spankbang xxnx porncuze porn800.me

Harborside 2019 Q2 Earnings Call Transcript

Home / Harborside 2019 Q2 Earnings Call Transcript

Corporate participants

Matt Chesler

Harborside Inc. — Head of Investor Relations

 

Andrew Berman

Harborside Inc. — President & Chief Executive Officer 

 

Keith Li

Harborside Inc. — Chief Financial Officer 

 

Conference Call Participants

Russell Stanley 

Beacon Securities — Analyst

 

Michael Gruber

Salveo Capital — Analyst

 

Kerk Hilton

AltaCorp Capital — Analyst

 

Luke McAlister

Westcourt Capital — Analyst

 

Zack Kembar

Burk Norris Investments — Analyst

 

PRESENTATION

Operator

Good morning. My name is Sylvie and I will be your conference operator today. At this time I would like to welcome everyone to Harborside’s Second Quarter 2019 Earnings Conference Call.  Note that all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. And if you would like to withdraw your question, you will need to press star then number two. Thank you. 

At this time I would like to turn the conference over to Matt Chesler, Head of Investor Relations. You may begin.

Matt Chesler — Head of Investor Relations, Harborside Inc.

Good morning and welcome to the Harborside Inc. conference call to discuss the company’s results for the second quarter of 2019. On with me today with prepared remarks are Andrew Berman, President and Chief Executive Officer, and Keith Li, Chief Financial Officer. Also joining for the question-and-answer session will be Greg Sutton, Vice President of Finance.

By now, everyone should have access to the earnings release. For those who haven’t, it’s available on SEDAR, Harborside’s corporate website at www.investharborside.com. 

This call is being webcast and a replay will be available for approximately 30 days. A recording will also be available one hour after the end of the call until September 13th.

Before we begin, we’d like to remind everyone that today’s discussion and responses to questions is provided for general information purposes only and does not constitute legal or professional advice. No user should act on the basis of any material discussed on this conference call without obtaining proper legal or other professional advice specific to its situation. The company will not be responsible for any consequential, incidental, or direct damages suffered in the course of using this information contrary to its intended purpose.

This conference call may also include forward-looking statements based on management assumptions. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results could differ materially from those anticipated and stated here today. Please refer to the earnings release dated August 30, 2019 and Harborside’s SEDAR filings, including Harborside’s Form 2A Listing Statement dated May 30, 2019 for trends and risk factors which may impact the company and the forward-looking statements made on this call. 

Throughout the discussion Harborside will refer to non-IFRS measures that do not have any standardized meaning prescribed by IFRS such as EBITDA, adjusted EBITDA, and pro forma results of operations, which are defined in the press release issued earlier today. We believe the adjusted results provide relevant and useful information for investors because they clarify our actual operating performance, make it easier to compare our results with those of other companies, and allow investors to review performance in the same way as our management. Please note all financial information is provided in US dollars, unless otherwise indicated. 

This call also contains time-sensitive information that is accurate only as the date of this live broadcast. Harborside assumes no obligation to update any forward-looking statement that may be made on today’s release or call. 

With that, now I would like to turn the call over to Harborside’s President and CEO, Andrew Berman.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you, Matt, and good morning, everyone. We appreciate you joining us for our first earnings call as a public company.

After navigating our 13-year operating history in California, going public in June was truly another milestone. Though, candidly, given the market, it’s not been the start any of us had hoped for for the company or for you as shareholders. So that’s why I’m going to break with tradition today and rather than take you through our history and our strategy and the results I’m going to first talk instead about the issue we are all most concerned about, and that is our stunning loss of market value in such a short span of time.

Let me first calibrate the loss. We have about 47 million in-the-money diluted shares. We opened on June 10th on the Canadian Securities Exchange at a C$6 share price, so a market cap of approximately C$280 million. We closed yesterday on the CSE at a share price of C$2.45, a market cap of approximately C$115 million. That’s a C$165 million loss in market cap and that is simply extraordinary. 

While the US operator market itself has fallen broadly by some 40% to 50%, Harborside, for some reason, became a bit of an outlier, having fallen by a wider margin than others. Listing as the market fell, before we had any research coverage or even the opportunity to settle into life as a public company has been a challenge. To put this in perspective, we’re now trading at roughly 1.5x 2019 sales on a current set of assets. In other words, not including any assets that are in our pipeline opportunities or M&A. This is an extreme discount versus our peers, some of whose numbers also include pro forma growth on non-owned assets, and we all know how uncertain that can be to close those deals at all or on proposed terms or in proposed timelines.

