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Harborside 2019 Q3 Earnings Call Transcript

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Corporate participants

Jessica Bornn

MATTIO CommunicationsInvestor Contact

 

Peter Bilodeau

Harborside Inc. — Chairman & Interim Chief Executive Officer

 

Keith Li

Harborside Inc. — Chief Financial Officer

 

Conference Call Participants

Kenric Tyghe

AltaCorp Capital — Analyst

 

Greg Miller

National Institute for Cannabis Investors — Executive Director

 

Tony Kamin

Eastwood Partners — Analyst

 

Mike Siskind

Decade Group Inc. — Investor

 

 

PRESENTATION

Operator

Good morning, ladies and gentlemen, and welcome to Harborside Inc. Third Quarter Results Conference Call.  At this time, all lines are in listen-only mode. Following the presentation we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, November 22, 2019.

I would like to turn the conference over to Jessica Bornn. Please go ahead.

Jessica Bornn — Investor Contact, MATTIO Communications

Good morning and welcome to the Harborside Inc. conference call to discuss the company’s results for the third quarter of 2019. On with me today with prepared remarks are Peter Bilodeau, Chairman and Interim Chief Executive Officer; Jack Nichols, General Counsel and CCO; and Keith Li, CFO. Also joining for the question-and-answer session will be Greg Sutton, COO.

By now, everyone should have access to the earnings release, which went out this morning. For those who haven’t, it’s available on SEDAR at SEDAR.com and 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 December 6, 2019. Please visit www.investharborside.com for details on the replay.

Before we begin, I would like to remind you that the comments on today’s call will include forward-looking statements within the meaning of Canadian and United States securities laws, which by their nature involve estimates, projections, plans, goals, forecasts, and assumptions. Although the Company believes that these forward-looking statements are reasonable, such statements are subject to risks and uncertainties that could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements on certain material factors or assumptions that were implied in drawing a conclusion or making a forecast in such statements. As such, you should not place undue reliance on such forward-looking statements.

These forward-looking statements speak only as of the date of this conference call and are presented for the purpose of assisting you in understanding the Company’s financial position and results of operations. These forward-looking statements should not be relied up on as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by applicable law. Additional information about the material factors and assumptions forming the basis of the forward-looking statements and risk factors can be found in the Company’s filings and press release on SEDAR and the Canadian Securities Exchange.

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, adjusted gross profit, adjusted gross margin, and pro forma results of operations, which are defined in the press release issued earlier today. There are no comparable IFRS financial measures presented in the Company’s third quarter financial statements but reconciliations of the non-IFRS financial measures are presented in the third quarter MD&A. The Company believes these measures provide useful information to you in order to understand its performance and evaluate its business relative to its peers.

Please note all financial information is provided in US dollars, unless otherwise indicated.

Now I would like to turn the call over to Harborside’s Chairman and Interim CEO, Peter Bilodeau.

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Thank you, Jessica, and good morning, everyone. We appreciate you joining us for our third quarter earnings call. I’d like to start off by discussing the continued success of Harborside as well as some of our near-term goals and challenges and how we plan to address those.

Firstly, as you know, we have added and are in the process of adding additional firepower to our executive team and are deep at work building a strong culture of performance throughout the Company with the existing management and employees.

Secondly, we are laser focused on streamlining cost and identifying efficiencies. Part of this cost-cutting program is through the implementation of the changes suggested by Alvarez & Marsal, which has already resulted in immediate savings in the $0.5 million range and an expected cost savings of $2 million to $4 million per year based on our current revenues and asset base as our team further executes on the plan. Additionally, we are working on our own initiatives at are Salinas facility where we have undertaken a granular, in-depth analysis of our operating costs to ensure significant improvement in operating results going forward.

