Exhibit 99.1

HARVEST HEALTH & RECREATION INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

		Page
Report of Independent Registered Public Accounting Firm			F-2
Consolidated Balance Sheets as of December 31, 2020 and 2019			F-3
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019			F-4
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and 2019			F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019			F-6
Notes to Consolidated Financial Statements			F-8

 

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Harvest Health & Recreation Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Harvest Health and Recreation, Inc. (the Company) as of December 31, 2020 and 2019, and the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2020, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Haynie & Company

Haynie & Company

Salt Lake City, Utah

March 30, 2021

We have served as the Company’s auditor since 2018.

 

 

F-2

HARVEST HEALTH & RECREATION INC.

Consolidated Balance Sheets

(Amounts expressed in thousands of United States dollars, except share data)

 

 

		December 31, 2020				December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents		$	78,055			$	22,685
Restricted cash			4,542				8,000
Accounts receivable, net			5,051				12,147
Notes receivable, current portion			21,556				47,768
Related party notes receivable, current portion			10,052				3,581
Inventory, net			36,862				27,987
Other current assets			5,280				4,788
Total current assets			161,398				126,956
Notes receivable, net of current portion			18,211				34,430
Property, plant and equipment, net			176,827				149,841
Right-of-use assets for operating leases, net			60,843				52,445
Related party right-of-use assets for operating leases, net			5,621				6,321
Intangibles assets, net			272,118				159,209
Corporate investments			19,091				—
Acquisition deposits			50				3,645
Goodwill			116,041				84,596
Assets held for sale			6,585				2,444
Other assets			19,850				8,114
TOTAL ASSETS		$	856,635			$	628,001
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Current liabilities:
Accounts payable		$	10,755			$	6,969
Other current liabilities			28,896				22,029
Contingent consideration, current portion			17,985				13,764
Income tax payable			17,504				5,310
Operating lease liability, current portion			2,906				2,244
Related party operating lease liability, current portion			135				428
Notes payable, current portion			20,910				8,395
Total current liabilities			99,091				59,139
Notes payable, net of current portion			244,066				213,181
Warrant liability			20,908				5,516
Operating lease liability, net of current portion			58,637				48,731
Related party operating lease liability, net of current portion			5,595				5,533
Deferred tax liability			53,082				28,587
Contingent consideration, net of current portion			—				16,249
Total liabilities associated with assets held for sale			718				—
Other long-term liabilities			63				179
TOTAL LIABILITIES			482,160				377,115
Commitments and contingencies (Note 20)
STOCKHOLDERS’ EQUITY
Subordinate Voting Shares (Shares Authorized, Issued and Outstanding at December 31, 2020: Unlimited, 220,913,258 and 220,913,258, respectively, at December 31, 2019: Unlimited, 105,786,727 and 105,786,727, respectively)			—				—
Multiple Voting Shares (Shares Authorized, Issued and Outstanding at December 31, 2020: Unlimited, 182,842,232 and 182,842,232, respectively, at December 31, 2019: Unlimited, 181,338,834 and 181,338,834, respectively)			—				—
Super Voting Shares (Shares Authorized, Issued and Outstanding at December 31, 2020: Unlimited, 2,000,000 and 2,000,000, respectively, at December 31, 2019: Unlimited, 2,000,000 and 2,000,000, respectively)			—				—
Capital stock			667,248				481,182
Accumulated deficit			(293,607	)			(233,977	)
Stockholders’ equity attributed to Harvest Health & Recreation Inc.			373,641				247,205
Non-controlling interest			834				3,681
TOTAL STOCKHOLDERS’ EQUITY			374,475				250,886
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	856,635			$	628,001

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3

HARVEST HEALTH & RECREATION INC.

Consolidated Statements of Operations

(Amounts expressed in thousands of United States dollars, except share and per share data)

 

 

		For the Year Ended December 31,
		2020				2019
Revenue, net of discounts		$	231,460			$	116,780
Cost of goods sold			(129,873	)			(75,636	)
Gross profit			101,587				41,144
Expenses
General and administrative (related party operating lease expense for the year ended December 31, 2020 and 2019 was $788 and $340)			99,603				105,966
Sales and marketing			4,960				8,937
Share-based compensation			22,495				17,695
Depreciation and amortization			7,920				5,360
Fixed and intangible asset impairments			664				16,977
Total expenses			135,642				154,935
Operating loss			(34,055	)			(113,791	)
Other (expense) income
Gain (loss) on sale of assets			11,752				(2,313	)
Other (expense) income			17,185				(8,286	)
Fair value of liability adjustment			(10,125	)			5,482
Foreign currency loss			(63	)			(970	)
Interest expense (related party interest income for the year ended December 31, 2020 and 2019 was $444 and $267)			(38,612	)			(9,514	)
Contract asset impairment			(732	)			(35,098	)
Loss before taxes and non-controlling interest			(54,650	)			(164,490	)
Income taxes			(3,650	)			(3,756	)
Net loss from continuing operations before non-controlling interest			(58,300	)			(168,246	)
Net loss from discontinued operations, net of tax			(1,278	)			(568	)
Net loss before non-controlling interest			(59,578	)			(168,814	)
Net (income) loss attributed to non-controlling interest			(52	)			2,079
Net loss attributed to Harvest Health & Recreation Inc.		$	(59,630	)		$	(166,735	)
Net loss per share—basic and diluted		$	(0.16	)		$	(0.59	)
Attributable to Harvest Health and Recreation Inc.		$	(0.17	)		$	(0.58	)
Attributable to discontinued operations, net of tax		$	—			$	—
Weighted-average shares outstanding—basic and diluted			354,757,211				286,626,553

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4

HARVEST HEALTH & RECREATION INC.

