Rapid Reaction: Harvest Health adapting to new market reality

Rapidly changing cannabis market conditions are forcing companies to dial back growth plans, restructure acquisitions, change guidance strategy, reduce spending and alter funding plans.

We believe more cannabis companies will need to make similar changes to adapt to the rapidly evolving business landscape.

The sooner that management teams recognize new market realities and adapt their business models to effectively compete in the new landscape, the better opportunity those companies have to succeed at creating shareholder value.

On its third-quarter earnings conference call, Phoenix-based Harvest Health & Recreation (CSE: HARV) discussed multiple changes, including:

  • Scrapped its planned acquisition of all of CannaPharmacy.
  • Lowering 2020 revenue and EBITDA margin guidance.
  • Canceling a┬áfunding agreement with Torian Capital.
  • Outlining a new cost-reduction plan.
  • Removing time-of-closing guidance for deals requiring regulatory approval.

Investors will have to reduce their future revenue and earnings estimates for Harvest Health, but the decline in the company’s stock price over the past few months implies the market was already expecting reduced revenues and earnings. The willingness of Harvest Health management to recognize that previously stated plans were not achievable removes some of the overhang on the business.

“Recent market developments in tightening capital markets have led us to revisit growth plans and prioritize different investment opportunities,” Harvest Health CEO Steven White said.

“We plan to complete our pending M&A transaction and focus on capital allocation toward key markets, including Arizona, California, Florida, Illinois, Maryland, and Pennsylvania.”

Related to that, management has also changed its guidance policy with respect to mergers and acquisitions by admitting that previous timelines often proved too aggressive, so the company will not provide guidelines on the timing of deals that require regulatory approvals.