Harvest Health has been one of the companies that issue a press release about earnings and performance, and yet, doesn’t publish their financials at the same time. In Harvest’s case, it was April 7th, and yet the actual statements weren’t published until the 24th. That’s garbage in my humble opinion. Total garbage. It allows management to make untested claims, and establish a fact free narrative of their own choosing. As we’ll see shortly, several material and substantive activities/actions didn’t make it into their update.

Here’s hoping that this sort of trash behaviour is called out and labelled for what it is.

Our first look at Harvest Health saw a company burning cash while following a rather inorganic build strategy of ‘buying versus building’.

Retail margin was seen to be deteriorating QoQ, and our last look at their financials saw a modest uptick in that metric. Still, it’s anemic relative to peers. They are pretty well leveraged, and their Super/Multiple share structure enables this company to do exactly what they want to do – at any point in time. The 100:1 Multiples are a serious punji trap for any minority shareholder.

Let’s have a look at their fiscal year end, and see how 2019 turned out for them.

To the (extremely late) financials!

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• Sales up $5MM to $38MM (from $33MM previous quarter). 36% margin reported for the year, while this last quarter it was 37%. A modest improvement.
• $17MM in impairments on tangible and intangible assets this quarter. And they’re littered all over the financials. To wit:
  • A Canadian holding company of which $HARV bought 5% in for $5MM in late 2018 that “holds agreements and minority investments in various cannabis related entities in the United States” – was written off in entirety.
  • $9MM on ‘licenses’ was impaired
  • $8MM in PP&E was written off
  • $30MM impairment on a note receivable from the Falcon blast crater
• Sadly, none of these have much in terms of description outside of being a line item.
• And defying the laws of physics, SBC for the company appears to have been negative for the quarter. Previously, they’d reported some $19MM in SBC, but the year end value is $17MM. Perhaps it’s in the way they account for the aggregate exposure, but positive deltas to earnings from option valuation in SBC is plain silly. As far as I’ve seen in any cannabis company, its unique to $HARV.
• Falcon, Devine, ICG. Verano. CannaPharmacy. Ugh. These are acquisitions that have all hit the ditch.
• Note 22 (Subsequent Events) is massive: a 4 pager that describes the ditch that these deals hit, along with changes in their executive (new COO, resignation of their Executive Chairman), private placements of a whack of Multiple shares, and incremental debt.
• Interestingly, the former Chairman is to: “assume all of the Company’s obligations on the remainder of a 10-year lease for premises which the Company has no longer targeted for deployment”; he will held to non-competes; and he will be compelled to swap 1MM Super shares for Multiples. Oh, and he’s forfeiting 2.5MM in stock options and any cash owed to him on the way out the door.

• $HARV lost a million in forex on the year. Despite CAD being relatively stable during 2019, there’s some moving parts in here. Yeah, its’ immaterial. But forex is so straightforward to manage, I simply don’t understand how an outfit can bleed out $80k/month on an exposure that can be dealt with in minutes with a pen, a napkin, and a phone call.
• As mentioned last time, San Felasco Nurseries is $HARV’s entry into Fortress Florida™. And we get to see what assets came along with the license to do business there. More below.
• The handy schedule showing SVS conversion and dilution (displayed in the previous two structures) is no more. It’s gone from the financials.
• Despite their $116MM in sales this year, they were able to rack up expenses of $158MM. The G&A is epic, having spent no less than $31MM this year in professional fees. I’m guessing there’s a straight-line from this to the deals that have gone bust. And bust they have.

Ok.

Regarding acquisitions, $HARV hasn’t had the smoothest ride of the MSO’s. These financials detail a slew of litigation, arbitration, and tens of millions going by the wayside regarding them. These financials some of it for 3 of their purchases….actions of which are just within the past 6 months.

For those following the Falcon saga, what initially appeared to be a straightforward pickup, turned sour earlier this year as lawsuits were launched by both companies, and the deal appeared scuttled. What most certainly is dead is $30MM written off in notes receivable to Falcon. Events over the past couple of months have shown $HARV apparently dropping their lawsuit against them, pushing for binding arbitration, and ultimately now, seeking to force Falcon to buy back what was (now disputed) sold to $HARV.