Consolidated Statements of Changes in Stockholders’ Equity

(Amounts expressed in thousands of United States dollars, except share data)

 

 

		Number of Shares												$ Amount
																						Stockholders’
		Super				Multiple				Subordinate												Equity				Non-				TOTAL
		Voting				Voting				Voting				Capital				Accumulated				attributed				Controlling				STOCKHOLDERS’
		Shares				Shares				Shares				Stock				Deficit				to Harvest				Interest				EQUITY
BALANCE—December 31, 2018			2,000,000				2,179,691				63,358,934			$	435,495			$	(67,117	)		$	368,378			$	5,572			$	373,950
Adoption of ASC 842			—				—				—				—				(125	)			(125	)			—				(125	)
Restated total equity at January 1, 2019			2,000,000				2,179,691				63,358,934				435,495				(67,242	)			368,253				5,572				373,825
Shares issued			—				13,773				271,888				2,322				—				2,322				—				2,322
Capital contribution			—				—				—				312				—				312				188				500
Exercise of warrants			—				—				785,469				5,145				—				5,145				—				5,145
Shares issued in connection with acquisitions			—				33,629				—				18,512				—				18,512				—				18,512
Issuance of $10MM convertible note			—				—				—				1,000				—				1,000				—				1,000
Conversions to subordinate voting shares			—				(413,705	)			41,370,436				—				—				—				—				—
Debt issuance costs paid in warrant			—				—				—				701				—				701				—				701
Share-based compensation			—				—				—				17,695				—				17,695				—				17,695
Net loss			—				—				—				—				(166,735	)			(166,735	)			(2,079	)			(168,814	)
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			—				456,161				22,652,568				90,156				—				90,156				—				90,156
Shares returned and cancelled			—				(42,378	)			—				(7,670	)			—				(7,670	)			—				(7,670	)
Deconsolidation of Ohio entities			—				—				—				—				—				—				1,388				1,388
Divestiture of Arkansas assets			—				—				—				—				—				—				(4,162	)			(4,162	)
Shares issued in connection with acquisitions			—				316,411				398,600				59,785				—				59,785				—				59,785
Conversions to subordinate voting shares			—				(920,754	)			92,075,363				—				—				—				—				—
Equity method investment adjustment			—				—				—				—				—				—				(125	)			(125	)
Discount on notes payable			—				—				—				397				—				397				—				397
Conversion of convertible note payable			—				205,594				—				20,903				—				20,903				—				20,903
Share-based compensation			—				—				—				22,495				—				22,495				—				22,495
Net loss			—				—				—				—				(59,630	)			(59,630	)			52				(59,578	)
BALANCE—December 31, 2020			2,000,000				1,828,422				220,913,258			$	667,248			$	(293,607	)		$	373,641			$	834			$	374,475

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5

HARVEST HEALTH & RECREATION INC.

Consolidated Statements of Cash Flows

(Amounts expressed in thousands of United States dollars)

 

 

		For the years ended December 31,
		2020				2019
CASH FLOW FROM OPERATING ACTIVITIES
Net loss		$	(59,578	)		$	(168,814	)
Net loss from discontinued operations, net of tax			1,278				568
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization			11,290				7,755
Amortization of right-of-use assets			5,375				3,525
Amortization of debt issuance costs			4,263				2,793
Amortization of debt discount			1,632				42
Amortization of warrant expense			3,518				1,816
Impairment of fixed and intangible assets			664				16,976
Impairment of right-of-use assets			(249	)			—
Gain on settlement of contingent consideration			(13,957	)			—
Gain on deconsolidation of Ohio entities			(11,899	)			—
Impairment of investments			—				5,000
Gain on legal settlements			(9,260	)			—
(Gain) loss on divestments and sale of assets			(1,467	)			3,847
Loss on extinguishment of notes payable			463				—
Loss on dead deals			3,707				—
Loss on lease derecognition			3,428				547
Change in fair value of financial liability			10,125				(5,482	)
Unrealized exchange loss			—				496
Deferred income tax expense			(5,378	)			517
Share-based compensation			22,495				17,695
Noncash transaction expenses			—				71
Provision for bad debts and credit losses			903				31,788
Changes in operating assets and liabilities:
Accounts receivable			(2,743	)			(11,603	)
Inventory			(2,801	)			(2,402	)
Other assets			(1,729	)			(1,373	)
Income taxes payable			13,368				781
Accrued expenses and other liabilities			(2,417	)			(2,005	)
Accounts payable			6,890				(882	)
Operating lease liabilities			(5,429	)			(3,219	)
Prepaid expenses and other current assets			(2,774	)			(2,849	)
NET CASH USED IN CONTINUING OPERATING ACTIVITIES			(30,282	)			(104,412	)
NET CASH USED IN DISCONTINUED OPERATING ACTIVITIES			(1,267	)			(568	)
NET CASH USED IN OPERATING ACTIVITIES			(31,549	)			(104,980	)
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired			(16,029	)			(31,170	)
Acquisitions/advances of intangibles			(773	)			(12,757	)
Acquisition deposits			100				—
Prepayment of acquisition consideration			—				(3,645	)
Purchases of property, plant and equipment			(26,863	)			(109,436	)
Proceeds from divestments and sale of assets			9,225				—
Issuance of notes receivable			(1,825	)			(110,370	)
Payments received on notes receivable			10,601				9,830
NET CASH USED IN INVESTING ACTIVITIES			(25,564	)			(257,548	)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from exercise of warrants			—				5,145
Proceeds from issuance of equity			91,757				—
Proceeds from issuance of convertible notes payable			—				110,000
Proceeds from issuance of notes payable			40,315				187,841
Repayment of notes payable			(22,643	)			(11,483	)
Payment of finance lease liabilities			(19	)			(1,644	)
Fees paid for debt financing activities			(385	)			(12,403	)
Extinguishment of debt			—				(84,126	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			109,025				193,330
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH			51,912				(169,198	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			22,685				191,883
RESTRICTED CASH, BEGINNING OF PERIOD			8,000				8,000
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD			30,685				199,883
CASH AND CASH EQUIVALENTS, END OF PERIOD			78,055				22,685
RESTRICTED CASH, END OF PERIOD			4,542				8,000
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD		$	82,597			$	30,685

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6

HARVEST HEALTH & RECREATION INC.