Thirdly, our team is implementing strategies to grow revenue and profit margins, maximizing the returns of our current retail and wholesale assets. To do this we are: A, implementing additional training to improve retail management and sales staff at our stores with an emphasis on growing basket size. B, with our increased capacity and a stabilizing source of better-quality products at the farm, we’re expanding our wholesale business with an initial emphasis on increasing the shelf space capture rate in our retail stores for our in-house brands, KEY and Harborside Farms. From there, we will more aggressively expanding this reach to other dispensaries across California. C, we are currently in search of a brand leader to broaden the KEY and Harborside Farm brands market penetration and to further expand our collection of house brands. Fourthly, ensuring value to our shareholders. Strategic opportunities in our pipeline are now more robust than ever with regular inbound calls on the M&A front. Valuation expectations are being reset and we continue to evaluate opportunities within our stringent requirements. Harborside will not grow through acquisitions for the sake of growing. Any opportunities pursued need to be accretive to the Company and its shareholders and non-dilutive to our overall cash position.

Now turning to our third quarter results, in the third quarter we had solid revenue growth. Our second quarter as a public company under the Harborside banner was another solid one. We reported our highest revenue to date of $14.1 million, representing year-over-year growth of 22.4%. This represents the 15th quarter since Q1 2016 in which our quarterly revenue has tracked over USD$10 million. These results were driven by a 57.1% increase in wholesale and a 13.5% increase in retail sales. Keith will go into the results in greater detail a bit later. We have a very solid sustainable business with a loyal customer base of over 200,000 registered customers and today we are servicing 1,300 customers every day on average.

Our team. As you know, since quarter end we have made some significant changes in personnel. We have added Lisah Poore as Chief Retail Officer and she is now running our six all-soon-to-be-operational stores. Greg Sutton has been promoted to Chief Operating Officer of the Company with responsibility for cultivation, wholesale sales, and supply chain management. Mireille Duclos has joined us as Vice President of Human Resources. And this week we added Larry Kelly as Corporate Controller. We are also happy to report that we are in the final stages of hiring a new CFO in Oakland so that we can have someone on the ground involved in day-to-day operations. This individual has a strong cannabis background. We expect to have him on board in early December. Formal announcements will be made when finalized. Also, as mentioned earlier, we are looking for the right individual to lead our Harborside Farms and KEY brands and expand our house of brands. These new executives, together with Jack Nichols, our long-serving General Counsel, form the expanded and revitalized executive team that will lead the Company in its future growth.

Turning to our CEO search, the Board, as well as myself, is committed to identifying the right candidate to take Harborside to the next level of growth and profitability. We are encouraged by the number of tremendous candidates, many with cannabis experience, that we have identified through our Board’s relationships with several executive search firms how are presently submitting candidates. We are seeking a candidate with public market experience in cannabis, retail, or both, someone that can execute at the speed of cannabis markets and lead this dynamic team, all while maintaining an unwavering dedication to safety and compliance required in this highly regulated and evolving industry. At this time, I would like to take the opportunity to thank Andrew Berman for his leadership over the last two years. Andrew did an excellent job helping the Company to navigate through the IPO and we thank him for all of his tireless efforts and the hard work he put in.

I would now like to discuss our outlook for the remainder of the year. We are updating our full-year 2019 revenue guidance from $55 million to $57 million to $50 million to $52 million. This decrease reflects the delayed timing of the openings of the Desert Hot Springs and San Leandro locations, causing a $2 million decrease in revenue, and the delayed closing of the Lux acquisition resulting in a $1.5 million decrease to revenue. Additionally, a production issue at the Company’s farm disrupted three harvests that we expected to monetize in the fourth quarter worth approximately $1.5 million of revenue.

We continue to be committed to being the preeminent California-focused cannabis company, expanding our Northern California market position through the state and focusing on retail excellence, branded products, and production capacity to capture shelf space and higher margins.

Our retail expansion is underway. I am excited to announce that our Desert Hot Springs location has a grand opening scheduled for December 7, 2019. This marks our first retail dispensary outside of the bay area and we’ll have the first drive-thru dispensary in southern California. It is located right off the I-10, attracting customers from Palm Springs and those heading from LA to Indio or Coachella.

