We are one of the largest multi-state vertically integrated operators in the cannabis industry in the United States that operates from “seed to sale.”
Our business was established in Arizona and received its first license there in 2012. The Company was formed to own, operate and develop certain businesses related to the cultivation, processing, distribution and sale of cannabis and cannabis related products under the "Harvest" brand in jurisdictions where such cultivation, processing, distribution and sale is authorized under applicable state law.
We are one of the largest operators in the state of Arizona, which is one of the largest medical cannabis markets in the country and one of the oldest regulated cannabis markets in the world. Building on its success in Arizona, the Company has consistently grown its revenues and industry footprint every year since founding and currently operates facilities or provides services in Arizona, Arkansas, California, Florida, Maryland, North Dakota, Pennsylvania and Washington with provisional licenses in Massachusetts and planned expansion into Nevada upon completion of the acquisition of GreenMart of Nevada, LLC.
Since 2013, the Company has won a variety of operating awards, including seven Best Dispensary awards issued by four independent organizations, four Best Medical Cannabis Strain awards, and one Best Medical Cannabis Product award. During 2020 and 2021, the Company plans to expand cultivation facilities in key states, investing in new and existing operations for indoor, outdoor, and greenhouse cannabis to support product sales in retail and wholesale channels. The Company believes its approach to design, construction and implementation results in competitive production costs. More recently, the Company has shifted away from large acquisitions to focus on development of assets in core markets and streamlining operations as part of an overall plan to return to profitability.
The Company 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 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 fees on contracts with third-parties who provide services at certain cultivation facilities the Company is licensed to operate.
The Company’s principal operating locations and type of operation as of June 30, 2020 are listed below:
State Nature of Operations Commencement Date Arizona - 14 locations Retail Dispensary September 2013 - February 2020 Arkansas - 1 location Retail Dispensary February 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 - 5 locations Retail Dispensary September 2018 - November 2019 Washington - 5 locations* Retail Dispensary Services March 2020 Arizona Greenhouse/Indoor and Outdoor Grow/Processing Lab July 2015 - February 2020 Florida Indoor/Outdoor Grow/Processing Labs February 2019 - December 2019 Maryland Indoor Grow/Processing September 2017 - July 2019 Pennsylvania Indoor Grow/Processing Labs March 2020
We are currently in various stages of expansion as we grow our commercial footprint focusing on acquiring and building additional retail, cultivation and processing locations for medical and adult use cannabis in its key markets. The Company expects to grow less through acquisitions and more through organic growth in the markets we already occupy.
Each Operating Subsidiary holds the active and/or pending cannabis licenses associated with its activities, staffs, manages o r 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 and processing licenses allow for the conversion of cannabis into other products (e.g., edibles, oil, etc.). Cultivation and processing licenses comprise the wholesale operations.
In other states, for example Arizona, where the Company’s largest concentration of business activity is located, 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, Arizona, 85281.
Recent Transactions
On June 22, 2020, the Company sold ICG to a wholly owned subsidiary of Hightimes following the spinoff of certain assets as provided for in the Second Restated Purchase Agreement by and among Hightimes, the Company, Steve White, Harvest of California LLC, ICG and other parties dated June 10, 2020 (the “Hightimes Agreement”). 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”). The sales price for these assets was $67,500 payable $1,500 in cash and $66,000 in the form of Series A Voting Convertible Preferred Stock, par value $0.0001 (“Series A Preferred”) issued by Hightimes. $60,000 of Series A Preferred Stock was issued on June 22, 2020 upon completion of the sale of ICG and the remaining $6,000 of Hightimes Series A Preferred Stock will be issued to Harvest upon transfer of the Harvest Dispensaries. At the time of closing, Hightimes had no other series or class of preferred stock issued and outstanding. The Series A Preferred Stock has a stated or liquidation value of $100 per share. Commencing on the later to occur of (A) September 30, 2020, or (B) the Closing Date, the Series A Preferred Stock will pay a quarterly dividend at the rate of 16% per annum. The Dividend shall accrue and shall be added to the face amount of the Series A Preferred Stock issuable upon conversion of the Series A Preferred Stock. We may convert all or a portion of the Series A Preferred Stock into shares of Hightimes Class A voting Common Stock at a conversion price per share of $11, subject to adjustment to $1 per share, based on the 11-for-one forward stock split of the Hightimes Common Stock to be consummated upon completion of Hightimes’ Regulation A+ initial public offering; provided, that in no event shall the number of shares of Hightimes Common Stock issuable upon full conversion of the Series A Preferred Stock, exceed 19% of the issued and outstanding shares of Hightimes Common Stock, after giving effect to such optional conversion.
To the extent not previously converted into Conversion Shares, the then outstanding shares of Series A Preferred Stock shall be subject to automatic conversion into Hightimes Common Stock on the earlier to occur of (a) two (2) years from the Initial Closing Date, or (b) if the market capitalization of the Hightimes Common Stock, based on the volume weighted average closing prices for any ten (10) consecutive trading days, shall equal or exceed USD$300,000,000. In either event, the per share conversion price of the Series A Preferred Stock shall be the volume weighted average closing price for any ten (10) consecutive trading days immediately preceding the date of automatic conversion. Notwithstanding the foregoing, in no event shall the aggregate number of Conversion Shares exceed 19% of the issued and outstanding shares of Hightimes Common Stock, after giving effect to any prior optional conversion or a mandatory conversion.
The number of Series A Preferred Shares is subject to reduction in the event Hightimes does not obtain the required consent to transfer ownership of the California HAH Dispensaries or the Harvest Dispensaries within one year following the applicable closing and such failure is not a result of Hightimes failure to use its commercially reasonable efforts (which shall not include having to make any additional payments to any member or manager of any dispensary) to obtain such consent as provided for in the Hightimes Agreement. In addition, if the required consent is not obtained, the applicable entity shall be removed from the list of dispensaries to be acquired and there shall be no further liability or obligation on the part of any party with respect to the failure to deliver the required consents or approvals for such entity.
The Series A Preferred Stock and the Hightimes Common Stock issuable upon conversion of the preferred stock (the “Conversion Shares”) are subject to a lockup agreement which prohibits the Company or any purchaser of the shares from affecting any sale, assignment, pledge or transfer of the Series A Preferred Stock or Conversion Shares for a period of six months following the applicable closing date. Thereafter, the Company may effect public sales into the market of such Conversion Shares at the rate of 10% of such Conversion Shares every six months (commencing on the six month anniversary of the Closing Date) with the balance of such Conversion Shares to be subject to public sales into the market at the expiration of such five year lockup period.
The Company estimated the fair value of the shares of Series A Preferred Stock received to be $19,100 as of June 30, 2020. For consideration received, the Company transferred its 100% ownership interest in ICG which whose primary assets consisted of several leases, leasehold improvements, other assets and rights to acquire eight California HAH Dispensaries and agreed to sell Hightimes the equity of two additional Harvest Dispensaries for a gain of $3,300 which is recorded in Discontinued operations in the Company’s Condensed Consolidated Statement of Operations.
Discontinued Operations
Following the completion of the merger with Interurban Capital Group, LLC (formerly Interurban Capital Group, Inc.) (“ICG”) discussed in Note 10, the Company sold ICG to a wholly owned subsidiary of Hightimes Holding Corp. (“Hightimes”) following the spinoff of certain assets as discussed in Note 10. 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.
“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 and 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 interim condensed consolidated statements of operations and the unaudited interim condensed consolidated statement of cash flows.