Similarly, a deal that closed on March 10th for a basket of assets/licenses in Washington State lasted happily until April 3rd, when $HARV went to the courts declaring “unfair or deceptive acts or practices” & “tortious interference with contractual relationships” against 5 companies and one individual involved.

A deal to buy CannaPharmacy collapsed somehow, but a purchase of a subsidiary of Canna went ahead. There’s a story in there, but as with these financials, there isn’t much said.

Likewise, a deal for 6 dispensaries (done in February 2019, and updated in August 2019) in Arizona is now before the courts. According to $HARV, the vendor flaked, and $HARV is seeking remedy for breach of contract, lack of good faith…..and so forth.

In archaeology, there’s a running joke that one stone is just a stone but two make a wall.

In the case of $HARV, between Verano and the three mentioned above, one should be prompted to consider who’s doing their due diligence, and how such successive deals keep hitting the ditch. Hey, litigation and disputes arise all the time in business. But dumping $30MM on what looks to be a deposit – and ending up so acrimoniously – is a prompt to me. And two of these happened after the date of financials.

San Felasco – a Florida outfit ready to be built into a 35 store business – has been on-boarded. And in typical East Coast fashion, the transaction was not only expensive, but appears to have no net assets:

Here’s another pickup of a Colorado based company for some $47MM. Called CBx Enterprises, it’s almost identical to San Felasco in being nothing at all on paper except for goodwill and intangibles:

And the deals continue. They purchased a Nevada asset called ‘Green Mart’ on December 31st for some $35MM. Green Mart may be known to some readers as it was a wholly owned asset of MPX (which was subsequently bought by $iAN). In other words, $iAN’s recent wobble was noticeable as early as Dec 31 of last year. It’s hard to imagine an accretive asset in a recreational jurisdiction would be shed by an outfit in build…..unless they were having cash issues. I pulled an interesting paragraph from the note about Green Mart in these statements – a bilateral financing deal was done specifically around it, and the asset was secured against the loan:

A private placement of Notes and ‘Units’ are detailed in Note 12 (Notes Payable), and were issued December 23rd 2019. They helped satiate a primary credit facility. So, despite bringing in some $94MM from raises in the quarter, $88MM of it went back out the door same week. Essentially a debt roll. But Note 22 sees another private placement in 2020 of $59MM. Whatever their track record in acquisitions is, some folks with deep pockets like the outfit.

Overall, they have $241MM in debt to be paid back in the next 5 years, while currently sporting $117MM/yr in sales and a 37% margin.

This has been one of the least insightful companies I’ve ever done a structure on. Their disclosure is poor, yes. Which, is also not far off many other outfits out there. But the continual (and growing) stream of friction around acquisitions, investments with no net assets (like, none), and the various splaying of numbers throughout the statements is just irritating. Add in a 3 week delay from press release to these financials…..I’ve been elevated to simply being pissed off.

Going through these financials is tortuous. This outfit has numbers absolutely everywhere in their statements, and with little regard for the reader. As I’ve bitched about – their press release mentions nothing of much of what I actually see and noted above about them.

They lost $175MM on the year, while having 31 outlets open in 6 states. With 11 in Arizona, that’s the likely culprit for the handbrake on margin – as the not-for-profit model of the state crimps being able to retrieve much return on assets.

Their entry into Washington State – a region of relative market maturity and retail saturation – is a bit of a sector outlier, and will bear out over the next year. Unlike most MSO’s who have been largely avoiding the non-virgin earth of WASH and COLO, $HARV appears to be going in hot. FLA is going to be capital draining, but the Fortress has shown ability to welcome expansion of sales and patients. Opening stores there in timely fashion while getting cultivation up isn’t an inexpensive proposition.

I can’t really get past the poor disclosure, their odd ability to get into litigation and arbitration so soon after deals are signed, and a relatively weak margin. Last time, we said that $HARV looks like a hard pass in terms of investing at this point. These financials underline that point to myself. And if capital begins drying up for them over the next 6-9 months, and operations don’t begin to show profitability, an $iAN-like credit event won’t be far behind. About the Multiples and capital structure…..its crap. Yes.

For these guys and investors though, one can almost say it isn’t the worst thing about this outfit, which is increasingly looking to be in tough shape, despite some folks with money being at the ready.

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 holds no position in $HARV or $iAN