Additionally, we completed the transaction to acquire 100% of San Leandro Wellness Solutions in October and we are putting the final touches on construction at that beautiful facility. We target opening that store in December. We are strategically located along the busy Interstate 880 corridor between Oakland and San Jose, one of the most heavily trafficked stretches of highway in northern California, and we’re just one of three licensed dispensaries in the City of San Leandro.

We are renegotiating the Lux acquisition and at this time both sides continue to want to move forward. We aim to wrap this up by year end and we expect it to be included in our run rate for 2020.

We intend to continue to drive organic retail sales growth through superior customer experience, marketing, and our revolving business models. (Inaudible) iconic California brand that has a 13-year history of providing our patients and customers with high-quality curated cannabis products. We are grateful to our existing loyal customer base as well as our new customers and, to that end, we are committed to elevating our in-store shopping experience. Innovations we have introduced to our open store, for example, include changing the selling environment to an open floor plan from a behind-the-counter model. This change has been well received by our customers and we intend to bring the learnings and customer feedback to our other locations when and where possible.

Our retail metrics remain healthy with an average of 1,302 customers per day and an average basket size of $82.94 in the third quarter. This represents a slight decline from $86.19 in Q2 and is the result of the change in the volume of plant sold. Q2 is the planting season for outdoor cannabis; we therefore realize our highest plant sales in this period. We are also opening an event venue and tasting room in Oakland in early December to further enhance our customers’ in-store experience and provide third-party sponsorship opportunities.

Our cultivation campus in Salinas now has approximately 160,000 square feet of operating canopy operating on a consistent two-week harvest schedule throughout the year. Importantly, our state-of-the-art Dutch Venlo greenhouse is now fully operational and we are in the midst of our harvest out of this facility. We expect to produce approximately 30 pounds of top-quality cannabis for wholesale sales and for vertically-integrated sales in our retail stores. We also received a power upgrade from our utility company to 5,000 amps, which we expect will drive improved yields and quality consistency throughout 2020. In addition, we will continue to increase the shelf space penetration of our in-house brands powered by our cannabis cultivated and processed in our Salinas production facility.

Our in-house brands, KEY and Harborside Farms, recently captured 25% of our flyer sales in our open and San Jose flagship stores. We achieved this with minimal sales and marketing efforts and simply by an increase in inventory. We see this as a very significant opportunity both for retail gross margin improvement as well as marketing exposure for our brands given our coveted retail shelf space and high volume customer traffic. This is also a significant opportunity as we expand our retail footprint. We will continue to leverage a coherent and well integrated marketing plan that includes paid, earned, and owned media, as well as our own digital social channels.

Moving to other matters, as you know, Harborside has been an industry leader in the fight for cannabis legalization. Harborside remains committed to continuing its leadership role in the fight for legalization at the local, state, and national level, and is further encouraged by the House Judiciary Committee’s recent passing of the MORE Act and the House passage of the SAFE Banking Act. And while our efforts continue to show good favour in the fight against 280E, we disagree with the recent ruling in all respects and have engaged appellate counsel who will be filing an appeal on our behalf within the allowed 90-day window.

We’d also like to update you on our buyback. The Company continues to monitor its previously announced normal course issuer bid for up to 5% of its issued and outstanding SVS bid. To date, the Company has not purchased any SVS under the bid. From time to time, when the Company does not possess material non-public information about itself or its securities, it will exercise its discretion in determining if SVS will be purchased under the bid.

Lockups. Last month we announced that executive members of the Board of Directors and insiders had entered into an additional extended voluntary lockup agreement with the Company through December 1, 2019. We are pleased to announce a further extension of this lockup period through June 1, 2020 that is now in place, which further highlights our key stakeholders’ confidence in our growth plan and long-term strategy. While this initiative isn’t a complete solution to our challenges, I believe it demonstrates our continued commitment as an executive team and as a board.

