Earnings Call: Q1 2021

Jun 1, 2021

Earnings release

Hello, everyone. Welcome to today's conference call to discuss Harborside's First 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 of the Board of Directors Peter Billeadeau, Interim Chief Executive Officer and Tom Giovanni, 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 risks and uncertainties relating to Harborside's future financial or business performance. Actual results could differ materially from those anticipated in the 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 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 this call is being recorded today, Tuesday, June 1, 2021. I would now like to introduce Mr. Matt Hawkins, Chairman of the Board of Directors of Harborside, please go ahead, Mr. Hawkins. Thank you, and hello, everyone, and thanks for joining us today. It's been a little while since we've hosted one of these, and I'm excited to update you on our progress. During today's call, I will provide an overview of the business I'll review our Q1 2021 results before turning the call over to Tom DiGiovanni, our CFO, who will go into 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 Q1 of 2021, we achieved positive adjusted EBITDA of approximately 1,000,000 On gross revenues of $13,000,000 Positive EBITDA is an important company milestone. We first reached 1 year ago and a sustained every quarter since. Our continuing solid EBITDA performance speaks to the underlying strength of our business. We have made great strides toward implementing improvements Efficiencies with further enhancements underway. This has laid a strong business foundation that will enable us to scale up our operations as we execute on our California focused growth strategy. As we announced on our last call, we commenced a strategic review of the business and together with management, We are evaluating opportunities in the marketplace to maximize shareholder value. These include, but are not limited to, potential merger and acquisition opportunities, possible financings and the potential purchase of our production facility in Salinas with much more favorable financing terms. I'm excited to report that since then we've been very active in executing on this plan. On the financing side to take advantage of Opportunities available to us in the California markets, we completed 2 strategic financings in the Q1, which has significantly strengthened our balance sheet. These findings include financings include an oversubscribed private placement where we raised CAD 35,000,000 And a CAD35.1 million and a CAD12 1,000,000 revolving line of credit with a federally regulated commercial bank. The line of credit has an initial interest rate of 5.75%, which gives us one of the most competitive costs of capital in the entire cannabis industry. We exit Q1 with more than $30,000,000 in cash on hand and we are well positioned to act on accretive M and A opportunities, which we are actively exploring. We expect to use the line of credit to support the purchase of the company's 47 acre production campus in Salinas, California, And we recently drew down an approximately $11,400,000 in anticipation of closing on that property. This transaction will lower our borrowing costs and is expected to improve our overall cash flow and enable us to make further capital investments in the facility to scale up our operations and meet consumer demand. Management team is in active discussions to complete this transaction and I expect that we will have a further update on this very soon. On the corporate development side, we recently completed a $5,000,000 strategic investment in Wow Pack, establishing an important partnership with the premier cultivator, brand operator and distributor. Since then, we have engaged Laupk to provide services aimed at identifying production efficiencies and improving harvest yields at our production campus and Laupak has started producing the 1st suite of Harborside branded products under a contract manufacturing arrangement. We have also increased the availability of Laotac branded products, including Smokies, Kingpin and Dimebag at our retail stores. Finally, before I return the call over to Tom, we need to address the big news today. We are thrilled to announce our acquisition of Sublime, an award winning cannabis manufacturing company known for its expansive line of high potency, high quality Fuzzy's brand products. Sublime had the California's number one pre roll brand in 2020 with distribution to over 500 active customers covering almost 70% of the California market. This acquisition is the 1st transaction with respect to our commitment to grow the company through M and A and we expect that this deal will provide a number of synergies. We will enable Harborside to utilize Sublime's production capabilities and robust distribution system and combined with the utilization of high quality cannabis grown In our 200,000 square feet 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 Brain and Harborside Key and Fuzzy's products, both on our own store shelves and to additional retailers throughout the state of California. We've known the team there for years and we've been longtime customers with their products broadly available in our retail stores. We are excited to bring them to the Harborside family and expect the acquisition to be immediately accretive to both revenues and EBITDA once it closes. This is a really exciting transaction and I look forward to welcome the team from Sublime with their exceptional product offerings to Harborside shortly. With that, I will now turn it over to Tom DiGiovanni, our CFO to provide our Q1 2021 financial results. Tom, take it away. Thank you, Matt, and good morning, everyone. This is an exciting time at Harborside and I'm thrilled with the progress we've made over the past 5 quarters as well as the expectations for what lies ahead. As Matt mentioned, I'm going to take a few minutes to go over our results for the Q1 of this year. And as a reminder before I get started, the