Harvest Health – a Leading US MSO to Watch

Hyper-growth sees this Cannabis Company thrive


Arizona-based Harvest Health and Recreation is one of the leading US Multi-State Operators (MSOs). The company received its very first license in 2012, opened its first dispensary in 2013,  and has grown from strength to strength since then. The company now operates a total of 13 dispensaries, 7 of which are in Arizona. As recent as late December 2018, they opened dispensaries in California, Pennsylvania, and Maryland.

The company listed on the OTC in November 2018, essentially coming to the public party very late. However, they may have been late to the game, but through a number of very significant acquisitions, they have catapulted themselves up the ladder to become of the largest MSOs in the US.



The company has aggressively expanded its footprint and in doing so, has solidified its leadership positions in key markets. Through these acquisitions (which we will get to in a second), they now have the rights to 142 retail locations, 42 cultivation facilities, and 35 processing facilities.

However, to fulfill their potential, they will require their acquisitions to close. Currently, they are still waiting on approval and closure of Verano Holdings, Falcon, and CannaPharmacy purchases. The cannabis company only ended April with 13 retail locations open in four states, but the goal was to open 23 additional stores by the end of July and 60 by the end of the calendar year.

Time will tell, and although they have been slow to close and integrate these acquisitions, once they have done so, and if they can efficiently integrate to create economies of scale, they will have a real shot at being one of the long term winners in the largest cannabis market in the world.


Verano Holdings

In March, Harvest shocked the cannabis world, when they announced their purchases Verano Holdings, in an all-stock deal valued at a staggering US$850 minion. At the time, this was the largest acquisition on US soil (it would later be eclipsed by Cresco Lab's purchase of Origin House for CAD$1.1 billion and then Curaleaf's acquisition of Cura Partners for CAD$1.47 billion).



The acquisition expanded Harvest's footprint into Illinois, Oklahoma, and New Jersey and significantly boosted its operating assets. Verano had 9 stores open, which at the time complimented Harvest's 10 open stores, as they were located in different States, immediately expanding Harvest's multi-state reach.

At the time, Verano was a privately-held cannabis operator in the U.S. holding 37 retail licenses, 9 open stores under the Zen Leaf brand, and 7 existing cultivation and production facilities. As mentioned above, one of the most attractive elements of the deal, was Verano's strong coverage of the Illinois, Maryland, and Nevada markets.

Since then, the company has actively increased its reach into other states such as Massachusetts, Ohio, Michigan, New Jersey, and Oklahoma.



What really excited the markets and moved the stock price significantly was that it immediately propelled Harvest to top tier MSO status with the combined entity predicted to have over 70 dispensaries, 13 cultivation facilities, and 13 manufacturing facilities by the end of 2019.


"The combination with Verano fits perfectly with our vision of creating the world's most valuable cannabis company. We are confident that this is an opportunity to continue to leverage each of our company's strengths and drive continued shareholder value, while at the same time achieving the scale we know will give us a leadership position in one of the largest cannabis markets in the world."

– Verano Holdings CEO and Co-founder George Archos


However, the one Verano asset not included in the deal was its newly acquired Florida assets. Verano acquired one of the 14 licenses in Florida from SOL Global (regular readers would be familiar with the Andy Defrancesco led SOL Global – but that's another story for another time). Although to be fair, Harvest wouldn't have been able to hold the licenses as current Florida regulation does not allow one entity to hold two or more licenses.

The acquisition looked to immediately create accretive revenue and profitability for the combined entity, especially given Verano's going concern operations in Illinois, Nevada, and Maryland. Management stated in the deal announcement call that as soon as the deal was finalised, they would give the market guidance on the combined entities projected Pro-forma EBITDA.


Other Acquisitions

The Verano deal was certainly the headline purchase for Harvest but was not the only acquisition. The company was very busy in 2018 and invested in product development by acquiring CBx Enterprises, and a major near-term growth with its acquisition of a Florida licensee which would give the company the opportunity to open up to 30 dispensaries in the state.

It also ramped up its activities in California with its acquisition of Falcon International. And in its home state, Harvest announced that it will acquire another six licenses which would solidify its dominant position in Arizona if regulators end up approving the deal.

And finally, just a couple of months ago, Harvest announced their acquisition of privately-owned CannaPharmacy, which immediately expanded its presence into four East Coast states. This deal gives Harvest licenses to operate 3 dispensaries in New Jersey, 1 cultivation/processing facility in Pennsylvania, 1 dispensary in Maryland, and 1 vertically-integrated license in Delaware.


Assets, assets, assets

As a result of the above, the company saw a massive increase in its assets from the calendar year 2017 to the calendar year 2018. As of December 31, 2018, the company reported $478 million in balance sheet assets, a whopping 635% increase over the previous year.

