StateHouse Archives - Green Market Report

Debra BorchardtJuly 29, 2022
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StateHouse Holdings Inc. (CSE: STHZ) (OTCQX: STHZF) reported that it reached a Partial Payment Installment Agreement with the Internal Revenue Service related to the federal tax returns of its wholly-owned subsidiary Patients Mutual Assistance Collective Corporation for the 2007 to 2012 fiscal years and the 2020 fiscal year. Formerly known as Harborside and one of the earliest medical marijuana dispensaries to exist, the company had waged a fight about cannabis company taxation. The plan was met with investor cheers as the stock jumped 18% on the news of the resolution.

Unfortunately, StateHouse lost that battle. Back in February of 2021, the United States Tax Court ruled in favor of the Commissioner of Internal Revenue. The company said it owed approximately $22.1 million in federal taxes. StateHouse said it has reached an agreement for the payments to pay its tax bill through the payment of approximately $5.8 million, to be made through $50,000 per-month payments over an expected period of 116 months, beginning in August 2022. StateHouse has said all along that it set aside tax money in case the judgment went against them and had roughly $21.6 million as of March 31, 2022.

The company said in a statement, “Given that the Provision is significantly higher than the anticipated repayments under the Agreement, the Company expects to record a positive non-cash accounting adjustment of approximately $15.8 million to reverse previous accruals in its financial results relating to the Provision. It is anticipated that the adjustment will be reflected in the Company’s financial results for the second quarter ended June 30, 2022.”

“This is a landmark agreement for our Company,” said Ed Schmults, StateHouse Chief Executive Officer. “By resolving this longstanding 280E obligation, and more recent federal tax obligations, in a satisfactory manner, StateHouse has demonstrated its leadership in the U.S. cannabis sector. This result provides significant clarity for investors on an issue of critical importance and puts StateHouse in a much stronger competitive position. It is an important step on our path to building a flagship California cannabis company.”

“We are grateful to the IRS for working with us to resolve this issue,” Mr. Schmults continued. “The federal tax burden on legal cannabis businesses is highly punitive and very difficult to navigate while trying to achieve profitability. The Agreement demonstrates that we can successfully manage the challenging taxation issues arising from the IRS 280E Tax Code, until there is reform at the federal level. We believe the case for this reform is very strong, as it would create tax fairness for legal cannabis businesses and significantly weaken the illicit market, which would result in stronger tax collections for the federal government over the long term.”

In addition, the Agreement allows the company said it will recategorize the majority of the related liability as a non-current liability, materially reducing the short-term obligations on its balance sheet.


Debra BorchardtNovember 30, 2021
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After the market closed on Monday, Harborside Inc.  (CSE: HBOR), (OTCQX: HBORF) announced it was buying California retailer UL Holdings Inc. also known as Urbn Leaf, and  LPF JV Corporation, better known as Loudpack. Loudpack is a manufacturer, cultivator and distributor of award-winning cannabis brands in California.  The newly combined company will be renamed StateHouse Holdings. The company said that it expects to trade the new company on the Canadian Securities Exchange under a new symbol (CSE: STHZ) and the deal is expected to close in the first half of 2022.

Ed Schmults, the current CEO of Urbn Leaf, is expected to be appointed as CEO of StateHouse upon completion of the Urbn Leaf Transaction and will be joining the Board of Directors of StateHouse. Marc Ravner, the current CEO of Loudpack, is expected to be appointed as President of StateHouse upon completion of the Loudpack Transaction and will be joining the Board of Directors of StateHouse. Matthew Hawkins, current Chairman and interim CEO of Harborside, will remain as Chairman of the Board of StateHouse.

