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.