Vext Sciences Inc. Q2 2024 Financial Results: Navigating Growth Amid Market Challenges
Executive Summary
Vext Sciences Inc. (VEXT) has announced its financial results for the second quarter of 2024. The company reported revenues of $8.4 million and an adjusted EBITDA of $1.1 million. While experiencing robust initial demand in Ohio following the launch of adult-use cannabis sales, Vext faced reduced sales in Arizona due to margin compression and weaker consumer spending. Despite these hurdles, Vext remains optimistic about the latter half of 2024, expecting revenue and cash flow improvements as the Ohio market matures.
Key Financial Highlights
- Revenue: $8.4 million.
- Adjusted EBITDA: $1.1 million.
- Strong Demand in Ohio: Boosted by the start of adult-use cannabis sales.
- Decreased Sales in Arizona: Affected by margin compression and lower consumer spending.
Strategic Insights
- Ohio Expansion: Plans to reach eight dispensaries by Q1 2026.
- Arizona Market: Anticipates improved margins with higher yields and lower costs.
- New Market Ventures: Exploring entry into Kentucky's cannabis market and finalizing the Big Perm acquisition by year-end.
- Robust Balance Sheet: Positive cash flow from Arizona operations.
Company Outlook
- Ohio Focus: Vext aims to be a leading player, targeting the state dispensary license cap.
- Brand Penetration: Expects own brand penetration in Ohio to exceed 50% post-license cap.
- Revenue Growth: Optimistic about Ohio's adult-use market expansion positively impacting future revenue and cash flow.
Performance Analysis
Bearish Points
- Arizona Sales Decline: Year-over-year sales decrease due to margin compression and weakened consumer spending.
- Ohio Cash Burn: Increased expenses and inventory buildup leading to temporary cash burn, expected to reverse with adult-use revenue.
Bullish Points
- Margin Improvements: Anticipates better margins in H2 2024 due to increased yields and reduced costs in Arizona.
- Strategic Shift: Focus on own production over third-party wholesale to enhance profitability.
Misses
- Brand Penetration Target: No exact target set for own brand penetration in Ohio.
- Cash Flow Sufficiency: Positive cash flow in Arizona hasn't fully offset Ohio's growth investments.
Q&A Session Highlights
- License Cap in Ohio: Vext's pathway to reaching eight dispensaries involves state authorizations and existing LOIs.
- Own Brand Penetration: Expected to be north of 50%, influenced by pricing pressures and market conditions.
- Arizona Cultivation: New growth significantly outperforming historical levels, with higher yields impacting results in Q3 and beyond.
Analyst Insights
- Ohio Market Impact: Initial nonmedical adult-use sales have seen a significant lift, with full impact expected as new rules come into effect.
- Market Trends: Arizona remains a strong market with population growth and investment, positioning Vext to capitalize on future potential.
Simplified Analysis
What This Means for You
- Investment Potential: Vext Sciences shows promise with strategic market expansions and improved operational efficiencies.
- Revenue Growth: Key markets like Ohio are expected to drive future revenue and cash flow.
- Market Challenges: Be aware of potential risks like margin pressures and economic factors affecting consumer spending.
How It Affects Your Finances
- Shareholders: Potential for stock appreciation as Vext expands its market footprint and improves profitability.
- Investors: Consider Vext's strategic positioning in emerging markets and operational resilience in established markets like Arizona.
- Consumers: Increased availability and potentially lower prices for cannabis products as Vext scales its operations.
Conclusion
Vext Sciences Inc. is navigating a critical growth phase, balancing market challenges with strategic expansions. The company's focus on Ohio's burgeoning market and its robust operational framework in Arizona position it well for future success in the evolving cannabis industry.
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Full Transcript - None (VEXTF) Q2 2024:
Operator: Thank you for standing by. This is the conference operator. Welcome to Vext Sciences' Second Quarter 2024 Financial Results and Conference Call. As a reminder, all participants are in a listen-only mode. And the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Priam Chakraborty. Please go ahead.Unidentified Company Representative: Thanks, operator. Good morning, everyone, and thank you for joining us today. Vext Second Quarter 2024 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 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 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 made this a material release from actual developments, 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. 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.