“Since reconstituting the Company’s board of directors last year, our team embarked upon an ambitious mission to create a unique platform capable of consolidating California and driving significant growth through added scale. With these transactions, we are working to create a west coast cannabis powerhouse,” said Mr. Hawkins. “California is one of the world’s largest legal cannabis markets, with sales expected to reach $7.4 billion by 2025. StateHouse will have a unique ability to navigate the operating challenges in the state and capitalize on the combined potential of the businesses we are acquiring. We are building what we believe is the ideal platform to consolidate the California cannabis sector, positioning us for long-term growth in both market share and profitability. Ed Schmults, an experienced leader with a proven retail and cannabis track record, is the right person to lead StateHouse into the future.”

The company said in a statement that it believes that StateHouse will have the highest estimated annual revenue and brand market share among its current publicly-listed California cannabis companies. Through the first nine months of 2021, Harborside, on a pro-forma basis including revenue of Sublimation for the entire period, had gross revenue of $57.8 million, while Urbn Leaf and Loudpack had revenue of $45.9 million and $61.4 million, respectively. By that calculation, on a pro forma basis, management estimates that StateHouse would have generated gross revenue of approximately $165 million for the same period.

Forecast Is Pulled

In addition to announcing the big transaction, Harborside also delivered some sobering news to investors. The company said it was withdrawing its previous revenue guidance for 2021 and said it would revisit the forecast after the deal closes. A variety of reasons were given including a decline in wholesale pricing for bulk products in the California market and a decline in retail revenue which was primarily due to a decrease in retail store foot traffic.  Harborside said this was due to the California retail market experiencing a softening in consumer demand and the beginning of commoditization decrease in wholesale revenues as a result of a decline in wholesale pricing for bulk products in the California market. “Operationally, the company also implemented a change in its harvest procedures which delayed flower production in Q3 2021 to allow for the adoption of a perpetual harvest schedule beginning in Q4 2021. The Production Campus also experienced a temporary COVID-19 related supply chain issue with a growing medium (substrate material) which did not meet agreed-upon specifications and thereby caused a short-term reduction in harvest yields.”

Third Quarter Earnings

Harborside reported that total gross revenues were $17.9 million, 10.4% higher sequentially than the previous quarter. However, both retail and wholesale revenues fell sequentially and the difference was only made up through manufacturing revenues, which didn’t exist in the second quarter. The manufacturing revenues came as a result of the Sublime acquisition.

The net income grew to $2.7 million versus the second quarter’s $1.7 million. The increase in net income attributable to Harborside was primarily the result of a one-time gain of approximately $5.3 million in the quarter due to the adjustment of the estimate for uncertain tax liabilities related to Internal Revenue Code section 280E, along with fair value gains in other current assets, derivative liabilities and preferred shares.

Pelorus Lower Coast Financing

Along with the transaction, the company received $77.3 million in rollup debt financing with Pelorus Equity Group who is expected to provide non-dilutive capital, leveraging StateHouse’s significant real estate portfolio. “We’re excited to be able to fund such a significant rollup in the California market,” said Travis Goad, Managing Partner of Pelorus Equity Group. “We think the combined companies will be a formidable player on a go forward basis. This loan is one of our first in our new lower cost stabilized lending program.  We expect this stabilized lending program will continue to be the best-in-class financing option for cannabis operators with cash flowing assets, especially for complex transactions such as this. Pelorus is constantly innovating new financing solutions for the cannabis real estate market.”   

StateHouse Statistics

Following the combination, Statehouse said it would have the following:

  • 15 retail locations, representing the number two retail platform in California under one unified banner with further planned expansion;
  • Nine popular brands, including top-five ranked brands in the pre-roll (Fuzzies and Kingpen), edible (Smokiez) and value flower (Dime Bag) segments, representing the #3 ranked brand house in California
  • Manufacturing facilities with an annual capacity of more than $400 million in branded products revenue at full utilization, with capabilities to produce across all product formats offered by the Company
  • A state-wide distribution network for the Company’s branded products that reaches more than 780 active accounts, including approximately 75% of California dispensaries
  • 230,000 square feet of greenhouse cultivation space, with additional near-term expansion capacity of more than 100,000 square feet of canopy
  • 36,000 pounds of cultivation capacity with 22,000 pounds of additional near-term cultivation capacity

 


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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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