Harborside Archives - Green Market Report

StaffStaffJuly 30, 2020
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6min3320

Editors Note: This story was written by Jackie Bryant.

Like everything else touched by COVID-19, unexpected trends and shifts have occurred in the cannabis industry. One such shift is towards consumers seeking value products, which are rising in popularity due to a reduction in work and income across many different industries as the COVID-19 crisis wears on. In particular, low price/high THC combinations seem to be the magic bullet for anyone shopping for cannabis on a budget. 

Canndescent, a brand that initially entered the market with a luxury-focus, recently launched the company’s third brand, Baker’s Cannabis Co. The brand offers lower-cost but still decent quality products, like $6 one-gram pre-rolled joints and $55 half-gram pre-ground pouches, which come equipped with rolling papers and crutches. 

Old Pal

The style echoes one of the original legal value cannabis brands, Old Pal, which began selling its pre-ground cannabis flower in similar packaging and has gained popularity for its surprisingly high-quality product despite being priced comparatively lower than others in the space.

“Quality weed at fair prices has always been in high demand,” says Rusty Wilenkin, CEO of Old Pal, noting that this isn’t exactly a specific-to-COVID trend. “Value at Old Pal means more than just perceived value of low cost, to us value is the best quality at fair prices. During COVID, we’ve seen steady demand from consumers for our products. The industry overall has felt disruption with changing and varying regulations for retail shopping state to state. And while this is not unique to the cannabis industry, with the industry being as young as it is, these changes have been even more demanding.”

Canndescent

“Consumers aren’t visiting dispensaries as often as before,” explains Canndescent’s CMO Sam Arellano regarding a specific buying trend that can be directly attributed to COVID. “When they do, they’re opting for cannabis in larger weight/sizes with strong value equations to carry them between visits. We’re experiencing this increase in demand with Baker’s Cannabis Co. Despite COVID-19, demand has been consistently strong and steadily growing as consumers come to trust Baker’s quality, price, and availability.”

Arellano continues, speaking to a very specific type of customer–people who genuinely use cannabis as part of their daily routine. So much of the cannabis industry revolves around the highest potency possible, which is expensive to cultivate and produce. Add in state and local taxes on top of dispensary mark-up, and suddenly, someone who was used to paying legacy market prices faces an incredible new sticker shock for something that is part of their everyday life.

“Beyond price, they care about efficacy, availability, and trust,” Arellano says of frequent users. “Trust that the cannabis they choose is free from pesticides and other harmful containments, grown responsibly by a cultivator they respect. Availability as in, always there when they want it. And efficacy as in quality product and consistent experience.”

Harborside

CEO Peter Bilodeau from Harborside (OTC: HSDEF) in Oakland also sees the low price/high THC correlation, but suggests there are other value trends afoot, too, and that rather than hunting for potency regardless of any other factors, buyers are instead settling on personal ratios of price to THC relative other factors. 

“For some, low price and high THC correlates to value,” he says, “but we still have a varied customer base that is looking for high quality, small-batch items, flavor, consistency, and a wide selection of strains/options. We think this is why people tend to shop for the sales items for the best deal versus only shopping for items that are consistently priced lower.” 

Overall, Bilodeau says, Harborside has seen an increase in customers shopping for their sales products as well as increased basket sizes.

In any industry, the value market has always been, well, invaluable to the success of most brands that don’t market themselves to be exclusively luxurious. In an age where inequality is rising and in an industry where inequality is always at the forefront of political issues, like cannabis is, it makes even more sense that value-marketing would become an increased priority for cannabis brands looking to corner the market. 

Now that cannabis has been deemed essential in many states, sweeping federal legalization is again being discussed and it appears that economic upheaval is here to stay, at least for a while, the market for value cannabis brands has never been brighter.

 


StaffStaffJune 30, 2020
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8min1930

It’s Time for your Daily Hit of cannabis financial news for June 30, 2020. 

On the Site 

GW Pharmaceutical 

GW Pharmaceuticals plc (NASDAQ:GWPH) has pushed the legalization of cannabis ahead with its work on the drug Epidiolex. Now the company is making its plans for its other cannabis drug Sativex known and it’s impressive and hopeful. 

The company is announcing its plans for its pipeline product nabiximols to the U.S. market. This strategy includes multiple opportunities for the submission of an initial New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA), the earliest of which could occur in 2021. 

Zynerba 

Some drugs work and at other times they don’t, which is the whole point of testing and the importance of trying to find solutions to patient conditions. Unfortunately for Zynerba Pharmaceuticals, Inc. (ZYNE) its latest top-line results from the 14-week pivotal CONNECT-FX (Clinical study of Cannabidiol (CBD) in Children and Adolescents with Fragile X) trial failed to produce the necessary threshold for positive results. The stock was selling off as a result of the news. 

IIP & GrowGen 

Cannabis investors remain hungry for stock as long as the company is one with solid and consistent revenue. It seems GrowGeneration Corp. (NASDAQ: GRWG) and Innovative Industrial Properties, Inc. (NYSE: IIPR) are two such companies. Both priced and upsized offerings today. 

HBO Max 

HBO Max has become the latest production company to use cannabis products as a marketing tool. The company is partnering with Sunderstorm’s Kanha Cannabis Infused Gummies and online cannabis marketplace Eaze to launch a collection of character-inspired CLOSE ENOUGH edibles. 

