Time to take our first run through Verano Holdings Corp. financial statements.  With only one previous Q spread, usually I would wait for one more Q to try and take a stab at this.  But given the interest in the company I thought I would jump in a Q early.

Others might have more knowledge than I… so give me a Q or two to get more up to speed.

Their earnings release.

Let’s orient:

Verano is a roll-up that is in acquisition mode in the past Q.

Company is licensed to operate in 14 U.S. States, with active operations in 11, which includes 76 active dispensaries, eight cultivation licenses and approximately 690,000 square feet across its cultivation facilities and 10 processing/manufacturing license. Dispensaries are Zen Leaf and MUV, and brands include: Encore, Avexia, MUV and Verano.

Operating vertically in Illinois, Maryland, Florida, Massachusetts, West Virginia, Pennsylvania, Arizona, New Jersey, Nevada and Ohio, and owns dispensaries in Arkansas, Michigan, California and Missouri. Florida is their stronghold with 34 of their 80 dispensaries in that state, trailing TRUL, CURA and CERAF (Parallel). They are at maximum store count in Illinois, Maryland, Ohio, New Jersey.

In this Q, they closed in Arizona and Pennsylvania and expanded production output in Illinois, NJ, and Maryland.

Post Q, they added

• Mad River Remedies (used to be owned by LHS before being sold to intermediate owner) in Ohio on July 8, 2021
• Agri-Kind in Pennsylvania on July 12, 2021, a 62,000 sq foot cultivation and production facility. USD 66 million with earnout of $31.5 million.
• Agronomed Biologicals in Pennsylvania on July 12, 2021, which holds a clinical registrant license. USD 10 million with earnout of $15 million.
• Not closed: WSCC in Nevada. Sierra Well for USD 29 million

OK… not off to a good start with two addition errors in their financial statements.

Income Statement:

Net Income before Non-Controlling Interest should be $27,000 more than reported.

Balance Sheet:

Who knows which one is right?

Open the fins and MDA and let’s dive in.

Income Statement Drivers & Breakeven Sales: Trend

VRNO operates in 11 states with 3 more on deck (+0 QoQ), with 80 retail dispensaries (+7 QoQ), and 11 processing facilities (+1 QoQ).

Vertical: IL, FL, AZ, NJ, PA, OH, MD, MA, NV

Stores: IL 10, FL 34 (+2 QoQ), AZ 6, NJ 3 (+1 QoQ), PA 10 (+2 QoQ), OH 5, MD 4, MA 2, NV 4 (+2 QoQ), MI 1, AR 1

Sales Table:

Sales increased sequentially by 64%, an increase of $78 million. Acquisitions in AZ and PA and flower and output expansion in IL, NJ, MD are cited as reasons.  Retail increased 72% on the +7 stores in the Q, presumably more stores for a full Q that were opened in Q1F21, while wholesale almost doubled to +48%.

Ok… another error, this time in the presser:

• Revenues increased 39% from the first quarter of 2021, and 164% from the second quarter of 2020 to a record $199 million.

Revenues increased 64% not 39% QoQ.

Retail is now 72% of mix and Wholesale is 28%, a slight growth in retail to mix in Q.

Retail Sales: Peer and Trend

Stores: IL 10, FL 34 (+2 QoQ), AZ 6, NJ 3 (+1 QoQ), PA 10 (+2 QoQ), OH 5, MD 4, MA 2, NV 4 (+2 QoQ), MI 1, AR 1

They rank fourth in retail revenue.

Revenue per average stores opened in the Quarter (which takes the average of stores opened at the end of each quarter and divided by 2 to get average retail stores opened in Q) increase 57% QoQ, a very healthy increase, to $1.8 million but trailing CL, TRU, CURA and GTII whom are all north of $2.0 million store/quarter.

Wholesale: Peer and Trend

VRNO evidenced a +48% increase in wholesale via acquisitions and increased production. 

They rank 4^th in wholesale in the above peer group.

Annualized Sales $ per (PPE + ROU + Goodwill/Intangibles)

What I have done above is annualize the last Q’s sales and divided it by the aggregate of PPE +ROU + G/I (UPDATED to include ROU) to see how much sales are being generated and what the trend is. I added PPE + ROU + G/I to try to normalize the companies that have gone an organic path (TRUL and CWEB until their new acquisition) versus the more acquisitive (VRNO, Cura and GTII)

Given they added a good chunk to the denominator in the Q (+$390 million to $1,607 million) in the Q, this will take a Q or two to normalize. Even the next Q has sizeable additions to denominator.

Income Statement Drivers & Breakeven Sales: Peer

Verano is 5^th in sales.

Gross Margin: Trend & Peer

GM% slid from 62% to 50%, but without inventory step up from acquisitions would have been 53%.  GM was $100 million +$25 million (or +$31 million without step up).

Keep in mind a large percentage of their retail fleet is in gross margin friendly vertical markets.  We count 79% of their stores are in these markets.

Realized Fair Value on inventory sold is a stunning $186 million compared to sales of $199 million and CoGS of $98 million. Unrealized Fair Value of Bio Assets increased to $161 million from $137 million QoQ… so expect an increase in own grown product.

The aggregate of the IFRS voodoo is a -$25 million versus +$71 million the previous Q. I do not know I have seen a negative number like that.  Could be the IFRS of folding in bio assets in progress via acquisitions.

Annualized Gross Margin $ per (PPE + ROU + Goodwill/Intangibles)

This is our attempt to normalize the companies growing organically from the roll ups.  We have annualized the gross margin and divided that by aggregate of PPE + ROU + G&I.

This metric will also need some time to work itself out given the additions to denominator the last Q and next.

