Vext Science, Inc. (VEXT.CN) Q4 2024 Earnings Call Transcript

Thank you for standing by. This is the conference operator. Welcome to Vext Science's Fourth Quarter and Fiscal Year 2024 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 Priam Chakraborty. Please go ahead.

Thanks, operator. Good morning, everyone, and thank you for joining us today. Vext fourth quarter and fiscal year 2024 financial results we 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 that forward-looking statements are included in today's filings. 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 development and circumstances or results are detailed in the MD&A and Vext 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 development, circumstances or results. This call 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 as well as the MD&A. 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 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.

Thanks, Priam. Good morning, everybody, and thank you for joining our fourth quarter and full year 2024 Financial Results Conference Call. I'm joined today by Trevor Smith, Vext's CFO. I will start by providing a brief overview of our progress during the fourth quarter as well as 2024 before turning it over to Trevor for an update on our financial performance. 2024 was a pivotal year for Vext despite macroeconomic headwinds and shifting consumer behavior, Vext reinforced its operational strength and solidified its position in Arizona and Ohio. Q4 marked a turning point as a successful launch of Ohio's adult use market began translating into meaningful revenue growth and increased cash flow for Vext. Fourth quarter of 2024 was our first full quarter of adult-use sales in Ohio, which helped bolster our overall revenue generated to $10.2 million and adjusted EBITDA of $3.2 million. I'm pleased to share that Q4 of 2024 was our strongest operating quarter in recent years, both in terms of adjusted EBITDA and operating cash flow. This performance was primarily driven by Ohio with our consolidated retail locations, delivering 40% country growth in total sales in the fourth quarter of 2024 and driving significant operating leverage. With additional adult use regulations still pending, we see additional upside as the market continues to evolve. While Ohio demonstrate a solid performance, Arizona can face pricing pressure from oversupply and heightened competition. The key to success in this environment is focusing on retail, we strongly believe that in cannabis, just like many other traditional consumer goods categories, retail price is a significant portion of the economics. You have to be where consumers shop, particularly if advertising is restricted in e-commerce is not the primary channel for your products. Shelf space is paramount. You can't have a brand in this industry without that shelf space. Our view is that consumers choose a dispensary based on location, value and service. What they walk out with is simply the product available on the shelf. Some in this space may call that branding, but without a vertical integration, in-house brands and a focus on what consumers really want those operators often struggle to compete. That's why we focused on capturing value at the retail level by controlling shelf space, improving customers' in-store experience, combined with disciplined execution, and prudent cost controls. We have spent several quarters investing, and now we are starting to see the returns. For 2024, Vext generated revenue of $36 million a 3% increase over fiscal 2023 and adjusted EBITDA of $9.2 million, up 66% year-over-year. I'm incredibly proud of our team's ability to retain market share in the challenging Arizona market, while efficiently scaling our Ohio operations. Taking a closer look at Ohio, the market has performed largely as we had expected. According to state data, adult-use cannabis sales in Ohio exceeded $2.5 billion as of March this year, despite relatively solid top line growth, prices across most product categories have declined with over half seeing double-digit price decreases. Operating in this market proves a fundamental truth, price matters a lot. And if you're going after the mass market thinking you'll be a premium-priced brand, you're going to need to adjust your expectations. We have always seen this as a value game like traditional high-low retail, it's all about giving customers value, driving house brand penetration and mixing back to a higher margin. The price trends we are seeing in Ohio are exactly what we observed in Arizona during its transit to an adult-use market. And the same story that has played out across other mature markets. We saw this going into Ohio. We even laid it out in our investor materials before the market opened. So we are ready in position to drive results. We are in the early phases of market expansion and are well positioned to capitalize on this growth and maintain share as the market matures. As we previously demonstrated in Arizona, our disciplined strategy allows us to generate above-market results even in competitive environments. Vext operations in Ohio have performed exceptionally well with the momentum from Q3 carrying through Q4 and into early 2025. To support this growth, we continue to expand our cultivation capacity, increasing plant counts and improving the yields to meet growing retail demand. Trevor will expand on this further in his remarks. Net third-party wholesale sales in Ohio increased by 33% in quarter 4 2024 compared to quarter 3 2024. While wholesale is not a primary driver of our long-term revenue strategy, Ohio's regulations for manufacturing and cultivation creates significant opportunities and we expect to capitalize on the expanding market. Just as we laid out the expectations that price will start falling, we only see whole-sale as a short-term driver of the business. and have designed our capacity to perfectly match what we think we can sell at market maturity through our own retail doors. Looking ahead, we expect Ohio to remain a key contributor to Vext's growth in 2025 and beyond. The acquisition of the two big perm dispensaries in Athens in Jeffersonville is nearing completion. As announced in our press release this morning, we have received regulatory approval from the Ohio division of Cannabis Control and expect to complete the transaction imminently. Together with the recently announced Fortuna location and our 10b allocation, we are on track to reach Ohio's -- license cap eight with new locations set to open throughout 2025, and potentially into early 2026. As a fully vertically integrated operator with the maximum possible license, we will be in the strongest possible position in the Ohio market and anticipate significant revenue, profitability and cash flow growth from the state in the coming years. Let's turn to Arizona. In 2024, Arizona experienced the sixth worst year-over-year performance of any cannabis market in the U.S. with total statewide sales declining 12.6%. Factoring in the increase in dispensary count for 2023, the average per store sales declined 25%. Excess cultivation capacity leading to an oversaturated brand landscape continue to create pricing pressures. Despite these headwinds, our team successfully drove traffic in the stores through data-driven campaigns, leveraged improved yields from our Eloy cultivation facility meaning gross margins in a challenging market and enhance the efficiencies across the vertical footprint. On a six-month basis, our retail sales in Arizona were up 2.4% and compared to a statewide decline of 6.4%. A solid performance, which position us to drive even better long-term results as the market stabilizes and pricing pressure begins to ease. We do not anticipate pursuing new retail acquisitions in Arizona in the near term as vendor expectations remain higher than most market conditions justified. However, as weaker operators continue to exit, we expect additional opportunities to emerge, and we will evaluate them when pricing and timing align with our strategy. Long term, we see significant value and additional owned retail or we can add to upstream footprint and leverage that scale. In closing, I am pleased with our performance in 2024. We executed our strategy effectively, delivering strong results across our key markets and establishing Vext as one of the industry's strongest operators relative to our size, positioning us well to drive results over the next several quarters, as cash flow continues to grow and highlights how undervalued this organization is on that basis. As we continue in 2025, our focus is clear continued expansion in Ohio, optimizing Arizona's vertical footprint and generating sustainable cash flow while maximizing value for our shareholders. With that, over to Trevor for a quick review of the financials. Trevor?

