Vireo Health International Inc. (VREOF) quietly went public this month and began trading on the Canadian Securities Exchange and on the U.S. over-the-counter market. This multistate firm operates in seven states and has some 300 employees, and normally a new company of its size hitting the market would be a big deal. Why is Vireo flying under the radar?
Well, Vireo apparently continues to suffer from an alleged smuggling case against two top former employees. The ex-staffers face charges that they illegally transported cannabis oil in 2016 from Minnesota across state lines to a company facility in New York.
At roughly the same time, Vireo was involved with a company called MaryMed that applied for a legal-cannabis license in Maryland. Vireo owned 90% of the company, which had received pre-approval for a license -- but which was then denied a final OK based on the case above.
However, Vireo notes that only former employees face charges, not the company itself. And according to court papers, the case stemmed from allegations made by an ex-staffer who'd been fired.
Ultimately, Vireo went to court and got its Maryland license approved. The company has also had its licenses renewed in both New York and Minnesota, as the allegations above didn't directly involve the company and have not yet been proven against the individuals charged.
Still, management wrote in a recent filing that regulatory questions surrounding the matter have "put a financial and reputational strain on Vireo, including delaying the Maryland licensure process."
Who Is Vireo?
Vireo was founded by CEO Dr. Kyle Kingsley in 2014 after winning one of only two vertical licenses issued by the state of Minnesota. The company has operations in seven states -- Arizona, Minnesota, New York, Pennsylvania, Maryland, Rhode Island, and Ohio. Prior to going public, Vireo raised more than $50 million through a brokered and non-brokered private placement offering with Eight Capital and Canaccord Genuity.
In a rare show of diversity for an MSO these days, the company's chief financial officer is a female, Amber Shimpa. Prior to joining Vireo Health, Shimpa was a vice president of a $1.6 billion bank focused on commercial, nationwide lending.
Similarly, Jennifer Duey serves as Vireo's chief security officer following more than 17 years in law enforcement/security. Meanwhile, Colette Bellefleur is Vireo's vice president of new-market development, while Ericka Cummins serves as controller.
As a relatively new company, Vireo generally reports its revenue on a pro-forma basis. For the nine months ended September 2018, the company reported pro-forma revenue of $17.6 million, while actual revenue was $12.8 million.
Gross profits were $11.4 million, or $15.7 million on a pro-forma basis. However, the company reported a $1.8 million net loss ($2.5 million on a pro-forma basis). Still, Vireo said in its filing that it expects to be positive cash flow in 2020.
Vireo is currently buying two existing California dispensaries and a Minnesota "nutraceutical" manufacturing company. It has also signed a joint venture with a Canadian producer.
The company also has several other acquisitions that have or are expected to close soon. For instance, Vireo just bought Arizona Natural Remedies for $10.5 million in cash and $5 million in promissory notes. It's also buying Mayflower Botanicals for $10 million in a deal that includes 400 acres of property in Massachusetts and Connecticut. Additionally, Vireo is purchasing Silver Fox in New Mexico for $4 million, and also has several smaller acquisitions in the pipeline.
Vireo's Sales Channels
According to the company filing, Vireo currently sells and distributes a suite of products through the following three primary sales channels:
- Vireo Dispensaries. Vireo owns and operates four dispensaries in New York, four in Minnesota and operates one dispensary in Arizona and two in New Mexico. The company anticipates a substantial expansion in the number of dispensaries in these states. It also foresees the potential addition of dispensaries in Pennsylvania (license to operate three recently granted), Maryland (pre-approval granted), Puerto Rico (licensed for six), New Mexico (licensed for a total of six), Massachusetts and potentially in California.
- Vireo Home Delivery. In New York, Vireo offers home-delivery service throughout New York City and surrounding counties. Vireo also plans to add home delivery in Minnesota, Pennsylvania, Arizona and other states as allowed by law.
- Vireo Wholesale. Vireo recently launched a wholesale channel in Pennsylvania and is in the process of launching wholesale businesses in New York and Maryland.
Vireo currently has about a $371 million market cap, and its stock has moved slightly higher in both Canada and the United States since going public.
The Canadian stock, which trades under the ticker "VREO," opened on March 20 at C$5.65 and closed Thursday at C$5.80. The U.S. listed shares opened at $4.0659 on March 21 and ended Thursday at $4.3169.
If Vireo can get past the legal blemishes, it could be a great value here.
After all, there have been lots of industry whispers about multiple New York cannabis companies allegedly bringing product in from out of state. Some cultivators who follow the rules grouse that regulators turn a blind eye to those who don't. But these same people refuse to go on the record, and it isn't clear whether New York regulators are investigating or not.
Either way, the case against Vireo's ex-employees hasn't been resolved -- and until it is, it will likely hang over the company. Still, a bargain hunter might want to take the chance that once the case is settled, Vireo traders will have the green light that they seek.
(This column has been updated and corrected to note that MaryMed sought a license in Maryland rather than Massachusetts, that Vireo operates in seven states rather than six, and to fix other errors.)