The big news on the day of earnings release was the acquisition of HARV by TRUL. Molly thinks TRUL got themselves a good buy. And given CEO Rivers took HARV off the market prior to these rather good earnings, she likely save herself some money.

A helpful graphic from MJ Biz.

Florida they will likely have to disgorge HARV assets due to ownership restrictions.

We will leave the guidance up for the year, or until merge.

Guidance from Q4F 2020 CC:

• Turning now to our outlook, we are introducing our 2021 full-year revenue target of $380 million. The 2021 revenue target includes continued growth driven by retail dispensary openings, same store sales growth, recreational sales in Arizona and expanded cultivation and manufacturing operations. For the first quarter of 2021, we expect to report revenue of at least $87 million. We expect gross margins to continue to improve overall with some quarterly fluctuations due to product and market mix.
• And as we said in the last call, our goal is to have our gross margins in the high 40% to 50% range.

Progress against guidance:  Sales annualized are at tracking at 93%.  GM of 54%.

Let’s look at Harvest Health fundamental financial metrics from their latest quarter.

Earnings release.

Income Statement Drivers & Breakeven: Trend US GAAP.

How they describe their operations:

• Cultivation – Harvest grows cannabis in outdoor, indoor and greenhouse facilities. Its expertise in growing enables the Company to produce proprietary strains in a highly cost-effective manner. Harvest sells its products in Harvest dispensaries and to third parties.
• Processing – Harvest converts cannabis biomass into formulated oil using a variety of proprietary extraction techniques. The Company uses some of this oil to produce consumer products such as vaporizer cartridges and edibles, and it sells the remaining oil to third parties.
• Retail dispensaries – Harvest operates and provides services to retail dispensaries that sell proprietary and third-party cannabis products to patients and customers.

Total Stores: 37 -1 QoQ

• Arizona: 15 dispensaries supported by cultivation facilities in Camp Verde, Phoenix and Wilcox, and processing and manufacturing facilities in Phoenix. Expanding cultivation. Largest retail presence in state.
• Florida: 6 dispensaries supported by cultivation indoor, outdoor and processing facility. Cannot wholesale in FLA.
• Maryland: 3 dispensaries, 4 is maximum. Net wholesaler in state. Anticipate expansion of cultivation and processing in 2020.
• Pennsylvania: 9 dispensaries (+1 QoQ), 15 is maximum. Expanding cultivation and manufacturing operations to alleviate product supply constraints, enhance margins and support the opening of additional retail locations in 2020 and 2021.
• California: 4 dispensaries
• Colorado: purchased chocolate processor.

Sold North Dakota and 2 stores.

Sales Table:

Revenue aggregated $89 million a +27% increase or +$18.9 million for the Q. Revenue has three components:

• Retail $78 million +48% QoQ or +$25 million.                    Mix 87% +12% QoQ
• Wholesale $9.2 million -17% QoQ or -$1.9 million.           Mix 10% -6% QoQ
• Licensing $1.9 million -70% QoQ or -$4.4 million.              Mix 2% -7% QoQ

Cultivation and processing assets: AZ, FL, NV, MD, PA, CO, UT

Retail Revenue: Peer & Trend

Retail revenue topped CL but we are still awaiting their Q1F21.

Retail revenue is generated from 37 dispensaries (-1 QoQ) in AZ 15, CA 4, FL 6, MD 3, PA 9 (+1) and sold ND -2.  They unloaded Washington services contracts.

Retail revenue per average stores opened in the Q increased to $2.4 million from $1.9 million or +27% QoQ.  AZ opened for adult rec in late January.  They have 15 dispos (41% of total dispos) in AZ.  I would think the bulk of increase is from AZ. 

They are no longer providing YOY same store sales growth figure.

Pennsylvania seems to be a hot state for HARV as well, as they opened one more last Q and two the prior Q. Not at cap yet but with TRUL acquisition they will be at cap.  They were looking to expand cultivation as the state is supply constrained.

From MDA on licensing revenue: “Revenue growth during the quarter was partly offset by the divestiture of retail assets in Arkansas and North Dakota and a decline in licensing fees due to the cancelation and restructuring of margin dilutive contracts at the end of 2020.”  The WA contracts were purged.

Wholesale Revenue: Peer & Trend

Wholesale revenues decrease $1.9 million QoQ and decreased to $9.3 million. No narrative is provided from the MDA. It could be they were directing more of their product through their own retail stores.

Annualized Sales per $ of Property, Plant & Equipment plus Goodwill/Intangibles

This is our attempt to try and compare the organic growth companies (eg. TRUL and LHS) with the companies that are going organic plus “roll up” route.  The idea is that when a company purchases another company and instead of getting lots of PPE they are instead paying G/I to get a head start in the market. 

For the Q HARV evidenced an increase from $0.50 to $0.65 in this metric.  The numerator increased $18 million (annualized $96 million) with the denominator (PPE and G/I) decreased by $15 million. 

They are 5^th in this metric +2 spots QoQ, surpassing CURA, CWEB, AYR, LHS, MMEN and ACRG.

A very good trend line.

Income Statement Drivers & Breakeven: Peer

 Harvest is 5^th by revenue in the above group. No change in ranking from last Q.

