Q4 2020 Vireo Health International Inc Earnings Call
Well, I mean, and vertically integrated markets, and Arizona, Maryland, Minnesota, New Mexico, and New York, where we saw a clear path to profitability.
The results of these decisions.
The result of the decision has been steady improvements and our financial performance over the past several quarters as evidenced by continued strength and sales growth and greater consistency and margins as recent efforts to increase scale and operating efficiencies have been successful with.
Proud of the fact that we've been able to guide our portfolio of assets closer to producing positive cash flow from operations, Despite operating and mostly restricted and medical markets and now vireo is and the enviable position and which a majority of our core markets appear likely to transition to adult use programs and the next 24 months.
As many of you know, Arizona recently became the first of our markets to transition to recreational use and we were thrilled to record vireo is first of our adult use sales last month, and I'll talk a little bit more of other operations and the state momentarily, but it's important for us to continue pointing out that our core markets and New York, Minnesota, and New Mexico May all pass meaningful cannabis legislation.
They performed this year.
And our markets in New Mexico, and New York appear likely to pass capacity adult use policy reform in 2021, and while there is currently and adult use still working its way through the state legislature and Minnesota, the more likely scenario and our home state is for the Legislative addition of smokable flower to the medical program. This year each one of these outcomes would likely.
Serve as significant revenue growth catalysts for <unk> business.
The other important distinction for us to continue drawing for investors is that we do not require handicapping levels of capital outlay to capture these growth opportunities because we've been investing strategically in these markets for the past two years for longer and today, our balance sheet is strong.
And Minnesota, and New York, we were.
Currently operating at a fraction of our full capacity and we've just completed capacity expansion projects, and Arizona, and Maryland, which will allow us to drive strong revenue growth and both of these markets for the foreseeable future.
And Arizona, we added a nine acre outdoor cultivation facility, which brought our total square footage of cultivation and the state for approximately 300000 square feet. We're very excited about our position and this market and feel confident about our ability to drive revenue growth through the Arizona wholesale market, while we look to augment our retail presence and that state.
And Maryland, we recently announced that our newly renovated 110000 square foot greenhouse facility and Massey has been completed and should be fully operational by the end of the second quarter, we're expecting to produce for plus turns of cultivation and a year, which should increase our biomass output capacity and the state by approximately 12 times.
We've also made enhancements to our manufacturing and processing capabilities at our 30000 square foot facility and her Maryland and opened our first dispensary and Frederick Maryland earlier, this month, which brought our total number of operational dispensaries to 16.
These projects should enable us to continue driving stronger revenue growth and Maryland for the foreseeable future.
Minnesota and the rollout of our Greenville, Dispensaries is complete and we now have ink and 13 total retail stores that are currently operational and the state.
Patient enrollment and the state's medical program is continuing to show good growth and there's also potential for legislative reform and the state, which I mentioned, which could allow for the sale of flower and the medical program. We continue to believe that the Minnesota market is one of the most overlooked cannabis opportunities and the entire United States.
And new Mexico are two new managed dispensaries and Las Cruces, and Albuquerque are on track to open during the second quarter subject to regulatory approval, which will bring our total number of operational dispensaries, and new Mexico to for and.
And with progress towards the potential enactment of adult use legislation and the coming weeks, we may pursue additional store openings and new Mexico. During the second half of this year.
Our balance sheet is and a great position with over $25 million and cash at the close of the year and as referenced in today's earnings release, we expect to have roughly $42 million.
And cash following the closing of the first tranche for debt financing, which we referenced in this morning's earnings earnings release.
We also expect to close on the pending divestiture of our Ohio processing facility next week, which will yield another one $1 5 million and cash proceeds.
We clearly have a lot of exciting opportunities in front of us and our improved balance sheet and more optimistic regulatory environment across our various state markets has given us the confidence to continue making strategic growth investments and our business beginning with incremental expansion projects at our facilities and Arizona and Maryland during the second quarter, and Arizona, we expect to invest and.
Additional $3 million for the development of a dry flower processing facility and a second time and acre shade house adjacent to our existing operations pending regulatory approval, which would bring the total size of our cultivation facilities and the state to approximately 18 acres.
