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

Hello, and welcome to the Goodness Growth Holdings, Inc. Third Quarter Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Sam Gibbons with Investor Relations. Please go ahead, sir.

Thank you, Lisa, and thanks to everyone for joining us this morning. With me on today's call are Chief Executive Officer, Dr. Kyle Kingsley; and our Chief Financial Officer, John Heller. Today's conference call is being webcast live on 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, 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 this morning. I'll begin with a high-level review of our performance and recent business highlights, then John will provide a more detailed review of the financials and outlook before we open the floor to questions. I'll start on Slide 4 of today's presentation, where we provided a summary of results from the third quarter, which underperformed compared to our expectations due to factors we'll discuss on today's call. Total revenue of $13.4 million increased approximately 28% compared to the third quarter of last year, excluding discontinued operations. This performance reflects year-over-year growth in all of our markets and continued sequential growth in Maryland, Minnesota and New Mexico. However, we experienced a sequential decline in revenue in Arizona, New York as a result of 2 distinct events, which also negatively impacted gross margin performance in the quarter. John will detail the specific revenue and margin impacts of these events late this morning. First, these negative performance drivers was unfavorable weather in Arizona, which experienced one of the harshest monsoon seasons of the past decade and caused a substantial amount of lost biomass and revenue during the third quarter. Recall, unlike other publicly traded MSOs operating Arizona, our exposure in the state is primarily our outdoor cultivation operation. And crop loss due to weather impacts of natural disasters is an inherent risk of operating outdoors, but we move long-term cost benefits of scaled outdoor cultivation justified these risks, especially in Arizona, where we believe there's a clear niche for low-cost biomass. The other nature of our operation at Elephant Head Farm obviously presents weather-related risks, which could create volatility in our performance. We acquired this asset in 2019, along with several other cultivation assets in the Southwest because we were attractive to geographic locations that were suitable for outdoor cultivation. Our team continues to believe that having optionality to source low-cost outdoor biomass at scale could have a meaningful impact on our manufactured product margins if interstate commerce cannabis is allowed in the future. So, despite these inherent federal-related risks, we like our current position as a wholesale biomass supplier in the Arizona market and we're pleased to continue developing our expertise as a scaled outdoor producer with these assets. The second negative performance driver that impacted sequential revenue growth and margin performance during the third quarter was the non-recurrence of a high-margin wholesale bulk oil order in New York that occurred during the second quarter. Political climate in New York over the past several months has created a fair amount of uncertainty in the timing of the implementation of the adult-use program. During the second quarter, we were optimistic that recreational use sales could commence potentially as early as next summer. With one of the largest current manufacturing facilities in the New York market, we believe we were in a position to capitalize on our inventory of distillate and bulk oil for manufactured products by increasing wholesale sales to other operators that we're also preparing to ramp up inventories ahead of been getting adult use sales. At that time, we believe it was likely there will be a continued demand for wholesale bulk oil sales in New York, but the change in leadership Governor's office during the third quarter appears to have impacted market expectations about the timing of adult-use sales, and as a result, bulk oil wholesale order flow in this market. We're obviously not happy with our third quarter results, but we have much to look forward to in the coming quarters, but we've made a lot of progress in several areas since last quarter's call, especially in the realm of new product implementation. Following the recent upgrades we made to our manufacturing facilities in Maryland, we're pleased to share on today's call the launch of 2 new brands, which are supporting our roll outs of live resin concentrates and edibles in the Maryland market. On Slides 5 and 6 of today's