Vireo Growth Inc

Ladies and gentlemen, thank you for standing by and welcome to the Vireo Health International 3Q20 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Mr. Sam Givens with Investor Relations. Please go ahead.

Thank you, Sharon. Thanks, 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 webcapped live from the investor relations section of our website. The dial-in webcast details for the call have also been provided on slide three 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 report a cautionary note regarding forward-looking statements in today's earnings release. Now I hand the call over to Dr. Kingsley.

Thanks, Sam. Good morning, everyone, and thank you all for joining us. We'll begin with our usual discussion of the highlights from the quarter, and I'll hand the call to John for his review of the financial results. I'd also like to remind everyone that our reported results exclude the impacts of our former cultivation and processing subsidiary, Pennsylvania Medical Solutions, or PAMS, which we sold to a subsidiary of Jucci Holdings in the transaction that closed in August. Please turn to slide four, where we provided a summary of highlights from the quarter. Total revenue of $13.4 million, including PAMs, was in line with our expectations and grew 68% year-over-year. We experienced revenue growth across each of our operational markets and are pleased with the progression of gross margin improvement and continued discipline and cost controls, which resulted in sequential improvements in adjusted operating expenses and SG&A as a percentage of sales. For the past several quarters, we've been focused on executing our core strategy, and our team has been working tirelessly to position our portfolio of vertically integrated assets to produce sustained and profitable growth. We believe today's results indicate that we're closing in on an inflection point in generating cash flow from operations, and we still haven't even benefited from any of the tailwinds that come from transitioning to recreational use markets. We also have not yet capitalized on any of the substantial scale we're bringing to bear in Maryland and Arizona in the coming months. Arizona is poised to become our first state to permit recreational market sales after voters approved the ballot initiative after this month's election, and we can continue to expect the majority of the rest of our medical markets to enact some form of regulatory change to their program frameworks within the next year. I'd encourage any current or prospective investor to investigate a few case studies of revenue growth trajectories in other states that have made the important transition from medical to recreational use, and then consider the fact that Vireo is already well prepared for these transitions as we invested heavily in CapEx to expand manufacturing capacity across our footprint over the past 18 months. It should also be noted that New York and Minnesota, our two largest markets, still do not allow for the sale of flour in those programs. In Minnesota and New York, we're currently operating at only about 50% of our capacity, and we're nearly finished with both of the massive expansion projects that we announced last quarter in Arizona and Maryland. As a reminder, last quarter we disclosed our plan to invest between $8 and $9 million in development projects in Arizona, Maryland, Minnesota, and New Mexico before the end of January. All of these projects are currently on time and budget. And in quarter three, we deployed roughly half of those dollars with most of the balance likely to occur in quarter four. In Arizona, we added nine acres of outdoor cultivation, which brought our total square footage of cultivation in the state to over 400,000 square feet. We've completed our first harvest on this new grow, and given the timing of Arizona's approval of recreational use legislation, we're in an excellent position to capitalize on an expected shortage of biomass in this market over the coming year. We're actually producing high-quality outdoor-grown flower in the ground here and should be able to produce between five and eight tons of biomass from this addition on an annual basis once the operation has been optimized. We're obviously very excited about this asset and feel confident about our ability to drive significant revenue growth through the Arizona wholesale market over the near term while we look to augment our retail presence. In Maryland, we're still in the process of upgrading the 120,000 square foot greenhouse facility we purchased this past summer, but we're aiming to have our first harvest there in late quarter one. Once we're done with our facility improvements, we're expecting to produce four plus turns of cultivation a year through that facility, which should increase our capacity approximately 12x compared to our former 22,000 square foot facility, which will become