Consolidated Statements of Cash Flows

(Amounts expressed in thousands of United States dollars)

 

 

		For the years ended December 31,
		2020				2019
Supplemental disclosure with respect to cash flows
Interest paid		$	34,064			$	14,232
Taxes paid		$	5,806			$	6,161
Supplemental disclosure of non-cash activities
Shares issued for business acquisitions		$	59,785			$	18,512
Shares issued for the acquisition of intangible licenses		$	—			$	1,526
Shares issued for the acquisition of a lease		$	—			$	771
Trade and notes receivable settled for business acquisitions		$	55,716			$	—
Notes payable issued for business acquisitions		$	16,650			$	—
Notes payable issued for the acquisition of intangible licenses		$	1,000			$	1,470
Notes payable issued for the acquisition of a lease		$	500			$	—
Notes payable issued for the acquisition of property, plant and equipment		$	—			$	5,650
Notes payable settled upon divestment		$	1,905			$	—
Contingent consideration issued for business acquisitions		$	5,000			$	—
Conversion of convertible debentures		$	19,535			$	—
Notes receivable received upon deconsolidation		$	12,000			$	—
Right-of-use assets obtained in exchange of operating lease liabilities		$	15,332			$	49,862
Right-of-use assets obtained in exchange of finance lease liabilities		$	5,178			$	—

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

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, Arkansas (on November 13, 2020, we completed the divestiture of our ownership interest in the Arkansas retail and cultivation assets), California, Florida, Maryland, Nevada, North Dakota and Pennsylvania with two 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 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
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 – 8 locations		Retail Dispensary		September 2018 – October 2020
Washington—5 locations*		Retail Dispensary Services		March 2020
Arizona		Greenhouse/Outdoor Grow/Processing Lab		July 2015 – February 2020
Arkansas**		Greenhouse		January 2020
Colorado – 1 location		Processing		October 2020
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		Cultivation/Processing		October 2020

 

*	See Note 20 (Commitments and Contingencies – Washington Litigation) with respect to the disputed termination of the Company’s service agreements with the licensees of the Washington locations.

**	See Note 11 (Acquisitions/Divestitures – Divestiture of Arkansas Assets) with respect to the sale of the Company’s ownership interests in Natural State Wellness Dispensary, LLC and Natural Statement Wellness Enterprises, LLC.

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

 

F-8

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

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 the U.S. (the “OTCQX”) under the symbol 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 consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as of December 31, 2020 and 2019.

Certain prior year amounts have been reclassified, including assets held for sale and the results of discontinued operations, to conform to the current year presentation. Unless otherwise indicated, amounts provided in the Notes herein pertain to continuing operations. See Note 5 for additional information.

 

(b)	Basis of Measurement

These 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 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 consolidated financial statements as of and for the years ended December 31, 2020 and 2019 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.

 

F-9

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

(e)	Discontinued Operations

The Company followed 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 5 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:

 

•

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 years ended December 31, 2020 and 2019, respectively.

The Company has agreements in place whereby third-parties provide services or licenses 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 licensor pays the Company a license fee. The Company recorded $23.6 million and $19.4 million for the years ended December 31, 2020 and 2019, 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.

 

F-10

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

The following represents disaggregated revenue information:

 

		Retail				Wholesale				Licensing and other				Consolidated
Revenue for the Year Ended December 31, 2020		$	171,147			$	32,696			$	27,617			$	231,460
Revenue for the Year Ended December 31, 2019		$	67,131			$	27,494			$	22,155			$	116,780

 

(g)	Use of Estimates

The preparation of these consolidated financial statements and accompanying notes in conformity with GAAP requires management to make judgments, assumptions, and estimates that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results and outcomes may significantly differ from those estimates. The estimates and judgments, including underlying assumptions, are reviewed on an ongoing basis and are based on historical experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the consolidated financial statements include:

 

•

estimated useful lives, depreciation of property plant and equipment, and amortization of intangible assets

 

•

amounts recorded in business combinations

 

•

valuation and obsolescence relating to inventories

 

•

valuation of investments in private holdings

 

•

impairment of indefinite-lived intangible assets, long-lived assets and goodwill

 

•

allowance for credit losses

 

•

valuation of share-based payments and derivatives

 

•

valuation of financial instruments

 

•

lease assumptions

 

•

measurement and valuation allowances against deferred tax assets, and evaluation of uncertain tax positions

 

(h)	Non-Controlling Interests

Non-controlling interests (“NCI”) represent equity interests owned by outside parties. NCI may be initially measured at fair value or at the NCI’s proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The choice of measurement is made on a transaction by transaction basis. The Company elected to measure each NCI at its proportionate share of the recognized amounts of the acquiree’s identifiable net assets. The share of net assets attributable to NCI are presented as a component of equity. Their share of net income or loss is recognized directly in equity. Total income or loss of subsidiaries is attributed to the shareholders of the Company and to the NCI, even if this results in the NCI having a deficit balance.

