Good afternoon, all. Welcome to today's conference call to discuss Harborside's Second Quarter 2021 Financial Results. A press release detailing the financial results was distributed prior to the call and is available on the investor relations section of the Harborside website. On the call today are Matt Hawkins, Chairman and Interim CEO, Tom DiGiovanni, Chief Financial Officer. Listeners are reminded that certain matters discussed on today's conference call or answers that may be given to questions asked, could constitute forward-looking statements that are subject to the risk and uncertainties relating to Harborside's future financial or business performance. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are detailed in Harborside's annual information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR database at www.sedar.com.
Any forward-looking statements made today on this call are based on assumptions as of today, and Harborside assumes no obligation to update these statements as a result of new information or future events. I'd like to remind everyone that this call is being recorded today, Tuesday, August 31st, 2021. I would like to introduce Mr. Matt Hawkins, Chairman and Interim CEO of Harborside. Please go ahead, sir.
Thank you very much. Good afternoon, everyone, and thank you for joining us today. I'm excited to update you on our progress. During today's call, I'll provide an overview of the business and briefly review our Q2 2021 results before turning the call over to Tom DiGiovanni, our CFO, who will go into a more detailed review of our numbers. We will then open up the line to questions. First off, I'm very proud to report that for the second quarter of 2021, we achieved positive adjusted EBITDA of approximately $1.1 million. Positive EBITDA continues to be an important company milestone we first reached in Q1 of 2020 and have sustained every quarter since. Our continued solid EBITDA performance speaks to the underlying strength of our business and the changes we continue to make to improve operations.
I'm also proud to report that our Q2 2021 gross revenues increased 25% sequentially to $16.2 million, and we reported a 4.1% sequential gross profit improvement for the quarter. Together, management and the board continue to evaluate opportunities in the marketplace to maximize shareholder value. As we scale up our operations and execute on our California-focused growth strategy, our immediate areas of focus include pursuing additional accretive merger and acquisition opportunities and building out a world-class management team. We hope to make additional announcements very soon. On the M&A front, subsequent to quarter end, we completed the previously announced acquisition of Sublime, an award-winning cannabis product manufacturing company known for its expansive line of high-potency, high-quality Fuzzies branded products.
Sublime had California's number one pre-roll brand in 2020, with distribution to over 500 active customers covering almost 70% of the California market. The acquisition of Sublime provides us with a number of synergies, including Harborside's ability to access Sublime's production capabilities and robust distribution network. When combined with the utilization of the high-quality cannabis grown in our 200,000 sq ft of greenhouses in Salinas, we expect to see improved gross margins as well as to expand the overall sales and distribution of our combined suite of branded Harborside, Key, and now Fuzzies products, both on our own store sales and to additional retailers and distributors throughout California. We've known the Sublime team for years and have been longtime customers, with their products broadly available in our retail stores.
We are excited that they are now part of the Harborside family and are already finding the acquisition to be accretive to both revenues and EBITDA. In addition, since completing the $5 million strategic investment in Loudpack, a premier cultivator, brand operator, and distributor in the California market, we engaged them to provide services aimed at identifying production efficiencies and improving harvest yields at our production campus. In Q2, Loudpack began producing Harborside-branded products under a contract manufacturing arrangement. The first of these products recently became available in our dispensaries and is also being sold through our distribution network. We've also increased the availability of Loudpack-branded products, including Smokiez Edibles, Kingpen Vapes, and Dime Bag Flower, at all of our retail locations. We continue to expand our talented management team. During the quarter, we announced a key hire.
Travis Higginbotham Jr., who joined us as Vice President of Production, overseeing our Salinas, California, production campus, which includes cultivation, post-harvest processing, and packaging facilities. Travis has a master's degree in horticulture, and he joins Harborside with more than eight years of experience in the hemp and cannabis space, where he has previously managed a 2 million-sq ft grow operation that had sales of hemp-related CPG products across more than 20 states. We are thrilled to welcome him to the team, and his impressive cultivation and business development expertise will be instrumental in leading our production teams, implementing further improvements at our cultivation facility. We expect that this will ultimately reduce operating costs and boost profitability for the business. Also, subsequent to the end of Q2, we appointed Ahmer Iqbal as the Chief Operating Officer of Harborside.
