Harbor's Dark Takeover

In 2011, the "development stage" Harbor BioSciences HRBR lost 3.8M which was an improvement over the $6.6M lost in 2010 and $15.6M lost in 2009.  Not pretty and with a market cap of only $6.5M, not inspiring.  Amun LLC came along with a cash infusion of $2.8M to save the day if only shareholders will approve the following conditions:

• must perform reverse/forward split to get below 300 shareholder cutoff for de-registration
• must file to de-register from the SEC
• must give 3 board seats to Amun
• must approve a provision to preserve Net Operating Losses (NOLs)
• money will be forfeited if "At any time following the Deregistration, the Company makes any filing with the Securities and Exchange Commission (“ SEC ”) pursuant to Sections 13 and 15(d) of the Exchange Act on a voluntary basis"

Wow.  Amun wanted the NOLs and to disappear.  The transaction was approved and HRBR stopped communicating after putting out one last 10k in Jan 2012.  

After 8 years of muted darkness Harbor Diversified (HRBR) put out an 8k in Apr 2020 with one of my favorite lines ever: 

as of January 1, 2020, which is the first day of the Company’s current fiscal year, the Company determined it no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act. As a result, the Company determined it is required to file the Annual Report

Shareholders made them file again!  So amazing and here's an article.  I don't know the details but it seems they were taken to court and forced to come back to the light.  Whoever did this is my hero.  They've since put out a 10k showing $69M cash, $78M book value, and $263M annual revenue.  They earned $4.2M in the latest 10Q.  The market cap is currently $12M...sound interesting?

We need a timeline:

• Feb 9, 2010
• Name change from Hollis-Eden Pharmaceuticals to Harbor BioSciences
• July 28, 2011
• Sell 2M shares of pref A to Amun LLC for 2.8M cash in escrow account
• 28% of economic interest and 38% voting interest in company
• can appoint 3 directors
• Amun has put option to get their money back if
• Shareholders do not approve the NOL provision or the reverse split
• The company makes any filing with the SEC on a voluntary basis
• Aug 2011
• File proxy with everything Amun LLC wanted
• Oct 26, 2011
• Reverse and forward split to reduce shareholders to < 300 to de-register from SEC
• Jan 12, 2012
• File form 15 to de-register from SEC
• Jan 20, 2012 
• Last filing before disappearing
• 35,422,140 shares common outstanding
• Federal NOLs $215M and state NOLs $156M
• Jan 30, 2012
• Harbor Diversified incorporated in Delaware
• Jan 31, 2012
• AWAC Aviation (Air Wisconsin parent) is transferred to Amun LLC
• Amun LLC sells 80% of AWAC to Harbor Diversified
• Nov 12, 2014
• NeurMedix company formed by Harbor Therapeutics Chief Scientific officer
• Dec 9, 2014
• NeurMedix buys Harbor Therapeutics for $2.5M
• 3 executives of NeurMedix worked at Harbor Therapeutics
• Jan 2016 
• Harbor Diversified acquires the remaining 20% of AWAC Aviation
• Jan 17, 2020
• Acquired 3 jets plus 5 engines from Southshore for 4M shares series C pref
• Apr 29, 2020
• First filing in 8 years
• May 22, 2020
• Acquire 8 jets for $3M
• July 10, 2020
• First 10k as Harbor Diversified 
• 54,863,305 shares of common stock outstanding
• Amun still has 28% so they did not dilute all to Amun
• 4,000,000 shares of Series C Convertible Redeemable Preferred Stock outstanding
• Federal NOLs $61M and state NOLs $18M
• These must be new since old Harbor BioScience NOLs were lost in 2018 troubled debt restructuring 

In 2011 HRBR was a struggling pharmaceutical company with a tiny $0.1M revenue.  Amun saw those NOLs and couldn't resist.  They came on board and forced HRBR into darkness then immediately brought in Air Wisconsin.  The pharmaceutical business was sold off a couple years later leaving HRBR unrecognizable to the past.  New board, new business.  Now in 2020 Harbor Diversified rises from the ashes bringing in $260M.  

The stock dropped from around $0.20 when Amun first came into the picture all the way to $0.015 in 2017.  It was at about $0.04 when the new filings hit in Apr 2020 and has since run to the current price of $0.22 thanks to a microcapdaily write up. 

On the one hand I don't like buying into a chart that has risen 10x in a year, but if you look back it used to be much higher.  I wish I would have heard of this right when they started filing again but oh well, you can't win them all.  Right now it sits about where it was in mid 2011 when Amun came on board but market cap has doubled due to dilution.  Below you can find the 1 year, 10 year, and all time charts.  I like the fact that we're way below all time highs and there was a good base from 2017-2020.  

This stock has so many things I look for.  Change.  Inflection points.  Abrormalities and non-linearities with the potential to cause big stock price changes.  The main draw is the situation.  The company the world had familiarity with has died and I think the new reality has yet to be reflected in the price.  They went dark to re-invent themself and have done just that.

