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 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
- 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
- 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
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":
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.
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
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.As of December 31, 2019, we had aggregate federal and state net operating loss carryforwards of approximately $60.9 million and $17.9 million
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
Thank you for laying it all out - am certain the officers and directors of HRBR are VERY unhappy with your efforts
ReplyDeleteDan,
ReplyDeleteAbout 4 or 5 years ago I reached out to get involved in the revival of Air WI and got a response from an investor group working on this. I believe it would be the group you mentioned. At the time didn't have the cash so I begged off in getting in. I think the number of holders went up because of these events. You may want to do some news searches on Air WI in Wisconsin papers. My guess is that is the cause of getting back above the 300 investor level. Maybe not as sinister as you think. This has been a long playing story locally. I did not know the full connection to Harbor but these guys are well known VC's and I'm not surprised at the maneuvers they made to get this done. I would think the numbers will not be great (like other airlines) but after Covid who knows.
Thanks Duane
DeleteVery nice write up!
ReplyDeleteReally interesting company and write up. This one was like reading a novel.
ReplyDeleteAs always good revenue and balance sheet. Fantastic outlook for the next months after Covid. Don' t like very much airlines companys but this one has a lot of potential.
Thanks for sharing. Love your style.
You are welcome and yes it's a super interesting situation. The cash on the balance sheet is great but I don't like the debt. Numbers for 2020 will probably be bad due to covid
DeleteSince the last-reported cash of $78m is as of March 31 (ie, pre-covid) what is your estimate of the cash burn since then? It seems almost certain that it is lower than that today...notwithstanding the "cheap" metrics, how do you get comfortable the company is a survivor?
ReplyDeleteI have no estimate of cash burn. Many of the stocks I buy are small, struggling companies. Some of them will die (like SOFT for example) and that is part of this way of investing. I do not have any particular thinking about how HRBR will survive
Delete"notwithstanding the "cheap" metrics" I cannot do because that's a main reason I bought HRBR
Well I estimate it could have already burned around -100m. Good news is I think we will see a good recovery based on the vaccine over the next 2 months. Bad news there's very high operating and balance sheet leverage. It does seem quite cheap on cash flow if they survive bankruptcy.
DeleteI agree with your ultimate conclusion (that it seems cheap) but don't agree with your premise. For example, if you could put together a reasonable argument that the company may have already burned through $x million of cash from operating losses already incurred in Q2-3, and it's also unclear what cash burn will be like going forward (ie, until the world gets back to "normal"), then maybe your current P/BV is actually 0.5x with BV possibly shrinking, as opposed to the 0.2x you noted...but maybe after doing some back of the envelope numbers it's also still worth a bet.
DeleteIt's kind of like purchasing a property where the house just burned down yesterday. You might have an appraisal from last year showing a very high number with the house intact, and if you buy it cheap enough (ie, perhaps below a conservative land value) it may still make sense, but the last appraisal value shouldn't be so heavily weighted.
By the way, please don't (at all) take my comments as criticizing your analysis or your blog. You've done some great work, and I really appreciate someone like yourself who goes far off the beaten path - professional investors should take note. I'm just hoping that by taking other things into account (if you agree they're valid points), you may be able to take your CAGR returns from 50% to 60% :)
It is certainly a good idea. I am not so sure about the timing based on the "Fear and Greed" index, which shows extreme greed for U.S. stocks:
ReplyDeletehttps://money.cnn.com/data/fear-and-greed/
You are moving the market! Late for me.
ReplyDeleteA blog reader was nice enough to let me know an interesting piece of information I missed. Air Wisconsin looks to have received $42M in April 2020 as part of the Cares Act.