Ahmer came into the organization as part of the Sublime acquisition, and his operational background with Amazon, as well as his track record of results as CEO of Sublime, make him well-suited to drive further operational improvements at Harborside as the company continues to grow. We remain committed to bringing in a new CEO and are currently evaluating several potential candidates for that role. I hope to have an update on that front very shortly. Last quarter, we announced that we secured a $12 million revolving line of credit with a federally regulated commercial bank. The line of credit has an initial interest rate of 5.75%, which provided us with one of the most competitive costs of capital in the entire cannabis industry. During Q2, we drew down approximately $11.4 million of the credit facility to complete the purchase of our 47-acre production facility campus in Salinas, California.
This transaction lowered our borrowing costs significantly and is expected to improve overall cash flow and enable us to make further capital investments in the facility to increase production and meet consumer demand. Taking a quick look at our operations, we continue to make great strides toward implementing improvements in our operational efficiencies. During the second quarter, we completed the greenhouse upgrades at our Salinas cultivation facility. The upgrades included, among other things, the installation of blackout curtains, supplemental LED grow lights, and the incorporation of a state-of-the-art environmental control system. We expect these upgrades to generate as much as 50% increase in annual cultivation capacity and enable a perpetual harvest cycle at the facility. We commenced initial planning in July and are expecting our first harvest from the upgraded facility into September.
During the second quarter, we also announced that we received approval from the California Bureau of Cannabis Control to commence adult use retail sales at our existing San Leandro Wellness Solutions dispensary, which will enable us to better compete in that local market. We are already seeing higher revenues in that location as their customer base expands. We also currently expect to have the Haight-Ashbury retail location in San Francisco open for business during the fourth quarter of this year. With that, I will now turn it over to Tom DiGiovanni, our CFO, to provide an overview of our second quarter 2021 financial results. Tom, take it away.
Thank you, Matt. Good afternoon, everyone. This is an interesting and exciting time for Harborside as we continue to focus on our California growth strategy. I'm pleased with the improvements we've made over the past six quarters. I'm excited by the expectations for what lies ahead. As Matt mentioned, I'm going to take a few minutes over our results for the second quarter of this year. As a reminder, the results I'll be going over today can be found in our quarterly financial statements and filing. All are in U.S. dollars. During the second quarter of 2021, Harborside generated approximately $11 million of retail revenues and $5.2 million of wholesale revenues for a combined gross revenue capture of $16.2 million.
This compares to approximately $10.9 million in retail revenue and $5.2 million in wholesale for a total of $16.1 million in combined revenue in the second quarter of 2020. While the year-over-year combined revenue results were relatively consistent, as Matt mentioned earlier, our quarter-over-quarter combined revenues increased by 25%, mainly due to the harvest yield and product quality improvements we achieved at our production facility in Salinas, combined with less reliance on retail discounts as we revamped our customer loyalty program. In our retail business, revenue in the second quarter was consistent with Q2 2020, and that's despite dealing with intermittent local government mandates, which limited the amount of customers we could admit into our retail stores at any one time. Our Oakland store, which is our largest retail sales location, was the most affected by these capacity controls.
Like many other retailers, we saw a shift in consumer preference towards fewer in-store visits as a result of COVID, so we bolstered our delivery operations as well as our ability to offer curbside and in-store pickup to consumers. We're also planning special outdoor experiential events, as well as using our revamped loyalty program to entice consumers to visit our stores more frequently. Fortunately, when measured across our entire retail store footprint, we've been able to maintain a strong average basket size of more than $90, with some stores reaching an average of more than $100 per transaction. Our delivery operation is seeing an average transaction size of more than $150. Retail gross margins were approximately 57% for the quarter, reflecting a year-over-year improvement of about 6%.
This was primarily due to changes in our loyalty program, which encouraged consumers to visit more frequently by offering targeted discounts with short expiration dates, as opposed to the prior points accumulation program, which offered cumulative discounts that expire six months without a visit. We also continue to optimize the number of SKUs and brands that we offer, with a focus on our in-house brands. As we move forward, this focus includes the Fuzzies brand of infused pre-rolls. In our wholesale business, net revenues for Q2, measured after cultivation taxes are removed, was also consistent on a year-over-year basis, while at the same time increasing approximately 82% on a quarter-over-quarter basis.