Gross Margin: USA Peer

VRNO is tied for 7th highest in this peer group with Cura. Without the step up they move to 5^th.

Gross Margin: North American Peer

VRNO is 7th highest on a North American basis.

One thing I want to point out… Village Farms, a Canadian LP, pulled down a 40% GM on their cannabis business this past Q (their negative margin Tomato business pulls down their overall GM%).  This is in Canada, where we have national pricing, competition is fierce and there is no verticality. 

A concern we share is that the margins of US MSO’s should be much better than Canadian LP’s given their lack of competition, no national pricing and verticality.  The MSOs are certainly better, but it will be interesting to see if they can continue this level if/when competition and national pricing is in the mix.

We get the argument that costs will also come down with interstate, but in order to generate the same level of GM$’s (to pay your bills) with say a 50% cut in retail prices (which we have seen and more in Canada), the company will need to work that much harder to maintain that GM$ level. Production costs might go down, but SGA will likely need to increase.

SGA & SBC as % of Sales: Trend

Selling was $2.4 million for the Q and represents 1% of sales, an increase of $1.4 million and from 1%, respectively QoQ.  

G&A was $51 million for the Q and represents 26% of sales, an increase of $25 million and increase from 22%, respectively QoQ.  Salaries and benefits increased $7 million, while G&A was +$18 million, likley due to new stores.

SGA on whole increased by $27 million to $53 million from $26 million QoQ and increased to 27% of sales from 22%.

SBC is minimal.

Depreciation of $4 million, an increase from $2.4 million from last Q, rounds out Opex.

Opex increased by $29 million to $58 million and increased to 29% of sales from 24% last Q.

SGA & SBC as % of Sales: Peer

VRNO’s 27% Aggregate SGA is very similar to other retail heavy CURA 28% and TRUL 28%, but above GTII 23%. To round out the top 5… CL is 29% but less retail heavy.  Retail has more SGA as dispensary expenses live here.

+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer

Net Operating Profit before IFRS voodoo was + $43 million versus + $46 million last Q.  The increase in absolute GM by $25 million was offset by $29 million in increased Opex expenses.

Other Income (Expenses) and Taxes:

Other Expenses for the Q was negative $5 million versus negative $2 million last Q, which was largely comprised of

• Interest expense -$5.5 million versus -$1.8 million last Q.
• -$1.3 million in Other Expenses previous Q and nil this Q.

Taxes were $5.1 million versus $45 million last Q.   

Hey, yet another error.  Taxes were supposed to be Note 15 (from B/S) but are actually Note 16. No reason given for the delta QoQ.

Net Income after Non-Controlling Interest and before IFRS Voodoo was + $32 million versus negative $2 million last Q.   With IFRS voodoo the reported Net Income was $7.5 million versus $69 million last Q.

+Net Operating Profit Sales Breakeven divided by Current Q Sales: North American Peer

In the North American Peer group VRNO ranks 2nd best.

+EBITDA: Trend & Peer

My Adjusted EBITDA is $65 million.  Theirs is $81 million as they add back M&A costs and employee earnouts of $16 million that are not line itemed.

Their EBITDA increased $13 million, as GM (less the step up) overpowered the cash Opex increase.

Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles)

We have added this new metric to now look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA.

Again… this metric will be more useful with a normalized Q without big acquisitions in Q.

+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer

VRNO leads the peer group at 35% sales required to be +EBITDA.

+EBITDA Sales Breakeven divided by Current Q Sales: North American Peer

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

Here is our metric introduced last Q.  It is meant to show how much cash went into the bank account from operations after Interest and Taxes are serviced.  Essentially EBITDA without the I + T added back. 

VRNO tops this metric with a sizeable increase QoQ, but without tax disclosure QoQ I cannot tell why.

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

Only Acreage is negative in this metric.

VRNO is 1^st in this metric.  Again, previous tax disclosure caveat applies.

Balance Sheet Items of Note:

Cash position $150 million an increase of $38 million QoQ.  

“Waterfall” Trend

Inventory increased by $19 million to $251 million.  New cultivation is likely driving that figure. Quarterly Inventory to Sales ratio is 1.26:1.

Finished Goods Delta was $21 million, a nice increase after $24 million the preceding quarter.

“Waterfall” Peer

VRNO has the second most inventory in peer group behind CURA. Keep in mind Cura & VRNO still are using IFRS and includes Gain on Biologicals in inventory.

Bio assets decreased $32 million QoQ to $144 million.

• PPE increase $33 million to $281 million (leasehold improvments being $26 million of the increase as stores were added) and ROU increases $17 million to $41 million
• G/I increase $339 million to $1,285 million that is 79% of long-term assets.

On Liability and Equity side:

• Acquisition price payable increased $88 million to $163 million.  This is current portion so they will need a raise to cover that unless they generate free cash flow.
• Long term debt increased to $131 million +$97 million QoQ.
• Non-current leases increased +$16 million to $38 million.
• Share capital increases $219 million as shares went out for the acquisition.

This Q:

The four sloppy accounting presentation errors does not inspire confidence.

They are certainly in the top 5 of MSOs but are the most retail dependent excluding TRUL (who does not segment and is largely in FLA.)

Their sales increases are tough to tell what was bought and what was organic in the Q. GM without the step up certainly has the resonance of the reliance on vertical FLA and other GM favorable states they reside in.

SGA as % of sales is in line with peers.

Debt and leases are reasonable. Goodwill and Intangibles are huge.

If interstate commerce gets footings or the CAOA strips retail (and it is the draft)… well… I am not sure what they have left.  They might be a company that flips to retail.

The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in VRNO and will not start one in the next five days.