“Close Enough, is a surreal animated comedy about a married couple, their five-year-old daughter, and their two divorced best friends/roommates all living together on the east side of Los Angeles. The series is from the creator  JG Quintel, creator of the Emmy Award-winning “Regular Show” and begins streaming on July 9. 

Paragon Coin 

Coin Telegraph reported that Paragon Coin will face federal claims from a class-action lawsuit alleging that the firm’s $70 million ICO from 2017 violated securities laws. The website said that a Californian federal judge has certified an investor class in a lawsuit alleging that the cannabis crypto firm Paragon Coin Inc violated securities laws in its 2017 initial coin offering (ICO) that raised $70 million. Paragon Coin promoted its ‘PRG’ tokens as a currency for the cannabis industry and hired popular rapper The Game to promote the offering. 

In Other News 

Harborside 

Harborside (OTC:HSDEF)said that its delay in completing the Annual Filings occurred due to the impact of the COVID-19 pandemic. “In addition, as previously announced, the company is relying on the blanket exemptions issued by provincial securities commissions due to COVID-19 to extend the date of filing its interim financial report for the three months ended March 31, 2020 and related management’s discussion and analysis. The Company does not expect to file the Interim Filings before the expiry of the 45-day extension on July 14, 2020.” 

The company said it continues to expect to file the Annual Filings, as well as the financial statements for the fiscal years ended December 31, 2017 and 2018, no later than July 10, 2020 and will apply to have its previously disclosed cease trade order revoked. Harborside said it expects trading to resume on the CSE shortly after the revocation of the CTO. 


Sean HockingSean HockingJune 9, 2020
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31min1860

If you wish to re-publish this story please do so with following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

Harborside has new tax lawyers.  Harborside’s (OTC:HSDEF) new tax lawyers have appealed the DECISION of the United States Tax Court entered October 19, 2019, that determined Harborside has deficiencies in income tax in the total amount of $11,013,236.75 for the years 2007-2012.

Harborside has appealed this DECISION to the Ninth Circuit Court of Appeals.  Harborside filed its Opening Brief on May 26, 2020. [See Case: 19-73078, 05/26/2020, ID: 11701759, DktEntry: 19-1]

The determination Harborside has an additional $11+M federal income tax liabilities for the years 2007-2012 is based on Judge Mark V. Holmes’ Opinion on the substantive income tax issues filed November 29, 2018.  Patients Mut. Assistance Collective Corp v. Comm’r, 151 T.C. 176 (2018).

In a related Opinion filed December 20, 2018, Judge Holmes declined to impose an accuracy-related penalty on Harborside in connection with these income tax deficiencies.  Patients Mut. Assistance Collective Corp v. Comm’r, 151 T.C. Memo. 176 (2018).

 

Law Professor Bryan Camp wrote an outstanding article relating to COGS and Cannabis that Harborside’s new lawyers should have carefully read before they filed this Opening Brief. Professor Camp states,

 

“In real life . . . inventory accounting, Alterman & Gibson v. CIR,, TC Memo 2018-82. June 1, 2018] a case involving poor representation of a medical marijuana business. Disclaimer: not only do I not teach COGS but I also never practiced it, so if you dive below the fold, you may catch me out in error. I know for some readers that is actually an incentive to read on—kind of like waiting for a crash on the racetrack. But if you find yourself guffawing at something, please do not hesitate to publicize the error in the comments section. And remember, at least I’m not representing anyone!”[1]

 

We wrote a several articles relating to Harborside’s dispute with with the Internal Revenue Service (“IRS”) for its tax years 2007-2012.  [[  We criticized Harborside’s counsel for pursuing an argument that was not likely to succeed while at the same time foregoing the opportunity to maximize the tax savings that the IRS gave to cannabis dispensaries in Chief Counsel Memorandum 201504011.  We predicted Judge Holmes first Opinion.  [[  We did not anticipate Judge Holmes second Opinion.  [[

 

While we stand behind our criticism of Harborside’s original tax counsel, Harborside has made a grievous error in changing counsel.  Harborside’s new tax lawyers lack adequate education and experience in federal tax law and accounting to pursue this appeal.  Harborside’s costs for tax counsel have no doubt increased, but the quality of the representation has not. 

As I read Harborside’s Opening Brief I recalled something my mother told me on a number of occasions when I was in grade school,

“Be sure you understand what a word means before you use it.”

 

Lest anyone think we are being too harsh, we will concede Harborside’s new tax lawyers may actually prevail in this appeal, although success in this appeal seems highly unlikely for multiple reasons.  This appeal should not have been taken.  It is unnecessary.  The Tax Cuts and Jobs Act [“TCJA”] gave most cannabis businesses the precise relief with respect to Cost of Goods Sold (“COGS”) that Harborside is seeking in this appeal.  The Act was effective January 1, 2018.

 

Harborside’s original tax lawyers could have saved Harborside substantial amounts by taking the actions that were available to minimize federal income tax liabilities instead of trying to change the law.  Harborside’s new tax lawyers are following the same futile path.

 

We will devote the balance of this article to explaining how the [[ Act can be utilized to avoid this aspect of Harborside’s federal tax problems.  In [[ we explained how the impact of IRC §280E could be neutralized.