exclusively the site of our new processing operations. These projects should enable us to continue driving strong wholesale revenue growth in Maryland for the foreseeable future. We're also looking forward to opening our first retail dispensary in Frederick, Maryland next month or early in 2021. In Minnesota, we recently opened our fifth retail dispensary in the Duluth area, which is the fourth largest city in Minnesota, and we're on track to finish the construction of new dispensaries in Blaine, Woodbury, and Burnsville, Minnesota, which are all in the Minneapolis metropolitan area before the end of the year. We believe there's a path toward the inclusion of flour in this upcoming legislative session in the spring, but either way, we're well positioned to be profitable in Minnesota next year and continue to believe that this market is one of the most overlooked cannabis opportunities in the United States. For those of you who aren't familiar with our home state, there are only two vertically integrated licenses here for a population of 5.6 million people. Finally, in New Mexico, we're awaiting final approval of a 13,000-square-foot cultivation facility, and our two new dispensaries in Las Cruces and Albuquerque are on track to be completed next month, with anticipated regulatory approval in January, which will bring our total number of operating dispensaries in New Mexico to four. We continue to believe that New Mexico will be a sleeper market for us, where we've been able to carve out a profitable niche, especially as many Texan residents are likely to become tourist customers if adult use is approved as we expect. It's amazing what a difference even six months can make in our industry, but after a difficult first few quarters as a public company, Vireo is emerging in a very healthy position with significant upside opportunity in front of us. Our balance sheet is in great position with over $16 million in cash as of close of the third quarter, and this does not include $16 million in additional cash proceeds that we're expecting over the course of the next couple of months, resulting from the recent forced conversion warrants and the private placement we did in March, as well as the pending divestitures of our Ohio Processing and dispensaries in Pennsylvania. Last quarter we disclosed that in the August timeframe we were burning approximately $750,000 a month in cash from operations and that we were expecting that figure to continue improving into next year. We still have about $4 million to deploy to complete the development projects we discussed today, but with $32 million in expected cash between what is on hand at the end of quarter three and what we believe is coming in, as well as the potential for up to a $46 million non-divertible debt facility that we recently announced we have here earlier this month, we suddenly have a lot more flexibility to continue making strategic investments in our business. We're going to be mostly patient with these decisions and make sure to drive the highest possible ROIs for our investors. But suffice it to say, we have a lot of exciting opportunities in front of us. We also realize there's growing appetite from the investment community for us to start providing some form of guidance. But before we do, we'd like to be more familiar with our new operations in Arizona and Maryland, and we'd like to get better visibility into forthcoming regulatory changes, potentially across all of our core markets in 2021. Our hope is that we'll be in a position to provide the investment community with an update on all of our development initiatives and their potential impacts to our long-term operating and financial outlook sometime in the spring of next year. Before I hand over the call to John, I'd like to briefly recognize promotions of Christian Gonzalez to the role of Chief Operating Officer and Patrick Peters to the role of Executive Vice President of Retail. Christian and Patrick have been a huge part of our recent success, and these promotions have been very well earned. Christian joined us in 2018 as the General Manager of our Pennsylvania operations and since then has overseen several major capacity expansion projects and helped our teams optimize manufacturing efficiencies in our cultivation and processing facilities. Maryland, Arizona, and New Mexico. Patrick joined us last year to lead the nationwide rollout and rebranding of our green goods retail stores. Patrick's team is in the process of expanding our retail store account to 18 stores by the end of the first quarter, and they'll now also be spearheading our wholesale and e-commerce sales initiatives across our various markets. We're thrilled to have Christian and Patrick as part of our team and are looking forward to their continued contributions to helping Vireo drive profitable growth. That concludes my prepared remarks. I'll now hand the call over to John.

