Vireo Health Announces Fourth Quarter and Fiscal Year 2019 Financial Results and Pre-Announces First Quarter 2020 Revenue
- Fourth-quarter revenue of $9.0 million increased 13% sequentially and 60% year-over-year
- One-time impairment charge of $28.3 million reflects changing market valuations
- Announces first quarter 2020 revenue of $12.1 million, a sequential increase of 34%
MINNEAPOLIS, May 14, 2020 /PRNewswire/ — Vireo Health International, Inc. (“Vireo” or the “Company”) (CNSX: VREO, OTCQX: VREOF), the science-focused, multi-state cannabis company with active operations in exclusively medical-only markets and licenses in nine states and the Commonwealth of Puerto Rico, today reported financial results for its fourth quarter and fiscal year ended December 31, 2019. All currency figures referenced in this release reflect U.S. dollar amounts.
Fiscal year 2019 was a year of policy evolution, shifting sector dynamics, and operational maturation for the broader cannabis industry and Vireo.
Kyle Kingsley, M.D., Founder & CEO
In fiscal year 2020, we have shifted our focus from driving near-term revenue growth to improving profitability in our six core medical markets of Arizona, Maryland, Minnesota, New Mexico, New York, and Pennsylvania
Dr. Kingsley continued, “Our fourth-quarter results reflect improving revenue trends across the business, with sequential growth of 13 percent demonstrating organic growth in our core markets. From a profitability standpoint, we incurred non-cash charges of roughly $28 million during the quarter to reflect changing market valuations. As we enter fiscal year 2020, our recently completed private placement transaction provided capital to enable us to execute an operating strategy that seeks to yield positive cash flow beginning in the first half of calendar year 2021 by focusing on our core medical markets.”
Full Year 2019 Business Highlights
During fiscal year 2019 the Company completed five acquisitions which expanded its nationwide footprint to nine states and the Commonwealth of Puerto Rico. The Company generated operating revenue in seven states during the year: Arizona, Maryland, Minnesota, New Mexico, New York, Ohio, and Pennsylvania. Total revenue for fiscal year 2019 increased 62 percent to $30.0 million versus fiscal 2018.
Retail revenue for the year was approximately $24.4 million, an increase of approximately 34 percent compared to $18.1 million in 2018. Wholesale revenue was $5.6 million in 2019, as compared to $311,655 in 2018, reflecting revenue contributions from wholesale markets in Arizona, Maryland, New York, Ohio, and Pennsylvania.
Net loss for fiscal year 2019 was $57.0 million, as compared to a net loss of $3.1 million in the prior year, with the variance driven principally by a $28.3 million impairment charge as well as transaction expenses and increased operating and interest expenses to support the Company’s growth. Adjusted net loss, as described in accompanying disclosures and footnotes, was $22.9 million, as compared to adjusted net loss of $8.8 million in fiscal 2018.
Fiscal year 2019 Adjusted EBITDA, as described in accompanying disclosures and footnotes, was a loss of $16.7 million, as compared to a loss of $983,518 during the prior year.
Vireo welcomed Canopy Growth founder Bruce Linton as Executive Chairman in November 2019. Vireo has and continues to make significant improvements during the year in the areas of human capital, finance and IT, manufacturing, retail, marketing and product innovation, including the development of several patent-pending technologies and related intellectual property.
The Company expanded cultivation and processing operations significantly during the year, completing major expansion projects in Arizona, Minnesota, Ohio, and Pennsylvania. In total, Vireo’s square footage of operational cultivation and processing increased by approximately 180,000 square feet, or 120 percent as compared to the end of fiscal year 2018.
During the year Vireo launched its retail dispensary brand, Green Goods™. Vireo exited the year with 13 operational dispensaries, an increase of five locations, or 60 percent as compared to the end of fiscal year 2018.
Fourth Quarter 2019 Financial Summary
Total revenue for Q4 2019 was $9.0 million, up 60 percent from $5.6 million in Q4 2018. Revenue growth was driven primarily by retail sales growth in Minnesota and Pennsylvania, wholesale revenue growth in Pennsylvania and Maryland, and the impacts of acquisitions completed in Arizona and New Mexico.
Retail revenue was approximately $6.7 million in Q4 2019, an increase of approximately 25 percent compared to $5.4 million in Q4 2018. Wholesale revenue was $2.3 million in Q4 2019 and reflected revenue contributions from wholesale markets in Arizona, Maryland, New York, Ohio, and Pennsylvania.
