VEXTF - Vext Science Inc. (VEXTF) Q1 2023 Earnings Call Transcript
2023-05-25 10:19:07 ET
Vext Science, Inc. (VEXTF)
Q1 2023 Earnings Conference Call
May 25, 2023 8:00 A.M. ET
Company Participants
Jonathan Ross - Investor Relations
Eric Offenberger - Chief Executive Officer
Stephan Bankosz - Chief Financial Officer
Conference Call Participants
Matt Bottomley - Canaccord Genuity
Russell Stanley - Beacon Securities
Andrew Semple - Echelon Capital Markets
Presentation
Operator
Thank you for standing by. This is the conference operator. Welcome to Vext Science’s First Quarter 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions]
I would now like to turn the conference over to Jonathan Ross. Please go ahead.
Jonathan Ross
Thanks, operator. Good morning, everyone, and thanks for joining us today. Vext’s first quarter 2023 financial results were released earlier this morning. The press release, financial statements, and MD&A, are available on SEDAR, as well as on the Vext website at vextscience.com.
We would like to remind listeners that portions of today’s discussion include forward-looking statements, and the forward-looking statements are included in today’s press release. There can be no assurance that these forward-looking statements will prove to be accurate or that management’s expectations or estimates of future developments, circumstances, or results contained therein will materialize.
Risks and uncertainties that could affect future developments, circumstances, or results, are detailed in the MD&A, and Vext’s other public filings that are made available on SEDAR, and we encourage listeners to read those risk factors in conjunction with today’s call. As a result of these risks and uncertainties, the developments, circumstances, or results predicted in forward-looking statements may differ materially from actual developments, circumstances, or results. This presentation also includes non-IFRS financial information, and such non-IFRS financial measures are subject to the disclosure and reconciliation included in our press release disseminated earlier today.
Forward-looking statements made during this conference call are made as of the date of this call. Vext disclaims any intention or obligation to update or revise such information, except as required by applicable law. Vext’s financial statements are presented in U.S. dollars, and the results discussed during this call are in U.S. dollars.
I will now pass the call over to Eric Offenberger, Chief Executive Officer of Vext.
Eric Offenberger
Thanks, John. Good morning, everybody, and thank you for joining our first quarter 2023 financial results conference call. I am joined on the call today by Stephan Bankosz, CFO of Vext. I will start by providing a brief overview of our results before turning it over to Stephan for an update on our financial performance.
As mentioned on our previous call and as highlighted by the results being reported by retailers across the board in the Q1 earnings season, consumer facing companies continue to experience sales challenges as discretionary incomes remain under pressure. In Arizona, overall market sales declined by approximately 15% in the first two months of the year according to state data as compared to the same period last year.
Sustained pressure on consumer wallets overall economic conditions and changes in consumer behavior related to trade down in the ongoing medical to recreational shift were some of the key contributors. Against this backdrop, our team was able to continue to execute on our strategy.
For the first quarter of 2023, Vext generated revenue of 9.1 million and adjusted EBITDA of 2.9 million with an adjusted EBITDA margin coming in at 32%. Vext also continued to deliver profitability reporting EBITDA of 1.6 million during quarter 1, making us one of the few companies in the sector to be able to consistently generate positive EBITDA.
During the first quarter, we continued to bring traffic into our stores with customer count growing at a double-digit rate. Our team's expertise at leveraging targeted promotional activities to grow traffic key to generating the top line results we realized in the quarter, despite average basket size moderating, compared to last year, aligned with market trends.
We are getting better every quarter at targeting existing customers and potential new customers using a growing data set and robust analytical tools, which also led to strong customer retention numbers during the first three months of the year. We maintained our efficiency at retail with our retail operations team handling more transactions and orders during the quarter with the same headcount as in quarter 1, 2022.
We remain well-positioned to manage our cultivation footprint based upon market needs and conditions, while prudently controlling expenses. On the cultivation front, we decided to idle the outdoor growing Prescott Valley and we'll be bringing up the [yearly growth] [ph] as needed support our own volume requirement.
Wholesale continues to be oversupplied in vertical states such as Arizona, which is driving the price of wholesale flower lower consistent with last quarter. Wholesale flower prices have affected us minimally owing to our ability to absorb what we grow through our retail operations. And as MSOs continue to focus on margins and cash flow, the wholesale market and our general wholesale business have seen an impact as retailers are reducing inventory, decreasing the number of brands they carry and offering more of their own products to maximize profitability and margins.
