There’s been a rush of financials over the past week in the smaller operators in the legal cannabis space, and we’ll be going through most of them over the coming days. Vireo Health ($VREO) is one of them.

I’ve also had my eye on them for awhile. We first looked at them upon their hiring of Bruce Linton (he of Canopy ($WEED) fame), which, turned out to be nothing more than a dalliance bad date. I’d been hunting some of the nether-reaches of MSOs…..trying to find assets that are attractive in the sector. As it turned out, $VREO wasn’t one of them, even while I speculated that Linton might actually do something while he was there.

Last quarter, we noted prima fascia self-dealing; an incredibly inept front office; and the exorbitant cost of having dinner with Linton. As it turns out, Bruce has lit the shit out of the share price run, dumping enough to fall below a 10% ownership threshold, and is now exempt from disclosure law (yup, $VREO gave him that much to come in).

Let’s have a look at their first quarter of fiscal 2021. The market certainly hasn’t been taking my opinion to heart, as share price has kept some level of support, despite being down $1.75 from the high in early March. I present these charts to point out volatility. Hey, if an investor is going to wear something like this, returns need to compensate:

To the financials!

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• Cash is up to $40MM, as the initial tranche ($26MM) of the $46MM credit facility came in.
• They booked the warrants that went out for the loan as a contra-liability (FFS). And….there’s something going on in derivative liabilities. Having to track down this stuff is irritating, more below.
• Total intrinsic value of management’s stock options is $45.1MM. I didn’t even have to calculate that, because $VREO does. They also have another $5MM of unrecognized SBC due to unvested options not included in the above. This doesn’t account for extrinsic value……I’m not going to bother.
• This thing is nothing more than a loot-box.
• Sales are off YoY. 42% margin isn’t bad, but looking just past that: it took $8MM in SG&A to generate $5.6MM of margin.
• Interest is a million this quarter, SBC reported at $2.8MM <snicker>
• So, at this point…..they are on track to lose $28MM on $52MM in sales this year.

Ok. Enough of a Sunday morning spent on this mutt.

Sometimes I like writing about a company I have little regard for, while other times – it’s simply a slog. With $VREO, it’s always the latter. I mentioned derivative liabilities above. So, here’s what is there:

• That external loan came onto the books at $26MM
• Closing costs and fees came in at $2.96MM
• Warrants attached to the deal were valued at $5.39MM (as warrant liability)

Those latter two items have been summed, and placed into a contra-liability account, and described as ‘deferred financing costs’. So, net debt is reported at some $17MM. I’ve never seen a company do this before. And I didn’t know one even could:

Another item of note is around valuation of 13MM warrants granted during a raise in March 2020.

Initially, a warrant liability of $3.55MM was booked on that $7.6MM raise. $VREO revalued the warrants this March, putting the liability at $2.2MM, and booked a gain of $1.3MM. All well and good, I can back into all of their numbers. Except. They used a share price of $0.38, and an exchange rate $0.20 lower than current. Using share price/FX as of March 31, 2021 (~=$2.35) I get a value of these warrants to be ~=$1.86 USD, or, $25.4MM,

Total warrant liability they have in Note 16 (Derivative Liabilities) is $7.466MM, yet they only have the warrants arising from their debt deal ($5.39MM) on the balance sheet. Sigh.

This has taken me almost an hour to backtest the numbers, and there’s little fun in unwinding errors. I expect that somewhere, somehow, this thing will come out in the wash. Something to watch for in subsequent quarters. Perhaps the accountants screwed up. Could be deliberate. In any case, in the absence of some sort of special paper around those warrants, this thing’s a reaI gem.

It gets even better, as these warrants could have been put into a forced conversion as early as last November.

94k Multiple Shares were converted into 9.4MM subordinates during the quarter. So, down to 52.4MM more to come. The exercise brought in no cash. Share count is up 21.6MM (or 42%) since January 1st:

It looks like some of those warrants were exercised, theres some 3MM of them left now (?). I can’t tell. $VREO’s warrant schedule doesn’t add up to the description in the underlying Notes.

$VREO hasn’t always been consistent in keeping a ‘medical’ angle in self-portrayal. They seem to be returning to it now though. Minnesota recently signed smokable flower into law, which will likely expand SKU count and perhaps revenue. $VREO is also expanding to a whopping four (4!) cultivars in NY, ultimately promising to get to 20 by September.

They do have 16 dispensaries operating across 6 states, but claim only New York, Arizona, and New Mexico to be ‘core’.

That increase in SKU count will add to opex, which, is a big red flashing light here. Their notional restructure and asset shedding seems to have done little operationally, but has kept this outfit’s capital afloat.

I have no clue why anyone would even have the slightest inclination to invest in this dog. Management – and now their primary lender – have a complete hammer-lock on this thing. Perhaps someone sees a play of an outfit staying wholly in the medical channel, but $VREO’s run hot/cold on sticking to one lane.

I’ll repeat myself from last time: $VREO’s C-Suite is a stink bomb. They’ve had plenty of time to get something going, and their track record says it all. This is one of the least investible companies I’ve looked at in the sector.

I’m gonna go take a hot shower.

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 holds no position in $VREO, and hope you don’t either.