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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

Commission File Number 000-56224

 

HARVEST HEALTH & RECREATION INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

British Columbia

84-3264202

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

1155 W. Rio Salado Parkway

Suite 201

Tempe, Arizona

85281

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (480) 494-2261

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

N/A

 

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒     No   ☐ 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  

As of May 5, 2021, there were 248,419,605 shares of the registrant’s Subordinate Voting Shares, 1,631,281 shares of the registrant’s Multiple Voting Shares, and 2,000,000 of the registrant’s Super Voting Shares issued and outstanding.

 

 

 

 


 

HARVEST HEALTH & RECREATION INC. 

 

 

QUARTERLY REPORT ON FORM 10-Q

Table of Contents

 

 

 

 

Page

 

 

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

Item 1.

Financial Statements (Unaudited)

3

 

Condensed Consolidated Balance Sheets

3

 

Condensed Consolidated Statements of Operations

4

 

Condensed Consolidated Statements of Cash Flows

5

 

Condensed Consolidated Statements of Changes in Stockholders' Equity

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

 

 

 

PART II.

OTHER INFORMATION

34

 

 

 

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36

Item 6.

Exhibits

37

 

 

Signatures

38

 

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HARVEST HEALTH & RECREATION INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

 

 

March 31,
2021

 

 

December 31,
2020

 

 

 

 

 

(In thousands, except share data)

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

$

106,948

 

 

$

78,055

 

Restricted cash

 

 

 

 

3,000

 

 

 

4,542

 

Accounts receivable, net of allowance of $265 and $824, respectively

 

 

 

 

9,477

 

 

 

5,051

 

Notes receivable, current portion

 

 

 

 

8,412

 

 

 

21,556

 

Related party notes receivable, current portion

 

 

 

 

10,313

 

 

 

10,052

 

Inventory, net

 

 

 

 

45,193

 

 

 

36,862

 

Other current assets

 

 

 

 

5,380

 

 

 

5,280

 

Total current assets

 

 

 

 

188,723

 

 

 

161,398

 

Notes receivable, net of current portion

 

 

 

 

11,036

 

 

 

18,211

 

Property, plant and equipment, net

 

 

 

 

161,663

 

 

 

176,827

 

Right-of-use assets for operating leases, net

 

 

 

 

98,921

 

 

 

60,843

 

Related party right-of-use assets for operating leases, net

 

 

 

 

5,564

 

 

 

5,621

 

Intangible assets, net

 

 

 

 

272,886

 

 

 

272,118

 

Corporate investments

 

 

 

 

40,924

 

 

 

19,091

 

Acquisition deposits

 

 

 

 

 

 

 

50

 

Goodwill

 

 

 

 

116,176

 

 

 

116,041

 

Assets held for sale

 

 

 

 

6,581

 

 

 

6,585

 

Other assets

 

 

 

 

22,618

 

 

 

19,850

 

TOTAL ASSETS

 

 

 

$

925,092

 

 

$

856,635

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

 

$

14,809

 

 

$

10,755

 

Other current liabilities

 

 

 

 

34,948

 

 

 

28,896

 

Contingent consideration, current portion

 

 

 

 

10,898

 

 

 

17,985

 

Income tax payable

 

 

 

 

26,826

 

 

 

17,504

 

Operating lease liability, current portion

 

 

 

 

2,061

 

 

 

2,906

 

Related party operating lease liability, current portion

 

 

 

 

142

 

 

 

135

 

Notes payable, current portion

 

 

 

 

29,713

 

 

 

20,910

 

Total current liabilities

 

 

 

 

119,397

 

 

 

99,091

 

Notes payable, net of current portion

 

 

 

 

240,046

 

 

 

244,066

 

Warrant liability

 

 

 

 

37,261

 

 

 

20,908

 

Operating lease liability, net of current portion

 

 

 

 

98,072

 

 

 

58,637

 

Related party operating lease liability, net of current portion

 

 

 

 

5,557

 

 

 

5,595

 

Deferred tax liability

 

 

 

 

53,082

 

 

 

53,082

 

Total liabilities associated with assets held for sale

 

 

 

 

718

 

 

 

718

 

Other long-term liabilities

 

 

 

 

53

 

 

 

63

 

TOTAL LIABILITIES

 

 

 

 

554,186

 

 

 

482,160

 

#NAME?

