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Edited Transcript of DME.H.V earnings conference call or presentation 14-May-20 12:30pm GMT

May 26, 2020 (Thomson StreetEvents) — Edited Transcript of Vireo Health International Inc earnings conference call or presentation Thursday, May 14, 2020 at 12:30:00pm GMT

Vireo Health International Inc. – Founder, Chairman & CEO

Vireo Health International Inc. – VP of IR

Vireo Health International Inc. – CFO

Ladies and gentlemen, thank you for standing by, and welcome to the Vireo Health International 4Q ’19 Earnings Conference Call. (Operator Instructions)

I would like to hand the conference over to Mr. Sam Gibbons, Investor Relations. Sir, please go ahead.

Sam Gibbons, Vireo Health International Inc. – VP of IR [2]

Thank you, Angel, and thanks to everyone for joining us. With me on today’s call is our Chief Executive Officer, Dr. Kyle Kingsley; and our new Chief Financial Officer, Shaun Nugent. Today’s conference call is being webcast live from the Investor Relations section of our website, and dial in and webcast details for the call have also been provided on Slide 3 of today’s presentation, which 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 of North American securities laws. These statements are based on management’s current expectations and 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, please refer to cautionary note regarding forward-looking statements in today’s earnings release.

Now I’ll hand the call over to Dr. Kingsley.

Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [3]

Thanks, Sam. Good morning, everyone, and thank you all for joining us. Before we begin the review of our fourth quarter and full year performance, I’d like to start by formally introducing Shaun to our investor community. Shaun has been with us since early December, but has already made considerable contributions to the overall strength of the organization. Shaun’s reputation as a transformative finance chief and business leader in the Minneapolis community preceded him prior to my first meeting with him last year. He was instrumental as Chief Financial Officer in the development and growth of the unit economic models that helped both Champps Entertainment and Life Time Fitness grow from small regional operators to national brands. And his tenure as CFO and CEO of Sun Country Airlines is equally impressive as he helped their business emerge from bankruptcy and return to profitability in the wake of the September 11 attacks, which had crippled the passenger airline industry at the time.

His experience building and running consumer businesses and helping navigate challenging economic environments and executing business turnaround plans has prepared him well for a career in cannabis, and we’re thrilled to have him on our team. We’re looking forward to introducing Shaun to investors and analysts in person as soon as reasonably possible once the situation around coronavirus normalizes.

On that note, I’d like to provide a brief update on Vireo’s response to this pandemic and explain how we’ve been navigating this challenge across our various operational markets. Since we’re currently operating in strictly medical markets, we’ve been fortunate to have each of our state-based cannabis programs granted essential service designations since stay-at-home orders began being implemented in mid-March. We’re continuing to carefully monitor the pace of progress in each of these local jurisdictions. But so far, all of our cultivation and processing facilities as well as our retail dispensaries have been able to continue operating without any major disruptions.

I’ve been extremely proud of our team’s response to the crisis as we reacted quickly to implement a wide array of proactive measures to protect the safety of our patients, employees and local communities through the process. We implemented some alternative staffing models, including nonoverlapping teams and shifts, augmented sanitation protocols, along with the use of personal protective equipment.

We’ve also been encouraged by temporary regulatory approvals to improve patient point-of-sale interactions with curbside pickup. Our ability to meet the needs of patients, protect public safety and help improve the overall health and wellness of our communities in a time of crisis should serve as a strong sign to many that cannabis deserves a welcome place in our society.

As our industry continues to evolve, I’m confident that Vireo will continue demonstrating why scientific focus is critical to unlocking the substantial untapped potential benefits that cannabis may offer to hundreds of millions of people across the globe.

Please turn to Slides 4 and 5, where we’ve provided summaries of highlights for the full year and fourth quarter. There is no question that calendar year 2019 was an important one in the development to the broader cannabis industry. It was a year of policy evolution, shifting sector dynamics and operational maturity for many legal operators. For Vireo specifically, it was all of these things within the context of an unprecedented year of growth investment. We completed our go-public transaction and simultaneous financing in March of 2019, which enabled us to grow our footprint from 3 revenue-generating markets to 7 with only — within only a few short months.

