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

Good morning. My name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Goodness Growth Holdings Third Quarter 2020 Results Call. [Operator Instructions] Mr. Sam Gibbons of Investor Relations, you may begin your conference.

Thank you, Devon, and thanks, 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 in this morning's earnings release, which is also available on our website. Before we get started, we'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 the earnings release. We'd also like to remind investors and analysts that on October 13, 2022, we received notice from Verano Holdings Corp. that it was purporting to terminate the arrangement agreement dated January 31, 2022, with Goodness Growth, pursuant to which Verano had agreed to acquire Goodness Growth on satisfaction of certain conditions. We believe that this purported termination was invalid and have treated it as a wrongful repudiation of the arrangement agreement. We filed suit against Verano in the Supreme Court of British Columbia on October 21, 2022, seeking damages. We are unable to comment further on the litigation at this time beyond what has already been disclosed and direct your attention to the pleadings, which are available from the court. Now I'll hand the call over to Dr. Kingsley.

Thanks, Sam. Good morning, everyone, and thank you all for joining us today. I'll begin with a high-level review of our third quarter performance and provide a brief update on our management team and Board strategic priorities following the wrongful repudiation of our transaction to be acquired by Verano. After that, John will review our financial performance and balance sheet in more detail. Our third quarter results reflect continued revenue growth across each of our operating markets in Maryland, Minnesota, New Mexico and New York, as well as consistency of our gross margin performance as compared to the prior quarter. Total revenue of $18.9 million increased approximately 41% compared to the third quarter of last year. If you exclude last year's contributions from our former operations in Arizona, which were discontinued earlier this year, total revenue grew approximately 60% year-over-year, driven by significant increases in retail sales in Minnesota, Maryland and New Mexico as well as wholesale sales growth in New York. On a sequential basis, excluding our former Arizona operations, sales declined 4.5% as compared to the second quarter of this year, with the decline driven primarily by lower sales in New Mexico, as store count across the state has increased significantly following the commencement of adult-use sales during the second quarter. As a reminder, there is no cap on the number of adult-use dispensaries allowed for licensed operations in New Mexico and the state has quickly grown store count per 100,000 residents well above industry average trends since the state transition to adult-use sales. Our home market in Minnesota remains especially strong following the commencement of flower and edibles sales earlier this year. And we are also pleased with substantial increases in wholesale volumes in New York. We expect both these positive trends to remain strong growth drivers for our business as we continue working toward the launch of adult-use sales in New York next year. Gross margin performance improved significantly year-over-year from 38.3% of sales in the third quarter of last year to 50.6%. Gross margin has benefited from our recent wind-down of operations in Arizona. And when we exclude previous contributions from Arizona, we've now delivered 2 consecutive quarters of positive adjusted EBITDA performance with gross margins in excess of 50% of sales. We're also very pleased with recent regulatory developments in Maryland and Minnesota, which should create additional revenue growth opportunities for our business. Last week in a largely expected outcome, Maryland voters approved a ballot initiative to legalize recreational use sales. Even more importantly, however, were the midterm election results in our home state of Minnesota. Democrats gained controlled the State Senate for the first time since 2014, which opens a pathway for the state legislature to pass an adult-use legalization bill without opposition. Despite strong support from the governor, previous initiatives to pass marijuana reform in Minnesota have been blocked by the former Republican majority in the State Senate. So this has been a very positive regulatory development in one of our most important markets. Lawmakers have already voiced strong support for this initiative since the conclusion of the interim elections. We believe it is likely that legalization of adult-use program could be approved by the state legislature in Minnesota sometime in 2023. Despite the many positive trends we are experiencing in our business, we were extremely disappointed by Verano's decision to wrongfully repudiate our transaction on October 13. As a reminder, we previously anticipated the transaction to be acquired by Verano would close sometime during the fourth quarter of this year. We reiterate that this repudiation was wrongful, and we will be seeking significant damages through the judicial process based on Verano's breach of contract and its duty of good faith and honest performance. While this unexpected development with Verano has resulted in a steep decline in our share price, we continue to believe there is significant long-term value in our asset portfolio, and that view has been validated by the strong support we've received from some of our largest shareholders over the course of the last several weeks. Our management team and Board