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Subordinate Voting Shares (Shares Authorized, Issued and Outstanding at
   March 31, 2021:
Unlimited, 245,336,531 and 245,336,531, respectively, at
   December 31, 2020:
Unlimited, 220,913,258 and 220,913,258, respectively)

 

 

 

 

 

 

 

 

Multiple Voting Shares (Shares Authorized, Issued and Outstanding at
   March 31, 2021:
Unlimited, 1,636,065 and 1,636,065, respectively, at
   December 31, 2020:
Unlimited, 1,828,422 and 1,828,422, respectively)

 

 

 

 

 

 

 

 

Super Voting Shares (Shares Authorized, Issued and Outstanding at
   March 31, 2021:
Unlimited, 2,000,000 and 2,000,000, respectively, at
   December 31, 2020:
Unlimited, 2,000,000 and 2,000,000, respectively)

 

 

 

 

 

 

 

 

Capital stock

 

 

 

 

686,899

 

 

 

667,248

 

Accumulated deficit

 

 

 

 

(316,729

)

 

 

(293,607

)

Stockholders' equity attributed to Harvest Health & Recreation Inc.

 

 

 

 

370,170

 

 

 

373,641

 

Non-controlling interest

 

 

 

 

736

 

 

 

834

 

TOTAL STOCKHOLDERS' EQUITY

 

 

 

 

370,906

 

 

 

374,475

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

$

925,092

 

 

$

856,635

 

 

The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

3


 

HARVEST HEALTH & RECREATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

 

 

For The Three Months Ended March 31,

 

 

 

 

 

2021

 

 

2020

 

 

 

 

 

(In thousands, except share and per share data)

 

Revenue, net of discounts

 

 

 

$

88,826

 

 

$

44,235

 

Cost of goods sold

 

 

 

 

(40,908

)

 

 

(26,086

)

Gross profit

 

 

 

 

47,918

 

 

 

18,149

 

Expenses

 

 

 

 

 

 

 

 

General and administrative (related party operating lease expense for the three months ended March 31, 2021 and 2020 was $200 and $187, respectively)

 

 

 

 

26,276

 

 

 

26,419

 

Sales and marketing

 

 

 

 

898

 

 

 

1,276

 

Share-based compensation

 

 

 

 

4,862

 

 

 

13,804

 

Depreciation and amortization

 

 

 

 

2,529

 

 

 

1,670

 

Total expenses

 

 

 

 

34,565

 

 

 

43,169

 

Operating income (loss)

 

 

 

 

13,353

 

 

 

(25,020

)

Other (expense) income

 

 

 

 

 

 

 

 

Gain on sale of assets

 

 

 

 

1,795

 

 

 

2,419

 

Other income

 

 

 

 

1,504

 

 

 

9,050

 

Fair value of liability adjustment

 

 

 

 

(24,434

)

 

 

6,945

 

Foreign currency gain (loss)

 

 

 

 

12

 

 

 

(138

)

Interest expense (includes related party interest income for the three months ended March 31, 2021 and 2020 was $97 and $99, respectively)

 

 

 

 

(8,717

)

 

 

(4,550

)

Loss before taxes and non-controlling interest

 

 

 

 

(16,487

)

 

 

(11,294

)

Income taxes

 

 

 

 

(6,481

)

 

 

(3,794

)

Net loss from continuing operations before non-controlling interest

 

 

 

 

(22,968

)

 

 

(15,088

)

Net loss from discontinued operations, net of tax

 

 

 

 

 

 

 

(384

)

Net loss before non-controlling interest

 

 

 

 

(22,968

)

 

 

(15,472

)

Net (income) loss attributed to non-controlling interest

 

 

 

 

(154

)

 

 

88

 

Net loss attributed to Harvest Health & Recreation Inc.

 

 

 

$

(23,122

)

 

$

(15,384

)

Net loss per share - basic and diluted

 

 

 

$

(0.06

)

 

$

(0.05

)

Attributable to Harvest Health and Recreation Inc.