Through a combination of select acquisitions in attractive markets and investments in both organic growth opportunities and human capital, 2019 was always intended to be a major year of development for Vireo. During the year, we more than doubled our production and processing facilities’ square footage with major expansion projects in Arizona, Minnesota, Pennsylvania and Ohio, and we upgraded existing facilities in Maryland and New York, where we recently laid the foundation for a significant expansion of manufacturing operations sometime in the future.

We also launched our national retail brand, Green Goods, shortly after going public, and we continue to grow our number of total operating dispensaries as the year progressed before finishing with 13 at the end of December. In the late fall, we were pleased to welcome Canopy Growth founder, Bruce Linton, to our Board of Directors as Executive Chairman. And throughout the year, we complemented Bruce’s addition to the team with significant organizational improvements in the areas of human capital, finance and IT, manufacturing, retail, marketing and product innovation.

Total revenues grew 30% compared to fiscal year 2018 with top line growth in each of our geographic markets. While we are continuing to see encouraging signs that we’ll be able to drive strong revenue growth in our existing markets for the foreseeable future, I do feel it’s important to acknowledge the level of revenue growth and overall financial performance we achieved in 2019 was significantly below our initial expectations.

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 growing public health concerns related to a sudden rise in the number of cases of lung problems associated with the use of illicit market vaporizers. Growth capital became much more difficult for the industry to access during the second half of 2019, which caused our management team to revise our operating strategy and further prioritize capital allocation decisions that drove stronger profitability metrics rather than revenue growth at any cost. The result has been a refocused operating plan within what we now consider our 6 core limited license markets of Arizona, Maryland, Minnesota, New Mexico, New York and Pennsylvania.

We’re positioned well to be successful in each of these core markets. But these decisions have resulted in changes to future expectations as we no longer anticipate meaningful contributions from pre-revenue markets like Massachusetts, Puerto Rico and Rhode Island. We had invested a limited amount of growth capital into those markets during the middle part of last year. And the decision to delay further development of these assets for the foreseeable future required us to adjust the fair value book value — a fair book value of intangible assets and goodwill related to noncore assets on our balance sheet during the fourth quarter. This resulted in a onetime noncash impairment charge of $28.3 million in quarter 4, which was by far the biggest driver of consolidated performance during the period.

Outside of that noncash charge, sales growth is continuing to ramp up nicely in our core markets, as evidenced by a fourth quarter revenue increase of 62% year-over-year, and 13% sequentially compared to the third quarter in 2019. We’re also continuing to experience a strong pace of revenue growth in the first quarter of this year with sequential growth of approximately 30% in quarter 1, as we discussed in this morning’s earnings release.

I’d also continue to remind investors that many of our state-based medicinal markets appear to be close to transitioning to adult-use. We believe that New York, Pennsylvania, Maryland, Arizona, Minnesota and New Mexico could each transition to adult-use within the next 6 to 24 months, which could significantly augment our expected future performance if and when these developments occur.

We ended the year with approximately $7.6 million in cash on our balance sheet, and our recently completed private placement transaction this past March is allowing us to execute our fiscal year 2020 strategy, which we believe will begin to yield positive cash flow beginning in the first half of calendar year 2021 by focusing on our 6 core markets.

We feel it’s prudent to continue a lean, scaled approach to our markets, and we will only be moving forward with development projects in areas where we expect prompt returns on investment. Shaun will be discussing our philosophy on capital allocation decisions and development projects in a little more detail momentarily, but we’re in a good position with expectations for continued revenue growth and recent cost reductions that should enable us to execute our plan successfully in fiscal year 2020.

Finally, we’re continuing to pursue strategic partnership opportunities within the realm of scientific advancement and intellectual property, which we continue to believe could become meaningful catalysts for our future.

It’s always been our view that this industry will be one with superior science and meaningful protectable IP that yields safe and reliable products with proven evidence and outcomes. Vireo is interested in developing next-generation products that can serve as replacements to alcohol, tobacco and opioids as we think cannabis has real potential to disrupt these 3 largely detrimental consumer products in our society.