Gross profit before fair value adjustments was $1.7 million, or 18 percent of revenue, as compared to gross profit of $1.8 million or 31 percent, in the same period last year. The variance in gross profit before fair value adjustments as compared to the prior year was driven by a greater portion of sales in wholesale versus retail markets, a shift in product sales mix compared to the prior-year quarter, planned production downtime in certain states to accommodate facility upgrades, and greater competition across most markets as they continue to mature.
Total operating expenses in the fourth quarter were $11.0 million, and included a $4.0 million adjustment related to inventory costing of labor expenses during the full year. Excluding this accounting adjustment, total operating expenses increased by $3.4 million over the fourth quarter last year, with the increase primarily attributable to stock-based compensation as well as increased professional fees, depreciation and salary expense.
Total other expense was $30.7 million during Q4 2019. These non-operating expenses were primarily attributable to write-downs of intangible assets and goodwill of $28.3 million related principally to non-core assets, as well as interest expenses from the capital leases of cultivation and manufacturing facilities in Minnesota, New York, Ohio, Maryland, Pennsylvania and Puerto Rico.
Net loss in Q4 2019 was $37.1 million, as compared to net loss of $1.2 million in Q4 2018. Adjusted net loss for Q4 2019 was $9.2 million, as compared to a loss of $4.2 million in the prior year quarter.
Q4 2019 Adjusted EBITDA was a loss of $6.8 million, as compared to a loss of $1.4 million in Q4 2018. Please refer to the Supplemental Information and Reconciliation of Non-IFRS Financial Measures at the end of this press release for additional information.
Discussion of Fourth Quarter Impairment Charge
The Company’s recent decision to focus its efforts and capital on its six core markets resulted in changes to future expectations of the resulting non-core assets which impacted the overall revenue and profitability outlook of its consolidated operations.
As at the time of Vireo’s acquisition of its now non-core assets in early 2019, global cannabis stocks were approaching all-time highs and valuation methodologies within the sector were predominantly tied to revenue growth expectations rather than cash flow or profitability metrics. The book value of Vireo’s various state-by-state assets at the time similarly reflected expectations for an aggressive pace of expansion as access to growth capital for cannabis business operators within the global capital markets was much more readily available.
As calendar year 2019 progressed, several factors contributed to a more challenging operating environment for legal cannabis businesses, including delays in anticipated legal and regulatory changes and public health concerns related to a sudden rise in the number of cases of lung disease illnesses associated primarily with the use of, what appears to be, illicit-market vaporizer liquids. Growth capital for cannabis businesses also became much more difficult to access during the second half of 2019, which caused Vireo’s management to revise its operating strategies to prioritize capital allocation decisions to its six core medical markets.
These decisions resulted in changes to Vireo’s future expectations and required the Company to make adjustments to the fair book value of intangible assets and goodwill on its balance sheet, resulting in non-cash impairment charges of approximately $28.3 million during the fourth quarter. Vireo does not anticipate its non-core assets will be fully developed in the short-term, although there may be future opportunities to effectively monetize these assets through partnerships or potential divestitures.
Subsequent to December 31, 2019, there was a global outbreak of a new strain of coronavirus, COVID-19. The global and domestic response to the COVID-19 pandemic continues to rapidly evolve. Vireo’s medical cannabis business has been deemed “essential” in each of the states in which it currently operates, and the Company has taken a proactive approach to protection of its customers and team members during the COVID-19 outbreak, with the early implementation of procedures including the use of personal protective equipment, alternative staffing models and sanitation protocols.
Subsequent to December 31, 2019, the Company implemented several strategic initiatives to optimize its cost structure and operating model. The objectives of these initiatives are to build sustainable value with changing market conditions and to improve the Company’s operating performance. These initiatives included shuttering the Company’s New York corporate office, the related termination of an office lease, the reduction of its workforce by approximately nine percent, and the elimination of certain other costs.
On March 10, 2020, the Company announced that it had closed a non-brokered private placement of CAD $10.5 million of 3,651,574 units of the Company intended to help drive increased sales and margins. Each Unit is comprised of one subordinate voting share in the capital of Vireo (a “Share”) and one subordinate voting share purchase warrant of Vireo (a “Warrant”). Each Warrant entitles the holder to purchase one Share (a “Warrant Share”) for a period of three years from the date of issuance at an exercise price of CAD $0.96 per Warrant Share, subject to adjustment in certain events. The Company intends to use the proceeds from the Offering to fund various growth initiatives, as well as for working capital and general corporate purposes.
On April 30, 2020, the Company announced the formation of a wholly-owned subsidiary called Resurgent Biosciences, Inc. Resurgent Biosciences is a Delaware corporation which has been created with the intent to commercialize Vireo’s portfolio of intellectual property and related initiatives in a non-plant-touching entity which may broaden potential partnership opportunities or other strategic outcomes as Vireo seeks to monetize scientific advancements within the cannabis industry and beyond. Vireo currently has several patent applications pending approval by the United States Patent and Trademark Office. Its patent for harm reduction in tobacco products was allowed earlier this year.