Here are numbers as of the most recent 10k:

• 54.9M shares common flat from 2018 to 2019
• 4M shares convertible preferred
• Converts into 16.5M common shares
• Voting rights equal to 16.5M shares common
• Conversion price $0.80 
• Liquidation preference $13.2M total
• revenue $263.5M in 2019 vs $240.6 in 2018
• book value $77.5M vs $96.7M
• cash $69.5M vs $60.2M
• debt $195.1M vs $184.8
• earnings -$19.2M vs -$17.4M
• they actually reported +$181.3M net income in 2018 = EPS $3.30 but that was a one time gain due to extinguishment of debt

And numbers from the most recent 10q:

• Cash $78.3M vs $69.5M from prior Q
• BV $81.7M vs $77.5M
• earnings $4.4M vs -$3M from last year
• rev $67.1M vs $61.5

Based on the 10k numbers I'd say the stock is worth at least a dollar.  Maybe $2-3.  Going by those numbers the stock is at 16% of book value, 17% of cash, and 5% of revenue.  On top of that you have the $4M earnings posted in the last 10q which will make this stock incredibly cheap if it continues.

The risk is all that debt and in these numbers are a few things I do not like.  There are too many shares out.  Too much debt.  They've lost $36M the past two years if you exclude their gain due to debt restructuring.  I don't like the business in a normal year and with covid in 2020 I extra don't like it.  I don't like airlines and I don't like owning those huge depreciating assets.  Numbers reported from 2020 will likely be horrible due to covid.  

In a situation like this I want to know the motivation of all parties.  

Shareholders

First, why did shareholders approve this deal.  Amun clearly wanted to disappear and said so in the 8k announcing their financing.  Just look at these conditions:

Amun clearly stated their case.  They must have the NOLs and be on the board.  The company must de-register from the SEC and explicitly not communicate.  The company can't even spend $100k without Amun's approval!  

It was a takeover for the low cost of putting $2.8M cash into an escrow account.  Amun didn't even hand over the money.  They just put it up against these strict requirements on how HRBR could utilize:

Under the terms of the Purchase Agreement, the Company may be reimbursed from the escrow account for amounts required to purchase fractional shares of the Company held by record holders of Common Stock in connection with the Reverse Stock Split, if implemented. In addition, to the extent that certain of the holders of the Company’s warrants issued in connection with the June 2010 registered direct offering of Common Stock and warrants

In addition, under the terms of the Purchase Agreement, beginning January 1, 2012 and on the first day of each month thereafter, the Company will be entitled to disbursements from escrow in the amount of $200,000 (the “ Working Capital Amount ”) for so long as: (x) the Investor has not made a Qualifying Transaction Proposal to the Company, (y) for sixty calendar days following the Investor having made a Qualifying Transaction Proposal (provided that the sixty day period will be extended an additional fourteen calendar days in the event the sixty day period includes all or any part of the period from December 15 through December 31, 2011); and (z) in the event that a Qualifying Transaction has been presented and definitive documentation relating to such Qualifying Transaction has been executed, for so long as the Qualifying Transaction has not been consummated

So the money goes to escrow but it can only be used to eliminate shareholders (the reverse split and warrants) and give some monthly cash until Amun presents them with a "Qualifying Transaction".   From the beginning Amun had a plan to bring a large transaction to the table so it doesn't seem like much of that $2.8M would ever really be spent: 

As contemplated by the Purchase Agreement and the Stockholders Agreement, the Investor intends to bring to the Company an offer for the Company to acquire a controlling interest in a profitable entity, which transaction would provide to the Company at least $5,000,000 in cash plus an amount equal to the costs and expenses incurred by the Company in connection with such transaction (not to exceed $200,000), which amounts, together with any operating cash held by the Company immediately prior to closing such transaction, would be transferable, together with any and all (i) intellectual property and (ii) other assets of the Company related to the Company’s biotechnology business, to a newly formed subsidiary of the Company, which subsidiary will assume all liabilities of the Company as of immediately prior to such closing (a “ Qualifying Transaction ”).

My guess on shareholder motivation is they saw Amun coming in for the NOLs with plans for a large transaction and thought "why not vote for this, it can't be any worse than what we've experienced in the past 5 years": 

Board Members

Second question is why did board members and executive officers vote for this.  Why did they recommend shareholders vote for this.  Imagine the conversation, "We will take over your board and disappear and in return HRBR gets controlling interest in some unnamed company."  Super shady.  How can they recommend shareholders vote for something that would stop all communication.

First of all they owned almost no HRBR stock so what did they care.  Three of them owned less than 1% of the stock.  Three owned 1%.  And one owned 2%.  That is sad.

But I believe the real reason is they were given their company to walk away.  HRBR's Chief Scientific Officer Christoper Reading spent 15 years at Harbor developing their therapeutics product NE-3107.  Amun appeared on the scene with HRBR at a $6.5M market cap.  A few years later Reading starts a new company NeurMedix who then bought Harbor's therapeutics division for $2.5M.  How convenient.  

I think Amun came to HRBR and said, "Look we want your NOLs and that's it.  Let us take over the company we will go so dark we disappear and the stock will drop to nothing.  You just keep working on your therapeutics.  Once the world has forgotten Harbor we will sell you that division for half of what the world thinks it's worth now." 

