#vreo

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

Multi-state operator Vireo Health Inc. has bolstered its board of directors with four appointments in a bid to accelerate its ambitious growth plans. Chelsea Grayson, the first female chief executive at jeans manufacturer True Religion, will lend her commercial expertise to the Vireo boardroom. Entrepreneur Amy Langer, co-founder of Salo LLC and a former KMPG auditor, brings experience within finance, human resources, and accounting. ACOVA Integrated Health chief executive Chad Martinson, another former KPMG auditor, also joins the board, as does Judd Norquist, a partner at regional accounting firm Abdo, Eick & Meyers. This foursome will sit alongside Vireo founder and chief executive Kyle Kingsley, chief financial officer Amber Shimpa and chief operating officer Ari Hoffnung on the new-look board. It will also allow Vireo to create three new internal committees to provide oversight and guidance on audit, compensation, and general corporate governance.

The Cannabis Company of the Future

“Vireo Health is pleased to have added several highly-regarded industry leaders with deep retail, manufacturing and financial expertise to help guide the company as we continue to execute upon our ambitious growth plans,” said Kingsley. He feels it can now become “the cannabis company of the future”. Los Angeles native Grayson took the top job at True Religion in Nov. 2018 after a spell as chief executive at American Apparel. She also sits on the board of Delta Dental of California and Marca Global. She said she is pleased to join two other talented women on the board in Langer and Shimpa. The U.S. cannabis industry has recognized the need to promote better diversity and equality and it has just launched a taskforce to spearhead this drive.

An Undervalued Stock?