The Salinas facility delivered improved harvest yields and flower quality in Q2 2021, which allowed us to bring more bulk product to market during the quarter, and we expect to see continued improvements in harvest yields and quality over the coming quarters as we continue to make operational improvements. Wholesale gross margins in Q2 2021 were approximately 57.3% after adjustments for bio-assets, which was a year-over-year improvement of approximately 11.4% when compared to the second quarter of 2020. We expect to see wholesale margins continue to improve as further operational improvements take hold in Salinas. Overall combined gross profit for the second quarter of 2021 was approximately $8.7 million, resulting in a 56.7% overall gross margin. That reflects a 7% increase when compared to the $7.6 million in gross profits and 49.7% combined margin in the second quarter of 2020.
Total operating expenses for the second quarter of 2021 were approximately $9 million, compared to approximately $7.1 million in operating expenses in the second quarter of 2020. The year-over-year increase in total operating expenses is primarily due to higher legal and professional fees in the current quarter related to M&A and litigation activities, as well as increases in general and administrative expenses related to billboard advertising, banking and processing fees, and employee bonuses. Operating loss for the second quarter of 2021 was approximately $300,000 as compared to an operating income of approximately $500,000 for the second quarter of 2020.
Net income attributable to Harborside was approximately $1.8 million in the second quarter of 2021, compared to a net loss of approximately $1.7 million in the second quarter of 2020, with the difference being primarily due to fair value gains, which were recognized in the quarter on other current assets and derivative liabilities. As we mentioned earlier, adjusted EBITDA, which factors out non-cash items and one-time expenses, was approximately $1.1 million, or 7% of net revenues for the quarter, as compared to approximately $2 million, or 13% of net revenues for the second quarter of 2020. The year-over-year decrease in EBITDA was largely a result of non-cash changes in the valuation of bio-assets related to the Salinas cultivation operations.
Lastly, as you may remember, during the first quarter of 2021, Harborside closed a private placement with gross proceeds of approximately CAD 35.1 million, and also secured a $12 million revolving line of credit with a large commercial bank. As Matt mentioned earlier, during Q2, we drew down approximately $11.4 million on the revolving credit facility, which was used towards the purchase of the cultivation and production campus in Salinas in early June. We ended the second quarter with total current assets of approximately $38.4 million, including approximately $26.6 million of available cash in the bank. In conclusion, we exited the second quarter well-positioned to continue our strategic plans. With that, I would now like to ask the operator to open the call for questions. Thank you.
Thank you, sir. Ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw your question, simply press star followed by two. If you're using a speakerphone, you will need to lift the handset before pressing any keys. We do ask that you please limit yourself to three questions and then return to the queue. Your first question will be from Frederico Gomes at ATB Capital. Please go ahead.
Thank you, and good afternoon, gents. Just with respect to sort of sequencing here, can you speak to, I understand the completion of the Salinas upgrades, expectations of continued ramp both in terms of revenue and margin, with respect to your wholesale business. Could you give us some sort of indication there so we sort of can pace and sequence this correctly? I'm just trying to understand the revenue build and the ramp through the back half of this year, and anything you can provide to better handicap that would be useful.
Sure. This is Tom, Kendrick. Nice to hear you again, and I'll take that one. I think everyone may be aware, but as a reminder, we had a rough Q1 at that facility. There was a storm that blew through that took off part of the roof in one of the greenhouses, and we were delayed in finishing our greenhouse improvements because of some supply chain disruptions. All of that is sort of in the rear-view mirror now, and Travis has been making operational improvements at that facility. In the sort of early harvests that have been coming down as these operational improvements begin to take hold, we're seeing as much as a 30% increase in each harvest in terms of sort of available flower weight, dried flower that can be sold into the market.
As we continue to go forward, we're moving towards what we call perpetual harvests. There will always be a harvest coming down every week, versus before, where we had gaps in our harvest schedule, as we cleared out an entire greenhouse and then had to clean it and all that before we could put new plants in it. What we're expecting is, I think Matt alluded to it earlier, overall, over a period of time, as much as 50% additional production coming from that facility, let's say over the next 1 year to 18 months. What we're seeing in the short term is the ramp-up of our cultivation harvests is being a little bit more back-weighted. We're going to start to see a little bit more of a pickup at the end of this quarter and then going into Q4.
Whereas normally we would've seen sort of a high point in Q2 going into Q3. We're a little bit behind schedule, but you should start to see that ramp up over the next, call it, three to six quarters. Did that answer your question?
That gives some great color. Maybe just a quick follow-up there. The capacity increase in and of itself is obviously a positive, but what is the level of conviction or appetite as to your ability to place and find a home for that? What is the regard the product is now being held in or could be held in, and how comfortable are you that you will have end-market demand and sort of strong pull-through on that additional capacity? What's your visibility there, I guess is the other way to put it?
