Harborside Inc. (HBOR.C), a company whose stock has the great misfortune of being a bellwether for late entrants into the public cannabis market, is most-surely and inarguably sinking.
Harborside is one of the oldest and most respected cannabis retailers in California, operating two of the major dispensaries in the San Francisco Bay area, and opening its third northern California facility and first Southern California retail facility in late 2019. The company also operates two dispensaries in Oregon and a cultivation facility in Salinas, Calif.
My premise seems astonishing when one considers Harborside’s fundamentals: The company had USD$19.3 million in cash as of the end of Q2, it is an established dispensary chain with healthy revenues and access to a booming American market.
By all accounts, these details should translate into an upward-trending stock chart. And yet one must consider the following when discussing the company’s prospects.
One striking detail of note is the short-lived nature of the company’s tenure on the public markets, despite having been in business for 13 years.
It is a detail which becomes more interesting when considering the company’s latest news release regarding the Harborside-owned.Patients Mutual Assistance Collective Corp (PMACC).
“The U.S. Tax Court has ruled that PMACC owes an aggregate tax deficiency of approximately $11.0-million,” according to the release. The Internal Revenue Service initially sought $36 million from Harborside.
In October 2019, Jay, founder of The Deep Dive, wrote “The tax issue has been a long standing cloud over Harborside, whom is believed to have gone public largely as a result of the big tax bills owed to the US government.”
“At the time of its go-public transaction, Harborside was in involved in a total of five different tax court cases, three of which applied to its Oakland dispensary. The total amount in payment, as estimated by the firm, was anywhere from $11.0 to $13.0 million as per Harborside’s filing statement. Today’s ruling announcement confirms that that figure will be at the low end of the estimate.”
–Jay, The Deep Dive
This is supposition, but it goes without saying that using investor money to settle legal liabilities is no way to run a business.
And Harborside still has two pending court cases relating to tax and penalties from operations at their Jan Jose Wellness dispensary, with $4.4 million hanging in the balance.
Although the company is well capitalized, Harborside is facing a liquidity issue within the near term.
In the most recent quarter, ended in June, Harborside recorded $13 million in expenses, including $5.2 million on G&A and $3.6 million on professional fees, resulting in a $6.1 million loss for the quarter after accounting for gross profit.
The company has respectable cash reserves, but although the company has $19.3 million in cash, $15.2 million of that figure was raised from financing activities during the quarter.
Additionally, the terminated Airfield acquisition shows that Harborside is all too aware it needs to reduce its spending.
Subsequent events listed on the company’s latest financials say “in light of the Company’s current share price and the substantial cash component of the purchase price which management has determined is not in the best interests of shareholders.”
The Airfield Acquisition is structured as a share purchase transaction, with a total purchase price of US$41,800,000 subject to certain adjustments, payable as follows:
i) a non-refundable deposit of US$1,000,000 payable in cash on and subject to the execution of the definitive agreement pertaining to the Airfield Acquisition;
ii) a subsequent cash payment or deposit into escrow of the remainder of the purchase price, $2,090,000 of which shall remain in escrow to account for possible adjustments to the purchase price based on Airfield’s annual revenue and EBITDA for the year ended December 31, 2018, and an additional US$2,090,000 shall remain in escrow as security for payment of any indemnification obligations of the selling shareholder of Airfield which may arise following closing of the Airfield Acquisition.
The company is most definitely aware of how its stock has performed. To assist with low volume, Harborside has recruited Mackie Research and Generation Advisors to “provide trading, market stabilization and liquidity services for the company in accordance with regulatory guidelines.”
Since going public, the company’s stock has seen a ~72% reduction in value. Harborside is cash flow negative and its warchest is predominantly made up from funds raised through financings.
Similarly, the company’s declining stock price has already upset one acquisition, leading one to wonder what other M&A opportunities Harborside may have to pass up in a bearish cannabis market, where cheap acquisitions are some of the few things to smile about.