Vireo Growth Inc. (VREO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Vireo Health International Fourth Quarter '20 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Sam Gibbons, with Investor Relations. Thank you. Please go ahead, sir.

Thank you, Adam, and thanks to everyone for joining us. With me on today's call is our Chief Executive Officer, Dr. Kyle Kingsley; and our Chief Financial Officer, John Heller. Today's conference call is being webcast live from the Investor Relations section of our website, and dial-in and webcast details for the call have also been provided on Slide 3 of today's presentation, which is also available on our website. Before we get started, I'd like to remind everyone that today's conference call may contain forward-looking statements within the meaning of the U.S. and Canadian securities laws. These statements are based on management's current expectations and involve risks and uncertainties that could differ materially from actual events and those described in such forward-looking statements. For more information on forward-looking statements, please refer to cautionary note regarding forward-looking statements in today's earnings release. Now I'll hand the call over to Dr. Kingsley.

Thanks, Sam. Good morning, everyone, and thank you all for joining us for our fourth quarter and full year 2020 results call. Please turn to Slide 4, where we provided a summary of highlights from the full year. Full year revenue of $49.2 million grew 64% compared to 2019, and we experienced good organic growth across each of our operational markets in both the quarter and full year periods. Excluding contributions from our former Pennsylvania subsidiaries, fourth quarter revenue grew 46% to $11.5 million, which was up roughly 9% sequentially compared to quarter 3. As many of you know, throughout fiscal year 2020, we were focused on executing our core market strategy with the objective of optimizing our portfolio of vertically integrated assets to produce stronger and sustainable profitable growth. Early in 2020, our management team and Board of Directors made the decision to pause our development plans in states like Massachusetts and Nevada. We divested our businesses in Ohio and Pennsylvania, where we did not have strong-enough retail footprint to be successful. And we decided to focus on our remaining vertically integrated markets in Arizona, Maryland, Minnesota, New Mexico and New York, where we saw a clear path to profitability. The results of these decisions -- the result of these decisions has been steady improvements in our financial performance over the past several quarters as evidenced by continued strength in sales growth and greater consistency in margins as recent efforts to increase scale and operating efficiencies have been successful. We're proud of the fact that we've been able to guide our portfolio of assets closer to producing positive cash flow from operations despite operating in mostly restricted medical markets. And now Vireo is in enviable position in which a majority of our core markets appear likely to transition to adult-use programs in the next 24 months. As many of you know, Arizona recently became the first of our markets to transition to recreational use, and we were thrilled to record Vireo's first-ever adult-use sales last month. I'll talk a little bit more about our operations in this state momentarily, but it's important for us to continue pointing out that our core markets of New York, Minnesota and New Mexico may all pass meaningful cannabis legislative reforms this year. Our markets in New Mexico and New York appear likely to have passed -- to pass adult-use policy reform in 2021. And while there is currently an adult-use bill working its way through the state legislature in Minnesota, the more likely scenario in our home state is for the legislative addition of smokable flower to the medical program this year. Each one of these outcomes would likely serve as significant revenue growth catalysts for Vireo's business. The other important distinction for us to continue drawing for investors is that we do not require handicapping levels of capital outlay to capture these growth opportunities because we've been investing strategically in these markets for the past 2 years or longer. And today, our balance sheet is strong. In Minnesota, New York, we're currently operating at a fraction of our full capacity. And we just completed capacity expansion projects in Arizona and Maryland, which will allow us to drive strong revenue growth in both