 

 

 

$

(0.06

)

 

$

(0.05

)

Attributable to discontinued operations, net of tax

 

 

 

$

 

 

$

 

Weighted-average shares outstanding - basic and diluted

 

 

 

 

407,632,006

 

 

 

304,179,427

 

 

The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

4


 

HARVEST HEALTH & RECREATION INC.

CONDENDSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$

(22,968

)

 

$

(15,472

)

Net loss from discontinued operations, net of tax

 

 

 

 

 

384

 

Adjustments to reconcile net loss to net cash from operating activities

 

 

 

 

 

 

Depreciation and amortization

 

 

3,519

 

 

 

2,454

 

Amortization of right-of-use assets

 

 

1,575

 

 

 

1,309

 

Amortization of debt issuance costs

 

 

861

 

 

 

1,011

 

Amortization of debt discount

 

 

371

 

 

 

405

 

Amortization of warrant expense

 

 

926

 

 

 

703

 

Noncash gain on earnout

 

 

 

 

 

(12,597

)

Noncash gain on deconsolidation

 

 

 

 

 

(6,119

)

Noncash loss on derecognition of asset

 

 

 

 

 

3,555

 

Gain on North Dakota divestment

 

 

(573

)

 

 

 

Gain on sale leaseback transaction

 

 

(1,058

)

 

 

 

Gain on legal settlements

 

 

(1,089

)

 

 

 

Gain on lease derecognition

 

 

(357

)

 

 

(70

)

Change in fair value of financial liability

 

 

24,434

 

 

 

(6,945

)

Deferred income tax expense

 

 

 

 

 

(945

)

Share-based compensation

 

 

4,862

 

 

 

13,804

 

Noncash transaction expenses

 

 

64

 

 

 

 

Provision for bad debts and credit losses

 

 

80

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(4,506

)

 

 

(1,102

)

Inventory

 

 

(8,856

)

 

 

(2,376

)

Other assets

 

 

(2,764

)

 

 

(2,364

)

Income taxes payable

 

 

9,322

 

 

 

3,560

 

Accrued expenses and other liabilities

 

 

3,192

 

 

 

14,532

 

Accounts payable

 

 

3,217

 

 

 

1,730

 

Operating lease liabilities

 

 

(700

)

 

 

(1,488

)

Prepaid expenses and other current assets

 

 

202

 

 

 

(1,043

)

NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES

 

 

9,754

 

 

 

(7,074

)

NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES

 

 

 

 

 

(384

)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

 

9,754

 

 

 

(7,458

)

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Acquisition of businesses, net of cash acquired

 

 

 

 

 

(14,397

)

Sale leaseback transaction

 

 

22,280

 

 

 

 

Acquisitions/advances of intangibles

 

 

(1,660

)

 

 

(1,180

)

Acquisition deposits

 

 

51

 

 

 

 

Prepayment of acquisition consideration

 

 

 

 

 

4,573

 

Purchases of property, plant and equipment

 

 

(9,632

)

 

 

(14,699

)

Proceeds from divestments

 

 

2,121

 

 

 

 

Issuance of notes receivable

 

 

(261

)

 

 

(462

)

Payments received on notes receivable

 

 

229

 

 

 

 

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

 

 

13,128

 

 

 

(26,165

)

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from issuance of equity

 

 

6,842

 

 

 

58,999

 

Proceeds from issuance of notes payable

 

 

 

 

 

40,773

 

Repayment of notes payable

 

 

(2,329

)

 

 

(3,627

)

Payment of finance lease liabilities

 

 

(44

)

 

 

(11

)

Fees paid for debt financing activities

 

 

 

 

 

(1,631

)

NET CASH PROVIDED BY FINANCING ACTIVITIES

 

 

4,469

 

 

 

94,503

 

NET INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

 

 

27,351

 

 

 

60,880

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

78,055

 

 

 

22,685

 

RESTRICTED CASH, BEGINNING OF PERIOD

 

 

4,542

 

 

 

8,000

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

82,597

 

 

 