of Directors remains focused on maximizing value for shareholders. The transaction committee was formed by our Board of Directors to explore strategic alternatives for the company in the third quarter of 2021 and is continuing to evaluate all opportunities to maximize value for stakeholders in the wake of termination of the Verano transaction. We would like to remind investors that the transaction committee with the assistance of outside advisers ran a thorough sale process and received multiple bids on the company prior to announcing the agreement with Verano on February 1, 2022. Transaction Committee will be revisiting those opportunities as it continues evaluating strategic alternatives for the company. We also remind investors that there was some license overlap with the combined Goodness Growth in the Verano asset portfolio. And we were already in the process of identifying potential divestitures to satisfy regulatory requirements in certain jurisdictions if the Verano transaction had closed. So while strategic alternatives for the companies could include this position of a material business or assets or a merger sale of the company, we are unable to set the timetable for the completion of this review process at this time. Regardless of any outcomes of this review process, we have an extremely attractive portfolio of U.S. cannabis assets and are looking forward to additional positive regulatory developments in our markets in Maryland and New York, with New York's long await to transition to adult-use sales expected next week and the recent legalization of adult use sales in Maryland, following a successful ballot initiative in last week's election. Quantifying the opportunity in Maryland will depend on outcomes of the state's adult-use programs implementation, but historical per capita spending trends across the United States suggests there is still substantial upside for sales growth. Per capita cannabis spending in Maryland is currently around $6 within the existing medical market. Typically, adult-use markets have been reaching normalized per capita spending of about $15 within 2 years of legalization. So we're looking forward to unlocking this new catalyst for sales growth in the Maryland market next year. As a reminder, in Maryland, we currently have 2 operating green dispensaries in Frederick and Baltimore, as well as approximately 110,000 square feet of cultivation capacity and approximately 20,000 square feet of processing space where we are already manufacturing a full spectrum of cannabis product categories. We recently began selling high-dose edibles in Maryland, and we're one of the first movers in this market with edible product offerings of up to 40 milligrams of THC per dose. We are continuing to enhance our manufacturing capabilities in Maryland to accommodate greater variety of adult-use products, and we're confident that our dispensaries will likely -- will be highly competitive stores in that market when adult use sales begin, which we believe is likely to occur next summer. In New York, per capita spending in the existing medical market is one of the lowest in the country at approximately $0.70. That maturity based on these per capita spending trends, the New York adult-use market is expected to be one of the largest in the company -- country with more than $5 billion in potential annual sales at maturity. We were one of the first 5 licensed operators in this market back in 2015 and are extremely proud of our leadership position we've established in the state's existing medical program. Today, we are one of the larger operators with 41,600 square feet of cultivation capacity and produce one of the most diverse product sets operating in the market. The exact timing of the implementation of adult-use sales next year remains uncertain. We are encouraged by the state's Cannabis Control Board's recent proposals for certain retail operations. Our operations are governed by similar concepts, we would be able to operate our stores until midnight and maintain our existing home delivery service, which we believe is one of the largest legal home delivery operations in the state and currently accounts for more than 50% of our retail sales. For the past several quarters, we have been focusing on optimizing our flower production capabilities, we've been responsibly stockpiling bulk oil inventory where possible so that we can maintain a strong focus on flower production upon the launch of adult-use, which will be critical in ensuring long-term success in New York's market. Flower sales and wholesale sales have been increasing nicely since these operating plans were implemented. And as we mentioned earlier, we expect to continue growing wholesale sales in New York, leading up to the launch of adult-use program. As far as our expansion plans in New York are concerned, we have received regulatory approval from the state to operationalize 170,000 square feet of the 324,000 square foot structure. We've -- as we've done in the past, we have partnered with IIP through a sale leaseback transaction to finance most of the first phase of construction, which should be completed in the first half of next year. The new building is predominantly composed of cultivation space as well as a new home for our cloning and vegging space, drying, curing, trimming and flower packaging operations. The remaining square footage of the new building remains available shelf space for future expansion. As we continue to operationalize the new facility expansion, we will be retrofitting the old facility to enhance our processing and manufacturing capabilities. I'll now hand the call over to John for a more detailed review of the financials.

