Harborside Inc. Reports Second Quarter 2021 Financial Results

Second Quarter 2021 Gross Revenues Increase 25% Sequentially to $16.2 Million;

Reports 6^th Consecutive Quarter of Positive EBITDA⁽¹⁾

Harborside Inc. (“Harborside” or the “Company”) (CSE: HBOR) (OTCQX: HBORF), a California-focused, vertically integrated cannabis enterprise, today reported its financial results for the second quarter ending June 30, 2021 (“Q2 2021”). The unaudited condensed interim consolidated financial statements for Q2 2021 and corresponding management’s discussion and analysis (collectively the “Q2 Filings”) are available for download from the Company’s investor website, investharborside.com, and on the Company’s SEDAR profile. Unless otherwise indicated, all dollar amounts in this press release are in U.S. dollars.

Management Commentary

“I’m thrilled with the strong sequential growth we drove in our second quarter while continuing to make solid improvements to our gross margins and profitability,” said Matt Hawkins, Chairman and Interim Chief Executive Officer (“CEO”) of Harborside. “We continue to build a robust business, supported by our high-quality cultivation, leading consumer brands, and best-in-class retail experience. Our continued focus on improvement has allowed us to become a leader in the California cannabis market and we expect our business to continue to advance as we begin to integrate the synergies afforded by the Sublime Acquisition that closed in July”.⁽²⁾

Mr. Hawkins added, “I’d like to thank our team for their ongoing dedication to achieving our goals and providing our customers with the incredible service, products and experiences that they have come to expect from Harborside. As we move into the second half of the year, our focus remains on further scaling our reach through accretive M&A opportunities and building our leadership team, including our goal to bring in a new CEO, which together with our strong foundation will position Harborside for long-term growth.”⁽²⁾

Q2 2021 Operational Highlights

• Completed upgrades to the Salinas production campus
• Acquired the Salinas production campus
• Entered into a definitive agreement to acquire Sublimation Inc. (“Sublime”) for US$43.8 million (the “Sublime Acquisition”)
• Commenced adult-use sales at the San Leandro dispensary
• Appointed Travis Higginbotham Jr. as Vice President of Production

Subsequent Events

• Appointed Matt Hawkins as Interim CEO and Ahmer Iqbal as Chief Operating Officer of Harborside
• Completed the Sublime Acquisition, which includes “Fuzzies”, California’s award-winning infused pre-roll brand

Q2 2021 Financial Results and Highlights ⁽³⁾

Q2 2021 Financial Summary

Revenues

During Q2 2021, Harborside generated retail gross revenue of $11.0 million and wholesale gross revenue of $5.2 million, for total gross revenue of $16.2 million, as compared to retail gross revenue of $10.0 million, wholesale gross revenue of $2.9 million and total gross revenue of $12.9 million during the three months ended March 31, 2021 (“Q1 2021”). On a quarter over quarter basis, retail revenues improved by approximately 9% as the Company adjusted its customer loyalty program from a points based plan to a new model that rewards frequent buyers while relying less on cumulative discounting at the point of sale. Wholesale revenues increased as the Salinas production campus delivered improved harvest yields and flower quality in Q2, which allowed the Company to bring more bulk product to market during the quarter.

As compared to retail revenue of $10.9 million, wholesale revenue of $5.2 million and total gross revenue of $16.1 millionachieved during the three months ended June 30, 2020 (“Q2 2020”), retail and wholesale revenues for the quarter were generally consistent with Q2 2020.

Gross Profits

The Company’s retail operations generated gross profits of approximately $6.2 million in Q2 2021, compared to approximately $5.5 million in Q1 2021. The quarter over quarter retail gross profit improved by approximately 12% as the Company adjusted its customer loyalty program from a points based plan to a new model that better rewards frequent buyers while relying less on discounting at the point of sale. As a result of the above changes, retail gross margins⁽¹⁾increased from 55.0% in Q1 2021 to 56.5% in Q2 2021. See “Non-IFRS Financial Measures, Reconciliation, and Discussion”.

