Harborside Inc. (“Harborside” or the “Company”) (CSE: HBOR), (OTCQX: HBORF) a California-focused, vertically integrated cannabis enterprise, today announced the completion of its previously announced acquisition of Sublimation Inc. (“Sublime”), an award-winning cannabis manufacturing company located in Oakland, CA, for a total consideration of US$43.8 million (the “Acquisition”).
“We are thrilled to complete this Acquisition and add Sublime’s talent and its iconic, award-winning California brand, with an exceptional product offering and consumer following, to our growing brand portfolio,” said Peter Bilodeau, Interim CEO of Harborside. “With a strong balance sheet and deep cultivation and brand building expertise, our unified company is well-positioned to support the continued growth of the Sublime brands while expanding the reach of Harborside’s existing branded product portfolio in both the retail and wholesale markets.”
Ahmer Iqbal, CEO of Sublime, added, “We are thrilled to officially join forces with Harborside and create a leading California house of brands. Together, we can leverage our vast production and retail capabilities to further expand the distribution of our suite of branded products. On behalf of my team, we look forward to commencing the integration process and working together to scale Harborside’s reach.”
Founded in 2016, Sublime is best known for its expansive line of high-potency, high-quality and affordable, Fuzzies branded pre-rolls, a leading brand of pre-rolls in the state of California, as well as vapes and roll-your-own flower kits. Since 2019, Sublime has delivered a revenue CAGR of approximately 70%, and ended 2020 with 7.9% California pre-roll market share.(4) Sublime is strategically positioned for continued growth as pre-rolls are the fastest growing cannabis sub-segment within the California market since the beginning of 2020.(4)
Harborside expects to realize significant synergies by bringing together Sublime’s brands, production capabilities and robust distribution system with the high-quality cannabis grown at the Company’s Salinas, California cultivation facility which is anticipated to result in additional gross profit and EBITDA by extending the reach of Sublime, Harborside and Key branded products throughout the state of California.(1)(2)(3) Harborside also expects to bolster Sublime’s marketing capabilities, which is expected to drive higher retail margins for the Company as an owned brand within its portfolio.(2)(3)Finally, Harborside will seek to license the Fuzzies California lifestyle brand in additional legal recreational markets across the country, particularly those that do not currently have high potency infused products.(2)
Transaction Details
Harborside has acquired 100% of the issued and outstanding shares of Sublime (the “Sublime Shares”) in exchange for a total consideration of US$43.8 million (the “Purchase Price”). The Purchase Price comprises of approximately US$38.4 million payable in multiple voting shares of the Company, representing 207,579.66 multiple voting shares (“MVS”) of the Company based on volume-weighted average price of the subordinate voting shares of the Company (the “SVS”) on the Canadian Securities Exchange (the “CSE”) for the 30-days immediately preceding the date of the initial agreement and approximately US$5.4 million in cash (of which approximately US$3.4 million was used to repay indebtedness of Sublime). The Purchase Price represents a multiple of approximately 1.78x to the estimated $24.6 million of standalone 2021 revenues for Sublime.
Concurrent with the closing of the Acquisition, the Company entered into a lock-up agreement with certain shareholders of Sublime (the “Locked-Up Shareholders”) in respect of the MVS to be received by such shareholders pursuant to the Acquisition (the “Lock-Up Agreement”). Pursuant to the Lock-Up Agreement, the Locked-Up Shareholders agreed not to sell, assign or otherwise transfer the multiple voting shares received. The restrictions lapse in three installments with 50% of the shares released from the restrictions on the 12-month anniversary and 25% of the shares released from the restrictions on each the 15-month and 18-month anniversaries from the closing of the Acquisition, respectively.
In addition, concurrent with the closing of the Acquisition, the Company granted options (each, an “Option”) to purchase an aggregate of 536,875 SVS to certain employees of Sublime, who are now employees of the Company. Each Option is exercisable into one SVS in the capital of the Company at an exercise price of $1.78. The Options will expire five years from the date of grant and are subject to vesting conditions. All Options were granted in accordance with Harborside’s equity incentive plan adopted by the Board of Directors of Harborside on June 30, 2020, and approved by shareholders on November 24, 2020 (the “Plan”). A copy of the Plan is available under the Company’s SEDAR profile at www.sedar.com.
Financial and Legal Advisors
ATB Capital Markets Inc. acted as financial advisor, and Duane Morris LLP and Cassels Brock & Blackwell LLP acted as legal counsel to Harborside. PI Financial Corp. provided a fairness opinion to the Board of Directors of Harborside. VIII Eight Capital acted as financial advisor, and CGL LLP and Gowling WLG (Canada) LLP acted as legal counsel to Sublime.
