In between running Harvest Health’s ($HARV) and Trulieve’s ($TRUL) financials, I thought I’d take a break and revisit a couple of Tier 3’s looked at earlier this year.

Last time we looked at The Harborside Group ($HBOR), we saw a company with an improving margin, a change in their ‘Chairman Emetrius’, ongoing tax travails, and all the hallmarks of a related party hootenanny.

That tax thing got sorted in late April, with the courts ruling against $HBOR.

They’ve secured a $12MM credit facility from a commercial bank (they tout it as a first) to purchase the 200k ft² greenhouse they’d only operated previously. The press release is opaque, in that the majority of loan proceeds will be used to ‘support’ the acquisition later this year. What the ultimate purchase price is to be, or whether there’s a definitive agreement in place is not said. They’d been spending on upgrading it through the previous 2 quarters, but no mention of a full acquisition. $HBOR allocates $12MM of the $19MM in PP&E on their books as “Agricultural Buildings” and “Agricultural Equipment”, but no leasehold improvements over that period. I did find that the company that became $HBOR (FLRish) had bought a piece of it back in 2016.

I mention it to illustrate how complex ownership can become when non-controlling interests and (ostensibly) related parties come together. In this case, I spent 15 minutes to find out I’d need to spend several hours to unwind this. That’s a useful takeaway for any investor looking at a shop: if a company hasn’t laid out their asset base and plans and financial obligations clearly – the question becomes ‘why?‘

I can’t speak to the current state here, but use as example.

That loan from a ‘commercial lender’ came in with an original issue discount, shot out 4k in warrants on multiple voting shares (MVS) (conversion at 100:1, or ~=400k in common shares), secured all of their assets against it, as well as assigning a deposit account, and putting up cash for collateral. A pretty short (and pricy) leash to be sure. Its’ at prime plus, but the interest rate ‘plus’ isn’t specified.

Let’s see how they’re making out, and if they yet again printed another quarter like the quarter previous. And the one before that. All amounts in USD unless otherwise noted.

To the financials!

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• These babies clock in at 79 pages. Yeah, it’s a year end. But….
• They absolutely nailed a raise in mid-February, hitting $2.55 a share. They were issued in both MVS and SVS units, only US residents were able to access the MVS ones. It brought in $35MM CAD gross.
• Cash currently at $11MM, it’ll get a boost. A/P at $17MM.
• $HBOR dropped $5MM on a relatively complex convertible debenture issued by an outfit called “Loudpack”, which looks to be a medium/small producer/brand house. Verbiage around the agreement looks like Loudpack is planning to go public.
• Netting the raise (~=$24MM), they’ll have about $12MM left.
• They’ve had some turbulence in San Leandro, where their medical dispensary ran onto the rocks, both with a group of people and apparently, the landlord. $HBOR sued the group, lost, has has also filed a breach claim against the landlord.
• On April 1st, $HBOR filed for a stay on an eviction until May 15th. That seems to have worked (?), as they’ve negotiated to have an extension that’ll permit them to operate while they go build another dispensary.
• Litigation features large in these financials, pretty near $HARV levels in ongoing actions.
• They lost a COO in January, got another one (this time as VP) in May.
• Retail sales $10MM. Again. Wholesale really took a dump though, dropping from $8.9MM to $3MM QoQ. Margin on the year was good overall at 53%.
• They’re guiding up to $68-$73MM for revenue in 2021 (last year was $60MM). They ascribe the increase to improved yields and a better price environment in 2021. Interesting.
• Wholesale tanking last quarter saw GM drop ~=$2MM, while OPEX ballooned by $5MM to $12MM. All commentary is YoY, or only speaks to decreases in it. Looking closer, almost all of the increase was due to growth in salaries and benefits. No explanation provided.
• The only thing they seem to chalk the drop in wholesale in the 4th Q was due to wildfires decreasing available supply. I’d expect retail prices to have really shored up in CA then, but I don’t recall seeing that impact anywhere.
• They began the year with some 42MM SVS shares (with conversions), and they’ll end this one with about 60MM if they don’t issue any more.

Ok. Well, that’s about scratched that Dive Bar itch.

I think $HBOR presents like many of the ‘Tier 3’s’ do – as there is a business in there that’s allowed a much larger capital cornice to built out of it. Their optionality is largely out of the money, and inconsequential at this point.

That raise they did in February – the timing was excellent. Perhaps not for investors, but for the company. In some ways, they parallel C21 Investments ($CXXI) in terms of being boring. They’re sitting on a relatively known brand, running the same laps of the same course, quarter after quarter. Absent some sort of catalyst, they’ll be doing the same thing for a while.

The buy into Loudpack might be an attempt at broader reach, but if so, it’s incremental given the region and level of investment.

Salaries blowing out this quarter is a red flag, as is wholesale collapsing. Above all, is a $38MM tax liability that’s going to need to be paid, and I’m not sure how that’s gonna come about. Any instalment plan will be costly.

Wholesale returned to levels of a year ago, yet demonstrated solid QoQ growth during the year. That’s a big question mark as well.

Add in the need to ‘build’ a new outlet, it’ll take capital they don’t have, on a company that loses $2.5mm/quarter like clockwork….and I suspect it’ll come back to a raise. They’ve now got $22MM in non-current debt on the books as well, giving the mental impression of a swimmer with their face just above water.

As we’ve seen, these conditions can be held onto for awhile, all while getting more expensive for the shareholder as returns remain stagnate. $HBOR has benefitted greatly from the ‘MSO’ run last year (and particularly in February’s bump). And just like $CXXI, I don’t see much as having fundamentally changed with it at all. These financials suggest several questions I’d have of management if I was anywhere remotely interested in them. I’m not. Given their level of sales, I’d doubt a larger MSO would be interested in them either at this point.

We’ll look at them again sometime. If it becomes the increasingly stale story it looks like it’s telling – we’ll know soon enough.

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 holds no position in $HBOR or $CXXI