Q3 2020 Vireo Health International Inc Earnings Call
[music].
I should ask a question during the session you'll need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to Mr., Sam Gibbons with Investor Relations. Please go ahead.
Thank you share and thanks, everyone for joining US with me on today's call are Chief Executive Officer, Dr., Kyle Kingsley and our Chief Financial Officer, John Heller Today's conference call at least what that line from Investor Relations section of our website diluted weighted cap exhausting falls off for the providers on slide three of today's presentation 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 you are needing securities losses. 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 beautifully cautionary note.
Moving forward looking statements in today's earnings release, now moving to call over to Dr. can do.
Thanks, Jim Good morning, everyone and thank you all for joining us we'll be even for usual discussion of the highlights from the quarter and I'll hand, the call for Jon for his review the financial results.
Also like to remind everyone that our reported results exclude the impact of our former cultivation and prosecute subsidiary debt.
For BD medical solutions for pounds, which we sold to a subsidiary of GP Holdings any transaction that closed in August. Please turn to slide for where we provided a summary of highlights from the quarter total revenue of 13.4 million, including Downs was in line with our expectations for 68% year over year, we experienced revenue growth across.
For operational markets and are pleased with the progression from gross margin improvement and continued disciplined cost controls, which resulted in sequential improvements in adjusted operating expenses investing as a percentage of sales.
For the past several quarters, we've been focused on executing our core strategies and our teams are working tirelessly to position our portfolio for vertically integrated assets to produce sustained and profitable growth. We believe today's results indicate that we're closing in on an inflection point for generating cash flow from operations and we still haven't even benefited from any other tailwinds that come from transitioning to record.
Additionally, each markets. We also non capitalized on any of the substantial scale, we're bringing to bear in mineral interest in Arizona in coming months, Arizona is poised to become our first stage permit recreational markets sales up for voters approved the ballot initiatives. This month selection and we continue to expect the majority of the rest of our medical markets.
And at some form of regulatory change to their program frameworks within the next year I'd encourage any for current and prospective Investor day, two investigator for use case studies for revenue growth trajectories in other states that have made the important transition for medical direct regional use and then consider the fact that he was already well prepared for these transitions as we invest in Hell.
Italy, and capex to expand manufacturing capacity across our footprint over the past 18 months.
Sales, we noted that we are in Minnesota, our two largest markets still do not allow for the sale a follower in those programs admin.
Administered in New York for current operating currently operating at only about 50% of our capacity and we are nearly finished with both as a massive expansive profit expansion projects that we announced last quarter in Arizona in Maryland.
As a reminder, last quarter, we disclosed our plan to invest between 89 million in developing projects in Arizona, Maryland, Minnesota in New Mexico before the end of January all of these projects are currently on time and budget in quarter. Three we deployed roughly half of those dollars with most of the balance likely to occur in quarter for now.
Arizona, we added nine acres of outdoor cultivation, which brought our total square footage cultivation stage over 400000 square feet. We've completed our first harvest on this new growth and given the timing of here is there.
There is always approval recreational use legislation for an excellent position to capitalize on an expected shortage biomass in this market over the coming year.
We're actually producing high quality outdoor run flower in the ground here and should be able to produce between five and eight tons of bio mass 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.
For two years on a wholesale market over the near term, while we look to augment our retail presence.
In Maryland, we are still in the process of upgrading the 120000 square foot greenhouse facility. We purchased this past summer, but we're aiming to have our first harvest they're linked quarter. One once we're done with our facility improvements we're expecting to produce for plus turns of cultivation year for that facility, which should increase our capacity approximately 12 EPS.
Compared to our former 22000 square foot facility, which will become the exclusive exclusively the size 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 Frederic Maryland.
Next month for early in 2021.
In Minnesota, We recently opened our shift retail dispensary in the news area, which is the fourth largest city in Minnesota and we're on track to finished the construction of new dispenser either in lean we're very can earn from Minnesota, which are all in the Minneapolis Metropolitan area before the end of the year.
We believe there is a path towards the inclusion of flower in this upcoming legislative session in the spring, but either way, we are well positioned to be profitable in Minnesota next year and continue to believe that this market is one the most overlooked canvas opportunities in the United States for.