of these markets for the foreseeable future. In Arizona, we added a 9-acre outdoor cultivation facility, which brought our total square footage of cultivation in the state to approximately 300,000 square feet. We're very excited about our position in this market and feel confident about our ability to drive revenue growth through the Arizona wholesale market while we look to augment our retail presence in that state. In Maryland, we recently announced that our newly renovated 110,000 square foot greenhouse facility in Massey has been completed and should be fully operational by the end of second quarter. We're expecting to produce 4-plus turns of cultivation a year, which should increase our biomass output capacity in the state by approximately 12x. We've also made enhancements to our manufacturing and processing capabilities at our 30,000 square foot facility in Hurlock, Maryland and opened our first dispensary in Frederick, Maryland earlier this month, which brought our total number of operational dispensaries to 16. These projects should enable us to continue driving stronger revenue growth in Maryland for the foreseeable future. In Minnesota, the rollout of our Green dispensaries is complete, and we now have inked the 13 total retail stores that are currently operational in the state. Patient enrollment in the state's medical program is continuing to show good growth. And there's also potential for legislative reform in the state which I mentioned, which could allow for the sale of flower in the medical program. We continue to believe that the Minnesota market is one of the most overlooked cannabis opportunities in the entire United States. In New Mexico, our 2 new managed dispensaries in Las Cruces and Albuquerque are on track to open during the second quarter, subject to regulatory approval, which will bring our total number of operational dispensaries in New Mexico to 4. And with progress towards the potential enactment of adult-use legislation in the coming weeks, we may pursue additional store openings in New Mexico during the second half of this year. Our balance sheet is in a great position with over $25 million in cash at the close of the year. And as referenced in today's earnings release, we expect to have roughly $42 million in cash following the closing of the first tranche of debt financing, which we referenced in this morning's earnings release. We also expect to close on the pending divestiture of our Ohio processing facility next week, which will yield another $1.5 million in cash proceeds. We clearly have a lot of exciting opportunities in front of us, and our improved balance sheet and more optimistic regulatory environment across our various state markets has given us the confidence to continue making strategic growth investments in our business, beginning with incremental expansion projects at our facilities in Arizona and Maryland during the second quarter. In Arizona, we expect to invest an additional $3 million for the development of a dry-flower processing facility and a second 9-acre shade house adjacent to our existing operations, pending regulatory approval, which will bring the total size of our cultivation facilities in the state to approximately 18 acres. In Maryland, we're planning to invest approximately $6 million to add an additional 75,000 square feet of cultivation capacity in Massey. Both of these projects should help us become one of the largest producers of biomass within each of these markets. We expect these projects to be complete before the end of the third quarter of 2021. Given near-term uncertainties related to the timing and outcome of certain regulatory developments in several of our core markets, we've opted not to provide quantitative commentary regarding our revenue or profitability outlook for fiscal year 2021 on today's call. However, we do anticipate experiencing continued organic growth for the foreseeable future, and expected reduction in SG&A expenses as a percentage of sales will together substantially reduce cash outflows from operations through 2021. Our recent efforts to scale production and expand our retail dispensary footprint could also help drive improved financial performance through fiscal year 2022. We hope to be in a position to provide the investment community with an update on our development initiatives and provide more specific expectations regarding the longer-term outlook for the business by the middle of this year. That concludes my prepared remarks. I'll now hand the call over to John for his review of the financials.