There is no fundamental reason we should be so undervalued given today’s market and our comparable peers. Why do I say that? First, we’re an iconic brand with deep cannabis industry experience. We are serving today an average of over 1,300 customers a day in our Harborside stores. And we know these customers are each spending about $86 a visit, resulting in average daily retail sales of over US$100,000. That’s US$40 million of retail revenue per year, a level we have largely maintained the past few years despite the multiple regulatory changes in California, changes, by the way, which have forced many out of the legal market.

We’ve been able to maintain this level of sales because of who we are, our history, and that includes providing patients and customers with high-quality, curated cannabis products for 13 years. So, as a result, we have a very loyal customer base, to whom we’re extremely grateful. And this powerful historical combination has generated sales in excess of $300 million over the last 13 years. And just this year, in the first half of 2019, we generated revenue of almost $25 million, exiting Q2 with a quarterly run rate of nearly $13 million. That ranks us in a top 15 US reporting cannabis companies, with the majority of those other companies having market caps well in excess of $300 million. And we also had adjusted positive EBITDA this quarter and are just shy of breakeven for the first half of 2019, also on an adjusted basis. We also expect our full-year 2019 revenue to be in the range of US$55 million to US$57 million and that we will be profitable on an adjusted EBITDA basis this year too. These estimates demonstrate growth based on forecasts generated from real historic revenue numbers. This means we’re growing and on a path to profitability in our transition from years of operating as a non-profit. And, again, these forward-looking numbers don’t account for any significant M&A or the operational cost controls that we’ve put in place and are continuing to implement. 

Indeed, unlike many of our industry colleagues, we can say that these numbers are indeed based on installed assets, that is things we are owning and operating today, things I walk through each day. That includes our flagship store in Oakland, which, in the first half of the year, generated $14.5 million; and also our store in San Jose where through June 30th we had revenue of $5 million; and of course our cultivation facility in Salinas, California where we’re currently generating, over the last three months, wholesale sales in the $1.2 million to $1.5 million per month range. 

This facility has 160,000 square feet of licensed canopy, including another 32,000 square feet of licensed canopy that’s coming on line in a state-of-the art Dutch Venlo greenhouse that opens next month. We’ve invested $5 million into that new fully-funded facility and with it we expect our total 2020 production capacity to increase to about 30,000 pounds per year at the farm. And then this fall we also expect to open and manage retail stores in San Leandro and Desert Hot Springs with our partners. And let me just say a few words about each of these stores. 

Just this week the certificate of occupancy for Desert Hot Springs was issued. That’s great. This allows us to move into the building, finish setting up the interior, begin training the staff that we’ve already hired, and we’ll have a projected opening in October. And Desert Hot Springs is a very unique place, because it’ll have a drive-thru, one of only two in the state of California, strategically located in the I-10 right as you exit the airport, the Palm Springs Airport.

San Leandro is still under construction and we continue to work in good faith with our partner to fund its completion and amicably resolve all open items. To this end, earlier this month the parties met for a facilitated discussion on our respective funding contributions. We believe we have reached an agreement in principle and anticipate resolving the issues in a timely manner with no additional impact on the project’s completion. 

And of course we also own and operate two stores in Oregon, one if Portland and one in Eugene, that came over with Lineage, and in a moment I want to talk more about Lux in San Jose, which still remains on track to close this year.

So, it’s for all of these reasons that I am confident in our numbers and come to work every day to a business whose fundamentals I see as being intact. We have an installed base of operating assets with known and recognized brand names and real operating histories. And it’s for these reasons that I believe the C$115 million market cap, which implies that we’re trading at only 1.5x this year’s sales, when the average for the US company MSO is much higher, means we’re undervalued. And we as a team are going to work tirelessly to educate the market that Harborside should be viewed in a much more favorable light than it currently is.

Now, all that said, I know we have to do more and we are going to do more. And here’s what we’re doing. First, I am pleased to announce today that we are implementing a normal course issuer bid for up to 5% of our outstanding share capital. Given our current valuation and, of course, giving consideration to our own working capital needs, we believe this program is in the best interests of our shareholders, because this company represents good value. The program, of course, is subject to any regulatory or legal constraints resulting from potential M&A transactions or other material events that are under consideration.

Second, we continue to address costs with a specific target of getting our operating expenses to be less than 35% of revenue. I was appointed CEO 18 months ago and was tasked with transitioning Harborside from a non-profit medical cannabis collective into a for-profit, fully regulated, publicly-listed and profitable company. And while we have made significant progress on that front, we’re going to accelerate our efforts to optimize costs across our assets while never compromising, of course, the quality and customer experience that we provide. 

To assist with this cost-cutting initiative, we’re working with Alvarez & Marsal, one of the foremost experts on performance improvement and business transformation on an appropriate statement of work and we expect to realize the results of this initiative heading into the first quarter of 2020. We’ve also strengthened our investor relations effort and, in particular, have retained Mattio Communications out of New York to aide us in this important effort. Matt Chesler joining us today through Mattio too. We’ve also hired Mackie Research and Generation Advisors to provide secondary liquidity services. And finally, we expect our first research piece from our underwriters to be out soon and we will actively seek to widen coverage in meetings with leading investment analysts firms starting next week in Toronto. These items demonstrate our commitment as a management team and a board to drive shareholder value.

