Harvest One Provides Strategic Update and Announces Q2 2020 Financial Results

Published: March 4, 2020

Harvest One Provides Strategic Update and Announces Q2 2020 Financial Results

Harvest One Cannabis Inc. announced its financial and operating results for the three and six months ended December 31, 2019, as well as an update on the Company’s strategic plan.

Update on Strategic Plan

On November 26, 2019, the Company announced a strategic plan to refocus on the Company’s core strengths of product development, brands and distribution, while also committing to significant cost reductions and a targeted approach to capital investment.

“In light of industry challenges, Harvest One realigned its strategy to focus on our core strengths of brands and distribution and undertook significant cost cutting initiatives to rightsize the organization. We anticipate a strong rollout of our Cannabis 2.0 products, specifically our LivReliefcannabinoid-infused topical creams, which are in strong demand from retailers,” said Grant Froese, Chief Executive Officer of Harvest One.

Mr. Froese continued, “We remain focused on solidifying our balance sheet with additional sales of non-core assets and continuing to evaluate various financing alternatives. We are confident that we are taking all the necessary steps to reduce costs and move the Company towards profitability.”

Sale of non-core assets
As recently announced on February 26, 2020, the Company successfully closed the sale of its 19.99% interest in Burb Cannabis Corp., a private cannabis retailer based in British Columbia, for cash proceeds of $1.5 million and entered into a definitive agreement to sell its interest in its 398-acre site in Lillooet, British Columbia for cash consideration of $770,000.

The Company is also in discussions to divest its 50.1% interest in the Greenbelt Greenhouse facility located in Hamilton, Ontario, which would provide additional capital to the Company and allow the Company to focus on the growth of its core businesses in Cannabis 2.0, product branding and international distribution.

Cannabis 2.0 Products
Harvest One’s initial Cannabis 2.0 product offerings include a selection of pain relief topical creams and vape pen cartridges. Products have undergone the necessary Health Canada notifications and are currently in the process of being listed  in OntarioBritish ColumbiaAlbertaSaskatchewan and Manitoba. All five provinces have completed registrations and the Company is currently working through final arrangements with a production partner to finalize its product launch. Products are expected to be available later this quarter.

Satipharm Gelpell – Canadian Production
In November 2019, the Company received permission from Health Canada to import Satipharm’s 10mg CBD Gelpell® capsules into Canada for research and development purposes. The Company also continues to prepare for a launch of Satipharm’s CBD Gelpell® capsules into Canada and is working through the necessary arrangements with Gelpell®. The development of this business will be a key element of future growth for Harvest One, pending obtaining sufficient financing.

US Distribution of non-infused LivRelief
Delivra has two US Food and Drug Administration (“FDA”) approved LivRelief™ topical pain relief SKUs. Initial US online sales commenced on Amazon in January, 2020, and the Company continues to leverage its extensive US Dream Water distribution network to rollout US LivRelief™ distribution with major retailers across the US.

US distribution of CBD-infused Dream Water and LivRelief™
Harvest One continues to await clarification from the FDA in regards to both CBD-infused topicals and ingestibles. The Company has completed the necessary formulation and development work to move forward with the distribution of such products in the US once the regulatory environment in the US allows.

Cost Reduction Plan
Since November 2019, the Company has undertaken a number of initiatives which are expected to contribute to a 30% reduction in selling, general and administrative (“SG&A”) expenses on an annualized basis.  These initiatives include: (i) an overall reduction in workforce by over 20%; (ii) a comprehensive salary reduction program at the senior management level; (iii) the downsizing and consolidation of corporate offices; and (iv) the implementation of remote workforce programs. These cost reduction efforts have already positively impacted cash SG&A expenses in Q2 2020. The Company expects cash SG&A expenses to continue to decrease throughout the remainder of the 2020 fiscal year.

Capital Investment Optimization
In order to focus capital on the support of its existing operations, the Company has suspended active development at its Lucky Lake and Mission Road facilities.  The Lucky Lake facility has been fully redesigned in support of the Company’s renewed focus on Cannabis 2.0 products and distribution, while Mission Road Phase 1 expansion has been completed and licensed.  Additional investment in these facilities remains an attractive strategic option, subject to obtaining suitable financing to support further development.

Summary of Key Financial Results

Three months ended December 31

Six months ended December 31

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(1)Adjusted EBITDA is a non-GAAP measure defined as loss from operations before interest, taxes, depreciation and amortization adjusted for fair value items and other non-cash items, as reconciled in the Management’s Discussion and Analysis for the three and six months ended December 31, 2019 (the “Q2 2020 MD&A”).

Financial  Commentary

Net revenues from our cultivation division were negatively impacted due to industry wide factors. The decrease in net revenue was primarily attributable to product returns, pricing adjustments and reduced provincial orders in comparison to the prior year. Despite this, our consumer division continued to show steady results with 11% revenue growth over the previous quarter. The Company has also made significant progress on reducing its overall SG&A expenses with cash expenses decreasing compared to the previous quarter, after adjusting for one-time items. The decrease is a result of the implementation of cost reduction initiatives mid-way through Q2 2020 as previously discussed. Q2 2020 expenses were impacted significantly by $9.9 million in non-cash impairment charges in the cultivation and consumer divisions.

Q3 2020 Outlook
Sales volumes to date in Q3 2020 have improved significantly from Q2 2020, most notably at United Greeneries.  Both dried and bulk flower sales have increased significantly and Cannabis 2.0 sales are expected to be reflected in our Q3 2020 results as a result of strong demand from both our retail and provincial cannabis store partners. Revenues from our consumer and medical divisions are also expected to show steady quarter-over-quarter growth.