Yeah. Some of that, of course, is really related to the overall market in California. There's sort of a two-part answer to your question. One, for our grow facility in particular. We're still seeing very strong demand for our product because the quality is high enough and consistent enough that we've got a pool of buyers that continue to pay good prices for our product on the bulk side of the market. Now, anecdotally, we're starting to see some softness in the California market for bulk products, particularly in Southern California. That's hit other folks harder than it has hit us to date. We haven't seen much price compression yet on the wholesale side. I think as we've been telegraphing for several quarters now, we're looking at accretive M&A opportunities and some other things to try to put more of our products into consumer packaged goods form.
We're using that as a hedge against falling wholesale prices. As we go forward, our goal is at some point to get 100% of the production out of that facility to go onto our own shelves, because that's where we make the most money for it. We're obviously not there today, but we're going to start to try to shift more and more of that production into CPG form as we go. We're doing a couple of things, but we're still seeing strong demand on the wholesale side for our products today. I expect that to continue for a couple more quarters at least.
That's great color, Tom. Thank you. Just a final one for me before I get back in the queue. Is there any additional color the team is now in a position to provide on Sublime, both in terms of seasonality on that, call it, roughly $25 million in revenues, 2021 expected revenues. Previously there was little to no color you were able to provide around expected margin profile, either through 2021 or looking to 2022. Any additional color on Sublime, nice to hear it's already accretive and contributing, but anything you could provide to help us better model out and sequence Sublime would also be appreciated.
I can take that one as well. When we went into the Sublime transaction, a level of revenue and model the business post-Sublime, or at least we haven't released any sort of earnings projections or updates post-Sublime. What we're seeing, that I can share with you, is they're essentially on track so far since the acquisition, and remember, we on July 2nd. We've had seven or eight weeks of activity from Sublime. We've really been focused more on sort of the synergistic aspect of that deal. For example, moving trim from our Salinas facility over to Sublime so they can use it for Fuzzies pre-rolls, which improves profitability across the company. The other part of it, as we mentioned on the call earlier, putting more focus on Fuzzies product on our own store shelves.
The other thing that we're looking at is basically bolting Harborside products into Sublime's distribution network. As Matt mentioned, they have distribution into just over 500 locations in California, or 70% of the market. We're starting to cross-pollinate our flower products into their distribution network. We're also looking at potentially selling our cannabis clones into their distribution network as well. They've identified over 100 locations that could potentially take our clones. Right now, we're only selling those in our own retail stores, so that's a pretty big opportunity for us. As we go, I don't want to speak to specifics for the Sublime deal. You'll see that as we report our Q3 numbers. As we mentioned, it is accretive already in terms of revenues and EBITDA.
That's great. Thanks, Tom. I'll get back in queue and circle back.
Thank you. Once again, ladies and gentlemen, as a reminder, if you would like to ask a question, please press star followed by one on your touch-tone phone. We ask that you please limit yourself to three questions and then return to the queue. Next question will be from Russell Stanley at Beacon. Please go ahead.
Hello, and thanks for taking my question. Just wanted to follow up first on the house brand effort. You've identified one of your priorities being to increase the share of retail revenue from your house brands. Just wondering what share you reached in Q2 and where you'd like to get to, particularly bringing Sublime's pre-rolls in-house.
Hi, Russell. This is Tom. I'll take that question as well, and it is nice to hear your voice. I hope you are well. In Q2, what we are typically seeing on our retail shelves is between 15% and 17% of all retail dollars are going towards Harborside-branded products. We have not yet done the analysis including Fuzzies, because that is a Q3 transaction. We are seeing on the flower side of our retail shelf, about 42% of our flower sales are Harborside-branded products. That number has been slightly improving as we go on a quarter-to-quarter basis. The one thing that Harborside has in its past and has carried right through to today is consumer choice. We actually carry more brands than most of our competitors.
We're going through a sort of SKU rationalization project, so we'll cut the number of brands slightly, but we still want to offer quite a bit of consumer choice, including our own brands. We are doing some things on the retail sales floor to try to promote our in-house brands, as well as offering spot discounts and doing some sales events around them. I expect to see the percentage of our sales go up, particularly as we incorporate the Fuzzies products in.