ReplyDeleteSearch for Air Wisconsin here: https://home.treasury.gov/policy-issues/cares/preserving-jobs-for-american-industry/payroll-support-program-payments
Hi Dan,
ReplyDeleteNice write-up. The only thing I would add that I find somewhat concerning is that they have filed notices that they are unable to file their June and September 10-Qs on time. They do say it is because of work from home orders and COVID that they don't have the ability to complete on time. As a resident of Minnesota, I'm not sure I buy this. I know that Wisconsin has for the most part removed all restrictions since sometime back this summer. I do want to add that I don't know all the information on local restrictions in eastern Wisconsin, so this could be different. I was in this area in July and things were pretty normal, but I wouldn't know about how a business like this is operating from briefly visiting the area. A delay like this doesn't necessarily mean anything bad, just is likely to increase volatility the longer it lasts and could result in a big move when they get caught up on filings.
The other red flag besides the obvious unknowns for the industry is that they have changed audit firms. It makes me wonder if this is in connection with their delays in filings. They do state that there were no disagreements on the previous annual filings, but I do wonder if there was discussions around going concern and asset impairments after their last filing. Especially with the timing of the recent purchases, I would expect impairment charges. These are non-cash, so I wouldn't want to exaggerate the importance of them. Obviously whatever they paid pre-covid is more than they would have had to pay now. Unfortunate timing, but it is over and done with. Only other thing to add is that I don't think the change in CPA firms would be for cost savings, as BDO and Grant Thornton should be about the same ballpark price wise. I would actually expect Grant Thornton to be slightly more expensive.
In the end, I see this as one of two outcomes--either they are worth a multiple of the current market value or they are close to bankruptcy. I don't really have a prediction which one that would be. I do think that in the event they pull through, there will still be an opportunity to buy below market value. You obviously have a great track record, so not trying to provide advice. Just think I will watch this one closely and wait rather than buy today. Best of luck.
I tried posting a similar summary a few days ago that didn't post, not sure if there was an issue or you just haven't gotten around to approving it. I apologize if it is a duplicate.
Thanks for the detailed comment Mark. The late filings I guess don't bother me. I have a lot of companies that get late from time to time. we'll see
DeleteThe audit thing yeah might be a concern. I dunno how to read that
sorry about your first comment. It's not there on my end so something must have happened. I get emailed when there's a comment so I approve right away.
Regarding the change in CPA, they cite on the 8K that it's related to Topics 606 and 842 (https://yahoo.brand.edgar-online.com/displayfilinginfo.aspx?filingid=14477555&tabindex=2&type=html)
Delete606 covers revenue recognition of contract revenue, I'm speculating this is benign and simply to update their accounting after this was passed in 2018.
842 covers leasing, and requires operating leases to be capitalized on the BS. Would imagine this is actually beneficial to them since their EBITDA would improve from the additional depreciation vs the operating lease effect on EBITDAR, given their recent purchases.
Curious if you've done any sort of channel check or reaching out to mgmt. I've done some scuttlebutt research: they don't appear to have laid off any pilots on LinkedIn, their twitter is pretty meticulously updated/responsive, and their flight history albeit scaled down is still operational, so things look somewhat OK.
Lastly, given your background with companies going dark Dan, what are some ways that Amun could potentially force this company back into the dark again, if he were incentivized to do so? Thanks for the article!
Probably does not matter, but that 8K states that those are the only adverse opinions or disclaimers on the last two annual filings, not that they are the reason for changing. A company will never give the real reason for changing-- could be cost, could be their perception of how willing they are to discuss issues, or even something as petty as a board member that doesn't like someone there. It is a pain to switch and get a new firm familiar with your business, so it is almost always due to cost or a general feeling about their performance.
DeleteBoth of the issues identified have since been fixed. I see that they have the operating lease asset and liability on their most recent 10K, so nothing would change going forward on their financial reporting on these items.
My understanding of topic 842 is that you are only putting the PV of future lease payments and benefits on the balance sheet. The expense recognition on the income statement still relies on operating vs capitalized classification.
Just posting to add to the information, it is still more likely than not an immaterial item. Just unusual timing that makes it something to consider. I work in finance for a publicly traded company, so I read and assist in filings regularly.
I have not done channel checks or reached out to management. I saw they are hiring and yes I see their twitter is kept up to date
Deleteas for how they go back into the dark, they could just stop talking. I mean I don't know what really prevents any company from stopping communication. I guess it's shareholder lawsuits but I've seen companies just stop talking and then file form 15 to de-register years later. That's what SOFT did.