Thanks very much, Eric. Vext delivered strong financial performance in the fourth quarter and full year 2024. Demonstrating continued growth and operational discipline. For fiscal 2024, we rated revenue of $36 million, a 3.4% increase over fiscal 2023. In the fourth quarter of 2024, revenue was $10.2 million, a sequential increase of 13%. As Eric mentioned, these results were primarily driven by strong adult-use sales in Ohio, which offset continued pressures in Arizona. We expect Ohio to remain a key revenue driver as customer count increases and Vext's new dispensaries come online. Vext recorded adjusted EBITDA of $3.2 million in the fourth quarter of 2024 compared to $0.5 million in the fourth quarter of 2023 and up 13% sequentially. This was our strongest quarter from adjusted EBITDA perspective in more than two years. For the full year, adjusted EBITDA came in at $9.2 million a 66% increase over fiscal 2023. These strong results reflect growth from a full quarter of adult use sales in Ohio, combined with our disciplined approach to cost control. Inventory levels remained stable during the fourth quarter of 2024 compared to the third quarter of 2024, with inventory declines in Arizona offset by inventory increases in Ohio. This reflects improvements in cultivation yields, particularly in Ohio. Eloy cultivation facility also continues to perform exceptionally well and continue to harvest crops every other week throughout the fourth quarter of 2024. Crop yields and potency have notably improved compared to our legacy Arizona sites and now exceed industry averages. Even after the improved yields, our Arizona operations are fully sold through on flower leaving no exposure to the Arizona flower wholesale market and the downward pricing pressures therein. In Ohio, we are actively increasing retail sell-through as well as exploring additional wholesale and white label opportunities ahead of opening our additional retail stores in the state. As Eric mentioned, we expect Ohio to follow Arizona and being fully sold throughout flower once all eight locations are open. Operating expenses during the fourth quarter in fiscal 2024 remained flat. As indicated last quarter, we expect operating expenses to remain relatively stable and continue to decrease as a percentage of revenue. The efficiencies gained at Eloy, along with the monetization of our increased inventory through adult-use sales in Ohio are expected to contribute to this trend. Cash flow from operations was $4 million in the fourth quarter of 2024 compared to negative $0.7 million year-to-date as of the third quarter of 2024, reflecting strong performance from our Ohio operations and increasing contributions from our vertically integrated footprint. Once again, the fourth quarter of 2024 marked the highest quarterly cash flow from operations in three years. Cash flow from operations for the year 2024 in total were $3.3 million. While this represented a 24% decline compared to fiscal 2023, it was primarily due to our increased inventory investments in Ohio to sort of elevated adult-use demand. With the rollout of adult-use sales in Ohio, we anticipate further strengthening of cash flow from operations throughout this year and into 2026. Vext ended the quarter with $4.6 million in cash as of December 31, 2024. With a solid balance sheet entering 2025, we do not anticipate any capital raises for operational expenses or the Ohio retail expansion plans, positioning us well to continue executing on our strategic priorities. In line with our commitment to strengthening our financial position, we have prioritized debt reduction, we expect to pay down approximately $6.5 million in non-mortgage debt in 2025, keeping us on track to eliminate all nonmortgage debt by the end of 2026. Additionally, we made the decision to wind down our Oklahoma joint venture and the Happy Travel's joint operation in California due to ongoing market challenges and oversupply. This resulted in a noncash impairment charge of $2.9 million in the fourth quarter. We do not anticipate any further charges related to these wind downs and this decision allows us to fully focus our resources on our core markets where we see the greatest potential for long-term value creation. In 2025, our focus remains on generating free cash flow to reduce debt, optimizing our Ohio and Arizona operations and positioning Vext for continued growth. Our vertically integrated model enables us to optimize price, preserve margins and remain agile in the face of challenging market conditions, and we are confident that our disciplined approach will enable us to drive strong financial performance this year and beyond. Thanks, everyone, for joining us for our fourth quarter and full year 2024 financial results conference call. I'll now turn it over to the operator for your questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.