Gross Margin: USA Peer & Trend

Harvest GM% improved to 54% in Q from 45% last Q.  Narrative is light on this. The surge in higher margin retail had to be the driver.

GM increased to $48 million or +$17 million QoQ.

This is interesting they provided GM segmentation for the F2019 and F2020 and provided quarterly for first time.

• Retail:                 F2020 49% vs 41% F2019                           Q1F21 55%
• Wholesale:         F2020 40% vs 20% F2019                           Q1F21 42%
• License:              F2020 38% vs 16% F2019                           Q1F21 86%

This is a nice addition to Q reporting.

Annualized GM $’s divided by Property, Plant and Equipment and Goodwill + Intangibles

As per the Annualized Sales version of this graph we are seeing how effective at GM generation the peer set has been. 

Harvest is generating $0.35 of annualized GM for each $1 they have spent on PPE and G/I. This is a $0.13 improvement over last Q.

Previous Q Harvest ranked 9^th in this metric. We said…  With AZ ramping they should distance themselves from MMEN and ACRG. This Q tied for 3^rd with CURA.

Gross Margin: USA Peer

Harvest ranks tied for 7^th amongst their USA peer group.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

NOTE: I have moved impairment of fixed assets to Other to maintain peer comparability.

The previous Q Selling expenses doubled to $1.6 million QoQ +$0.8 million.  They were preparing for AZ launch was reason given. This Q Selling expenses are down $0.7 million.

G&A increased by $1.0 million to $26.3 million and decreased to 31% of sales. I think they had a bunch of true-ups in Q4.

SBC increased to $4.9 million an increase of $0.7 million QoQ.  

SGA and SBC are 31% of revenue an improvement from 39% last Q.

Depreciation of $2.5 million, up from $2.0 million QoQ.   

Overall Opex was $35 million or 39% of sales, an increase of $2 million QoQ.

NOP was +$13 million (first +Q when IFRS voodoo is removed from prior periods) versus -$1.7 million last Q.  Increase in GM was slightly offset by increase in Opex.

Other Income and expenses total -$29 million versus negative $7 million last Q, and include:

• Interest expense of $8.7 million versus $13.1 million QoQ.
• Gain on sale of assets was $1.7 million from ND
• -$24 million Fair Value of Liability Adjustment vs -$14 million last Q.  These are the stock warrant liabilities.
• Other Income was $1.5 million versus $7 million last Q and no narrative is given as to reason.

Tax was a of $6.4 million versus a credit of $1.5 million last Q.

Net Income for the Q was negative $23 million versus negative $7.3 million last Q.

SGA & SBC as a % of Sales: Peer

Middle of the pack.

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

Using current GM% and OPEX$’s, they would need 72% of current sales to achieve +NOP. A big improvement over last Q’s +6% in incremental sales needed to break even.

+Net Operating Profit 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. And if they are not going to provide disclosure to evaluate them, I will not add them back. Store opening expenses are going to be prevalent for a while, so why back them out?

I did not back out their expansion expense (pre-open) and Transaction & other Special Charges of $5.1 million.

I have Harvest at positive EBITDA $21 million an impressive increase from the $5 million last Q.

GM driven from increase in retail sales the driver.

+EBITDA Quarterly Breakeven Sales: USA Peer

Harvest produced a +EBITDA in the Q.  At current GM% and cash Opex they are EBITDA breakeven at 57% of existing sales.

+EBITDA Quarterly Breakeven Sales: North American Peer

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

Here is our new metric.  It is meant to show how much cash went into the bank account from operations after Interest and Taxes are serviced.  Essentially EBITDA without the I + T added back. 

Harvest joins the positive crew that are putting money from operations into the bank each Q. +$5 million up from -$6 million last Q.

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

This metric flipped to positive 6% from -9% QoQ.

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

US GAAP.

Inventory levels increased during the Q by $8 million to $45 million, and they converted more of same into FG (or purchased for retail from others) with +$4.9 million in Q.  With increase in sales and increase in FG it shows good throughput.  They will need good throughput as they have a Q’s worth of inventory on hand.

“Waterfall”- Peer

I’ll start peer comparing again when we get more US GAAP filers.

Cash increase QoQ by $29 million to $107 million. They had a sale lease back of $22 million and received $7 million from equity (likely the warrants that went out at last raise).

Corporate Investments increased $22 million to $41 million. This is the new Falcon settlement result. They received 10% of Falcon with option to increase at $1.91/share.

PPE decreased $15 million to $162 million with the sale leaseback. ROU increased $38 million and lease liabilities increased a similar amount.

Note Payable current portion increased by $9 million to $30 million as some migrated up from long term.

Income tax payable increase $9 million to $30 million.

Warrant liability increased $16 million to $37 million.

In Closing:

They got the anticipated lift from AZ opening adult use where they have a dominant share of market.  The Sales at higher retail margins drove through the income statement and produced strong improvement in NOP and EBITDA.

They also flipped to a surplus cash generated from operations after interest and tax.

A good Q from Harvest and soon to be TRUL. CEO Rivers took them off the market before these results were released.  She might have had to pay more if her timing was off.

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.