HARVEST HEALTH & RECREATION INC. Management's discussion and analysis of financial condition and results should be read in conjunction with the financial statements and accompanying notes in this report. Forward-Looking Statements This Quarterly Report on Form 10-Q contains statements that we believe are, or may be considered to be, "forward-looking statements." All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q regarding the prospects of our industry or our prospects, plans, financial position or business strategy may constitute forward- looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as "may," "will," "expect," "intend," "estimate," "foresee," "project," "anticipate," "believe," "plan," "forecast," "continue" or "could" or the negative of these terms or variations of them or similar terms. Furthermore, forward-looking statements may be included in subsequent annual, quarterly and other filings that we make with theUnited States Securities and Exchange Commission (the "SEC") and Canadian securities regulators or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. These include, but are not limited, to the material risks described more fully in Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC and Canadian securities regulators onMarch 30, 2021 , in Item 1A of this Quarterly Report on Form 10-Q, and in our subsequent filings in theU.S andCanada . All such risk factors are difficult to predict accurately and are generally beyond the direct control of the registrant. Readers are cautioned not to place undue reliance on any forward-looking statements contained in this Quarterly Report on Form 10-Q, which reflect management's opinions only as of the date hereof. Forward-looking statements in this Quarterly 28 -------------------------------------------------------------------------------- Report on Form 10-Q, other than the statements regarding the proposed arrangement with Trulieve Cannabis Corp. ("Trulieve"), do not assume the consummation of such proposed arrangement unless specifically stated otherwise. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any subsequent disclosures we make in our reports to theSEC and Canadian securities regulators. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , this Quarterly Report on Form 10-Q for the quarter endedJune 30, 2021 , and our subsequent filings in theU.S. andCanada .
Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things:
? There are various risks associated with the proposed arrangement withTrulieve which could impact our business operations, financial results and share price, including without limitation, the failure to complete or delays in completing the arrangement, termination of the arrangement, the payment of termination amounts in certain circumstances, the fixed nature of the deal consideration (subject to potential downward adjustment upon the occurrence of certain permitted Harvest debt refinancings), and fluctuations inTrulieve's stock price. ? Actions taken against us by theU.S. federal government for participation in the cannabis industry, as cannabis remains illegal underU.S. federal law. ? Changes in the regulation of the cannabis industry at theU.S. federal, state, or local level. ? Increased or heightened scrutiny byUnited States and Canadian authorities due to the industry in which we operate. ? The uncertain application of laws and regulations that impact our operations owing to the legal status of cannabis. ? Our ability to fully comply with applicable regulatory requirements in the jurisdictions where we carry on our business. ? The results of future clinical research may be unfavorable to cannabis which may have a material adverse effect on the demand for our products. ? The accuracy of various articles, reports and studies that support our beliefs regarding the medical benefits, viability, safety, efficacy and dosing of cannabis, and the impact of such reports on consumer perceptions. ? Inconsistent public opinion and perception of the medical and adult-use use cannabis industry hinders market growth and state adoption. ? The expansion of our cultivation facilities to support product sales in retail and wholesale channels. ? Our continued success in improving product yield in our current and future growing facilities. ? Our financial statements have been prepared on the going concern basis and we have incurred net losses in each of our past three fiscal years, we cannot provide assurance as to when, or if, we will become profitable. ? Our ability to acquire anticipated needed additional financing to operate our business and difficulties we may face in acquiring additional financing on terms acceptable to us or at all. ? Our ability to successfully integrate acquired businesses and personnel and exercise sufficient control to direct their operations. Our subsidiaries may not be able to obtain necessary permits and authorizations. ? Disparate state-by-state regulatory landscapes and the constraints related to holding cannabis licenses in various states results in operational and legal structures for realizing the benefit from cannabis licenses that could result in materially detrimental consequences to us. ? Security risks related to our physical facilities and cash transfers. ? Our ability to generate revenue and be successful in the implementation