Thank you, Kyle, and thanks to everyone for joining us on today's call. Before I begin my review of the financial highlights, I'd like to remind everyone that this was the first quarter and fiscal year that we've presented our results in accordance with U.S. GAAP. This transition should be a welcome change for the investment community and make it easier to evaluate our performance as it eliminates the confusing presentation of biological asset adjustments under IFRS. It also represents the natural progression of our disclosure practices as we ultimately seek to uplist to a major U.S. exchange sometime in the future. The work related to this transition resulted in onetime professional fees of approximately $500,000 during the fourth quarter, which was in line with the expectation we discussed on the third quarter call. The key variances between methodologies primarily relate to the treatment of biological assets, inventory adjustments and sale-leaseback transactions as the operating leases on our retail dispensaries are now included within operating expenses rather than as interest expense under IFRS. The accounting methodology for the valuation of biological assets under IFRS also created some variances in tax amounts and deferred taxes given the treatment of inventory carried forward at fair value under IFRS versus at cost under GAAP. Now please turn to Slide 6, where I'll begin with a review of highlights from the full year and fourth quarter. Please keep in mind that all numbers stated refer to U.S. dollar amounts unless otherwise noted. For the full year, total revenue, including our former Pennsylvania subsidiaries, increased 64% to $49.2 million compared to 2019. Excluding Pennsylvania, revenue was $42.2 million, an increase of 57% as compared to last year. Fourth quarter GAAP revenue of $12.4 million increased 38% and was up 46% to $11.5 million, excluding Pennsylvania. On a sequential basis, excluding the former Pennsylvania subsidiaries, revenue increased approximately 9% sequentially compared to the third quarter. Retail revenue, excluding Pennsylvania in the fourth quarter, was $9.1 million, an increase of 39.3% and reflected growth in each of our markets. Wholesale revenue, excluding Pennsylvania, increased 78.6% driven by strong growth in Arizona and Maryland. Gross profit for the full year increased by $9.8 million to $17.1 million or 34.8% of revenue as compared to $7.3 million or 24.5% last year. Gross profit in the fourth quarter was $5.3 million or 42.6% of revenue as compared to gross profit of $1.3 million or 14.6% of revenue in the same period last year. The improvement in gross margin has been primarily the result of operational efficiency gains in several markets and improved operating leverage through higher sale volumes, especially in the Maryland wholesale channel, which was operating below normalized capacity utilization rates in 2019. Total OpEx for the fourth quarter was $7.5 million, an improvement of $3.7 million or 33% as compared to $11.2 million in the fourth quarter of 2019. The reduction in operating expenses was primarily attributable to a reduction in share-based compensation expenses, lower salaries and wages and a onetime adjustment related to inventory costing of labor in the prior year quarter, partially offset by higher depreciation costs related to expanded operations. Excluding depreciation and share-based compensation, operating expenses in the fourth quarter of 2020 were $6.7 million or 53.9% of sales as compared to $9.2 million or 102.2% of sales in the fourth quarter of 2019. Net loss from operations during the fourth quarter was $2.2 million compared to a loss of $9.9 million in the fourth quarter of last year. Total other income was $2.0 million during Q4 2020, a favorable variance of $32.1 million compared to total other expense of $30.2 million in Q4 of 2019. This favorable variance is primarily attributable to an intangible asset impairment charge of $28.3 million in the prior year quarter to reflect changing market valuations of cannabis businesses at that time and a gain of $3.8 million on the divestiture of the company's former Pennsylvania Dispensary Solutions subsidiary in Q4 2020, partially offset by a loss of derivative liability of $1.2 million. Net loss in Q4 of 2020 was $2.3 million as compared to a net loss of $39.5 million in Q4 2019. The favorable improvement in net loss was primarily the result of the nonrecurrence of onetime impairment charges in the prior year quarter as well as improved revenue growth and efficiency of operations. Adjusted EBITDA was $112,652 in Q4 as compared to a net loss -- excuse me, a loss of $7.3 million in Q4 2019. Please refer to the supplemental information and reconciliation of non-GAAP financial measures at the end of today's earnings release or additional information on this metric. We ended the quarter with total current assets of $47.0 million, including cash on hand of $25.5 million, which includes $10 million in proceeds received from the forced redemption of warrants related to issuance of 13,651,574 additional subordinate volume shares that we disclosed in November. Once all those warrants were redeemed, and the derivative liability associated with them fell off our books in the fourth quarter. Total current liabilities at year-end were $19.9 million, with $1.1 million in debt due within 12 months. As of December 31, 2020, there were 113,016,459 equity shares issued and outstanding on an as-converted basis and 157,274,493 shares outstanding on an as-converted fully diluted basis. Following the expected closing of the first tranche of debt financing, which we announced with Chicago Atlantic and Green Ivy Capital, the company should have cash on hand of approximately $42 million. And we also expect cash proceeds of over $1 million related to the pending divestiture of Ohio Medical Solutions. As Kyle mentioned, the improved strength of our balance sheet and the potential for favorable regulatory developments in several of our markets has given us the confidence to continue investing in our business. And we are planning to begin incremental expansion projects in Arizona and Maryland during the second quarter. We expect these new projects to cost approximately $9 million and that they'll both be finished by the end of the third quarter. That concludes our prepared remarks. Operator, we'll now open the line to analyst questions.