 

The provisions related to the treatment of “trafficking expenses” and the composition of Cost of Goods Sold have been complex since Congress created IRC Sec. 280E in response to the decision in

 

In January 2015, the Internal Revenue Service issued an internal memorandum [CCM201504011] that opined on how state-legal cannabis businesses should compute federal income taxes. Drafted by the IRS Chief Counsel, the memo rejects many of the tax deductions that these businesses have traditionally made. The memo challenges tax strategies that allow these businesses to stay afloat, and imposes a strict interpretation of IRC Sec. 280E.

 

The expenditures which had been traditionally scrutinized under IRC Sec. 280E include:

 

  • Employee salaries
  • Utility costs such as electricity, internet and telephone service
  • Health insurance premiums
  • Marketing and advertising costs
  • Repairs and maintenance
  • Rental fees for facilities
  • Routine repair and maintenance
  • Payments to contractors

 

The disallowance of IRC Sec. 263A principles by the CCM added

 

General and administrative costs (bookkeeping, legal expenses, technology costs)

  • State excise taxes
  • Storage of cannabis
  • Purchasing cannabis
  • Depreciation of cannabis

 

The Tax Court decisions in Harborside has been viewed as creating an entire set of new rules related to accounting for inventories and the calculation of cost of goods sold [“COGS”] for the cannabis industry[2].The most significant aspect of the opinion in the Harborside case is that it is a reviewed opinion.  As a reviewed opinion, Harborside is binding on all of the judges of the Tax Court unless and until some substantive issue addressed in this opinion is reversed or modified by a higher court.  The substantive decisions addressed in the Harborside opinion largely confirmed and clarified earlier, and in many instances memorandum, opinions issued by other Tax Court judges.  Judge Mark V. Holmes’ opinion in Harborside is comprehensive, thoughtful and well-written as is invariably true of opinions written by Judge Holmes.

The most significant aspect of the Harborside opinion for California’s cannabis industry lies not in the opinion but in the interplay between this opinion and California’s regulation of its cannabis industry.  The Harborside opinion rejected the use of IRC Sec. 263A and approved the use of IRC Sec. 471 in the determination of COGS.

[Lead in to IRC Sec. 471(c)(3)

 

(c)Exemption for certain small businesses

 

(1)In general In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year—

 

  • subsection (a) shall not apply with respect to such taxpayer for such taxable year, and

 

  • the taxpayer’s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either—

 

(i) treats inventory as non-incidental materials and supplies, or

 

(ii) conforms to such taxpayer’s method of accounting reflected an applicable financial statement of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer’s accounting procedures.

 

(2) Applicable financial statement – For purposes of this subsection, the term “applicable financial statement” has the meaning given the term in section 451(b)(3)[3].

(3) Application of gross receipts test to individuals, etc.

In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership.

(4) Coordination with section 481

Any change in method of accounting made pursuant to this subsection shall be treated for purposes of section 481 as initiated by the taxpayer and made with the consent of the Secretary.

 

We were amused by the article[4] [Member Blog: IRC Section 471(c) of the TCJA May Mitigate the Curse of 280E for the Cannabis Industry]

which appeared in the CCIA Journal in May 2020 which was authored by a member of the same firm the prepared the CA-9 brief.

 

[1] The article continues

Most businesses that sell stuff must comply with the inventory accounting rules in §471. COGS becomes even more important to businesses that get hit with §280E, the section that prohibits deductions and credits for any trade or business activity that “consists of trafficking in controlled substances…which is prohibited by Federal law….” [Note: that is not a grammatical error: it is the prohibition of trafficking that is the trigger, not the prohibition of the substances themselves].

The restrictions in §280E give affected businesses every incentive to cram as much of their business costs into COGS as they can. That is because the idea underlying COGS is that costs of acquiring or producing property that held for sale is not a §162 “expense” (hence deductible from the income the sale of property produces) but is instead part of the computation of gross income when the property is sold.

I am thinking that this idea of COGS is a necessary result from the famous formula in §1001 that says the income produced by the sale of property is the amount realized minus the taxpayer’s basis in the property sold. COGS is the method of allocating basis to the items of property a business sells. If I sell a bottle of car wax for $10, I am selling property. I do not have $10 of gross income minus the expenses of acquiring that bottle. COGS accounting allows me to report as gross income only the net of the $10 over the cost of acquiring the bottle because I have a basis in the bottle (I wonder…had a CPA written the classic song by Police would it have been titled “Basis in A Bottle”?). But if I wax your car for $10, I must report the entire $10 as gross income. I have no basis in my labor. If I can deduct my costs of performing that service from the $10, then perhaps it’s the same result.

COGS reminds me of form over substance. For those interested in more theory, you cannot do better than Joe Dodge’s “The Netting of Costs against Income Receipts (Including Damage Recoveries) Produced by Such Costs, without Barring Congress from Disallowing Such Costs,” 27 Va. Tax Rev. 297 (2007)(advocating a computational netting approach to the treatment of contingent attorneys fees). My takeaway from that article is that there is no principled distinction between netting expenses against gross receipts to arrive at gross income and netting expenses against gross income to arrive at net income. Both methods of accounting are based on the same underlying principle: it takes money to make money and the money used should be deducted from the money made. 

Take salaries, for example.  Treas. Reg. 1.471-11(b) tells you that some salaries can be accounted for as part of the COGS calculation of gross income while other salaries must be taken as deductions from gross income. Now, for a business that sells stuff, perhaps it does not make much of a tax difference whether a particular employee’s salary is taken as a §162 deduction or goes into COGS. But a business subject to the limitations in §280E really needs to get its COGS numbers right.”