of our business plan is dependent on consumer acceptance of and demand for our products. ? Our business is subject to the risks inherent in agricultural operations, including supply chain reliability and contract disputes. ? Cyberattacks, data or privacy breaches or technological malfunctions could undermine or inhibit our operations and expose us to losses, reputational harm, and liabilities. ? Our insurance coverage may not cover all potential risks associated with our operations. ? The inability of third-party suppliers to produce and ship certain products and orders in a timely manner, or at all. ? We are dependent on key inputs, suppliers and skilled labor for the cultivation, extraction and production of cannabis products. ? Our ability to attract and retain key personnel. ? The outcome of any material litigation or regulatory proceedings in which we are, or may, be involved. ? Difficulty protecting our intellectual property and enforcing claims related to our brands, trademarks, trade names, and proprietary processes. ? Changes in Canadian orUnited States tax laws. ? Our ability to raise further capital as the market price for our publicly traded shares is volatile (as well as for publicly traded cannabis companies generally), and our voting control is concentrated. 29 -------------------------------------------------------------------------------- ? Unfavorable coverage by securities or industry analysts. ? Currency fluctuations in theU.S. dollar relative to the Canadian dollar. ? The effects of the weather, natural disasters, and health pandemics, including the novel coronavirus (COVID-19), on customer demand, our supply chain as well as our condensed consolidated results of operation, financial position and cash flows. ? Impacts related to the COVID-19 pandemic, including, consumer demand volatility, supply chain disruptions, retail and manufacturing disruptions or mandated closures, and regulatory delays, among others.
Use of Names
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms "we," "us," "our," "Company" or "Harvest" refer toHarvest Health & Recreation Inc. together with its wholly owned subsidiaries.
Overview of the Business
We are one of the largest multi-state vertically integrated operators in the
cannabis industry in
Our business was established inArizona and received its first license there in 2012. We were 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 ofArizona , which is one of the largest medical and recreational cannabis markets in the country and one of the oldest regulated cannabis markets in the world. Building on our success inArizona , we have consistently grown our revenues and industry footprint every year since founding and currently operate facilities inArizona ,California ,Florida ,Maryland ,Nevada ,North Dakota andPennsylvania . OnFebruary 19, 2021 , we completed the divestiture of ourNorth Dakota retail assets. Since 2013, we have 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 the remainder of 2021, we plan 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. We believe our approach to design, construction and implementation results in competitive production costs. More recently, we have shifted away from large acquisitions to focus on development of assets in core markets and streamlining operations as part of an overall plan to achieve profitability. We conduct 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"). We operate in one segment, the cultivation, processing and sale of cannabis. We grow cannabis in outdoor, indoor, and greenhouse facilities for sale in our retail locations and for wholesale. In addition, we convert cannabis biomass into formulated oil using a variety of proprietary extraction techniques. We use some of this oil to manufacture products such as vaporizer cartridges and edibles. We sell cannabis, oil, and manufactured products in our dispensaries and to third parties for resale. In addition, we collect fees on contracts with third parties who provide services at certain cultivation facilities we are licensed to operate. Our principal operating locations and type of operation are listed below as ofJune 30, 2021 : State Nature of Operations Commencement Periods Arizona - 15 September 2013 - locations Retail Dispensary September 2020 California - 4 December 2018 - locations Retail Dispensary October 2019 Florida - 10 February 2019 - June locations Retail Dispensary 2021 Maryland - 3 September 2018 - locations Retail Dispensary December 2019 Pennsylvania - 10 September 2018 - May locations Retail Dispensary 2021 July 2015 - February Arizona Greenhouse/Outdoor Grow/Processing Lab 2020Colorado - 1 location Processing October 2020 February 2019 - Florida Cultivation/Processing December 2019 September 2017 - July Maryland Cultivation/Processing 2019 Nevada Cultivation/Processing August 2020 Pennsylvania Cultivation/Processing March 2020 Utah(1) Indoor Grow October 2020 (1)
On
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We are currently in various stages of expansion as we are growing our commercial
footprint focusing on acquiring and building additional retail, cultivation and
processing locations for medical and adult use cannabis. We expect to grow less
through acquisitions and more through organic growth in the markets in which we
already occupy.