Capital markets performance. With a steady revenue base established over many quarters, it is (inaudible) upon the new team to add growth and results to our business and to provide some much needed growth in our stock price for our stakeholders. Since June, we have seen an enormous erosion of value in our industry. By some estimates, $10 billion of value has been lost by shareholders and not since the days of the tech boom and bust have we seen an industry sector experience such a rapid and severe retrenchment. I am very disappointed to say that at the close of business yesterday Harborside was trading at approximately 0.8x our reset 2019 pro forma sales. This multiple is well below the 5.7x average multiples of other cannabis operators in the sector. As Chairman and Interim CEO, I recognize that in order to improve our capital markets performance we have to get better coverage from industry analysts. We also have to execute and perform better. The markets have clearly stated as of late that they are looking for healthy balance sheets and sustainable, profitable growth. While we are assured some analysts coverage is forthcoming, as a Company we need to better deliver on our execution and KPIs to become more noticeable as leading operators. I give you my assurance that it is our new team’s mission to make us more noticeable and to make Harborside the industry leader it was created to be.

I would now like to turn this over to Keith, who will take you through our numbers and provide a financial review.

Keith Li — Chief Financial Officer, Harborside Inc.

Thank you, Peter, and good morning, everyone. And with that said, let’s dive into our financial performance.

For the three quarters ending September 30, 2019, our total revenue increased by 22.4% to $14.1 million. Adjusted gross margin, having adjusted for fair value changes in our biological assets, was at $3.4 million or 32%. And after adjusting for non-cash items and other non-recurring items, our adjusted EBITDA for the quarter was a loss of $2.9 million. The negative margin’s up 20.4%. And year to date our total revenue was at $38.8 million, which is an increase of about 22% compared to the same period last year. We had a 31.3% adjusted gross margin for year to date and an adjusted EBITDA of a $3 million loss.

The third quarter revenue mix was approximately 75% in retail and 25% in wholesale compared to a shift from 80% and 20% in the same period last year. The mix this year is mainly driven by a 57% increase year over year in wholesale sales and our retail sales had also increased by about 14%. Year to date, the mix is approximately 80% to 20%, driven by wholesale sales, which increased by about 170%.

I’m pleased to have had continued growth in the third quarter in a very competitive, highly regulated, and highly taxed marketplace. Our retail growth speaks to the enduring appeal of the Harborside offering, the loyalty of our customers, and a number of new initiatives around customer experience and some marketing strategies that Peter had referred to earlier. For your information, we have included the full set of our quarterly and historical retail metrics in our press release, which is now posted on SEDAR.

Our third quarter adjusted gross margin is 22.6% .That number excludes the impact of fair value changes in biological assets and represented a slight decrease from the 24% we have seen in Q2 with roughly half of this improvement due to larger than typical fair value adjustment for inventory sold. And year to date gross profit excluding the impact of the biological assets is about 31.3%.

And in terms of financial position, as of September 30, 2019 the Company had total assets of about $53 million, including cash of $16.6 million. And in terms of liabilities, there’s only about $0.8 million of outstanding debt.

Finally, following the end of the third quarter, we acquired full ownership of San Leandro Wellness Solutions. Harborside previously owned 50% of the dispensary under a joint venture agreement and would have provided management services to the store upon opening of the store in the current quarter, which is Q4. And with the close of this transaction the results of San Leandro will now be fully consolidated into our Company’s financials. We continue to own 10% of Desert Hot Springs, where we receive a service fee for managing the store.

To recap, revenue for the nine months year to date total was up 21.7% compared to the same period in 2018. Adjusted EBITDA for the same period in 2019 is a loss of $3 million. Moving forward, we are expecting sales for 2019 to be in the range of US$50 million to US$52 million with a guidance for negative adjusted EBITDA.

Now, Peter, back over to you.

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Thank you, Keith.

Before opening the lines for questions, I want to reiterate some of my opening comments. Firstly, we are in the final stages of building a dynamic executive team to lead the Company forward. Secondly, the new team is laser focused on streamlining costs and earning profits. Thirdly, with the new dispensary additions and the completion of our Venlo greenhouse, several new strategies are being created to grow revenue and profit margins, both at the retail and wholesale levels, and by building our house of brands, starting with our existing Harborside Farms and KEY brands. Fourthly, returning value to our shareholders is of paramount importance to our entire team.