Now, before I go into the basics around strategy and growth, I want to also take a moment to address some of the pipeline acquisitions identified in our listing statement, which many of you have asked about: Airfield, Agris, and Lux. 

First, we have decided not to pursue the acquisition of Airfield Supply Co. in San Jose. Airfield is a well run, profitable, mature store with a good brand. We certainly would have been happy for its team and facility and brand to join our company but, upon further evaluation, we’ve determined that it is not in our shareholders’ best interest to acquire this asset given, in particular, the large cash component of the purchase price and our current share value, which makes the stock component of the deal simply too dilutive. 

Second, we do not expect to close the Agris Farms acquisition in Yolo County, California. There are two reasons we take this view. First, Agris’ owner wants to renegotiate some of the terms, including its purchase price. Second, our existing cannabis production capacity, which I described a little bit earlier, including our ability to engage in further state-of-the-art expansion in Salinas, provides sufficient biomass. So, given these two factors, our time and dollars are much better spent developing brands and increasing shelf space penetration for those brands at our retail stores.

Finally, we still expect to close the Lux acquisition by the end of the third quarter. Lux is one of only 16 licensed dispensaries operating in the City of San Jose, the third largest city in California and one of the most attractive cannabis markets, particularly with the city opening up new licenses for the existing licensees next year. Lux’s license includes retail, manufacturing, and delivery, covering both adult use and medicinal sales. And this dispensary will add an additional 3,700 square feet of retail space to our existing Bay Area footprint.

And now I’d like to just take a few minutes to cover strategy and our plans for growth. Our strategy remains very straightforward. It’s to be the premiere California-centric cannabis in the United States. Why California? That’s simple. It’s the largest cannabis market in the country. The California market will be growing to over $7 billion over the next several years and the Bay Area alone, the place where we call home, is expected to be a $1.5 billion market, making it a top-five state in the US 

California, and the Bay Area in particular, is where cannabis grew up and where we grew up. We know very well the unique challenges cannabis companies face in California. We know the rules, we know the regulations, and the state and local governments and the regulatory agencies, and while some industry players are encountering compliance and regulatory challenges, Harborside has maintained strong government relations and compliance results, including our labor piece agreement in Salinas. In fact, we’ve had over 10 regular course inspections by regulatory agencies just this year and we’ve passed them all.

So, we’re here in California and we believe we are very well positioned to grow in California and we believe that comes in several ways. First, we will continue to drive organic retail sales growth and margins through customer experience, marketing, and our evolving business models. At our Oakland store in the spring, for example, we reconfigured the in-store model from a post office style behind-the-counter store to an open floor plan with shopping baskets similar to what you see in retail grocery outlets. This alone has increased our average basket size by $2. And this fall we are also opening an event and tasting room in Oakland to further enhance our customers’ in-store experience and provide third-party sponsorship opportunities.

Second, we’re increasing our shelf space penetration for our in-house brands powered by our cannabis from Salinas. Our capture rate currently stands at less than 10%, so we see this as a significant opportunity both for retail gross margin improvement as well as marketing exposure for our brands. We will continue to leverage a coherent and well-integrated marketing plan that includes paid, earned, and owned media and our own digital and social channels and Steve’s too. And we are investing in our current brands and also developing new ones. 

KEY has been an early success, something we’re looking to replicate. Targeting the price-sensitive consumer, we launched KEY softly late last year and have since been adding SKUs. In fact, we’re up to 13 KEY SKUs today. KEY’s been sold into about 20% of the license stores in California but, most fundamentally, KEY is a great product. Its edibles in particular have been very positively received in the market. In fact, the Red Berry Jellies took home a third place award for best edibles in the recent High Times Bay Area Cannabis Cup, a very competitive event. And we have two additional brands under development, including a brand targeting women that we expect to launch in early 2020. 

And of course we will continue to drive quality cultivation capacity that provides biomass throughout the supply chain. In fact, we have seen success with our biomass in the supply chain already. Apex Extraction’s Sled Dog was awarded a first place in the indica concentrates category at the High Times Cannabis Cup NorCal and its Alien Rock Candy placed third in the vape pen category at the Bay Area Cup, and these extracts are sourced with cannabis from Harborside Farms. 

The first harvest from our new state-of-the-art Dutch Venlo that I referenced earlier is scheduled for mid-November and our first sales from this facility are expected to be before the end of the year. So, for 2020, we expect to be adding about another 10,000 pounds of production per year from this Venlo, taking our total expected 2020 annual production from the farm to about 30,000 pounds.

