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Replies to post #1317 on Cannabis Investment Club
Three months ended September 30, 2020
Revenue
Revenue for the three months ended September 30, 2020 and 2019 was $61.6 million and $33.2 million, respectively, an increase of
$28.5 million or 86%.
Third quarter same store sales increased 49% year over year for the 16 stores that were open in both periods. We
operated 37 stores as of September 30, 2020 versus 26 stores as of September 30, 2019. Revenue growth was driven by the addition of
new and acquired dispensaries as well as growth in our existing cultivation, processing, retail operations and licensing related revenues.
Cost of Goods Sold & Biological Assets
Cost of goods sold are derived from costs related to the internal cultivation and processing of cannabis and from retail purchases made
from other licensed producers operating within our state markets.
For the three months ended September 30, 2020, cost of goods sold, excluding any adjustments to the fair value of biological assets, of $32.9 million was up $11.4 million, or 53%, compared to three months ended September 30, 2019. The increase is driven by continued market growth and higher sales volume.
Inventory of plants under production is considered a biological asset. Under IFRS, biological assets are to be recorded at fair value at
the time of harvest, less costs to sell. The biological assets are transferred to inventory, and the transfer becomes the deemed cost on a
go-forward basis. When the product is sold, the fair value is relieved from inventory, and the transfer is recorded to cost of sales. Cost
of goods sold also includes products and costs acquired from other producers and sold by the Company.
Gross Profit
Gross profit before biological asset adjustments for the three months ended September 30, 2020 was $28.7 million, or 47%, gross
margin, representing a gross profit margin on the sale of branded cannabis flower and processed and packaged products including
concentrates, edibles, topicals and other cannabis and licensing arrangements. This is compared to gross profit before biological asset
adjustments for the three months ended September 30, 2019 of $11.6 million, or 35%, gross margin.
Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.
Gross profit after net gains on biological asset transformation for three months ended September 30, 2020 was $38.3 million,
representing a gross margin of 62%, compared with gross profit after biological asset transformation of $11.9 million, or 36%, gross
margin, for the three months ended September 30, 2019.
Total Expenses
Total expenses for the three months ended September 30, 2020 and 2019 were $26.4 million and $46.1 million, respectively. The
decrease in total expenses of $19.7 million for the three months ended September 30, 2020 is primarily attributable to a decrease in
general and administrative of $10.3 million resulting from a decrease in professional fees and to a lesser extent, salaries and wages.
Stock compensation expense decreased $6.5 million as a result of forfeited awards from executive and employee turnover and sales,
marketing decreased $2.1 million and depreciation and amortization decreased $0.9 million.
Total Other Income/(Expense)
Total other income/expense for three months ended September 30, 2020 was $13.4 million, an increase of $7.6 million compared to the
three months ended September 30, 2019 and was primarily due to an increase in interest expense of $7.7 million on a higher debt balance.
Provision for Income Taxes
Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or
substantively enacted at year-end. For three months ended September 30, 2020 and 2019, federal and state income tax expense totaled
$0.2 million and $0.5 million, respectively. The provision for income taxes was reduced as we anticipate a NOL carryforward to offset
part of our 2020 taxes.
Net (Loss)before discontinued operations and non-controlling interest
Net (loss) before discontinued operations and non-controlling interest for three months ended September 30, 2020 and 2019 was a loss
of $1.6 million and a loss of $39.5 million.
Harvest has developed a strategy to focus primarily on growth in its core markets while working to streamline the business and realize
operational efficiencies. We expect to grow less through acquisitions and more through organic growth and continued development of
the existing asset base in the final quarter of 2020 and 2021.
Quarterly fluctuations in revenue mix may impact gross margins. Gross
margins in the Company’s retail operations are the highest and most influential on reported results. As the Company continues to make
investments in the cultivation and manufacturing of its own products for sale in its retail locations, we would expect the percentage of
revenue from retail operations to increase and drive a favorable impact on gross margins.
While there are likely to be quarterly fluctuations in gross margin, we expect the overall trend will be upward in the near term as we focus more heavily on core markets with greater profit potential.