While we expect this trend to continue, we are starting to see some reduction in capacity and anticipate prices to stabilize by the second half of the year. Our base and brand investment class products continue to differentiate us. Vext is committed to continue developing innovative products, bringing them to market the right price points, targeting new customers, and retaining our existing ones through data backed marketing campaigns to drive revenue, maximize margins, and expand the customer base.
While the current backdrop in Arizona is challenging, we expect the combination of higher sequential [customer count] [ph] and high customer retention rates to result in growth, tailwind is discretionary [incomes rebound] [ph] and basket sizes improve.
Let's turn to Ohio. As I've indicated on our past couple of calls, we see Ohio as our next key leg of growth. Our agreement to acquire our joint venture partner, Appalachian Pharm Processing, including its subsidiaries and affiliated companies is progressing well and is on-track to close towards the end of the third quarter of 2023 based on state approvals.
On closing, the acquisition will create a diversified fully vertically integrated entity with up to 25,000 square feet of cultivation, built out manufacturing facilities, and a strategic retail footprint across Ohio, a 100% owned by Vext. While the cultivation is not yet consolidated, they made their first small sale in the quarter and are on-track for full production beginning in quarter two. The result of this facility are exceeding our expectations already, and the staff is doing a tremendous job of bringing this facility online.
On January 2, we closed the acquisition of our Jackson dispensary, which was included in our quarter 1 results. We are very pleased with the early performance of the store under our ownership and given its location with limited competition in the surrounding area, we expect this to be a well-protected location over the long-term as the market grows. I would also like to remind you that on closing the proposed Ohio acquisition, we will expand our retail footprint and gain ownership of another cannabis dispensary based in Columbus, Ohio.
We intend to apply to the regulators for an ownership transfer shortly afterwards strengthening our retail foothold in the state. While Ohio is not immune to discretionary spending pressures, the market structure suggests that will be strong versus many other states. Licensing in Ohio has market cash for the number of cultivations, processing, as well as the number of dispensaries and the concentration of dispensary ownership. This structure provides for a better matching of supply and demand.
Overall, the pieces are in place for Vext to consolidate our vertical operations further and grow market share in Ohio. The key challenge here will be to support the initial growth while keeping an eye on expense control to drive positive cash flow. Overall, we expect cash flow to continue to grow as these operations come online. We also continue to monitor market developments in other areas of our JV portfolio. As I indicated last quarter, Kentucky is an interesting opportunity. And towards the end of March, the state approved the use of medical cannabis.
Our 50-50 partner there has an operating manufacturing facility located in a high-traffic area, not far from the borders of Tennessee and Illinois and are well-positioned to benefit from this development once it takes effect in 2025. As a reminder, we have a right of first refusal to buy these operations just as we did with Ohio. While our current focus remains principally on our Arizona and Ohio operations, we are well-positioned to continue executing on these opportunities as they arise.
On the whole, during a challenging first quarter, our team continues to walk and [tack on] [ph] to drive results for shareholders. We remain focused on bringing customers into our stores with a broad selection of value-based products and operating efficiently to drive profitability and cash flow. With the continued execution of our plans in Ohio and progressive improvement in the Arizona market anticipated in the second half of the year, we expect improved performance in the coming quarters.
With that, I will now pass the call to Stephan for a quick review of the financials. Stephan?
Stephan Bankosz
Thanks, Eric. In the first quarter of 2023, Vext generated revenue of 9.1 million, an 11.4% increase from 8.2 million in the previous quarter, down from 10.8 million in Q1 of 2022. The overall increase in revenue over last quarter can be attributed to the Jackson, Ohio, dispensary, which has now been consolidated. I would just note that we are not recognizing the benefits of vertical integration from Ohio currently.
We recognize the income and expenses from a dispensary in the quarter. And once the cultivation of manufacturing operations are consolidated, we will expect a margin benefit by Q3 to Q4. Adjusted gross margin for Q1 2023 was 51% up compared to gross margin of 50% in Q4 of 2022. We grow these constant margins by a continued focus on value products, rapid innovation, and targeted promotions to generate traffic to our stores, despite the challenging market conditions.
During the quarter, we recognized a charge of $712,000 related to the idling of the Prescott Valley outdoor grow, and biological inventory, which ran through cost of goods sold. We recorded 2.9 million in adjusted EBITDA for quarter 1, down slightly compared to 3.2 million in the previous quarter. From an expense perspective, we saw a reduction, compared to Q4 as we continue to focus on efficiency.