And then finally, as I mentioned before, we expect to open Desert Hot Springs and San Leandro but also deepen our California retail footprint by continuing to evaluate and engage in strategic retail acquisitions. We see a lot of acquisition opportunity and we always have a seat at the table because of Harborside’s legacy in California and its stewardship of the cannabis industry for so many years and, frankly, because we fit strategically and culturally with these targets.

So, just a brief summary before handing this off to Keith. I just want everybody to think about this as we reflect on Harborside trading at roughly 1.1x this year’s sales. All told, by the end of 2019 we expect to be operating seven dispensaries: our two Harborside flagships, our two Terpene Station stores in Oregon, our two managed stores under development with partners, and Lux. And, again, this is prior to any additional assets added through any M&A activity. 

We have a strong iconic brand with historic and real numbers and real operating history and we know cannabis and we know our customers and we know our market, the California market. There’s not another public cannabis company that has been operating cannabis retail for as long as we have. Our retail experience also is extensive with growing sales and strong retail metrics.  We have significant cultivation capacity under license and we’re producing high-quality cannabis at scale. We are focused on optimizing our cost structure and we’re also building out a house of brands—and, remember, we can control the life and the flow of those brands with the cannabis that we have and the shelf space that we control

We know the market is very, very demanding every day. We also know that performance and value is about strategy and execution. We can confidently say that we are executing on our installed asset base and that we’re going to be using that as a platform for growth. Thank you. 

Keith, I’d now like to turn it over to you, our Chief Financial Officer, to take everybody through the numbers and provide a financial review. 

Keith Li — Chief Financial Officer, Harborside Inc.

Thank you, Andy, and good morning, everyone. 

To begin with, I would like to remind everyone that we completed a reverse takeover transaction with Lineage Growth Company on May 30th and we subsequently listed on the Canadian Securities Exchange on June 10th. The RTO transaction had a significant impact on our IFRS financial statements due to one-time RTO transaction-related cost and timing. As a result, we believe that our adjusted metrics are a more accurate reflection of our operating performance, so I’ll present them alongside the reported figures when appropriate. With that, let’s dive into our financial performance.

For the quarter ended June 30th, revenue increased by 19.8% to $12.7 million. Adjusted gross margin was $7.1 million or 56%. And we also generated adjusted EBITDA of $2.5 million with margins of 19.5%. And year to date for the six month period our revenue was $24.7 million, which was up 21.4% year over year. We had 36% adjusted gross margins and an adjusted EBITDA loss of approximately $100,000. 

The second quarter revenue mix was approximately 83% from the retail division and 17% from the wholesale division, which is a shift from mix of 93% and 7% from the same period last year. The change was mainly driven by the 208% year-over-year growth in the wholesale division. On the retail side we also saw an increase of about 6.5%. Year to date, the revenue mix is approximately 80/20, driven by wholesale sales, which grew by approximately 493%. 

I’m pleased to report improved top line performance in the second quarter in a very competitive, highly regulated and highly taxed marketplace. Our retail growth speaks to the (inaudible) of the Harborside offering, the loyalty of our customers, and a number of new initiatives around customer experience and the marketing strategies that Andy had referred to earlier. 

Our retail metrics remain very healthy with an average 1,325 customers a day and an average basket size of about $86 in the second quarter. And, not surprisingly, we peaked on a day before 4/20 of 1,938 customers. Our sales per square feet is $6,300 for the first half of 2019 and that is one of the highest in the cannabis space. And, for your reference, we have included a full set of our quarterly and historical retail metrics in a press release on SEDAR. 

Our accelerated growth in wholesale sales driven by our Salinas cultivation campus has been driven by increased capacity and production, improved product quality, expanded distributions of our biomass throughout the supply chain, and our growing KEY brand. The wholesale growth comes despite delays at the local level impacting the opening of our state-of-the-art Dutch Venlo greenhouse, which have now been resolved and opening is expected before the end of Q3. As well, there were challenging weather conditions in the first quarter of the year and for part of the second quarter, which contributed to production challenges. 

The second quarter gross profit margin of 56% excludes the impact of changes in biological assets. This represents a substantial increase from 14% in the prior year quarter with roughly half of this improvement due to a larger than typical fair value adjustments for inventory sold. Year-to-date gross profit excluding biological assets, the impact was at 36% approximately. 

And now I would like to talk about some of the costs that were incurred due to the RTO transactions and which were excluded from calculations of adjusted EBITDA. 

