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

Good day, and thank you for standing by. Welcome to the Vireo Health International First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sam Gibbons with Investor Relations. Please go ahead.

Thank you, Megan, 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. Dial-in webcast details for the call have been provided on Slide 3 of today's presentation, which is also available on the 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 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 the 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 on our quarter 1 call. I'll begin on Slide 4 of today's presentation where we provided a summary of highlights from the quarter. First quarter results reflect a continuation of the trends we observed in quarter 4 with double-digit sequential revenue growth, excluding our formal -- former Pennsylvania subsidiaries and stable gross margins as we've increased scale and driven greater efficiency in our operations. Full revenue of $13.2 million grew 9% compared to quarter 1 last year, driven by continued organic growth across each of our markets. Excluding contributions from our former Pennsylvania subsidiaries, first quarter revenue grew 30% and 14% sequentially compared to quarter 4. We're very pleased with the continued improvement we're experiencing in our home market of Minnesota. Patient enrollment trends remained strong in the state and we believe we're gaining market share with the rollout of the 4 new Green Goods retail dispensaries at the end of last year. We currently have 8 of the 13 total retail stores that are currently operational in the state. In Arizona, we experienced strong growth in retail and wholesale revenue, as expected, given the start of adult-use sales in quarter 1 and we expect to continue supporting increased flower demand in the state with our recently completed 9-acre expansion at Elephant Head Farm in Amado. Wholesale in Maryland declined on a year-over-year basis as well as on a sequential basis as a result of the move from our former cultivation and processing facility in Hurlock to our new 110,000 square foot facility at Massey due to the need to utilize cultivation capacity to generate biomass for the new facility versus flower and manufactured products for wholesale. The facility in Massey is now fully operational and enhancements to our manufacturing and processing capabilities at the facility in Hurlock will enable us to offer a full suite of medical to more adult-use leaning products, including concentrates as well as gummies and hard-candy edible products combined with the additional 75,000 square feet of expansion of cultivation in Massey that we discussed on last quarter's call. These upgrades will solidify our position as one of the largest-scale producers of biomass and manufactured products in the Maryland market. We're extremely excited to have recently completed our vertical integration in the state with the opening of our Green Goods dispensary in Frederick, which brought our total number of operational dispensaries to 16. The Frederick Green Goods is performing very nicely out of the gate and the scale we're bringing to bear in Maryland is a prime example of why we believe our portfolio of assets is so attractive. We're taking full advantage of the various opportunities across our core markets to build sustained, profitable businesses and we're looking forward to our asset portfolio in Maryland showcasing the attractive upside that we foresee across the rest of our markets in the coming years. We've shared some images of the recent Green Goods dispensary openings in Maryland and Minnesota on Slide 5 of today's presentation. The Green Goods retail brand represent a departure from Vireo's medically-focused dispensaries, which were reflective of the more restrictive medical programs launched in Minnesota and New York back in 2015. The Green Goods stores are designed to meet the needs of both medical and adult-use consumers. We're very encouraged by the performance of recent store openings and look forward to watching this brand grow as we continue evolving with regulatory changes in our markets. Adjusted EBITDA performance in the quarter was impacted by an increase in SG&A expenses of roughly $1.1 million compared to quarter 1 of last year. More than half of those expenses are attributable to G&A expenses that will support stronger revenue growth across our portfolio. As a reminder, we opened 4 new Green Goods stores in Minnesota markets since the beginning of quarter 4, and there have been additional G&A expenses to support the expanding operations in Arizona, Maryland, and New Mexico. The remainder of the increase in G&A compared to quarter 4 of last year primarily reflects a combination of marketing expenses and professional fees as we begin to position recreational use products and brands across our footprint. We do anticipate continued organic revenue growth to result in a reduction in SG&A expenses as a percentage of sales as revenues continue to ramp into the end of the year, and we're confident that our recent results to scale production and expand our retail dispensary footprint will drive improved financial performance through fiscal year 2022 as more of our core markets transition to adult-use programs. Since our quarter 4 update call, our markets in New Mexico and New York have passed adult-use legislation and we're in the process of ramping up capacity in both of these states in preparation for increased demand for our products. In New Mexico our recently completed 13,000 square foot cultivation expansion received regulatory approval in late April and is now fully operational, and will enable us to be ready for adult-use sales in our existing 2 dispensaries as well as the 2 new stores that we have completed and are awaiting regulatory approval in Las Cruces in Albuquerque, New Mexico. We are optimistic that these stores will receive approval for the end of the second quarter, which will bring our total number of operational dispensaries in New Mexico to 4. In New York, we've submitted an expansion proposal to the state that would significantly expand our cultivation and processing capacity. As a reminder, we recently secured an option on and intend to purchase an additional 96 acres of land adjacent to our existing manufacturing site near Albany, and we look forward to providing the market with more details on these plans and facilities as soon as we receive regulatory approval. It is also our expectation that our expansion projects in New York will be financed through real estate partners. In Minnesota, an adult-use bill passed in the House of Representatives last night, but this is an uphill battle in the Senate. However, there is potential for the inclusion of flower to the medical program this year, and we have excess cultivation capacity in the state that will enable us to immediately capitalize on this growth opportunity. In Minnesota and New York, we're ramping up on our existing production capacity and the various capacity expansion projects in other states will help us drive stronger revenue growth, especially next year, as the completion of these projects is not expected to occur until this coming fall. It's been a very productive last couple of quarters for Vireo from a development standpoint and we still have lots of exciting opportunities in front of us that we will plan to discuss in more details at our upcoming Investor Day event, which we expect to announce in the coming weeks. That concludes my prepared remarks. I'll now hand over the call to John for his review of financials.

