By: Mona Zhang (States Cannabis Policy Reporter at Politico) 
02/04/2022 05:01 AM EST
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Cannabis borrowers, when they can find a lender, typically face high interest rates and conditions on par with those accepted by distressed companies at risk of bankruptcy. | Steve Helber/AP

In the heady days of the green rush, iAnthus emerged as one of the most ambitious U.S. companies seeking to cash in on the booming legal marijuana industry.

By June 2018, the company had operations in six U.S. states, including potentially massive markets in Florida and New York, and wanted to become a national player.

But it had a problem: lack of cash.

iAnthus had few traditional options to bankroll its expansion because marijuana remains illegal under U.S. federal law. To go big, iAnthus’ then-CEO, Hadley Ford, reached out to someone he considered a friend: Jason Adler, founder of Gotham Green Partners, which had emerged as one of the biggest lenders in the cannabis industry.

Gotham Green ultimately agreed to loan iAnthus up to $140 million, but the lender was not obligated to provide the full amount.

While it appeared to be a financial lifeline at the time, the series of deals could ultimately prove catastrophic for iAnthus shareholders, potentially wiping out hundreds of millions of dollars and giving Gotham Green ownership, according to investors and court documents.

“They basically brought us out into the middle of the ocean and then drowned us,” said Beth Stavola, iAnthus’ former chief strategy officer.

The iAnthus experience shows how cannabis companies in the U.S. face stiff challenges raising money to expand their operations, even as states sanction markets across the country in an industry projected to surpass $40 billion by 2025.

Cannabis borrowers, when they can find a lender, typically face high interest rates and conditions on par with those accepted by distressed companies at risk of bankruptcy, said Neil Kaufman, a cannabis attorney who specializes in corporate and securities law. Desperately seeking cash to grow, borrowers agree to terms that heavily favor the lender — and often result in transferring ownership to those who provide the capital.

“The iAnthus-Gotham Green situation is … emblematic of a wave of debt financings that we tended to see a couple years ago that we in the industry call ‘loan-to-own,’” Kaufman said. “I’ve seen a lot of lending transactions in this industry that might be characterized as predatory.”

Court filings, state records and interviews with four former iAnthus executives and investors detail the company’s turbulent financial history.

iAnthus did not respond to a request for comment and Gotham Green Partners declined to comment for this story. In court filings, Gotham Green argues that it had “no obligation to advance additional funds to iAnthus,” according to an affidavit from GGP Principal Alex Wang. He also pointed out that both companies are “sophisticated commercial entities” with access to “experienced financial and legal advisors.”

Looking for cash

By 2018, iAnthus had over $142 million in assets and was publicly traded in Canada, where many cannabis firms often go because U.S. exchanges don’t accept them.

Ford and Adler struck up a friendship in 2017, when both men worked in midtown offices just blocks from each other in New York, according to Ford. They’d often grab lunch to talk shop, and Adler invited Ford to dinners at his home and even to his kid’s Bar Mitzvah, he recounted.

That personal connection seemed to pay off: Gotham Green first provided a $40 million loan to iAnthus in 2018. It then agreed to an additional $100 million financing plan in September 2019. In connection with the $100 million plan, Gotham provided a total of more than $56 million in two separate installments.

Then the money stopped flowing. iAnthus officials say that unraveled their entire company. They built a business plan assuming the full $100 million would arrive and spent cash on expansion rather than setting aside money to service debt.

According to the terms of the plan, Gotham Green was under no legal obligation to provide the remaining $44 million of the $100 million in financing. But Ford says Adler repeatedly assured him the money was coming and that he relied on those promises.

“Gotham has told us, don’t worry about it, you’re going to have the money,” Ford told an iAnthus investor in a phone call recording that was leaked to New Cannabis Ventures and later obtained by POLITICO, which confirmed the authenticity of the recording. No one from Gotham was on the call to confirm or challenge Ford’s representations.

Structuring an investment deal to dole out money in multiple portions is a “classic tactic used by loan-to-own lenders,” Kaufman said, speaking broadly about such transactions and not specifically about the Gotham Green-iAnthus deal.

As months ticked by without additional funding, iAnthus executives said they started to get nervous about an interest payment on a loan from Gotham Green coming due at the end of March 2020. But the investment firm reassured Ford they could work something out, like an interest forbearance, according to claims made by Ford to the investor in the leaked call.

On March 24, 2020, just as Covid-19 was shutting down businesses across the world, Ford asked about the paperwork for the interest deferral. According to Ford, as recounted in the investor call, what Adler proposed instead shocked him: Adler told him not to make an interest payment.

“We’re going to wipe out the public shareholders and the junior guys,” Ford further recounted Adler saying. Adler told Ford that he would make more money if he went along with the plan.

Ford claimed to the investor that he immediately declined the arrangement, and that Adler urged him to “sleep on it” and not send any emails or texts about it. Ford said he immediately called some of the board members, including Stavola, the former chief strategy officer.

“He couldn’t even get the words out of his mouth,” Stavola said of the conversation with Ford.

The cash crunch left iAnthus with few options. When the company missed the March payment, Gotham Green took steps to seize control of the company.