Balance Sheet and Liquidity
As of December 31, 2019, total current assets were $51.1 million, including cash on hand of $7.6 million. Total current liabilities were $3.8 million, with zero debt currently due within 12 months.
As of December 31, 2019, there were 24,300,903 equity shares issued and outstanding, and 127,094,237 shares outstanding on an as-converted, fully-diluted basis.
Chief Financial Officer Shaun Nugent commented, “We’re continuing to balance near-term capital requirements with the best long-term interests of shareholders. We have more flexibility on our balance sheet following our recently completed private placement transaction, and the optionality of our valuable collection of state-based cannabis licenses and intellectual property continues to provide substantial opportunities to improve our cash position and future operating performance.”
Many aspects of Vireo’s long-term performance will depend largely upon federal and state legislative changes. As a result, the Company does not believe it is prudent to provide commentary regarding its expected financial performance for future fiscal years.
However, the Company did today announce revenue expectations for its first calendar quarter ended March 31, 2020. As of the date of this news release, the Company expects to report first quarter 2020 revenue of approximately $12.1 million, representing sequential growth of approximately 34 percent as compared to the fourth quarter of 2019.
Dr. Kingsley concluded, “With a renewed focus on our six core markets, we are positioned in well-regulated markets for the potential expansion of these states to include adult use regulations. With most of our major production development projects completed last year, we expect capital expenditures primarily to increase our retail presence and resulting sales margins during fiscal year 2020 and should begin to see the benefits of recent cost reduction initiatives materialize in our results during the second quarter. We believe these factors provide us with a clear path to profitability beginning in the first half of next year.”
Conference Call and Webcast Information
Vireo Health management will host a conference call with research analysts on Thursday, May 14, 2020 at 8:30 a.m. ET to discuss its financial results for its fourth quarter and fiscal year ended December 31, 2019. The conference call may be accessed by dialing 866-211-3165 (Toll-Free) or 647-689-6580 (International) and entering conference ID 3986853.
A live audio webcast of this event will also be available in the Events & Presentations section of the Company’s Investor Relations website at https://investors.vireohealth.com/events-and-presentations/default.aspx and will be archived for one year.
Additional information relating to the Company’s fourth quarter and fiscal year 2019 results is available on SEDAR at www.sedar.com. Vireo Health refers to certain non-IFRS financial measures such as adjusted net income, Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and adjusted EBITDA (defined as earnings before interest, taxes, depreciation, amortization, less certain non-cash equity compensation expense, one-time transaction fees, and other non-cash items. These measures do not have any standardized meaning prescribed by IFRS and may not be comparable to similar measures presented by other issuers. Please see the Supplemental Information and Reconciliation of Non-IFRS Financial Measures at the end of this news release for more detailed information regarding non-IFRS financial measures.
About Vireo Health International, Inc.
Vireo Health International, Inc. is a physician-led cannabis company focused on building long-term, sustainable value by bringing the best of medicine, science, and engineering to the cannabis industry. With operations strategically located in early-stage, limited-license medical markets, Vireo manufactures pharmaceutical-grade cannabis products in environmentally-friendly greenhouses and distributes its products through its growing network of Green Goods™ retail dispensaries and hundreds of third-party locations. Its current core medical markets of New York, Minnesota, Pennsylvania, Arizona, New Mexico, and Maryland all have the potential to enact adult-use legalization in the next three to 24 months, and two additional markets in Puerto Rico and Massachusetts also have potential for commercialization. Combined with its teams’ focus on driving scientific innovation within the industry and securing meaningful intellectual property, Vireo believes it is well positioned to become a global market leader in the cannabis industry. Today, eight of its 10 markets are operational with 13 of its 32 total retail dispensary licenses open for business. For more information about the company, please visit www.vireohealth.com.
Reconciliation of Non-IFRS Financial Measures
EBITDA, Adjusted Net loss EBITDA and Adjusted EBITDA are non-IFRS measures and do not have standardized definitions under IFRS. The following information provides reconciliations of the supplemental non-IFRS financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with IFRS. The Company has provided the non-IFRS financial measures, which are not calculated or presented in accordance with IFRS, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with IFRS. These supplemental non-IFRS financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believe that the supplemental non-IFRS financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-IFRS financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the IFRS financial measures presented.
Reconciliation of Net Loss to Adjusted Net Loss and Adjusted EBITDA