From a salary and wage perspective, as well as in G&A, going forward, we expect to continue to operate relatively flat, compared to the Q1 level. We had a one-time charge of roughly $742,000 in the quarter related to the cost of debt financing for the pending acquisition of the Ohio assets. You will have also noticed a $190,000 non-cash charge that flowed through the income statement this quarter. This is due to the Ohio acquisition having a pre-payment option on the note.
Due to IFRS guidelines we are required to fair value them on a quarterly basis and run the charge through the income statement. Cash flow from operations came in at 0.4 million during Q1. Ohio coming online and the completion of the capital growth for Eloy in Ohio resulted in pay downs of accounts payable and increased contributions to the Ohio operations.
As Eric mentioned, we expect improvement in cash flow moving forward as the Ohio operations continue to come online and are consolidated and we see the working capital normalize. Vext has no material growth capital expenditures planned for 2023 as the expansion in Arizona and Ohio are currently budgeted and complete. Vext ended the quarter with 3.4 million in cash at March 31, 2023, which is adequate to execute our business plans.
Thanks, everyone for joining us for our Q1 2023 financial results conference call. I'll now turn it over to the operator for your questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.
Matt Bottomley
Good morning, everyone. Just first question for me is just on the sequential increase in revenue, about $1 million or 11% versus Q4. Can you break down or give any other color between what you experienced in Arizona, which I know was a down period, although you guys outperformed it versus what came online from a contribution standpoint in Ohio?
Eric Offenberger
Yes, Matt, it was primarily all Ohio. The sequential increase was all Ohio, is picking up that dispensary in Ohio for the first quarter.
Matt Bottomley
And then on the, I guess, the Arizona segment, can you give any expectations looking forward of how that state might be normalizing now? You mentioned obviously putting your own flower through your retail stores directly. But just more on the consumer behavior, snowboard travel, things like that, that have been supporting the market in years past, how that's looking now that we're a year out or whatever it is at this point from COVID?
Eric Offenberger
Yes. I think what you're really seeing in Arizona is the same thing you see in all consumer-facing businesses that the consumer has less money on the disposable income level. The same comments we've been making for about the last year, year and a half seems to be true, is that depending on the geography or the location or the makeup of your store mix really tells you what's going to happen in that store.
So, one of our stores is a little bit more of an affluent area and those consumers will make the choice of not coming in as frequent and they'll buy down, but not buy down as significantly as some of the other places where the customer is consistently in the store, but they're buying down. And I think you see a trend as you see the consumer credit rise in the economy, which we've all seen in the U.S. economy. We are not a credit business. So, we don't participate in any of that. And as they get squeezed, you see them trading down. So that's really what we've noticed.
The basket size continues to drop. And as you switch from medical to recreational, a lot of consumers have made the decision not to renew their recreational card and they pay that additional excise tax, which takes 17% away from what they potentially could buy, so on a $100 basket, that's $17. So, it's significant. And that's what you've seen on the trade down. So obviously, your average basket is a lot better on your medical patient versus your recreational patient, but the switch is significant in the state.
Matt Bottomley
Got it. Okay. And then just another question for me on just some of the movements from Q4. So revenue is up about 10% – 11% and about 100 basis points improvement on the gross margin. So, you mentioned some of these one-time charges, a lot of them non-cash in the prepared remarks. But on an adjusted basis, using EBITDA – or adjusted EBITDA, margin down from 39% to 32%, still above where the industry averages, but I'm just curious with Ohio coming online, some of the operating leverage that was discussed by keeping some of your OpEx flat going forward, how do you find, sort of a low 32% margin as a base? And can you give any color on going forward, the appropriateness of that level of profitability for the remainder of the year?
Eric Offenberger
The challenge right now is the regulatory climate on how soon it will take to get Ohio approved where we can consolidate it and continuing to get that operation up and going. So, that really gives me the biggest challenge for that. In Arizona, I think it's, how much product of your own are you going to move through, and we've really seen the hit on the wholesale side in Arizona, especially like on the contract manufacturing and stuff like that, and that was a big part of the margin because remember that is all labor.
While we're still doing that, some of that's coming off-line, too, are backing up. You'll see in the MD&A, there's 285 brands that we've identified working in the state of Arizona now, 90 cartridge brands. So, you kind of get the idea that everybody's got their own brand in their store now. So, you're really seeing that. And that squeezes your margin a little bit. So, I think you're going to be in that – I think you probably should be closer to 35, but it's going to be backing off a little bit as you go through the first half of the year.
