Vireo Health Q1 2019 Earnings – No Flash just Execution

Bottom Line 

This is a brand-building year for Vireo both from an investor and customer standpoint.

In March, Vireo joined a very crowded cannabis field and is at the early stages of proving it’s worthy of an investment.

We are intrigued by Vireo as it takes a different approach than peers to cannabis legalization through a medical first platform.

The management team has a deep background in medicine and the company is pursuing patents and creating products with potential long term medical applications.

On top of the medical focus, Vireo is creating a fast-growing multi-state footprint that now spans 10 states with plans to generate revenue in 16 states by year-end.

Vireo is 20% cheaper than the multi-state operator average in 2019, but if the stock continues to languish it will be a full 70% cheaper by next year when growth of more than 300% is expected by analysts.

Forecast Enterprise Value to EBITDA Multiple in 2019

Source: SEDAR, Capital 10x Estimates

What stands out to us is Vireo’s discount to the market even though the company has more than three years of cash left compared to a cost structure that could potentially break even in 6 months.

Expectations for the stock are low, liquidity is good and growth should be robust, especially in 2020, giving the company the runway and the opportunity to exceed revenue estimates over the coming quarters.

As we’ve learned in the cannabis industry, every company has its day and we think Vireo deserves a place in a diversified cannabis portfolio.

State Licenses by Operator

Source: Company Filings

Looking at MSOs on a dollar of market cap per state basis, Vireo is way below similar-sized peers at only $47 million/state while peers trade at 2x-20x higher.

We admit this simple metric doesn’t account for many of the different growth strategies and profitability between operators, but it still shows us that Vireo’s 10-state footprint is at a deep discount.

$ of Market Cap per State License

Source: Company Filings, Capital 10X Estimates

With 109 million shares outstanding, Vireo has the fourth lowest share count in the group.

They will undoubtedly issue more shares for expansion, but shareholders are already benefiting from a lower relative share count than peers with the same state footprint.

Diluted Share Count

Source: SEDAR, Capitl10x Estimates

Quarterly Highlights

Vireo posted solid quarterly performance with revenues of $7 million pro-forma for recent acquisitions that haven’t yet closed.

This represented 25% growth quarter over quarter which compares favorably to other MSO’s.

Quarter over Quarter Revenue Growth

Source: SEDAR, Capital10X Estimates

They achieved their sales with a cost of goods sold of only $3.76 million, giving them a gross profit of $2.11 million, or margins of 37%. This represents a 20% increase in gross margin, demonstrating once again that they can efficiently run their operations and simultaneously manage growth.

Quarterly operating expenses held relatively flat at $3.75 million. This gave them negative EBITDA of $1 million. When including fair value adjustments and other expenses, they posted a net loss of $1.23 million, in line with last quarter.

After their IPO in March, Vireo’s balance sheet is sitting pretty with $40.4 million in cash. With a cash burn rate of $2.95 million excluding acquisition expenses, Vireo continues to demonstrate a disciplined approach to cash usage with over 3.4 years of cash remaining.

While we expect to see them continue making acquisitions, similar to their moves this quarter, this amount of cash provides the company with a considerable runway. Peers on average have less than a year of cash available.

Years of Cash Left

Source: Sedar, Capital10x Estimates

Operational Highlights

In Q1 2019, Vireo expanded their operations by 5 states with new licenses and dispensaries, increasing the number of states they have a presence in to 10. They plan on rolling out their national dispensary brand Green Goods as early as Q2 2019.

In March, Vireo commenced trading on the Canadian Stock Exchange (CSE) under the ticker symbol VREO.

At the end of May, they announced the hire of a new Chief Marketing Officer, Harris Rabin, formerly a Global Vice President at AbInBev with a decade of experience at Bayer prior to that.

He will be leveraging his significant experience in both the alcoholic beverage and consumer health industries to drive brand development, e-commerce, and sales for Vireo Health.

Mr Rabin will likely be instrumental in brand creation around infused beverages and other edible products if the company decides to go that direction in the future.

We see this as an excellent hire for Vireo as they have found someone with experience in an analogue market like alcoholic beverages, while also fitting in with their medical focused brand.

Vireo is a Market Awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

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