Each Operating Subsidiary holds the active and/or pending cannabis licenses associated with its activities, staffs, manages 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 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 exampleArizona where our 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. Arizona Proposition 207, also known as the Smart and Safe Arizona Act, was a voter initiative to legalize the adult recreational use of cannabis that was approved by voters onNovember 3, 2020 . The Arizona Smart and Safe Act directed theArizona State Department of Health Services to establish rules for retail cannabis sales byJune 1, 2021 , to allow cannabis to be subject to state and local sales taxes like other retail items, and would impose an additional 16% excise tax on cannabis products. OnJanuary 22, 2021 , we recorded the first sale and started offering access to regulated and legal adult recreational use cannabis products to our customers. Arrangement Agreement OnMay 10, 2021 , we entered into an Arrangement Agreement (the "Arrangement Agreement") with Trulieve Cannabis Corp ("Trulieve"), pursuant to whichTrulieve will acquire all of the issued and outstanding subordinate voting shares, multiple voting shares and super voting shares of Harvest pursuant to a plan of arrangement under the Business Corporations Act (British Columbia ) (the "Arrangement"). Subject to the terms and conditions in the Arrangement Agreement, each subordinate voting share, multiple voting share and super voting share of Harvest outstanding immediately prior to the effective time of the Arrangement will be converted into 0.1170 of a share ofTrulieve subordinate voting shares, subject to certain adjustments based upon the occurrence of certain permitted Harvest debt refinancings. At the effective time of the Arrangement, the multiple voting shares and super voting shares will be treated on an as-converted basis to subordinate voting shares pursuant to their respective terms. The obligations ofTrulieve and Harvest to consummate the Arrangement are subject to customary conditions, including, but not limited to, (a) obtaining the required approval of Harvest's shareholders, (b) obtaining an approval of theSupreme Court of British Columbia (or any other court with appropriate jurisdiction) at a hearing upon the procedural and substantive fairness of the terms and conditions of the Arrangement, (c) the absence of any injunction or similar restraint prohibiting or making illegal the consummation of the Arrangement or any of the other transactions contemplated by the Arrangement Agreement, (d) the required regulatory approvals having been obtained, including approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (e) no material adverse effect having occurred, (f) subject to certain materiality exceptions, the accuracy of the representations and warranties of each party and (g) the performance in all material respects by each party of its obligations under the Arrangement Agreement. The foregoing description of the Arrangement Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the agreement which is included as Exhibit 2.1 to our Current Report on Form 8-K, filed onMay 12, 2021 . We have prepared this Quarterly Report on Form 10-Q and the forward-looking statements contained in this Quarterly Report on Form 10-Q as if we were going to remain an independent company. If the Arrangement Agreement is consummated, many of the forward-looking statements contained in this Quarterly Report on Form 10-Q will no longer be applicable.
Results of Operations
The following table presents selected financial information derived from our condensed consolidated financial statements:
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(In thousands, except per share data) Three Months Ended
Six Months Ended
2021 2020 2021 2020
Total Revenues $ 102,463 $ 55,661 $ 191,289 $ 99,896
Less Cost of Goods Sold 50,201 32,246 91,109 58,332
Total Gross Profit $ 52,262 $ 23,415 $ 100,180 $ 41,564
Total Expenses $ 40,933 $ 32,389 $ 75,498 $ 75,558
Other Expense, Net $ (21,770 ) $ (14,634 ) $ (51,610 ) $ (908 )
Net Loss Attributable to Harvest $ (19,505 ) $ (27,574 ) $ (42,627 ) $ (42,958 )
Loss Per Share $ (0.05 ) $ (0.08 ) $ (0.10 ) $ (0.13 )
Adjusted EBITDA (non-GAAP) $ 28,022 $ (395 ) $ 54,938 $ (5,203 )
Revenue
We derive our revenue from both our wholesale and retail businesses from cannabis products we manufacture, sell and distribute to third-party retail customers, and from direct sales to end consumers in our retail stores. In addition, we collect fees on contracts with third parties who provide services at certain cultivation facilities we are licensed to operate.