30,685

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

 

106,948

 

 

 

82,515

 

RESTRICTED CASH, END OF PERIOD

 

 

3,000

 

 

 

9,050

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD

 

$

109,948

 

 

$

91,565

 

 

The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

5


 

HARVEST HEALTH & RECREATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Supplemental disclosure with respect to cash flows

 

 

 

 

 

 

Interest paid

 

$

744

 

 

$

1,591

 

Taxes paid

 

 

406

 

 

 

501

 

Supplemental disclosure of non-cash activities

 

 

 

 

 

 

Shares issued for business acquisitions

 

 

 

 

 

4,692

 

Notes receivable issued upon North Dakota divestment

 

 

850

 

 

 

 

Notes receivable (net book value) settlement in exchange for investment

 

 

21,833

 

 

 

 

Financing obtained in exchange for property, plant, and equipment

 

 

2,581

 

 

 

 

Right-of-use assets obtained in exchange of operating lease liabilities

 

 

40,227

 

 

 

3,173

 

 

The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

6


 

HARVEST HEALTH & RECREATION INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

 

 

Number of Shares

 

 

$ Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders'

 

 

 

 

 

 

 

 

 

Super

 

 

Multiple

 

 

Subordinate

 

 

 

 

 

 

 

 

Equity

 

 

Non-

 

 

TOTAL

 

 

 

Voting

 

 

Voting

 

 

Voting

 

 

Capital

 

 

Accumulated

 

 

attributed

 

 

Controlling

 

 

STOCKHOLDERS'

 

(In thousands, except share data)

 

Shares

 

 

Shares

 

 

Shares

 

 

Stock

 

 

Deficit

 

 

to Harvest

 

 

Interest

 

 

EQUITY

 

BALANCE—December 31, 2020

 

 

2,000,000

 

 

 

1,828,422

 

 

 

220,913,258

 

 

$

667,248

 

 

$

(293,607

)

 

$

373,641

 

 

$

834

 

 

$

374,475

 

Shares issued

 

 

 

 

 

15,581

 

 

 

14,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital contribution

 

 

 

 

 

 

 

 

 

 

 

382

 

 

 

 

 

 

382

 

 

 

230

 

 

 

612

 

Shares returned and cancelled

 

 

 

 

 

(2,545

)

 

 

 

 

 

(1,000

)

 

 

 

 

 

(1,000

)

 

 

 

 

 

(1,000

)

Warrants exercised for cash

 

 

 

 

 

15,000

 

 

 

2,369,422

 

 

 

6,842

 

 

 

 

 

 

6,842

 

 

 

 

 

 

6,842

 

Reclassification of warrant liability related to warrants exercised for cash

 

 

 

 

 

 

 

 

 

 

 

8,080

 

 

 

 

 

 

8,080

 

 

 

 

 

 

8,080

 

Acquisition of non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

485

 

 

 

 

 

 

485

 

 

 

(485

)

 

 

 

Divestiture of North Dakota assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

Conversions to subordinate voting shares

 

 

 

 

 

(220,393

)

 

 

22,039,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

4,862

 

 

 

 

 

 

4,862

 

 

 

 

 

 

4,862

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

(23,122

)

 

 

(23,122

)

 

 

154

 

 

 

(22,968

)

BALANCE—March 31, 2021

 

 

2,000,000

 

 

 

1,636,065

 

 

 

245,336,531

 

 

$

686,899

 

 

$

(316,729

)

 

$

370,170

 

 

$

736

 

 

$

370,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE—December 31, 2019

 

 

2,000,000

 

 

 

1,813,388

 

 

 

105,786,727

 

 

$

481,182

 

 

$

(233,977

)

 

$

247,205

 

 

$

3,681

 

 

$

250,886

 

Shares issued

 

 

 

 

 

418,439

 

 

 

 

 

 

58,999

 

 

 

 

 

 

58,999

 

 

 

 

 

 

58,999

 

Deconsolidation of Ohio entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,388

 

 

 

1,388

 

Shares issued in connection with acquisitions

 

 

 

 

 

307,169

 

 

 

283,550

 

 

 

59,785

 