In conclusion, Harborside remains an iconic California brand and our strength is represented with the success seen in our retail and wholesale assets, which we continue to innovate and evolve. We remain true to our California roots and our values, emphasizing trust, choice, and value.

At this point we would like to open it up for any questions which may be on the line. Operator, please open the lines.

Q & A

Operator

Thank you. Ladies and gentlemen, should you have a question, please press star followed by one on your touchtone phone. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question.

Your first question is from Kenric Tyghe from AltaCorp Capital. Please go ahead.

Kenric Tyghe – Analyst, AltaCorp Capital

Thank you and good morning. Peter, I wonder if you could just speak to the delayed store openings in quarter and perhaps the drivers of that. And looking beyond just the delays in quarter, how confident are you with respect to your planned openings and also Lux not, perhaps, slipping into the first quarter of 2020?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Sure. Well, the San Leandro location was delayed just because of negotiations on the ownership. We will have that open. It’s in the final stages right now of completion, so it will be open by the end of December. Desert Hot Springs will open December 7, 2019. It’s completed now. And the Lux acquisition, we are still in negotiations. This deal was originally structured on share price, so we’re just trying to finalize that with the existing owners. They are committed to try and close, it’s just, ah, it’s been a lot of things happening at once.

Kenric Tyghe – Analyst, AltaCorp Capital

Fair enough. I just wanted to get some indication there just so we know, can sort of baseline our 2020 thinking.

Just switching gears, with respect to the production issue in quarter, certainly we were impressed when we went through your production grows, certainly relative to some of your peers, so a little surprised about the issue that you experienced. Could you speak to any or provide any specifics on the issue and whether it’s behind you? And I guess part two of that would be was there any—any of the gross margin compression in quarter, was that impacted by this issue or is the issue really only impacting your fourth quarter outlook?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Yes, it has impacted the quarter, for the quick answer. The operation now, it was just a production issue that backed things up and put us several weeks behind. The main thing to say is I was at the greenhouse last week, at the farm last week, it was completely, absolutely beautiful. All stages are in full bloom at their various stages on this two-week cycle that we’re operating on. I have never seen it look so great.

Kenric Tyghe – Analyst, AltaCorp Capital

As is said, Peter, impressed when we did the tour of the facilities, so certainly happy to hear the production issue is behind you. Can we just switch, just in terms of G&A, were there any pre-opening expenses related to the stores that you initially expected to have open a little earlier in third quarter or how should we think about sort of the run rate of SG&A, you know, looking into the fourth quarter here and perhaps sort of looking beyond that into 2020?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Well, there will definitely be improvements moving forward on the SG&A expenses. That is one of the prime targets that we’re reviewing right now. There is some impact in the quarter on those as well, but moving forward I think you will see substantial improvements in that from quarter to quarter. The new team, we are doing a deep dive into every dollar spent in this organization and with the additions of the new accounting support and lead staff, I think you can count on, I’m confident you can count on some very significant improvement there.

Kenric Tyghe – Analyst, AltaCorp Capital

That’s great. And maybe if I could, just a quick final one for me, and perhaps this is more directed at Jack, but could you just walk us through again, even at a very high level, the process, the sort of procedure and timing on resolution of the tax issues? I mean certainly my understanding is there’s a pretty long fuse on the issue and settlement or settlement dollars make for a pretty wide range of outcomes here. I’d like to just understand or just refresh some of the thoughts around that and perhaps better understand the issue.

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Well, our (inaudible) site has been well documented. There’s the dissent at the Ninth Circuit Court of Appeals gives us a path to reverse the tax (inaudible) on constitutional grounds. We are going to fight, as mentioned earlier, we’re going to fight that and take this forward. We’ve been very successful at the fight so far and we’re going to continue that until there are no more options.