The company incurred several RTO-related expenses and other one-time costs which totaled approximately $3.6 million in the second quarter and approximately $4.5 million for the six-month period year to date. These expenses, including advisory, professional, legal, consulting, separation, and accounting fees have been added back to arrive at the adjusted EBITDA figures since these costs are non-recurring in nature and are not part of ongoing operational activities of the company. You can find the detail of these items and the reconciliations of our net loss to adjusted EBITDA on page 19 of the MD&A filed under SEDAR. As of June 30, 2019, the company had total assets of approximately $60 million, including cash of $19.3 million. 

Next, the company and its subsidiaries are involved in multiple pending US Tax Court cases involving the applications of IRC Section 280E. We are continuing to wait for the US Tax Court’s final ruling, after which we have the right to appeal the decision to the US Court of Appeals for the Ninth Circuit. The company disagrees with the ruling in all respects and we fully intend on appealing any adverse decisions. We have engaged appellant counsel for such an appeal. Without meeting, in any respect, any liability or otherwise prejudicing the company’s rights, the company recorded a provision of $50 million for potential payments to the IRS during the quarter. 

Finally, after the end of the quarter the company exercised its previously-disclosed merger options with Patients Mutual Collective Corporation and San Jose Wellness, which resulted in a 100% ownership of the iconic Oakland dispensary at the 1840 Embarcadero location plus 100% ownership of the Harborside San Jose dispensary store and a 50% ownership in San Leandro. And we also continue to own 10% of Desert Hot Springs. Both the San Leandro and Desert Hot Spring stores will be accounted for under the equity method going forward when we’ll be receiving a service fee for managing the stores and participating our share of the net earnings at the income level.

And overall, to summarize, revenue for the first half of the year was up by 21% compared to the same period in 2018, adjusted EBITDA for the first half of 2019 is merely at a breakeven level, and we have provided guidance for 2019 of approximately $55 million to $57 million in sales and profitability on the adjusted EBITDA basis. We will also be undertaking an operational cost review of our business with the goal of getting our operating expenses to be no more than 35% of our revenue. 

Now, Andy, back over to you.

 

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you, Keith. And, again, at 1.4x, 1.5x our current year sales, I just can’t reiterate enough our value proposition and I hope we’ve gotten that message across today.

 And the only other thing I want to share before we open up the mic to Q&A is just about our core values. I think everybody knows that Harborside was established by Steve and dress in 2006 in an effort to bring wellness and medicine from cannabis to those in need. Since then, Harborside has been a model of professionalism and integrity for the cannabis industry. We’ve always been about health and wellness, we’ve always been about serving our community, we’ve always been on the front lines of advocacy, promoting high standards and taking away the stigma from cannabis, and we’ve always been about trust and choice and value. And everybody should remember that these tenants remain fundamental parts of our roots. It’s who we are today and they’re going to remain with us going forward.

Operator, at this point we’d like to open up the mic for any questions for folks that might be on the line.

Q & A

Operator

Thank you, sir. Ladies and gentlemen, if you do have a question, please press star followed by one on your touchtone phone. When you do, you will hear a three-tone prompt acknowledging your request. Should you decide to withdraw your question, simply press star followed by two. We do ask that, if you are using a speakerphone, to please lift the handset before pressing any keys. 

Your first question will be from Russell Stanley at Beacon Securities. Please go ahead.

Russell Stanley – Analyst, Beacon Securities 

Good morning and thanks for taking my questions. Congrats on the EBITDA performance in the quarter and, with respect to the wholesale business in particular, 20% penetration now, just wondering what your targets are. I apologize if I missed it earlier but what penetration targets have you set for this business line specifically given your expansion plans on the cultivation side?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Russell, by the way, thanks for joining the call and it’s nice to hear your voice. Thanks very much. No, look, we’re going to keep on moving towards that 20% number. When you’re saying about the wholesale business, and I assume you’re referring to shelf penetration, so we finished up last year at just under 10%, we’re sitting at about 10% right now, and we’d like to get the shelf penetration closer to north of 15% and certainly, if we can get there, to 20%. 

But I’ve been open with everybody, you know, you and I have talked about it as well too, you know, we have always been purveyors of cannabis, we have broad choices on our shelves, and so we’re not going to turn this just into Harborside only or just our own branded products.

 

Russell Stanley – Analyst, Beacon Securities 

Great. Thank you on that. And maybe moving on to the OpEx margin target of 35%, just wondering, understanding you’re early days on that, on progressing there, but wondering, ah, obviously some of that might come by way of revenue growth, but have you identified any specific opportunities for cost reductions yet and, I guess, can you elaborate on where some of those levers might be?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Yeah. So, there are a couple things we’re looking at. One is just we’ve had a lot of—I’m getting some feedback on the line myself. Look, we have been operating as a medical cannabis non-profit for many years. There are efficiencies at the retail level that I’m confident we can continue to lever. And also at the farm as well, too. Remember, we put a lot of investment at the farm and now we’ve finally got the environmentals in place and the automation that’s going to go in place that the Dutch Venlo that will provide some efficiencies there. And then the third prong that we’ve already started looking at is some of the consolidation on actual job duties at the stores and having some of the things that are being done by two people being done by one person.

