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Harvest Health & Recreation Inc (CNSX:HARV) CEO Discusses Consolidation Impact on MSO Valuations

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Harvest Health & Recreation Inc (CNSX:HARV) (OTCMKTS:HRVSF) CEO Steve White discusses the consolidation effect in the cannabis space in light of Canopy Growth Corp’s (TSE:WEED) (NYSE:CGC) (FRA:11L1) planned acquisition of Acreage Holdings Inc (CNSX:ACRG.U) (OTCMKTS:ACRGF). He highlights that Canopy has created a blueprint for foreign acquisition of multi-state operators and emphasizes this strategy can be applied by all major companies, not just Canadian LPs. White believes the deal is positive for US MSOs like Harvest because valuations will increase. He discusses the valuation discrepancy between Canadian and US cannabis names and suggests that share price difference will keep Harvest focused on acquisitions in the US space. White addresses growing price competition in established markets and explains the importance of securing licenses in emerging jurisdictions quickly. He explains that Harvest protects its margins by growing its retail and wholesale footprint, which Harvest then uses to build its brands.

Transcript:

Narrator: Harvest Health & Recreation Inc. is a vertically integrated cannabis company with one of the largest footprints in the US. The company has recently entered into a binding agreement to acquire Verano Holdings LLC, one of the largest privately held licensed operators of cannabis facilities, for an estimated purchase price of $850 million USD. The deal is one of the largest US cannabis consolidations in history, and will give Harvest the right to operate up to 200 facilities across 16 states and territories.

Harvest Health & Recreation is listed on the CSE and trades under the ticker symbol HARV.

James West:   Steve White joins me now. He’s the CEO of Harvest Health and Recreation, trading on the CSE under the symbol HARV. Steve, welcome.

Steve White:  Thank you very much for having me.

James West:   Steve, we are meeting on this momentous occasion of where Canopy Growth has made an offer to purchase all of the stock outstanding in Acreage Farms which, if concluded, would be the largest transaction in the cannabis space to date in the form of a merger, and it’s particularly interesting because it’s a cross-border merger, which nobody really thought would be able to happen in the current environment where marijuana is Federally prohibited in the US.

Now, what are the implications for Harvest Health & Recreation directly, and the entire sector in the US and Canada, generally?

Steve White:  So, start with Canada because that’s the easy one: it’s another instance where Canopy Growth figured out a way to do something that everybody else thought was impossible, and then they went out and executed it. So, kudos to them for being first on this.

And so the problem now for Canadian LPs is, the blueprint is now out there, and the blueprint does not require a Canadian LP to make the acquisition. So this is something that if a consumer packaged goods company, or an alcohol company was interested in the space, they copy Canopy’s blueprint, and in they come.

That also means that prices get higher, right? So US multi-state operators become more valuable, because there are more people, you know, looking to purchase them over time, and that’s another problem for Canadian LPs.

For Acreage, it’s a great deal as well. They did, they took, it’s the ultimate private equity play. They put together a number of assets, they bundled them together, and they sold them at a much higher price than what they acquired them for. Kudos to them. Also positive for US MSOs, because we have more people who could be targeting acquisitions in the US.

James West:   So the consolidation momentum that has now been established yet again by Canopy, do you think that’s going to take the whole sector higher in terms of valuation in the immediate term? Or is it more like a long, slow burn to the upside that’s just going to keep on going as these bigger companies and bigger deals happen?

Steve White:  I think the long term’s easier to predict, and I do think it is going to go up over time. I’ve given up on trying to predict what stocks are going to do day-to-day or on the short term.

James West:   Sure.

Steve White:  Particularly in this sector; it’s so volatile, and if it’s, if volatility is something that is a problem for you, this is the wrong place to be.

James West:   Right, that’s right.

Steve White:  There’s a lot of other places that are safer and a lot easier to deal with.

So I think, but I do think short-term, what we’ve seen is people who, US companies who everyone knows are going to be aggressive and are going to look to do mergers, acquisitions, look for financial partnerships, those people will be rewarded, because there is a blueprint available for that to happen.

James West:   You bet. So for Harvest Health and Recreation, acquire or acquirer?