For those who aren't familiar with our home state there are only two vertically integrated license here for a population of 5.6 million people.
Finally in new Mexico, we are waiting final approval for 13000 square foot cultivation facility and are too you dispensers in Las Cruces in Albuquerque are on track to be completed next month with anticipated regulatory approval in January which will bring our total number of operating these entries in Mexico for.
We continue to believe that new Mexico will be asleep for market for us, where we've been able to cargo to profitable niche, especially as many techs and resident they are likely to become tourist customers 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 video is emerging in a very health healthy position with significant upside opportunity in front of us our balance sheet is in great position with over 60 million in cash as of closing for third quarter and this does not include 16 million in additional cash proceeds that were.
Expecting over the course of the next couple of months, resulting from recent forced conversion warrants from the private placement we did in March as well as the pending divestitures of our Ohio processing facility and dispensers in Pennsylvania last call.
Quarter, we disclosed that in the August timeframe, we're burning approximately $750000 a month in cash from operations and that we were expecting that figure to continue improving into next year we.
We still have about 4 million to deploy to complete development projects, we discussed day, but were $32 million in expected cash between what's on hand at the end of quarter three in what we believe is coming in as well as the potential for up to $46 million non convertible debt facility that we recently announced for we have your earlier. This month, we suddenly have a lot more flexibility to continue making strategic.
Dick investments in our business.
We are going to be mostly patients with these decisions and make sure to drive the highest possible ROI for our investors, but suffice it to say we have a lot of exciting opportunities in front of us.
We also realized there is 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 in Maryland, and we'd like to get better visibility into for cutting regulatory changes potentially across all of our core markets in 2021 our.
Our hope is that we'll be in a position to provide the investment community with an update from all of our development initiatives and the potential impacts to our long term operating and financial outlook for sometime this spring of next year.
Before I hand over the call to John I would like to briefly recognize promotions of Christians in Dallas to the role of Chief operating Officer, and Patrick Peters to the role of Executive Vice President retail Krishna and Patrick EBIT, a huge part of our recent success.
These promotions are going very well mannered Christian joined Us in 2018 as the general manager of our Pennsylvania operations and since then has overseen several major capacity expansion projects and health care teams optimized manufacturing efficiencies in our cultivation and processing facilities in Minnesota for your Maryland, Arizona, and New Mexico cash.
Eric joined US last year and lead the nationwide rollout and rebranded rebranding of our green goods retail stores Patricks team is in the process of expanding our retail store count the 18 stores by the end of the per quarter.
And they are now.
And they will now also be spearheading, our wholesale and ecommerce sales initiatives across our various markets. We're thrilled to have krish impact as part of our team and looking forward for their continued contributions to other urea drive profitable growth.
To conclude my prepared remarks, I'll now hand, the call over to John.
Your trial and thanks, everyone for joining us on todays call ill begin with the review of our reported results on slide five for today's presentation.
Please keep in mind that all numbers stated or per us dollar amounts unless noted otherwise.
Total revenue, including Pan for increased 68% year over year at $13.4 million, excluding sands revenue was $11.9 million an increase of 67 percentage.
The third quarter of last year, and 11% sequentially compared to the second quarter of this year.
Retail revenue through our own dispenser sales was 9.9 million an increase of 61% compared to 6.2 million in Q3 2019, with the increase primarily driven by greater patient enrollment and average revenue per patient in our Minnesota in new Mexico markets as well as contributions from our two retail dispensers, Pennsylvania.
Wholesale revenue of our products for third parties was 2 million in Q3, 2001 and reflected revenue from Dnbi customers in Arizona narrower in New York and Ohio for.
For biological adjustments required by higher for Rs. The company generated Q3, 2014 gross profit of $5.1 million or for 43% of revenue as compared to 1.8 million or 25% from the same period last year in.
The improvement in gross margin compared to the prior year was the result of operational efficiency gains in several markets improved operating leverage through higher sales volume and production facility upgrades completed last year.
Total operating expenses in Q3 for 6.9 million, an improvement of 1.3 million or 16% as compared to 8.2 million from Q3 2019.