We recently announced the formation of a wholly-owned subsidiary called Resurgent Biosciences, which we’ve created to house our portfolio of intellectual property, and a structure that will make it easier for us to work with potential partners and monetize the various opportunities we see within this unique portfolio. We’re continuing to engage with interested parties on a number of these opportunities, and look forward to working with future partners to commercialize these opportunities as soon as timing and costs allow. Our team’s focus on driving real intellectual property, including proprietary and high-margin products that will succeed long-term, is a key differentiator that sets us apart when you begin to consider a future where major players in the pharmaceutical, tobacco, CPG and agricultural industries will start participating more actively in our space.

We’re going to be a logical and attractive partner for many of these types of entities, and we feel we’re well positioned to create a compelling long-term value for all of our stakeholders as a result.

That concludes my prepared remarks. I’ll now hand the call over to Shaun.

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Shaun Nugent, Vireo Health International Inc. – CFO [4]

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All right. Thank you, Kyle, and thanks, everyone, for joining today’s call. It has been an exciting first few months for me on the job here at Vireo, and I’ve been extremely impressed by the commitment of our team to the vision we have for the future of the cannabis industry. I think we have a significant opportunity to become a leading player in this space, and I’m looking forward to doing everything I can to help achieve that level of success.

I’ll begin my financial discussion on Slide 6 of today’s presentation, where we provided an overview of key financial metrics for both the fourth quarter and year-to-date. All numbers stated refer to U.S. dollars, unless otherwise noted.

Total revenue for the fourth quarter was $9 million, a 60% increase over Q4 of 2018. Revenue growth was driven by retail sales in Minnesota and Pennsylvania, wholesale growth in Pennsylvania and Maryland, and the acquisitions in Arizona and New Mexico during the first quarter of 2019. We’re continuing to see increased market penetration of Vireo products in Pennsylvania, Maryland and Ohio markets and remain encouraged by increasing demand in Minnesota, which is partially the result of increased qualifying conditions, which has contributed to recent growth in certified patient enrollments.

Retail revenues through our own dispensaries was $6.7 million in Q4 of ’19, with an increase of 25% compared to $5.4 million in Q4 of ’18. Wholesale revenue of our branded products, third-party dispensaries was $2.3 million in Q4 ’19 and reflected revenue from B2B customers in Arizona, Maryland, New York, Ohio and Pennsylvania. Before biological adjustments required by IFRS, the company generated Q4 2019 gross profit of $1.7 million or 18% of revenue as compared to $1.8 million or 31% 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 temporary increase in the portion of sales in wholesale versus retail markets. Increased demand for concentrated distillate products, plant production downtime in certain states to accommodate facility upgrades.

Total operating expenses in Q4 were $11 million and included a $4 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 compared to Q4 of 2018. This increase is attributable primarily to an increase in stock-based compensation expense as well as increased salary and wages, professional fees and depreciation. Over the course of the last several months, we’ve taken considerable measures to improve the overall cost structure of our business, and we reduced headcount by approximately 9% during that time. These actions, including closing of our New York City office, the termination of office lease and a reduction or elimination of other expenses, have allowed us to reduce costs to match our refocused business plan that Kyle alluded to.

Other expenses during the quarter were $30.1 million and predominantly reflect the $28.3 million impairment charge Kyle discussed earlier. We also disclosed in this morning’s earnings release related to the write-down of intangible assets goodwill on our balance sheet.

Net loss during the fourth quarter was $37.1 million compared to a net loss of $1.2 million in the fourth quarter of last year, with a major variance compared to the prior year resulting from the impairment charge I just discussed, as well as lower gross margin and increased operating and interest expense to support the growth of our business.

Excluding fair value adjustments and the impact of the impairment charges and share-based compensation, adjusted net loss in the fourth quarter was $9.2 million compared to an adjusted net loss of approximately $4.2 million in the prior year quarter. Adjusted EBITDA was a loss of $6.8 million compared to a loss of $1.5 million in Q4 2018. Please refer to the reconcile — reconciliation of non-IFRS items in the management discussion and analysis, which will be available on SEDAR today for additional details regarding these metrics.