 

[2] The inventory costing methods available under IRC Sec. 471 includes

Small businesses which have average gross receipts for trailing three years of less than $25 million

  • and are not a tax shelter
  • may rely on their book method of determining COGS for tax purposes. Stated differently, qualifying taxpayers do not need to make book-to-tax adjustments for COGS.

IRC Sec. 471(a) states

“Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income”.

 

If an industry adopts best practices of capitalizing the majority of direct and indirect costs into COGS and the use of such a method clearly reflects income, then the IRS cannot adjust the taxpayer’s method of determining COGS solely for the purpose of “clearly reflecting income” based on IRC Sec. 471(a).

The Regulations define “Inventories at Cost” as:

For merchandise on hand at the beginning of the taxable year, the inventory price of such goods [See Reg. 1.471-3(a)

In the case of merchandise purchased since the beginning of the taxable year, the invoice price less trade or other discounts, except strictly cash discounts approximating a fair interest rate. The cost of transportation or other necessary charges incurred in acquiring possession of the goods [See Reg. 1.471-3(b)]

In the case of merchandise produced by the taxpayer since the beginning of the taxable year;

the cost of raw materials and supplies entering into or consumed in connection with the product, expenditures for direct labor, and

indirect production costs incident to and necessary for the production of a particular article, including in indirect production costs an appropriate portion of management expenses, but not including any cost of selling or return on capital, whether by way of interest or profit. See Reg. Sec. 1.263A-1 and 1.263A-2 for specific rules regarding the treatment of production costs [Reg. 1.471-3(c)]

Inventories of a Retailer – A retailer may use the retail inventory method.  The retail inventory method uses a formula to convert the retail selling price of ending inventory to an approximation of cost (retail cost method) or an approximation of lower of cost or market (retail LCM method) [Reg. Sec. 1.471-8 – Further, a taxpayer may use the retail inventory method instead of valuing inventory at cost under Reg. Sec. 1.471-3 or lower of cost or market under Reg. Sec.1.471-4.]

 

Manufacturer’s Inventory – To conform as nearly as possible to the best accounting practices and to clearly reflect income[7], both direct and indirect production costs must be taken into account in the computation of inventory costs in accordance with the “full absorption” method of inventory costing.

Under the full absorption method of inventory costing production costs must be allocated to goods produced during the taxable year, whether sold during the taxable year or in inventory at the close of the taxable year, determined in accordance with the taxpayer’s method of identifying goods in inventory. Thus, the taxpayer must include as inventoriable costs all direct production costs and all indirect production costs [Reg. Sec. 1.471-11, for the purposes of this section, the term financial reports refer to the GAAP.]

A taxpayer should be able to capitalize the cost of goods sold when doing so is consistent with industry practices[9].  Taxpayers in the cannabis industry could justifiably assert that substantial authority existed to sustain the use of IRC Sec. 263A in the calculation of the cost of goods sold prior to the release of Chief Counsel Memorandum 201504011.’

This CCM requires:

Taxpayers trafficking in a Schedule I or Schedule II controlled substance to determine the cost of goods sold using the applicable inventory-costing regulations under IRC Sec. 471 as these regulations existed when IRC Sec. 280E was enacted; and

Unless the taxpayer is properly using a non-inventory method to account for the Schedule I or Schedule II controlled substance pursuant to the Code, Regulations, or other published guidance, the IRS may require an adjustment to clearly reflect income.

The ability to use IRC Sec. 263A and assert that the IRC Sec. 6662 “substantial understatement” penalties do not apply ended with the publication of CCM 201504011.  The methodology that Harborside utilized for the years 2007-2012 is not acceptable for years after 2014.

The situation becomes particularly grim for California dispensaries beginning after 2017.  California’s Bureau of Cannabis Control adopted regulations beginning in 2018 that require Retailers to purchase cannabis

 

[3] (3) Applicable financial statement For purposes of this subsection, the term “applicable financial statement” means—

 

  • a financial statement which is certified as being prepared in accordance with generally accepted accounting principles and which is—

 

(i) a 10–K (or successor form), or annual statement to shareholders, required to be filed by the taxpayer with the United States Securities and Exchange Commission,

(ii)an audited financial statement of the taxpayer which is used for—

 

(I)credit purposes,

(II)reporting to shareholders, partners, or other proprietors, or to beneficiaries, or

(III)any other substantial nontax purpose, but only if there is no statement of the taxpayer described in clause (i), or

 

(iii) filed by the taxpayer with any other Federal agency for purposes other than Federal tax purposes, but only if there is no statement of the taxpayer described in clause (i) or (ii),

 

(B)a financial statement which is made on the basis of international financial reporting standards and is filed by the taxpayer with an agency of a foreign government which is equivalent to the United States Securities and Exchange Commission and which has reporting standards not less stringent than the standards required by such Commission, but only if there is no statement of the taxpayer described in subparagraph (A), or

(C) a financial statement filed by the taxpayer with any other regulatory or governmental body specified by the Secretary, but only if there is no statement of the taxpayer described in subparagraph (A) or (B).

 

[4] On March 30, 2020, the Treasury Inspector General for Tax Administration issued a report titled “The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance.” The 53-page report discussed several different topics, including that the IRS should conduct more audits under Section 280E, and this discussion focuses on Section 471(c).