Eric Offenberger: Thanks, Priam. Good morning, everybody, and thank you for joining our second quarter 2024 financial results conference call. I am joined today by Trevor Smith, Vext's CFO. Overall, the second quarter of 2024 remained a challenging period for consumer-facing companies across sectors. Against this backdrop, our team's strength has consistently set us apart. We generated revenue of $8.4 million and adjusted EBITDA of $1.1 million in the quarter. While we continue to face the impact of the tough consumer environment, we steadily drove traffic to our stores through innovative programs and our own brands to meet customer demand. On today's call, I will focus my remarks primarily on Ohio, where the launch of adult-use cannabis sales following the close of the quarter marked a major milestone for Vext. After over two years of serving medical consumers and preparing for this transition, our Jackson and Columbus dispensary began offering adult use cannabis on August 6. In the first two weeks of the adult-use sales in Ohio, we've seen good initial demand. Our dispensers are experiencing solid increases in traffic as expected, and our brands are resonating well with consumers. We are pleased with these initial results, which validate our strategic positioning and set a strong foundation for performance in the months ahead. Diving deeper into Ohio, we also saw increased demand from third-party wholesale customers in quarter two, 2024 as reseller statewide increased inventory in preparation for the launch of adult-use sales. On the retail side we fully integrated our Columbus dispensary resulting in a 45% increase in consolidated retail sales. Excluding Columbus, sales were down temporarily as consumers delayed purchases in anticipation of the adult-use launch. We see this as a short-term adjustment ahead of the transition and anticipate a significant uptick in customer volume in the coming quarters. As I've highlighted on previous conference calls, we are fully vertically integrated in Ohio. Our network currently includes a Tier 1 cultivation facility, a manufacturing facility and two operating retail dispensaries. Upon closing of our previously announced acquisitions and completion of additional licensing under state law for the Tier 1 cultivation facility, we anticipate reaching the state dispensary license cap in 2024 and anticipate all will be operational by the first quarter 2026. This will position us with one of the largest vertically integrated footprint in the Ohio market among publicly traded peers. We see Ohio as another potential multibillion-dollar market in the Mid-West with the launch of adult-use sales, we're well prepared and strategically positioned to capture significant market share in the state. Turning to Arizona, continued downward pressure on wholesale prices and muted consumer discretionary spending created margin compression causing significant sales headwind. This led to a decrease in total sales compared to the second quarter of 2023 across both our dispensaries. This is consistent with the state reported averages per store. I am pleased that we're consistently outperformed published state averages in Arizona. We view Arizona as a strong market with a significant population growth, a skilled labor force with record levels and investments, particularly in the semiconductor industry. When the market turns are fully vertically integrated and modular footprint will position us to capitalize on its potential. While our current focus remains primarily on our Arizona and Ohio operations, we continue to monitor market developments in other areas of our joint venture portfolio. With recent medical legislation in Kentucky, we see an opportunity to participate in the medical licensing process to potentially transition our existing CBD joint venture into a medical cannabis operation. In closing, I would like to reiterate that I am pleased by our team's performance during this challenging period for consumer-facing companies. Looking to the back half of the year, we anticipate steadily improving performance through our focus on executing our plans in Ohio and further optimizing our vertical presence in Arizona. Before I turn the call to Trevor, I would like to take a moment to recognize and thank Thai for his leadership, friendship, vision and commitment during his tenure as Chairman of the Board. His contributions have been invaluable, and we are pleased that he will continue to provide his expertise as a director. I'm also pleased to share that Mark Opzoomer, who is a valuable member of our Board has been appointed as non-executive Chairman. With his deep understanding of our business and dedication to our strategic goals, I am confident that Mark's leadership will be instrumental as well as we embark on our next phase of growth. With that, over to Trevor for a quick review of our financials. Trevor?
Trevor Smith: Thanks very much, Eric. In the second quarter of 2024, Vext generated revenue of $8.4 million, flat compared to the previous quarter and down from $9.2 million in the second quarter of 2023. The year-over-year decline can be attributed to continued weakening in Arizona revenue, offset by the inclusion of consolidated Ohio cultivation and processing as well as the Columbus dispensary. Vext recorded $1.1 million in adjusted EBITDA for the second quarter, flat year-over-year and a decrease compared to the $1.9 million in the first quarter of this year. Adjusted EBITDA margins were 12.9%. Operating expenses were higher compared to second quarter of 2023, driven by higher costs in Ohio ahead of the adult-use launch despite a decrease in controllable expenses in Arizona. In the third quarter of 2024, we plan to further reduce operating expenses in Arizona, while maintaining and enhancing our customer service levels. Overall, while we expect total operating expenses to increase in the third quarter of 2024, which is attributed to our increased scale of operations in Ohio, we anticipate a decrease in operating expenses as a percentage of revenue as the Ohio adult-use market expands. Cash flow from operations was negative $0.6 million during the second quarter. Aligned with our previous commentary, we expect revenue and cash flow from operations to improve during the latter half of 2024 as Ohio commences adult-use sales. As of June 30, 2024, Vext ended the quarter with $3.4 million in cash. As a result of Ohio implementing adult-use sales, our expectation is that cash flow from operations will trend upward for the remainder of the year, providing us with plenty of liquidity to fund our current operations. Thank you, everyone, for joining us for our second quarter 2024 financial results conference call. We look forward to our next update, where we expect to discuss the impact of Ohio's adult-use program, along with our other ongoing initiatives. I'll now turn it over to the operator for your questions.
Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Ty Collin with Eight Capital. Please go ahead.
