Harvest Health has a habit of publishing their full financial statements and MDA well after they release their presser and hold their CC.  This Q was no different.  Presser November 10, 2020. Financial statements and MDA published November 23, 2020.

And look at that… while their Income Statement from presser was correct, the balance sheet had quite a few adjustments from the presser. Presser overstated current assets by $5 million, understated Fixed Assets by $10 million and Total Assets by $5 million.  Presser understated Current Liabilities by $22 million and overstated Long Term Liabilities by $17 million.

GHETTO!!!

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

Earnings release.

From last Q 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.

From this Q earnings release:

• Outlook Harvest is increasing its full year 2020 revenue target to greater than $225 million, up from the prior target of $215-220 million. 

So, they are $25 million more in Q4 than they did last Q.  YTD they are at $162 million in sales. Last Q is expected to be $63 million. Pretty flat to this Q’s $62 million.

This Q they have a sequential QoQ analysis, but I still have to ”CTRL F” their CC transcript to find information.

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:

• Arizona: 15 (+1 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. 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: 6 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.

Revenue aggregated $62 million a +11% increase or +$5.9 million for the Q. Revenue has three components:

• Retail $46 million +9.3% QoQ or +$4 million. Mix 75% +1% QoQ
• Wholesale $8.6 million +19% QoQ or $1.4 million. Mix 14% -1% QoQ
• Licensing $6.8 million +11% QoQ or +$0.7 million. Mix 11% flat QoQ

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

Retail Revenue: Peer & Trend

Retail revenue is generated from 37 dispensaries (+2 QoQ) in AZ 14 (+1), AR 1 (which they are selling for $25 million), CA 4, FL 6, MD 3, ND 2, PA 6 (+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 from $1.6 million to $1.7 million or +8% QoQ.

From their Presser:

• YoY stores open in the Q was 16 and sales increased in comparable Q +49%
• QoQ stores open in the Q was 35 and sales increased in previous Q +12% which would be $6.7 million which is greater than the $4 million increase in retail QoQ… I am confused, given they also opened two more stores in the Q.

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

Wholesale Revenue: Peer & Trend

Wholesale revenue increase $1.4 million QoQ and increased to $8.6 million. No narrative is provided from the MDA.

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 $0.44 to $0.45 in this metric.  The numerator increased $6 million with the denominator (PPE and G/I) increased by $41 million. 

They are 8^th in this metric, surpassing only 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% improved to 46% in Q from 42% last Q.  Narrative is light on this. Given mix tilted marginally in favor of retail QoQ would likely be part of the reason.

GM% adjusted for removing licensing revenue was 36% up from 31% QoQ. One of the lowest in the industry.

GM in absolute terms was $29 million up from $23 million last Q for +$6 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 $0.21 of annualized GM for each $1 they have spent on PPE and G/I. This is a $0.02 improvement over last Q.

Harvest ranks 8^th in this metric surpassing only MMEN and ACRG.

Gross Margin: USA Peer

Harvest ranks 8^th amongst their USA peer group, only ACRG and MMEN are worse.

Gross Margin: North American Peer Base

SGA & SBC as a % of Sales: Trend

Selling expenses declined modestly to $0.8 million QoQ reduction of $0.4 million.  They decreased on the sales growth to 1% from 2%. 

G&A decreased by $0.8 million to $20.7 million and decreased to 34% of sales. Salaries and benefits decreased $2.0 million, while Professional fees increased by $0.2 million to $3.9 million, and covid reduced travel to a credit of $0.2 million.

SBC decreased to $1.3 million a reduction of $2.0 million QoQ.  

SGA and SBC are 37% of revenue an improvement from 47% last Q.

Depreciation of $3.6 million, stable QoQ.  

Overall Opex was $26 million or 127% of sales, a decrease of $4 million QoQ. The majority of the decrease was SBC and salaries.

Other Income and expenses total -$13 million versus negative $15 million last Q, and include:

• Interest expense of $13.2 million versus $12.3 million QoQ… 45% of GM is going to interest service. Ouch!
• The lack of Contract and Other Impairments this Q is the largest area of improvement. Previous Q it was $2.4 million.