And Maryland, we're planning to invest approximately $6 million to add an additional 75000 square feet of cultivation capacity and Nancy both of these projects should help us become one of the largest producers of biomass and within each of these markets and we expect these projects to be complete before the end of the third quarter of 2021.
Given near term uncertainties related to the timing and outcome of certain regulatory developments and several of our core markets. We've opted not not to provide quantitative commentary regarding our revenue or profitability outlook for fiscal year 2021 on today's call. However, we do anticipate experiencing continued organic growth for the foreseeable future.
And expected reduction in SG&A expenses as a percentage of sales will together substantially reduce cash outflows from operations through 2021.
Our recent efforts to scale production and expand our retail dispensary footprint, but also help drive improved financial performance through fiscal year 2022, we hope to be and positioned to provide the investment community with an update on our development initiatives and provide more specific expectations regarding the longer term outlook for the business by the middle of this year.
That concludes my prepared remarks, I'll now hand, the call over to John for his review of the financials.
Thank you Kyle and thanks to everyone for joining us on today's call.
Before I begin my review of the financial highlights I'd like to remind everyone that this was the first quarter and fiscal year that we've presented our results in accordance with U S. GAAP.
This transition should be a welcome change for the investment community and make it easier to evaluate our performance as it eliminates the confusing presentation of biological assets and asset adjustments under Ifr S. And also represents the natural progression of our disclosure practices as we ultimately seek to uplift to a major U S exchange sometime in the future.
The work related to this transition resulted in one time professional fees of approximately $500000 during the fourth quarter, which was in line with the expectations. We discussed on the third quarter call.
The key variances between methodologies, primarily related to the treatment of biological assets and inventory adjustments and sale leaseback transactions as the operating leases on our retail dispensaries are now included within operating expenses, rather than as interest expense under Ifr Rs.
And the accounting methodology for the valuation of biological assets under Ifr S. Also created some variances and tax amounts and deferred taxes and give them a treatment of inventory carried forward at fair value under Ifr S vs at cost under GAAP.
Now please turn to slide six where I'll begin with a review of highlights from the full year and fourth quarter. Please keep in mind that all numbers stated refer to U S dollar amounts unless otherwise noted.
For the full year total revenue, including our formal penciled that former Pennsylvania subsidiaries increased 64% to $49 2 million compared to 2019.
Excluding Pennsylvania, and revenue was $42 2 million and increase of 57% as compared to last year.
Fourth quarter GAAP revenue of $12 4 million increased 38%.
And was up 46% to $11 5 million, excluding Pennsylvania on a sequential basis, excluding the former Pennsylvania subsidiaries revenue increased approximately 9% sequentially compared to the third quarter.
Retail revenue, excluding Pennsylvania, and the fourth quarter was $9 1 million and an increase of 39, 3% and reflected growth in each of our markets wholesale revenue, excluding Pennsylvania increased 78, 6% driven by strong growth in Arizona and Maryland.
Gross profit for the full year increased by $9 8 million to $17 1 million or 34, 8% of revenue as compared to $7 3 million or 24, 5% last year.
Profit and the fourth quarter was $5 3 million or 42, six percentage of revenue as compared to gross profit of $1 3 million or 14, 6% of revenue and the same period last year.
The improvement in gross margin has been primarily the result of operational efficiency gains in several markets and improved operating leverage through higher sales volumes, especially in the Maryland wholesale channel, which was operating below normalized capacity utilization rates in 2019.
Total opex for the fourth quarter was $7 $5 million and improvement of $3 7 million or 33% as compared to $11 2 million and the fourth quarter of 2019.
The reduction in operating expenses was primarily attributable to a reduction and share based compensation expenses, lower salaries and wages and a onetime adjustment related to inventory costing of labor and the prior year quarter, partially offset by higher depreciation costs related to expanded operations.
Excluding depreciation and share based compensation operating expenses and the fourth quarter of 2020 were $6 7 million or 53, 9% of sales as compared to $9 2 million or 102, 2% of sales and the fourth quarter of 2019.
Net loss from operations during the fourth quarter was $2 2 million compared to a loss of $9 9 million and the fourth quarter of last year.
Total other income was two point million during Q4 of 2020, a favorable variance of $32 1 million compared to total other.