 

(i)	Cash and Cash Equivalents

Cash and cash equivalents include cash deposits in financial institutions, other deposits that are readily convertible into cash, with original maturities of three months or less, and cash held at retail locations. Cash balances with institutions may at times be in excess of Federal Deposit Insurance Corporation (“FDIC”) limits.

 

F-11

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

(j)	Restricted Cash

Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. At December 31, 2020 and 2019 restricted cash was $4.5 million and $8.0 million, respectively, which is for cash consideration set aside as a reserve in relation to the San Felasco Nurseries, Inc. acquisition.

 

(k)

Inventory

Inventory consists of raw materials, supplies and consumables used in the inventory process, merchandise for sale, finished goods and work-in-process such as pre-harvested cannabis plants, by-products to be extracted, oils and edible products. Inventory is valued at the lower of cost and net realizable value. Net realizable value is determined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Cost is determined using the weighted average cost method.

Costs incurred during the growing and production process are capitalized as incurred to the extent that cost is less than net realizable value. These costs include materials, direct and indirect labor, and overhead used in the growing and production processes. Inventories of purchased finished goods and packing materials are initially valued at cost and subsequently at the lower of cost and net realizable value. Products for resale and supplies and consumables are valued at lower of cost or net realizable value.

The Company reviews inventory for obsolete, redundant and slow-moving goods and any such inventories are written down to net realizable value. Inventory reserves are based on inventory obsolescence trends, historical experience and application of the specific identification method.

 

(l)	Property, Plant and Equipment

Property, plant and equipment are recorded at cost net of accumulated depreciation and impairment losses, if any. Expenditures to construct assets or that materially increase the life of the assets are capitalized. Costs to construct assets are included in capitalized borrowing costs during the construction and development period. Ordinary repairs and maintenance are expensed as incurred. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

 

Category		Range (in years)
Computer equipment		3—5 years
Leasehold improvements		Shorter of asset’s estimated useful life and the remaining life of the lease
Production equipment		7 years
Buildings and improvements		7—39 years
Furniture and fixtures		5—7 years
Vehicles		5 years

The assets’ residual values, useful lives and methods of depreciation are reviewed annually and adjusted prospectively, if appropriate. An item of equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying value of the asset) is included in gain or loss on sale of assets in the Consolidated Statements of Operations in the year the asset is derecognized.

 

(m)	Equity Investments

Investments in equity of entities over which the Company does not have a controlling financial interest or significant influence are accounted for at fair value. Equity investments without readily determinable fair values are measured at cost with adjustments for observable changes in price or impairments (referred to as the “measurement alternative”). In applying the measurement alternative, the Company performs a qualitative assessment on a quarterly basis and recognizes an impairment if there are sufficient indicators that the fair value of the equity investments are less than the carrying values. Subsequent changes in fair value are recognized in the Consolidated Statement of Operations.

 

F-12

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

Investments in entities over which the Company does not have a controlling financial interest but has significant influence, are accounted for using the equity method, with the Company’s share of earnings or losses reported in earnings or losses from equity method investments in the Consolidated Statement of Operations. Significant influence is assumed when the Company has 20%-50% ownership interest unless qualitative factors overcome this assumption. Equity method investments are recorded at cost, plus the Company’s share of undistributed earnings or losses, and impairment, if any, within other assets on the Consolidated Balance Sheet.

 

(n)	Business Combinations

The Company accounts for business combinations using the acquisition method in accordance with ASC 805, Business Combinations (“ASC 805”), which requires recognition of assets acquired and liabilities assumed, including contingent assets and liabilities, at their respective fair values on the date of acquisition. Any excess of the purchase consideration over the net fair value of tangible and identified intangible assets acquired less liabilities assumed is recorded as goodwill. If the fair value of identifiable net assets acquired exceeds the purchase consideration and any previously held equity interest, the difference is recognized in the Consolidated Statements of Operations immediately. The costs of business acquisitions, including fees for accounting, legal, professional consulting and valuation specialists, are expensed as incurred. Purchase price allocations may be preliminary and, during the measurement period, not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.

In determining the fair value of all identifiable assets, liabilities and contingent liabilities acquired, the most significant estimates relate to contingent consideration and intangible assets. Management exercises judgement in estimating the probability and timing of when earn-outs are expected to be achieved which is used as the basis for estimating fair value. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of these assets and any changes in the discount rate applied. See Note 11 for additional information.

 

(o)

Goodwill

Goodwill represents the excess of the purchase price paid over the estimated fair value of the net assets acquired in a business combination. Goodwill is either assigned to a specific reporting unit or allocated between reporting units based on the relative fair value of each reporting unit, where applicable.

Goodwill is not subject to amortization, but is tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than the carrying amount. If the Company concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the Company conducts a quantitative goodwill impairment test. The quantitative impairment test involves comparing the fair values of the reporting unit with its carrying value. Management estimates the fair value of its reporting unit using a combination of the income and market approaches. If the carrying amount of the reporting unit exceeds the reporting unit’s fair value, any amount by which the carrying value of the reporting unit exceeds the fair value is recognized as an impairment loss.

See Notes 11 and 12 for additional information.

 

(p)	Intangible assets other than goodwill

Intangible assets are recorded at cost, less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value at the acquisition date. Amortization is recorded on a straight-line basis over their estimated useful lives, which do not exceed the contractual period, if any. Intangible assets that have indefinite useful lives, which include licenses and permits and tradenames, are not subject to amortization, but are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value, a quantitative impairment test to compare the fair value to the carrying value is performed. An impairment charge is recorded if the carrying value exceeds the fair value.