We ended the year with a total current assets of $51.1 million, including cash on hand of $7.6 million. Total current liabilities were $3.8 million as of December 31, 2019, with no debt currently due within the next 12 months. I’d also remind investors that in March, we completed a private placement of roughly $8 million. We sized that raise modestly to balance the near-term capital requirements of this business with the best long-term interest of shareholders.

We also have several opportunities to monetize our noncore assets to access additional capital in the future if needed. With this capital, we’re confident we’ll be able to execute our fiscal 2020 plan. 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. For additional details surrounding our share structure, including warrants and option grants, please refer to our disclosures surrounding the share capital in our quarterly financials filed on SEDAR.

We’re continuing to take a proactive approach to capital allocation decisions and believe it’s prudent within our current environment to only deploy capital in our core markets where we expect to see near-term returns on investment. The most recent expansions in Minnesota and Pennsylvania were primarily funded via our relationship with our real estate partner and did not result in outflow of Vireo cash. These investments will help us drive profitable growth. We do not anticipate any additional capital expenditures of significance until further notice beyond the ongoing tenant improvement projects funded by our real estate partner, and to augment revenue in our core markets of New York, Pennsylvania, Minnesota, Maryland, Arizona and New Mexico.

Each of these state jurisdictions has potential to enact adult-use regulations over the next 6 to 24 months, and we’ll continue to focus on optimizing our existing infrastructure within those markets and improve the overall performance in our retail dispensary and wholesale channels. We take responsibility as strong stewards of shareholder capital seriously, and believe that our recent cost reduction initiatives combined with lower CapEx spending in the future and expectations for continued revenue growth, position us to begin generating positive cash flow by the middle of 2021.

That concludes our prepared remarks. Operator, we’ll now open the line to analyst questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question from the line of Graeme Kreindler.

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Graeme Kreindler, Eight Capital, Research Division – Principal [2]

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I just wanted to start off following up on operational impact you’re seeing from COVID-19. I’d just like to know whether you think that’s going to have any effect on the retail/wholesale split of the business as the retail operations have had to transition and make a couple of changes, and maybe there’s a potential to fill in some of the gap on the wholesale side in your markets from some other producers who might be experiencing some disruption there?

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Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [3]

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Graeme, Kyle Kingsley here. Good morning and thanks for the question. We’ve been generally encouraged by our proactive response to the COVID crisis. And like we mentioned, we’ve not had any disruptions of consequence. We’ve seen significant increase in retail volumes. Much of our — a lot of our retail apparatus is more efficient now. We’re able to do telehealth consultations. And so we actually have much less volume in the dispensary itself, but higher volumes, higher throughput, curbside pickup, that’s pretty encouraging. As you alluded to, we have seen some disruption of competitors in various markets in their — kind of their manufacturing cultivation apparatus. We have not had the same result.

And I would say that — it’s safe to say we have seen an uptick in wholesale demand. Obviously, from a margin standpoint, we prefer to route things to our own retail apparatus. But in states where we do have extra capacity such as New York and Pennsylvania, it’s a pretty compelling opportunity for us there. So hard to say exactly what the shift will be. We’ve seen great growth in retail, and we anticipate good follow-on growth with wholesale products here in places like Pennsylvania and New York.

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Graeme Kreindler, Eight Capital, Research Division – Principal [4]

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Okay. And then to follow-up, you pre-released the preliminary revenue figure for Q1 here. I was wondering if you could discuss what you saw in April and what you’re seeing throughout May here in terms of what the levels look like on the consumer demand side. Do things look like they’re continuing that accelerated pace that you’ve seen in the first quarter of the year? Or things kind of settled back to where they might have been closer in January and February?

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Shaun Nugent, Vireo Health International Inc. – CFO [5]

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Thanks, Graeme, this is Shaun. I think as we looked at our — kind of how our businesses kind of progressed over the sequential quarters, we continue to see the growth that we’re expecting. Our April was as strong as our first quarter. We continue to see, as Kyle alluded to, in our core markets, key metric increases, both in terms of patient counts, in terms of kind of average user spend. And those metrics continue to be strong and sequentially increasing over this period. So now we haven’t slid back to anything. We continue to grow at that top line level and continue to really focus in on delivering that at the lowest possible cost.