Thank you, Kyle, and thanks to everyone for joining us on today's call. Please turn to Slide 6 where I'll begin with a review of highlights from the quarter and keep in mind that all numbers stated refer to U.S. dollar amounts unless otherwise noted. Total revenue, including our former Pennsylvania subsidiaries, increased 9% to $13.2 million compared to Q1 of 2020. Excluding contributions from Pennsylvania, revenue increased 30% as compared to Q1 of last year and 14% sequentially compared to Q4. Retail revenue, excluding Pennsylvania, in the first quarter was $10.4 million, an increase of 34% compared to Q1 of last year with growth in each of our markets. Wholesale revenue, excluding Pennsylvania, increased by 17% driven by strong growth in Arizona where we expect to continue benefiting from increased demand of flower now that the state has transitioned to adult-use sales. As Kyle mentioned, our wholesale business in Maryland was impacted during the quarter by the timing of the new -- from our former cultivation facility in Hurlock to the new 110,000 square foot facility in Massey, but our increased scale in this market will help us drive stronger revenue growth and profitability during the second half of this year. Gross profit in the first quarter was $5.6 million or 42.6% of revenue as compared to gross profit of $3.3 million or 27% of revenue in Q1 last year. The improvement in gross margin has been the result of operational efficiency gains in several markets and operating leverage through higher sales volumes. Total operating expenses in the first quarter were $10.7 million, an increase of $900,000 or roughly 10% as compared to $9.8 million in the first quarter of last year. The increase in expenses was attributable to an increase in SG&A expenses of $1.1 million, more than half of which is attributable to the ramp-up of G&A to support future growth and expanding markets, specifically Arizona and Maryland where we've been expanding cultivation and manufacturing operations as well as the addition of 4 new retail stores that we recently opened in Minnesota. On a GAAP basis, SG&A expenses of $8 million increased 18% in Q1 last year and reflected 61% of sales compared to 57% of sales last year. As Kyle mentioned in his prepared remarks, we do anticipate seeing improvements in SG&A as a percent of revenue as sales continue to ramp across our footprint through the remainder of the year. Net loss from operations during the first quarter was $5.1 million compared to a loss of $6.5 million in the first quarter of last year with the improvement driven by stronger gross margin, partially offset by the increase in SG&A expenses. Total other expenses were roughly $374,000, a slight improvement compared to total other expenses of roughly $600,000 in Q1 of last year. The variance primarily reflects this onetime gain on the divestiture of the company's former affiliate Ohio Medical Solutions at the end of the quarter. Net loss was $7 million as compared to a net loss of $7.5 million in Q1 of last year with the improved loss from operations, reduction in other expenses, and onetime gain on the divestiture of Ohio Medical Solutions partially offset by increased taxes. Adjusted EBITDA was a loss of $1.8 million in Q1 as compared to a loss of $3.1 million in Q1 of 2020. The favorable variance was driven by higher gross margin and increased sales, partially offset by the increase in SG&A expenses supporting the company's growth. We ended the quarter with a total current assets of $58.6 million including cash on hand of $40.6 million. Total current liabilities at the end of the quarter were $24.1 million with $2 million in debt due in 12 months. As of March 31, 2021, there were 125,196,702 equity shares issued and outstanding on an as-converted basis, and 153,577,058 shares outstanding on an as-converted fully diluted basis. That concludes our prepared remarks. Operator, we'll now open the line to analyst questions.