The reduction in operating expenses was attributable for lower professional fees and as Jumei expenses, including startup expenses relating to build up from pre revenue operations in some markets.
Excluding depreciation.
Excuse me, excluding depreciation and share based compensation operating expenses in the third quarter of 2014 were $6.1 million for 51% of sales as compared to $7.5 million or 105% of sales in the third quarter of 2009, and 55% of sales in the second quarter of 2020.
ESG and expenses as a percentage of revenue improved to 18% as compared to 57% from the third quarter of last year and 22% in the second quarter of 2012, we did generate positive net income of $122000. During the third quarter, but this was the result of a $16.4 million one line being that we really.
For it on the divestiture hams 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 other expense of $825000. In Q3 2019, I'd also like to remind investors that recent fluctuations in the other income line items have been primarily relates to the book value from derivative liabilities we.
The derivative liability associated with the warm for issued in conjunction with the private placement we completed in March.
You should a news release earlier this month announcing that we have exercised their rights for the redemption of these warrants we expect misery redemptions to result in cash proceeds of approximately $10 million during the fourth quarter as well as the issuance of an additional 13.651 million subordinate voting shares to the warrants.
Once all the one segment of this derivative liabilities will fall off the books.
Net loss from continuing operations during the quarter it was $347000 compared to a loss of $12.5 million for the quarter of last year.
We did have income from discontinued operations hands during the third quarter of $469000, but this was a result of the gain on biological assets of roughly $800000 exams with non has been profitable for the quarter otherwise.
Adjusted EBITDA was a loss of $676000 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 papers items in todays earnings release, and M&A, which will be available on SEDAR later this afternoon.
We ended the quarter with total current assets of $81.3 million, including cash on hand at $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 penta.
Pennsylvania, Dispensary solutions, and Ohio metal prices.
I'd also like to remind investors that since we've announced the pending divestitures in Ohio and Pennsylvania.
Dispensary solutions results of these two subsidiaries will appear on the discontinued operations in the fourth quarter income statement.
Total current liabilities for 21, excuse me $20.7 million and we continue to have zero debt current review within 12 months.
As of June 32020, there were 37 million for 137000 equity shares issued in outstanding and $153 million 376000 shares outstanding as converted fully diluted basis.
Was fully diluted share count for here is inclusive of the additional subordinated 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 grants. Please refer to our disclosures surrounding share capital in our quarterly financial statements filed on SEDAR.
In terms of our priorities for revenue year over year into early 2021, we still have about for millions of deployment. We ended the first quarter to complete the development projects, we have underway, Maryland, Minnesota and new Mexico.
These projects should be completed 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 sheet strength has enabled us to begin evaluating new investment opportunities to improve for 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 spring of next year.
Before we wrap up I'd like to point out that we currently are in the process of transition to becoming a U.S domestic registrant and expect this earnings call will be the last time when we report our results from your higher higher price accounting rules beginning of next quarter's call. We plan to present, our financial statements in accordance with generally accepted accounting principles.
Space as a result, we expect to begin filing our results for the FCC with annual growth annual reports on form 10-K quarterly reports on form 10-Q improved reports on form 8-K.
We believe this transition will make it easier for our current and prospective investors to understand the performance of our business without adjusting for the volatility and fluctuating values of biological assets and we anticipate that were related to this transition will result from onetime professional fees of approximately half a million dollars from the fourth quarter.
That concludes our prepared remarks, operator, we'll now open the line to analyst questions.
I'd like to ask a question at this time. Please press star one on your telephone keypad, if youd like to touch on your question press accounts team from.
Question comes from Eric Larry. Please go ahead.
All right great. Thanks for taking my questions guys and congrats on the quarter I really impressive distracting, making a profitability.
I'd like to current focus on that impressive growth margin improvement.
Over a thousand basis for an 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.
There may be some greater efficiencies on retail our cultivation operations.
Just any any more specific color on that expansion will be great.
Yes, so primarily if you look year over year.
It's just a continued price.
Cost control and current production facilities increase increasing yield and.
No it's more more efficiency in our production and if you look at Q3 and 19.
There we had some one time.
