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

Ladies and gentlemen, thank you for standing by, and welcome to Goodness Growth Holdings Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Now I would like to hand it over to Mr. Sam Gibbons with Investor Relations. Sir, please go ahead.

Thank you, Roel, and thanks to everyone for joining us. With me on today's call are 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 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 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 today and to all of you who attended our Investor Day events in June for the unveiling of our Horizon strategy. For those interested in watching the webcast replays and viewing our Investor Day materials, you may do so via the Investors section of goodnessgrowth.com. We'll discuss our progress on several of the initiatives announced at Investor Day during today's call, but I'll begin on Slide 4 of today's presentation, where we've provided a summary of highlights from the second quarter. Second quarter revenues were in line with our expectations, and we achieved record gross margins during the quarter through continued operating improvements and greater scale across our core markets. Total revenue of $14.2 million grew 16% compared to quarter 2 last year, with continued organic growth across each of our markets, excluding contributions from our former Pennsylvania and Ohio subsidiaries. Second quarter revenue grew 45% and 8% sequentially compared to quarter 1. As we discussed on last quarter's call, the move to our new 110,000 square foot cultivation facility in Massey created some temporary impacts on our wholesale performance during the first and second quarters. However, we recorded our first wholesale sales from the new facility in June, and we expect our combined operations in Maryland to be back to normalized production levels by the end of the third quarter. The additional 75,000 square foot expansion of cultivation in Massey remains on track to be completed by the end of the third quarter. And once finished, we'll be one of the largest scale producers of biomass and manufactured products in the Maryland market. Our Green Goods dispensary in Frederick is continuing to grow sales each month. We believe there's still upside for this location as we introduce new products and form factors from recent upgrades to our processing facility in Hurlock, Maryland. As a reminder, this facility will enable us to offer a full suite of medical to more adult-use leading products, including live resin concentrates like shatter and wax as well as gummies and hard candy edibles. We're also looking forward to contributions from our second dispensary in Maryland through our pending acquisition in Baltimore, which we announced at the end of last month, which remains subject to regulatory approval and other customary closing conditions. This dispensary is currently a lower revenue generating store than our Green Goods in Frederick, but we're excited by the opportunity to increase retail sales in the Maryland market. Given our substantial increase in production capacity, we expect this acquisition to improve our profitability in the state, once the acquisition is closed and we transition to the Green Goods brand and shift the product mix in the store more toward our manufactured products. SKU pipeline we're developing in Maryland represents the widest selection of products across our portfolio, and we were very pleased by the recent review of our Green Goods dispensary in Frederick by Maryland's Leaf magazine, which noted that the quantity and quality of our selection of concentrates is one of the best in the state. Profitability during the first half of the year has been impacted by an increase in expenses that will support future growth across our portfolio. As a reminder, we're operating 4 new Green Goods stores in Minnesota this year and have increased G&A to support our expansion projects in Arizona, Maryland and New Mexico. We've also increased marketing expenses as we prepare to introduce new recreational use products and brands across our footprint. As we progress through the second half of the year, we should begin seeing operating leverage materialize as the additional biomass production in Maryland and Arizona come online and our new dispensaries in New Mexico ramp up to their full potential. As a reminder, in New Mexico, our recently completed 13,000 square foot cultivation expansion is now fully expansional -- operational, and we're looking forward to the expected commencement of adult-use sales next spring, pending development of operating regulations. Our 2 new Green Goods dispensaries in Las Cruces and Albuquerque have received regulatory approval and are now operating, bringing our total number of operational dispensaries in New Mexico to 4. In Minnesota, the state recently approved the addition of flower to the medical program in the spring of next year, and we're in the process of ramping up production capacity to capitalize on this growth opportunity in our home market. Our cultivation teams across our footprint are focused on flower production and increasing flower strain variety and quality as we prepare for transition to adult-use markets and for the addition of flower in Minnesota. We've recently improved the strength of our cultivation teams with new growers in multiple markets that we've hired from recreational markets like Colorado and Arizona. And these teams are focused on building stream portfolios to have at least 20 flagship strains with higher THC content and production at all times. We plan to have additional strains in rotation at smaller scale to rotate into our dispensaries throughout the year. These strains include both workhorse commercial strains and more boutique strains at lower level of production. By the end of 2021, we expect to have a wide array of strains that we can produce with consistent quality and content in each of our markets, which will give our sales and marketing teams much more flexibility with product offerings than we've had historically in these predominantly medical markets. From a development