NASDANK

A pot company with no profit, weak internal controls, and skeptical accountants has filed for an IPO

Obsession
The Green Economy
Obsession
The Green Economy

MassRoots, a social network for cannabis users, this week applied to go public on the Nasdaq.

If approved, MassRoots would not be the first marijuana company on the exchange, but it would probably be the first to openly embrace stoner culture. (A biotech firm called GW Pharmaceuticals, which develops cannabis-based drugs, went public on the Nasdaq in 2013).

It’s unclear how receptive Nasdaq is to letting in MassRoots into its exchange, but a decision will be made in the coming month, according to its listing guidelines. A Nasdaq representative told Quartz it does “not comment on open S1 filing applications.”

The S-1 registration form for going public, which was filed April 11, highlighted a number of red flags that could give the exchange pause. Stating risks is standard procedure with S-1 filings, but the ones mentioned by MassRoots—including the fact that its “accounting firm has expressed concerns about [its] ability to continue”—seem particularly worrisome. MassRoots CEO Isaac Dietrich told Quartz he was unable to comment on anything “material” to the S-1 during the company’s quiet period.

Here are the risks the company lays out:

“Our independent registered accounting firm has expressed concerns about our ability to continue as a going concern.”

In short, the firm is concerned about “the absence of significant revenues,” “significant losses from operations,” and the fact that MassRoots will need “additional financing to fund [its] operations.” In 2015, it generated $213,963 and reported $8.5 million in losses. MassRoots already anticipates needing to raise $2.5 million to fund its operations through the end of the year

“In the past we have experienced material weaknesses in our internal control over financial reporting, which if continued, could impair our financial condition.”

MassRoots has taken steps to address its weak internal control over financial reporting by restructuring its board and creating an audit committee, and it also plans to hire more accounting staff. But if weak internal control remains a problem, it could be costly, potentially forcing it to restate its financial reporting, “which could cause us to expend additional funds that would have a material impact on our ability to generate profits,” according to the filing.

“We have limited operational history in an emerging industry, making it difficult to accurately predict and forecast business operation.”

MassRoots is a young company run by a young CEO. Dietrich is 23 years old, and the company has been operating for less than three years. Its short history means “it is extremely difficult to make accurate predictions and forecasts on our finances,” especially since the budding legal-marijuana industry is also in its infancy.

“As a growing technology company, we have yet to achieve a profit and may not achieve a profit in the near future, if at all.”

The company is brutally frank about the fact it has yet to turn a profit and probably won’t be profitable in the near future. The phrase “if at all” is particularly ominous.

“We may require additional capital to support business growth, and this capital might not be available on acceptable terms, if at all.”

More financing will come at a cost to existing shareholders, diluting their equity in the company. Furthermore, MassRoots notes that additional debt financing could include clauses that make it difficult to “obtain additional capital and pursue business opportunities,” such as acquisitions.

“Cannabis remains illegal under Federal law.”

And of course, there’s the marijuana aspect of MassRoots. Though some states have legalized weed for medical or recreational use, it remains illegal under federal law. (The US Drug Enforcement Authority, however, will soon decide whether to reschedule marijuana, which is currently classified as a schedule 1 drug—considered the most dangerous class of drugs with a high potential for abuse.) Dietrich has aways insisted that MassRoots is a technology company first and a cannabis company second. “We’re in a unique position,” he tells Quartz. “We never touch the plant.”

But that argument might not hold up. “It might be really easy to say it’s not a cannabis company,” says Alan Brochstein, who runs 420 Investor, an investment research site focused on the marijuana industry. “If I’m Nasdaq and I know this company … there are a lot of ways it can be accused of money laundering and running an illegal company.”

Still, Brochstein says compared to its peers in the cannabis sector, MassRoots “stands out heads and shoulders,” because it is generating revenue (“although not super substantial”) and attracting a lot of press attention. He would prefer to see stronger financials and user growth, but “the fact there are so few legitimate cannabis companies could also help them,” he adds.

Read this next: The marijuana industry’s newest customers are sick and elderly dogs

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