Kenric Tyghe – Analyst, AltaCorp Capital

And not to put words in your mouth, but would I be correct to characterize your current provisions as being pretty conservative or, you know, never want to use the word a worst case outcome when referring to tax-related issues, but would you believe that the provisions you’ve taken would err on the side of being very conservative? Or how should we think about the provisions you have there in terms of dollar values and potential risks to those dollar values?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Yes, I definitely think, you know, we’ve taken these numbers downs substantially in our fight. We think we’ve properly allowed for any exposure risk that we have and we are hoping to see that even reduce further over time.

Kenric Tyghe – Analyst, AltaCorp Capital

That’s great. Thank you very much. I’ll get back in queue.

Operator

Thank you. Your next question is from Greg Miller from National Institute for Cannabis Investors. Please go ahead, Greg.

Greg Miller – Analyst, National Institute for Cannabis Investors

Good morning, all, and thanks for taking my question. I want to dial in a little bit closer on the guidance for the remainder of 2019. It seems like an unusually wide range given that we’re in the last quarter and we’re done with two months of it and, in any event, based on the nine months to date, that implies a sequential sales decline of somewhere between 6% and 20%. I wonder if you can talk a little bit more about what’s involved with that. I mean you talked about what’s going to delay increasing revenues, but decreasing revenues is a different animal. And then if you could also address sort of how the consolidation of San Leandro will mix into that, how much that increases the revenues for the quarter, that sort of thing. Thanks.

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Well, let’s start first with—our retail stores continue to perform on target or ahead of projection, (inaudible), our existing ones, and I explained (inaudible) will open just before the end of the year, so it’ll really add no significance in dollars for this year. The main issue is the timing and delivery of our farm crops and putting that to market. As I said, the greenhouses are all in top shape right now, the new Venlo is absolutely performing exceptionally well, and we anticipate great results going forward, but the main differential in range is because of the crops.

Greg Miller – Analyst, National Institute for Cannabis Investors

Okay. Is that where we should expect to see a revenue decline for the quarter also?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Well, likely, because—yes. We lost $1.5 million of revenue out of the farm that we were counting on and otherwise we’re pretty well on target.

Greg Miller – Analyst, National Institute for Cannabis Investors

Okay. Terrific. Thanks.

Operator

Thank you. Your next question is from Tony Kamin from Eastwood Partners. Please go ahead, Tony.

Tony Kamin – Analyst, Eastwood Partners

Hi, Peter. Thank you. Can you, just bringing the various sort of strands together here as you look forward, you’ve got in place what sound like pretty robust cost-cutting measures going on, you’ve talked about the addition of the new stores coming in this quarter. Is the objective of the Company to try to get to sort of EBITDA neutral at some point next year? Is that reasonable to expect?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

I would be a little more bullish on that to say EBITDA positive. And I don’t want to get into, too much into forward-looking statements, because we’re still working on some plans. You know, we have the complete new team, a new CFO coming on board, the new controller just on board, but absolutely we are looking for positive EBITDA for 2020.

Tony Kamin – Analyst, Eastwood Partners

Okay. And my last question is, you know, I think it’s very admirable you put in a further lockup today, you had a buyback in place, I think you cogently and succinctly kind of described the state of the capital markets, and I assume all that is in response to, as you mentioned, you believe the current valuation of the shares doesn’t represent probably what it should. So, amongst the shares we follow, Harborside, probably the most of any of them, seems to suffer from really irregular gaps in its trading. It really trades poorly. And I guess what I’m looking for is a comment on, you know, it’s our belief that if you started to use, in a moderate way, recognizing that cash is so valued right now, but in a moderate way to start to use some of the buyback that that would create a lot more stability around the share price. Can you comment on what it would take to get you to begin the buyback?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Good question. So, the biggest thing, and this is one that we’ve been struggling with, is just the timing and the blackout periods for the Company. For instance, for the last, pretty much since we announced or shortly after announcing the buyback potential, we’ve been in blackout because of third quarter. Also, any discussions or any material information that isn’t disclosed to the public, if there’s anything like that we have to continue with the blackout. So, we read this carefully, if you read the press release carefully, I’m not trying to play on the words, but there are times that we can and cannot but we just want to, we’re basically reviewing it all the time, but since the original buyback announcement we’ve pretty much been in a blackout period.