standpoint, the addition of a second 9-acre outdoor shade house in Arizona is on time and should be completed by the end of the third quarter. We expect that additional biomass from the new field will help accelerate the trajectory of revenue growth in Arizona in late quarter 4 and into next year. As many of you know, and as we have discussed at Investor Day in New York, we recently received regulatory approval from the state to significantly expand our cultivation and processing capacity. There've been some delays in the formation of the state's oversight board for the recreational use program. But over the next several weeks, we expect to be in a position to announce more details regarding the timing of the beginning of construction of the new facility, which we will build on the additional 96 acres of land we purchased adjacent to our existing site near Albany. Our retail team has also been busy working to identify and secure locations for our new dispensaries in the state. We're looking forward to sharing details of these locations in the coming months. We have a lot of exciting opportunities in growth in front of us, and we're looking forward to a stronger second half of fiscal year 2021 as the first portion of our expansion projects come online. We're confident that our efforts to scale production and expand our retail dispensary footprint will drive even stronger financial performance through fiscal year 2022 as most of our core markets benefit from improving regulatory environments or transition to adult-use programs. 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. Please turn to Slide 5, where I'll begin with a review of the highlights from the quarter. Please keep in mind that all numbers stated refer to U.S. dollar amounts unless otherwise noted. Total revenue, including our former Pennsylvania and Ohio subsidiaries, increased 16% to $14.2 million compared to Q2 of 2020. Excluding contributions from Pennsylvania and Ohio during 2020, revenue increased 45% as compared to Q2 of last year and 8% sequentially compared to Q1. Retail revenue, excluding Pennsylvania and Ohio, in the second quarter was $11.3 million, an increase of 36% compared to Q2 of last year with growth in each of our markets. Wholesale revenue, excluding Pennsylvania and Ohio, increased 93%, driven by strong growth in Arizona and New York, where we've begun to increase our focus on improving our wholesale sales channel penetration ahead of the advent of adult use in New York, which we still believe could begin toward the end of next year. Gross profit in the second quarter was $6.9 million. We achieved record gross margin of 48.6% through improved operating efficiencies and greater scale in our core markets, which drove lower fixed unit costs. Gross profit in the second quarter of last year was $3.6 million or 29.4% of revenue. Total operating expenses in the second quarter were $10.2 million, a reduction of $5.5 million compared to $15.6 million in the second quarter of last year. The decrease in total expenses was attributable to a decrease in equity-based compensation expenses, partially offset by increased general and administrative expenses, which were driven in large part by operational build-outs in Arizona and Maryland, resulting from the ongoing cultivation and manufacturing expansion projects in these markets. On a GAAP basis, SG&A expenses of $8.3 million increased 32% compared to Q2 of last year and reflected 58% of sales compared to 51% of sales last year. As we've mentioned previously, we do anticipate seeing improvements in SG&A as a percent of revenue as sales continue to ramp up across our footprint through the remainder of the year. Net loss in Q2 was $5.5 million compared to a loss of $16.1 million in the second quarter of last year with the improvement driven by the increase in gross profit and lower operating and other expenses, partially offset by increased income tax expense. Total expenses were $1.3 million in the second quarter, an improvement of $2.4 million compared to $3.7 million in Q2 of last year, with the decrease primarily attributable to a gain on derivative liability of $1.5 million during the quarter. Loss from operations in Q2 was $3.2 million compared to a loss of $12.1 million in the second quarter of last year with the improvement driven by the increase in gross profit and lower operating and other expenses. Adjusted EBITDA was a loss of $1 million in Q2 as compared to a loss of $1.8 million in Q2 of 2020. The favorable variance was driven by increased sales and higher gross margin, partially offset by the increase in operating expenses supporting future growth. We ended the quarter with total current assets of $42 million, including cash on hand of $20.8 million, following the payment of roughly $7 million in taxes in May and roughly $6 million in CapEx spend primarily related to the projects in Maryland and Arizona during the quarter. As we discussed at our Investor Day event in June, as these expansion projects are completed and we continue executing our Horizon strategy, we expect to experience substantial improvements in revenue growth and profitability over the next 18 months. Variability in our performance will depend on the timing of completion of the projects we've discussed as well as regulatory approvals in our markets, including the expected commencement of adult-use sales in New York and New Mexico and flower sales in Minnesota next year. As of now, we're confident in the regulatory time lines in New York and -- excuse me, in New Mexico and Minnesota and believe there's still a possibility for rec sales to begin in New York toward the tail end of next year despite recent delays to the formation of the state's oversight board for the adult-use program. Total current liabilities at the end of the quarter were $16.1 million, with $1.1 million in debt due within 12 months. As of June 30, 2021, there were 126,021,801 equity shares issued and outstanding on an as-converted basis, and 154,346,560 shares outstanding on an as-converted fully diluted basis. That concludes our prepared remarks. Well, we'll now open the line to analyst questions.