 

F-13

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

Useful lives are based on the Company’s estimate at the date of acquisition and are as follows for each class of intangible asset:

 

Category		Range (in years)
License and permits		Indefinite life intangible asset
Tradenames		Indefinite life intangible asset
Patient relationships		Straight-line over 2 years
Technology		Straight-line over 3 - 10 years
Software		Straight-line over 5 years

The estimated useful lives, residual values and amortization methods are reviewed at the end of each reporting year, with the effect of any changes in estimate being accounted for on a prospective basis.

See Notes 11 and 12 for additional information.

 

(q)	Impairment of long-lived assets

The Company evaluates the recoverability of other long-lived assets, including property, plant and equipment, and definite lived intangible assets, whenever events or changes in circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Factors which could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends. When the Company determines that the carrying value of long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If the carrying value of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset’s carrying value over its fair value.

 

(r)

Leases

The Company determines whether an arrangement contains a lease at inception. When the Company determines the arrangement is, or contains, a lease, the lease is classified as either an operating lease or a finance lease . Operating leases are included in right-of-use (ROU) assets and operating lease liabilities on the Consolidated Balance Sheets. Finance leases are included in property and equipment, net and finance lease obligation are included in other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The Company primarily leases space for corporate offices, retail, cultivation and manufacturing under non-cancellable operating leases.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Lease ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. For finance leases, the Company records interest expense on the lease liability in addition to amortizing the right-of-use asset (generally straight-line) over the shorter of the lease term or the useful life of the right-of-use asset.

The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Right-of-use assets also include any prepaid lease payments and lease incentives.

See Note 10 for additional information.

 

F-14

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

(s)	Financial Instruments

The Company applies fair value accounting for all financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers all related factors of the asset by market participants in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions, and credit risk.

See Note 19 for additional information.

 

(t)	Contingencies

Contingent liabilities may result from a variety of legal matters as well as from contingent consideration included in business combinations. Contingent liabilities are recorded for asserted and unasserted claims when it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. Contingent liabilities are disclosed when there is a reasonable possibility that the ultimate loss will exceed the recorded liability. Contingent consideration in a business combination is remeasured at fair value each reporting period until the contingency is resolved and any change in fair value, from either the passage of time or events occurring after the acquisition date, is included in earnings. Additionally, estimating the loss, or range of loss, associated with a contingency requires analysis of multiple factors, and changes in law or other developments may ultimately cause our judgments to change. Therefore, actual losses in any future period are inherently uncertain and may be materially different from our estimate.

 

(u)	Share-Based Payments

The Company operates equity settled stock-based remuneration plans for its eligible directors, officers, employees and consultants. All goods and services received in exchange for the grant of any stock-based payments are measured at their fair value unless the fair value cannot be estimated reliably. If the Company cannot estimate reliably the fair value of the goods and services received, the Company shall measure their value indirectly by reference to the fair value of the equity instruments granted. For transactions with employees and others providing similar services, the Company measures the fair value of the services by reference to the fair value of the equity instruments granted.

Equity classified share-based payments, including grants of employee stock options, are recognized in the financial statements based upon a grant-date fair value of an award. The fair value of stock options is estimated using the Black-Scholes option-valuation model. The Company recognizes the grant-date fair value in compensation expense on a straight-line basis over the requisite service period of awards that are ultimately expected to vest. Accordingly, stock-based compensation expense is reduced for estimated forfeitures. When estimating forfeitures, the Company considers voluntary termination behaviors as well as historical trends of actual option forfeitures. Non-market vesting conditions are included in the assumptions about the number of options that are expected to become exercisable. Estimates are subsequently revised if there is any indication that the number of share options expected to vest differs from the previous estimate. Any cumulative adjustment prior to vesting is recognized in the current period. No adjustment is made to any expense recognized in prior period if share options ultimately exercised are different to that estimated on vesting.

The fair value of restricted stock units is based on the closing price of Company’s stock as of the grant date. Compensation expense is recorded on a straight-line basis, by amortizing the grant-date fair value over the requisite service period of the entire award.

Liability classified equity awards, such as those settled in cash or a variable number of shares, are recognized as a liability in the financial statements and remeasured at each reporting period with changes in fair value included in earnings. The fair value of liability classified awards are estimated using the Black-Scholes option-valuation model each period.

 

F-15

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

(v)	Convertible Note Payable

At December 31, 2020 and 2019, the Company has a convertible promissory note with detachable warrants. Management evaluated the convertible note to determine whether the conversion feature required bifurcation from the host instrument, which management concluded it did not, and whether the conversion feature was a beneficial conversion feature, which similarly was concluded to not be beneficial. The debt is classified as conventional convertible debt. It is classified as a liability and is measured at amortized cost using the effective interest rate until it is extinguished upon conversion or maturity. The warrants were evaluated for equity or liability classification and determined to meet liability classification.

Transaction costs are included in the carrying value of the convertible debt liability and amortized over the estimated useful life of the debentures using the effective interest rate method.

 

(w)	Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for those deferred tax assets for which management cannot conclude that it is more likely than not that such deferred tax assets will be realized.

In determining the amount of the valuation allowance, estimated future taxable income, feasible tax planning strategies, future reversals of existing temporary differences and taxable income in prior carryback years, if a carryback is permitted, are considered. If the Company determines it is more likely than not that all or a portion of the remaining deferred tax assets will not be realized, the valuation allowance will be increased with a charge to income tax expense. Conversely, if the Company determines it is more likely than not to be able to utilize all or a portion of the deferred tax assets for which a valuation allowance has been provided, the related portion of the valuation allowance will be recorded as a reduction to income tax expense.