Russell Stanley – Analyst, Beacon Securities 

Great. That’s great color. Just a final question from me and I’ll get back in the queue and it’s just a higher-level one. Much has been made in California of the resilience of the illicit market. I’m just wondering if you’ve seen any evidence of enforcement efforts picking up and any notable changes on that front.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

The area where we have seen some enforcement is at the cultivation level. There have been a couple of the farms that are adjacent to ours in Salinas that have had some raids. There’s also the BCC that has been doing some investigations as well too and, of course, doing inspections like we have seen. The reality is the illicit market is still pretty strong. All the tax revenue that the governor expected to get from this program hasn’t materialized yet, so it’s going to be a work in process, but we’ve seen it more at the cultivation level so far.

Russell Stanley – Analyst, Beacon Securities 

Thank you very much for the color and congrats again.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you very much, Russell. Look forward to seeing you.

Operator

Thank you. Next question will be from Michael Gruber at Salveo Capital. Please go ahead.

Michael Gruber – Analyst, Salveo Capital  

Hi, Andy. Just wanted to, ah, as we were going through the numbers I want to just get clarity for 2020. I think I heard the projection was between $55 million and $57 million on top line. There was a statement about profitability on an adjusted EBITDA basis for 2020 but there was no number attached to that. What is the forecast on your adjusted EBITDA basis? And maybe you could just comment on what the adjustments are to get to that adjusted EBITDA.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

So, Michael, A, good to hear your voice. Thanks for dialing into the call. Thanks for all your support over the last year. B, the numbers that I was giving you, that’s 2019. So, I gave guidance on 2019 being in the $55 million to $57 million range with positive adjusted EBITDA in 2019. I did not speak to 2020.

Michael Gruber – Analyst, Salveo Capital  

Okay. So, is there a number, a specific number that would be the profitability on an adjusted EBITDA basis? I just heard profitability but I’m not sure about the magnitude of that. And then I’m not sure if you could comment on just how—what are the adjustments that are made to get to adjusted EBITDA?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Yeah, the adjustments that are made, and Keith outlined that and I think he also referenced one of the slides in the MD&A, but it’s basically focused on the RTO costs and some separation in cost. Those are big adjustments to EBITDA. Those totaled about $4.6 million. And then there are the non-cash items as well too.

 

Michael Gruber – Analyst, Salveo Capital  

All right. And then just a quick follow up. I didn’t hear much about it but just in terms of future revenue mix, obviously you’re promoting your in-house brands, KEY and others, and some of which you referenced that you won some awards on the edible side, but there had previous plans to build-out your own extraction manufacturing capabilities as well as kitchen. Maybe you could just provide some better commentary on what the plans are of either doing it yourself in the future or whether you’d be using third parties for such production of those products.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Yeah, I mean you and I have had some discussions over the last year. We have looked at bringing extraction manufacturing in-house.  We have not done so simply because the third parties that we work with whose products, frankly, are on our shelves, have continued to provide us with better pricing along the way. I continue to look at extraction and pulling it in. I haven’t made a final decision on that yet but we’ll keep you informed as we evaluate that. But haven’t pulled that in yet and we are still working with third parties on manufacturing.

Michael Gruber – Analyst, Salveo Capital  

All right. Thank you.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you, Michael.

Operator

Thank you. Next question will be from Kerk Hilton at AltaCorp Capital. Please go ahead. 

Kerk Hilton – Analyst, AltaCorp Capital  

Hi, gentlemen. Thanks for the time here today. Just wanted to see if you could maybe define a little bit about where you see the best opportunities. Obviously you’ve got the wholesale cultivation as well as the growth in retail here. Where do you think are the best returns and that we could start look for in 2020 and so on?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Well the other piece is, Kerk, good to hear your voice, thanks for joining the call. So, yeah, you’re right, there’s growth in wholesale and there’s addition of retail and growth in retail, but you know we’ve been thinking about the brand strategy more than anything else and that’s where we see a lot of the value drivers going forward, which is why we have put the work that we’ve done into targeting, I would call them, demographic-specific brands that are coming out.

So, the first one that we expect to come out in the beginning of 2020, which is already under development, will be targeted at women. And then a second one that would be coming out afterwards that we’re targeting towards a wellness or an older demographic as well too. So, having one end of the book and having enough biomass, obviously, coming in and having a secure source of clean cannabis, as the testing requirements are just getting more and more rigorous, being able to control the significant quantity of shelf space so that when we put these brands out we can control the life and the flow of those brands by having the guaranteed biomass to get into those brands and the shelf space to put them on. 