Early Warning Disclosure
Immediately prior to completion of the Acquisition, Cresco Capital Partners II LLC (“Cresco”) beneficially owned, and exercised control or direction over, 697,638 SVS, 35,500 MVS and 35,500 warrants to purchase MVS, representing approximately 15.49% of the issued and outstanding MVS on a non-diluted basis and approximately 26.82% of the issued and outstanding MVS on a partially-diluted basis, assuming the exercise of the warrants held by Cresco. Assuming the conversion of all of the MVS beneficially owned, or controlled or directed, by Cresco, and that no other securities, including those convertible into, or exercisable for, Harborside’s securities, are issued, converted or exercised, Cresco beneficially owned, and exercised control or direction over approximately 18.68% of the SVS. On a fully-diluted basis, Cresco owns less than 10.0% of the issued and outstanding SVS and approximately 12.76% of the issued and outstanding SVS on an as-converted and partially-diluted basis.
The completion of the Acquisition resulted in the issuance of 207,579.66 MVS to Sublime shareholders. Cresco is entitled to a minimum of 20,570.25 MVS based on its ownership of the Sublime Shares, representing a decrease in Cresco’s interest in the MVS of approximately 7.43% on a partially diluted basis, although (i) such MVS are currently held in trust on behalf of Cresco for 12 months; and (ii) Cresco will be entitled to a substantial number of additional shares under the terms of the Lock-Up Agreement and escrow arrangements amongst the former shareholders of Sublime. At this time, the total number of MVS that Cresco is entitled to is unknown but will be substantially higher than 20,570.25 MVS. Assuming Cresco is only entitled to 20,570.25 MVS, Cresco beneficially owns, and exercises control or direction over, 697,638 SVS, 91,570.25 MVS and 35,500 warrants to purchase MVS, representing approximately 12.84% of the issued and outstanding MVS on a non-diluted basis and approximately 19.39% of the issued and outstanding MVS on a partially-diluted basis, assuming the exercise of the warrants held by Cresco. Assuming the conversion or all of the MVS beneficially owned, or controlled or directed, by Cresco, and that no other securities, including those convertible into, or exercisable for, Harborside’s securities, are issued, converted or exercised, Cresco beneficially owns, and exercises control or direction over approximately 22.50% of the SVS, representing an increase in Creso’s interest in the SVS of approximately 3.82%.
CCP Flrish Inc. (“CCPF”), Cresco Capital Partners, LLC (“CCP”), Matthew K. Hawkins (“Hawkins”) and Andrew Sturner(“Sturner”), each a “joint actor” (as such term is defined in National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues) of Cresco, also own, or exercise control or direction over, securities of Harborside.
CCPF owns an aggregate of 385,542 SVS, representing approximately 1.11% of the issued and outstanding SVS. CCP owns an aggregate of 96,385 SVS, representing approximately 0.28% of the issued and outstanding SVS. Hawkins owns an aggregate of 333,350 options to purchase SVS (“Options”) of Harborside, representing approximately 0.95% of the SVS on a partially converted basis (assuming the exercise of all Options owned by Hawkins, and that no other securities, including those convertible into, or exercisable for, Harborside’s securities, are issued, converted or exercised). Sturner owns an aggregate of 130,000 Options, representing approximately 0.37% of the SVS on a partially converted basis (assuming the exercise of all Options owned by Sturner, and that no other securities, including those convertible into, or exercisable for, Harborside’s securities, are issued, converted or exercised). CCPF, CCP, Hawkins and Sturner did not own Sublime Shares.
As a result of the Subscription, Cresco, together with CCPF, CCP, Hawkins and Sturner, owns, or exercises control or direction over, an aggregate of 91,570.25 MVS, 1,179,565 SVS, 35,500 warrants to purchase MVS and 463,350 Options, representing approximately 19.39% of the issued and outstanding MVS on a partially-diluted basis, assuming the exercise of the warrants held by Cresco and approximately 24.40% of the issued and outstanding SVS on a partially-diluted basis, assuming (i) the conversion or all of the MVS beneficially owned, or controlled or directed, by Cresco; (ii) the exercise of the warrants held by Cresco and subsequent conversion into SVS; (iii) the exercise of all Options owned by Hawkins; and (iv) that no other securities, including those convertible into, or exercisable for, Harborside’s securities, are issued, converted or exercised.
While Cresco currently has no immediate plans or intentions with respect to the securities of Harborside, depending on regulatory changes, market conditions, general economic and industry conditions, trading prices, Harborside’s business, financial condition and prospects and/or other relevant factors, Cresco may develop such plans or intentions in the future and, at such time, may from time to time acquire additional securities, dispose of some or all of the existing or additional securities or may continue to hold the securities of Harborside.
A copy of the early warning report filed by Cresco will be available under Harborside’s profile on SEDAR at www.sedar.com or by contacting Cresco at (254) 266-6322. Harborside’s head office is located at 2100 Embarcadero, Suite 202, Oakland, California, 94606.
Cresco’s head office is located at 2801 Woodside Street, Dallas, Texas, 75204.