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Graeme Kreindler, Eight Capital, Research Division – Principal [6]

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Okay. And then moving on to — you discussed earlier on the call about efforts made to reduce the SG&A spend and capital allocation. So I was just wondering, if we were to look in terms of the level where things were in Q4 on CapEx and on SG&A, further reductions, I would expect that they’re going to be realized into 2020. Can you quantify the magnitude of what those levels will look like or what you’re aiming for moving forward? And whether we’re going to see those front-half loaded, back-half loaded or spread out through the course of the year?

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Shaun Nugent, Vireo Health International Inc. – CFO [7]

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Good question. I think as we look at the first quarter, a lot of the impact of what we did in terms of reducing our cost structure had some short-term costs associated with it. As we move forward, we are expecting continually trying to drive down our SG&A, both discretely and as a percentage of revenue throughout the period. And while we don’t have specific targets in mind, it is a daily effort on our part to reduce those costs, both at the retail level, at the manufacturing level and then certainly within the corporate structure that is kind of leading the business.

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Graeme Kreindler, Eight Capital, Research Division – Principal [8]

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Okay. And then I wanted to touch on — you mentioned on the call the monetization of noncore assets. We’ve seen a number of various sales go through even in the environment that we’re in right now. So I was just wondering, what — how are you assessing the current market conditions here in terms of monetizing noncore assets? Do you see the possibility for something to happen more near term? Or do you want to wait for the conditions in the market to stabilize a bit more? I just wanted to get an idea of what the discussions are like. And how far is the gap between buyers and sellers in terms of trying to realize the value you think is appropriate for these noncore assets?

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Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [9]

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Yes. No, I appreciate the question. Kyle, here. We are seeing, as you’re aware, substantial interest in some of these peripheral markets. We are laser-focused on what we see as the 6 greatest opportunities for us, which, as we mentioned, are Pennsylvania, New York, Minnesota, Maryland, Arizona and New Mexico. You start looking at our secondary markets, Rhode Island, Massachusetts and Puerto Rico, we are interested in monetizing those. As far as the specific price points, I’m not willing to get into that. I don’t think there’s that big of a gap between — in the market here. So we’re open to doing — moving on those short term. If it takes intermediate or long term, we’re fine with that, too.

As you know, 12 months is sort of a lifetime in this space. And so we’re willing to be a little bit patient if we need to be. But there’s the other vigorous conversations around some of these assets.

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Graeme Kreindler, Eight Capital, Research Division – Principal [10]

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Okay. And then my final question here, Kyle. Just if we look at the stock in terms of where it is today, and you look at the portfolio of assets, core and noncore. I mean I think you can make the argument that there’s a significant amount of value in those assets alone that could be — it’s material above where the stock is. So I’m just wondering, you look at the volatile environment we’re in right now, but if you had to characterize some of the key catalysts, whether it’s from an industry perspective or whether it’s from the operational perspective of Vireo itself, what do you think are some of those key catalysts that you think might continue to help bridge that gap between where things might be of worth and where things are being reflected as of today?

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Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [11]

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Yes. You hit it on the head, Graeme. It’s fascinating if you look at sort of the value of our individual assets compared to just enterprise value, and that’s a pretty remarkable disconnect. Fairly unique to Vireo, I think, just given the quality of our kind of early limited license markets. And obviously, federal change would be very meaningful for kind of normalizing that. That being said, I think we’re most likely to see real regulatory change in our 6 core markets.

So you look at Minnesota with the inclusion of flower, that could happen as early as next year. You look at New York, with the inclusion of adult-use, it could happen as early as this fall. You look at Pennsylvania with its vigorous medical market, same with Maryland, which could be looking at adult-use. And then lastly, Arizona, New Mexico. Arizona is looking at adult-use here in November and New Mexico also in 2021. So we’re building with the assumption of sort of ongoing medical regulation. But this is pretty substantial upside. And right now, we don’t have any of these sexy, frothy markets. But all 6 of our core markets are on the cusp of becoming those. So we’re feeling pretty good about our position.

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Operator [12]

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And our next question comes from the line of Bill Papanastasiou.