 

 

 

 

 

59,785

 

 

 

 

 

 

59,785

 

Conversions to subordinate voting shares

 

 

 

 

 

(37,003

)

 

 

3,700,300

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discount on notes payable

 

 

 

 

 

 

 

 

 

 

 

397

 

 

 

 

 

 

397

 

 

 

 

 

 

397

 

Conversion of convertible note payable

 

 

 

 

 

 

 

 

 

 

 

628

 

 

 

 

 

 

628

 

 

 

 

 

 

628

 

Share-based compensation

 

 

 

 

 

 

 

 

 

 

 

13,804

 

 

 

 

 

 

13,804

 

 

 

 

 

 

13,804

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,384

)

 

 

(15,384

)

 

 

(88

)

 

 

(15,472

)

BALANCE—March 31, 2020

 

 

2,000,000

 

 

 

2,501,993

 

 

 

109,770,577

 

 

$

614,795

 

 

$

(249,361

)

 

$

365,434

 

 

$

4,981

 

 

$

370,415

 

 

The accompanying notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.

 

7


 

1.      Business Description

Harvest Health & Recreation Inc., a British Columbia corporation (the “Company” or “Harvest”) is a vertically integrated cannabis company that operates from “seed to sale.” The Company holds licenses or provides services to cannabis dispensaries in Arizona, California, Florida, Maryland, Nevada, North Dakota (on February 19, 2021, the Company completed the divestiture of its North Dakota retail assets) and Pennsylvania, with provisional licenses in Massachusetts. In addition, the Company owns CO2 extraction, distillation, purification and manufacturing technology used to produce a line of cannabis topicals, vapes and gems featuring cannabinoids and a hemp-derived product line sold in Colorado. The Company also owns, manufactures and distributes a portfolio of cannabis consumer packaged goods brands, including ROLL ONE, MODERN FLOWER, EVOLAB, CHROMA, CO2LORS, ALCHEMY, AVENUE, LOVELI, and CBX SCIENCES, to third-party licensed retail cannabis stores across the United States as well as to select retail stores the Company owns or operates, in addition to providing support services and financing to a Utah-licensed medical cannabis cultivator.

 

The Company operates in one segment, the cultivation, processing and sale of cannabis. The Company grows cannabis in outdoor, indoor, and greenhouse facilities for sale in its retail locations and for wholesale. In addition, the Company converts cannabis biomass into formulated oil using a variety of proprietary extraction techniques. The Company uses some of this oil to manufacture products such as vaporizer cartridges and edibles. Harvest sells cannabis, oil, and manufactured products in Harvest dispensaries and to third parties for resale. In addition, the Company collects licensing fees from third parties associated with operations at certain cultivation, manufacturing or retail facilities.

 

Harvest conducts business through wholly-owned and majority-owned operating subsidiaries, operating agreements and other commercial arrangements established to conduct the different business areas of each business (each an “Operating Subsidiary” and together, “Operating Subsidiaries”). The Company’s principal operating locations and type of operation are listed below:

 

State

 

Nature of Operations

 

Commencement Periods

Arizona - 15 locations

 

Retail Dispensary

 

September 2013 - September 2020

California - 4 locations

 

Retail Dispensary

 

December 2018 - October 2019

Florida - 6 locations

 

Retail Dispensary

 

February 2019 - July 2019

Maryland - 3 locations

 

Retail Dispensary

 

September 2018 - December 2019

North Dakota - 2 locations*

 

Retail Dispensary

 

July 2019 - August 2019

Pennsylvania - 9 locations

 

Retail Dispensary

 

September 2018 - March 2021

Arizona

 

Greenhouse/Outdoor Grow/Processing Lab

 

July 2015 - February 2020

Colorado - 1 location

 

Processing

 

Oct-20

Florida

 

Cultivation/Processing

 

February 2019 - December 2019

Maryland

 

Cultivation/Processing

 

September 2017 - July 2019

Nevada

 

Cultivation/Processing

 

August 2020

Pennsylvania

 

Cultivation/Processing

 

March 2020

Utah

 

Indoor Grow

 

October 2020

 

*

On February 19, 2021, the Company divested the two retail dispensary locations located in North Dakota for an immaterial amount of cash.

