Q2 2021 Harvest Health & Recreation Inc Earnings Call

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Good afternoon, and welcome to the harvest Health <unk> Recreation Conference call to review second quarter, each might be 'twenty, 1 financial and operating results and discuss the company's performance outlook. At this time, all participants will be in you listen only mode.

Paul will begin with prepared comments by management.

There will not be a question and answer session.

Today's conference call is being recorded.

I would now like to turn the conference over to your host Christine Hersey director of Investor Relations for harvest. Thank you you may begin.

Thank you.

Good afternoon, everyone and welcome to harvest second quarter 2021 earnings call. Today's call will include remarks from harvest founder and Chief Executive Officer, Steve White.

These remarks may include forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.

These risks and uncertainties are detailed in the Companys reports filed with the United States Securities and Exchange Commission and Canadian Securities regulators, including our annual report on form 10-K, which was filed on March 30th 2021 and in each of our quarterly reports on form 10-Q.

Quarterly report for June 32021, when filed this week along with today's earnings press release, and our Powerpoint presentation can be found under the investors section of our website.

Harvest assumes no obligation to update or revise any forward looking statements to reflect events or circumstances that may arise. Following today's call throughout the discussion harvest will refer to adjusted EBITDA, which is a non-GAAP financial measure a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure is include.

In our earnings press release, and SEC and SEDAR filings. Please note all financial information is provided in U S dollars unless otherwise indicated I will now turn the call over to Steve White harvest founder and Chief Executive Officer. Please go ahead. Thanks Christine.

Good afternoon, everyone and thank you for joining us and appreciate your continued support and interest from harvest.

Before we review our second quarter results I will provide a brief update on true he's pending acquisition of harvest.

For those of you who may not be aware, depending sales previously announced on May 10.2021.

Details regarding the transaction are aligned and regulatory filings with the SEC SEDAR.

Since the deal was announced both companies have made significant progress towards meeting closing conditions and obtaining necessary regulatory approvals required to complete the transaction.

On June 22nd truly have announced that the HSR Act waiting period expired.

Following the completion of this milestone both companies immediately began integration activities in anticipation of closing.

To date integration planning and preparation for combining the 2 organizations has gone smoothly.

The harvest shareholder vote for the proposed transaction was being held Tomorrow August 11th.

Part of me harvest annual and special special shareholder meeting.

In parallel to the integration efforts both companies have been working hard to secure required state and local regulatory approvals to transfer ownership and operation of existing harvest assets to true it.

And while we cannot provide an exact time when those regulatory approvals maybe complete the collaboration to date adds further excitement about the prospects for the combined organization moving forward and we appreciate it shareholder support of the business combination.

Now turning to our results.

Second quarter sales of $102.5 million represents.

84% increase year over year, and a 15% increase from the first quarter.

Approximately 89% of our second quarter revenue was derived from our core markets, Arizona, Florida, Maryland, and Pennsylvania.

Revenue derived from core markets, excluding Florida was 83%.

Revenue mix during the second quarter was 83% retail, 17% wholesale and other.

Second quarter same store sales increased by 100% year over year for the 32 stores that were opened during both periods.

For the 36 stores that were opened in both the first and second quarters of 2021 same store sales increased by 11% sequentially.

During the second quarter profit increased by 22%, while basket size declined 9% compared to the first quarter.

In the second quarter revenue growth was driven by the full quarter contribution of recreational sales in Arizona growth in new and existing locations companywide and contribution from cultivation and manufacturing expansion activities.

And Arizona as expected harvest recreational sales continue to grow as a percentage of total sales.

During the second quarter, we added 5 new retail locations and continued our expansion activities at several cultivation and manufacturing facilities.

Subsequent to year end, we opened 2 new retail locations.

As of August 10th Harvest owned operated or managed 44 retail locations in 5 states, including 16 open dispensaries in Arizona.

Gross margin during the second quarter was 15% or excuse me, 51% compared to 53, 9% during the first quarter of 2021.

The sequential decline in gross margin was driven primarily by increased promotional activity and higher prices for select third party products promotional.

Activity was higher in the quarter in several markets due to sales associated with 420.

And promotional activity was higher than our home state of Arizona as more dispensaries expanded to include recreation sales.

SG&A was $34.6 million or 33, 7% of revenue during the second quarter.