The report states that certain qualifying cannabis taxpayers, who would otherwise be subject to business expenses being disallowed under Section 280E, could potentially account for their inventory under Section 471(c) using a method that would classify most or all of their expenditures as inventoriable costs and avoid Section 280E’s disallowance of such expenditures. Accordingly, as all the costs would be capitalized into inventory, they would then reduce taxable income as the inventory was sold. In other words, expenditures previously disallowed under Section 280E would be part of the cost of goods sold and allowed as a reduction of gross receipts. There was no public comment from the IRS in the report on the potential that 471(c) may eliminate 280E.

Before continuing to provide our additional comments, it is important to mention the impact of Section 471(c) on Section 280E has not been reviewed by the Courts and the Inspector General also stated that necessary guidance addressing 471(c) is lacking from the IRS. As such, the impact cannot be stated in certain terms. 

The curse of Section 280E on the cannabis industry cannot be overstated – some businesses actually end up paying more in tax than they make and Section 280E can turn an economic loss into a taxable gain. This seemingly unconstitutional result has been justified by the courts and IRS under a very old principle of taxation that “deductions are a matter of legislative grace.” New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934) Legislative grace, according to these authorities, means the legislature has the power to deny all deductions, if they so choose, and it should be said that the limitation of such grace, under the 16th Amendment to the US Constitution, is that 280E cannot disallow costs of goods sold. With Section 471(c), however, legislative grace appears to be on the side of the cannabis industry because, as discussed below, Congress created Section 471(c) and it appears to allow inclusion of deductions into the cost of goods sold where they can’t be disallowed under Section 280E. 

The Code states that Section 471(c) allows a small taxpayer, one with less than $25 million in revenues, who is not a tax shelter or public company to account for inventory according to their applicable financial statements, or absent applicable financial statements, according to the actual books and records of the taxpayer. For a qualifying business that doesn’t have applicable financial statements, if their books and records include deductions in COGS, then these deductions may not be subject to 280E.

 


Debra BorchardtDebra BorchardtNovember 22, 2019
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California-based dispensary company Harborside Inc. (CSE: HBOR) reported that its third-quarter revenue increased 22.4% year-over-year to $14.1 million for the quarter ending September 30, 2019. The company said that the increase in revenue was attributed to a 13.5% growth in retail revenue and 57.1% growth in wholesale revenue.

Net losses for the third quarter were trimmed to $1.2 million versus last year’s net loss of $5.2 million for the same time period. This was attributed to decreases in fair value of biological assets, increases in operating expenses and a one-time write-down of investment which was offset by a non-cash gain on derivative liabilities of $9 million due to translation on exercise prices of options and warrants, and conversion prices of debentures, denominated in other foreign currencies.

“We are pleased with the continued strong results from our retail and wholesale operations, which have contributed to a robust third quarter. Our revenue growth remains solid and Q3 represents the 15th quarter in a row in which our revenue has tracked over $10 million,” said Harborside Interim CEO Peter Bilodeau.

“While we are pleased with our third-quarter results, there is still much work to be done. We are focused on executing on our goals, continuing to drive growth through our retail and wholesale divisions, and remaining laser-focused on our California-centric growth plan. In addition, we have worked with our executives, members of the Board of Directors and insiders to extend the terms of the company’s lockup agreements until June 1, 2020, and expect analyst coverage of our company to commence shortly.”

Expenses

Harborside reported that its total operating expenses for the quarter were $8.7 million, which rose over last year’s $6.7 million for the same time period. Total operating expenses in the third quarter of 2019 included general & administrative expenses of $5.4 million,  $2.1 million in expenses related to share-based incentive compensation, $2.3 million of share-based payments, an allowance for expected credit loss of $0.3 million, and $0.284 million of depreciation and amortization.

“In addition, in order to be a profitable business, we must address costs. To reach our goal of reducing our operating expenses, we have begun implementing the cost-cutting initiatives the Alvarez & Marsal team identified to recognize the efficiencies in our business and have focused on streamlining our operating costs at our Salinas facility.” Total assets totaled $53.0 million and included $16.6 million of cash on hand.

Looking Ahead

“We are updating our full-year 2019 revenue guidance from $5557M to $5052M to reflect the delayed timing of the openings of the Desert Hot Springs and San Leandro locations and the delayed closing of the LUX acquisition. Both stores are in the process of opening, and we now expect LUX to close by the end of December, such that they will be reflected in our run rate for 2020. The delay in the closing of the LUX acquisition is expected to result in an approximately $1.5 million decrease to 2019 annual revenue, and an additional $2 million decrease in revenue resulting from the delay in the opening of the two new locations. Additionally, a production issue at the Company’s farm disrupted three harvests which the Company expected to monetize in the fourth quarter of 2019 worth approximately $1.5 million of revenue.”

The company noted that 2019 guidance does not include the results of any pipeline acquisitions other than LUX.


StaffStaffAugust 30, 2019
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4min11680

California-based cannabis dispensary company Harborside Inc.  (CSE: HBOR) delivered its results for the second quarter ending June 30, 2019, with revenues up 20% to $12.7 million. The results were driven by 6.5% growth in retail revenue and 208% growth in wholesale revenue.

Harborside reported a net loss for the second quarter of $15.6 million versus last year’s net loss of $4.8 million for the same time period. It was attributed primarily to a $15.4 million provision for potential tax penalties under 280E. The company had fought the 280e tax battle, which would have benefited the entire industry had they won. Unfortunately,  the issue remains tied up in the courts.