 

The Company is in various stages of expansion as it is growing its commercial footprint by focusing on acquiring and building additional retail, cultivation and processing locations for medical and adult use cannabis in its existing key markets.

 

Each Operating Subsidiary either holds the active and/or pending cannabis licenses associated with its activities, or has a commercial arrangement with the operating locations, and/or owns the real estate and primary fixed assets used in the cannabis businesses.

 

In certain states, cannabis licenses are typically divided into three categories: dispensary, cultivation, and processing. Dispensary licenses comprise the retail operations and allow a company to dispense cannabis to patients. Cultivation licenses allow a company to grow cannabis plants. Processing licenses allow for the processing of cannabis into other products (e.g., edibles, oil, etc.). Cultivation and processing licenses comprise the wholesale operations.

 

In other states, cannabis licenses are defined as vertically integrated, which allows the license holder the right to engage in dispensary, cultivation and processing activities.

 

The Company’s corporate headquarters is located at 1155 W. Rio Salado Parkway, Suite 201, Tempe, AZ, 85281. The Company has one class of stock that is traded on the Canadian Stock Exchange (“CSE”) and on the OTCQX International tier of the OTC Markets in

 

8


 

the U.S. (the “OTCQX”) under the symbols HARV and HRVSF, respectively. The stock price between the CSE and the OTCQX are identical after the U.S./Canadian currency exchange conversion.

2.       Significant Accounting Policies

(a)   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. Normal and recurring adjustments considered necessary for a fair statement of the results for the interim periods, in the opinion of the Company's management, have been included. Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The accompanying condensed consolidated financial statements and related footnote disclosures should be read in conjunction with the consolidated financial statements and notes thereto included in our 2020 Annual Report on Form 10-K filed with the SEC on March 30, 2021.

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from the estimates and assumptions used.

(b)   Basis of Measurement

These unaudited condensed consolidated financial statements have been prepared on the going concern basis, under the historical cost convention, except for certain financial instruments that are measured at fair value as described herein.

(c)   Functional Currency

These unaudited condensed consolidated financial statements are presented in United States dollars, which is also the functional currency of the Company and its affiliates.

(d)   Basis of Consolidation

These unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2021 include the accounts of the Company, all wholly-owned and majority-owned subsidiaries in which the Company has a controlling voting interest and, when applicable, variable interest entities in which the Company has a controlling financial interest or is the primary beneficiary. Investments in affiliates where the Company does not exert a controlling financial interest are not consolidated.

 

Subsidiaries over which the Company has a controlling financial interest are fully consolidated from the date control commences until the date control ceases. All of the consolidated entities were under common control during the entirety of the periods for which their respective results of operations were included in the consolidated statements (i.e., from the date of their acquisition). All intercompany accounts and transactions have been eliminated on consolidation.

(e)   Discontinued Operations

The Company followed Accounting Standard Codification ("ASC") 360, Property, Plant, an Equipment, and ASC 205-20, Discontinued Operations, to report assets held for sale and discontinued operations.

 

The Company classifies assets and liabilities of a business or asset group as held for sale, and the results of its operations as income (loss) from discontinued operations, net, for all periods presented, when (i) we commit to a plan to divest a business or asset group, actively begin marketing it for sale, and when it is deemed probable of occurrence within the next twelve months, and (ii) when the business or asset group reflects a strategic shift that has, or will have, a major effect on the Company’s operations and its financial results. In measuring the assets and liabilities held for sale, the Company evaluates which businesses or asset groups are being marketed for sale.

 

See Note 4 for additional information.

(f)   Revenue Recognition

The Company accounts for customer contracts in accordance with ASC 606, Revenue from Contracts with Customers (“ASC 606”), which includes the following five-step model:

 

 

9


 

Identification of the contract, or contracts, with a customer.
Identification of the performance obligations in the contract.
Determination of the transaction price.
Allocation of the transaction price to the performance obligations in the contract.
Recognition of revenue when, or as, the Company satisfies a performance obligation.

