Upheaval often follows after legacy marijuana companies go public

Just Released! Get realistic market forecasts, state-by-state insights and benchmarks with the new 2024 MJBiz Factbook member program, now with quarterly updates. Make informed decisions.

Turmoil Volatility Stock Market Ticker with the word TURMOIL on it

After the famed Oakland, California-based marijuana dispensary Harborside went public in 2019, long-term employees noticed a change within the company: a cultural shift from the activist roots of Harborside’s founders to a more buttoned-down corporate atmosphere.

They didn’t like it.

“It changed, and a lot of us left because it was no longer the same culture,” said one former Harborside staffer who requested anonymity to discuss the company history.

“The big change was that most of the family members that were involved in C-suite positions had to exit out. That was the start of the push of the legacy operators no longer being involved in operations,” the former staffer said, referring in part to Steve and Andrew DeAngelo, the longtime CEO and chief operating officer who were virtually synonymous with the company.

“It’s just not the Harborside it used to be.”

Harborside is part of a larger trend among legacy MJ companies that have been going public for years now – largely on the Canadian Securities Exchange – in attempts to raise money and grow as as quickly as possible.

But often expansion plans don’t work out, and going public proved either incredibly turbulent or even backfired on legacy company founders, many of whom were later shown the door by their new boards of directors.

The DeAngelo brothers – and their allies on Harborside’s board – were ousted from any positions of power during a hostile takeover of the company in November 2020.

Both DeAngelos formally cut ties with Harborside earlier this year.

The current Harborside board president, Matt Hawkins, also a principal at Entourage Effect Capital, said such a takeover was inevitable due to the poor financial performance of the business after it went public.

“The DeAngelos had raised money. They had shareholders, so they didn’t own 100% of the company. So they had a responsibility to their shareholders to bring in profit. So going public only exacerbated it from that end,” Hawkins told MJBizDaily.

“That’s just business. If people don’t understand that, then I don’t know what to say.”

Both DeAngelo brothers declined to comment for this story.

Hawkins added that from a business standpoint, the changes were “100%” for the betterment of the company.

He pointed to multiple victories Harborside has enjoyed since November, including a steadily climbing stock price (up to $1.71 as of June 21 from $1.44 on Nov. 2, 2020) and multiple acquisition deals.

He also said the board is about to hire a new CEO to replace the interim CEO, Peter Bilodeau.

One of many

The trend of turmoil following the transition from private to public has been an ongoing one for many legacy businesses, industry experts said.

“It just comes down to the fact that … all these companies, under normal circumstances, had no business going public,” said Jon DeCourcey, an analyst at New York-based Viridian Capital.

“A lot of companies who were established businesses, like a Harborside or (Colorado-based) Dixie (Brands), it was just too burdensome, and they really got whacked,” DeCourcey said.

A few examples of other longstanding companies that hit some type of major turbulence following a public offering include:

  • New York-based Ayr Wellness, which DeCourcey said ran into issues fulfilling promises it made to obtain cannabis business licenses in Massachusetts, but has now recovered and is performing well after its pivot.
  • Florida-based Cansortium, where founder and CEO Jose Hidalgo resigned less than a year after the company went public.
  • California-based MedMen, which forced out founders Adam Bierman and Andrew Modlin following a string of business defeats and negative headlines.
  • Colorado-based Medicine Man Technologies (now Schwazze), where founder Andy Williams stepped aside to let Dye Capital take over, and the new CEO promptly instituted a major course shift for the business and went on an acquisition spree.

“In several instances, management was either over their skis in terms of being able to comply with regulations … or just results weren’t sufficient enough to cater to investors, so they turned around and did lose control, and the investors took over and brought in new management teams,” DeCourcey said.

But many of those businesses have since adapted and started to perform better.

“It’s not necessarily a bad end result,” DeCourcey said, and pointed to another longtime California company, Indus Holdings.

“They got hit by a couple of licensing delays, and they almost ran out of money, and they eventually had to take on financing last year right before COVID,” DeCourcey said.

“The investors came in, kicked out the old management and now the business is poised to crush it” because the new management team narrowed the focus of the company from multistate expansion plans to cornering a niche in its home base of California, he said.

Same story in Canada

Similar stories exist north of the border in Canada, noted Morgan Paxhia, a principal at San Francisco-based Poseidon Asset Management.

One factor in Canada that led to C-suite turnover and industry turbulence was unbridled optimism following federal legalization in 2018, along with ambitious global expansion plans.

That combination led to far rosier revenue projections than most companies could actually meet.

A prime victim of the fallout was former Canopy Growth CEO Bruce Linton, who was fired in 2019 following a string of quarters with poor financial performance.

Linton was part of an industrywide culling that began in 2019 and has stretched into early 2021.

“In Canada, is there a single CEO that’s still CEO?” Paxhia joked.

He added that it’s more common than not to see the management team change once a company transitions from a startup phase to a publicly traded business, in part because running those two types of companies require different skill sets.

“It’s more the norm to see change happen in the C-suite. It’s more the exception for it to not,” Paxhia said. “We’ve seen this across our portfolio companies over the last eight years.”

Heightened expectations

The most common thread between many of these businesses and the turbulence they’ve experienced is that they simply weren’t prepared for the rigors of being a public company, said GreenWave Advisors founder Matt Karnes.

But the nature of public companies is they’re more driven by financial performances quarter-by-quarter, Karnes said. That is why so many legacy businesses had boards of directors that were quick to replace C-suite executives who weren’t meeting financial benchmarks.

That has led to an industrywide maturation, which is giving more overall legitimacy to the cannabis industry, Karnes said, adding that Harborside is an excellent example of how a legacy business can be turned around by fresh management.

“We’re at an inflection point right now, where the legitimacy of the industry is starting to materialize, and we have a lot more sophisticated investors, more demanding than the investors were early on,” Karnes said.

John Schroyer can be reached at john.schroyer@mjbizdaily.com