The Company records interest and penalties associated with uncertain tax positions as a component of income before taxes. Penalties and associated interest costs, if any, are recognized in general and administrative expenses in our Consolidated Statements of Operations. During the years ended December 31, 2020 and 2019, respectively, the Company recognized an immaterial amount of interest and penalties. The Company files income tax returns in the United States, various state jurisdictions, and Canada with varying statutes of limitations. The federal statute of limitation remains open for the 2017 tax year to the present. The state income tax returns generally remain open for the 2017 tax year through the present.

See Note 15 for additional information.

 

(x)	Start-Up Costs

Costs related to the start-up of new retail locations are expensed as incurred.

 

3.	Recently Adopted Accounting Pronouncements

In January 2017, the FASB issued Accounting Standards Update No. 2017-04 “Intangibles— Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”), which simplifies the accounting for goodwill impairment. ASU 2017-04 requires entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 under the current impairment test). The standard eliminates Step 2 from the current goodwill impairment test, which included determining the implied fair value of goodwill and comparing it with the carrying amount of that goodwill. ASU 2017-04 must be applied prospectively. The Company adopted the provisions of ASU 2017-04 as of January 1, 2020. See Note 2 for additional information.

 

F-16

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

We also adopted the following standards during the year ended December 31, 2020, which did not have a material impact on our financial statements or financial statement disclosures:

 

Date Issued		Standard		Effective Date
June 2016		ASU 2016-13, which, in addition to several clarifying ASUs, established the new ASC Topic 326, Financial Instruments — Credit Losses (“CECL”).		January 1, 2020
August 2018		ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (Topic 820)		January 1, 2020
August 2018		ASU 2018-15: Intangibles – Goodwill and Other – Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract		January 1, 2020

 

4.	Recently Issued Accounting Pronouncements

The following GAAP standards have been recently issued by the accounting standards board. The Company is assessing the impact of these new standards 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
December 2019		ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes		January 2021

 

5.	Discontinued Operations

Following the completion of the merger with Interurban Capital Group, LLC (formerly Interurban Capital Group, Inc.) (“ICG”) discussed in Note 11, 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 Consolidated Statements of Operations and the Consolidated Statement of Cash Flows.

 

F-17

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

The following table represents the financial results associated with discontinued operations as reflected in the Company’s Consolidated Statements of Operations:

 

		For the Year Ended December 31, 2020
Revenue, net of discounts		$	4,778
Cost of goods sold			(2,711	)
Gross profit			2,067
Expenses
General and administrative			1,622
Sales and marketing			46
Depreciation and amortization			1,057
Total expenses			2,725
Operating income (loss)			(658	)
Other (expense) income
Other (expense) income			(93	)
Interest expense			(717	)
Loss before taxes and non-controlling interest			(1,468	)
Income taxes			(308	)
Net loss from discontinued operations before non-controlling interest			(1,776	)
Net loss from discontinued operations, net of tax			1,278
Net loss attributed to Harvest Health & Recreation Inc.			(498	)

During the year ended December 31, 2019, cost of goods sold of approximately $0.6 million was included in discontinued operations.

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

 

		December 31, 2020				December 31, 2019
ASSETS
Inventory, net			93				—
Other current assets			33				—
Property, plant and equipment, net			1,747				1,183
Right-of-use asset, net			3,593				334
Intangibles assets, net			894				905
Other assets			225				22
Assets from discontinued operations			6,585				2,444
LIABILITIES
Lease liability, net of current portion			718				—
Liabilities from discontinued operations			718				—

 

6.	ACCOUNTS RECEIVABLE

The Company’s accounts receivable consisted of:

 

		December 31, 2020				December 31, 2019
Trade receivables		$	4,430			$	11,737
Other receivables			1,445				4,005
Total accounts receivable		$	5,875			$	15,742
Less: allowance for credit losses			(824	)			(3,595	)
Accounts receivable, net		$	5,051			$	12,147

 

F-18

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

As of December 31, 2019, the Company had amounts due from THChocolate LLC of $9.5 million, which represented 81% of total trade receivables. On October 30, 2020, all accounts receivable due from THChocolate, LLC were forgiven as part of the acquisition of THChocolate, LLC by Harvest and were included in the purchase consideration. See Note 11 for additional information.

The following is a roll-forward of the allowance for credit losses related to trade accounts receivable for the years ended:

 

		December 31, 2020				December 31, 2019
Beginning of period		$	3,595			$	3,274
Provision for expected credit losses(1)			171				2,522
Write-offs charged against allowance			(2,942	)			(2,201	)
End of period		$	824			$	3,595

 

(1)	The provision for expected credit losses is recorded in general and administrative expenses in the Consolidated Statement of Operations.

 

7.

INVENTORY

The Company’s inventory consisted of:

 

		December 31, 2020				December 31, 2019
Raw materials		$	12,632			$	11,219
Work in progress			5,634				4,887
Finished goods			19,718				12,999
Total inventory		$	37,984			$	29,105
Reserve			(1,122	)			(1,118	)
Total inventory, net		$	36,862			$	27,987

 

F-19

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

8.	NOTES RECEIVABLE

Notes receivable consisted of:

 