The investment firm sued iAnthus in Ontario courts, proposing a restructuring agreement. Investors were pressured to vote in favor of a proposed deal that would give them a mere 2.75 percent of the company, wiping out hundreds of millions of dollars, according to iAnthus investor Andro George.

“And if you vote ‘no,’ you get zero,” George said. “That’s what the lenders argued.”

Some investors tried to find someone to acquire the company, but had no takers during the Covid capital crunch, George said.

The timing was wretched for shareholders. As investors gained more confidence later in the pandemic, iAnthus received multiple offers to recapitalize the company with terms more favorable to shareholders. Three of those written offers would repay all the money owed to Gotham with a return on investment of over 15 percent, said iAnthus interim CEO Randy Maslow in an affidavit.

But by then, it was too late.

Canadian courts have largely ruled in Gotham’s favor, approving the restructuring agreement that would wipe out shareholder value and extending a deadline for regulator approvals.

Kaufman emphasized that what may look like a bad deal from the outside may not necessarily be predatory. Unlike smaller entrepreneurs who lack resources and business savvy, large firms like iAnthus are able to hire corporate lawyers. Still, even for large companies, the end result of a deal that leaves so much discretion with the lender is perhaps predictable.

“When you read [such] documents, you can see that the lender almost expected a default and would not be unhappy with a default because they could then essentially take the business,” he said.

Longtime cannabis investor Andi Goldman points out that there are two types of predatory lending that have grown common in the marijuana industry. One is a loan with unreasonable terms — high interest rates, short repayment deadlines and an unwillingness by the lender to negotiate. No one has contended that the Gotham loan suffered these defects. The other type is the “loan-to-own” model that ensnared iAnthus, where a deal is structured in a way where the borrower is more likely to default, giving the lender the ability to take over the company.

Those tactics aren’t necessarily illegal, but many entrepreneurs say they are unethical at best. However, business owners say that the lack of funding options means they often feel compelled to agree to whatever terms are demanded.

“[The lenders] are not going to play fair,” said Seun Adedeji, founder of Elev8, a cannabis retailer with operations in Massachusetts and Oregon, noting that he’s received loan offers with interest rates as high as 40 percent. “It’s predatory, but are you going to sit there and twiddle your thumbs and never open your business?”

Many investors also blame iAnthus executives for what happened. Lawsuits filed in U.S. federal courts accuse iAnthus executives of conspiring with Gotham Green to defraud investors, who question why iAnthus defaulted on the interest payment despite being required by the terms of the first loan to maintain an escrow fund for it.

“Even if they didn’t [have enough cash], what happened to the money in escrow?” George said. Many shareholders, according to George, speculated that the default “was intentional, that lenders are now one quarter away from being positive [cash flow] … and they’re going to take it away from the shareholders.”

This allegation appeared in investor lawsuits, which thus far have been dismissed by the courts. However, investors filed another amended complaint in November that is pending.

The Fallout

Gotham Green now faces a slew of regulatory hurdles to get final approval for the deal that would give it near-total ownership of iAnthus. Many states have established rules for marijuana companies intended to prevent a single entity from dominating the market, and Gotham’s numerous investments in the industry threaten to hamper its bid to take over iAnthus.

The Ontario courts have given the investment firm an unlimited timeline to gain the necessary approvals, infuriating investors and former iAnthus officials, many who are accusing Gotham Green in various court filings of purposefully misleading regulators in a bid to exceed ownership restrictions and take over the company.

“[Gotham Green] is trying to circumvent the law in any way they can,” said Michael Weisser, an iAnthus investor who filed a petition challenging a variance Florida regulators granted to approve the Gotham Green transaction, which state regulators referred to the Division of Administrative Hearings. “They’re screwing the existing shareholders out of hundreds of millions of dollars, which is reprehensible.”

Still, Kaufman said the iAnthus situation hasn’t damaged the firm’s credibility among other companies. Gotham Green remains “well respected in the industry,” he said.

When things went sour at iAnthus, Stavola, the former chief strategy officer, started to receive a torrent of emails from shareholders as the only company official that retail investors could get in touch with. While some were encouraging — “Beth, please fix this … we know that you can do it” — others were decidedly more disquieting.

One shareholder regularly emailed her to say things like, “I hope you’re eating steak and lobster because my kids are eating cat food.” Another threatened her family by sending an email with an aerial photo of her home, where she was holed up with her six children during the pandemic.

“What if a deranged shareholder took something so valuable from you?” the email said. “I heard you have six of them.”

It took Ford some time to come to terms with what happened with Adler and Gotham Green. For weeks, he now says, he was in denial, making excuses for what happened — thinking that maybe something was going on that he didn’t know about. But he claims that he eventually concluded that someone he considered a good friend lied to line his own pockets.

“What did I miss? How did I allow myself to get fooled? How did I allow myself to be duped so completely?” Ford says. “That’s a tough reconciliation that you have to go through.”

Whether Ford was indeed duped as he claims — and whether there is any merit to the accusations against GothamGreen or iAnthus made in court and regulatory filings across two countries — remains to be seen as the saga continues to unfold.