Tony Kamin – Analyst, Eastwood Partners

Okay. But your intent would be—I don’t want to put words in your mouth, you’ve pointed out you think the shares are undervalued, you have it in place, would the intent be to begin it even in a moderate way when you’re allowed to?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

We’ll continually be reviewing that, yes.

Tony Kamin – Analyst, Eastwood Partners

Okay. Thank you very much.

Operator

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star followed by one. Your next question is from Mike Siskind from Decade Group Inc. Please go ahead, Mike.

Mike Siskind – Investor, Decade Group Inc.

Hi, Peter. My question is, ah, just looking at the press release and looking at these share-based compensations, and I’m not sure if I missed it early in the call, could you explain to me what the $2.1 million in share compensation that went out as incentives? I found that surprising reading that when we’ve seen the huge decline in the stock and I’d like to understand what incentive was paid out. And then you had also $2.3 million in share-based compensation.

And then my second question would relate to sort of what the last question was getting at, which is you have $60 million in cash, you have a $15.5 million tax liability; when does the Company actually need more cash? And if you are buying back shares, to what extent does the management team or any of the founders, to what extent are they stepping up to the plate to support the stock, which clearly hasn’t been there for a year?

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Okay. Your first question I will put to the side and let maybe Keith address that, or we’ll have to… I know I can tell you that no new shares have been issued in the quarter or since listing. Okay?

Sorry. The use of cash. Sorry. Well, the use of cash is, well, cash is king right now in the industry, as you will know, holding on to as much cash as possible is deep in every operators thoughts every day just for proper guidance and to move forward properly. We are keeping that cash tight. As I said, we don’t want anything that we—we’re spending it very carefully, but we do, we still are trying to get over the hump, are working towards getting over the hump to crack a cash positive position.

The 280E is a tax provision, is conservatively high, and we’re fully intending to appeal that, which pushes any settlement there back at least a year. Or indefinitely. That’s from my counsel.

Keith, are you still on the line and can you address the question on the share (inaudible) more fully?

Keith Li — Chief Financial Officer, Harborside Inc.

Yes. So, Mike, per your questions regarding the Q3 numbers, what you see on the income statement is $2 million recording of stock-based compensation. This is actually a true-up adjustment. So, what we discovered is that, during the preparations of the Q3 financials, we actually discovered certain options that have been previously granted. So, for whatever reason, the valuation hasn’t been properly recorded, so this is an aggregate true-up of the numbers from the origins of the options. So, it does look a bit weird but, yeah, at the same time we have tried to clean up our financial records and this is our true-up number for the period.

Mike Siskind – Investor, Decade Group Inc.

So, you have two numbers here. I would understand that if you said share-based payments. You have $2.1 million in expenses related to share-based incentive compensation. Who’s getting compensated for incentives here?

Keith Li — Chief Financial Officer, Harborside Inc.

Yeah, so two different numbers we are talking about. The stock-based compensation is related to the options that I was just referring to where we have to true-up past valuations from prior years. The other number you’re referring to, which is the share-based payments, the $2.3 million for year to date, so if you refer to the financial statement, the share capital section, that relates to the success fees that were paid out to FMICAI on the completions of the reverse takeover transaction. So these are two separate numbers that we are referring to. And they’re payable in shares. So this is the valuations we come up on the shares that we issued on the success fee payment.

Mike Siskind – Investor, Decade Group Inc.

Okay.

Operator

Mike, do you have any other questions?

Mike Siskind – Investor, Decade Group Inc.

No. Thank you.

Operator

Thank you. There are no more questions at this time. Please proceed.

Peter Bilodeau — Chairman & Interim Chief Executive Officer, Harborside Inc.

Okay. Thank you all for your participation. Feel free to call me any time if you have any questions. Thanks very much.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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