<unk> expense of $32 million and Q4 of 2019. This favorable variance is primarily attributable to an intangible asset impairment charge of $28 3 million and the prior year quarter to reflect changing market valuations of cannabis businesses at that time.
And a gain of $3 8 million on the divestiture of the company's former Pennsylvania Dispensary solutions subsidiary and Q4 of 2020, partially offset by a loss of derivative liability of $1 $2 million net.
Net loss in Q4 of 2020 was $2 3 million as compared to a net loss of $39 5 million and Q4 of 2019, the favorable improvement and net loss was primarily the result of the non recurrence of one time impairment charges and the prior year quarter as well as improved revenue growth and efficiency of operations.
Adjusted EBITDA was 112006 hundred $52 and Q4 as compared to a net loss.
Excuse me a loss of $7 3 million and Q4 2019.
Refer to the supplemental information and reconciliation of non-GAAP financial measures at the end of today's earnings release for additional information on this metric.
We ended the quarter with total current assets of $47 million, including cash on hand of $25 5 million, which includes $10 million and proceeds received from the force redemption of warrants related to the issuance of 13 million and 651570 for additional subordinate voting shares and we disclosed in November.
Once all of those warrants were redeemed and the derivative liability associated with them and fell off our books and the fourth quarter.
Total current liabilities at year end were $19 9 million with $1 1 million and debt.
Within 12 months.
As of December 31, 2020, there were 113 million 16459 equity shares issued and outstanding on and as converted basis and $157 million 274000, and 493 shares outstanding on and as converted fully diluted basis.
Following the expected closing of the first tranche of debt financing, which we announced with Chicago Atlantic and Green IV capital. The company should have cash on hand of approximately $42 million and we also expect cash proceeds of over $1 million related to the pending divestiture of Ohio Medical solutions.
As Carl mentioned, the improved strength of our balance sheet and the potential for favorable regulatory developments and several of our markets has given us the confidence to continue investing and our business.
We're planning to begin incremental expansion projects, and Arizona and Maryland during the second quarter. We expect these new projects to cost approximately $9 million and that they'll both be finished by the end of the third quarter.
That concludes our prepared remarks, operator, we'll now open the line to analyst questions.
And once again, ladies and gentlemen, if you would like to ask a question over the telephone and set a star then the number one on your telephone keypad.
And once again for a question over the telephone and a star then the number one and we will pause for just one moment compile the Q&A roster.
And your first question comes from the line of Eric <unk> with Craig Hallum.
Great. Thanks for taking my questions guys. Congrats on the strong organic growth and margin expansion and great to see you break into positive EBITDA.
So New York legalization, and certainly front of mind today for.
For most of us on the call.
So far rules regarding existing license holders and their ability to co locate adult use sales or sell wholesale into the adult use market.
Not yet clear.
I'm wondering if you could share some color on what Youre hearing from you and New York team.
Regarding retail and wholesale and the adult use market.
Yes.
Yeah, Good morning, Eric.
Do you think that too.
Kind of conjecture on where things stand there until I actually see the granular proposed language.
But we are generally bullish on the outcome for the state of New York, and and existing operators, but I I I hate that.
Put numbers out there.
<unk> seen the proposed final language or been able to analyze and the detail so sorry for being evasive there.
No no.
So I figured I figured I'd try my best here.
Okay. So switching are switching to Arizona and.
And Maryland, great to see.
The continued organic expansion in those markets.
Can you give us any color on your early wholesale operations in those states and.
And then as it relates to Arizona any color on the early adult use sales.
Yeah.
And we encouraged I mean, obviously, we're kind of step functioning here and doing doubling dollar with additional expansion beyond what we just completed and those two markets. So you hit it on the add these are these are very substantial wholesale opportunities.
Generally have not been able to keep no flower in stock and in the Maryland, and the things on the wholesale side very excited about 12 X and our capacity there we actually have the biomass clone and are ready to fill that entire facility here in the coming weeks. So very excited about Maryland, we anticipate that's going to remain a very.
From a wholesale market here for the foreseeable future.
We mentioned, we also opened our first dispensary, there and Fredrik on the Arizona side, just high level kind of the 25% to 30% increase and sales on the retail side.