Comparison between the three months ended
Revenue was$102.5 million and$55.7 million , respectively, representing an increase of$46.8 million or 84%. Revenue growth was driven by a$43.0 million increase in retail operations and$7.9 million increase in wholesale. Approximately 89% of our revenue was derived from our core markets:Arizona ,Florida ,Maryland , andPennsylvania during the three months endedJune 30, 2021 . Revenue growth was driven by the full quarter contribution of recreational sales inArizona , growth in new and existing locations companywide, and contribution from cultivation and manufacturing expansion activities. The increase was partially offset by a$5.0 million planned decrease in licensing due to the cancelation and restructuring of margin dilutive contracts at the end of 2020.
Comparison between the six months ended
Revenue was$191.3 million and$99.9 million , respectively, representing an increase of$91.4 million or 91%. Revenue growth was driven by the addition of newly opened and acquired dispensaries, growth in our existing cultivation, manufacturing, and retail operations and the legalization of adult recreational use of cannabis inArizona . The launch of sales to adult use consumers inArizona onJanuary 22, 2021 in all 15 of the Company'sArizona dispensaries contributed to retail revenue growth during the first quarter. During the three months endedJune 30, 2021 we added five new retail locations and continued our expansion activities at several cultivation and manufacturing facilities. The Company generated revenue from 12 cultivation and processing facilities in the first quarter, including contributions fromColorado ,Nevada , andUtah that did not contribute revenue during the prior year period. Revenue growth during the quarter was partly offset by the divestiture of retail assets inArkansas andNorth Dakota and a decline in licensing fees due to the cancelation and restructuring of margin dilutive contracts at the end of 2020.
Cost of Goods Sold
Cost of goods sold are derived from costs related to the internal cultivation and production of cannabis and from retail purchases made from other licensed producers operating within our state markets. Cost of goods sold includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles, and concentrates, as well as packaging and other supplies, fees for services and processing, and allocated overhead which includes allocations of rent, administrative salaries, utilities and related costs. 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.
Comparison between the three months ended
Cost of goods sold was
Comparison between the six months ended
Cost of goods sold was
Gross Profit & Gross Margin
Gross profit is revenue less cost of goods sold. Gross margin measures our gross profit as a percentage of revenue.
We have developed a strategy to focus primarily on revenue growth in our 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
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development of the existing asset base in the remainder of 2021. Quarterly
fluctuations in revenue mix may impact gross margins. Gross margins in our
retail operations are the highest and most influential on reported results. As
we continue to make investments in the cultivation and manufacturing of our own
products for sale in our retail locations, we expect the percentage of revenue
from retail operations to increase and drive a favorable impact on gross margin.
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.
Comparison between the three months ended
Gross profit was$52.3 million , an increase of$28.9 million over the prior year comparable period. This represented a total gross margin of 51%, an increase of 900 basis points as compared to a gross profit margin of 42% for the prior year comparable period.
Comparison between the six months ended
Gross profit for was$100.2 million , an increase of$58.6 million over the prior year comparable period. This represented a total gross margin of 52%, an increase of 1,000 basis points as compared to a gross profit margin of 42% for the prior year comparable period. The increase in gross margin is primarily driven by improved gross margin on retail sales due to a reduction in discounts. The reduction in discounts is a result of an increase in retail sales related to the recreational sales inArizona as well as other initiatives implemented to reduce discounts. The increase in licensing gross margin is due to the cancellation of a significant licensing agreement with a 1% gross margin further contributed to overall increased gross margin.