On March 11, 2020, we completed an offering (the "Offering"), of a non-brokered private placement basis to a select group of investors,
of $59 million of our multiple voting shares at a price of $141 per share (or $1.41 per subordinate voting share on an as-converted basis)
resulting in the issuance of 418,439 multiple voting shares. Proceeds of the Offering will be used for capital expenditures, pending
acquisitions, and general corporate purposes.
On January 31, 2020, we closed on a $20 million term loan secured by real property owned by certain of the Company’s wholly-owned
indirect subsidiaries. The term loan bears interest at a fixed rate of 16% per annum. Accrued and unpaid interest is payable monthly,
with monthly principal amortization payments in the amount of $0.2 million payable commencing on October 1, 2020. The term loan
has an initial term of 18 months, which may be extended by us for two additional six-month increments upon the satisfaction of certain
terms and conditions.
On January 24, 2020, we closed a third tranche of our Debt Offering, resulting in the issuance of $0.14 million of Coupon Notes and
$11.2 million of Units. On February 13, 2020, the Company closed a fourth tranche of its Debt Offering, resulting in the issuance of
$10 million of Units.
On December 23, 2019, we closed the first tranche of a private placement offering (the “Debt Offering”) of (a) 15% senior secured notes
due 2022 (the “Coupon Notes”), and (b) units (the “Units”), with each Unit being comprised of (i) US$1,000 aggregate principal amount
of 9.25% senior secured notes (the “Unit Notes” and together with the Coupon Notes, the “Notes”) and (ii) 109 subordinate voting share
purchase warrants (the “Warrants”). The first tranche resulted in the private placement of approximately $73 million in Coupon Notes,
and $21 million in Units. The funds from the initial tranche were used to pay off the Company’s Bridge Facility and Primary Facility
balance of $83 million, resulting in a loss on extinguishment of $1.8 million.
The Coupon Notes bear interest at 15% per annum and are payable semi-annually in equal installments on June 30 and December 30 of
each year commencing on June 30, 2020. The Unit Notes bear interest at 9.25% per annum and are payable semi-annually in equal
installments on June 30 and December 30 of each year, commencing on June 30, 2020. None of the Coupon Notes, the Units nor the
subordinate voting shares that will issuable upon exercise of the Warrants will not be registered under the United States Securities Act
of 1933, or applicable state securities laws and will not be qualified by a prospectus in Canada. The Coupon Notes and the Units were
issued to accredited investors or qualified institutional buyers. The Notes are secured by (i) a first priority security interest in all of the
Company’s present and future personal property assets, (ii) a first priority security interest in the equity interests of certain of the
Company’s direct and indirect subsidiaries that guaranteed the Notes (the “Guarantors”), and (iii) a first priority security interest in all
of the Guarantor’s present and future personal property assets. We may redeem the Notes, in whole or in part, during the first year after
the issuance of the Notes, at 105% of the principal amount of the Notes redeemed, and thereafter at 100% of the principal amount of the
Notes redeemed. In the event of a change of control, each holder of Notes has the right to require the Company to purchase all or any
part of their Notes for an amount in cash equal to 101% of the aggregate principal amount of Notes and Units repurchased plus and
accrued and unpaid interest. The Notes include covenants that, among other things, limit the Company’s ability to pay dividends,
conduct certain asset or equity transactions, incur indebtedness, grant liens and dispose of material assets. The Warrants are issued and
governed pursuant to the warrant indenture and are can be exercised at a price of CAD $3.66 per warrant share. The issuance of the
9.25% notes with the attached Warrants resulted in the incurrence of a debt discount of $3.1 million, which is recorded to permanent
equity and will be amortized over the term of the Units.
In December 2019, the Company issued a 9% Convertible Promissory Note for a principal amount of $10 million. The interest is
payable semi-annually in arrears on June 30 and December 31 each year commencing on December 31, 2021. The holder has the right
at any time to convert the principal amount into the number of shares that is equal to the principal amount divided by the conversion
price CAD $3.6692. We have the right to convert the principal amount at the conversion price if for any twenty consecutive trading
days thevolume weighted average trading price (the “VWAP”) of our shares is greater than a 40% premium to such conversion price.