Steve White:  Both. Well –

James West:   You’ve already demonstrated –

Steve White:  We’ve been an acquirer over time. I mean, but, you know, it is our job as fiduciaries of the company to make good decisions for Harvest shareholders. If the right financial partner comes along, it’s a conversation we have to have. We do, and for us, you know, we love what we’re building. We’re very proud of it. We see incredible upside, and hopefully other people do, too.

James West:   Right. In terms of your footprint in the United States, you seem to have dominance in most of the legal markets that are important from a population perspective. Do you see any reason for a company like yours to make a move north into Canada?

Steve White:  There could be a strategic reason why we would do that. The problem that we have right now, the disadvantage we have over the relative to the Canadians is, our stock trades at a severely lower levels than the Canadians, right? So they trade based on earnings. They trade at 7 times what we trade. So for our stock is therefore more valuable to us. So we can’t go make Canadian acquisitions because Canadian stuff, frankly, is too expensive right now. So you know, the Canadian opportunity is a good one; it’s a legal market. There are companies that are executing well in the market. For us, that’s a difficult acquisition to make.

Plus, there are so many good opportunities in the US right now, that’s where our focus is.

James West:   Okay, so what’s your big problem that you have to execute on right now in order to sort of backfill the valuation that you have, even though by your own admission, it’s low relative to Canadians. But you know, there’s this expectation that these companies, like especially in the Canadian sense, where the valuations are high and they certainly are not justified by sales and revenue, but so it’s speculative value based on a future expectation of revenue growth and, ultimately, profit.

So in the US, the same thing applies even though the valuations aren’t there. What’s your approach to that?

Steve White:  We just have to continue to execute. The unique thing about Harvest is, we’ve been a profitable company for years. Before we went public, we made money. We learned how to make money because we had to make money. We didn’t have access to capital the way that the Canadian companies always have. So we had to run good foundational profitable businesses.

So it’s really about execution. When you tell analysts and you tell The Street and you tell investors you’re going to do something, you have to go out and do it; so that’s what we have to continue to demonstrate over time, that that is who we are, that’s what we’ll continue to do.

James West:   Sure. In the Canadian context, CEOs like to focus on the cost of growing and their realized cost per gram in the marketplace, which is, unfortunately, lower than anybody wants except maybe the consumer, because the government mandates this pricing model. In the United States, there’s no such limitation, so you’ve got, in some cases, extremely premium product going for as high as $30 USD a gram, while at the same time, in California, for example, there’s 200 to 300 percent more supply than there is demand, and so at the lower end, there’s price competition that’s threatening to become a commodity price level. Does that sort of scare you at all, or do you feel that your operation and your asset mix protects you sufficiently?

Steve White:  Yes. But I think that really underscores the importance of winning applications when the state issues them, because what you see consistently is, early on in a market you see that big margin spread. Harvest has traditionally been very good at going out and getting licenses when they’re issued, building facilities and stores quickly, and then turning the businesses profitable very, very quickly.

Over time, I think we all agree that there’s going to be a tendency towards commoditization for cannabis. In many instances, it’s going to be an ingredient in other products; that’s inevitable. We have to be able to, as leaders of these companies, see around the corner and build the business accordingly. For us, one of the things that we talk a lot about in the US is, the retail footprint, the wholesale footprint, and then ultimately using that to build brands. So that’s how we protect our margins.

James West:   What is Harvest Health’s flagship product?

Steve White:  We have a number of products, actually. So our flagship are really our retail stores; those are called Harvest, right? So the stock looks like the retail stores. But we have now over, with our recent acquisitions, we have more than 20 brands under the Harvest umbrella, with hundreds of skus when you add all those brands together.

We have, in multiple states, rolled out, you know, our biggest – we have some flower brands that are quite popular, we have some vape brands. Those are the most popular, those account for the biggest portion of our revenue.

James West:   The ability to advertise in the United States, is it uniform across all states? Advertising is more or less permitted?

Steve White:  Nothing is uniform across the states in the United States! We have everything from no restrictions to you can’t do it, and then everything in between. So that’s one of the challenges; it’s also one of the opportunities that we have. If we can navigate through that better than other people, it presents an opportunity for Harvest, but nothing is uniform across the 50 states in the US.

James West:   Wow, fascinating. Okay, well, Steve, we’re going to leave it there for now. It’s my first time talking to you, and I really appreciate the conversation. We’ll talk again soon.

Steve White:  Enjoyed it. Hope to be back soon.

James West:   Definitely.

Steve White:  All right.

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

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