		December 31, 2020				December 31, 2019
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.		$	12,000			$	—
Secured promissory notes dated February 2020 in the principal amount of $13.5 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.			13,471				—
Secured convertible promissory note, created from pending acquisition, dated December 31, 2019 in the principal amount of up to $30.0 million with maturity date of December 31, 2020; principal is due at maturity. Interest rate of 9.0% per annum, due at maturity.(2)			—				30,000
Secured promissory note, created from the Verano acquisition, dated September 4, 2019 in the principal amount of up to $16.0 with maturity date of September 4, 2020; principal is due at maturity. Interest rate of 5.0% per annum, due at maturity.(3)			—				8,000
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.(4)			456				11,625
Secured promissory notes, created from a pending acquisition, dated October 2018 to August 2019 in the principal amount of $10.1 million with maturity date contingent upon closing of proposed transaction; principal is due at maturity. Interest rate of 12% per annum, due at maturity.(5)			—				10,100
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				25,390
Secured promissory note dated May 3, 2019 in the principal amount of $0.1 million with maturity date of May 3, 2020; principal is due at maturity. Interest rate of 4% per annum, due at maturity.(3)			—				75
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				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.(6)			3,581				3,581
Unsecured promissory note, created from a pending acquisition, dated November 14, 2018, in the principal amount of $1.8 million with maturity date of December 31, 2021; principal is due at maturity. Interest rate of 8% per annum with interest payments due quarterly, beginning March 31, 2019.(3)			—				1,776
Gross notes receivable			79,532				115,046
Less: provision for impairment of notes receivable			(29,713	)			(29,267	)
Total notes receivable, net of allowance			49,819				85,779
Less: current portion of notes receivable			(31,608	)			(51,349	)
Notes receivable, long-term portion		$	18,211			$	34,430

 

(1)

These notes were issued by Falcon in connection with the Falcon Merger Agreement described in Note 20 (the “Falcon Notes”). In connection with the Falcon Lawsuit, described in Note 20, the Company is seeking restitutionary damages from Falcon and its shareholders including repayment of the Falcon Notes. During the year ended December 31, 2019, the Company recorded a provision for impairment of $32.5 million, including interest of $1.2 million related to the Falcon Notes and other amounts for license purchases. Of the principal balance of the Falcon Notes, $28.9 million is impaired and is noted in the table above.

(2)	This note was settled in the acquisition of GreenMart. See Note 11 for additional information.

 

F-20

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

(3)	This note was repaid during the year ended December 31, 2020.

(4)	$10.4 million of these notes were settled in the acquisition of Franklin Labs (see Note 11 for additional information) and a $0.8 million note was repaid during the year ended December 31, 2020.

(5)	These notes were settled as part of the Devine Lawsuit settlement. See Note 20 for additional information.

(6)

These notes are currently in default. The Company is negotiating a settlement agreement with the debtor and, at this time, expects to receive the full principal balance. The Company’s provision for expected credit losses for the year ended December 31, 2020 includes $0.3 million related to these notes. See Note 21 for additional information.

The following is a roll-forward of the allowance for credit losses related to notes receivable for the years ended:

 

		December 31, 2020				December 31, 2019
Beginning of period		$	29,267			$	—
Provision for expected credit losses, net of recoveries(7)			446				29,267
Write-offs charged against allowance			—				—
End of period		$	29,713			$	29,267

 

 

(7)	The provision for expected credit losses of notes receivable is recorded in contract asset impairments in the Consolidated Statement of Operations.

Stated maturities of the notes receivable are as follows:

 

Year Ending December 31,		Expected Principal Payments
2021		$	61,158
2022			7,676
2023			802
2024			784
2025			9,112
2026 and Thereafter			—
		$	79,532

 

9.	PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of:

 

		December 31, 2020				December 31, 2019
Land		$	19,108			$	17,952
Buildings and improvements			127,423				66,203
Furniture, fixtures and equipment			26,488				16,477
Assets under construction			23,954				56,729
Total property, plant and equipment, gross		$	196,973			$	157,361
Less: accumulated depreciation			(20,146	)			(7,520	)
Property, plant and equipment, net		$	176,827			$	149,841

Assets under construction represent construction in progress related to both cultivation and dispensary facilities not yet completed or otherwise not placed in service.

The Company recorded depreciation expense of $9.2 million for the year ended December 31, 2020 ($3.3 million included in cost of goods sold and $5.9 million included in depreciation and amortization, in the Consolidated Statements of Operations) and $5.4 million for the year ended December 31, 2019 ($2.4 million included in cost of goods sold and $3.0 million included in depreciation and amortization, in the Consolidated Statements of Operations). Depreciation periods are based on management’s estimates at the date of acquisition.

 

F-21

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

Right-of-use assets for finance leases are included within building and improvement and accumulated depreciation. See Note 10 for additional information.

The Company recorded impairments of $0.7 million and $7.8 million in the year ended December 31, 2020 and December 31, 2019, respectively. The $0.7 million fixed asset impairment was for tenant improvements, furniture and fixtures the Company planned to use while performing services under the service agreements with the licensees of the Washington locations obtained in the ICG Merger. The service agreements were terminated on November 9, 2020 as part of a legal settlement between the Company and the owners of the Washington locations. The Company does not currently have an alternate use for the fixed assets and the impairment was based on the full net book value of the fixed assets. The $7.8 million was comprised of a $5.0 impairment for land, building and improvements the Company planned to use for the cultivation and production of cannabis in Pennsylvania that was abandoned following the Pennsylvania Department of Health’s denial of the renewal of a grower/processor permit required to operate that facility. The impairment was based on a probability weighted estimate of the cash recoveries. The remaining impairments of $2.8 million were for machinery and equipment that were purchased in anticipation of rapid growth, which no longer have a use and were impaired based on a probability weighted cash recovery estimate.

 

10.

LEASES

The Company primarily leases space for corporate offices, retail, cultivation and manufacturing under non-cancellable operating leases with initial terms typically ranging from 1 to 20 years. The Company had two finance leases at December 31, 2020.

The following table presents assets and liabilities within the Consolidated Balance Sheet:

 

Lease and Classification		December 31, 2020				December 31, 2019
Operating Leases:
Right-of-use asset, net		$	66,464			$	58,766
Lease liability, current portion		$	3,041			$	2,672
Lease liability, net of current portion		$	64,232			$	54,264
Finance Leases:
Property, plant and equipment, net(1)		$	5,523			$	423
Other current liabilities		$	5,504			$	160
Other long-term liabilities		$	—			$	179

 

(1)	Finance lease assets are recorded net of accumulated amortization of $0.1 million and <$0.1 million for the year ended December 31, 2020 and December 31, 2019, respectively.

