Harvest terminates one deal and closes another, KushCo reorganizes for positive EBITDA, Curaleaf buys 3 dispensaries & more

Harvest Health terminates Verano acquisition, buys Franklin Labs

It was a busy week for Harvest Health & Recreation (CSE: HARV), terminating its planned acquisition of Illinois-based Verano Holdings on Thursday and then announcing plans on Friday to acquire Franklin Labs.

We offered a detailed analysis of the proposed Verano acquisition, which you can read here, but the key takeaways are:

As Harvest’s share price has dropped from $6.37 the day before the deal announcement on March 11, 2019, to $1.13 Wednesday, this comparatively small consideration is now 31.9 million shares, up from 5.6 million when the deal was announced.

This small clause has gone from 4% of the shares issued to Verano to 20% of the shares to be issued, and Verano would have owned 29% of the pro forma Harvest. This is actually down compared with 33% at deal announcement, since Harvest has increased the base share count by 40% since the deal was announced.

By walking away from Verano on Thursday, Harvest avoids issuing 161.4 million shares or 42% of dilution of the 386.6 million existing shares.

Meanwhile, Arizona-based Harvest on Friday closed its acquisition of Franklin Labs, a deal that was originally announced Nov. 20, 2019.

Recall that the Franklin Labs deal was a downsizing of an April 2019 deal to acquire CannaPharmacy.

Harvest is paying $25.5 million for Franklin Labs – structured with $15.5 million paid in cash and a $10 million promissory note – to acquire a 46,800-square- foot cultivation and manufacturing/processing facility in Reading, Pennsylvania. The facility will help supply Harvest’s five retail stores in the state.

Harvest Health CEO Steve White said in a statement that “this accretive acquisition helps to alleviate supply constraints in a fast-growing market, while contributing to improved financial performance.”

KushCo’s strategic plan to achieve positive adjusted EBITDA

KushCo Holdings detailed a new strategic plan involving cost reductions, layoffs and senior management changes in an effort to accelerate its plan to reach EBITDA positive.

Nick Kovacevich, CEO of the California-based company, said the plan will:

  • Reduce overhead expenses.
  • Streamline warehouses.
  • Reduce inventory.
  • Alter its sales strategy to rely less on the smaller operators.
  • Strengthen its core base of large MSOs, LPs and leading brands.

Management believes the plan will put the company on an accelerated path to positive adjusted EBITDA but did not offer a timeline for the EBITDA goal.

Our key takeaways are that KushCo will continue to serve its large customers as it always has but will now work with its smaller customers on a cash-only basis and will not take on custom projects in an effort to limit accounts payable risk from smaller, higher-risk customers.

Additionally, KushCo will reduce its workforce by 49 people and, thus, cut its annual cash compensation by approximately $4 million. The head-count reduction will include salespeople. The company believes it can serve its smaller, legacy customers better through automation.

Stephen Christoffersen, executive vice president of corporate development, has been appointed KushCo’s chief financial officer, effective April 10. He will replace the current CFO, Christopher Tedford, who will leave the firm on that date.

Curaleaf reports 4Q19 results, buys three Connecticut dispensaries

Curaleaf (CSE: CURA) slightly missed revenue ($75.5 million versus consensus expectations of $80.0 million) but beat on EBITDA ($13.8 million versus consensus of $9.3 million) for its fourth-quarter 2019 results. This yields a strong margin of 18.2%, well ahead of consensus of 11.6% and on its way to the old guidance of 30%+ margins.

Most importantly, on its 4Q19 conference call, Massachusetts-based Curaleaf stepped away from the pro forma revenue guidance of $1.0 billion to $1.2 billion of revenue at a 30%+ EBITDA margin for 2020, first given in August and reiterated in November.

The company first blamed the timing of the close of its Grassroots Cannabis acquisition, which at first seems odd since the guidance was always pro forma and, thus, should be independent of the timing. This implies the guidance must have included integration benefits from Grassroots as well.

The second reason was the uncertainty caused by the COVID-19 outbreak, which makes more sense to us. Curaleaf noted that year-to-date sales were up significantly and guided to managed revenue of $100 million for the first quarter of 2020 – which yields 22% growth compared to 4Q19.