Net Income for the Q was negative $1.6 million versus negative $16 million last Q. The improvement is traced back to increase in GM, reduction in salaries and SBC.

SGA & SBC as a % of Sales: Peer

Middle of the pack.

+Net Operating Profit Quarterly Breakeven Sales: USA Peer

Harvest achieved +NOP in the Q. Using current GM% and OPEX$’s, they would need 92% 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.

I did not back out their expansion expense (pre-open) and Transaction & other Special Charges of $2.7 million. Another $0.6 million in charges they backed out that I am not trying to reconcile.

I have Harvest at positive EBITDA $7.1 million an improvement from the $1.7 million last Q.

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

+EBITDA Quarterly Breakeven Sales: USA Peer

Harvest produced a +EBITDA in the Q.  At current GM% and cash Opex they are EBITDA breakeven at 75% of existing sales.

+EBITDA Quarterly Breakeven Sales: North American Peer

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

Inventory levels increased during the Q by $9 million to $41 million, and they converted more of same into FG with $16 million in Q and a $6.0 million QoQ improvement.   

Their projected yield is up to 7,600 kgs an increase of 9% QoQ.  Selling more of their own product in their retail should be good for margins.

“Waterfall”- Peer

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

Cash increase QoQ by $4.5 million to $66 million. During the Q their Notes Receivable decreased by $37 million, which would have been a source of cash.  They tapped a private placement post Q for $32 million, their third equity offering of F2020. They also sold Arkansas operation post Q for $25 million with a net of $12 million.

Right of Use Assets increased $12 million QoQ to $67 million.  Could be the aborted sale of all of the dispensaries to High Times.

Current portion of Notes Payable increased by $17 million to $51 million. Keep an eye on how they intend to deal with this in the next 12 months.

Lease liabilities increased $12 million to $61 million, tied to the increase in Right of Use Assets.

In Closing:

Harvest made some progress in the Q with a sales increase of 11% or $6 million.  I am unsure how they achieved 12% sequential growth from the 35 stores open in each of the last two Q’s, yet retail sales grew only 9%.  Math does not work.  (All the more reason for them to put their Revenue segmentation into their MDA and notes to the financials.)

The two new retail stores (one in each AZ and PA) were opened in the Q as well.  There should have been some contribution from these stores.

Arizona got the green light to go Adult Use in the election, and while HARV is well positioned in AZ the state has a population of only 6.5 million, which would place it between Washington and Colorado in terms of population. Arizona is the 6^th most populous legal adult use state to date.

They expect a very quick transition to being able to sell adult use as well.

The Governor of PA is also making a lot of noise about moving to adult use in the near term. 

Next Q they are forecasting flat sales.  Are they just managing expectations?  We will see next Q.

Given that +45% of their GM$’s is being gobbled up by interest expense they need to improve EBITDA from +$15 million a quarter to simply service the interest.

I do note that in their MDA they list quite a bit of ongoing litigation. Their Litigation Assessment has the usual language …

• The Company has evaluated its claims and the foregoing matters to assess the likelihood of any unfavorable outcome and to estimate, if possible, the amount of potential loss as it relates to the litigation discussed above. Based on this assessment and estimate, which includes an understanding of the Company’s intention to vigorously prosecute its claims, the Company believes that any defenses of any of the counterparties lack merit, and the likelihood of any recoveries by any of the counterparties against the Company appears remote.

Lawyers always think they will win… until they lose.

I am pretty “meh” about Harvest.  They have had a ton of missteps in the past on acquisitions.  The news in Arizona is good for them, but with Adult Use more competition will eventually flow into the market and Gross Margin might not be as defensible on a % basis.  Pennsylvania should be a growth market irrespective of if adult use comes to pass.

Their efficiency metrics are only above some real dregs and they have payments on taxes, leases, debt and contingent considerations due in the next twelve months of $83 million.  This is a company that will likely need more raises to float the bota.  And given how much of GM is being gobbled up by interest payments presently, equity is where it will come from.

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.