Higher professional fees and expenses, including transaction costs associated with the pending truly transaction as well as increased salaries and wages associated with our increased employee count contributed to the sequential increase in SG&A expenses.

Net loss before non controlling interest for the second quarter was $19.2 million.

Net loss includes the impact from an $8.4 million expense associated with the fair value of warrant liability.

This noncash charge was driven by stock price movement during the quarter.

We cannot predict the impact of this accounting treatment for our outstanding warrants each quarter, but we note that it is not a reflection of our underlying business.

At the end of the second quarter, we converted the currency of select outstanding warrants to U S dollars from Canadian dollars, which will result in the classification of those warrants as equity for the third quarter and moving forward.

We expect this change will significantly decrease the impact of fair value warrant liability measurements to our income statement in future reporting periods.

Our second quarter, adjusted EBITDA increased to $28 million or 26% of revenue compared to $26.9 million or 30% of revenue during the first quarter of 2021.

Harvest ended the second quarter of 2021 with approximately $71 million in cash.

And 270.579 million Finfet.

Subsequent to quarter end harvest divested non core cultivation and processing assets in Utah for an immaterial amount of cash and completed the conversion of $10 million from convertible debt due December 2021 to equity.

During the 3 months ended June 2021, we spent approximately $17.6 million on capital expenditures with the majority of the investments made in our core markets, Arizona, Florida, Maryland, and Pennsylvania.

In our home state of Arizona, We have 16 locations, serving both medical patients and recreational customers.

Our 17th and 18th locations will open in the near term pending regulatory approvals.

We expect that the 19th locations starting in 2023, when our current licensing agreement expires in may of that year.

Our retail locations are supported by cultivation facilities in camp Verde, El Mirage, Phoenix, and Wilcox and processing and manufacturing facilities in Flagstaff from Phoenix.

We are expanding cultivation and processing operations in Arizona to provide greater supply to our retail locations.

We expect continued strength in the Arizona market as new customers continue to learn about and embrace legal and regulated cannabis products.

Our other 3 core markets all have future potential upside from recreational cannabis consumption.

In Florida, we have 11 open retail locations, including 5 new locations opened since may.

We are continuing to expand our cultivation and manufacturing capacity with new product and store openings coming into the market from 2021.

In Maryland, we currently have 3 open retail dispensaries cultivation and processing facility.

Harvest is a net wholesaler in the state of Maryland with strong sales outside of our retail operations.

We are expanding our cultivation and manufacturing operations in Hancock, Maryland to support our wholesale business and retail locations.

In Pennsylvania Harvest currently operates 10 retail dispensaries, and a cultivation and processing facility.

Harvest has 5 retail licenses, allowing for up to 15 potential retail locations.

We are expanding cultivation and manufacturing operations to enhance margins and support the openings from additional retail locations in 2021.

Now turning to our 2021 outlook.

At this time, we're not adjusting our 2021 full year revenue target of at least $400 million.

Since the start of the Covid pandemic, we followed CDC state and local guidelines at all all of our facilities and.

And recently, we have reinstated heightened COVID-19 safety measures as recommended at our facilities to protect our employees patients and our customers.

It is due to the lack of visibility and difficulty of predicting the impact of Covid on retail performance for patient and consumer behavior that we are leaving our 2021 revenue target unchanged at this time.

The 2021 revenue target implies continued growth driven by recreational sales in Arizona same store sales growth, new retail dispensary openings and expanded cultivation and manufacturing operations.

While we expect gross margins will continue to fluctuate quarterly due to levels of promotional activity product and market mix and the cost of third party products. We expect our reported gross margins will remain at or above 50%.

Debt service for the remainder of the year is approximately $34 million, including the $10 million convertible debt was converted to equity after the end of the second quarter.

Capital expenditures for the remainder of the year are expected to range between 20, and $35 million and may be expanded or accelerated depending on the availability of financing.

Capital expenditures for the full year are expected to be between 45 and $60 million.

From a private our prior target of $35 million to $45 million and higher than 220 capital expenditures of $26.9 million.

We are pleased with the progress that we've made over the past several quarters, we look forward to continuing to build on this momentum as we prepare to complete the merger with truly we believe the combined organization will be very well positioned to capitalize on growth opportunities for years to come.

And this will conclude our earnings call today. Thank you.

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This does conclude today's conference call. Thank you for participating you may now disconnect.

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