Harvest Health has a habit of publishing their full financial statements and MDA well after they release their presser and hold their CC. They did it last Q, and by the time they did I had forgotten to publish the Q in Pics I had written because there was a lineup of other MSO’s and LP’s that I was writing up that I thought were more worthy of timely analysis.

This Q was no different. Presser August 11, 2020. Financial statements and MDA published Friday August 20, 2020 at a hair before 10 PM.

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

Earnings release.

• Outlook Harvest is increasing its full year 2020 revenue target to $215-220 million, up from the prior target of approximately $200 million.

Last Q I mentioned: I also recommend a perusal of the Conference Call transcript with particular attention to the last set of questions. Sounds like someone (“Unidentified Analyst”) is frustrated with Harvest’s less than transparent disclosure for Q1 to Q2 incrementality.

This Q they have a sequential analysis. It is not to deep, but it is a start.

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 +80% of the business:

• Arizona: 14 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. Arizona is to vote on recreational in 2020 should petition signatures hold up.
• 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: 5 dispensaries, 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.

In their MDA they have Washington and 5 dispensaries listed with an *. It is the only * in the entire MDA. So, not sure what it means. They also have quite a few lawsuits, including Washington. So, it could be in there.

While wholesale looks like a segment in addition to Retail, Harvest provides zero segmentation in Financials or MDA. But alas, they mentioned it in CC: 76% retail, 13% wholesale, 11% licensing.

Sales increased QoQ +24% +$11 million to $56 million. They had 35 dispensaries at both of the last two Q ends. Of the 31 that were opened for the entire period they had a 29% increase in revenue or +$9 million of the $11 million sales increase.

They indicate for the 13 stores open in this Q versus same Q last year, sales are +29%.

Pennsylvania seems to be their hot state right now. They are looking to expand cultivation as the state is supply constrained.

We run a metric that averages revenue across the average store count for the Q. Not a perfect metric as they wholesale an undisclosed amount and the retail an undisclosed amount. But when you are starving for information from a company you make do with what they provide.

Harvest had an average of 35 stores open in the Q and revenue per average store was $1.6 million, a increase of 8% QoQ. This on the heels of a 2% decrease last Q.

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 $0.35 to $0.44 in this metric. The numerator increased $11 million with the denominator (PPE and G/I) decreasing by $12 million.

They are 7th in this metric.

Income Statement Drivers & Breakeven: Peer

Harvest is 6th by revenue in the above group.

Gross Margin: USA Peer & Trend

Harvest GM% improved to 42% in Q from 41% last Q. Narrative is light on this. From MDA:
• Gross profit before biological asset adjustments for the three months ended June 30, 2020 was $23.4 million, or 42%, gross margin, representing a gross profit margin on the sale of branded cannabis flower and processed and packaged products including concentrates, edibles, topicals and other cannabis and licensing revenues. This is compared to gross profit before biological asset adjustments for the (13) three months ended March 31, 2020, of $18.1 million, or 41%, gross margin. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.

GM in absolute terms was $23 million up from $18 million last Q for +$5 million.

Segmentation of Gross Margin would be handy wouldn’t it?

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 $0.19 of annualized GM for each $1 they have spent on PPE and G/I. This is a $0.05 improvement over Q1.

Harvest ranks 7th in this metric.

Gross Margin: USA Peer

Harvest ranks 7th amongst their USA peer group.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

Selling expenses were stable QoQ at $1.2 million. They decreased on the sales growth to 2% form 3%.

G&A decreased by $2.4 million to $21 million and decreased to 39% of sales. Salaries and benefits decreased $1.4 million, while Professional fees reduced by $0.6 million to $3.7 million, and covid reduced travel by $0.4 million,

SBC decreased to $3.2 million a reduction of $10.5 million QoQ. From MDA:

• The decrease in total operating expenses is primarily attributable to a decrease in stock compensation expense of $10.5 million as a result of higher expense in the first quarter of 2020 due to stock options surrendered by executives to increase the number of shares in the stock option pool for other employees.

SGA and SBC are 47% of revenue an improvement from 56% last Q.

Depreciation of $3.5 million, stable QoQ.

Overall Opex was $30 million or 137% of sales, a decrease of $12 million QoQ. The majority of the decrease was SBC.

Other Income and expenses total -$70 million versus negative $6 million last Q, and include:

• -$1.6 million loss on sale of fixed asset, this is as opposed to a $2.5 million increase last Q.
• Interest expense of $12.3 million versus $7 million QoQ… 53% of GM is going to interest service.
• Contract impairment of $2.4 million attributable to credit losses. No further note provided.
• Income Tax was $1.1 million versus $4 million the previous Q.

Net Income for the Q was negative $15.5 million versus negative $20 million last Q.

SGA & SBC as a % of Sales: Peer

Middle of the pack.

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

Harvest would need incremental sales of 26% 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 produced a +EBITDA in the Q. At current GM% and cash Opex they are EBITDA breakeven at 92% of existing sales.

+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. And if they aren’t going to provide disclosure to evaluate them, I won’t add them back.

I did not back out their expansion expense (pre-open) of $1.2 million and $1 million in Transaction & other Special Charges.

I have Harvest at positive EBITDA $1.8 million an improvement from the negative $7 million last Q.

The GM uptick of $5 million, coupled with the improvement in G&A, were the biggest drivers.

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

Inventory levels were drawn down during the Q by $5 million to $32 million, and they converted more of same into FG with $10 million in Q and a $0.7 million QoQ improvement.

Their projected yield is up to 7,000 kgs an increase of 43% QoQ. Selling more of their own product in their retail should be good for margins.

“Waterfall”- Peer

Harvest has the 7th most inventory in the peer group.

Cash decreased QoQ by $21 million to $62 million, even with the $59 million private placement in March 2020.

Right of Use Assets decreased $26 million QoQ as did Corp Investments, likely due to sale of assets to High Times.

A/P are modest at $6 million, however other current liabilities at $23 million, contingent cash considerations of $16 million and taxes of $6 million (aggregates $51 million) will put pressure on cash.

Lease liabilities decreased $26 million with the sale of Right of Use Assets.

Harvest is betting on Arizona going Adult Use on the November 2020 vote. They expect a very quick transition to being able to sell adult use as well.

Given that +50% of their GM$’s is being gobbled up by interest expense they need to improve EBITDA from + to +$15 million a quarter to service it.

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.