presentation, we've included some marketing materials from our launches of HiCOLOR and Kings & Queens, which are the work of our Chief Marketing Officer, Harris Rabin. We believe adding to our product depth is currently important as the nascent markets of New York and Minnesota look to accelerate in the coming years. We're also very pleased to welcome chef Michelle Mango to our team during the third quarter, who'll be overseeing the development of our edibles products. Michelle began to work with us in Maryland with the launch of gummies products featured in the HiCOLOR marketing materials on Slide 6. This new pipeline we're now offering in Maryland represents the widest selection of products across our various operating markets. Our improved product offering should help us drive revenue and profitability in Maryland in the future, especially with the pending acquisition of our second retail dispensary in Baltimore, likely to close during the fourth quarter. That transaction received regulatory approval a couple of weeks ago and we're looking forward to shifting the product mix in the store more toward our own manufactured products. In addition to the launches of HiCOLOR and Kings & Queens, both Harris and Michelle's teams have a lot of other exciting work in progress and we'll continue sharing updates on these initiatives as we see regulatory approvals or new launches across our various markets. As we progress towards the end of the year and begin fiscal year 2022, several regulatory catalysts should contribute to improved financial performance. As most of you know, we've received regulatory approval in the state of New York to begin selling flower during the fourth quarter, recorded our first flower sales in New York on October 30. We expect to increase our flower stream variety in New York over the course of the next several weeks with an expectation of having a lease 6 high-quality flower strains available in our New York dispensaries by the end of this calendar year. We're also looking forward to the commencement of adult-use sales in New York and flower sales in Minnesota's medical market early next year. As a reminder, we expect adult-use sales to begin in New Mexico during the month of April and flower sales to commence in Minnesota on or before March 1, 2022. From a development standpoint, our teams are continuing to focus on the substantial growth opportunities we see in the New York market. As disclosed in a news release last month, we've executed a sale-leaseback transaction with IIPR, which fully finances the development of a 324,000 square foot indoor cultivation and processing facility. We have received regulatory approval from the state to operationalize 170,000 square feet of this facility, which leaves the remaining square footage of this building available at shelf space for potential future expansion. We brought in 2 outside highly cannabis experienced consultants to assist with the development of this new facility and construction is well underway with an expectation for completion sometime during the second quarter of next year. This time line will provide us with the opportunity to complete at least 1 full cultivation turn prior to the commencement of recreational sales as well as opportunities to adjust and optimize operating procedures before ramping potentially the full approved capacity following the onset of the state's adult-use program. In addition to the expansion of cultivation and processing capacity in New York, Patrick Peters retail team has been busy working to identify and secure locations for new dispensaries as well as candidates for relocations for some of our existing medical dispensaries. We are still awaiting clarity from the state's regulatory body regarding the classification of economically underserved areas, which will require before deciding where to open the first 2 of our 4 additional retail dispensaries this year, pardon me, next year. We're confident that our recent and ongoing efforts to improve operations and scale production across our markets as well as our expanded retail dispensary footprint will help drive stronger financial performance in fiscal year 2022 and beyond. I'd also remind investors that we believe there's still potential for the state of Maryland to pass adult-use legislation in 2022, which could result in strong growth in profitability in that market as compared to our current expectations. Of course, we believe New York and Minnesota represent remarkable growth opportunities and we're highly focused on ensuring we drive success as these markets ramp. That concludes my prepared remarks. I'll now hand the call over to John for a more detailed review of financials and outlook.