 

Through application of the standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

 

Revenues consist primarily of wholesale and retail sales of cannabis, which are generally recognized at a point in time when control over the goods have been transferred to the customer and is recorded net of sales discounts. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s credit policy. Sales discounts were not material during the three months ended March 31, 2021 and 2020, respectively.

 

The Company has agreements in place whereby third-parties provide services or license the right to operate certain aspects of cannabis facilities owned by the Company. Under the terms of these agreements, the service provider operates various aspects of the business including procurement, production, regulatory compliance, marketing and sales, subject to oversight by the Company. The Company pays the service provider a fee for its services or in the case of licenses, the licensee pays the Company a license fee. The Company recorded $0.3 million and $6.4 million for the three months ended March 31, 2021 and 2020, respectively, on a gross basis. The determination that the Company was the principal under these agreements was made in accordance with ASC 606-10-55-36 through 55-40 and consists of the following analysis. The Company analyzed the agreements first to determine what the specified good or service is that is being provided. Secondly, whether the Company is in control of the goods prior to the goods being transferred to the customer. The specified goods consist of various cannabis products sold at either in a retail location or wholesale. In order to determine whether the Company had control of the specified goods prior to transfer to the customer, the terms of the agreements to provide the goods to the customers were evaluated. Pursuant to the terms of the agreements, the Company is at all times the owner of the products which is the marijuana and marijuana concentrates. Further, the service provider would not be able to sell the products to the customer without the use the of the Company’s license which permits it to sell marijuana under state law.

 

The following represents disaggregated revenue information:

 

(In thousands)

 

Retail

 

 

Wholesale

 

 

Licensing and other

 

 

Consolidated

 

Revenue for the three months ended March 31, 2021

 

$

77,648

 

 

$

9,293

 

 

$

1,885

 

 

$

88,826

 

Revenue for the three months ended March 31, 2020

 

$

30,012

 

 

$

6,065

 

 

$

8,158

 

 

$

44,235

 

 

3.       Recently Adopted and Issued Accounting Pronouncements

 

We adopted the following standard during the three months ended March 31, 2021, which did not have a material impact on our financial statements or financial statement disclosures:

 

Date Issued

 

Standard

 

Effective Date

December 2019

 

ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes

 

January 2021

 

The following GAAP standards has been recently issued by the accounting standards board. The Company is assessing the impact of this new standard on future consolidated financial statements. Pronouncements that are not applicable or where it has been determined the pronouncements do not have a significant impact on the Company have been excluded herein.

 

Date Issued

 

Standard

 

Effective Date

August 2020

 

ASU No. 2020-06: Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible Instruments and contracts in an Entity's Own Equity

 

January 2022

 

 

 

 

10


 

4.        Discontinued Operations

Following the completion of the merger with Interurban Capital Group, LLC (formerly Interurban Capital Group, Inc.) (“ICG”), the Company sold ICG to a wholly owned subsidiary of Hightimes Holding Corp. (“Hightimes”) following the spinoff of certain assets. At the time of disposition, ICG’s primary assets consisted of rights to acquire eight “Have A Heart”-branded cannabis dispensaries in California (the “California HAH Dispensaries”). In addition, the Company agreed to sell Hightimes the equity of two additional entities controlled by Harvest that are seeking cannabis dispensary licenses in California (the “Harvest Dispensaries”). As a result, assets and liabilities allocable to these operations were classified as held for sale. In addition, revenue and expenses, gains and losses relating to the discontinuation of the California HAH Dispensaries operations were eliminated from profit or loss from the Company’s continuing operations for all periods presented.

 

The Company also entered into a plan to abandon certain product lines or lines of business to include CBD products or items of inventory, and the Company’s planned expansion in the state of Michigan. Any related assets and liabilities are classified as held for sale. In addition, the revenue, expenses, gains and losses related to the discontinuation of these activities were eliminated from profit or loss from the Company’s continuing operations for all periods presented.

 

Discontinued operations are presented separately from continuing operations in the unaudited Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020. There was no material impact from discontinued operations to the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2021.