And that's ballpark of what we've been experiencing here and there continues to be very strong wholesale demand for.
For our flower there and as you know we have a very substantial facility in the form of shade houses currently theres, a nine acre shade house infrastructure built there and we're doubling down and doing that again with some augmented flower.
And the processing capacity there.
It's a very strong for our wholesale markets still and Arizona I don't know if you have any more granular questions Eric.
No that was that was that.
And that was great color it sounds like.
Strong strong demand for your products and.
Both market share and obviously.
Doubling down and in Arizona and continued expansion and Maryland. So that's good.
Great.
And for that sort of early.
Early indications on how wholesale is going it's great to hear that that demand is strong.
Last for me.
As it relates to Minnesota again, a bit more of a regulatory crystal ball question, but.
With the flower and kind of moving along and.
And the legislature and your Homestay, just wondering if you have.
And your expectations for for potential timing, assuming this would be a 2022 thing if it gets.
It gets over the finish line, but just would love to hear.
And the latest update from what you might be hearing.
Yeah, My best guess would be that this would slide into 2022 on the implementation side of things.
As you know we're operating at a fraction of our capacity on the cultivation side and Minnesota, we have really been laser focused on flower for quite some time now and.
Genetic diversity.
High potency high quality streams.
Augmented microbiological standards and testing over time, so we're really leaning into this we're hopeful that flower of becomes part of the medical program, there and we really anticipate we'll be ready once we get these are.
Once we get it across the finish line like you said.
Great well it sounds like lots and lots of exciting things on the legislative front and good to see you guys.
Continuing your your profitability increases and continuing expansion here. So I'm looking forward to what's to come. Thanks, guys. Thank you for.
And your next question comes from from the line of Graeme Kreindler with eight capital.
Okay.
Hi, guys, good morning, and tie, calling and selling and for Graham. This morning, and just another one on New York and how much capital of the company and looking to invest in New York over the next 12 months or so and given the New York medical market small size and that strong and let that market tightens, what engineering I think will be the key differentiating factor to be success.
For the legal environment.
Yeah hard to speak to the exact size of investment until we see kind of the more granular character of the law as it comes out if there are cannot be limits, obviously, that's going to potentially change size of investment number but number of dispensaries that are allowed or.
That's also quite important so hard part too.
The gas there generally speaking we are looking at some infrastructure investment and I anticipate on the production side and we would likely work for real estate partner on such an investment I do anticipate a fairly prolonged.
Plantation and timeline.
So the investment is likely it's just a matter of what kind of scale has allowed under under the law and that passes.
Okay, great and thanks for that color and just just to follow up on Arizona can you discuss how you're managing supply and the current path.
Adult use market and the theory other expected.
And Matt Taylor at some point and if so when is it expected growth and being able to support that.
Yes, we are quite wholesale focus now actually.
With these these very substantial outdoor grows.
Now that that leads to a pretty significant amount of inventory and so we did make the choice to not be terribly aggressive and quarter, four and wholesaling and Arizona and so we do have a pretty hefty amount of inventory at this time and really just looking to keep our own retail our supply and Thats our primary.
Our goal, but we are seeing.
Very strong wholesale demand and.
And we're going to have the supply to really back that up with the sequential expansion, particularly in the flower realm. There is very good demand for the often had flower.
Which as you know this is clean and naturally produced outdoor flower produce alpha Tucson, and the motto area there at our health and heart Health and farm for self and head farm facility.
Okay, great I appreciate that detail and if I can sneak one more and just just given an increase and recent acquisition multiples out there and we're looking at and be opportunistic at non core divestitures on the horizon.
Yeah, I think we're out of the business.
Not not a priority to divest ourselves of non core assets on the flip side, we're not going to overpay, even within our core markets for acquisitions.
So yes, we do.
Feel very good about our balance sheet no intent to jettison additional assets at this time.
Okay, Great I appreciate that thanks for taking my question and congrats on the club and the year. Thank you.
And once again, ladies and gentlemen, if you do have a question and a start and they number one on your telephone keypad.
And your next question comes from the line of Matt Bottomley with Canaccord Genuity.
Hey, good morning, everyone. Just wanted to ask a little more on the Minnesota market and what the dynamics are.