[Operator Instructions] And your first question comes from the line of Eric Des Lauriers with Craig-Hallum.

Congrats on the strong organic growth and margin expansion and great to see you break into positive EBITDA. So New York legalization, certainly front of mind today for most of us on the call. So far, rules regarding existing license holders and their ability to colocate adult-use sales or sell wholesale into the adult-use market, not yet clear. I'm wondering if you could share some color on what you're hearing from your New York team regarding retail and wholesale in the adult-use market.

Yes. Eric, hesitant to kind of conjecture on where things stand there until I actually see the granular proposed language, but we're generally bullish on the outcome for the state of New York and existing operators. But I hate to put rumors out there. I have not seen the proposed final language or been able to analyze it in detail. So sorry for being evasive there.

No worries. I figured I'd try my best here. Okay. So switching to Arizona and Maryland. Great to see the continued organic expansion in those markets. Can you give us any color on your early wholesale operations in those states? And then as it relates to Arizona, any color on the early adult-use sales?

Yes. Very encouraged. I mean, obviously, we're kind of step functioning here and doing -- doubling down with additional expansion beyond what we just completed in those 2 markets. So you hit it on the head. These are very substantial wholesale opportunities. We generally have not been able to keep flower in stock in the Maryland end of things on the wholesale side. Very excited about 12x-ing our capacity there. We actually have the biomass cloned and are ready to fill that entire facility here in the coming weeks. So very excited about Maryland. We anticipate that's going to remain a very strong wholesale market here for the foreseeable future. As we mentioned, we also opened our first dispensary there in Frederick. On the Arizona side, just high level, kind of the 25% to 30% increase in sales on the retail side. That's ballpark of what we've been experiencing here, and there continues to be very strong wholesale demand for our flower there. And as you know, we have a very substantial facility in the form of shade houses. Currently, there's a 9-acre shade house infrastructure built there, and we're doubling down and doing that again with some augmented flower processing capacity there. It's a very strong flower wholesale market still in Arizona. I don't know if you have any more granular questions, Eric.

No. That was great color. It sounds like strong demand for your products in both markets here, and obviously, doubling down in Arizona and continued expansion in Maryland. So that's great. Just looking for that sort of early indications on how wholesale is going. So great to hear that demand is strong. Last for me, as it relates to Minnesota. Again, a bit more of a regulatory crystal ball question. But with flower kind of moving along in the legislature in your home state, just wondering if you have any expectations for potential timing, assuming this would be a 2022 thing if it gets over the finish line, but just would love to hear kind of the latest update from what you might be hearing.

Yes. My best guess would be that this would slide into 2022 on the implementation side of things. As you know, we're operating at a fraction of our capacity on the cultivation side in Minnesota. We've really been laser-focused on flower for quite some time now and genetic diversity, high-potency, high-quality streams, augmented microbiological standards and testing over time. So we're really leaning into this. We're hopeful that flower becomes part of the medical program there, and we really anticipate we'll be ready once we get these -- once we get it through -- across the finish line, like you said.

Great. Well, it sounds like lots of exciting things on the legislative front and good to see you guys continuing your profitability increases and continuing expansion here. So looking forward to what's to come.

Thank you, Eric.

And your next question comes from the line of Graeme Kreindler with Eight Capital.

This is Ty Collin filling in for Graeme this morning. Just another one on New York. How much capital is the company looking to invest in New York over the next 12 months or so? And given the New York medical market's small size and its strong illicit market presence, what does Vireo think will be the key differentiating factor to being successful in a fully legal environment?

Yes. Hard to speak to the exact size of investment until we see kind of the more granular character of the law that comes out. If there are canopy limits, obviously, that's going to potentially change size of investment, a number of dispensaries that are allowed are -- that's also quite important. So hard to guess there. Generally speaking, we are looking at some infrastructure investment, I anticipate, on the production side. And we would likely work with a real estate partner on such an investment. I do anticipate a fairly prolonged implementation time line. So investment is likely. It's just a matter of what kind of scale is allowed under the laws that passes.

Okay. Great. And just a follow-up on Arizona. Can you discuss how you're managing supply and the current ramp-up of the adult-use market? And does Vireo expect to be a net wholesaler at some point? And if so, when does it expect it to grow to be able to support that?

Yes. We are quite wholesale-focused now, actually. With these very substantial outdoor grows, that leads to a pretty significant amount of inventory. And so we did make the choice to not be terribly aggressive in quarter 4 on wholesaling in Arizona. And so we do have a pretty hefty amount of inventory at this time. And really just looking to keep our own retail supply, that's our primary goal. But we are seeing very strong wholesale demand, and we're going to have the supply to really back that up with the sequential expansions, particularly in the flower realm. There is very good demand for the Elephant Head flower, which is this clean, naturally produced outdoor flower [ that produce Albatussin ] in the Amado area there at our Elephant Head Farm facility.

Okay. Great. Appreciate that detail. And if I could sneak one more in. Just given an increase in recent acquisition multiples out there, is the company looking at any opportunistic noncore divestitures on the horizon?

Yes. I think we're out of the business of -- not a priority to divest ourselves of noncore assets. On the flip side, we're not going to overpay even within our core markets for acquisitions. So yes, we're -- we feel very good about our balance sheet. No intent to jettison additional assets at this time.

