Harborside HBORF Stock Upside Potential For Long Term Investors

Harborside HBORF stock is a fully vertical cannabis company in the Bay Area, California, as well as having a dispensary up in Oregon.  There are six total dispensaries; 3 fully owned, 1 fully managed, 1 with a total of 21% ownership; all in California, as well as the Oregon dispensary.  At the beginning of the year, Harborside guided that they would be printing about $65M – $75M in revenue.  They just recently put in their MD&A that they will miss this.  Given what they have printed, they are looking like they might get luck to hit $55M – $65M.  Also, Harborside – Note: Name change to Statehouse STHZ Stock)is looking to divest Oregon and focus entirely on California.  That is a good idea, if you ask me as this is the biggest single market in the United States, even bigger than the entire country of Canada.  Also, there is a dispensary that Harborside is moving to a different location.  By doing this, Harborside will be able to better serve the area and, there will be cost savings.  For now, it does not appear that the State of California is issuing any new dispensary licenses.  This could be both an advantage and disadvantage simultaneously.

For now, focusing on cost savings, bringing the core business into a collective sovereignty, will better position Harborside moving forward.

I wanted to break down what there is now for the company but, looking forward is going to be difficult since we do not have the numbers for splitting out the company.  Nonetheless, this is a decent starting point for keeping an eye on Harborside.

Harborside HBORF Stock Comparison

Here are the numbers for comparing the cannabis companies on my Complete List of Top 100 Cannabis companies:

• #65 Market Cap: $29M
• #29 Revenue Growth Rate: 24.2%
• #21 Gross Margins: 57.1%
• #34 Operating Efficiencies: 58.4%
• #28 EBITDA/Revenue: 1.9%
• #43 Cash/Debt Ratio: 24.3%
• #43 Total Assets: $31.3M

As far as how Harborside stacks up against the other companies I’m looking at, they are in a decent position, but there are some areas I’d want to see improvements.  They have solid gross margins and I think they will continue to push forward with this.  Also, they may see costs savings in operating costs after divesting the Oregon operations, so it may be that operating costs are on the cusp of improving.

Harborside HBORF Stock Financial Data

Revenue

As I mentioned, I think Harborside may, at best, hit about $55M given what they have already printed, about $27.8M:

Revenue growth is a potential with current dispensaries.  But, what is Oregon contributing?  There may be an initial drop in revenue once this arm of the business divests.  But, it may be that costs will improve, so I do not see this as a bad thing, but this may be balanced out with improved margins.  That’s an even balance, if you ask me and completely worth what the new direction is heading towards.

Gross Margins

Harborside has solid gross margins and should only improve from here:

Dispensaries tend to have consistent gross margins and so, being vertically integrated – meaning having a grow facility, processing facility, as well as dispensaries; all three aspects of a cannabis company – the dispensaries will balance out any variability with growing products.  Dispensaries have a lot of fixed costs such as the rent on the building.  And, dispensaries have a pretty solid idea how many customers are going to walk through the doors on Monday morning as well as Friday evening.  This creates easily projectable costs.

Then, once Harborside starts growing organically at any one store, showing revenues that are higher on a year-over-year basis, this allows for improved metrics.  The very same resources are selling more product with no additional costs; all else equal.

Operating Efficiencies

Harborside operating efficiencies are a bit shallow at this point, but, management guided in the latest MD&A that the focus of moving one dispensary and selling the Oregon dispensary will create cost savings.  Perhaps this will affect operating efficiencies:

There is no telling how much Oregon adds to revenues & costs so it is difficult to project from here.  But, the focus is cost savings so, I imagine ultimately, there will be an improvement here.  Simultaneously, any organic growth from the company in general will improve operating costs: You want the lowest number in this metric.

The math is simple: Total operating costs divided over total revenue.  For now, Harborside has fairly steady operating costs.  But, more revenue typically means higher costs here despite the fact that operating costs are Sales, General, & Administrative (SG&A).  If revenue increases organically, all else equal, this metric will improve as operating costs diminish relative to revenue.

EBITDA Profits

Harborside has been able to print positive EBITDA numbers for this quarter:

I wonder how divesting Oregon will affect EBTIDA?  For a newish company, hitting EBITDA profits are the first real milestone achievement after production commences and the company makes its first sale.  Once a company hits EBITDA profitability then, all they would need to do is continually grow.  Marginal profits will continually trickle downward to EBTIDA profit and then, ultimately, net earnings.

Net Earnings

For now, Harborside has achieve net earnings positive, that ultimate goal of a new company:

I caution, however, that Harborside printed $4M in revenue & income outside of normal operations.  So, this should not be counted upon for future analysis.  Yet, Harborside has also printed sequential income outside of normal operations making it reliable.  I still look at it as a gift for this quarter and am more focused upon the real data of the core business.

Cash On Hand

For a business that is only worth $29M, there is a decent amount of cash on hand:

But, this amount of cash on hand is misleading in the sense that there is some debt.  You need to consider cash on hand, cash:debt ratio as well as total assets when you look at any of these three metrics.

Cash Debt Ratio

Cash:Debt Ratio is at about 24%, putting Harborside in the middle ground for cannabis companies with the companies I keep track of.

Considering the cash position, and its relationship to debt, I’m ever so slightly uneasy here.  Harborside would need to bring in more cash to sustain operations.  Otherwise, there will need to be a capital raise.  Given that, I’d like to see Harborside achieve a higher EBITDA rate relative revenue after the divestiture of Oregon.  Also, Oregon itself is likely to add a little bit of cash to the coffers which, that may be enough.

Total Equity

Harborside is seeing an increase in total assets:

Keep in mind, Harborside is also selling an asset.  So, this will not continually increase and analysis is going to have to take that into consideration.

Harborside HBORF Stock Chart

Lately, cannabis stock have seen significant sliding and, there is no real support here with Harborside:

As I have seen in the forum, there are many postings about short-interest.  This short interest is getting bigger and bigger.  And, along with driving other cannabis stocks lower, this is also a negative feedback loop.  Cannabis stocks are selling and so ETFs are getting redemptions which, this is pushing people out of cannabis stocks even more.  The feedback loop is getting very big.

Is Harborside HBORF Stock a Good Investment?

There are things that I like about Harborside.  First, gross margins are strong and, I expect this will only improve with time.  Harborside could easily push these metrics from where they are now.  It will not take too much more inventory sold in dispensaries to get cost of goods down to about 35% – 40%; gross margins up to 60% – 65%.

Operating efficiencies, with higher revenue and decreased costs coming out of Oregon, are likely to improve as well over time.  And, I do not expect that Harborside will be as high are they are with this metric for too long.

Cash on hand is a bit slight.  But, selling Oregon may put some cash into the coffers and improve costs and, therefore, get Harborside closer to break-even.

Given that, if Harborside were to hit about $75M in revenues, with a 40% cost of goods, 40% in operating costs, 10% in continuing costs, this would leave $7.5M in net earnings (Excluding the occasional earnings outside of normal operations).  With that kind of net income, with a current 36M shares outstanding, the potential would be for $0.02 EPS.  This could push the stock upwards to $2.00 over a period of time.

Then, given any strategic opportunities, Harborside could continue to build up its business and possibly merge with other California companies.  While the $2.00 is not terribly high, it shows that for now, Harborside is within shot of profitability and that there is upside potential.

But, I am waiting to see what will happen with the Oregon divestiture as well as cash on hand and any new guidance we may see in the future.