[Operator Instructions] Your first question is from Eric Des Lauriers with Craig-Hallum.

Great. I was wondering if you could give us a sense of the ramp in Maryland, so obviously, some moving parts there as you guys transition to a new facility and then got that up and running, I appreciate your comments that it is now fully operational, but could you give us a sense of maybe how you plan on bringing that in-line whether it's through phases or whatnot and how we might expect that to impact the revenues here?

Yes. Our approach really is sort of -- we wanted to bring the Massey facility to capacity as quickly as possible, and so that requires a little bit of patience instead of selling flower or finishing any of our biomass at the previous, the Hurlock facility where we had about 1/12 of the cultivation capacity. We had to be patient, we had to pause wholesale flower sales really build biomass, so that we could rapidly fill the Massey facility, which is now nearly full, if not completely full. Our first harvest is ongoing in Massey right now. So that was not done in phases. We really are kind of hitting on all cylinders at the -- in the 110,000 square feet. We're confident enough in Maryland that we did opt to move ahead as you know with the 75,000 square foot incremental space and we will probably pause -- not pause, but use some portion of one of our flowering capacity in the existing 110,000 square feet to populate that 75,000 square feet. If you run this through, if you do the math, it makes sense to delay the gratification and build a facility as quickly as you can. So it's -- the downside is, again, you pause wholesale very temporarily but we're excited with the way the facility is going. Everything seems to be working well there right now.

Yes. Great. And I guess, just to clarify there you mean essentially dedicate some of the space in the existing facility that could be used for flowering Canopy and essentially use that more for seedlings and clones or whatnot to stock the -- that new 75,000 square foot facility, is that what you're referring to?

Exactly. Yes, we're still aiming to have the incremental 75,000 square feet completed by the end of quarter 3 and it does make sense to preemptively use some of your space to grow up biomass predominantly in the form of larger plants that you can then call them out into the space at the expense of a little bit of your wholesale in the short term. So yes, our mission really is to get this thing full as quickly as possible, not just 110,000 square feet but that incremental 75,000 square feet also.

Yes. I think that absolutely seems like the right strategy here. Okay. I appreciate that color there. And then, I guess, switching to Arizona so I know that you guys are just kind of going off of this -- the fall harvest here right now, good to see that you guys did see a nice little pickup in wholesale revenues in Arizona, could you just give us some insight into what you're seeing on the ground there in Arizona? How have your flower sales sort of fared versus expectations whether that's demand-wise or pricing-wise? Just any sort of additional color on that wholesale operation down in Arizona would be great.

Yes. Pricing hasn't moved dramatically. There's been general strength in the pricing there on the wholesale side. We are doing predominantly autoflower crops this spring and as we're doing outdoor and hoop house grows, you rely on these autoflower plants, which definitely are lower yield. Our excitement in Arizona really focuses on, what they call, craft helper down there, where you have these massive outdoor crops with photo-sensitive genetics, standard genetics coming to bear after growing through the summer, so very excited about that. We're still working hard on this incremental facility in Arizona and 30,000 square feet of production space there. So yes, pretty much in line with expectations as far as the pricing goes. Yes, there is a bit of a pause as far as the size of biomass production because you're using autoflower in the spring in Arizona.

