Guidance from 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.

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

Another company transitions to US GAAP!

Earnings release.

Below are their acquisitions for F2020.

And here is the contribution those acquisitions made in F2020.

Interurban was aborted and litigation ensued (very Harvest), so we have not listed it above. In F2020, they purchased $128 million in acquisitions of which 104% was goodwill and intangibles. These acquisitions contributed $48 million in revenue and net losses of $5.8 million. A full year would have seen an additional $16 million in sales and increase in losses of $3.7 million.

With Arizona kicking of adult sales in late January 2021, the Az assets should have an opportunity to scale. They are indicating that their AZ stores are seeing a 100% increase in revenue.  I would caution readers that Arizona is not Illinois in terms of impact, as population is half the population of IL and medical cost per gram are considerably less in AZ than IL.

Income Statement Drivers & Breakeven: Trend

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.

Four core markets account for +85% of the business:

Total Stores: 38 +1 QoQ

• Arizona: 15 ( QoQ) 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: 8 dispensaries (+2 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 post Q end and sold Arkansas in Q4F2020.

Sales Table:

Revenue aggregated $70 million a +13% increase or +$8.3 million for the Q. Revenue has three components:

• Retail $52 million +13% QoQ or +$6.2 million. Mix 75% +0% QoQ
• Wholesale $11.2 million +30% QoQ or $2.6 million. Mix 16% +2% QoQ
• Licensing $6.3 million -7% QoQ or -$0.5 million. Mix 9% -2% QoQ

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

Retail Revenue: Peer & Trend

Retail revenue is generated from 38 dispensaries (+1 QoQ) in AZ 15, CA 4, FL 6, MD 3, ND 2, PA 8 (+2) and sold AR -1.  They also manage 5 stores in Washington, which I imagine is the licensing revenue.

Retail revenue per average stores opened in the Q increased to $1.9 million from $1.7 million or +9% QoQ.

From their Presser:

• YoY stores open in the Q was 26 and sales increased in comparable Q +57%
• QoQ stores open in the Q was 34 and sales increased in previous Q +7%

Pennsylvania seems to be their hot state right now, as they opened two more last Q.  They are looking to expand cultivation as the state is supply constrained.

MDA gives a nice YoY 12-month summary of sales increase:

• $46.7 million of the increase due to the full year benefit in 2020 of the opening of 16 new stores during 2019 in Arizona, California, Florida, North Dakota and Pennsylvania;
• $23.6 million of the increase due to the full year benefit in 2020 of the acquisition of five new stores during 2019 in Arizona, California and Maryland;
• $14.1 million of the increase due to same store sales from ten locations in Arizona, Florida and Maryland;
• $12.9 million of the increase due to the acquisition of three new stores during 2020 in Arizona and
• $6.7 million of the increase due to the opening of five new stores during 2020 in Arizona, Arkansas and Pennsylvania.

Wholesale Revenue: Peer & Trend

Wholesale revenue increase $2.6 million QoQ and increased to $11 million. No narrative is provided from the MDA, but they indicate Maryland is a strong wholesale market for them.

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 $0.45 to $0.50 in this metric.  The numerator increased $8 million (annualized $32 million) with the denominator (PPE and G/I) increased by $21 million. 

They are 7^th in this metric, surpassing AYR, LHS, MMEN and ACRG.

Income Statement Drivers & Breakeven: Peer

 Harvest is 5^th by revenue in the above group.

Gross Margin: USA Peer & Trend

Harvest GM% backslid to 45% in Q from 47% last Q.  Narrative is light on this. Given mix tilted marginally in favor of retail QoQ, where they sell other suppliers products too, would likely be part of the reason.

GM increased to $31 million or +$2 million QoQ.

This is interesting they provided GM segmentation for the F2019 and F2020, but not quarterly.

• Retail: F2020 49% vs 41% F2019
• Wholesale: F2020 40% vs 20% F2019
• License: F2020 38% vs 16% F2019

Nice improvement in their two growth areas. If Licensing is Washington’s 5 dispensaries, it looks like competition is eroding profits.

Certainly would be nice if they provide this quarterly.

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 $0.22 of annualized GM for each $1 they have spent on PPE and G/I. This is a $0.01 improvement over last Q.

Harvest ranks 9^th in this metric tied with MMEN and ACRG.  With AZ ramping they should distance themselves from MMEN and ACRG.

Gross Margin: USA Peer

Harvest ranks tied for 9^th amongst their USA peer group, only CWEB was worse.

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.

Selling expenses doubled to $1.6 million QoQ +$0.8 million.  They were preparing for AZ launch was reason given.

