$3.80 and C$0.05, respectively, the purchase price and exchange ratio imply a 315.72% premium to the price of Braxia shares.
The number of Irwin shares will also be adjusted upward in the event that the total consideration received by holders of Braxia Shares is less than $30 million, to be determined at a specified period of time after the closing date and as set forth in the agreement.
The LOI further states that the Irwin shares would be subject to a lock-up period and would be restricted from transfer or sale for a period of six months after close. Braxia insiders would be subject to a lock-up period of 12 months from the closing date.
The deal would bear out operations in several state markets in the U.S. and in Canada across three important business verticals: clinics, international clinical research services, and telehealth.
“This combination will optimize the drive for growth of mental health services, creating a first-mover advantage in many important markets in North America, while also expanding innovative drug development research to benefit from economies of scale across the businesses,” Irwin Naturals president Adam Berk.
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What We’re Watching
January’s almost in the rearview, which means we’re getting closer to the next round of earnings – and a snapshot of how 2022 ended for the cannabis industry.
Mississippi officially started medical cannabis sales last week, and Georgia finally took steps to move its program forward. What’s the outlook for cannabis in the South?
In case you missed it, we opened nominations for the 2023 Green Market Report Women’s Leadership Awards.
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