With earnings week staring us in the face (but not yet quite here), I thought I’d revisit a couple of outfits we’d previously kept an eye on, but had come to view as nothing much to look at ‘as was’.

They were in various states: staring at bankruptcy; capital thin; operationally static/moribund; or facing tax bills 3x their capital depth. In every case though, creditors and capital sources had made stress balls out of their balance sheets – working every penny of revenue that could be to get them to that point – without killing the host.

In each case, there is a fundamental business within them, and consistent revenue streams. Which, is what allowed such leverage to be installed. They’re different than some of the lootboxes out there (think $VREO, now rebranded as ‘Green Goods’. Jesus, did the CEO’s kid come up with that?).

$iAN/$CXXI/$HBOR are still trundling along – yet from a cursory glance – aren’t worth the effort of running a full structure on – but have posted financials. So….let’s have a closer (but shorter) look, and see if there’s anything new (or useful) that we can takeaway.

To the financials!

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iAnthus ($iAN)

Calling this company a ‘Mexican Soap Opera’ doesn’t really do it justice. I’d made a crack about $iAN a couple of weeks ago – which attracted some comments from folks probably not too aware of where the company is really at (‘Going Concern’ notes and all).

Long term readers will remember last June, when $iAN flaked on interest payments, delayed financials (which resulted in a cease-trade order), and ultimately led to Gotham Green asking for the sheriff to be sent in.

Since then – it looks like Gotham didn’t want to piecemeal anything, likely seeing more upside in cashflow continuation. Shortly after their demand letter – they entered a Restructuring Agreement which froze existing shareholders out, and was initially rejected until a judge approved amendments. Which, led to a Support Agreement that’s been winding its’ way through process…finally being approved in mid June. Ownership of the assets have been transferred, and Gotham and the debenture holders are going to run the joint until they get their money (and plenty in fees and ‘penalties’) out of the company. Naturally, previous shareholders have launched a Class Action against absolutely everyone (including Gotham), which is currently winding its’ way through the courts. All that’s missing is the arrival of an alien ship over headquarters.

As to operations for the quarter ending March 31st (Q1 F2021):

• $52MM in revenue, which generated a 57% margin ($29.7MM). Hey look at that! Nice number. SG&A at $23.6MM. Ok. Excluding depreciation, they have about $9MM there.
• The East is where they rock – 64% margin, and 60% of total sales. In the West, they’re more mortal, and running ~=50% GM.
• Interest, debt accretion, and taxes though: $17.8MM. The debt-holders are taking the equivalent of the entire free cash flow out every quarter, adding taxes took them to report a $20MM loss on that $52MM in sales. Woot.
• Not a single share has been issued since March 31st, 2020. Ownership is fixed in amber.
• The balance sheet from year end saw $200MM in Goodwill written off, and $iAN reported a net loss for 2020 of $310MM. Still, $iAN reports $360MM in assets, $154MM of which is in Intangibles.
• A $200MM/yr run rate with that kind of margin isn’t bad. Be a heck of a business if it didn’t have $161MM in current debt, and $750MM in cumulative losses.

Ok. This thing lives to transfuse cash to creditors. I suspect there’ll be another debt amendment, and existing owners will continue to warm their hands around the revenue fire for as long as needed. Should a tectonic shift occur in the sector (3-Tier and the DCC), this will probably change.

TheCannalysts have recorded most of the gory details along the way – at least until last summer. If you’ve a bend for masochism, there’s probably a full afternoon of it right here. I’ll take a moment to present my summary of them in the very first Structure we did on $iAN: “A business built on excel spreadsheets by bankers for bankers.”

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C21 Investments ($CXXI)

Like $IAN, $CXXI has long been a fascination for me, at least until last fall.

Operationally – I think it’s a great business, if the previous CEO hadn’t taken a pile of cash out of it, bought a bunch of overpriced dog-shit in Oregon, and threw a massive related-party party. What he did do was convince one Mr. Sonny Newman to bring in his 2 Nevada based dispensaries – in exchange for debt.

By last spring, it had become obvious that Sonny wasn’t going to get paid if things stayed the way they were, so, Sonny fired the last guy, fired half the staff, hired 2 funds as advisors, and went through the place like a prairie grassfire. One could surmise he had a strong interest in not losing his assets two cash cows because of bad ops and a stressed capital structure.

Needless to say, after rigorous and sustained negotiations with himself, he came to a deal he (and his advisors) could live with.