G&A increased by $4.6 million to $25.3 million and increased to 36% of sales. I think they had a bunch of true-ups in Q4 because I am showing G&A going up $12 million when I back out 9 month YTD from full year.  As example, rent and Occupancy alone went up $11 million alone in the Q to $13 million, which looks way off.

SBC increased to $4.1 million an increase of $2.9 million QoQ.  

SGA and SBC are 44% of revenue a slide from 37% last Q.

Depreciation of $2.0 million, down from $3.6 million QoQ.  It looks like $0.8 million of depreciation slid into CoGS in the Q.

Overall Opex was $33 million or 130% of sales, an increase of $6 million QoQ.

NOP was -$1.7 million versus IFRS adjusted +$2.3 million last Q.  Increase in GM was offset by increase in Opex.

Other Income and expenses total -$7 million versus negative $13 million last Q, and include:

• Interest expense of $13.1 million versus $13.2 million QoQ… 42% of GM is going to interest service. Ouch!
• Gain on sale of assets was $12 million from Arkansas
• -$14 million Fair Value of Liability Adjustment.  These are the stock warrant liabilities.
• Other Income was $7.0 million versus nil last Q and no narrative is given as to reason.
• Contract impairment reversal $1.7 million

Tax was a credit of $1.5 million versus a debit of $0.2 last Q.

Net Income for the Q was negative $7.4 million versus negative $1.8 million last Q.

SGA & SBC as a % of Sales: Peer

Middle of the pack.

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

Harvest backslid from +NOP to -NOP of -$1.7 million in the Q. Using current GM% and OPEX$’s, they would need +6% of current sales to achieve +NOP.

+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 $3.7 million.

I have Harvest at positive EBITDA $5.2 million a decrease from the $7.1 million last Q.

The SGA cost increases were the largest contributor and outweigh the improved absolute GM.

+EBITDA Quarterly Breakeven Sales: USA Peer

Harvest produced a +EBITDA in the Q.  At current GM% and cash Opex they are EBITDA breakeven at 83% 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, with large interest bill, remains negative at -$6.4 million.

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

This metric remained at -9% QoQ.

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

Switch to US GAAP removes the IFRS fluff.

Inventory levels decreased during the Q by $4 million to $37 million, and they converted more of same into FG with +$3.6 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 $12 million to $78 million. They had a raise of $32 million which included ½ warrants.  Sold Arkansas for $13 million in cash.

From presser:

• On November 2, 2020, Harvest announced a settlement agreement with Devine Holdings. Under the terms of the agreement, Harvest acquired three vertical medical cannabis licenses in Arizona exchange for the repayment by Devine Holdings of an outstanding $10.45 million receivable owed to Harvest concurrently with the license acquisition.
• On November 20, 2020, Harvest announced the settlement of a legal dispute with minority owners of Interurban Capital Group. Harvest canceled a total of 42,378.4 Multiple Voting Shares and received a $12 million secured promissory note with 7.5% interest and five-year maturity. Service agreements and call option agreements for Washington retail locations were cancelled.

A/R improved by $12 million, it appears that is Devine related above, and appears in LT Notes Receivable increase.

PPE increased $18 million to $176 million as they build out Florida and added the two dispensaries this Q.

G/I increased $3 million with addition of THChoclate.

Income tax payable increase $9 million to $17.5 million.

In Closing:

Harvest spent F2020 digging out from the failed acquisitions of F2019. Professional fees alone dropped $15 million YoY.

The sales increase of 13% was amongst the highest of their peers this Q and AZ should provide lift next Q.

SGA got away from them this Q, they even back out $43.6 million from EBITDA in this regard, but let’s see where it lands next Q.

While EBITDA is positive at $5.2 million it is less than half of the $13 million Q interest expense.

They were active post Q:

• On January 25, 2021, Harvest announced the closing of a sale leaseback transaction with Innovative Industrial Properties, Inc. Harvest sold a 292,000 square foot facility for $23.8 million. Harvest will operate the cultivation and processing facility and expects to receive up to $10.8 million in tenant improvements.
• On February 22, 2021, Harvest announced the divestiture of two medical marijuana dispensaries in Bismarck and Williston, North Dakota for an immaterial amount of cash.
• On March 15, 2021, Harvest announced the settlement of its dispute with Falcon International, Inc. In accordance with the settlement terms, Harvest now owns a 10% equity stake in Falcon and received a ten year warrant to purchase up to 20% of the company’s shares at an exercise price of $1.91 per share.

They will need continued lift from PA and AZ, increase cultivation from FLA to feed vertical stores, and increased contributions from balance of assets to meet guidance. 

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.