results I will be going over today can be found in our quarterly financial statements and MD and A and all are in U. S. Dollars. During the Q1 of 2021, Harborside generated approximately $10,000,000 of retail revenues and $3,000,000 of wholesale revenues for a total gross revenue capture of $13,000,000 combined. This compares to approximately $10,200,000 in retail revenue and $4,500,000 in wholesale revenue for a total of $14,600,000 in gross revenue for the Q1 of 2020. In our retail business, while we maintained a strong average basket size of more than $90 our retail revenue in Q1 was somewhat impacted by decreased in store foot traffic that was caused by COVID-nineteen related capacity controls in California, particularly in Alameda County where our largest store is located. This caused a slight decline in year over year retail sales when compared to the Q1 of 2020. It's important to note, however, that in Q1 2020, We saw a surge in our retail revenues during the last 2 weeks of March. As you may recall, consumers rushed into our retail stores to stock up on cannabis products When the pandemic was first declared, as they thought at the time that our stores might be subject to an emergency shutdown for an extended period. If we factor out the COVID surge, retail revenues were essentially flat on a year over year basis despite the more recent capacity constraints. Our Q1 of 2021 wholesale revenue was negatively impacted by lower than expected flower yields that limited the overall supply of sellable flower. This was caused by several factors including a COVID-nineteen related supply chain issue The delayed the planned capital improvements, which were intended to increase cultivation yield, along with a weather event in January that pour off part of the roof at one of our greenhouses and caused an infestation of non beneficial insects, which management subsequently addressed. Excuse me. Despite the revenue challenges that occurred in the quarter, our gross margins remained strong. Retail gross margins were approximately 55% for the quarter, reflecting a year over year improvement of about 3.7%. This was achieved through more effective supply chain management, the focus on sales of our in house brands and the reduction of operating costs across the company. Across Arborside's retail stores in California, Our in house branded products represented 5 of the top 10 selling SKUs in the Q1 of 2021. The continued focus on selling our own has had a positive impact on gross margins and we expect this trend to continue as we add more products and product categories to our in house brand portfolio. Wholesale gross margins in Q1 were approximately 13% before adjustments for bio assets, which was a year over year improvement 18.2% when compared to the Q1 of 2020. We expect to see wholesale margins continue to improve as we continue to work on refining our standard operating procedures and we continue to gain efficiencies of scale in our wholesale operations. Overall combined gross profits for the Q1 of 2021 were approximately $5,800,000 resulting in a 46.8 percent overall gross margin. That reflects a 15.6% improvement when compared to the approximately $5,000,000 in gross profits and 36.8% combined margin in the Q1 of 2020. Total operating expenses for the Q1 of 2021 were approximately 7,800,000 which included approximately $1,900,000 in one time non recurring costs. This compared to approximately $6,200,000 in operating expenses in the Q1 of 2020. After adjusting for the one time costs in Q1 of this year, We saw a 4.3% decrease in OpEx on a year over year basis. The one time items included approximately $1,300,000 in costs related to the warrants issued in our private placement, dollars 300,000 in expenses related to our search for a permanent CEO and $200,000 in consulting fees related to our operational improvement efforts. Operating loss for the Q1 of 2021 was approximately 3,200,000 as compared to an operating income of approximately $400,000 for the Q1 of 2020. Net loss and comprehensive loss was approximately $2,900,000 in the Q1 of 2021 compared to a net loss and comprehensive loss of approximately $2,400,000 in the Q1 of 2020. As we mentioned earlier, adjusted EBITDA, which factors out non cash items and one time expenses was approximately $1,000,000 or 7.7 percent of net revenues for the quarter as compared to approximately $300,000 or 2.6 percent of net revenues for the Q1 of 2020. The year over year increase in EBITDA was driven largely by the improved product margins and operating efficiencies realized across the company. Lastly, as Matt mentioned earlier, during the Q1 of 2021, Harborside closed the private placement with gross proceeds of approximately CAD 35,100,000 And we were able to secure a $12,000,000 revolving line of credit with a large commercial bank. In addition to validating our California focused thesis and the improvements to the business that we've made to date. At the end of Q1, these moves provided Harborside with approximately $30,600,000 of available cash in the bank And another $11,800,000 available to draw down against the line of credit, leaving us well positioned to continue to execute against our business plans. With that, I would now like to ask the operator to open the call for questions. Thank you. Thank you. Ladies and gentlemen, we'll now begin the question and answer You'll hear a 3 tone prompt acknowledging your request and your questions will be pulled in the order they are received. Okay. Your first question comes from Russell Stanley from Beacon Securities. Russell, please go ahead. Hello and congratulations on the Sublime announcement. First question on the transaction, wondering if you can provide us with Additional color on the margin profile of the business brings and how much incremental margin capture you expect to achieved from sourcing that biomass internally now? Tom, do you want to handle that one? Yes. Hi, Russell. Thanks for the question. We're expecting to release some additional guidance along those