Costs in in New York related to some improvements and there is some downtime in the production facility last year that resulted in some higher per unit inventory costs for the flow through in Q2 of this year. So that's responsible for some of the margin improvement for the year over year ends.
Sequentially, but primarily it's just that the number one driver is just continued cost control and yield improvement.
Okay, Great Thats helpful.
And then.
Yes, I'd, let me touch on the Minnesota market post election, and the potential for regulatory change.
It has a bit of a crystal ball question, but you think meaningful reform is likely in 2021 is that what what is the appetite for change whether its permitting flower adult you sales in Minnesota, just any color for the extent that do you have any insight there.
Yeah, Good morning, Eric ill here.
Yes, just relative to see the future there I can say that both sides of the aisle both the Republican controlled Senate and Democrats control house have interest in controlling costs for our patients and helping to limit Kenneth opioids and opioid crisis in the state a major path. There is the inclusion of flower into the existing medical program.
And let's weighted primary focus for us.
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 flower today the program in Minnesota.
Again as you realize our two primary markets, Minnesota in New York, but even allow for the use of flower here by our patients which provides for for really substantial upside for us within those changes happen, which I do feel is inevitable I don't know that will happen this year, but thats our health.
Okay that.
That makes sense and non yes certainly.
Very very substantial upside once flower comes at 50 percentage of sales pretty much.
Across our market share.
That's a good segue into my last question here so the cash.
Cash you guys have brought in from the end of Q2 has been really impressive especially for.
Factoring in that 46 million credit facility.
Can you talk about how that credit facility for this you got to take advantage.
Specifically of the New York market.
EBITDA use legalization is passed early next year this looking back at low.
Yes, I mean, I think for the credit facility is tranched, Alex and the other warrants reprice with each subsequent tranche that we like that I'd characterize it.
The.
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.
Please like New York, you view, a grossly under size cultivation capacity when you look at the transition to adult use depending on the exact timing, but that's a big opportunity for us and you hit it on the head that does really open doors for us as far as a further expansion in places like New York and frankly any for market, that's transitioning who don't use but new York is a primary.
Focus.
All right great well, congrats again guys.
Thanks, Eric.
Next question comes from Matt Bottomley with Canaccord.
Good morning, Thanks for taking the question just wanted to go back to Minnesota I'm wondering if you can provide any data on.
Whether its percentage increases or absolute number of patients on what the uptake has been maybe quarter over quarter and so far this year and then any other updates on.
The planned retail locations for your additional spend for use in that state and if there's any restrictions on where you can or can't open.
Yes, absolutely. So roughly speaking again these are estimates about a 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 started contemporaneously with co bid where we're now looking at between 230 250 patients joining.
Each week, so very interesting uptick there I can't really attribute that to anything other than that it may be coded. 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 it was interesting to see that absent. The addition of flower into the program, but very encouraging.
Good good good traction in new Herman town Delever facility and you mentioned that we have three additional facilities sort of in first and second tier suburbs for the greater Minneapolis area very excited about those primary driver for patient self selecting dispensary dislocation and so we're excited to bring three day dispensary to those those dispensary location for debt.
Those are population centers that are currently without dispensary ask Matt I missed the second aspect for your question there sorry.
Thats Great I was just curious both on the patient uptake and then the retail on location update as well.
So thats very helpful and then if.
If you just kind of look at that.
Your messaging over the last for a while here she had the dispositions in Pennsylvania, and Ohio. So now that your balance sheet is pretty short up here and there is obviously ability for for incremental capital based on all the all the authentic that line on the call.
What's your ear I get the temperature out there for starting to invest some of that potential capital into going deeper in these markets you telegraphed where you're.
Capital expansions, our imagine, Arizona retail would be something but other things that you don't have today in existing markets. You're in that you can see M&A being the way to go both threat or is the next 234 quarters here just on continued execution and what you guys have.
Yes based on our analysis. So there is a lot more it's a lot more efficient use of capital for us to double down in existing markets. For example, substantial scale expansion into places like New York additional scale expansion in a place like Maryland, or Arizona, that's probably going to be higher yield than these rather expansive M&A actions in EMEA retail for for Arizona.