Matt Bottomley
Got it. And then just, one more sort of administrative housekeeping question for me. You spoke to your CapEx and a lot of growth CapEx has already been invested. So, can you provide any commentary on maybe run rating what you spent this quarter for Q1, so about $1 million in CapEx this quarter, is that an appropriate base for the remainder of the year?
Eric Offenberger
No, I think it will back down. I think there's probably about roughly and Stephan can probably answer this a little bit more specifically, but I think there's roughly 400,000 to 500,000, that's related to CapEx. We're in the typical season now on repairs and maintenance in Arizona where the older air conditioning units have to be replaced inside the grows, and that's been minimal. But we're guessing right now [indiscernible] crystal ball, I'd say there's probably $1 million of CapEx for the remainder of the year that you'll see.
Matt Bottomley
Got it. Okay, a lot less than. Alright, I will leave it there...
Eric Offenberger
Stephan, would you agree?
Stephan Bankosz
Yes. I would definitely agree. Eloy is coming online, and we should have our first harvest out of there in Q3, we're projecting. And then Ohio is already producing. So, yes, we're down to just the last 1 million of that.
Matt Bottomley
Okay. Thanks very much
Operator
Our next question comes from Russell Stanley of Beacon Securities. Please go ahead.
Russell Stanley
Good morning and thank you for taking my question. I guess first on Arizona, I guess can you update us on the latest efforts to expand the Central Phoenix store. I think you were working to bring that up to 5,000 square feet, and we're seeking municipal approvals around that. I guess what's the latest on that effort, please?
Eric Offenberger
Still waiting on the permitting and stuff like that, Russ. Candidly, they're handling more volume and more transactions in the existing footprint. And given the backup on margin in that, it's not one of those things I'm rushing to try to spend capital on. Candidly, I don't think it's going to increase the bottom line to the shareholders.
So, I wouldn't risk the cash at this point in time. But we want to get the inspections done and the valuations and everything so that as the market starts to improve, that we're positioned to do that. But we added those express windows into those locations, which took, kind of like bank teller type of window system and we put in three of those, which increased the number of stations that we can service customers with. And I think Stephan might have a better number, but I think the transactional volume in that store is up somewhere around 25% or 26%.
Stephan Bankosz
Correct. Yes, that's correct.
Russell Stanley
Thanks. Moving to Ohio and the Colombia story, I think you mentioned during the prepared remarks you expect for the application for the transferring it shortly. I guess on the last call, I think there was a – you were waiting some clarity, I guess, as to which government department you need to approach for that. I guess, do you have that clarity now? And can you, I guess, elaborate on the timelines for getting that application in and how long do you think it might take?
Eric Offenberger
Well, no, I don't have any clarity on who's going to end up regulating it. We kind of made a decision that we're not going to wait any longer. The biggest slowdown or the biggest impediment for getting the paperwork in place is candidly because of the concentration of our shareholders with the institutions, which is nice. Some of them – we hit some thresholds in Ohio when we started to get into a 100% ownership there versus the minority ownership that we have to get some of our institutional investors have to qualify.
So, now we got to get fingerprinting for them and go through that whole process. So, there just being [management] [ph]. We have to go a bit further to the investors and go beyond the founder, in that regard. So, we're working on getting that done. Hopefully, we'll have that done in the next two to three weeks and get the paper work done, and then we're waiting for the state.
Russell Stanley
Got it. Maybe just one last question, if I could. And is still in Ohio signature gathering around adult use, I guess, has resumed less in the last two months since the last call, but I guess, what are your latest views on that effort and your level of optimism for it getting voter approval?
Eric Offenberger
I think if it gets on the ballot, it'll get approved. That's kind of what I think. There's – it's like every other political issue out there, there's both sides of the faction and both sides of the coin. I think from our standpoint as a cannabis industry and stuff, whatever is going on in Ohio is going to be positive for us. They are either going to change how many conditions the ability to qualify for the medical card and make it easier for people and less expensive for people to go ahead and get the card.
So that would be a positive to increase to patient count. If it goes recreational, obviously, we know what that does. And as long as they continue to watch what the supply is, that will be a better position economically than you've seen in like Michigan or other states that have gone through this process.
We've seen it in Arizona, and we're – I think in Arizona, we're getting to the stage where some of the capacity, people are realizing, hey, it's not like you can just throw an infinite amount of this stuff and that there's going to be tremendous demand on the basic economics of supply and demand work in this industry like every other industry.
Russell Stanley
That’s great. I’ll be back in the queue. Thank you.
Eric Offenberger
Thanks, Russ.