The following table shows the total percentage of revenue generated by each of our revenue streams and the gross margin for each:
Three months ended June 30 , Six Months Ended June 30,
2021 2020 Increase/(Decrease) 2021 2020 Increase/(Decrease) Retail revenue 83 % 76 % 7 % 85 % 72 % 13 % Wholesale revenue 14 % 13 % 1 % 12 % 13 % (1 )% Licensing and other revenue 3 % 11 % (8 )% 3 % 14 % (12 )% Retail gross margin 50 % 49 % 1 % 52 % 49 % 3 % Wholesale gross margin 52 % 30 % 22 % 48 % 30 % 19 % Licensing and other gross margin 73 % 9 % 63 % 77 % 15 % 62 % Total Expenses
Total expenses other than the cost of goods sold consist of general and administrative, sales and marketing costs, share-based compensation expense, and depreciation and amortization.
General and administrative expenses include costs incurred at our retail sites
and corporate offices, primarily related to personnel costs and operating costs,
and other professional service costs. Sales and marketing costs include expenses
related to marketing and branding activities and development and support of
customer relationships.
As part of our ongoing efforts to achieve profitability we have implemented cost
reduction measures across the organization. We expect to realize the benefits of
scale and operational efficiencies and focus more heavily on our core markets.
Furthermore, we expect to have fewer acquisition and transaction costs related
to our opportunistic expansion plans.
Share-based compensation includes the straight-line expense recognition of the
grant date fair value of equity awards granted to employees and directors over
their vesting lives. Depreciation and amortization includes the straight-line
expense recognition of depreciation of property, plant and equipment over their
depreciable lives. In addition, this includes the amortization of finite lived
intangible assets.
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The following table sets forth the components of our expenses:
(In thousands) Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Salaries and benefits $ 14,202 $ 12,495 $ 26,655 $ 26,180
Rent and occupancy 6,236 7,926 11,584 13,114
Professional and legal
fees 8,391 3,720 12,935 8,055
Licensing and
administration 3,495 2,547 6,785 4,897
Travel and entertainment 285 212 401 814
Supplies and testing 718 240 1,243 499
Total general and
administrative expenses $ 33,327 $ 27,140 $ 59,603 $ 53,559
Sales and marketing 1,224 1,248 2,122 2,524
Share-based compensation 3,741 3,276 8,603 17,080
Depreciation and
amortization 2,641 725 5,170 2,395
Total expenses $ 40,933 $ 32,389 $ 75,498 $ 75,558 Certain prior year amounts in the table above have been reclassified for consistency with the current year presentation. These reclassifications are not material and had no effect on the reported results of operations.
Comparison between the three months ended
Total expenses were
?$4.7 million increase in professional fees related to mergers and acquisitions and other legal expenses ?$1.9 million increase in depreciation and amortization primarily driven by new store openings ?$1.7 million increase in salaries and benefits due to adjustments recorded to reflect anticipated higher attainment on our bonus plan and increased employee count
Comparison between the six months ended
Total expenses remained relatively flat compared to the prior year. The following activity occurred:
?$8.5 million decrease in share-based compensation expense primarily due to a$10.0 million charge for 2.4 million options surrendered by certain executives and redistributed by the Company in 2020 and fewer options issued in 2021, partially offset by a$0.9 million charge for 0.6 million options surrendered by certain executives by the Company in 2021 and fewer cancellations ?$4.9 million increase in professional fees related to mergers and acquisitions and other legal expenses ?$2.8 million increase in depreciation and amortization attributed to new store openings,Willcox, Arizona cultivation sites, and other capital improvements ?$1.9 million increase in licensing and administration due to overall growth in the Company Total Other (Expense) Income
Comparison between the three months ended
Total other expense was
?$6.9 million fair value adjustment to increase the warrant liability - see Note 14 ?$4.5 million adjustment for fair value contingent consideration - see Note 16 ?$2.8 million decrease in loss on sales due to the sale of ICG to Hightimes that occurred in the prior year ?$2.4 million decrease in contract asset impairments
Comparison between the six months ended
Total other expense was
?
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?