Thank you, Kyle, and thanks to everyone for joining us on today's call. I'll begin with a review of our reported results on slide five of today's presentation. Please keep in mind that all numbers stated refer to U.S. dollar amounts, unless more than otherwise. Total revenue, including PANs, increased 68% year-over-year to $13.4 million. Exclusive PANs revenue was $11.9 million, an increase of 67% compared to the third quarter of last year and 11% sequentially compared to the second quarter of this year. Retail revenue through our own dispensaries was $9.9 million, an increase of 61% compared to $6.2 with the increase primarily driven by greater patient enrollment and average revenue per patient in our Minnesota and New Mexico markets, as well as contributions from our two retail dispensaries in Pennsylvania. Wholesale revenue of our products to third parties was $2 million in Q3 2020 and reflected revenue from B2B customers in Arizona, Maryland, New York, and Ohio. Before biological adjustments required by IFRS, the company generated Q3 2020 gross profit of $5.1 million, or 43% of revenue, as compared to $1.8 million, or 25% in the same period last year. The improvement in gross and margin compared to the prior year was the result of operational efficiency gains in several markets, improved operating leverage through higher sales volumes, and production facility upgrades completed last year. Total operating expenses in Q3 were $6.9 million, an improvement of $1.3 million, or 16%, as compared to $8.2 million in Q3 2019. The reduction in operating expenses was attributable to lower professional fees and SGA expenses, including startup expenses related to buildup and pre-revenue operations in some markets. Excluding depreciation, Excuse me, excluding depreciation and share-based compensation, operating expenses in the third quarter of 2020 were 6.1 million or 51% of sales as compared to 7.5 million or 105% of sales in the third quarter of 2019 and 55% of sales in the second quarter of 2020. SG&A expenses as a percent of revenue improved to 18% as compared to 57% in the third quarter of last year and 22% in the second quarter of 2020. We did generate positive net income of $122,000 during the third quarter, but this was the result of a $16.4 million one-time gain that we recorded on the divestiture of PAMS during the quarter, which is reflected in the other income line item on today's income statement. Total other income was $10.5 million during the third quarter, compared to an expense of $825,000 in Q3 2019. I'd also like to remind investors that recent fluctuations in this other income line item have been primarily related to the book value of the derivative liability associated with the warrant for the issue in conjunction with the private placement we completed in March. We issued a news release earlier this month announcing that we had exercised the right to force the redemption of these warrants, and we expect these redemptions to result in cash proceeds of approximately $10 million during the as well as the issuance of an additional $13,651,000 subordinate voting shares to the warrant holders. Once all of the warrants have been reviewed, this derivative liability will fall off our books. Net loss from continuing operations during the third quarter was $347,000, compared to a loss of $12.5 million in the third quarter of last year. We did have income from discontinued operations at PAMS during the third quarter of $469,000, but this was the result of a gain on biological assets of roughly $800,000, and PAMS would not have been profitable during the third quarter otherwise. Adjusted EBITDA was a loss of $676,000 during the third quarter compared to a loss of $5.2 million in Q3 of last year. For additional details regarding these metrics, please refer to the reconciliation table of non-IFRS items in today's earnings release and MP&A, which will be available on CDAR later this afternoon. We ended the quarter with total current assets of $81.3 million, including cash on hand of $16.3 million. But I would point out this amount does not include approximately $16 million in expected cash proceeds. resulting from the redemption of warrants and the pending divestitures of Pennsylvania Dispensary Solutions and Ohio Medical Solutions. I'd also like to remind investors that since we've announced the pending divestitures of Ohio and Pennsylvania Dispensary Solutions, results of these two subsidiaries will appear under discontinued operations on the four-quarter of the income statement. Total current liabilities were $20.7 million, and we continue to have zero debt currently due within 12 months. As of June 30, 2020, there were 37,337,000 equity shares issued in outstanding and 153,376,000 shares outstanding on an as-converted, fully diluted basis. This fully diluted share count figure is inclusive of the additional subordinate voting shares issued in relation to the redemption of warrants that we discussed on today's call. For additional details surrounding our share structure, including warrants and option claims, please refer to our disclosures surrounding share capital in our quarterly financial statements filed on CR. In terms of our priorities for the remainder of the year into early 2021, we still have about $4 million to deploy before the end of the first quarter to complete the development projects we have underway in Maryland, Minnesota, and New Mexico. These projects should be complete by the end of Q1 2021 and are expected to contribute to revenue growth and margin expansion, as Kyle mentioned earlier. The recent improvement in our balance sheets has enabled us to begin evaluating new investment opportunities to improve the long-term performance of the business. We're in the process of evaluating these opportunities and expect to provide the investment community with an update on our development initiatives and the potential impacts to our long-term operating and financial outlook in the spring of next year. Before we wrap up, I'd like to point out that we currently are in the process of transitioning to becoming a U.S. domestic registrant and expect that this earnings call will be the last time that we report our results under IFRS accounting rules. Beginning of next quarter's call, we plan to present our financial statements in accordance with generally accepted accounting principles in the United States. As a result, we expect to begin filing our results with the SEC with annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on foreign pay decay. We believe this transition will make it easier for our current and prospective investors to understand the performance of our business without adjusting to the volatility and fluctuating values of biological assets. And we anticipate the work related to this transition will result in one-time professional fees of approximately half a million dollars during the first quarter. That concludes our prepared remarks. Operator, we'll now open the line to analyst questions.

