Vireo Health Q4 2018 Earnings – Undervalued and Underfollowed

Who is Vireo

Vireo is a recently listed multi-state operator (MSO) that has really caught our attention.

They are the first MSO built on a medical first and intellectual property driven platform.

The management team possesses strong medical backgrounds and the company looks to be establishing itself as a leader in medical marijuana research with six ongoing research studies and membership in the research initiative.

Most importantly Vireo owns licenses in 11 states (CA pending) and was a pioneer in establishing the medical marijuana programs in New York and Pennsylvania, two of the largest and most restrictive U.S. markets.

The company is also licensed for hemp cultivation, opening up expansion opportunities into CBD consumer products and hemp specific intellectual property in the future.

Source: Vireo Health

Bottom Line

Vireo recently piqued our interest for a few important reasons.

Number one was the multiple.

Vireo trades at a ~40% discount to the group based on 2019 estimated revenue of $80 million and a 60% discount to the top 8 companies.

The stock has 60% upside if it merely trades at the average multiple for the group.

2019 Estimated MSO Price to Sales Multiple

Source: Company Filings, Capital 10X Estimates

Try as we might, we can’t find a good reason to justify this discount.

Revenue growth is just as rapid as peers, expected to increase from $18 million in 2018 all the way to $250 million by 2020, a 14x increase.

Vireo’s 11-state footprint is also top notch.

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 $55 million/state while peers trade at 2x-20x higher.

$ of Market Cap per State License

Source: SEDAR, Capital 10X Estimates

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 11-state footprint is at a deep discount.

Number two is the regulatory team that looks to be one of the best in U.S. cannabis.

Vireo was a pioneer in obtaining medical licenses in New York, Pennsylvania, and Minnesota, three states with notoriously difficult licensing rules.

Vireo won one of only 2 licenses in Minnesota and one of five in New York, giving us confidence they can successfully navigate the regulatory process in other states targeted for expansion.

Being able to consistently win licenses organically is a powerful advantage as licensing fees are far lower than what you would have to pay to buy a license holder on the open market.

Shareholders benefit from a lower share count and higher earnings per share as Vireo has to raise less money to build a state by state footprint.

And number three is the share structure

With 112 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: Capital 10X Estimates, Company Filings

Overall Vireo looks to be an under-followed new entrant to the publicly traded U.S. cannabis space.

Management has a differentiated medical-first view on legal cannabis and is focusing on areas (medical research, patents, and intellectual property) where many other competitors are not.

With a low share count, low float (20 million shares) and a stock price still below where it listed in March, we think Vireo is ripe for a catch-up trade as management continues to execute in 2019.

Earnings Review

Overall, 2018 was a year of growth for Vireo. Their top line 2018 Q4 revenue grew ~70% year over year from $3.3 million to $5.6 million.

Revenue growth for the full year 2018 was similar, up 70% to $18.5 million from $10.9 million in 2017. This was good for a revenue per share of C$0.26 at their current run-rate, in the middle of the pack among other MSOs.

Their quarterly gross margin increased slightly year over year to ~31%, yielding a gross profit of $1.8 million and representing a ~49% increase. With gross profit increasing faster than revenue (49% increase compared to 40%), it appears Vireo is managing high growth while simultaneously becoming more efficient operators. This is a rare feat among cannabis companies.

Quarterly operating expenses of $3.6 million increased ~80% over last year as the company staffed up to handle their rapid growth.

The workforce increased by 50% as they added 74 new employees to support their growth.

Looking at their bottom line, Vireo posted a quarterly net loss of $1.2, down from net income of $0.27 million year over year. This loss can be attributed to one-time new market startup costs that total $1.56 million.

New market startup costs are related to licensing and legal fees to enter additional states and will decline significantly when the company puts less focus on state expansion and more capital into building out the retail footprint.

Finally, looking at their balance sheet, Vireo appears to be in a very strong position. As of Dec. 31, Vireo has over $9.5 million cash on hand (including the $51 million raised from the March public listing, Vireo has $58 million of cash to work with).

Based on 2018’s cash flow burn from operations and financing of $21.8 million, that leaves them with over 2 years of remaining cash, which is a very solid financial runway compared to Canadian peers and in line with other U.S. MSOs.

Operational Highlights

Vireo had an eventful quarter but with new licenses still to be integrated, the true revenue potential of the business is not yet being reported, creating an opportunity for investors.

Vireo created a new retail concept “Green Goods” this quarter and will be rolling it out in Pennsylvania to start with and nationwide thereafter.

Having a consistent retail strategy is important to build brand awareness with customers.

The company bought licenses in Massachusetts, Arizona, New Mexico, and Nevada after the quarter end and should see revenue from these businesses flow into next quarter’s results.

The $5.6 million revenue run rate will be noticeably higher next quarter with these four new states added.

On the conference call management also made an interesting comment that they are developing unique hemp strains and processing equipment that will allow faster and cheaper harvesting of hemp.

Management is also focused on R&D to create new retail products unique to Vireo to avoid the commoditization of vape pens, flower, and other currently available cannabis formulations.

Overall, Vireo had an eventful quarter but with new licenses still to be integrated, the true revenue potential of the business is not yet being reported, creating an opportunity for investors.

Vireo is a Market Awareness client of Capital 10X.

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Vireo was 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.

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.
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Mike Woods
Mike Woods
May 15, 2019 2:37 pm

Thanks for the excellent overview on the Vireo business and investment opportunity. Certainly a name I’ll have on the radar going forward, look forward to further execution.

Steve Raimondi
May 6, 2019 11:34 am

How can you give VIREO any publicity? On the overview, they show zero volitivity, the volume has been anywhere from 9k to 25k, They don’t show any revenues at all, the market cap of 407.2 million today. Why would they hide all this vital information? They don’t show any buying and selling at all. I have been watching them for a while now and in my opinion, they are a shell company. Something smells fishy with this stock. With revenues of 18.5 million annually. why are they hiding?

May 6, 2019 1:05 pm
Reply to  Steve Raimondi

Steve we had no problem finding all the financial and trading information we were looking for to form our opinion on Vireo. Curious what source you are referring to that is missing information?