$8.5 million decrease in other income due to the prior year having a $12.6
million gain on a payment of contingent consideration due to former CBx owners
partially offset by a $3.6 million loss to record a contingent liability related
to the separation agreement between the Company and a former executive officer
and director
?
$4.2 million increase in interest expense due to a decrease in interest income
primarily driven by a $56.3 million decrease in notes receivable, as well as an
increase in non-cash interest expense for the amortization of debt issuance
costs and debt discounts, including discounts for warrants issued with debt
Provision for Income Taxes
For the three months endedJune 30, 2021 and 2020, federal and state income tax expense totaled$6.8 million and$1.1 million , respectively. The increase was primarily due to the increase in gross profit. For the six months endedJune 30, 2021 and 2020, federal and state income tax expense totaled$13.3 million and$4.9 million , respectively. The increase was primarily due to the increase in gross profit. We are subject to income taxes in the jurisdictions in which we operate, and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As we operate in the illegal cannabis industry, we are subject to the limitations in Section 280E of the Internal Revenue Code of 1986, as amended (the "Code"), under which taxpayers are only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under Code Section 280E result in a higher effective tax rate than most industries. Therefore, the effective tax rate can be highly variable and may not necessarily correlate to pretax income or loss.
Discontinued Operations
Following the completion of the merger withInterurban Capital Group, LLC (formerlyInterurban 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 inCalifornia (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 inCalifornia (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 ofMichigan . 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 condensed consolidated statements of operations for the three and six months endedJune 30, 2021 and 2020 and the condensed consolidated statements of cash flows for the six months endedJune 30, 2021 and 2020. Net loss before discontinued operations and non-controlling interest for the three months endedJune 30, 2021 and 2020 was a loss of$17.3 million and$24.7 million , respectively. Net loss before discontinued operations and non-controlling interest for the six months endedJune 30, 2021 and 2020 was a loss of$40.2 million and$39.8 million , respectively.
Non-GAAP Financial Measures
Adjusted EBITDA
Adjusted EBITDA is calculated as net income (loss) before non-controlling
interest before net interest and other financing costs, income taxes,
depreciation and amortization expenses; fixed and intangible asset impairments;
gain or loss on sale of assets; change in fair value adjustment of liability;
other (income) expense; foreign exchange gain (loss); share-based compensation
expense; contract asset (recovery) impairment; discontinued operations, net of
tax; other expansion expenses (pre-open); and transaction and other special
charges.
We use adjusted EBITDA in assessing the effectiveness of our business strategies
and as a factor in making incentive compensation decisions. In addition to its
use by management, we also believe adjusted EBITDA is a measure widely used by
securities analysts, investors, and others to evaluate financial performance of
our company relative to our competitors. Adjusted EBITDA should not be
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considered a substitute for earnings before income taxes, net income or other
results reported in accordance with GAAP. Adjusted EBITDA may not be comparable
to similarly titled measures reported by other companies.
The following table provides a reconciliation of net loss before non-controlling interest to adjusted EBITDA for the periods indicated.