[Operator Instructions] Your first question is from the line of Eric Des Lauriers.

Congrats on the strong quarter and record margins here. I guess, first, drilling in on New York. So obviously, great to hear you guys have the regulatory approval there. Can you just remind us of the type of facility that you guys are looking to build out there, whether it's sort of a greenhouse hybrid or indoor and any other details on that facility? And maybe as a follow-up to that, just how your conversations with real estate partners are going for New York as well as some of your other build-outs here?

Eric. Yes, to remind everybody, in New York, we're building optimized indoor facility here with highest quality environmental controls. And this is not hybridized greenhouse. Given the likelihood of some sort of canopy limit in New York, we've opted to really focus on maximizing production and quality and that's definitely the way to do that. So this is pretty much an optimized indoor facility. I'll kick it over to John here for comments on real estate partners.

Yes. We are in ongoing conversations with multiple real estate partners, and we believe we have commitments to fund the New York project. And again, our -- feel we're close in our other markets as well. But we will certainly keep everyone posted when those deals are closed and executed.

Okay. Great. And then one other one for me here. So I was impressed with the gross margin improvement in the quarter here. I know you guys have been doing a lot of work in your production facilities and hiring some new personnel. So I was wondering if you could kind of talk to some of the personnel that you guys have brought on to manage those cultivation operations? And maybe how those changes might have contributed to the gross margin be it in the quarter? Or if we should think of that as more on the retail side of things? Would just like to get some more color on how you guys are looking to scale production here? How that's going from a personnel level? And how that may have impacted gross margins in the quarter?

Yes, I can touch on the high level, Eric. So we brought in, particularly, in Arizona and Maryland, some really high-caliber cultivators from mature adult-use states. And in addition to them really sort of optimizing the Arizona and Maryland, obviously, that cross-pollination and working with other team members has been pretty huge. We also have a Colorado cultivator in Minnesota, and he's been with us for quite some time. So he's not a new addition. But yes, just their contributions really can't be overstated. It's been amazing to have those guys added. We're laser-focused on optimizing sort of our capabilities with indoor cultivation in New York right now. And I would anticipate that may include some additional hires here over the coming quarters to further drive home what we see as advantages with these new experts. Do you have anything to add, John?

No. I think that's good.

We have yet to see a lot of these expert cultivation improvements kind of trickle through in our numbers. But the biggest thing there, as you guys know, is as you increase sort of the breadth of quality strains that you bring to bear, that's going to kind of increase the velocity on the wholesale side. We really equate sort of strain diversity to liquidity. And the other thing is just it's all about genetics and flower quality when it comes to the quality of your concentrates that you produce. So we're laser-focused on that, really focused on adult-use production here, which, again, amazing team members that we brought on to help with this.

Your next question is from the line of Matt Bottomley from Canaccord Genuity.

Just wanted to stay on that topic of the gross margins and maybe even adjusted EBITDA. Just given the 2022 guidance of inflecting into free cash flow in the second half of the year. Your adjusted EBITDA hovering around breakeven now for a couple of quarters. Just given some of the other dynamics we've seen with other U.S. operators that have scaled facilities the way that you guys have in some of your, I guess, nonprimary markets right now, we've seen that have a pretty, maybe not significant, but notable impact on margins and EBITDA. So just going from Q2 to, I guess, the first half of next year, how significant do you think we could see some volatility in both of those metrics? I'm just trying to understand what the underlying fundamentals of the business will look like as you transition to a much bigger enterprise over the next year or so here?