Kerk Hilton – Analyst, AltaCorp Capital  

And any status or update you can share on your progress in getting through other locations in California and even elsewhere?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

On the brand side? Which piece? Progress in which piece? On the brand side?

Kerk Hilton – Analyst, AltaCorp Capital  

Yeah, brand. Distribution of Harborside products other than through the existing Harborside system. 

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Yeah, no, well, KEY is a good example, and I referenced some of the metrics around that. We launched KEY earlier, late last year a soft launch but really this year, and we’ve put a team around that and it’s won the awards that it has but it’s penetrated about 20%. We have gotten it sold into about 20% of the stores, licensed legal stores in California, and so we’re quite pleased with that.

And then KEY extracts, you know, BDS last month published its report and KEY extracts are in a top-25 extract categories for sales in the States. So, very pleased with the early results of KEY. And of course I referenced the edible awards as well too and that’s all been done, Kerk, frankly, on very low, lean marketing efforts. And so one of the things that we’re putting some more horsepower behind is obviously the marketing, because we haven’t done a lot of that around either of those efforts.

Kerk Hilton – Analyst, AltaCorp Capital  

Right. Maybe just two quick questions more here for me. One is any sort of updates on the municipalities and the tax regime changes that I know have been going on there that you can talk to people about as well just on the IR side, progress on OTC or other forms of availability of the shares to be able to purchase in the US.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Oh, so, on the first side, on the tax side, yeah, both Monterey and San Jose have lowered their tax structures. Monterey lowered their cultivation tax, which has been quite helpful, and then San Jose lowered their supply chain tax as well too. So, those were two good efforts. We continue to do lobbying on that front. 

And then in terms of the OTC, I can share that we are certainly considering a listing on the OTC. We haven’t formally filed an application yet with the OTC but that’s in the works.

Kerk Hilton – Analyst, AltaCorp Capital  

Great. Thanks, Andy.

 

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you, Kerk.

Operator

Thank you. Ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one on your touchtone phone.

Your next question will be from Luke McAlister at Westcourt Capital. Please go ahead.

Luke McAlister – Analyst, Westcourt Capital  

Hi, Andy. It’s Luke from Westcourt. I just had a couple questions in relation to 280E. Just wanted some clarification there. Obviously, you guys made an adjustment there, $15 million, which is obviously non-cash. How long can you guys continue to appeal for?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

So, Luke, good to hear your voice. Thank you also for your support and Westcourt’s support. I want to make sure you heard that right. It’s $15 million. The provision was for $15 million. 

Luke McAlister – Analyst, Westcourt Capital  

Yeah, one-five. Yes.

 

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Good. I thought you said $50 million for a second there. How long can we appeal for? We will get a ruling. We would have expected, frankly, a final ruling from the Tax Court already. I mean the government is calculating what it thinks we owe after the opinion that came out last December and of course we’re reviewing their calculations now. We have 60 days after we get a final ruling from the Tax Court within which to appeal to the US Court of Appeals for the Ninth Circuit. 

That appeal, honestly, could take two or three years, Luke. The Ninth Circuit—our best advice from tax counsel and appellant counsel that we hired said, assuming we got a ruling in the next 60 days and filed a Notice of Appeal before the end of the year, we would likely be looking at Q1 of next year when the Ninth Circuit would tell us, you know, we’d like to put you on a briefing schedule, we’d like to talk to the parties first. And appeals on these types of matters in the US Court of Appeals for the Ninth Circuit can take two to three years, frankly.

Luke McAlister – Analyst, Westcourt Capital  

Okay. So does that mean during that time you guys make the provision you essentially set cash aside in case the IRS says, yes, you have to pay it? I mean is that something you guys need to continue to do going forward?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

We’ve made a small provision right now, Luke, of in the $3 million to $5 million range for an anticipated payment that we might have to make in the next 18 months. But typically this results, when you go through that process with the IRS it would typically result in some form of a payment plan that would be based on a percentage of revenue, and that’s assuming we would be unsuccessful in the appeal. I mean there are many possible outcomes but that’s what we believe would happen.

Luke McAlister – Analyst, Westcourt Capital  

Okay. So then in the scenario where I don’t think anyone really imagines that, that that’s going to occur under Trump’s watch, that federally they legalize marijuana, does that then become a moot point? I mean essentially you guys put that back in? Like there’s some sort of reversing entry that says, okay, no longer do we have to set aside this cash for 280E, you know, that thing essentially goes away.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Luke, ideally that would be the case. Can’t make any predictions on that. It really depends on, you know, when they de-schedule and when they remove the restrictions around 280E, what they would do to pending cases is just simply hard to say. I mean, ideally, you would have pending cases and they would say that none of these cases have merit anymore, but it’s just too hard to say honestly and predict that. 