They announced an expansion late last year, of which the first of two phases is supposedly initiating later this year. Let’s have a quick look at their latest quarter (Q1 F2022), and see what’s up:

• $6MM in cash previous quarter. $6MM in cash this quarter. Uh-huh.
• Revenue of $9MM. Same as last quarter. And the quarter before that. And the quarter before that….you get the idea.
• Margin of 47%. Oh, look. Same margin as every quarter last year too. SG&A a ridiculously lean $1.7MM. Sonny runs those stores as tight as a drum, no doubt about it. $100k in sales per day – man – they really motor (~=1,600 transactions per day)
• Excluding a $2.2MM up-kick from $CXXI’s share price tanking (vis a vis derivative liabilities), the business reports $2MM in income. Decent enough. Certainly not for an outfit with $14MM in short term liabilities ($37MM overall), and a 117MM shares out.
• They finally disgorged the Oregon mutts that brought Sonny in in the first place.
• Good disclosure overall.

I’d mentioned above that there are businesses within these outfits, and Sonny’s two cows in Nevada certainly qualify. He’s also managed operations well, an exception being a licensing hiccup that cost him $35k.

So – with incremental production coming online, $CXXI’s expecting to enter the wholesale and brand markets with reach into the new dispensaries expected sometime soon. Nevada had been on a license freeze since late 2019 – when companies who didn’t get one sued the State regulator – and argued the issuing process was unfair. It’s begun again, and there’s going to be a need for Sonny to replace any competitive losses from his own bubble wrapped position of the past 18 months – and presumably brand build.

Wholesale deals will attract lower margin as well – and yet currently being vertical – struggles with margin. Unlike say an AYR (and their LivWell outlets), Sonny appears to need to outsource a significant amount of production, which crimps that very margin. I’ve heard he competes aggressively on price too, so that likely has something to do with it as well.

I’ve talked alot about how I dislike creditors as operators, and that hasn’t changed. Where this outfit needs to do something is to fully supply their own vertical, to retain customer loyalty with increased competition, and hope to heck that 3-Tier doesn’t come in before he’s paid himself back. That’s gonna take another couple of years, and he can probably limp along as a marginally break even shop if nothing changes.

There’s little doubt about the impact those funds have had on this outfit – the bolts are tight, and cinched. I believe moves like this are from someone who know what they’re doing:

I see the risk profile here as the same as I did last time. Unless and until Sonny’s debt is out the door, it’s gonna stay exactly the same. Should you be interested, our complete research on them can be found here.

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Harborside Group (HBOR)

Yet another outfit up to its’ neck in leverage, re-reading our first Structure on them…perhaps it might be viewed as a little harsh. I had been in the middle of running Tier-3’s at the time, and not much in the mood to examine yet another outfit with a passel of highly-complex related-party transactions.

That $50MM $38MM tax bill aside, this is an easy story to tell: the capital structure is a 10 ton vehicle on a dock rated to 5 tons.

We saw some operational wobble in their final quarter of 2020 as well, some serious gesticulation with a landlord, and they absolutely nailed a raise back in February (I chalk that up to being dumb luck, I don’t see much ‘smart’ in this outfit, except in self-promotion).

Let’s have a quick look:

• Cash up to $30MM. That raise was a real banger. Still, Current Assets at $40MM, Current liabilities at $65MM.
• Retail sales are flatter than a pancake at $10MM. You could set a metronome to it – from a quick glance, retail sales haven’t varied more than +-$300k in any quarter for the past 6.
• Wholesale sales on the other hand – last 3 quarters from oldest to current: $9MM; $3MM; $2MM. The narrative around this makes no sense – as one of their facilities underwent an upgrade, and it’s expected to be putting out more product. Their entire MD&A talks right past it.
• They did a high-level hire in early May who’s supposed to increase wholesale, while saying they want to shift from wholesale to more finished good CPGs.
• Margin: 31% wholesale, 45% retail. Total reported margin of $5.8MM on sales of $13MM.
• $7.4MM in SG&A and professional fees – the latter being $3.1MM this quarter (!). Ouch. One would (should) expect (hope) that to back up next financials.
• Share based compensation: minus $1,000.00. I ain’t going there.
• Ultimately a $3.2MM operating loss, net loss of $3MM, which was helped out by share price tanking, with preferred shares and derivative liabilities showing a gain of $2MM.
• They took out a $12MM credit facility late in the quarter, with the lender granting them (in advance) a waiver on Q1 EBITDA. Hope those professional fees go down.
• They’ve produced guidance of $70MM in sales this year with $11MM in EBITDA. Well, next three quarters will need to see $14MM in EBITDA and $57MM in sales (which, is $5MM more in sales in each quarter than they did in any quarter last year).

Ok. Despite 2 Structures on these guys, I have absolutely no clue what they’re doing, nor, what they’re going to do about it. Perhaps there’s some sort of cunning plan in the works – if it is, they’re keeping it top secret.

To myself, this thing is – in a word – irritating. I am curious to see if there’s some sort of sales ramp, so if I get bored, we’ll have a another glance at them later this year.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author hold no position in any of the companies mentioned.