Thank you, Kyle, and thanks, everyone, for joining us this morning. Please turn to Slide 7, where I'll begin with a review of highlights from the quarter. Please keep in mind that all numbers stated refer to U.S. dollar amounts unless otherwise noted. Total revenue increased 7% to $13.4 million as compared to Q3 of 2020, including our former Pennsylvania and Ohio subsidiaries. Excluding contributions from Pennsylvania and Ohio during Q3 of 2020 revenue increased approximately 28% and declined about 6% sequentially compared to Q2 of this year. As Kyle mentioned, the sequential decline in revenue was driven by the adverse weather-related impacts at our outdoor farm in Arizona as well as the unexpected non-recurrence of large bulk oil wholesale order in the state of New York in the second quarter. We estimate that the lost biomass to weather in Arizona resulted in lost revenue of approximately $1 million during the third quarter. Retail revenue in the third quarter was $11.6 million, an increase of 35% compared to Q3 last year when you exclude the former Pennsylvania operations. Wholesale revenue, excluding discontinued operations, declined by approximately 5% year-over-year with the decline primarily attributable to the loss of biomass due to weather impacts, which we've discussed in Arizona. It's also worth noting that the ramp-up of wholesale sales in Maryland following our recent capacity expansion initiatives in this market has been slower than we anticipated, which also contributed to lower revenue as compared to our expectations in the third quarter. For this reason, we temporarily paused the construction of the additional 75,000 square feet of cultivation that was underway and massive to better align capacity and demand in this market. Gross profit in the second quarter was $5.1 million or 38.3% of sales as compared to $5 million or 39.8% of sales in the third quarter of last year. As discussed in Kyle's prepared remarks, gross margin performance in Q3 was negatively impacted by the unseasonal weather in Arizona and also sequentially as a result of the non-recurrence of a large wholesale order in New York in Q2 of this year. If you adjust last quarter's gross margin performance to exclude the large wholesale order, gross margin performance in Q2 of this year would have been approximately 45% of revenue. Additionally, if we assume we have realized similar margins compared to actual performance on the estimated level of loss revenue to weather in Arizona during Q3, gross margin in the quarter was also in and around the 45% level. We feel that this helps demonstrate a fairly consistent gross margin profile of approximately 45% over the last 5 quarters, which should be helpful information for investors and analysts. Total operating expenses in the third quarter were $9.2 million, an increase of $2.0 million compared to $7.2 million in the third quarter of last year. The increase in total expenses was attributable to increased general and administrative expenses, driven by operational build-outs in Arizona, Maryland, Minnesota and New Mexico, where the company has opened new retail dispensaries or has completed cultivation and manufacturing expansion projects. For additional color, I find out that we were operating 7 additional dispensaries in Q3 of this year compared to Q3 of last year. And we've had other G&A increases to support our expanded manufacturing operations in Arizona, Maryland and New Mexico. Finally, we've increased marketing expenses as we prepare to introduce new recreational use products and brands across our portfolio. On a GAAP basis, SG&A expenses of $8.1 million increased 24% compared to Q3 of last year and reflected 60% of sales compared to 52% of sales in Q3 last year. As we mentioned previously, we do anticipate seeing improvements in SG&A as a percent of revenue and sales ramp across our footprint. Loss of operations in Q3 was $4.1 million compared to a loss of $2.3 million in the third quarter of last year, with a variance primarily driven by the increase in selling, general and administrative expenses. Total other expenses were $1.5 million in the third quarter compared to other income of $11.2 million in Q3 of last year. The decrease was primarily attributable to the onetime gain of $16.9 million on the disposition of assets during the prior year quarter, partially offset by a derivative gain and higher interest expenses. Net loss in Q3 was $6.2 million compared to net income of $3.0 million in the third quarter of last year with the variance driven by the non-recurrence on the gain on disposition of assets in the prior year quarter, increased operating and other expenses and higher interest expenses. EBITDA, as described in our accompanying disclosures and footnotes, was a loss of $2.4 million during Q3 of 2021 compared to the gain of $11.1 million in Q3 of 2020, with the variance primarily attributable to the onetime gain on the disposition of assets during the prior year quarter. Adjusted EBITDA was a loss of $1.9 million in Q3 as compared to a loss of roughly $600,000 in Q3 of 2020. As of September 30, 2021, there were 126,351,477 equity shares issued and outstanding on an as converted basis and 154,358,312 shares outstanding on an as converted fully diluted basis. Total current liabilities at the end of the quarter were $15.2 million with $1.1 million in debt due within 12 months. We ended the quarter with total current assets of $44.8 million, including cash on hand of $11.8 million, which did not include the $15 million in expected cash proceeds from the divestiture of our Phoenix dispensary, which we announced last week and expect to close later this month. As discussed in conjunction with that announcement, given our presence as a predominantly wholesale supplier of biomass in the Arizona market, our management team and the Board of Directors felt that this transaction simplified our business during the period in which we're prioritizing resources for the attractive opportunities we see in other markets, especially in New York, where we're focused on supporting the development of our scale, cultivation and manufacturing facility and optimizing our retail footprint ahead of the commencement of adult-use sales. In terms of other development projects, the second 9 acre shade house in Arizona is now complete, but the weather-related impacts we experienced in the third quarter prevented us from optimizing the full 18 acres for this recent crop harvest. That crop is being processed now and we anticipate that total yield from this year's [ crop till October ] harvest will represent roughly half of the optimal output under ideal weather conditions at Elephant Head Farm in Arizona. Given the changes we've discussed today as well as revised time lines for the commencement of recreational use in New York compared to our prior expectations, we've revised our outlook ranges for fiscal year 2022. We now expect fiscal year 2022 revenues to be in the range of $100 million to $120 million and adjusted EBITDA in the range of $20 million to $30 million. The achievement of these range will depend on several factors, including the company's ability to achieve expected cultivation yield and quality, the timing and completion of various development projects, regulatory time line, the timing of the commencement and performance of developing sales in New Mexico and New York and the timing of the commencement and magnitude of flower sales in the Minnesota medical market. Importantly, we remain enthusiastic and focused on the opportunities in front of us. While the third quarter was frustrating, we are positioned with the combination of productive assets and expansion opportunities in a few of the most exciting markets in the United States. That includes our prepared remarks -- concludes our prepared remarks. Operator, we will now open the line to analyst questions.