Okay. And I suppose just last one for me here on Minnesota, so I think most -- I guess you guys actually touched on it that this legalization bill is basically dead on arrival in the Senate but certainly hopes are still alive for medical flower here. So to the extent that you have any insight to share, could you try to give us your sense of how you view the chances or opportunity for medical flower in Minnesota?

Yes, we have very strong support from the Republican-led Senate, and the Democratic House for the addition of flower to the medical program. We anticipate that based on kind of the current status that this will be part of the HHS Omnibus bill, that's a pretty substantial piece of legislation. We think that, that may be pushed into special session as far as actual passage. But we're very optimistic that flower will be added to the medical program. Implementation best guess would be, we'd go through kind of an expedited rule-making process, and our hope would be that in early 2022 we could move ahead with flower in Minnesota in the medical program. We've been focused on flower production in Minnesota in the form of augmented yield, quality, potency, and microbiological testing for the last 12 months. So we really feel good that, that will be ready. As you know, we're at about half capacity or less in Minnesota right now on the cultivation side. So we do have some excess capacity to take care of there, but I do have interest philosophically in a flower-specific facility of scale here in Minnesota. We do own 20 adjacent acres to the existing facility and that really is, as you can imagine, a massive opportunity, second only to adult-use in New York as far as a magnitude of opportunity for our enterprise.

Your next question is from Matt Bottomley with Canaccord Genuity.

I just wanted to -- sort of a high-level question here on sort of the key markets by your existing revenue of New York and Minnesota. And if you just ignore the potential legalization next year and then your comments on the flower in Minnesota, if we kind of look at where the -- these markets are today, what does the growth profile look like over the next number of quarters here particularly in Minnesota where you could effectively doubled your dispensary count as of the last quarter or so? And is that something that will bring on a proportionate number of new customers or is there more dynamic as to how these patients -- the speed at which these patients are registering that, that might tamper down the expectation of Minnesota doubling on its own just given the increased rebuild?

Yes. Great question, Matt. So interestingly I anticipate Maryland is going to kind of usurp the top spot there even passing Minnesota and New York by the end of the year just because of the biomass that we're bringing to bear and the manufacturing apparatus and kind of the strength of wholesale pricing there. So Maryland is going to surprise people through the end of the year, I believe. In Minnesota, we've continued to see sort of 250 to 300 new patients enter the program on a weekly basis. That has not changed dramatically since we opened additional dispensaries, but we do seem to be taking more of those new patients from a market share standpoint. I like to kind of make decisions based on data. We have not seen an upward inflection of new patients entering the program since last April where we went from about 150 to 250 to 300 per week and that persists. It's nearly completely linear growth. Our intent is to really augment general awareness in Minnesota. It's hard to do radio, hard to do television, you're kind of limited to some digital and potentially kind of build more tech marketing. And then obviously our forte is really direct marketing to healthcare providers. So Minnesota is the way that we're going to improve things beyond just our dispensaries as we need to kind of do a general awareness campaign and get more of the state aware of the fact that there is a cannabis program. Just -- there is an interesting data point as far as kind of per capita spending in places like Minnesota and New York versus more mature markets. John, are you able to chime in on...

Sure.

Per capita.

Yes. Just generally speaking, if you look at the per capita spend in market sort of transitioned from medical to adult-use for instance, Colorado, Illinois, Massachusetts, places like that and you look at the per capita spend before they went to when they -- before they transitioned from adult -- to adult-use, you see some pretty staggering increases in the monthly per capita. And Minnesota and New York currently have per capita spend of under $1.

$0.60.

Yes. And you look at -- and that's on a per month basis. You look at where Colorado is over $30, Massachusetts over $15, Illinois only about year and a half and is already close to $12 per capita, so the run rate there for the opportunity there is pretty powerful.

So Matt, to answer your question directly, I -- other than some direct marketing campaigns with your reasonable assumption that linear growth will continue in Minnesota until flower is added in early 2022. And the big question is, what does that do to the market here and I don't happen to -- nobody knows but we're prepared for a very dramatic expansion of the program at that point.