Good morning, everyone. Thanks for the questions here. Eric, I just wanted to expand a little if you could on what's happening in Arizona, I know that on the back of closed, there were some tariff reductions and you had some all-time weather highs a couple of years ago, maybe even into this year. And then we have overall just lower consumer spend. So how much of this is baked in that we might expect over the years to come to unwind a little bit? Or is the pricing pressure just more simply, as you mentioned, just pure too much cultivation in the market?

Matt, good morning. I think it's just too much cultivation in the market. I think that's the biggest issue that you have. I think there's some other good stuff going on in Arizona with the state starting to address the -- market, some of those other things. We still have a big black-market issue out here, just like you do everywhere else. I think that as the consumers press for cash, avoidance of tax is something that's of value to them. So, I think you're going to be facing that. That said, I think that you're seeing some disruption or some people with attrition -- my biggest issue in this space is that from an asset standpoint, it's where did the assets go. So they seem to pop back up. So, somebody goes into a receivership or it starts -- stops cultivating those assets eventually find somebody that's got the great idea that their brand is going to be better than everybody else and their -- that everybody is going to line up to get their product which we know is not a reality, but you're facing that. The question Trevor and I always talk about is, at what point in time does that stop? And I think you're seeing some of that with other people in the industry with the sale leasebacks and how do they unwind. I think that's still the big challenge. So simply put, I think the fundamentals of Arizona are good. It's growing in population. There's a lot of activity in Arizona, as you probably are well aware of. And we think that's still a positive. There's still people moving into the state and into the city of Phoenix primarily but until cultivation gets under hand, I think we're going to have that pricing pressure, which, again, Matt supports our model, which is we don't produce and try to sell into the wholesale market. We try to make sure our demand matches our supply. It's a balance. So, we're never forced really to have to find a home for product.

Got it. And then just maybe more broadly on strategy and sort of the next 12 or so months here. I think in the last two years, on a free cash flow basis, you guys are pretty consistent, maybe between $1 million and $2 million. So just with the increases in Ohio, I think you had mentioned staying free cash flow positive and servicing debt. But I'd imagine there's some increased capital spend there. So maybe just how to balance those two things or to get a better understanding of what the capital requirements are to hit your Ohio bulls?

Well, I'll give you the 40,000-foot look and Trevor will give you a little bit more detail on it. But from our standpoint, we think that everything is pretty well lined up, and it really works out well. And as Trevor mentioned in his comments, our objective is by the end of 2026, is not only have mortgage-backed debt that is really low cost, and it continues to come down. So I'll let Trevor give you a little bit more green right now on it, Matt, to answer your question.