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Bill Papanastasiou, Canaccord Genuity Corp., Research Division – Associate [13]

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So I just had a quick question in regards to the key markets. So obviously, the 6 key markets that you guys are focusing on. But it seems like Pennsylvania and Minnesota are — have been getting a bit more attention. I mean, the company released the 1937 Cannabis brand and the Green Goods banner. I was hoping you can provide a bit more color in terms of what’s being done in some of the other key states in terms of growing the top line and providing a bit more color on that.

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Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [14]

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Absolutely. One of the biggest opportunities that we see right now is there’s a perceived shortage of biomass and finished good flower in places like Pennsylvania, Maryland, Arizona and New Mexico. And there are fairly cost-effective ways to augment — to really augment capacity there. You had mentioned 1937, we’re also very excited about the LiteBud brand, which is — has been rolled out in Maryland. This is a lower THC pre-rolls. And we actually pair that with 1937-branded rosin and hash. We like the margins of these products. We like the branding around this. We do have a little bit of a capacity demand mismatch. We were very excited about flower in Minnesota. And unfortunately, that didn’t come to pass due to COVID complications here legislatively. We’re also excited about adult-use in New York, which didn’t happen.

So we have a little bit of extra capacity in New York and Minnesota. I’d be excited about a cost-effective expansion of our flower production capacity in the other 4 core markets, all of which have a perceived shortage of flower right now. We couple that short-term with the longer-term value-added products, the 1937-branded vaporizers, and a lot of these other things terpene-enhanced flower and stuff like that, that we have in queue, longer-term margin-preserving products, it’s a pretty exciting combination.

But we’re very excited about sort of correcting this capacity demand mismatch that we have here in 2020.

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Bill Papanastasiou, Canaccord Genuity Corp., Research Division – Associate [15]

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And just a follow-up on that. Congratulations on the 1937 Cannabis brand and the LiteBud. Those seem like some unique products. Are there — I know 1937 was the first type of dried flower product, I believe, that was being offered by Vireo. Are there any other products that you see that currently aren’t in Vireo’s kind of offering that potentially could be sold through the retail channel going forward? I was hoping you could provide a bit more color on that as well.

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Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [16]

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Yes. I see there’s a lot of opportunity in the concentrate space in some of our markets. We don’t have significant concentrate production in places like New Mexico and Arizona. There’s a great opportunity there. I also think a little bit more sophisticated vaporizer products like our 1937 vaporizers, which are a combination of concentrated oil and distillate, are going to get traction in places like Maryland. And then lastly, kind of as far as next-generation products, I’m interested in kind of naturally terpene-enhanced flower where you can preserve or enhance the flavor profile of flower. And I think things like that are going to be pretty differentiating over time.

Our general approach is that we have had good outcomes when we increase the number of SKUs, even if they’re relatively standard in a given state. And we have a lot of space for improvement in places, especially in the Southeast, New Mexico and Arizona in that realm. So I’m pretty excited about our product mix in 2020.

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Bill Papanastasiou, Canaccord Genuity Corp., Research Division – Associate [17]

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Okay. I guess last question for me. So congratulations, again, on opening the Green Goods store. Your current retail store count is at 13, but it’s been about 6 months since additional stores have been launched. My understanding, obviously, is that the CapEx spend has been scaled down in that regard. But I was hoping you could take us — you could guide us down the path to profitability, given where the — your limited revenue profile and expansion profile plans come into play?

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Shaun Nugent, Vireo Health International Inc. – CFO [18]

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Thanks, Bill, this is Shaun. Yes, I think that — as we look at our business, I think we are in these kind of incessant medical markets, and we are starting to grow those markets. It starts with our capacity. Kyle alluded to the fact that in Minnesota and in New York, we have excess capacity. We’re in the process of completing a significant expansion in Pennsylvania that will greatly augment our capacity to produce the demanded flower. And through those — through the capacity and then the pull-through we’ll get through the retail apparatus, both with the existing 13 dispensaries and the planned dispensaries that we have on the table relative to the licenses that we have, we believe that we will be able to augment revenue to the point where we will start to move towards a free cash flow model that will allow us to internally generate the cash we need to expand further. It’s a disciplined approach. It’s approach that’s based upon really developing sustainable kind of business models or business units. As you know, as an MSO, it’s a complex operating model in the sense that we have separate businesses in each of these states. And as our approach is to really focus in on trying to deliver kind of high margin growth, which is optimized based upon our cost structure and the fact that we have this extra capacity, while it has hindered our margins in the past, simply because of the way that the costing is done, I believe that it’s a significant advantage for us to build incremental revenue without substantial fixed costs. And then it will allow us to get to that point that I just described.