Yes. I think that's going to depend on the time line of the completion of the projects. Obviously, if you bring on these large projects early on before they -- when you're -- once the door opens and you're in a plant vegging and growing state, pre-revenue, that will likely have a somewhat of a drag on margins, but rapidly recover once you can bring that product to market. So it will depend on the timing of those projects.

And Matt, obviously, this very substantial facility that we're bringing on in New York is going to be dependent on the regulatory time line there and when that -- when we could actually start sales in New York. We're bullish on that. The recent changes with Cuomo are definitely a positive thing. And we're hopeful that we're going to see adult-use mid-to-late next year in New York with a substantial facility operational at that point.

Okay. And in New York, what's the exact -- I guess, where are we in a point in time now with sales of flower in New York and the sort of incremental bill that was put there and that's been -- I understand it's still sort of sitting on if not Cuomo's desk, I guess it has not changed. Just your thoughts on where that sits and timing for any changes on that part of the segment of the state?

Yes. We anticipate a pretty rapid movement here after Labor Day for appointment of the Regulatory Board in New York. And then there are several different components here. We're excited for flower in the medical program. Right now, only ground-metered flower is allowed in New York, which has basically been ground to dust, and it's definitely an inferior product compared to just unground flower. So we're excited to really work with the regulators in New York to make that happen quickly. And then obviously, the other thing is just the regulations and sort of go-live date on adult use, and we're more bullish now, absent Cuomo that, that can still happen next year. Our intent is to have our facility operational late quarter 1, early quarter 2 of next year, so we can get a few turns through that before we go live with adult-use. But just generally bullish on New York, and we think we have it timed fairly well. It still could be summer of next year that we see adult-use; worst case, it could be into early 2023 that we see adult-use. But I think our best guess is still mid-to-late next year.

Great. And then just one more quick one for me. Just if you could give some general commentary on your thoughts -- on your current cash balance and balance sheet, given a lot going on, a lot of facility expansion. So just the sufficiency of the $21 million versus the initiatives you guys have currently and planning undergoing?

Yes. So our Arizona and Maryland expansions are nearly complete. We'll have a little more going out the door for those here in Q3. But I would refer you to the guidance that we gave in our Investor Day materials, which said net of our real estate partners, we expect net CapEx of $15 million to $20 million over the next 6 quarters as we execute. But we think we're in decent shape with liquidity given what we expect to execute with our real estate partners.

Congrats on the quarter.

Thank you.

Your next question is from the line of Graeme Kreindler from Eight Capital.

Just a follow-up with respect to questions on New York and timing. How that relates to the Horizon strategy and the revenue and EBITDA targets you set out there? I'm just curious how much sensitivity is there? I believe those initial targets set New York rec start for summer of 2022. If we did see things slip into early 2023, what would that look like with respect to the targets on revenue and EBITDA given out in 2022?

Yes, Graeme, we didn't get into specific states, and we did give wide ranges to really sort of account for these potential different outcomes in New York. I do want to emphasize that major revenue drivers for us late this year and early next year are actually going to be this significant croptober that we expect in Arizona with the 18 acres of outdoor harvest in addition to the hoophouses. We should have the entire apparatus up and running in Maryland. And then lastly, we'll have flower implemented no later than March 1 next year in Minnesota, which could have a fairly substantial effects in the Minnesota market. So New York is important, but there's a reason we gave broad ranges, and that's really to account for different outcomes in New York. I think, again, our best guess is that we're looking at mid-to-late next year for adult-use. That's definitely our best guess for when this -- when our first sale occurs in New York.

Okay. Understood. So just to clarify then the $80 million -- the $40 million range, excuse me, on the revenue guidance provided does account for potentially New York looking later into '22?

Correct. That's the reason for the broad ranges, yes.

Okay. Perfect. I appreciate the clarification there. Then just as another follow-up, since the Investor Day and really shining more of a spotlight on our Resurgent Biosciences and the variance initiatives going on there. I'm wondering what the reception has been so far? Have you had any additional inbounds from various parties, cannabis or otherwise, who are interested in working with you? Or if there have been any other significant developments since that time since you've given Resurgent a bit more of a spotlight in the public eye? I would appreciate any thoughts.