POSC is one I was just looking at. they filed an NT-10k in Mar 2016 and then just never filed the 10k. 3 years later they finally put out the official form 15 to de-register.
So would HRBR's incentives to not file primarily be reporting cost and effort? And the only way shareholders can force them to report is to continually have >300 shareholders?
ReplyDeleteThere are lots of reasons a company may want to stay dark. For sure cost and effort is high on that list. On the nefarious side it could be that management wants to give themselves perks outside the public eye. Maybe drive the stock down to buy stock themself (or take it private). I don't know HRBR's intentions. Some companies just don't care and don't want to deal with the public. I've heard companies say they think it hurt them competitively to report in the public
DeleteYes the only way I know of is to continually have > 300 shareholders
It seems that this company was never really profitable. They record accumulated losses of 207 Mio. so the business is poor. They record a profit in 2018 but only because of some credit waivers. Further, the price has risen quite sharply. I prefer stocks that were at least highly profitable in the past.
ReplyDeleteThis is how one could potentially deal with the 300 shareholder issue in the future - recent 13D filing for MSLP:
ReplyDelete"In the Issuer’s most recently filed Annual Report on Form 10-K for the year ended December 31, 2019, the Issuer disclosed that as of August 18, 2020, there were approximately 295 holders of record of shares of its Common Stock. Public companies such as the Issuer, can deregister and terminate their obligation to file periodic and current reports with the Securities and Exchange Commission (the “Commission”) when it has a class of securities that are held of record by less than 300 persons.
In order to support the Issuer as well as its SHAREHOLDERS and ensure that it continues to maintain at least 300 holders of record, on October 26, 2020, Wynnefield Partners completed the process of distributing 31 shares of Common Stock to 31 of its limited partners. The Wynnefield Reporting Persons plan to continue this process in the future to ensure that the Issuer continues to remain a reporting company with the Commission."
https://www.sec.gov/Archives/edgar/data/1251565/000110465920118922/tm2034430d1_sc13da.htm
I LOVE THAT
DeleteCould you please have a look at the chart of XIN (Xinyuan). It looks like a perfect chart to me as the multi-year lows bottomed around usd 2. Now the stock is at 2.3 so close to the bottom. The price target of one analyst is at usd 6.93 and the P/E is around 8. Any comments?
ReplyDeleteI don't know that one. I'll take a look. thanks for the idea
Deletechinese real estate company is not for me. also too many shares outstanding
Deletesome Chinese stocks did lately very well such as FTFT or CGA. However, I dont see an explanation for these extreme price increases.
Deleteanother crazy event is a stock called Signal advance that did go up about 100x after a tweet by Elon Musk. He tweeted that you should use the app Signal instead of WhatsApp because of the new WhatsApp terms and conditions. Signal advance has nothing to do with the App!
DeleteReminds me of the year 2000. https://seekingalpha.com/news/3650522-mistaken-identity-sends-microcap-signal-advance-inc-soaring
Hi Dan. Are you still holding? Any recent developments?/reason for weakness of late?
ReplyDeleteyes I still hold all my HRBR shares. I've never sold any. I don't see any news or filings from them and I don't know why the price has dropped other than it's up 250% in the past few months
DeleteWhat do you make of possible nefarious shenanigans by mgt to get this to dark status again. see https://twitter.com/BlkDiamondCap/status/1346638172034240513 risk of takeunder alluded to by @blkdiamondcap on twitter
Deletewhat is your specific question? yes management is shady they are a risk
DeleteI wrote some time ago that Japan could be an interesting place for investors. Unfortunatly, there is a big language barrier and nobody writes about very small companies. Therefore this blog may be interesting: https://seekingalpha.com/instablog/5978721-ruerd-heeg/5543719-best-idea-for-2021-sekonic-corp
ReplyDeleteUnfortunatly I was not able so far to buy this stock as it is on the move up.