Ty Collin: Hey, good morning, gentlemen. Thanks for the question this morning. I just start on Ohio, obviously, really excited to see things get going there with all the hard work you put in ahead of that. Eric, just following up on your comments earlier in the call, could you maybe just kind of outline what the pathway is to getting to that license cap of eight in Ohio by year-end? And maybe just speak about the cadence of actually getting those remaining four dispensaries open. I know you said you expect that by 1Q 2026, but any more granular detail on timing there would be useful.
Eric Offenberger: Thanks, Ty. The stores in Ohio, the way we get to eight, part of it is predicated on the state authorization and our assumption that we'll get approved by the state, but part of it is controlled by that based on the LOI. So that's really how you get there. That's two. And then there's a 10(B) that would be associated with one of those acquisitions that we think will come along with it too. So with our existing and then the Tier 1s, if you add it up and do the math, that gets you to the eight. So within the first round, we received -- we were lottery number nine. So we stuck a pin into a location in Columbus, and we're actively working on that site right now to get everything ready. We don't anticipate the state really doing anything with those until the middle of September to give you your documents that you need that you can be doing preliminary work such as architectural type of stuff. So we think that store will get going. We think another store potentially could get going relatively quick. So our plan really is to get two of these things opened in the first half of 2025. After that, we're into the second stage of the lottery for the other two 10(B) licenses, and we haven't seen anything on that, but we do have a very early pick in that. So we think that will be opportunistic. The way we understand it, the state will pick region and say, these are the places you can get a store. And then based upon your pick, you can pick a region where you want to go and go try to secure property. So we'll start working on that as soon as we have a little bit more definition for that period. As I mentioned earlier, we brought on some in-house council that's got a background in this type of area, and it's been very successful and very helpful doing that. That's also helped us with as we've been looking at Kentucky to be able to try to get some insights and some traction on trying to participate in that program that we talked about a little bit in the comments.
Ty Collin: Okay. That's really helpful detail. And what level of own brand penetration are you targeting in Ohio once you do get up to that store cap, I guess, given where your capacity is going to be at?
Eric Offenberger: That's so hard to say. My instinct is it's probably going to be north of 50%, and that's going to be dependent really on the pricing pressures and the margin. The issue with Ohio opening up is that, you do have consumers under a lot of pressure for disposable dollars and you see that with Home Depot (NYSE:) earnings and Lowe's (NYSE:) earnings and Walmart (NYSE:)'s earnings are fantastic because everybody is trading down. So that disposable income amount that the customer has is really under pressure in Ohio and Arizona. So your transaction counts are better than they were previously, but your average ticket or your unit pricing is impacted. So that makes you focus on your internal stuff because you can obviously control your input cost on that a lot better than you can on the wholesale market and watching that trigger out. So I would guess north of 50%, but to tell you a specific. I don't think we've formulated that yet. I don't know, Trevor, you got anything you'd add on that?
Trevor Smith: No. I’d just add, we would likely exit any third-party wholesale activity to make sure we're 100% of our own production going through all of our retail distribution and our current footprint, probably also look at expanding the footprint to match demand as it comes.
Ty Collin: Right. Okay. Okay. Great. And then if I could just sneak one more in. Switching to Arizona. So congrats on getting those first batches out of Eloy there. It sounds like it's going well so far. But I'm curious to hear, I guess, how that new growth is performing compared to where your expectations were at? And was that higher yield output reflected in the Q2 results? Or is that really going to be more of an impact in the back half of the year?
Eric Offenberger: I'll let Trevor cover that one.
Trevor Smith: Frankly, we're thrilled. We had a couple of first test harvest that can't say, at historical levels. And then once the new rooms actually got up with some of the new genetics, we're significantly outperforming the old locations. So very, very happy with those. The impact of the higher yields will result in a lower per unit cost. You'll see that impact, maybe a little bit in Q3, but certainly in Q4 and beyond.
Ty Collin: Okay, great. Thanks. I’ll pass the line.
Operator: The next question comes from Pablo Zuanic with Zuanic & Associates. Please go ahead.
Pablo Zuanic: Good morning. Look, two questions regarding Ohio. There's a lot of talk in the market that everyone is talking about a nonmedical market, not necessarily a regular adult-use market. So when do you expect the new rules to be out for what would be an AU market? And should we be making a distinction between the two? Or you're already seeing enough of a lift that we shouldn't expect so much of a change when we actually get the regular adult use growth. Let's start with that and I've a follow-up. Thanks.
Eric Offenberger: Pablo, that's a good question. We know that by 9/7, that's kind of the legislative vote date. So we would anticipate seeing something. What it looks like, it's just the gossip in the market of what you can do or not do. We do think that, that will provide some opportunity because you'll be able to advertise a little bit more and reach out to the customer base. So we think that's going to help. And yes, I would agree, right now, when you look at the marketplace of what's happening, you're operating under the medical rule and why your customer count is increasing and stuff like that, it's not quite the multiple that you would have seen if it would have been full rules, but we're very glad that the state did it the way they did it, because you're able to kick your system and your processes through this before you've got the