And the overall uptake there so granted there isn't at 2021 outlook provided.
And you hear any color on what would be expected by the four new stores that opened and the back half of the year and linear should we expect your Minnesota contribution for double.
On the back of that is there cannibalization.
Cannibalization.
Sales between some of these locations and just wondering on what the dynamic and.
And your home state and how.
H nutrition tracking.
Yeah, Great question. So we.
We did have just globally and Minnesota, we on average we saw about 150 patients entering the market on a weekly basis.
Through about April of last year at which point, we had a pretty significant upward inflection to north of 250 patients a week and so that's been that's generally been persisting since we've opened our additional dispensaries and we havent really appreciated a significant change and that ongoing strong linear growth and patient numbers.
And we've seen a combination with the new openings of cannibalization of our own business, but also our sole competitor we've seen their patients come our way.
Really the location of the dispensaries as really a primary determinant for where patients go and they generally go to their closest dispensary independent of who it is.
And with either 13, dispensaries and we've seen.
And a general increase in our market share as far as new patients coming into the program. So encouraging for a little bit early to tell as you know kind of all of our dispensaries came on line end of last year.
But I'm encouraged by the growth we've been surprised by some and and underwhelmed with another one or two but I think they're all going kind of normalize and we do have a medical team that focuses on really educating referring providers in the vicinity of our dispensaries and so we're laser focused on augmenting, they're just very excited I'm blown away by the quality of kind of agree.
And good stores Theyre really.
Something special and we anticipate to continue to bite into market share.
And Minnesota as far as attrition too early for us to tell if that's going to shift at all and I anticipate attrition is going to continue to be an issue in the state and.
Until we see the additional flower at which point, we're going to have this whole other tranche of lower price products, but that's really going to be fundamentally transformative to the Minnesota market, which is generally expensive for folks right now.
And some estimates are that there is an $800 million illicit flower market and the state of Minnesota and many of those folks are using cannabis for medical reasons and so we're excited at the potential power and Minnesota, We think its great policy and we think it will transform the program here for our patients.
Great I appreciate that commentary.
Thanks for that.
And your next question comes from the line of Paul <unk> with M partners.
Hey, good morning, guys and congrats on the positive adjusted EBITDA.
And I just had a question on the Green and IV facility.
Is that being earmarked for New York or are there other potential plans with the capital.
Yes, theres a lot of different paths.
Some of that capital will be used for sequential expansion in Arizona, and Maryland as we outlined.
You can imagine given the regulatory tailwind and Minnesota, and New York, and New Mexico and that there may be additional paths for capital there.
One place that I am interested in and kind of expanding our footprint is on the retail side and we do have those opportunities and new Mexico and potentially New York. So a lot of different paths for capital generally speaking, we're interested and continuing to augment our cultivation production scale and our.
Best in class retail footprint and were looking for for amazing retail locations and so that's where a lot of that capital will go overtime.
And then be very prudent and measured and we're redirect this.
Yeah.
There's a ton of analysis that goes into each capital deployment.
We have nearly infinite places that we can put capital.
The low hanging fruit there is pretty compelling and that's the core markets that I just outlined there.
Okay.
And then just one more on on Nevada.
So you guys close those licenses.
Recently is there a plan to invest in that state, where you guys something for that sort of lower on the priority list.
Yeah, that's a little bit lower on the priority list.
Developed.
Taste for for vertical integration and we just didn't in early to intermediate term, we think that makes a ton of sense, but we do have a 5000 square foot production facility, there and <unk> Thats built on 14 acres, we could probably do 10 to 12 acres of cultivation and on top of that and it's a great micro climate for extremely affordable.
Kind of low cash low clock cost mid quality.
Biomass production there so it's lower but it is a very cost effective potential opportunity.
Always a little bit nervous about being an isolated wholesaler without that the vertical integration outlet on the retail side.
Okay understood.
And thanks, a lot guys congrats again on the quarter.
Thanks, Paul.
And there are no further questions at this time and I'll now turn it back to Carl.
Okay.
And thanks to everybody for joining us. This morning. We appreciate your continued support and look forward to speaking with you all again on our first quarter call and made thank you.
And this concludes today's conference call. Thank you for your participation you may now disconnect.