Great. Thanks for that color. Maybe if I could, on San Leandro, I think your extension there is good through, I believe, late October. Just wondering if you're tracking on schedule for development of the new site and relocating to that, if everything is moving along as scheduled on that front.
Yeah, I would say as of today, we're behind schedule in terms of towards a new location. We're sort of doing two things at the same time. One is we're actually negotiating an additional extension with our existing landlord, while we continue to move towards another location in the city of San Leandro. The other thing that's come up recently is, our existing landlord has telegraphed to us that he'd like to sell the building, so we're investigating that as well. We have a number of different options available to us in that local market. We're looking at all of those things right now, sort of simultaneously.
Great. Thanks. If I could, for my final question, just around M&A, I guess, can you elaborate on what kind of targets you're looking at now and how competitive the bidding is for businesses of that type? Thanks.
Yeah. I'll take that. Thank you.
Matt, do you want to take that?
Yeah, I'll take that. I've been pretty clear in my messaging to the market that we're looking to expand our footprint all the way up and down the value chain, both with retail, production, and manufacturing. The manufacturing and production footprint was increased with Sublime. We still have, as I've said previously, at least two other opportunities that we are close to the goal line on, that we hope to make announcements on the very near future that will expand the other prongs of that complete vertical integration that we already have, but continue to pursue and grow.
That's great. Thanks for the color. I'll get back in the queue.
Thank you. Next question will be from Nik Faes at Bryan, Garnier. Please go ahead.
Yeah. Thank you very much. Continuing on that question about consolidation in the California market, Matt, you are on record saying that by the end of this year, you would like to own anywhere between 15 and 20 retail outlets. I would like to ask you to kind of see where you are on that project.
Well, other than what I just said, there's not a whole lot more I can say other than that's what I've said in the past. That's our goal. If we can execute on the things we're working on right now, we'll be accomplishing that. I'll just leave it at that.
Okay. Other question, of course, me sitting here in Northern Europe, and we had exactly nine days of sunny days here. I understand from California, you're quite hot and burning. About the location of your operations, are they anywhere close to where the fires are, or is it any danger, or yes or no?
Sure
insurance? Yeah.
No. Good question. Our facility isn't anywhere near the fires at this point. California is precarious when it comes to that, Salinas is in a part of the state that isn't quite as dry as others, you never know what's going to happen. For now, we've been fortunate that it hasn't happened in the past two summers of cycle.
Nik, if I could add, we saw this in 2020, and we're expecting to see it again this year, that the outdoor crops are going to be affected by the fires, just due to the level of smoke in Northern California. There's a big fire right now near Lake Tahoe, and anything that's near that right now is being smoked out. That affects the outdoor harvests. In a typical year, when you don't have these fires, you start to see price compression in the wholesale market because all the outdoor guys, they bring their flower in at the same time. We didn't see that last year. It looks like we're going to see a similar year in 2021, just given the extent of the fires in Northern California.
Yeah. As a follow-up on that, and that's an interesting comment that you made there. We also had kind of news that there was a more aggressive stance from the authorities on the black market. Is that impacting pricing as well, or is the black market as large that for the moment, there's no impact from the more aggressive stance from the authorities?
Yeah, I think that the black market is still obviously in existence in California and throughout the nation. There's been two events that have occurred in the industry over the past couple of years that have tamped down the illicit market. One was the vape crisis, which was proven to be 100% driven by the illicit market. Then secondly, COVID. People started being more comfortable getting their products delivered safely, using curbside pickup, going into a socially distant store with masks. That was all due to the essential business designation that the State of California was given. With that, we expect further opportunities to continue to tamp down the industry. We've seen month-over-month sales since last year at this time with returning customers that were new prior to the pandemic. It's going to be a gradual process.
At some point, there will have to be an about face with the states on how much tax they're taking out of our sales simply because that is one big detriment to tamping it down further. We do expect that to ultimately work in our favor, and as I've said many times before, this is the most cost-burdened time the industry will ever face, because as we go forward, it's only going to improve.
All right. Okay. Great. Thanks. I'll get back in the queue.
Thank you. At this time, I would like to turn the call back over to Mr. Hawkins. Please go ahead, Mr. Hawkins.
Apologies. Thank you again, everyone, for joining Harborside's conference call today. The replay for this conference call will be available in approximately two hours on Harborside's website in the Investor Relations section. As always, I'm available for follow-up conversations, so do not hesitate to reach out. Have a great day. Thank you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.