In addition, we issued additional Coupon Notes under the Debt Offering in the amount of $20 million on December 31, 2019. Together
with the $10 million Convertible Promissory Note, we used the $30 million in proceeds to pay a signing payment (the “Signing
Payment”) that will be applied towards a portion of the $35 million purchase price of its planned acquisition of GreenMart of Nevada,
LLC (“GreenMart”), a wholly owned, indirect subsidiary of MJardin Group, Inc. (“MJardin”). GreenMart, MJardin and certain of its
subsidiaries issued us a convertible promissory note in the principal amount of $30 million to secure the Signing Payment pending
closing upon regulatory approval. See Note 7 to the consolidated financial statements for the years ended December 31, 2019 and 2018
for further details regarding the $30 million note receivable and Note 1 regarding the proposed acquisition of GreenMart.
In October and November 2019, we expanded the existing non-revolving term loan under its Amended and Restated Credit Agreement,
with additional draws of $20.7 million (CAD $27.5 million) and $26.6 million (CAD $35 million) through amendments to our than
existing amended and restated credit agreement originally executed on July 26, 2019 (as amended by a joinder and amending agreement
dated August 26, 2019 and first amending agreement dated October 21, 2019) (the “Bridge Facility”). These draws noted above were
in addition to the Company’s existing CAD $50 million facility (the “Primary Facility”) for which the original principal was borrowed
in October 2018 under the Letter Credit Agreement and amended and restated in July 2019. The entire Amended and Restatement
Credit Agreement balance of $82.5 million was paid off with the Senior Secured Notes and Units described above.
The Company was party to Letter Credit Agreement entered in October 2018 to borrow $19.8 million (CAD $26 million) for a period
of three years at an interest rate that is equal to Bank of Nova Scotia Prime plus 10.3% per annum. Principal payments under the loan
were amortized monthly on a straight-line basis over the term of the loan beginning six months after the date of the loan. The loan was
secured by a first lien on the assets of the Company and its subsidiaries and a pledge of its ownership in its subsidiaries.
The Company paid the agent of the lender a $0.6 million (CAD $0.8 million) work fee and issued to such agent $0.9 million (CAD $1.2 million) of shares of common stock of Subordinate Voting Shares of the resulting issuer. This loan agreement was Amended and Restated in July
2019 as noted above and settled with the Senior Secured Notes described above.
In May 2019, we received gross proceeds of $100 million from a brokered private placement issuance of 7% coupon, unsecured
debentures (the “Convertible Debentures”), which are convertible into SVS at a conversion price of $11.42 (CAD $15.38) per share at
any time and mature on May 9, 2022. The purchaser of the Convertible Debentures also received, for no additional consideration,
3,502,666 warrants. Each warrant is exercisable to purchase one SVS at an exercise price of $13.49 (CAD $18.17) per share, for a
period of 36 months from the date of issue. The proceeds were used to fund working capital and general corporate purposes.
The May 2019 $100 million tranche of Convertible Debentures, the Warrants and the Subordinate Voting Shares underlying both, were
subject to a statutory hold period which expired on September 11, 2019, being four months and one day following the date of issue of
the Convertible Debentures.
We may, subject to certain conditions, force the conversion of all of the principal amount of the then outstanding Convertible Debentures
at the applicable Conversion Price if, at any time after the date that is four months and one day following the date of issue of the
Convertible Debentures, the VWAP of the Subordinate Voting Shares is greater than CAD $21.53 for any 10 consecutive trading days,
by providing 30 days’ notice of such conversion.
Cash Flows
Cash Flow from Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2020 and 2019 was ($17.0) million and ($65.0) million,
respectively, with the improvement of $48.0 million attributed to a decrease overall in cash used to support working capital.
Cash Flow from Investing Activities
Net cash used in investing activities was $25.9 million and $214.2 million for the nine months ended September 30, 2020 and
2019, respectively, a reduction of $188.3 million. The change for the period is primarily attributed to a reduction in the use of cash for
purchases of property, plant and equipment, the issuance of notes receivable and the acquisition of businesses and intangible assets.
Cash Flow from Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2020 and 2019 was $86.5 million and $105.6 million,
respectively, is primarily attributed to proceeds from the issuance of equity for $59.0 million and the issuance of notes payable of $40.8
million. The cash provided in the nine months ended September 30, 2019 is primarily attributed to proceeds from the issuance of
convertible notes of $100 million and $19.7 million from proceeds from the issuance of new debt, offset in part by $10.7 million used
to repay debt.