if you'd like to ask a question at this time please press star one on your telephone keypad if you'd like to withdraw your question press the pound key first question comes from eric delorier please go ahead all right great thanks for taking my questions guys and congrats on the quarter a really impressive distraction making a possibility um

I'd like to first focus on that impressive gross margin improvement. We saw over 1,000 basis point expansion quarter over quarter. Can you comment on the source of that expansion, any specific markets you want to call out that are driving that, or maybe some greater efficiencies on retail or cultivation operations? Just any more specific color on that expansion would be great.

Yeah. So primarily, if you look year over year, It's just a continued cost control in our production facilities, increased yield, and more efficiency in our production. If you look at Q3 of 2019, we had some one-time failures. costs in New York related to some improvements and there was some downtime in the production facility last year that resulted in some higher per-unit inventory costs that flowed through in Q2 of this year. So that's responsible for some of the margin improvement both year-over-year and sequentially, but primarily it's just the number one driver is just continued cost control and yield improvement.

Okay, great. That's helpful. And then, you know, I'd love your thoughts on the Minnesota market post-election and the potential for regulatory change. You know, it's a bit of a crystal ball question, but do you think meaningful reform is likely in 2021? And, you know, what is the appetite for change, whether it's permitting flower or adult use sales in Minnesota? Just any color to the extent that you do have any insight there.

Yeah, good morning. Eric Kyle here. Yeah, difficult to see the future there. I can say that both sides of the aisle, both the Republican-controlled Senate and Democrat-controlled House, have interest in controlling costs for our patients and helping to limit the opioid crisis in the state. A major path there is the inclusion of flour into the existing medical program. And that's really a primary focus for us. You know, we'll work with legislators to evaluate any potential appetite for adult use. But if I had to guess, the more likely outcome here is the addition of flour to the program in Minnesota. Again, as you realize, our two primary markets, Minnesota and New York, don't even allow for the use of flour here by our patients, which provides a really substantial upside for us when those changes happen, which I do feel is inevitable. I don't know that it will happen this year, but that's our hope.

okay yeah yeah that makes sense and um yeah certainly uh very uh very substantial upside once flower comes at you know 50 of sales pretty much uh um you know across all markets here um and that's good segue into my uh last question here so um the cash you guys have brought in since the end of q2 has you know been really impressive especially uh factoring in that 46 million credit facility Can you talk about how that credit facility positions you guys to take advantage specifically of the New York market if adult use legalization is passed early next year as it's looking like it will?

Yeah, the nice thing about the credit facility is it's tranched out and the warrants reprice with each subsequent tranche. We like that character of it. One of the main drivers for us kind of pulling the trigger there was growth opportunities in places like New York. I look across all of our core markets, and there's little question that we have opportunity for additional scaling. A place like New York, you have grossly undersized cultivation capacity when you look at the transition to adult use, depending on the exact timing. But it's a big opportunity for us, and you hit it on the head. That does really open doors for us as far as further expansion in places like New York and, frankly, any core market that's transitioning to adult use. But New York is a primary focus.

All right, great. Well, congrats again, guys. Thanks, Harry.

Next question comes from Matt Bottomley with Canaccord.

Good morning, all. Thanks for taking the questions. Just wanted to go back to Minnesota. I'm wondering if you can provide any data on whether it's percentage increases or absolute number of patients, what the uptake has been maybe quarter over quarter and so far this year, and then any other updates on, you know, the planned retail locations for your additional dispensaries in that state, if there's any restrictions on where you can or can't open.

Yeah, absolutely. So roughly speaking, again, these are estimates of about 150 new patients were entering the program in Minnesota for the year plus leading up to April of this year. We saw an interesting upward inflection sort of contemporaneously with COVID where we're now looking at, you know, between 230 and 250 patients joining each week. So very interesting uptick there. I can't really attribute that to anything other than maybe COVID. Although, you know, you look at markets, generally speaking, there's an inflection point at some point, but usually it's tied to changes to the program. But that was interesting to see that absent the addition of flower into the program, but very encouraging. We've been getting good traction in the new Hermantown Duluth facility. And you mentioned that we have three additional facilities, sort of in first and second tier suburbs of the greater Minneapolis area. Very excited about those. Primary driver for patients selecting dispensaries is location, and so we're excited to bring three new dispensaries to those population centers that are currently without dispensaries. Matt, I missed the second aspect of your question there. Sorry.

No, no, that was great. I was just curious both on the patient uptake and then the retail location update as well. So that's very helpful. And then, yeah, if you just kind of look at your messaging over the last little while here, so you had the dispositions in Pennsylvania and Ohio. So now that your balance sheet is pretty short up here, and there's obviously ability for incremental capital based on all the events you've outlined on the call, what's your, I guess, the temperature out there for starting to invest some of that potential capital into going deeper in these markets? You've telegraphed where you're Capital expansions are, I imagine, Arizona retail would be something. But are there things that you don't have today in existing markets you're in that you could see M&A being the way to go through it? Or is the next two, three, four quarters here just on continued execution and what you guys have?

Yeah, based on our analysis, it's a lot more efficient use of capital for us to double down in existing markets. For example, substantial scale expansion in a place like New York, additional scale expansion in a place like Maryland or Arizona, that's probably going to be higher yield than these rather expensive M&A actions in retail for Arizona or Maryland, for example. We're very open, but we were kind of letting the ROI dictate where we put these dollars. Hopefully we can do all of the above eventually, but right now we're just going strictly to the highest IRR. It's very interesting how six months makes a difference. We're looking at capital preservation and we've flipped completely to the most prudent, highest yield capital deployment now, which is a really pleasant transition.