Okay. Great. I appreciate that. And congrats on the quarter and the year.

Thank you.

[Operator Instructions] And your next question comes from the line of Matt Bottomley with Canaccord Genuity.

Just wanted to ask a little more on the Minnesota market and what the dynamics are and the overall uptake there. So granted, there isn't a 2021 outlook provided. Can you share any color on what to be expected by the 4 new stores that opened in the back half of the year? Is it linear? Should we expect your Minnesota contribution to double on the back of that? Is there cannibalization of sales between some of these locations? Just wondering on what the dynamics are in your home state and how patient attrition is tracking.

Yes. Great question. So we did have -- just globally in Minnesota, we -- on average, we saw about 150 patients entering the market on a weekly basis through about April of last year, at which point, we had a pretty significant upward inflection to north of 250 patients a week. And so that's been -- that's generally been persisting. Since we've opened our additional dispensaries, we haven't really appreciated a significant change in that ongoing strong linear growth in patient numbers. We've seen a combination with the new openings of cannibalization of our own business but also our sole competitor. We've seen their patients come our way. Really, the location of the dispensaries is really a primary determinant for where patients go. And they generally go to their closest dispensary, independent of who it is. And with 8 of 13 dispensaries, we've seen the general increase in our market share as far as new patients coming into the program. So encouraged, it's a little bit early to tell. As you know, kind of all of our dispensaries came online end of last year. But I'm encouraged by the growth. We've been surprised by some and underwhelmed with another 1 or 2, but I think they're all going to kind of normalize. We do have a medical team that focuses on really educating, referring providers in the vicinity of our dispensaries. And so we're laser-focused on augmenting there. Just very excited. I'm blown away by the quality of kind of the Green Goods stores. They're really something special, and we anticipate to continue to bite into market share in Minnesota. As far as attrition, too early for us to tell if that's going to shift at all. I anticipate attrition is going to continue to be an issue in the state until we see the addition of flower, at which point, we're going to have this whole other tranche of lower-priced products that's really going to be fundamentally transformative to the Minnesota market, which is generally expensive for folks right now. Some estimates are that there's an $800 million illicit flower market in the state of Minnesota. And many of those folks are using cannabis for medical reasons. And so we're excited at the potential of flower in Minnesota. We think it's great policy, and we think it will transform the program here for our patients.

And your next question comes from the line of Paul Piotrowski with M Partners.

Congrats on the positive adjusted EBITDA. I just had a question on the Green Ivy facility. Is that being earmarked for New York? Or are there other potential plans with the capital?

Yes. There's a lot of different paths. Some of that capital will be used for sequential expansion in Arizona and Maryland, as we outlined. You can imagine, given the regulatory tailwinds in Minnesota and New York and New Mexico, that there may be additional paths for capital there. One place that I'm interested in kind of expanding our footprint is on the retail side. We do have those opportunities in New Mexico and potentially New York. So a lot of different paths for capital. Generally speaking, we're interested in continuing to augment cultivation production scale and our high -- best-in-class retail footprint. We're looking for amazing retail locations. And so that's where a lot of that capital will go over time. We're going to be very prudent and measured in where we direct this. There's a ton of analysis that goes into each capital deployment. We have nearly intimate places that we can put capital. But the low-hanging fruit there is pretty compelling, and that's the core market that I just outlined there.

Okay. And then just one more on Nevada. So you guys closed those licenses recently. Is there a plan to invest in that state? Or are you guys -- is that sort of lower on the priority list?

Yes. That's a little bit lower on the priority list. We've developed a taste for vertical integration. And we just -- in early to intermediate term, we think that makes a ton of sense. We do have a 5,000 square foot production facility there in Caliente that's built on 14 acres. We could probably do 10 to 12 acres of cultivation on top of that. And it's a great micro climate for extremely affordable kind of low-cost, mid-quality biomass production there. So it's lower, but it is a very cost-effective potential opportunity. Just always a little bit nervous about being an isolated wholesaler without that vertical integration output on the retail side.

Okay. Understood. Congrats again on the quarter.

Thanks, Paul.

And there are no further questions at this time. And I'll now turn it back to Kyle.

Okay. Thanks to everybody for joining us this morning. We appreciate your continued support and look forward to speaking with you all again on our first quarter call in May. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.