As it goes NeurMedix ended up with 3 executives who used to work at Harbor therapeutics...

Amun LLC

Third is why did Amun do this.  Take a look back at that timeline I posted above and read this FCC document:

Air Wisconsin, a privately held, regional airline, uses its wireless licenses for internal communications systems in support of its activities. On January 31, 2012, a reorganization of parent entities of Air Wisconsin was consummated pursuant to which the stock held by the seven shareholders of AWAC Aviation, the immediate parent company of Air Wisconsin, was transferred to a new intermediate subsidiary, Amun LLC. Amun LLC then sold 80% of the stock of AWAC Aviation to Harbor in exchange for shares of Harbor common stock and other consideration, with the result that Amun became the single largest shareholder in Harbor, with approximately 36% of the total issued and outstanding stock of Harbor. AWAC Aviation at all times continued to own 100% of the stock of Air Wisconsin, the entity that has been granted the wireless licenses.

AWAC is a holding company with one asset: Air Wisconsin airlines.  "Air Wisconsin operated a fleet of 64 CRJ-200 regional jets with an average of approximately 284 daily departures".  AWAC has moved HRBR's revenue from literally $0 to $263.5M.

HRBR is basically Air Wisconsin at this point and the interesting thing is it never really changed hands.  If you look around you can see business entity registrations for AWAC Aviation in a number of states (NH, AK, NY, FL, etc) and they all have the same directors.  It's the same group from Amun who is now running HRBR.  

The same group runs Southshore Aircraft Holdings which has leased planes to Air Wisconsin and from whom HRBR recently bought planes.  Southshore owns the preferred.  

Here's what I think really happened.  This group was already running AWAC Aviation with Air Wisconsin as their asset.  They approached HRBR because they wanted a shell company with net operating losses and Harbor certainly had that with $215M federal and $156M state.  Amun came up with this takeover idea that didn't really cost them anything beyond dilution.  They put provisions in place to make sure they'll get control, go dark, and keep the NOLs.  They put money in an escrow account never to be drawn upon beyond the costs of going dark.  When the time was right they moved Air Wisconsin under the HRBR umbrella.  Look back at the timeline.  Only 10 days after Harbor BioSciences' last filing they incorporated Harbor Diversified in Delaware and on the very next day "sold" 80% of AWAC to HRBR.  I think their idea was use the NOLs while enriching themselves with self dealing.  

There are a few parts to the story I'm not certain about.  One is the NOLs.  Clearly Amun wanted them as you can see with the NOL protection provisions in their original offer.  But I don't know how much were utilized because we have no filings.  All we know is the most recent 10k shows they were all forfeited in 2018 due to the troubled debt restructuring.  

As a result of a troubled debt restructuring in 2018, any remaining federal and state net operating loss and tax credit carryovers were eliminated, and therefore any related deferred tax assets and valuation allowances were reduced 

At December 31, 2019 and 2018, the Company had federal net operating losses of approximately $60,940 and $0, and state net operating losses of approximately $17,897 and $509, respectively 

As of December 31, 2019, we had aggregate federal and state net operating loss carryforwards of approximately $60.9 million and $17.9 million

Looks like whatever was left they lost and then they started earning new NOLs.  On the bright side the debt restructuring extinguished $198.7M in debt and who can complain about that.  

Filing Again

Now this is where the story changes.  Another inflection point.  I love this because shareholders took HRBR to court and won.  You can feel the company's anger at being forced to file again.

as of January 1, 2020, which is the first day of the Company’s current fiscal year, the Company determined it no longer met the eligibility criteria under Rule 12h-3 of the Exchange Act to suspend its reporting obligations under Section 15(d) of the Exchange Act. As a result, the Company determined it is required to file the Annual Report

There's an SEC rule about how a company will have to file again with the SEC if they end up with more than 300 shareholders at the end of their fiscal year.   HRBR's fiscal year ends Dec 31 so I wonder if these angry shareholders increased the number of shareholders "of record" above 300 by taking hold of shares in paper form or gifting them to relatives or something.  I've thought about going that route.  Or maybe it was something with their court case.  In any case I LOVE IT.  

There are some unanswered questions.  I don't know how or when the Amun group acquired Air Wisconsin.  What did it cost them?  What did Harbor pay for AWAC (Air Wisconsin)?  If I knew those it would be easier to put a relative valuation on this.

Every stock has 3 parts to the story: the numbers, the chart, and the future.  The numbers say it's cheap.  The chart says it has come up and has room to move a lot higher.  The future is where I'm not sure.  How hard is this airline hit due to corona virus.  Does Amun try to hide again or do they embrace the sunlight and push forward towards a higher valuation.  

You can see they turned a $4M profit last 10Q by reducing airplane rental costs.  Less than 3 weeks after realizing they were forced to file again they bought 3 planes they had been leasing.  Four months later, just before releasing their first 10k in 8 years, they bought 8 more planes.  Maybe they know how to earn money and are embracing the sunshine...

--Dan

disclosure: long HRBR