The following amounts were recognized within the Consolidated Statements of Loss:

 

		Year Ended December 31,
		2020				2019
Operating lease expense		$	11,476			$	7,820
Interest on lease liabilities		$	448			$	65
Expenses related to short-term leases		$	1,623			$	594
Expenses related to variable payments		$	1,001			$	579
Sublease income		$	1,563			$	48

 

F-22

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

Other information:

 

		Year Ended December 31,
		2020				2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	5,929			$	5,100
Operating cash flows from finance lease		$	448			$	65
Financing cash flows from finance leases		$	31			$	1,842

The Company’s lease terms and discount rates were as follows:

 

		December 31, 2020				December 31, 2019
Weighted average remaining term (in years):
Operating			11.1				10.4
Finance			0.1				6.9
Weighted average discount rate:
Operating			11.49	%			10.00	%
Finance			12.90	%			10.00	%

Maturity of lease liabilities were as follows:

 

		Operating				Finance
2021		$	11,841			$	5,512
2022			11,283				—
2023			10,919				—
2024			10,674				—
2025			10,421				—
Thereafter			73,724				—
			128,862				5,512
Impact of discount			(61,589	)			(8	)
Lease liability at December 31, 2020			67,273				5,504
Less: lease liability, current portion			(3,041	)			(5,504	)
Lease liability, net of current portion		$	64,232			$	—

 

11.	ACQUISITIONS/DIVESTITURES

The Company has determined that the acquisitions discussed below are business combinations under ASC 805. They are accounted for by applying the acquisition method, whereby the assets acquired and the liabilities assumed are recorded at their fair values with any excess of the aggregate consideration over the fair values of the identifiable net assets allocated to goodwill. Operating results have been included in these consolidated financial statements from the date of the acquisition. Any goodwill recognized is attributed based on reporting units.

 

F-23

HARVEST HEALTH & RECREATION INC.

Notes to the Consolidated Financial Statements

(Amounts expressed in thousands of United States dollars unless otherwise stated)

 

 

The following is a preliminary summary of the purchase consideration transferred and allocation of the consideration to the estimated fair value of each acquired acquirees’ assets acquired and liabilities assumed for the Company’s business combinations that occurred during the year ended December 31, 2020:

 

		Year Ended
		December 31, 2020
Purchase price allocation		THChocolate				GreenMart				ICG				AZNS				Franklin Labs				Total				Adjustments
Identifiable assets acquired:
Cash		$	1			$	121			$	1,057			$	—			$	92			$	1,271			$	146
Restricted cash			—				—				1,050				—				—				1,050				—
Accounts receivable			1,278				82				187				—				11				1,558				(2,235	)
Inventory			1,378				797				513				3,922				786				7,396				398
Other current assets			115				99				382				—				—				596				—
Property, plant and equipment			754				370				10,878				8,064				6,874				26,940				(93	)
Right-of-use assets for operating leases			—				12,051				27,728				950				—				40,729				6,467
Derivative and other assets			30				38				6,430				74				5,717				12,289				5,178
Intangibles assets
Licenses and permits			9,047				30,261				—				33,761				28,989				102,058				—
Other			—				—				11,500				—				—				11,500				—
Goodwill			2,524				13,172				15,458				4,737				10,862				46,753				1,715
Assets held for sale			—				—				8,500				—				—				8,500				—
Liabilities assumed:
Other current liabilities			—				(271	)			(2,813	)			—				(6,531	)			(9,615	)			(5,952	)
Operating lease liabilities			—				(12,051	)			(27,728	)			(950	)			—				(40,729	)			(6,699	)
Notes Payable			—				—				(18,500	)			(3,897	)			—				(22,397	)			634
Deferred tax liability			(2,319	)			(7,997	)			(5,300	)			(6,618	)			(8,584	)			(30,818	)			846
Net assets acquired		$	12,808			$	36,672			$	29,342			$	40,043			$	38,216			$	157,081			$	405
Cash		$	—			$	—			$	—			$	2,950			$	15,400			$	18,350			$	—
Fair value of MVS issued			—				—				29,342				30,443				—				59,785				—
Settlement of indebtedness, receivables and deposits			12,808				31,672				—				—				12,816				57,296				405
Issuance of notes payable			—				—				—				6,650				10,000				16,650				—
Contingent consideration arrangement			—				5,000				—				—				—				5,000				—
Total consideration transferred		$	12,808			$	36,672			$	29,342			$	40,043			$	38,216			$	157,081			$	405
Consideration paid in cash		$	—			$	—			$	—			$	2,950			$	15,400			$	18,350
Less: Cash acquired			(1	)			(121	)			(2,107	)			—				(92	)			(2,321	)
Net cash outflow		$	(1	)		$	(121	)		$	(2,107	)		$	2,950			$	15,308			$	16,029

The goodwill recognized for each acquisition listed above consists largely of the synergies and economies of scale expected from combining the operations of the businesses. These synergies include the access into a new market and the use of the Company’s existing commercial infrastructure to expand sales. None of the goodwill is expected to be deductible for tax purposes.

Measurement period adjustments

Where provisional values are used in accounting for a business combination, they may be adjusted in subsequent periods, not to exceed twelve months. The primary areas of the purchase price allocations that are subject to change relate to the fair values of certain tangible assets, the valuation of intangible assets acquired and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired at each acquisition date during the measurement periods.

 

F-24