In addition to that, the company had $3.6 million of non-recurring expenses related to its reverse takeover transaction and other one-time items, offset by a non-cash gain on derivative liabilities of $7.2 million due to translation on exercise prices of options and warrants, and conversion prices of debentures, denominated in other foreign currencies.

“The second quarter was a milestone for Harborside. On June 10, we listed on the CSE after completing the RTO and raising capital. I am pleased that in our first quarter as a public company, we reported solid revenue growth and were profitable on an Adjusted EBITDA basis and that we now rank among the top 20 US-listed cannabis companies by revenue,” said Harborside CEO Andrew Berman.

He went on to say, “That said, the Board and our executive team are not at all satisfied with the significant loss of market capitalization in our first months as a public company. While the overall market is down, what upsets us is that Harborside is down even more despite our installed base of revenue and solid growth prospects. We think we are significantly undervalued, and to demonstrate that firm belief, today we also announced that we are implementing a normal course issuer bid under which we expect to buy up to 5% of our subordinate shares.”

Deals Called Off

As of August 29, Harborside decided that it would not move forward with the purchase among “FLRish Retail Management & Security Services LLC and Airfield Supply Co., Inc. and its owner, in light of the company’s current share price and the substantial cash component of the purchase price which management has determined are not in the best interests of shareholders.”

In addition to that, Harborside said it also will not move forward with “The Agris Acquisition as contemplated by the Agris Agreement, in light of the principal owner’s demand for an increase in the purchase price and other terms which in management’s judgment make the transaction not in furtherance of the Company’s goals or strategy or otherwise in the interests of the Company’s shareholders, and given the Company’s already substantial capacity to produce high-quality cannabis at its Salinas facility at significant scale.” The company went on to say that Menna Tesfatsion, the founder and principal owner of Agris Farms, would not be joining Harborside as Chief Operating Officer.

Berman did give a forecast for 2019, “We are targeting $55 to $57 million of revenue and to achieve positive Adjusted EBITDA. We believe that the combination of solid topline growth and margin expansion for a cannabis asset trading at 1.5x revenue makes for a highly attractive investment opportunity.” 


Debra BorchardtDebra BorchardtJuly 29, 2019
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4min8110

It’s time for your Daily Hit of cannabis financial news for July 29, 2019.

On The Site

Nextleaf Solutions
Extraction technology company Nextleaf Solutions Ltd. (CSE: OILS) (OTCQB: OILFF) said that its common shares will begin trading today on the OTCQB Market. Nextleaf will trade on the OTCQB under the symbol “OILFF” and the company’s common shares will continue to trade on the Canadian Securities Exchange under the symbol “OILS”. Nextleaf owns a portfolio of issued and pending patents pertaining to the company’s unique, industrial-scale process of extraction and purification of cannabinoids.

CannBioRx
Special Purpose Acquisition Company (SPAC) KBL Merger Corp. IV (NASDAQ: KBLM) signed a definitive agreement for the merger of a wholly-owned subsidiary of KBLM with CannBioRx Life Sciences Corp., a drug development company focused on treating inflammatory diseases. It began trading last Friday as a NASDAQ-listed cannabis biotech.

Fake CBD
Hundreds of people have been benefited from using Cannabidiol (CBD) – a substance scientifically proven to be safe for human consumption – even for children!
It not only has a wide range of therapeutic benefits but also has been useful for treating numerous serious ailments and disorders. However, not all products touted as “natural CBD oil” are actually as natural they claim to be.

In Other News

SOL Global Investments Corp. (SOL.CN) (SOLCF) has purchased an additional 16,766,250 common shares in the capital of HeavenlyRx Ltd. at a price of $0.40 for an aggregate subscription amount of CAD$23,909,000.
The subscription is part of a larger private offering by HeavenlyRx of Heavenly Shares. As a result of this subscription, SOL Global now holds 44.53% of the issued and outstanding Heavenly Shares and the other shareholders of Heavenly Rx collectively hold the remaining 55.47%. The Heavenly Shares are subject to an indefinite hold period under applicable Canadian securities laws.

Radient Technologies Inc. (TSX Venture: RTI)(OTCQX: RDDTF) has issued an aggregate of 93,151 common shares to a third-party consultant for services provided during the quarter ended June 30, 2019, pursuant to the shares for service agreement previously approved by the TSX Venture Exchange. The common shares were issued at the TSX Venture Exchange 15 day VWAP share price of CAD $0.87.

Iconic Northern California cannabis company Harborside Inc. (CSE: HBOR) has appointed Mattio Communications as its investor relations advisors. Mattio is a New York-based communications firm which provides public and private cannabis companies with an array of services designed to maximize shareholder value through customized strategic investor relations programs (see https://www.mattio.com/). Harborside has also engaged Mattio to provide media and public relations support in an effort to build awareness of the Harborside brand and to capitalize on the company’s heritage as one of the oldest, largest and most respected cannabis retailers in the world.


Video StaffVideo StaffJune 14, 2019

6min14230

Harborside Inc. (CSE: HBOR) Co-founder and Chairman Emeritus Steve DeAngelo sat down with the Green Market Report’s Editor-in-Chief Debra Borchardt to discuss Harborside becoming a publicly traded company.