Yes, we've had a very good reception and definitely additional inbounds for potential partners on the Resurgent side. Nothing that we've disclosed here publicly to date, but that's been very encouraging. As you guys know, we announced a foray in the psychedelics on the IP side, sort of nonplant, nonfungus-touching endeavors there. The bulk of our inbound and focus on Resurgent remains sort of in the cannabis realm. And that's where we've seen most of sort of inbound interest in potential partnerships and synergies. So I can't get more granular than that, but it's been well received. And again, Resurgent is predominantly an IP company focused on the cannabis space, and that remains the case. A lot of fund developments, it's an exciting little aspect of our business.

Congrats on the quarter.

Thanks, Graeme.

Your next question is from the line of Jon DeCourcey from Viridian.

Congratulations on the quarter. Not a lot out of me since some other questions have been asked, but the 2 questions primarily are in Arizona with you guys and other operators coming online for additional cultivation, how do you see the pricing dynamics in the state kind of reacting?

Yes. We've seen fairly strong pricing here that's been relatively stable. We anticipate that should persist through this fall. I would not be surprised if you see a little bit additional downward price pressure here going into next year. There is -- as you guys know, there's significant production that takes place in the croctober. We are one of the most cost-effective scaled operators with now 18 acres of outdoor growth capability, that puts us in a pretty good spot. But yes, there is going to be a lot of raw material coming online through this year, but mainly into next year. I think that's safe to say.

Okay. And then secondly, regarding the Minnesota flower expansion, you just referenced that it could be significant. But kind of just -- could you give a little more color on how we should sort of think about that opportunity maybe as comparable to other states? Are we talking about kind of a 2x opportunity from the addition of flower? Or is it something even more significant than that?

Yes, John, that's a really tough question. And obviously, we spent a ton of time really delving into previous examples of what has that looked like. And there aren't that many examples of sort of markets that have really run a long ways with extract-only products and then transition to flower. Florida is probably one case. And basically, what you saw there is almost immediately, there was sort of a step function of about 30%. You then saw ongoing growth of both extract products and flower without a huge reduction in extract sales. So 2x to 3x seems very reasonable. I could see it being higher than that. But our working assumption is that we're looking at 2x to 3x over the few quarters following implementation of flower. Now there are some variables. Obviously, kind of the regulatory setup is really critical. And the other limit in Minnesota is there are fewer dispensaries. We do have 8 of the 13 in the state. But we're cautiously optimistic that flower is really going to change the dynamic here. We have a very substantial illicit flower-focused market in the state to the tune of many hundreds of millions of dollars by most estimates. And that is sort of the default path for anybody who wants to use a flower in either an adult-use or even a medical setting in the state as they have to go to the illicit market. So excited for that to change. Again, the law in Minnesota, that has to be completed by March 1. We'll be providing to patients by then. But hopefully, we can outperform and have that happen sooner.

Okay. And then 1 last question on Minnesota and it's -- is there any -- of the -- they're currently only 13 dispensaries. Are there any -- is there any progress happening in terms of the opening and licensing of new dispensaries? Or is it going to continue to be that limited kind of number here in the near term?

Yes. Current law of the land is 8 per manufacturer with 2 manufacturers, so an upper limit of 16. We've hit our statutory limit of 8. We're always looking to optimize and put those facilities in even better locations as we transition from an early cannabis real estate market to something that's a little bit more open-minded. But right now, the law of the land is a max of 16. I don't know a time line as far as which legislative session that could change moving ahead. But certainly, increased number of dispensaries is something that's interesting for the state of Minnesota.

[Operator Instructions] Your next question is from the line of Paul Piotrowski from M Partners.

With a few of your expansion projects either near completion or being completed, do you expect significant variability in the margin quarter-over-quarter? Or can there be some stability in the current range?

Yes. There'll be -- as we just discussed a few minutes ago, there -- as these new cultivation projects come online, next year, you're going to see some variability in margin, right? But in the short term, I think you're going to see similar trends.

Okay. Got it. Yes, I was talking specifically about probably the next quarter, not so much into next year, but that's...

Yes, yes. I think you should see similar trends in the -- for the rest of the year.

There are no further questions. I would like to hand it back to Dr. Kyle Kingsley. Sir, please go ahead.

Thanks again for joining us this morning. We look forward to speaking to you again over the coming weeks, and are hopeful we'll be able to resume in-person meetings on the conference circuit later this year. Thank you.

And with that, this concludes today's conference call. Thank you for attending. You may now disconnect.