In addition to the company assets, Harvest also saw its cash position skyrocket from $1 million in 2017 to $191.8 million in 2018. And their inventory levels increased by a game-changing 1,676% year-on-year, amounting to $23.17 million, with biological assets also increasing from $4.4 million in 2017 to $6.7 million in 2018.


Q4 and Full Year 2018 Financial Results

On April 23, 2019, Harvest reported its 2018 Q4 results.

Total revenue came in at $17 million, an increase of 52% from the last quarter and 135% year-on-year. Gross profit of $7.2 million represented a gross margin of 43% which was down slightly on Q3 but over 100% ole the corresponding Q4 2017 period. The company also reported positive adjusted EBITDA of $2.6 million, and in doing so, delivered a 15% EBITDA margin.

What made the results all the more impressive was the fact that much of the growth came organically through their existing footprint in one of the most lucrative US states – Arizona. Pro-forma revenue (assuming all the acquisitions are approved and settled) would have been far greater, and this sets the company up to continue to deliver top-line growth for the foreseeable future.



Q1 2019 Results

Subsequent to the above, on May 31, the company released its first-quarter earnings results.

It generated revenue of $19.2 million in the quarter, a year-over-year rise of 131%. Its revenue rose 14% sequentially. Harvest Health & Recreation reported an operational gross profit before biological assets accounting of $7.9 million, or 41% gross margin.

Meanwhile, Harvest Health & Recreation reported adjusted EBITDA of -$4.7 million in the quarter compared to $1.9 million in the first quarter of 2018. The company reported a net loss of $20 million in the first quarter compared to a net profit of $1.2 million in the first quarter of 2018.

It attributed the loss to "planned investments in people and infrastructure to support the company's growth initiatives and planned expansion."



As of December 31, 2018, the company had $192 million cash outstanding with $32 million debt, to realise a net cash position of $160 million. The bulk of this cash was raised through their RTO listing in November when they sold 33 million shares at CAD$8.67 for a total of CAD$289 million.

Then in April this year, they raised $500 million from convertible debentures with a 7% interest rate. With close to $700 million in pro forma cash, there is a very low probability of the company needing to come back to the market and raise any further cash in the foreseeable future.  In addition, the bulk of its acquisitions were in the form of all-stock deals, placing very little pressure on their cash balances.

Although one can never rule out a future cash raise, the company certainly does not find itself in the position of some of its peers who find themselves under serious pressure to raise additional funds, which in the current market environment will put significant pressure on their stock prices.


Peer Comparison

In comparison to its peers, Harvest is most certainly one of the leading US MSOs.

With the third highest quarterly revenue, they also have a solid gross margin. As we have mentioned above, expect their revenue to significantly increase, once their acquisitions close and the "pro-forma" revenue kicks in.

When one considers their Enterprise value, although is it one of the highest, its EV/Sales multiplier is one of the best on the industry. 

Although iAnthus, Green Thumb, Trulieve and Medmen have lower multiples, Harvest has significantly more revenue than these peers with far better national coverage. Trulieve for example, although it has one of the lowest multiples in the industry, only really operates in Florida, and is yet to prove they can scale nationally.


The Bottom Line

The company has demonstrated its ability to scale very quickly through accretive acquisitions that create synergistic opportunities for increased footprint and pro forma revenue. The company has put guidance out targeting the opening of 100 dispensaries in 14 states by 2020

What's more impressive is that these strategic acquisitions have been complemented with significant organic growth in their existing states, demonstrating their ability to execute growth. This leaves us thinking that once these acquisitions are bedded down, the company could really drive future revenue growth.

But growth is not only coming through acquisition. The company recently won every license it applied in Pennsylvania which enables it to open up to 21 retail locations in the state. Their well-timed convertible debenture raise of $500 million was smartly executed when the market conditions were right, placing minimal pressure on the stock price, while materially increasing the companies wear chest, which will be needed to drive expansion and growth over the coming quarters. As the saying goes, cash is king, and in this area, Harvest could be considered royalty. 


With a balance sheet fully loaded-up and plenty of room for near-term growth from both organic expansion and acquisitions, we think Harvest is well-positioned to become a dominant player in the near future.

By the end of this calendar year, the company expects to have over 70 dispensaries, 13 cultivation facilities, and 13 manufacturing facilities in operation. In addition, they also gave revenue guidance of $223 million in 2019 and $559 million in 2020.

Harvest Health & Recreation recently received a "strong buy" ratings from three analysts, while the remaining three analysts polled by Thomson Reuters on June 3 have given it "buy" or equivalent ratings.

The average target price from the analysts is CAD$19.20 representing a potential 125% upside over the closing price of $8.02 at time of publishing. Cashed up, well run, with a solid and experienced management team, and now with one of the largest footprints in the US, we believe Harvest to be one of the best ways to play the booming US market.

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Mark Bernberg
Mark Bernberg

Mark Bernberg is a long-time cannabis investing enthusiast and founder of The Green Fund, Asia Pacific's preeminent media house, positioned at the forefront of the global cannabis industry.

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