lines concurrent with closing the transaction. I can tell you, we've already taken a look at the production in our Salinas facilities and we're working through how much of it we can essentially start to Zoom in house. We have a fairly significant potential here for additional margin improvement, especially with our non premium flower, As it's worth much more in the marketplace when it's converted into fuzzy products than it is when we sell it in bulk into the wholesale market. So we're working through those numbers now We'll have an update for you in about 30 days. That's great. And just wondering around, I know it's Early days, but you mentioned efforts perhaps to license this brand in other adult use markets. Is that a relatively new venture or is that something that So, Blaine, this had irons in the fire on and can you give us a sense to which markets you would like to see that expand to? Well, I'll take that. Go ahead, Matt. Yes. Go. I'll just Tom, why don't I just jump Say initially, and then you can jump in. I mean, as we've said all along, when we took over the Board last fall, I mean, our number one mission is to become The preeminent single state operator in California. So everything we do is driven by that goal. And so at this point, I mean, that's what we're going to continue to do. In any development outside the state will be secondary in terms of the strategy point. Tom, you want to chime in? Yes, I would just add Sublime and their Fuzzies brand, it's hugely impactful in California. They have a great following. They've built a very, very strong brand profile. And we know that's replicable in other states. The key here is, if we were to engage with someone outside California, We would have to trust that they can manufacture and produce at the same standard as the Sublime team does today. And so we will selectively engage in the markets where we think it makes sense. There are a number of adult use markets Where these products would be well received. So we'll be looking at that as we go. But as Matt says, again, our primary focus is On California, if there are licensing opportunities that we can look at that are compelling, we'll certainly look at those and move forward when we can. If I can just sneak in one more and I'll get back in the queue. You highlighted increased sales of Harris Brands The priority you've had success today taking your retail margins up. Just wondering what share of your retail sales now come from House Brands and with the addition of Sublime, what do your targets become once that's integrated? Thank you. I'll take that one as well. So today about 1 in every 8 sales dollars that we process Through our own retail shelf is Harborside branded product. One of the things that we realized is that our product offering Prior to bringing on Sublime with Strictly Flower and we want to move across the shelf as well as up and down the shelf to increase the penetration of our own product. We do currently sell Sublime products on our shelf, so those will become in house to us. And as we continue to look for more product offerings, We expect the share of revenue, the overall share of revenue for our products to go up over time. That's great. Thanks for the color and congratulations again. Absolutely. Thank you. Thanks. Your next question comes from Mark Clark, Private Investor. Mark, please go ahead. Hi. Can you hear me? Yes, we can. Great. Okay. Thank you. First of all, congratulations on everything you guys have going on. I'm happy to be an investor. I went through the MD and A last night. It's quite extensive. I've gone through it before. It seems that the number of the Legal pursuits that the company has been entangling in the past are clearing themselves up and that's heading in the right direction. The new business Sublime, are there any entanglements in their business that we need to be knowing about as investors? Tom, do you want to take that and I'll jump in after? Yes, I can take that. We've looked at the potential legal exposure as part of the deal. But one of the things that I can share on this call is that we've created escrows in the transaction that we think will provide more than enough coverage, So that any of those potential legal issues really don't extend through the deal to Harborside. So as of today, we feel like we're more than adequately protected against any potential exposure. That's great. Thank you. Thank you very much. Question number 2 is, could you give us a little color on how the search for the new CEO, President of the business is going? Sure. I'll take that one. We engage as we mentioned back in the end of 2020, we engaged Heidrick and Struggles to lead a search for a permanent CEO. Yes, Peter Bilodeau has done a wonderful job on an interim basis. But We just came in and decided that it was and then Peter with Peter's full support to go ahead And get the process started. What's been really encouraging is that the quality of talent that we've seen and interviewed in this process has been unbelievably superior to what my expectations were initially. I mean, we're seeing candidates from all kinds of top tier brands, CPG companies, retailers, and they're all coming from The C level positions at these companies. So having said all that, We are extremely close to making an announcement. So then I would imagine that with before The end of June, we will have some type of announcement that addresses that. Super. Thank you. That's it for me. I'm super appreciative of your responses. Thank you. Thanks. There are no further questions at this time. I'll turn it back to Matt for closing remarks. Sure. And Thank you for that and I appreciate everybody joining today. The replay for this conference call will be available in approximately 2 hours on Harborside's Web site in the Investor Relations section. And as always, I'm available for follow-up conversations, so please don't hesitate to reach out. Hope everybody has a great day and we'll be in touch soon. Take care. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.