Perfect. And then last question for me, given that I know you're waiting until the spring for guidance and totally understood why, is there any other color you can give maybe for Q4 and Q1 of 21 of what to expect, maybe direction on the top line? It seems like a large majority is still Minnesota and New York, and those have longer-term growth profiles, but I don't think in the next three to six months here it's expected to be anything materially different, and correct me if I'm wrong, so should we expect the kind of you know, $12, $13, $14 million a quarter type prints? Or is there other maybe wholesale channels you might be turning on that might, you know, make that a little more variable than those numbers?

Yeah, we're confident we'll continue to see this sort of drumbeat upward organic growth in our existing retail. We do have these great step functions in the form of Arizona and Maryland coming online. And what we can see is that the way you get these step functions is substantial scale on the production side and subsequent wholesaling. But we also, remember, have a slew of dispensaries coming online here in the next six weeks. And so excited to see the effects of that on quarter one and beyond. Okay, very helpful. Thank you. Thanks, Matt.

Once again, to ask a question, please to our star one. And we have a question from Patrick Sullivan. Please go ahead.

Good morning, guys. Thanks for taking my question. Congrats on the quarter. I'm on the line here for Graham Kreindler. I'm just wondering if you can talk a little bit about whether there is any more interest in actual divestiture of non-core assets. I know you've definitely strengthened your capital position pretty strongly over the last quarter, but is there anything else you're looking to take off the table?

Yeah, you know, certainly everything has its price. I look at, you know, our licenses in Puerto Rico, the licenses in Massachusetts, the very interesting 14 acres with the production facility in Nevada. And, you know, it's an interesting discussion internally on development versus divestiture, and it really would come down to the price. But a lot of these places, we're not in a hurry. We have some pretty interesting assets that could have significant upside in the future. We are laser-focused right now in our core markets, but we're always open to conversations and additional divestitures if they make sense.

Okay, got it. And then I guess shifting to the New Mexico market, not one we hear much about. I thought I understood it to be that your cultivation is capped at some sort of number of plants. And I wonder how, if that has been changed, or if I'm misinformed there, and how that kind of fits into actually growing your platform in New Mexico.

Great question. The current limit is 1,750 plants, if I'm not mistaken, which is a pretty significant limit. You know, absent partnerships are working with other cultivators to try to increase that number. A big determinant of kind of the path for New Mexico will be the final adult use legislation, which we anticipate will pass this legislative session. That might be delayed into mid to late spring based on COVID restrictions. But, yeah, that's going to be a major driver. We do anticipate that plant limit will be elevated. There are other things you can do, you know, large plants to really kind of maximize your production through the 1750 limit. But that is, if you put it on the head, it's a major driver. We do anticipate that will change with adult use legislation.

Okay, got it. And then final one. You mentioned a few times you press released the conversion of your retail to launching your green goods branded stores. I'm just wondering how that's being received by patients and customers.

Yeah, very well thus far. Remember, a lot of our business is actually in the vestibule or curbside pickup, so they haven't been able necessarily to appreciate the interior of the stores. But this is best-in-class retail that we're presenting here. Very well received by the media, very well received by patients who have been able to access the stores. Very excited over time to kind of sequentially improve our retail footprint so that these are competitive long-term customers. And the green goods rebranding is a big part of that initiative. Okay, great. Thank you. I'll get back in the queue. Thank you.

Once again, to ask a question, please press star one. And we have a question from Paul Petroski with M Partners.

Hey, good morning, guys. Just backing up to the margins again. So you talked about cost controls, yield improvements. Can you comment on sort of which state exactly drove the improvement or which one drove it the most?

Yeah, the biggest margin improvement, you know, year over year was in New York.

Okay. Paul, I just also point out that in the prior year quarter, we were really just getting up to speed in Maryland. So, you know, this didn't quite have as much revenue in that state yet, but still a fair amount of expense. So that's important to be aware of.

Okay. And then one more follow-up on sort of the green goods banner. Can you guys give just a bit more detail on what you've seen and how they perform versus the other dispensaries, or if you can sort of quantify it in any way?

Yeah, a bit early to do that here. Remember, we have sort of a captive audience in Minnesota, and so, you know, we do anticipate we'll continue to eat up markets here in Minnesota with the transition, but it's a little bit early for us to say the effects of the change. Positive so far. All right, thank you.

Once again, to ask a question, please press star 1 on your telephone keypad. And we do not have any telephone questions at this time. I will turn the call over to the presenters.

Thanks again for joining us this morning, and happy Thanksgiving to those who dialed in from the United States. We appreciate your continued support and wish all of you a happy holiday season. We look forward to speaking to you again in the new year. Thanks.

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