GMR Debra Borchardt

The company just went public this week on the Canadian stock exchange and it must be just super exciting because you are a pioneer in the industry.

Steve DeAngelo, Co-Founder Harborside Inc.

Yeah, it’s incredibly exciting. Harborside was one of the first six licensed cannabis businesses in the United States, that’s back in 2006. Today we’re growing to be seven dispensary’s, 200,000 square feet of grow space, 250 employees, and we’ve launched two brands that we’re pushing out into the marketplace.

GMR

You have about a 3% market share in California. What are your plans to increase that?

Steve DeAngelo

So two ways basically. Number one, we’re going to continue to increase our retail footprint. And two, we have developed these two brands, the Key brand, and the Harborside brand and we offer vape pens, we offer flowers, we offer edibles, a line of products in both of those two brands. And so, we’re in a hundred dispensaries now. We’ll be in three or four hundred dispensaries within several months.

GMR

What makes Harborside so special because there are so many dispensaries competing for business right now. Why is a consumer going to go in your door versus another door?

Steve DeAngelo

Well, it’s a values-based proposition. Harborside has a well-earned reputation for not just being after our own financial gain but also representing values. And so, we’re very committed to the values of diversity and building a cannabis industry that is diverse. We were very committed to the values of fairness and economic justice and we’re very committed to the values of sustainability and you can see those values in everything we do

GMR

You really have a reputation as caring for the customer, caring for the patient, because that’s really was where you guys made your name was caring so much for the patients that were coming to you.

Steve DeAngelo

You know, Harborside was a medical cannabis dispensary for most of our life. And so, we had to be very, very careful to make sure that we gave not just customer service but also patient care. And that has developed an ethic in our culture of really engaging with everybody who comes through our door. We like to say that we want everybody to come out of Harborside feeling better than they came in.

GMR

So let’s talk about the elephant in the room, which is that 280E case. We know you guys have been fighting and really fighting it for the whole industry. If that judgment goes against you, what amount of money do you expect you would have to pay and is that money already set aside?

Steve DeAngelo

The maximum amount of money that we could be liable to the IRS has already been accounted for and is available as needed but this is a long ongoing struggle. We’ve been in this litigation for about 10 years now. It’s not going to end for at least several more years. We did have an adverse ruling on the underlying case at the trial court but we won on the penalties phase and we’re now appealing to the Ninth Circuit Court of Appeals, the most favorable court in the country on cannabis. There’s also legislation pending in the Congress, which is going to resolve the 280E situation. So, it’s far from over. Harborside will keep doing what we always do. We stand up for the industry, we stand up for what we think is right, and we’ll keep on doing that until we either win the case or have exhausted all legal avenues.

GMR

A lot of people may not know that you were part of the Yippies, that you have a storied history associated with this plant. Did you ever in your wildest imagination think that this was going to happen? Did you think it was going to happen sooner or what has been the biggest surprise to you with this?

Steve DeAngelo

There has never been any doubt in my mind that we would see a respected, honored place for cannabis in our society because of the inherent properties of the plant, its value and its safety just make it necessary over time. What has surprised me and still surprises me is how long that it’s taking us to get there.

GMR

You have been working on this for many years and I’m so thrilled that you took the time to talk to us at the Green Market Report.


Debra BorchardtDebra BorchardtJune 10, 2019
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The much-anticipated Reverse Takeover for Harborside Health began trading on the Canadian Securities Exchange using the symbol HBOR on Monday. The plan to go public was originally announced back in August of 2018. At that time, Toronto-based Lineage Grow Co. said it would acquire Oakland-based FLRish – which manages Harborside’s retail and dispensary operations – in exchange for newly issued common shares of Lineage worth roughly 200 million Canadian dollars or $152.2 million.

Harborside was a pioneer in the medical marijuana world. It made the first legal cannabis sale in California and has been serving over 300,000 patients and generating over $400 million in sales since those early days. Harborside currently commands 3% of the entire CA retail market, which is by a landslide the biggest market in the country.

The company has previously completed a $26 million Series B funding round and a $14.6 million Series C. Founder Steve DeAngelo’s tireless, decades-long cannabis advocacy has made Harborside the most trusted and respected name in the game.

History

When Steve DeAngelo and Dress Wedding ( yes, his real name) founded Harborside in Oakland in 2006, they had the distinct purpose of providing patients with a safe, trusted source for high-quality medical cannabis products. The San Jose location is one of the first dispensaries in the city. In late 2016, the company acquired a cultivation facility in Salinas, allowing it to grow its own flower, which helped expand the product offerings and increase margins. The company currently employs 250 people in total and they are currently planning the expansion of Harborside locations throughout the Bay Area and eventually to San Leandro and more.

Tax Overhang

One issue clouding the IPO was the tax case that Harborside fought with the government over the 280e business deduction claim. DeAngelo said, “We did not seek this fight with the federal government, but don’t shrink from standing up for our rights and the rights of the cannabis industry when we think they are under threat. Our tax case began in 2009 when we challenged the right of the government to apply 280e to state-legal cannabis businesses. The case has wound through the courts since then, with wins and losses on both sides. Most recently, at the trial court level, the IRS won on the underlying judgment, while we won on the imposition of penalties.”

He went on to add, “We have appealed that ruling to the 9th Circuit Court of Appeals, historically one of the most favorable appeals courts for cannabis cases. We hope for a better ruling there. No matter what, our intention is to pursue this case until we either win or all legal avenues are exhausted. Unless the IRS decides to voluntarily dismiss its case, that process is expected to take several more years.”