Yes, a little bit higher continuing maintenance CapEx just because we got the additional assets in Ohio. But we're not expecting that to exceed $2 million a year. We'll have some build-out CapEx related to the Ohio retails, which as we mentioned, our comments are going to be self-funded.

Okay. And then just last sort of question kind of for me is, is there anything to expect several quarters out here as Ohio is a higher proportion of your total top line, just in terms of your margin profile. I know pricing has come down in Arizona, you had mentioned some pricing declines in Ohio, but I imagine that's earlier days because it just sort of got off the market and there's some volatility there. So, any upside to overall margin profile as Ohio takes up a higher proportion into '26?

Yes. We certainly think so, Matt. And it's probably not for the reason you're expecting, which is early markets with higher pricing. We think it's more so that as we get to an eight-store location, we're going to be faster to getting to 100% vertical sell-through, which will have a natural improvement over margin versus going into the wholesale market.

Okay, that's it for me. Thanks everyone.

The next question comes from Pablo Zuanic with Zuanic & Associates. Please go ahead.

Thank you. Good morning, everyone. Eric, regarding Ohio, it's a bit of a three-part question in terms of regulations. Do we know the timing of when adult use rules will come out? Do we have a sense of what those rules will look like? I mean is there some consents? Or is it all over the map? And then number three, maybe for the audience, remind us -- what will be so different? I mean what will really make the difference in terms of those rules compared to what you have right now in terms of the nonmedical market? Thank you.

So, on the rules, Pablo, we don't have a clue. The legislation still has you see different things going back and forth, whether they're going to increase the tax rate, not increase the tax rate, it looks like they're not going to do that. The commission still seems to be very good to work with, and they're very easy to work with. I think they're just backlogged on the -- what they're getting through. But I think we'll get some clarity in the next I'm guessing two months that the legislation will finally be clear of what's going to happen. Are they going to change the potency and restrict it and all that kind of stuff. So, I think that's still a pretty gray area for us, but we'll see. Now as far as the last part of your question, I think the biggest thing for us is going to be advertising and it looks like that's still up in the air. Some of the stores how do you get the population to know that they're there. You read some surveys that say 40% of the population still doesn't realize they have legal adult-use cannabis program. So that's going to take some time. I think as more stores come on in the marketplace and different things happen, some of that will start to go through. But we could get that a lot faster if we could do some type of advertising or outreach that store fund. So, to me, that's the biggest challenge. Obviously, adding new product like pre-rolls and some of that stuff, that will help, too because that's usually a little bit of a different consumer price entrance point. And I think that will make people a little bit more coming into the storefronts. And we think that's going to be helpful, too.

Understood. But just to be clear, in terms of existing customer base, I mean, those consumers that go to your dispensaries, you can stay in touch with them through your loyalty programs and through e-mail and text, I suppose, for that cannot be done either in Ohio.

Yes, you can do that. I mean, the loyalty program can offer any like cash off discounts or anything. You have to almost like coupon it to merchandise or noncannabis merchandise. So it's not your traditional loyalty program that you're used to in the cannabis at this point in time. And yes, you're promoting to them with e-mails that are your specials and everything. It's a matter of expansion of ending that customer base. Our stores do very well on retention, and we track that. So that's in the high percentage of how many customers we see on a recurring basis and stuff like that, and we watch the frequency that they come in. In traditional retail, KPIs and metrics that you watch. So that's been pretty positive in Ohio, and that's tracked with Arizona. That consumer still intends to stay within a region in a district. That's why we like the rural stores, too, because that customer base is more oil to the store, you don't have the geographic overlaps -- right? So as long as you provide a good product, good service, good pricing, you tend to maintain that customer a lot more oil where they're not jumping from shop to shop within a large metro area.

Got it. And then in terms of the eight stores in Ohio. I know you said opening them in 2025 and some I don't know if you can give more granularity in terms of how many do you expect to have by end of 2Q and the 3Q and 4Q are all the stores to be rural, some larger, smaller? Or that's still unclear? Or do you know where all the stores are going to be? If you can give more color, that would be helpful. Thanks.