On our Maryland for example, we're very open, but we will kind of letting the ROI dictate where we put these dollars.
Hopefully we can do all the above eventually but right now we're just going strictly for the highest IR. It's.
But to be very interesting now six months makes a difference you know we're looking at capital preservation and we 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 till the spring for for guidance and totally understand 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 in New York and those have longer term growth profiles, but I don't think in the next three to six months.
Sure it's expected.
To be anything materially different and correct me if I'm wrong. So should we expect the kind of.
12, 13 $14 million per quarter type print or is there other maybe wholesale channels you might be turning on that might make that a little more variable than than those numbers.
Yeah. We're confident we'll continue we continue to see this sort of drumbeat upward organic growth in our existing retail we do have a great step functions in the form of Arizona, and Maryland coming on line 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 half.
A slew of dispensary is coming on line 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 Scott.
Once again to ask a question. Please turn to start one and the other question from Patrick Sullivan. Please go ahead.
Good morning, guys. Thanks for taking my question Congrats from Macquarie Among line here for Graham Kreidler.
I was just wondering if.
You can can talk a little bit about.
Whether there is any more interest and actual.
Divestiture of non core assets I know youve definitely strength in your capital position pretty strongly for the last quarter.
But is there is there anything else you're going to be take off the table.
Yes, certainly everything has its price I look at.
Yes.
Our licenses in Puerto Rico, the licenses in Massachusetts.
The very interesting 14 acres with a production facility in Nevada, and it's an interesting discussion internally on development versus divestiture and it really would come down to the price velocity.
A lot of these places we were not in a hurry we have some pretty interesting assets that could have significant upside in the future. We are laser focused right now on our core markets.
But we were always always open to conversations and additional divestitures if that makes sense.
Okay got it and then I guess shifting to the new Mexico market not one we hear much from about.
I thought I understood it to be that you're cultivation is is capped at some sort of number of plants and I wonder how.
That'd be changed I'm misinformed, there are and how that kind of fits into actually growing your platform in new Mexico.
Yes, Great question. The current limited 1700, 50 plants, if I'm not mistaken, which is a pretty significant limit.
And partnerships are working with other 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 coal weighted.
But yes, that's going to be a major driver we do anticipate debt plant limit will be elevated there are other things you can do in a large plant.
It's a growth maximizing production through the 17 could limit.
So that adjusted EBITDA on the AD. That's a major driver we do anticipate that will change with adult use legislation.
Okay got it and then final line.
You mentioned a few times you press release, the conversion of your retail to sales onto your green grass Green good branded stores I'm, just wondering how thats being received by patients from customers.
Yes, very well, thus far and remember a lot of our business is actually in the vestibule or curbside pickup so they haven't been able to necessarily to appreciate the interior of the stores. But these are this is best in class.
Retail that we're presenting here very low received by the media very well received by patients revenue able to access other stores very excited over time to cash to sequentially improve our retail footprint. So that these are competitive long term and the Greek as rebranding is a big part of that initiative.
Okay, great. Thank you I'll get back in queue.
Thank you.
Once again to ask a question. Please press star one and the other question from Poppy Trotsky with M partners.
Hey, good morning, guys.
And just backing up for the margins again, so you talked about cost controls yield improvements pick comment on sort of which state exactly what drove the improvement.
For which when approved drove at the most.
Yes, the biggest.
The biggest margin improvement.
Year over year was in New York.
Okay, Yes kind of call. It must also point out that in the prior year quarter, we're really just getting up to speed in Maryland.
So it's been quite have as much revenue from that say, yet, but still a fair amount for expense. So.
Important to be aware of.
Okay.
And then one more follow up on on sort of the green goods banner.
Sales give just a bit more detail on what you're seeing and how they performed versus the other expense reserve net income if you can sort of quantify in any way.
Yes, 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 will continue to debt market share in Minnesota with transition, but for a little bit early for us to say the effects of the change positive so far.
Okay all right. Thank you.
Thank you once again net cash question. Please press star one 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 for the United States. We appreciate the continued support and wish all of you a happy holiday season, and we look forward to speaking you again in the new year. Thanks.
This concludes today's conference call you may now disconnect.
Total.
[music].
Yes.