When the Flandreau Santee Sioux Tribe announced an agreement with an outside business for advice on how to grow and sell marijuana on its land, it touted the consultant's experience advising other groups on the topic and that it's a publicly traded company.
But documents filed by Colorado-based Monarch America Inc. with the Securities and Exchange Commission show its auditor has raised "substantial doubt" over its ability to continue as a going concern, with management estimating it needs more than $2.5 million in revenue by the end of March to stay afloat.
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Flandreau Santee Sioux President Anthony Reider told The Associated Press that tribal officials knew of Monarch's financial challenges but chose it because the company was willing to sign a short-term deal and sought a smaller share of profits than other consulting firms.
"Obviously, it raised a red flag," Reider said of the SEC filings. "But ... there are so many people in the industry that would be able to step in and help in the event that they were to close."
Monarch CEO Eric Hagen said in an interview that efforts to raise the revenue are going "very well," but wouldn't elaborate. He downplayed Monarch's financial challenges, saying the company is "in a good position currently."
The tribe already operates a casino and other businesses on its land and sees marijuana as a way to bring in more money to develop housing and other projects. It's estimating a monthly profit of up to $2 million from a 15,000-square-foot recreational area that would include bowling, arcade games, gambling machines, bar and food service and an outdoor music venue.
The legalization vote in June came six months after the Justice Department outlined a new policy allowing Indian tribes, which are considered sovereign nations, to grow and sell marijuana on tribal lands under the same conditions laid out for states that have legalized the drug.
Federal officials aren't tracking tribes that will be selling pot, but groups monitoring nationwide developments believe the Flandreau tribe is the first to take advantage of the new policy in a state that has not decriminalized the use of marijuana.
Monarch is advising the tribe on the facility's engineering as well as the best practices for growing marijuana. It isn't managing either the indoor growing site or the recreational lounge where people may use the drug.
The company was founded in Nevada in 2010 as Lingas Ventures Inc., a mineral exploration company. Current management took over in 2014, acquired a hydroponic light and indoor gardening supplies company called The Big Tomato and renamed the company Cannabis Kinetics Corp. It became Monarch America in December.
Monarch touts services that can "elevate the business of cultivation from the erratically stocked, sparsely staffed and managed, independent-store model to that of an efficient and consistently managed organization," according to an SEC filing.
Hagen said Monarch manages growing sites in Washington state and Colorado, one of which tribal officials visited before signing the agreement in June. The company expects to begin receiving monthly payments of $50,000 starting in August under a management services agreement with Green Sky Inc., an indoor growing site in Denver.
But in a recent quarterly filing, the company said it doesn't have enough cash to cover expenses over the next 12 months. It warned that failure to raise enough capital "will have a severe negative impact on its ability to remain a viable company."
A going concern doubt, meaning auditors believe a firm doesn't have the resources to stay in business, complicates a company's chances of finding investors, said Ashwinpaul Sondhi, president of the A.C. Sondhi & Associates investment and consulting firm in Florida.
"The basic question for any new investor would be 'How are they going to get their money out?' There are so many other investments that are available," Sondhi said. "So in order to invest in something that is so risky that it has a going concern problem, you need to not only make sure that you get your money back, but of course the normal problem of how are you going to get a return on your investment."
Monarch needs $1 million by March 30 to pay the former owners of The Big Tomato and faces a Jan. 30 deadline to repay more than $1.15 million to a creditor. As of March, the company had $226,060 in cash and liabilities of more than $3.6 million. Its stock was trading Wednesday at 7 cents per share.
Its five-year agreement with the Flandreau Santee Sioux calls for Monarch to get a fixed percentage of net revenues for its consulting services. The agreement has two five-year renewal options. Neither Monarch nor Reider would give financial details.
Construction began this week and marijuana cultivation is expected to start in October, with the tribe hoping to have product ready for sale in December.
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