(In thousands) Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
Net loss (GAAP) before
non-controlling interest $ (19,229 ) $ (25,645 ) $ (42,197 ) $ (41,117 )
Add (deduct) impact of:
Net interest and other financing
costs(1) 9,184 9,390 17,905 14,106
Income tax 6,834 1,132 13,315 4,926
Amortization and depreciation(2) 3,532 1,803 7,051 4,257
(Gain) loss on sale of assets 21 2,783 (1,774 ) 364
Fair value adjustment of
liability 8,353 1,497 32,787 (5,448 )
Fair value of contingent
consideration 4,500 - 4,500 -
Other (income) expense(3) (269 ) (1,205 ) (1,773 ) (10,255 )
Foreign currency (gain) loss (17 ) (30 ) (29 ) 108
Share-based compensation expense 3,741 3,276 8,603 17,080
Contract asset impairment - 2,420 - 2,420
Discontinued operations, net of
tax 1,954 905 1,954 1,289
Other expansion expenses
(pre-open)(4) 3,371 2,323 6,543 5,664
Transaction & other special
charges 6,047 956 8,053 1,403
Adjusted EBITDA (non-GAAP)(5)
(1)
Includes less than$0.1 million and$0.2 million of interest reported in cost of sales for the three months endedJune 30, 2021 and 2020, respectively. Includes less than$0.1 million and$0.4 million for the six months endedJune 30, 2021 and 2020, respectively. (2) Includes$1.1 million and$0.9 million of depreciation reported in cost of sales for the three months endedJune 30, 2021 and 2020, respectively. Includes$1.9 million of depreciation reported in cost of sales for both the six months endedJune 30, 2021 and 2020, respectively. (3) Primarily represents gains and losses associated with settlements of contingent consideration, litigation, and other non-recurring charges. (4) These are set-up costs to prepare a location for its intended use. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, this adjustment enhances comparability to prior periods. (5) Adjusted EBITDA is a financial measure used by management that is not defined byU.S. GAAP and may not be comparable to similar measures presented by other companies. See discussion above for a definition of our adjusted EBITDA non-GAAP financial measure and reconciliation to the most directly comparableU.S. GAAP measure. The adjusted EBITDA income during the three months endedJune 30, 2021 was$28 million , as compared to an adjusted EBITDA loss of$0.4 million during the three months endedJune 30, 2020 . The period-over-period increase of$28.4 million in the adjusted EBITDA is primarily attributed to increase in gross profit period-over-period as discussed in greater detail above. The adjusted EBITDA income during the six months endedJune 30, 2021 was$54.9 million , as compared to an adjusted EBITDA loss of$5.2 million during the six months endedJune 30, 2020 . The period-over-period increase of$60.1 million in the adjusted EBITDA is primarily attributed to increase in gross profit period-over-period as discussed in greater detail above.
Liquidity and Capital Resources
Working Capital
We use working capital and cash flow measures to evaluate the performance of our operations and our ability to meet our financial obligations. We define Working Capital as current assets less current liabilities. The calculation of Working Capital provides additional information and is not defined as a measure of financial performance under GAAP. This measure should not be considered in isolation or as a substitute for any standardized measure under GAAP. This information is intended to provide investors with information about our liquidity.
Other companies in our industry may calculate this measure differently than we do, limiting its usefulness as a comparative measure.
As ofJune 30, 2021 , we had negative working capital of$40.5 million , a decrease of$102.8 million as compared toDecember 31, 2020 , driven primarily by$113.5 million increase in current notes payable due to unsecured convertible debentures with the principal amount of$100.0 million with a maturity ofMay 2022 and$20.2 million for taxes paid attributed to overall growth in the company and 36
-------------------------------------------------------------------------------- specifically related Arizona Recreation. As ofJune 30, 2021 andDecember 31, 2020 , we had total current liabilities of$195.9 million and$99.1 million , respectively, and cash and cash equivalents of$71.1 million and$78.1 million , respectively, to meet our current obligations. OnMay 10, 2021 , the Company entered into the Arrangement Agreement withTrulieve , pursuant to whichTrulieve agreed, subject to the terms and conditions thereof, to acquire all of the issued and outstanding subordinate voting shares of the Company, multiple voting shares of the Company, and super voting shares of the Company. OnJuly 13, 2021 , the Company issued the Proxy soliciting stockholder approval of the proposed transaction. Upon completion of the transaction and change in control, the Company will have the ability to repay or refinance indebtedness. Cash Flows (in thousands) Six Months Ended June 30, 2021 2020 Net cash provided by (used in): Operating activities$ (14,167 ) $ (21,219 ) Investing activities (5,523 ) (30,565 ) Financing activities 11,157 91,316 Net increase/(decrease) in cash and cash equivalents (8,533 )
39,532
Cash, cash equivalents, and restricted cash, beginning of period 82,597
30,685
Cash, cash equivalents, and restricted cash, end of period $ 74,064 $ 69,668 Operating activities
Net cash used in operating activities for the six months ended
?$42.2 million net loss before non-controlling interest ?$58.2 million net add-back of non-cash income statement items ?$30.2 million net change in operating assets and liabilities
Included in the non-cash items were
Net cash used in operating activities for the six months ended
?$41.1 million net loss before non-controlling interest ?$8.9 million net add-back of non-cash income statement items ?$10.4 million net change in operating assets and liabilities Included in the non-cash items were$17.1 million for share-based compensation,$13.9 million gain on an earnout,$5.4 million gain for change in fair value of financial liability, and$6.2 million gain on deconsolidation of two Harvest entities. Investing activities Net cash used by investing activities for the six months endedJune 30, 2021 was$5.5 million , compared to net cash used in investing activities for the six months endedJune 30, 2020 of$30.6 million . The decrease of$25.1 million in cash provided was primarily due to proceeds of$22.3 million from the sale leaseback transaction during six months endedJune 30, 2021 , see Note 7 of our condensed consolidated financial statements in Item 1 for additional information, and$14.4 million in cash payments for business acquisitions during the six months endedJune 30, 2020 .
