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Harvest Health September 30, 2019 – “Quarter in Pictures”

Originally published December 3, 2019

Let’s look at Harvest Health fundamental financial metrics from their September 30, 2019 quarter.

Earnings release  

Income Statement Drivers & Breakeven: Trend

Sales increased QoQ +25% to $33 million on the backs of opening another 10 dispensaries for a total of 26 throughout 6 states. Arizona added 3; ND and CA added 2 each; Maryland, Pennsylvania and Florida added 1 each.  Maryland also added a processing facility.

From MDA

Three transactions are pending: Verano, Falcon, and CannaPharmacy.

Income Statement Drivers & Breakeven: Peer

Harvest is 6th in Revenue amongst MSOs.

Gross Margin: USA Peer & Trend

Harvest GM% improved to 35% in Q. No narrative is provided. I would hazard a guess that they are working through inventory acquired via acquisition which has no Gross Margin. As they sell that acquired inventory they will get “normal” GM % on future.

GM in absolute terms was $12 million up from $7 million last Q.

Gross Margin: USA Peer

Harvest ranks last in GM% amongst MOS’s.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

Selling expenses increased by $1.1 million and inched up as % of sales to 9%

G&A increased $7.2 million and increased to 95% of sales. G&A is $31 million, greater than sales.  Professional Fees of +$5 million to $11 million and Salaries and Benefits of +$2.8 million to $14 million were the largest increases.

SBC decreased as % of sales to 23% and decreased $0.3 million to $7.7 million.

SGA and SBC are 126% of revenue.

Overall Opex was $46 million or 149% of sales, an increase from $27 million last Q.

SGA & SBC as a % of Sales: Peer

Combined SGA as a % of sales has Harvest better than MMEN, Acreage and similar to iAnthus.

Aggregate SGA and SBC has Harvest behind only MMEN, Acreage and iAnthus

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

Harvest would need incremental sales of 297% quarterly to achieve +NOP using current GM% and OPEX$’s.

+Net Operating Profit Quarterly Breakeven Sales: North American Peer

+EBITDA Quarterly Breakeven Sales: USA Peer

Harvest would need incremental sales of 188% quarterly to achieve +EBITDA using current GM% and OPEX$’s. This is the worst in the Peer Group.

+EBITDA Quarterly Breakeven Sales: North American Peer

EBITDA Trend and Peer

My EBITDA is different from theirs as they pull out items that are not line item listed elsewhere.

I have Harvest at negative EBITDA $22 million a deterioration from negative $15 million last Q.  Their adj EBITDA was negative $11 million this Q and negative $2.2 million last Q.

The GM uptick of $5 million was not sufficient to overcome increase in cash based OPEX for the Q of +$10 million.

Harvest has the second worst EBITDA in US MSO Peer Group only ahead of MedMen.

“Waterfall”- Trend  [Sales, Bio Assets, Inventory, WIP, FG]

Inventory levels were drawn down during the Q and are only $3 million greater than Q sales at Q end. A small FG inventory delta is present but did not keep pace with sales growth.

“Waterfall”- Peer

Inventory is in lower range of peer group, greater than GTII and iAnthus.

Cash reduced $72 million to $18 million.  This is a $100 million decrease over two Q’s.  They have added $65 million in combined Goodwill and Intangibles and $91 million in PPE over that period.

They cancelled a $225 million secured term loan financing on November 20, 2019.  Cash will be required given negative EBITDA and +$5 million in interest expense not to mention maturities within the next 12 months of $14 million.

From MDA

Harvest is in a precarious position and will raise cash in a bear market.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in Harvest and will not start one in the next five days.