Thank you, Kyle, and thanks to everyone for joining us this morning. 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 41% to $18.9 million as compared to Q3 of 2021. Excluding contributions from our recently discontinued operations in Arizona, total revenue increased 59.6% year-over-year and reflected strong growth in each of our operating markets. Retail revenue, excluding Arizona, increased 60.1% to $16.4 million in Q3 2022. Wholesale revenue, excluding Arizona, increased 56.1% to $2.5 million, driven by increased sales in Maryland and New York. Gross profit in the third quarter was $9.5 million or 50.6% of revenue as compared to $5.1 million or 38.3% of revenue in the third quarter of last year. Total operating expenses in the third quarter were $9.7 million, an increase of $0.5 million compared to $9.2 million in the third quarter of last year. The increase in total expenses was primarily attributable to an increase in professional fees related to the former agreement to be acquired by Verano Holdings Corp. On a GAAP basis, SG&A expenses of $8.5 million increased 4.7% compared to Q3 of last year and reflected 45% of sales compared to 60% of sales in Q3 last year. These improvements in SG&A as a percent of revenue were expected, given the ramp-up in sales we've been experiencing across our footprint. Loss from operations in Q3 was $0.2 million, an improvement of $3.9 million as compared to a loss of $4.1 million in the third quarter of last year. The improvement in operating performance was driven by increased revenue and gross profit dollars, partially offset by the increase in total operating expenses. Total other expenses were $7.6 million in the third quarter compared to $2.2 million in Q3 of last year. The variance in other expenses was primarily attributable to increased interest expense related to the company's credit facility and an impairment of long-lived assets of $2.1 million, which I'll discuss momentarily in my review of the balance sheet. Net loss in Q3 was $8.4 million compared to a loss of $6.9 million in the third quarter last year, with the variance driven by the improvement in operating income, offset by increased interest expenses and the impairment of long-lived assets. EBITDA as described in our accompanying disclosures and footnotes was a loss of $1.2 million during Q3 of 2022 compared to a loss of $3.1 million in Q3 2021 with the variance primarily attributable to higher interest expenses. Adjusted EBITDA was a gain of $1.9 million in Q3 2022 as compared to a loss of $1.9 million in Q3 2021. As of September 30, 2022, the company had 128,126,330 equity shares issued and outstanding on an as-converted basis and 158,380,087 shares outstanding on an as-converted fully diluted basis. Total current liabilities at the end of the third quarter were $26.3 million. We ended the quarter with total current assets of $53.9 million, including cash on hand of $21.8 million, which included net proceeds received from an increase on our delayed draw loan of $8.5 million during the quarter, but does not include an additional $7 million in expected cash proceeds from an increased draw on our credit facility anticipated in the first quarter of next year. We had $55.6 million in long-term debt outstanding as of September 30, 2022, of which $6 million in debt is due within the next 12 months. During the 9 months ended September 30, 2022, the company drew $27.1 million in principal debt from its delayed draw loans. Proceeds received net of deferred financing fees of $2.1 million or $24.9 million. The delayed draw loans at a maturity date of April 30, 2023, we have the unilateral option to extend the maturity date another 12 months for an additional fee of $1.4 million, and we expect to exercise this option. As Kyle mentioned during his prepared remarks, our management team and Board of Directors continues to explore all opportunities to maximize value for stakeholders. We have identified property, equipment and leased assets and liabilities associated with our assets and businesses in Maryland as well as assets in Arizona, Nevada and Massachusetts. We're carrying amounts that are expected to be recovered principally through sale or disposal rather than through continuing use. The sale of some of these assets and liabilities is highly probable. They can be sold in their immediate condition and sales are expected to occur within the next 12 months. As such, these assets and liabilities have been classified as held for sale. The carrying value of these assets exceeded fair value less expected costs fell. And as such, the company recorded an impairment loss of $2.1 million in the third quarter and $7.5 million for the 9 months ended September 30, 2022. I'll now hand the call back to Kyle for some additional closing comments.