Financing activities
Net cash provided by financing activities for the six months endedJune 30, 2021 and 2020 was$11.2 million and$91.3 million , respectively. The decrease of$79.6 million was primarily due to a decrease in proceeds from issuances of equity and proceeds received from non-convertible notes payable issued compared to prior year, partially offset by proceeds received from the exercise of warrants. During the six months endedJune 30, 2021 , there were proceeds from the exercise of warrants of$10.3 million . During the six months endedJune 30, 2020 , the Company raised additional funds from debt and equity financing transaction by issuing an aggregate of$20.1 million of debt inJanuary 2020 and$59.0 million of Multiple Voting Shares onMarch 11, 2020 .
Off-Balance Sheet Arrangements
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As of
Transactions with Related Parties
See Note 18 of our condensed consolidated financial statements in Item 1 for detail of our transactions with related parties.
Recently Issued Accounting Pronouncements
See Note 3 of our condensed consolidated financial statements in Item 1 for the impact of recently issued accounting pronouncements on the Company's condensed consolidated financial statements.
Critical Accounting Estimates
The preparation of our condensed consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that impact the amounts reported in our condensed consolidated financial statements and accompanying notes that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered relevant. Actual results may differ from these estimates.
There have been no material changes to our critical accounting estimates from those discussed in Item 7 of our 2020 annual report on Form 10-K.
Financial Instruments and Financial Risk Management
Our financial instruments consist of cash and cash equivalents, accounts receivable, member contribution receivable, notes receivable, due from related parties, investments, accounts payable and accrued liabilities, notes payable, derivative liability, liability for acquisition of noncontrolling interest and contingent consideration payable.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:
Level 1-Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2-Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly and
Level 3-Inputs for the asset or liability that are not based on observable market data.
Financial Risk Management
We are exposed in varying degrees to a variety of financial instrument related risks. Our Board of Directors mitigates these risks by assessing, monitoring and approving our risk management processes.
Credit Risk
Credit risk is the risk of a potential loss to us if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure atJune 30, 2021 is the carrying amount of cash and cash equivalents. We do not have significant credit risk with respect to our customers. All cash and cash equivalents are placed with majorU.S. financial institutions. We provide credit to our customers in the normal course of business. We have established credit evaluation and monitoring processes to mitigate credit risk but have limited risk as the majority of our sales are transacted with cash.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations associated with financial liabilities. We manage liquidity risk through the effective management of our capital structure. Our approach to managing liquidity is to ensure that we will have sufficient liquidity at all times to settle obligations and liabilities when due.
Market Risk
Market risk is the potential economic loss arising from adverse changes in market rates and prices, such as interest rates, foreign exchange rates, raw material and other commodity prices. Each type of market risk affecting the Company is discussed in Item 3 of this Quarterly Report on Form 10-Q.
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