William SumnerWilliam SumnerJune 6, 2019
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It’s time for your Daily Hit of cannabis financial news for June 6, 2019.

On the Site

Cresco Capital Partners

Cresco Capital Partners (Cresco Capital) announced today that it has closed an oversubscribed fund of $60 million. Founded in 2014, Cresco Capital was one of the first and largest private equity firms to focus solely on the legal cannabis industry.

Italian court bans cannabis derivatives, in blow to popular sector

Italy’s top court has banned the sale of cannabis products, on the heels of threats by the country’s deputy prime minister to close shops who sell legal derivatives of the plant. Deputy Prime Minister and far-right League leader Matteo Salvini had declared war on so-called “cannabis light” shops in the run up to the European Parliament elections.

In Other News

Harborside

Harborside Inc. has announced that it has filed its listing statement with the Canadian Securities Exchange and that it will begin trading shares of the company on June 10, 2019 under the ticker symbol “HBOR.” “The start of trading represents a significant milestone for Harborside, and we’re grateful for the support that we’ve received from the CSE throughout the process,” said Harborside CEO Andrew Berman. “We’re excited to move forward as a public company, with a vehicle that attracts growth capital from new investors, and continue maintaining Harborside’s status as California’s premier cannabis operator.”

PharmaCielo Ltd.

PharmaCielo Ltd. (TSXV: PCLO) has entered into an implementation agreement to acquire all of the issued and outstanding shares and listed options of the global medical cannabis company Creso Pharma Ltd. for A$122 million. Under the agreement, PharmaCielo will pay A$0.63 per share, which is a premium of 50% over the closing trading price of the Creso Pharma shares on May 31, 2019. “PharmaCielo’s acquisition of Creso Pharma, harnessing the synergies between us, creates a combined company that is poised to become a global powerhouse in the medicinal cannabis industry,” said David Attard, CEO of PharmaCielo. “Upon closing of the transaction, the combined company will quadruple our global footprint with presence in more than a dozen countries spanning North and Latin America, Switzerland, Europe, the Middle East, Australia and New Zealand.”

Aleafia Health

Aleafia Health Inc. (TSX: ALEF) (OTC: ALEAF) (FRA: ARAH) reports that it is offering 35,000 convertible debenture units of the company, at a price of $1,000 per unit, for a total of $35 million. Leading the offering is Mackie Research Capital Corporation and BMO Capital Markets, which is acting on behalf of a syndicate of agents including Canaccord Genuity Corp.  The proceeds of the offering will be used for working capital requirement and other general corporate purposes.

Medicine Man Technologies

Medicine Man Technologies, Inc. (OTCQX: MDCL) has entered into a securities purchase agreement for the sale of up to $14 million of the company’s common stock from an affiliate of the private equity firm Dye Capital & Company. The company will use the proceeds to fund growth initiatives. The company also announced a series of pending acquisitions, including MedPharm Holdings, Colorado’s first licensed cannabis research & phytopharmaceutical company; Medicine Man Denver; Los Sueños Farms,  North America’s largest sustainable cannabis farm; and Mesa Organics, a cannabis products manufacturing company. “Dye Capital is the right partner for our Company with a unique set of skills and experience in merger and acquisition transactions, integration experience, and scaling operations.  Our entire team is excited about teaming with Dye Capital,” said Medicine Man Technologies Co-Founder and CEO Andy Williams.


William SumnerWilliam SumnerJune 6, 2019
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3min31810

Cresco Capital Partners (Cresco Capital) announced today that it has closed an oversubscribed fund of $60 million. Founded in 2014, Cresco Capital was one of the first and largest private equity firms to focus solely on the legal cannabis industry. Although the two names are similar, Cresco Capital is not connected to Cresco Labs (OTCMKTS: CRLBF), which is a vertically owned cannabis company operating in 11 U.S. states.

“Surpassing our original goal of raising $50 million for CCP Fund II by almost twenty-percent not only represents a significant milestone for Cresco Capital Partners, it serves to validate the leadership role we play in providing growth capital and advisory services to companies within the cannabis industry,” said Matthew Hawkins, Managing Principal of Cresco Capital Partners. “With the overwhelming success of CCP Fund II, we are preparing to begin marketing a third fund in which we hope to raise $200 million. This fund will continue to target investments in value-add opportunities in the legalized cannabis space both plant touching and non-plant touching.”

To date, the company has raised more than $85 million and has invested over $50 million in 32 cannabis companies through two funds, CCP I and CCP II, and co-investment vehicles.

The company’s portfolio includes a diverse set of cannabis companies, ranging from cultivation to ancillary services. Several of Cresco Capital’s most notable investments include MJ Freeway, PROHBTD, NorCal Cannabis Company, Sunderstorm, Phylos Biosciences, Sublime, Cellibre, and Harborside/FLRish Inc. Most recently, Harborside closed a C$19.5 million private placement of subscription receipts, with Cresco Capital as one of its investors.

So far, the company has achieved seven exits between its two funds; including Acreage Holdings (OTCMKTS: ACRGF) and Green Thumb Industries (CNSX: GTII); who recently closed the acquisition of Integral Associates, which holds multiple retail dispensary licenses in California and Nevada, as well as two cannabis cultivation and processing facilities.



About Us

The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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