Operator
[Operator Instructions] Our next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
Andrew Semple
Hi, there. Good morning. Congrats on the Q1 results. First up, just like to go back to Ohio, and with this being kind of the first quarter that you've consolidated the second – dispensary in the second state, what kind of margin impact would that have had on the quarter? How does the Ohio store, compared to, kind of the vertically integrated operations [Vext in Arizona] [ph]?
Eric Offenberger
The biggest challenge with the second dispensary in Ohio for the first quarter, Andrew is, we didn't have the cultivation up to support it, right? So, it's still buying in the open market, so it's still a wholesale buyer. So, you can't do a sale through running your product to the – as far as where you leave the margin dollars and stuff like that, there's tax implications and tax strategies associated with that.
On the whole, though the margin was down slightly in the Ohio store year-over-year. And you'll see that in the MD&A, we did talk a little bit about that in the MD&A. So, you'll see that we anticipate that we can recover that. On the goods store – on the good news on the Ohio store, we saw an increase in our transactional volume, an increase in the total sales dollars, some really favorable things. And we think there's a lot more we can do there. The prior group – candidly, we're putting more inventory in there.
We put cash towards it to be able to get inventory. Once we can start supplying more of it from our own in-house, it will be more cash positive to us, not a cash drain. And that's really what you saw like on the cash flow statement. As we projected that this was going to happen that we'd stay positive on cash, but we knew bringing up Ohio that it'd be a little bit of a drawdown on cash. And then you had the sales drop in Arizona. So, we continue to watch the expenses and they make darn sure, just like everybody else, watch the balance sheet right now, that's the prudent thing to do.
Andrew Semple
Great. That's helpful. And as you begin to recognize your first sales in the Ohio markets from the cultivation facility, just wondering if you can maybe comment on how demand is beginning to shape up for your wholesale flower in the state? Is that in-line with your expectations or how the first, kind of few weeks in market, how has that gone?
Eric Offenberger
Well, I think anybody that told you everything goes exactly the way they want to is lying to you. I always would say, I want to see it selling more and selling faster because I like to turn the cash, but it's selling well and it's doing a good job and the team out there is executing and they're making a lot of sales.
It's going through the stages of how do you package flower and sending people out from Arizona to help get the flower packaged in the equipment and all that stuff. So, they're going well. I think so – we talk about this in the MD&A also we think they go cash neutral in the second quarter and start going cash positive in the third quarter.
So, that's kind of our expectations on what they're doing, and that's all predicated on the flower. So, the first harvest is pretty much ran through and been sold. The second harvest is in the process of coming to the finished goods and the rest of the rooms are coming up. And the product looks great. The testing is great on the product. We couldn't be happier with that. As far as getting it sold, takes a little bit of time, but we do have a good distribution network there, and we have the good channels.
So, let me put it this way, the gentleman who runs that is a seasoned pro, and he's not concerned at all, and I'm not either. And I'm seeing the sales coming through.
Andrew Semple
Awesome. That's helpful. And then a final question, just maybe going back to Arizona. You're speaking about the potential for maybe pricing conditions to stabilize in the second half of this year. What's your thoughts, if we begin to see pricing stabilize, do you think that we could see that market return to growth? You are speaking to pretty significant increases in transactional volumes through your own stores. And if we see pricing stabilize, do you think that offers better opportunities for revenues to expand in the state? What's your thoughts there?
Eric Offenberger
Without a doubt. I mean, I think the biggest challenge is, you tell me what the U.S. economy is going to do on the consumer end, and I'll tell you, I agree. I personally – I tend to look at more at retail like the big box guys saying stuff like that. So, you see Home Depot, all of those gentlemen and as you know all of those companies and what they're talking about is that the consumer is going to continue to face a lot of pressure.
The nice thing about Arizona is there's a lot of manufacturing base expansion and chip – federal chip money backing it and stuff along those lines. So, we'll continue to see building a little bit less, but that pressure is going to be there. I look more of what's going to happen on the supply side that's going to help us. And I do think you're going to see the supply side retract a little bit. If I told you I wasn't disappointed about what has been going on in California that their supply is decreasing, I'd be lying to you, because I still believe there's a lot of black market stuff in Arizona. And the more that, that dries up on the West Coast, I think that helps the Arizona market, too.
Andrew Semple
Great. Thanks for taking my questions. I’ll get back in the queue.
Eric Offenberger
Thank you.
Operator
This concludes the question-and-answer session and today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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Vext Science, Inc. (VEXTF) Q1 2023 Earnings Call Transcript