Thanks, John. While the unexpected unlawful termination of the Verano transaction, has been disappointing for all of our stakeholders, our asset portfolio is positioned for strong growth next year, and we believe we remain a very attractive long-term player in the United States cannabis market. Despite the near-term challenges created by the repudiation of the arrangement agreement with Verano, we are operating in the midst of a regulatory climate, which has never been more promising for our business and for the broader U.S. cannabis industry. As we discussed earlier, our historically medical markets in Maryland, Minnesota and New York are all on the cusp of enacting adult-use programs, and these will each serve a strong growth catalyst for goodness growth. Furthermore, bipartisan support for federal legalization, which could open access to safe banking and a variety of other potential social equity improvements remains very strong with potential for meaningful change to occur during the upcoming Lame Duck session of Congress, which ends on January 3, 2023. President Biden's recent decision to ask Congress to review the scheduled classification of Marijuana under the Controlled Substances Act was another major step toward righting the wrongs caused by the failed war on drugs. There are several potential outcomes from this review process, which could be extremely favorable for our company, especially considering our reputation as one of the most respected leaders in the true science and medicine of cannabis in the United States. We've recently seen additional new entrants to the U.S. market from nontraditional non multistate operators, and we believe this type of interest is likely to continue in the current environment. Our asset portfolio, combined with our medical and scientific leadership, and one of the strongest portfolio of intellectual property and cannabis will remain a very attractive opportunity for strategic partners for the foreseeable future. Our management team and Board of Directors remain committed to maximizing value for stakeholders and we're continuing to work very closely with our outside advisers and lenders to protect our long-term interests. We're continuing to focus on executing what's within our control amidst the current landscape, and we'd like to thank all of our team members and stakeholders for their continued support for the company and its mission. Operator, that includes -- that concludes our prepared remarks. We'll now open the line to analyst questions.

[Operator Instructions] Our first question comes from Eric Des Lauriers with Craig-Hallum Capital Group.

First here just on Minnesota, it's great to see that at over 50% of sales by now. Could you just comment on your overall capacity utilization on cultivation and production side of things? Obviously, we have smokable flower now allowed and the prospects for adult-use just got ratcheted up significantly. So I'm wondering to what extent you have the capacity to serve that expected increase in demand.

Yes, Eric, I appreciate that. So we do have significant capability for increasing our throughput through the existing facility. And actually, through the course of this winter, we're looking at augmenting HVAC, so we can get even more dense with our production in the existing 60,000 square feet of flowering greenhouse that we have. We also have access to adjacent 20 acres of property for any additional expansion moving ahead. So we're considering all options here right now. The first step is augmentation of the existing facilities, which provide significant upside to current throughput, but we do have that 20 acres, which we're excited about as we look at the advent of adult-use in the state.

That makes sense. Next question on Maryland. So if I heard John's comments correctly that you have some Maryland assets that are held for sale. Could you just help us understand perhaps which assets are held for sale here? I know presumably, everything is on the table strategically for you guys. But just how are you looking at the Maryland opportunity with the assets you have, given the potential for adult use coming up here?

Yes. Eric, in related to Maryland, we just have some of the structures for the -- we were going to build a second greenhouse there that was put on pause, and there was some equipment and -- part of additional greenhouse that we are looking to sell, and we just have written that down to what we believe is the realizable value. That's the only thing in Maryland at this point that's been reflected on the balance sheet.

And Eric, in broad strokes, the Board of Directors and transaction committee are looking at sort of all assets and all paths forward here. So we can't get a whole lot more granular on that as far as specific assets.

That makes sense. And yes, it's going to hear that just those 2 structures that if you guys do decide to stick in Maryland, you do have significant assets to make that adult-use demand. Last question for me here. I appreciate the color you guys gave on New York. It sounds like wholesale delivery continues to go well for you guys. Can you comment just on the overall competitive landscape with the illicit market? How much of a risk do you see from that illicit competition? And are you noticing a big difference sort of within New York City and then the more suburban and rural areas of the state?

Yes. Obviously, there's a substantial illicit market in New York. We're -- we believe it's just a matter of time until there's actually a requirement for regulated safe public health facing volume of plant material. And one thing that we're seeing is there's -- it doesn't seem to be nearly as much capacity coming online in New York. So our plan is really to rightsize our facility, gear it towards anticipated demand and also to really use the existing facility that we have. We do a 40,000 square feet of flowering greenhouse there right now. So we're taking a measured approach here. We're really trying to gauge demand. Obviously, the big uncertainty in New York is the go-live date for adult-use. So once we get more clarity there, we'll be able to save more.

There are no further questions at this time. I turn the call over to Dr. Kingsley.

Thank you all for joining us today. We wish everyone a safe and happy holiday season, and we'll look forward to connecting with you all in the New Year. Thank you.