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Operator [19]

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(Operator Instructions) And we do have a follow-up question from the line of Bill Papanastasiou.

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Bill Papanastasiou, Canaccord Genuity Corp., Research Division – Associate [20]

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Perhaps just talk a bit more about your capital position looking forward. And my understanding is you guys have an additional financing of that CAD 10 million. How do you view that in terms of your path to profitability?

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Shaun Nugent, Vireo Health International Inc. – CFO [21]

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Bill, this is Shaun again. And again, as I indicated before, profitability comes from kind of our top line growth in these key core markets where we’re optimizing our fixed costs, right? And so as we look at spending capital on CapEx in terms of investment, Kyle alluded to it, augmenting our capacity in key markets like New Mexico and Arizona. And Pennsylvania where we have significant flower demand will be pretty significant. We think we can do that in a very modest way.

We also believe that kind of the reduction in our SG&A spend and our overall cost structure to more normalize it to existing kind of revenue environment will allow us to utilize that cash that we brought in, in the first quarter to really kind of be able to get to that landing or to that runway to profitability. Now it’s not going to happen overnight. We have a lot of work to do, but we believe that the scale that we’re contemplating from a capacity standpoint and our ability to sell that through our retail kind of apparatus will contribute significantly to it.

So we have a lot of opportunities within existing licenses to expand retail, and we’re continuously monitoring kind of the balance between near-term capital spend and that growth. And so that’s kind of the summary of kind of how we believe we’ll be able to pull-through that additional capacity.

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Bill Papanastasiou, Canaccord Genuity Corp., Research Division – Associate [22]

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Great. And just one more follow-up question. Perhaps you can speak to kind of changes in retail growth with the Green Goods dispensaries. How has that been trending? And are there still plans perhaps into the future of 2020, of kind of converting existing dispensaries under the Green Goods banner? What’s your take on that?

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Shaun Nugent, Vireo Health International Inc. – CFO [23]

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Yes. Yes. I think, first of all, to answer the first part of the question, we continue to see really good growth, both sequential growth and obviously, year-over-year growth in our new dispensaries that we brought online in the prior year. And that we anticipate that, that will continue to grow. The changes that Kyle alluded to before has allowed us to become much more efficient with respect to serving the needs of our customers and our patients. So that, I think, is a good feature. Kyle has some insights on some of the other elements of that.

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Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [24]

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Yes. Thank you. So a very interesting question. The opportunity to rebrand existing dispensaries in places like Minnesota and New York as Green Goods. I do see that as an opportunity. It can be done cost effectively. It’s a pretty interesting opportunity to kind of reintroduce ourselves in these markets where there may be a little bit less kind of global awareness of the medical cannabis industry generally. And then also the interesting opportunity from a timing standpoint in New York as we look at adult use, we think the Green Goods experience and sort of just retail appearance and feel is much more compelling than the existing state. So excited to transition that.

But again, like everything, since Shaun has joined the team, all capital outlays are very much analyzed on kind of the return on the investment. And so it’s analyzed akin to opening additional dispensaries as sort of an individual business decision.

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Operator [25]

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And ladies and gentlemen, I would now like to turn the call back over to Dr. Kyle Kingsley for any closing remarks. Please go ahead, sir.

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Kyle Kingsley, Vireo Health International Inc. – Founder, Chairman & CEO [26]

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Yes. Thank you all for joining us this morning. We appreciate your continued support and look forward to speaking with you all again on our first quarter earnings call, which is currently scheduled for June 16. Thank you.

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Operator [27]

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And ladies and gentlemen, this does conclude today’s conference call. You may now disconnect.

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