[Operator Instructions] Your first question comes from the line of Graeme Kreindler with Eight Capital.

I was wondering to start off, if we could get a bit more color in terms of expectations into Q4 and what you're seeing to date, given potentially positive seasonality in Arizona with more tourism increasing in that market as well as New York with the introduction of flower. How are those markets tracking relative to your expectations so far?

Very encouraging in New York to see sort of the non-ground just standard flower hit the market. That's been very positive and we've been struggling to keep it on the shelf, but the major focus for us sort of augmenting the number of strains that we have on the shelves there. Currently, we have two streams, and that's going to rapidly scale over the coming weeks. That's been a major focus for the last 3 to 4 quarters for a sort of high-quality flower. We were very encouraged to see how quickly OCM move to get flower approved. And we anticipate that's going to be a very positive catalyst in New York for the foreseeable future. I'd like to remind everybody that New York to date has really been nearly flowerless with the exception of this metered ground flower, which has significantly less flavor. It's a much less desirable product than sort of standard flower. And I think this actually has the potential to make the New York medical market sort of a real cannabis market, independent of adult-use, which is also forthcoming. So, we're very encouraged. We're seeing sort of substantial improvements to home delivery and just kind of revenue across the dispensary portfolio in New York. It's a very encouraging development. On the Arizona side, we are transitioning out of the retail end there, but we still remain positive that there is a niche for scaled low-cost outdoor biomass production. And again, the monsoon was unfortunate and definitely a detriment and that will, as John mentioned, affect our fall crop. But we're still optimistic that we can have a positive fourth quarter in Arizona with the biomass that we're bringing down given outdoor field.

Then just turning to the 2022 guidance, and appreciate the comments earlier with respect to the moving parts on the revisions. I'm wondering in terms of the New Mexico market there and the expected commencement of adult-use sales in the first quarter of 2022, just given the delay that we've seen in New York, do you think there's any risk there in terms of how that guidance was comprised with the potential delayed start in New Mexico or what are the signals you're getting for that market for the potential start date there?

All signals are that there won't be any delays. Again, there's no guarantees when it comes to this sort of thing, but we're pretty optimistic here that we're looking at early second quarter for commencement of New Mexico. Remember, it is a more mature medical market with the substantial flower production apparatus and a larger number of dispensaries. So, I think based on our experience that we're cautiously optimistic on the time line for New Mexico.

And my last question here, just with respect to CapEx budgeting over the next 12 months, do you have any specific budget you could share with us and then potential sources of capital, whether that comes from balance sheet, incremental from sale leasebacks or otherwise?

Still formulating some aspects of CapEx here for the next 12 months, but you did see the substantial IIPR arrangement in New York, which is going to be kind of our major CapEx undertaking. I don't know if you have anything you want to add, John?

We've talked previously about roughly $15 million to $20 million of CapEx to execute our plans through the anticipation of going live with adult-use in New York. And that -- the timing of that is going to depend on what's basically the timing of go live in New York. And so that's kind of what we're thinking there.

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

Just wondering if we can focus a little bit more on the state of New York and your thoughts on how to manage, I guess, the overall margin profile of your company and CapEx as we wait that market to launch. Clearly, many markets can take longer than initially indicated by some of the regulators or some of the legislators. So, early on in the earnings season here, but we've had some commentary. I'm just curious on what you've experienced from your business on just medical patients who with respect to that potentially tapering off a little bit? And then how to manage your overall, I guess, acceleration of CapEx in that market? Should delays continue in New York or should it just be uncertain as to the ultimate start date?

So, for New York, right, that project is fully funded with a lease from IIP. So that CapEx is -- that cash flow is -- that CapEx funding is coming directly from IIP to construct that facility, all right. So, the timing of that will just be dispersed fully as we construct that project. And so again, it's fully funded.

