By Sara Brittany Somerset
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Oakland, California – Founded in 2006 and beginning as a nonprofit, pioneering dispensary Harborside was awarded one of the first six medical cannabis licenses granted in the United States and made the first legal cannabis sale in the state of California. The company is serving over 300,000 patients and generating over CAD $400 million in sales since then.
Harborside dispensary has been through some harrowing times including a legal row with the IRS. However, the company is bouncing back and going public.
Harborside currently commands 3% of the entire CA retail market, which is by a landslide the biggest market in the country, according to the company.
Harborside Inc. (formerly Lineage Grow Company Ltd.) is announcing today the completion of its reverse takeover of FLRish, Inc. (d/b/a Harborside) (“FLRish”). FLRish is one of California’s largest vertically integrated cannabis companies. FLRish cultivates, processes, manufactures, distributes, and retails cannabis products in several facilities throughout the state.
Pursuant to the terms of a merger agreement dated February 8, 2019, as amended on April 17, 2019 among the Company, FLRish, Inc. and Lineage Merger Sub Inc., a wholly-owned subsidiary of the “reverse Takeover”. The Reverse Takeover was completed by way of a “three-cornered merger” whereby FLRish merged with Merger Sub to form a merged corporation and a wholly-owned subsidiary of the Company.
Immediately prior to the Reverse Takeover taking effect, Harborside consolidated its common shares on the basis of approximately 41.82 common shares into one new common share (the “Consolidation”), (b) changed its name to Harborside Inc., (c) reclassified the post-Consolidation common shares as subordinate voting shares (the “Subordinate Voting Shares”) and (d) created a new class of multiple voting shares (the “Multiple Voting Shares”). On closing, the holders of shares of FLRish received Multiple Voting Shares, Subordinate Voting Shares or a combination thereof, for each share of FLRish outstanding immediately prior to completion of the Reverse Takeover.
Harborside’s new board of directors is now consisted of Andrew Berman, Peter Bilodeau, Adam Szweras, Matthew K. Hawkins, Tracy Geldert, Sherri Altshuler and Nayir Felix Munoz, with Mr. Bilodeau as Chairman. Mr. Andrew Berman, CEO of FLRish, is now the President and CEO of the Company, with Mr. Keith Li continuing his role as CFO of the Company. Mr. Jack Nichols has been appointed the Corporate Secretary of the Company. Iconic Founder Mr. Steve DeAngelo serves as Chairman Emeritus.
Andrew Berman, CEO of Harborside Inc., said in a press release this morning, “Today is a historic day for Harborside. The company has served as a pioneer for the entire industry, and we’re excited to extend Harborside’s tradition of ‘trust, choice, and value’ to both our customers and our shareholders.”
It is expected that the Subordinate Voting Shares will be listed on the Canadian Securities Exchange (“CSE”) at the opening of the markets on or about June 6, 2019, subject to the satisfaction of certain conditions to listing, and are expected to trade under the symbol “HBOR”. In conjunction with the closing of the Reverse Takeover, the Company’s auditors will be MNP LLP.
Law Firm Aird & Berlis LLP acted as FLRish’s Canadian legal advisor, whilenDuane Morris LLP acted as FLRish’s U.S. legal advisor. Fogler, Rubinoff LLP acted as Lineage’s Canadian legal advisor.
Harborside going public is a monumental step in the industry symbolically and financially. The company claims it plans to increase sales growth and deliver profitability, driving its retail and wholesale business off the production from its stores and farms. Three additional stores and a grow facility are already in the works.
In May 2019, Harborside executed a reverse takeover with Lineage Grow Company adding two dispensaries in prominent cities in Oregon, additional cultivation, distribution and retail assets to its portfolio, and an expected public listing on the CSE. The Company has entered into a purchase agreement with Walnut Oaks, LLC d/b/a Agris Farms and has signed a binding letter of intent to acquire Lucrum Enterprises, Inc. d/b/a LUX.
The company has previously completed a $26 million Series B funding round and a $14.6 million Series C.
In a landmark U.S. Tax Court ruling, the case of Harborside Health Center of Oakland vs. the IRS finally concluded last year on Monday, December 3rd. Predictably, the courts adhered to Internal Revenue Code 280E, citing the federally illegal classification of cannabis. Meaning, the dispensary must repay the majority of its tax deductions claimed from 2007 through 2012.
Harborside’s supporters feel that the dispensary is being scapegoated and penalized for paving the way to state legalization. “The IRS is using 280E to police businesses that are otherwise complaint,” said a source close to the case.
IRS Setback is a Catch-22
While the company pays taxes, it is unable to claim tax deductions for operating expenses.
Internal Revenue Service (IRS) Rule 280E prohibits businesses from conducting expenses associated with the trafficking of illegal substances as defined by the Controlled Substances Act (CSA) on federal income tax statements.
According to the IRS, Rule 280E, “Also prevents cannabis companies from deducting large portions of their operating expenses,” resulting in higher tax rates as compared to other industries.
According to an internal Harborside document, “280E is a contingent liability,” for its Oakland location. Harborside uses a franchise-like dispensary model to navigate the US regulatory framework.
The Tax Court ruling on Harborside’s case reinforces that IRS Code 280E will staunchly remain operational for canna-businesses, even those operating within state-legal markets.
In the ruling, Patients Mutual Assistance Collective Corp. (d.b.a. Harborside) was ordered to reimburse potentially tens of millions of dollars. The dispensary owes CAD 30M ($22.41 million) to the IRS.
Meanwhile, they have two stores that are forecasted to bring in CAD 49M in revenue this year. Harborside raised CAD 30M on their convertible, so perhaps they can settle with the IRS for eight to ten million. However, that did not leave much money for their recent acquisitions until their capital raise.
According to an internal company report, their total revenue in the 2017 fiscal year was CAD 58.9M ($44.44 m) while their gross revenue was CAD 11.2M ($8.45 m).
Legendary Cannabis Activist
To many, Steve DeAngelo is an icon, a pioneer and a patient advocate all rolled into one. His tenacious, decades-long cannabis advocacy has made him legendary throughout the industry. Subsequently, Harborside a trusted and respected name in a sea of competitive for-profit companies that are eager to cash in on the greed rush without offering any corporate social justice initiatives.
From grassroots community campaigns to appearing on national television networks, and every uphill battle for legalization in between, DeAngelo has been on the frontlines as an activist for more than four decades. He played a key role in the passage of Initiative 59, Washington DC’s medical cannabis law and the passage of Prop 64, California’s adult use law. He successfully defended multiple attempts by US federal authorities to close Harborside. He continues to stand for legalization and decriminalization of cannabis around the globe.
According to SXSW, DeAngelo believes a profitable, ethical, politically-engaged cannabis industry will be the most powerful force in spreading cannabis reform to every corner of the planet. He will not rest and will not stop until the last cannabis prisoner is free.