Great. Very helpful comments. And then just lastly for me, just looking next year into New York State and the expected implementation of adult-use, I get a lot of questions about obviously who the players are there and there's only 10 so that's pretty beneficial I think to yourself and those others that are in the market, but in terms of trying to goalpost positioning in that market in specific for Vireo, is it looking at the ability to expand capacity quicker? We know that over the long term just having the most infrastructure, we've learnt those lessons in Canada, doesn't necessarily mean that you're going to be the winner over the long term. But given that it's like a $100 million or $150 million of dollar market today and everyone is expecting it to go up to probably $5 billion in the next 2, 3, 4, 5 years whatever the timeframe is, what are the key success factors in your view and how much of that is just allocating capital efficiently and then quicker, I guess, than some of your peers?

Yes. Fairly simple approach. You need to scale the manufacturing and cultivation side to the maximum extent allowed. Full transparency is likely there will be some Canopy limited in New York, and our goal is to be built up to that Canopy limit, whatever it is, ideally by the time adult-use goes live. You want to have scaled manufacturing so full-on scaled CBG-type manufacturing apparatus that has to be ready to go on your day 1. And then the last thing is, we're going from 4 to 8 dispensaries. We've been working for multiple quarters on opportunities on the retail side, lot of resources, lot of time going into augmenting that. So you need to be massively scaled, cultivation and processing as early as possible in the process, and you need to have the best-in-class retail space that's available. A lot of competition for those spaces, but we feel like we've been doing a great job being ahead of the curve there. We really see New York as opportunities 1, 2 and 3 for the entity right now and that is where the lion's share of our resources are going kind of across the spectrum of the business.

[Operator Instructions] Your next question is from Graeme Kreindler with Eight Capital.

I just had a follow-up question regarding Arizona. Kyle, appreciate the comments at the top of the call regarding the expansion going on there. Just curious, as you went through the Q1 period and heading into Q2 here coinciding with the release of stimulus checks and 420, how is the inventory situation right now in Arizona given the onset of rec, how have you been able to manage that and if you could give some color regarding I guess, the continuance of uptake from customers post that peak period incurred with 420 and stimulus that would be appreciated.

Graeme, I think really frankly flying off the shelves there. I don't have any granular comments on inventory other than the spring harvest is going to be diminished as this kind of autoflower crop and we anticipate a very substantial lot of biomass in the October timeline with the harvest of 9 or 18 acres of the shade house coupled with the existing hoop house and greenhouse apparatus that we have there. And we're excited about this incremental 30,000 square foot flower processing capability at Elephant Head Farms. So yes, it is a very robust adult-use market and we're seeing inventory fly off the shelves in the dispensary there.

Thank you. Appreciate that. Then as a follow-up with respect to New Mexico, what is the internal expectations about potential timing of the onset of that market and given the dynamics there, I think New Mexico is a market that isn't as popular as -- in terms of where investors are across the various state-level markets. What do you think is going to be the key for success in that market? Is it going to be leading with the retail, is it really about ramping up supply to meet the onset of demand? How do you see Vireo in a position to really capitalize out of the gate there?

Yes. It is -- it really is leading with retail. So as you know, there's plant count limit still in New Mexico. We want to stay ahead of that and we have the capacity in place to go to larger plant cultivation if we need to supplier dispensaries, but we're interested in ideally north of 12 dispensaries by the end of 2022. We do have interest in the Texans coming across the border into a mature adult-use program there in New Mexico. Simply put, best-in-class retail, we think the Green Goods concept is distinctly better than many of the other dispensaries in the state from a professionalism standpoint, and we're going to supply those with a broad array of flower. And this is a humble opportunity compared to the likes of a New York and Maryland or Minnesota, but we're excited about it. It's a cost-effective place to operate and there are kind of barriers to entry there with the planned counts to lot of others so.

There are no further questions at this time. I turn the call back to presenters for closing remarks.

Great. Thanks again for joining us this morning. We look forward to speaking with you all again over the coming months at our Investor Day event as well as the upcoming conferences this summer. Have a great day.

This concludes today's conference call. You may now disconnect.