And yes just kind of macroscopically, very encouraged by the flower and the medical program. And if -- hypothetically, this gets pushed into early 2023 as far as go live for adult-use. That is pretty helpful. When you're talking about scale indoor production on that facility being able to do several turns is really going to sort of optimize. And it's not like there isn't a destination for those products with what we expect to be a burgeoning medical market in the state. That's very flower focused. So we're really ready for kind of any set of reasonable outcomes on the timing. We're also, as I mentioned, focusing on optimizing the retail footprint. That's been ongoing for 3 or 4 quarters. The question is timing of that CapEx for go live and adult-use. And that's something that we're working with the regulators to fine tune that. And -- but very encouraged that we're bringing scale to bear sort of across the full vertical integration cultivation processing and retail and we have some flexibility there. There are worse things than having an extra turn of cultivation prior to go live with adult-use through that facility.

And yes part of the questions, I guess, particularly for states like New York and New Jersey is how various MSOs are going to deploy that capital and understanding that you guys are funded for it, given that there could be the risk of underutilized infrastructure, should there be delays, and that's good to you that it can be a little more dynamic with working with the regulators. And then just my other question just would be if we could get a little more color on -- and I'm just -- maybe this is just a lack of knowledge on my part, but just in the New Mexico market, how that market looks with respect to the products that are allowed? Obviously, Arizona is a market that when it was medical-only looked very much like recreational. So, I'm not looking for particular guidance or numbers of what dispensaries could do, but maybe just if you could use another state as a proxy as to kind of what New Mexico looks like once it goes live on the rec side?

It's very similar to Arizona. It's very flower focused. This is a very adult-use like medical state right now. So we anticipate it will -- again not a huge lift of a transition for that state to go to adult-use.

[Operator Instructions] Your next question comes from the line of Eric Des Lauriers with Craig-Hallum.

I just focused on Maryland a bit. So, I understood that you have a kind of pausing expansion on that 75,000 expansion project. Can you remind us -- I think you had 110,000 square feet now. Can you kind of remind us whether that's indoor or greenhouse and sort of how the demand or reception is for your wholesale products in that market so far? And then maybe just remind us -- I think you're mentioning high power and Kings & Queens are kind of live in that market now. Any kind of anecdotes there on the demand for that would be great.

We currently have 110,000 square feet, and that is greenhouse with, I would say, fairly substantial HVAC humidification capabilities. The -- generally speaking, in full transparency, the rev up in Maryland has been a bit slower than we expected. Just -- that's mainly us getting our full array of skewed up to the market, and that's just an interface with the regulators. The 2 primary new SKU categories that we're bringing to bear are concentrates. So kind of our first foray in the hydrocarbon extraction in Maryland. Kings & Queens has been very well received, essentially selling it as quickly as we can make it. I love that brand. It's a very high-quality product. A lot of our biomass is being directed that direction given the demand that we're seeing. And then the other, edibles are just entering the market now, very excited about the HiCOLOR brand of edibles. And you may recall that we retrofit the previous cultivation and processing facility to just pure manufacturing now. And so we actually produce all SKU categories out of our HELOC facility. So a little bit slower rev up than expected, but we're very encouraged by what we're seeing with these new SKU categories and optimistic that we can move biomass through the existing 110,000 square feet. I do anticipate over time, we will complete the facility. The incremental 75,000 square feet is just important that we match dollars out the door for CapEx very precisely to demand. And we're getting increased visibility now that we're fully participating in the wholesale market.

So, as we kind of look forward, I guess, maybe just for the next 12 months or so, should we think of Maryland as mostly this Kings & Queens brand, mostly kind of concentrate focus for you guys given that -- given the greenhouse infrastructure there? Are you guys kind of working towards market as well?

Still working on flower and biomass sales at scale and that just takes a little bit more time. But again, cautiously optimistic that that will be a big part of what we do. But these other SKUs are pretty exciting.

And then just on Arizona here. I think in the -- in your guys -- at Analyst Day, the summer, you guys had kind of touched on the potential for greenhouse expansion in that market. Is that anything that we should consider sort of in the CapEx budget right now, maybe for '22 or '23 or is this similar to the Maryland expansion here just going to be a function of demand?

Right now, we're focusing on existing infrastructure and capacity down to the Amado facility and no additional expansions here are forthcoming. But the amount of facility, the incremental 9 acres of shade house was completed and that's the primary focus right now.

At this time, there are no further questions. I would like to turn the call back over to Dr. Kingsley for closing remarks.

Thanks again for joining us this morning. We wish everybody a happy and safe holiday season, and we look forward to connecting with you all again in the new year.

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