Trulieve beats estimates, iAnthus defaults on debt, Harvest in multiple lawsuits & KushCo’s massive reserve for losses

TRUL beats estimates, maintains 2020 guidance

Bucking the trend of cannabis companies missing estimates and lowering guidance, Florida-based Trulieve (CSE: TRUL) reported a strong fourth quarter in 2019 and maintained its 2020 revenue and EBITDA guidance.

Revenue was $79.7 million versus a $79.5 million estimate, and EBITDA was $45 million versus a $36.2 million estimate.

Trulieve management also chose to keep their 2020 revenue and EBITDA guidance, which was originally set in late November 2019.

2020 Guidance
Revenue Low 380,000
Revenue High 400,000
EBITDA Low 140,000
EBITDA High 160,000

The cannabis industry and the general economy have changed drastically since then. Trulieve’s CEO Kim Rivers made it a point to reiterate how the company feels about the guidance, saying “we do feel strongly that we can reaffirm (guidance).”

A large part of the revenue and EBITDA growth in 2020 will be driven by new store openings.

The company plans to have 68 dispensaries open in 2020, compared with 44 at year-end 2019. All but a few of those new dispensaries will be in Florida, where the company has more than 50% market share, economies of scale and a loyal repeat customer base.

The company ended 2019 with more than 100 delivery vehicles, which have been a huge benefit for the company amid COVID-19 travel restrictions.

Trulieve’s business model of going very deep in one state instead of establishing a shallow presence in a handful of markets has enabled it to better weather the capital market and broader economic storm that is battering so many multistate operators.

We estimate Trulieve has more than enough cash on the balance sheet and internally generated cash flow to execute its business strategy without raising additional capital.

Trulieve reports a host of operating metrics on a monthly basis that investors can use to track the company’s performance:

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20
FL Stores 24 24 26 27 28 29 30 31 35 38 40 42 43 45
FL Retail Sq Ft n/a n/a n/a n/a 68,000 80,406 74,035 80,666 94,113 102,889 107,929 114,906 121,681 129,006
Avg Sq Ft / Store n/a n/a n/a n/a 2,429 2,773 2,468 2,602 2,689 2,708 2,698 2,736 2,830 2,867
CA, CT, MA Stores 1 1 1 1 2 2 2 2 2 2 2 2 2 2
Customers in Database 129,314 137,571 146,252 158,548 170,158 181,020 192,386 203,692 214,827 226,560 238,398 250,528 261,608 273,069
New Patients in Month 9,503 8,257 8,681 12,296 11,610 10,862 11,366 11,306 11,135 11,733 11,495 12,130 11,080 11,461
Avg patients daily n/a n/a n/a n/a 3,500 5,200 5,100 5,300 5,200 5,773 6,600 7,300 n/a n/a
Avg visits per Month n/a n/a n/a n/a 2.0 2.0 2.0 2.0 2.0 2.0 2.5 2.6 2.6 2.7
Cultivation Sq Ft 562,790 615,710 638,008 660,000 686,008 686,006 710,000 1,612,408 1,660,408 1,684,408 1,684,408 1,684,408 1,684,408 1,708,408
Product SKUs 150 156 170 195 224 224 235 240 249 267 290 311 342 349
Vehicles in Delivery Fleet n/a n/a n/a n/a 68 74 75 75 79 99 98 107 n/a n/a

iAnthus investigating its CEO, defaults on debt

An April 6 news release from iAnthus (CSE: IAN) indicated the New York-headquartered company:

  • Defaulted on its secured debentures.
  • Is investigating its CEO for conflicts of interest.
  • Has hired an adviser to explore strategic changes to its capital structure.

Marijuana Business Daily‘s initial report on the story is available here.

Integrity of senior management is a key criterion when analyzing a company as a potential investment.

The board of directors’ decision to form a committee to investigate iAnthus CEO Hadley Ford for potential conflicts of interest is a major red flag. The news release did not indicate the nature of any potential conflicts, but the mere fact the company is investigating is a flashing danger signal.

It appears iAnthus made an active decision to default on a $4.4 million interest payment. Our analysis shows that the company has enough cash on its balance sheet to make the payment but, for strategic reasons, is choosing to not to do so. That is very different from not actually being able to make the payment.

The company tried to negotiate with bondholders to delay the interest payment but did not succeed – though there will be more attempts to renegotiate. The company said it will continue to explore renegotiating existing finance arrangements and contracts with lenders and subsidiaries.

iAnthus hired Canaccord Genuity to assist with negotiations and to explore alternative capital structure plans.

HARV reports fourth-quarter 2019 earnings

Phoenix-based Harvest Health & Recreation’s (CSE: HARV) fourth-quarter 2019 revenue of $37.8 million missed estimates of $39.2 million, but EBITDA of -$6.8 million was better than analyst estimates of -$8.6 million.

First-quarter 2020 revenue guidance calls for sequential growth in line with fourth-quarter 2019, or 14%. That puts first-quarter revenue at about $43 million, a shortfall versus the $46.7 million consensus estimate.

It is not clear how much that guidance is lower than investor estimates because Harvest recently closed several acquisitions and management won’t detail how much revenue those will contribute in the coming quarter. Without that information, it’s difficult to isolate how the core business is truly performing.

No matter the magnitude of acquisition contributions, core revenue is clearly significantly lower than investors expected.

We previously projected that Harvest Health would have to reduce 2020 guidance because the company’s acquisitions of Verano Holdings and Falcon International constituted the bulk of projected revenues in 2020.

To put into perspective the revenue impacts from the changed economic landscape and terminated or at-risk deals, compare the first-quarter 2020 revenue guidance of $43 million, or about $172 million annualized revenue, to management’s 2020 revenue guidance of $700 million to $1 billion issued in November 2019.

That is beyond a massive shortfall.

Harvest had a flurry of activity since its previous earnings report:

  • CEO Steve White took control of more than 50% of the company’s voting shares. (Our deep dive is available here.)
  • The proposed Verano Holdings acquisition was terminated.
  • The company completed its Interurban Capital Group acquisition; however, it subsequently entered litigation with some of the company’s management.
  • Harvest announced legal action to terminate the Falcon International acquisition. (Our deep dive is available here.)
  • The company completed its Franklin Labs and Arizona Naturals acquisitions in Pennsylvania and Arizona.
  • Harvest raised $94 million of debt and equity in 4Q19 and another $100 million so far in 2020.

The company cited market uncertainty related to COVID-19 issues for why it cannot provide 2020 guidance but said it will look to do so on its May earnings call.

KushCo makes huge reserve for future losses

KushCo Holdings’ profitability took a huge hit in its fiscal second-quarter earnings report, which included a $9.1 million provision for bad debt expense.

The California-headquartered company noted on its quarterly call that these debts are primarily from smaller “legacy” customers, which were $13.8 million of revenue in 3Q19. In other words, KushCo is expecting to write off 66% of its 3Q19 “legacy” customer revenue.

While the bad debt has been reserved, it has not been written off yet. We believe nonpayment of past sales and write-off of accounts receivables will become a larger issue for the cannabis sector overall.

Our detailed analysis of the situation and ramifications for the cannabis industry in general, is available here.

Craig Behnke can be reached at [email protected].

Mike Regan can be reached at [email protected].