As compared to the approximately $5.6 million in gross profit achieved during Q2 2020, the year over year increase of approximately 11% in retail gross profits was due primarily to the continued focus on sales of in-house brands, more effective supply chain management and fewer point of sale discounts as the Company adjusted its customer loyalty program. As a result of these ongoing efforts, retail gross margins⁽¹⁾ improved from 51.2% in Q2 2020 to 56.5% in Q2 2021.

After bio-asset adjustments are factored in, the Company’s wholesale operations generated gross profits of approximately $2.5 million in Q2 2021, compared to approximately $(0.9) million in Q1 2021. As compared to net wholesale revenues, wholesale gross margins⁽¹⁾ including bio-asset adjustments increased from (38.5)% in Q1 2021 to 57.2% in Q2 2021. This was primarily due to higher cultivation yields and flower quality, more effective supply chain management and the ongoing focus on reducing operating costs across the Company.

Q2 2021 combined gross profit, including adjustments for biological assets, was approximately $8.7 million, an approximately 90% quarter-over-quarter increase as compared to the approximately $4.6 million in gross profit reported in Q1 2021. On a year-over-year basis, combined gross profit increased approximately 15% as compared to the approximately $7.6 million reported in Q2 2020, and combined gross margins⁽¹⁾ increased from approximately 49.7% in Q2 2020 to 56.7% in Q2 2021.

Operating Expenses

Total operating expenses for Q2 2021 were approximately $9.0 million, compared to $7.1 million in Q2 2020. The year-to-year increase in total operating expenses is primarily due to an increase in general and administrative expenses of $0.9 million, to $5.4 million as compared to $4.5 million in the comparative period in 2020 and an increase in professional fees of $1.0 million, to $3.3 million as compared to $2.3 million in Q2 2020, which was primarily due to an increased level of legal and professional fees in the current quarter related to the Sublime Acquisition and the settlement of litigation.

During Q2 2021, the Company also recorded income tax expense of approximately $1.7 million, compared to approximately $1.4 million in Q2 2020, based on estimated federal income taxes payable at each period-end.

Operating income (loss) for Q2 2021 was approximately $(0.3) million, compared to an operating income of approximately $0.5 million for Q2 2020. Net income attributable to Harborside was approximately $1.8 million in Q2 2021, compared to a net (loss) of approximately $(1.7) million in Q2 2020, an approximately 201% increase in net income on a year-over-year basis. The year over year increase was due primarily to fair value gains related to other current assets which were recognized during the quarter.

Adjusted EBITDA⁽¹⁾ for Q2 2021 was approximately $1.1 million or 7.3% of net revenues, compared to approximately $2.0 million or 13.2% of net revenues for Q2 2020. The year-over-year decrease was largely the result of increased professional fees, along with higher general and administrative expenses recognized during the quarter. See “Non-IFRS Financial Measures, Reconciliation, and Discussion”.

Liquidity and Cash Balance ⁽³⁾

As of June 30, 2021, Harborside had total current assets of approximately $38.4 million, including approximately $26.9 million of available cash, as compared to current assets of approximately $21.9 million, including approximately $13.6 million in available cash as of June 30, 2020.

During Q1 2021, Harborside closed a brokered private placement for aggregate gross proceeds of approximately C$35.1 million and entered into a loan financing arrangement with a federally regulated commercial bank in the amount of $12.0 million pursuant to a senior secured revolving credit facility due March 19, 2023. On May 28, 2021, the Company drew down approximately $11.4 million on the revolving credit facility in advance of purchasing the cultivation/production facility in Salinas on June 1, 2021.

Conference Call Information

Harborside will host a conference call Tuesday, August 31, 2021, to discuss the Q2 2021 results. Matt Hawkins, Interim CEO, and Tom DiGiovanni, Chief Financial Officer will host the call starting at 1:00 p.m. Eastern time. A question and answer session will follow management’s presentation.