 

(In thousands)

 

Three Months Ended March 31, 2020

 

Revenue, net of discounts

 

$

782

 

Cost of goods sold

 

 

(657

)

Gross profit

 

 

125

 

Expenses

 

 

 

General and administrative

 

 

325

 

Sales and marketing

 

 

22

 

Depreciation and amortization

 

 

18

 

Total expenses

 

 

365

 

Operating income (loss)

 

 

(240

)

Other (expense) income

 

 

 

Interest expense

 

 

(6

)

Loss before taxes and non-controlling interest

 

 

(246

)

Income taxes

 

 

(138

)

Loss from continuing operations before non-controlling interest

 

 

(384

)

Net loss from discontinued operations, net of tax

 

 

384

 

Net loss attributed to Harvest Health & Recreation Inc.

 

$

 

 

The following table is a summary of the assets and liabilities of discontinued operations:

 

(In thousands)

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS

 

 

 

 

 

 

Inventory, net

 

$

93

 

 

$

93

 

Other current assets

 

 

33

 

 

 

33

 

Property, plant and equipment, net

 

 

1,747

 

 

 

1,747

 

Right-of-use asset, net

 

 

3,593

 

 

 

3,593

 

Intangibles assets, net

 

 

894

 

 

 

894

 

Other assets

 

 

221

 

 

 

225

 

Assets from discontinued operations

 

$

6,581

 

 

$

6,585

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

Lease liability, net of current portion

 

 

718

 

 

 

718

 

Liabilities from discontinued operations

 

$

718

 

 

$

718

 

 

 

11


 

5.       Inventory

The Company’s inventory consisted of:

 

(In thousands)

 

March 31,
2021

 

 

December 31,
2020

 

Raw materials

 

$

15,284

 

 

$

12,632

 

Work in progress

 

 

6,729

 

 

 

5,634

 

Finished goods

 

 

24,604

 

 

 

19,718

 

Total inventory

 

 

46,617

 

 

 

37,984

 

Reserve

 

 

(1,424

)

 

 

(1,122

)

Total inventory, net

 

$

45,193

 

 

$

36,862

 

 

6.        Notes Receivable

The Company's notes receivable consisted of:

 

(In thousands)

 

March 31,
2021

 

 

December 31,
2020

 

Secured promissory notes dated November 2020 in the principal amount of $12.0 million with a maturity date of November 9, 2025; monthly payments of $0.1 million, inclusive of principal and interest. Balloon payment of $8.4 million due at maturity. Interest rate of 7.5% per annum.

 

$

11,771

 

 

$

12,000

 

Secured promissory notes dated February 2020 through February 2021 in the principal amount of $13.7 million with maturity dates from August 2021 to February 2022; principal is due at maturity. Interest rates of 6 - 8% per annum, due at maturity.

 

 

13,732

 

 

 

13,471

 

Secured promissory notes, created from the CannaPharmacy acquisition, dated April and June of 2019 in the principal amount of $11.6 million with maturity dates in April and June of 2021; principal is due at maturity. Interest rate of 8% per annum, due quarterly.

 

 

456

 

 

 

456

 

Secured convertible promissory note, due from Falcon International Corp. ("Falcon") and subsidiaries, dated June 7, 2019 in the principal amount of up to $40.4 million with maturity date of June 6, 2022; principal is due at maturity. Interest rate of 4% per annum, due at maturity.(1)

 

 

 

 

 

25,525

 

Unsecured convertible promissory notes, due from Falcon and its subsidiaries, dated October 2018 through February 2019 in the principal amount of $24.5 million with maturity dates of August to November 2019; principal is due at maturity. Interest rate of 8% per annum, due at maturity.(1)

 

 

 

 

 

24,499

 

Secured revolving notes dated December 2018 through January 2019 in the principal amount of up to $30.0 million with maturity dates of December 2019 to February 2020; principal is due at maturity. Interest rates of 8.25 - 8.5% per annum with interest payments due monthly.(2)

 

 

3,581

 

 

 

3,581

 

Secured promissory notes dated February 2021 in the principal of up to $0.9 million with a maturity date of February 19, 2022; principal is due at maturity. Interest rate of 10.0% per annum with interest payments due monthly.

 

 

850