Overall, Curaleaf has a strong liquidity position with $229.2 million of cash (combining the Dec. 31 cash balance and the January debt offering), and it is quite a strong signal that the major insider shareholders (primarily Executive Chair Boris Jordan) will provide up to $100 million in additional liquidity “should higher return acquisitions or projects present themselves.”

This long-term commitment and focus on returns puts Curaleaf in a good position to acquire good assets in need of capital.

Finally, the company confirmed our earlier assertion that the BlueKudu acquisition is really about expanding its Select brand in Colorado. Which means the Colorado edibles market will get more competitive:

“BlueKudu, a producer of premium cannabis chocolates and gummies, gives us the manufacturing platform to further build the Select brand in Colorado … We are excited to introduce Select to the mature, but robust Colorado market, and we have already seen a strong reception from discerning Colorado consumers …

“Upon close, Curaleaf will obtain an 8,500-square-foot cultivation processing facility that will support the company’s planned expansion of recently acquired Select brand into Colorado. Select was successfully launched there in January, and we view this market as an attractive opportunity to build brand identity and gain market share through a robust dispensary market.”

Then, on March 26, Curaleaf strengthened its position in Connecticut by entering an agreement to acquire three Arrow Alternative Care medical marijuana dispensaries in the state.

Curaleaf operates one of the four licensed cultivation facilities in the state, so this acquisition makes the company a vertically integrated operator in Connecticut.

Management at Curaleaf, which now operates three of the 18 licensed dispensaries in Connecticut, plans to still pursue the company’s wholesale strategy. In addition, Curaleaf CEO Joe Lusardi said the Connecticut “acquisition will be immediately accretive.”

Green Thumb reports fourth-quarter 2019 results, moves to GAAP reporting

In a refreshing break from most cannabis companies missing revenue and EBITDA estimates and guiding down, Green Thumb Industries (CSE: GTII) reported good fourth-quarter 2019 revenue and EBITDA numbers after market close Thursday.

The Illinois-based company posted $75.8 million of revenue versus consensus expectations of $75.7 million and $14.3 million of adjusted EBITDA versus expectations of $12.0 million. Total store count was also strong in 2019, coming in at 39 locations versus guidance of 35-40.

Since the majority of Green Thumb shareholders reside in the U.S., the company must now report its financials in accordance with United States GAAP.

Management cited uncertainty around the impact of the coronavirus crisis as the reason Green Thumb did not issue full-year 2020 revenue, EBITDA or store-opening guidance. However, management did guide revenue growth for the first quarter of 2020 at 20%-25%.

More important, management mentioned continued progress on reaching free cash-flow positive in 2020.

Green Thumb’s same-store sales were exceptionally strong, posting year-over-year growth of 50% on 14 stores open more than a year and quarter-to-quarter sequential growth of 15% on a store base of 19.

The company is rapidly adapting to coronavirus restrictions by implementing curbside-pickup and home-delivery services at certain dispensaries.

Charlotte’s Web’s 4Q19 results

Charlotte’s Web (TSX: CWEB) reported fourth-quarter 2019 results that included missing the analyst revenue estimate, issuing 2020 revenue guidance well below estimates, announcing a sizable acquisition and getting up to $20 million of line-of-credit financing from JP Morgan.

Fourth-quarter revenues of $22.8 million were 15% lower than the $26.8 million that analysts expected. Several factors were cited for the weak performance, including:

  • Lack of U.S. Food and Drug Administration ruling on ingestible CBD products.
  • Intense competition and price reductions in the natural store channel.
  • Reluctance of the FDM sales channel (food, drug and mass retailers) to buy ingestible products without FDA-issued guidelines.

Management now estimates the FDA regulatory framework will not be set until mid-2021 and has adjusted its revenue guidance accordingly. If the FDA clarifies regulations before then, it would be an upside to the company’s current outlook.

The delayed FDA regulatory framework resulted in Charlotte’s Web having to take a $13.9 million charge to account for inventory that expired before it could be sold.

In the absence of selling ingestibles into the FDM channel, Charlotte’s Web is focusing its efforts on growing its direct-to-consumer efforts as a key revenue growth driver.

Craig Behnke can be reached at [email protected].

Mike Regan can be reached at [email protected].