Luke McAlister – Analyst, Westcourt Capital  

Yeah, understood. Thanks a lot for your clarity there.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

(Inaudible). I’m sorry, go ahead?

Luke McAlister – Analyst, Westcourt Capital  

No, no, just thanks for the clarity. I mean it’s just one of those things that just it’s hard to kind of ballpark how long it’s going to continue to hang there, how many more adjustments you guys are going to need to make, because at some point I assume you guys will just get it cleared up from having this issue in the past and you kind of just move on from it.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Honestly, Luke, I don’t know that we will have to make more adjustments. I want to be careful here, but the adjustments and the provision that we put in was based on very good advice from tax and appellant counsel and based on what we’re seeing in the government’s at least initial calculations to the Tax Court on what’s called a 155 calculation. 

But these are based on the calculations that the government are showing, at least initially showing us as we move towards a final Tax Court ruling. So we feel, you know, we’re being conservative at the $15 million provision.

Luke McAlister – Analyst, Westcourt Capital  

Perfect. Thanks a lot for the clarity.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you, Luke.

Operator

Thank you. Next question will be from Zack Kembar at Burke Norris. Please go ahead.

Zack Kembar – Analyst, Burk Norris Investments   

Hi, Andy. Good morning. How’s it going?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Fine, thanks, Zack. It’s good to hear your voice. Thanks for all your support the last year and a half.

Zack Kembar – Analyst, Burk Norris Investments   

So, Andy, I wanted to kind of follow up on some conversations we’d had before with respect to research, more robust market making, and just general profile for the stock that would get it into an area where it’s not only tradable but is higher visibility and so on. Can you comment at all to that?

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Yeah. So, very important to us as well, too. We did announce that we hired secondary liquidity providers. Both Mackie and Generation have been hired and are working that now. Our underwriters, AltaCorp, they’ve done a couple of desk reports on us and they’re also going to be doing more research with us. I had a communication with Jon Horsman, their CEO, and they’ve hired a new analyst that’s going to be targeting the US MSO market and so we’ll be meeting next week. So that’s positive.

And then, you know, everybody has said, “Andy, let’s get through your first earnings call, let’s see how you’re doing as a company, let’s take a look at what you’re sharing with the market” but I have meetings set up next week with Beacon and with Cormark and with Haywood. All three of those were in our syndicate for our concurrent round and so my hope and my expectation would be that we begin to get coverage certainly from Alta and hopefully Beacon and Haywood and Cormark and others can come in.

Zack Kembar – Analyst, Burk Norris Investments   

Excellent. Thank you.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you, Zack.

Operator

Thank you. Next is a follow up from Michael Gruber. Please go ahead.

Michael Gruber – Analyst, Salveo Capital  

Andy, I just wanted to get a little more clarity. You had mentioned at the beginning of your opening remarks about an issuer bid for up to 55% of the company. If you can just provide more details about the approach and what you’re thinking for that. Obviously, you would have to go through regulatory approval, but if you could just provide some more details on that.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Yeah, sure. So, we’re doing a normal course issuer bid, Michael. We’ve already engaged AltaCorp as our broker for that and obviously we’re going to be purchasing from the market at market prices. This is not treasury stock. And the securities will be canceled. And all of this is going to be in accordance with Canadian securities laws. We’re going to kick the program off in the week after next and we’ll run it for up to a year. And of course it’s all subject, and I said that in my comments, obviously all subject to any blackout periods that we’ll be under for M&A activities or related reasons.

Michael Gruber – Analyst, Salveo Capital  

Okay. And then I guess a related question to that is just based upon the total amount of stock outstanding and what may be tradable by insiders. Do the same continued lockups still exist based on the listing or have there been any changes? Have there been talks internally about an updated agreement on lockups? As we’ve seen from a number of companies that have had their earnings calls over the past few weeks, we’ve seen a number of the insiders agree to some longer-term lockups.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

As you know, we have our officers, directors, and promoters and large shareholders and insiders locked up. We extended the 10% that could initially be released on listing by four months and then we would be following the 15% every six months thereafter. We have not extended those yet. We’ve talked about it. Haven’t’ made a final decision on it yet.

 

Michael Gruber – Analyst, Salveo Capital  

Okay. Thank you.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you.

Operator

Thank you. And at this time we have no other questions. You may go ahead and proceed with any closing comments.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Well, the only thing I’d want to say is just thank you, everybody, for participating in the call. Thank you for listening and for your support of Harborside. Appreciate that and looking forward to finishing off the year strong and heading into 2020. 

Operator

Thank you, sir.

Andrew Berman — President & Chief Executive Officer, Harborside Inc.

Thank you, Greg, for being here as well, too. Thank you, everybody.

 

Operator

Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time we do ask that you please disconnect your lines. Have yourselves a great weekend.

X