Yes. I think the best color I can give you right now is to tell you it's -- a lot of it's predicated on regulation. So, we have map pins in the state. So, somebody could get this is public information. we will be in Portsmouth. We'll be down around the Cincinnati area. We'll have another store in the Columbus metro area. And then we'll have one in that Portsmouth that we talked about. So the way we really see it, we have like three regions, we have Columbus, Cincinnati and then Southeast Ohio will be where the stores are located. And we think that, that's a good geography for us. Again, we operate the business as traditional manufacturing distribution type of a business under a commodity so I always like to have my locations within like a two, two-and-a-half-hour radius of where my manufacturing plan is in order to keep logistical issues down. I think that's a big play for us and then, as Trevor mentioned, as wholesale becomes less of a critical function but not a function that we ignore, but it just last of a priority for us or a need that also lends well to that, too, is that we keep ourselves to do that thing. So, we don't have all that logistics to deal with and added costs, especially out of commodity, as you well are aware, freight on a commodity really kills your business?

Thank you and one very last one. Regarding Kentucky, anything you can say there. I mean we saw -- signed up an agreement with one of the largest cultivators there. I think it's MSA, what's the opportunity for you in Kentucky for the time being or no focus there, just Arizona, Ohio? Thank you.

Okay. So, in the MD&A, you'll see in the discussion on Kentucky under subsequent event that we did get the processor license in Kentucky. So, we have that we have transferred 100% of the vape in Kentucky, which was the CBD operation over to our ownership and we will be making a decision of what we do in Kentucky in the immediate future. So, we're kind of exploring what's it look like? What's it going to take to operate in Kentucky the best way that makes the most sense for us. So that's an ongoing discussion right now, and that's in the MD&A as a subsequent event.

Got it. Thank you.

The next question comes from Paul Penney with Partner Capital Group. Please go ahead.

Hey, good morning, Eric and Trevor. Can you give more color on the wholesale margins in Ohio and in terms of -- and how long do you expect to be in the wholesale business in Ohio?

Well, I'll let Trevor talk about the margin profile a little bit. But as far as like being in there, Trevor also hit that in his comments, Paul, we anticipate by the time we get the store eight the need to be in the wholesale market is not there. From a purely business standpoint, if you just were saying that you could absorb your whole supply that doesn't mean we'll exit the wholesale market. That just means that we get to participate in it based upon a want, not a need, and we prefer to be in that position. We think that's the better strategic position to be in. and a better match, especially as you watch cultivation in this space, people tend to produce too much, and they don't really control it, and a lot of them have this fixed cost and they kind of think that they're going to leverage down that fixed cost versus what the variable is going to do and stuff along those lines. So, we think there's opportunity within that when you have the retail door. So that's kind of the maximum of Ohio when we hit to the eight stores or at the max and if you can do more great. Now that doesn't mean we won't align with somebody that we have a relationship with and try to support that sell-through because we always like to have alternatives in the stores for the consumer and stuff along those ones we recognize the importance of that. But it gets back to that desire to do it versus the need that you have to do it. So, I'll let Trevor address the margins a little bit for you.

Good morning, Paul. Ohio as a percentage, wholesale was about 30%, just under 30% in 2024 that compares to sub-10 in Arizona for a product mix. We're expecting product mix to continue to decline in Ohio, particularly as new retails come online? I'd expect it to drop probably under 20 with 26 -- probably marijuana in Arizona is under 10%. So, at the end of the day, we're pretty much only expecting to have to move finished goods through the wholesale market. We're not seeing significant depreciation, at least not yet. So, I'd say the kind of margins are probably more in line with the medical margins that you were seeing about a year ago.

Okay, great, that's helpful. And then switching gears, very impressive cash flow, and thank you so much for highlighting that one of the few companies that do that. Do you expect this to continue? Maybe just reuse a little more color. I'm still a little gray on CapEx requirements for the year through 2025. And separately, is there any change in your tax strategy in terms of accruing for taxes and not paying them?

I'll take the second question first. No change from last quarter, still under audit still working with counsel, still don't have any uncertain tax positions on the balance sheet. Yes. Maintenance CapEx, as I said earlier, so you guys under $2 million a year. These are both brand-new facilities on the cultivation side with Eloy in Ohio. Growth and expansion CapEx, I'm budgeting a little bit more than this, just to be safe from my projections, but you're looking at just about $1 million a store to add to the four new stores on.

The thing I'd add on that, too, Paul, for you that I think is helpful is look at how we've announced and then finance them. So, we've done some mortgage-backed stuff that 10% interest rates or lower interest rates, and then we do some stuff with the capital in that and the cash flow. So, we're very fortunate that we have some good relationships with shareholders and other people that helped structure this to make it a little bit more advantageous as you're bringing them on versus they start to generate revenue, right? So, we do have some stuff in place, which I think makes it pretty nice for us.

Great. Thanks guys. Appreciate it. Solid quarter.

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.