Thank you for standing by. This is the conference operator. Welcome to the Vext Science's Fourth Quarter and Fiscal 2023 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal on operator by pressing star then zero. I would now like to turn the conference over to Jonathan Ross. Please go ahead.
Thanks, operator. Good morning, everyone, and thanks for joining us today. Vext's fourth quarter and fiscal year 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 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 may differ materially 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'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.
Thanks, John. Good morning, everybody, and thank you for joining our fourth quarter and full year 2023 financial results conference call. Today, I am joined on the call by Trevor Smith, CFO of Vext. I will start by providing a brief overview of our progress during 2023 before turning it over to Trevor for an update on our financial performance. 2023 has been a challenging year to navigate from a macroeconomic perspective with sustained inflation and rising interest rates leading to a pressured consumer. On top of these pressures, in Arizona, we faced industry-specific hurdles such as overproduction and falling wholesale prices. Vext has demonstrated remarkable operational strength despite this backdrop as a result of our focused blocking and tackling to drive traffic into our stores, maintain gross margin in a tough market, and to drive efficiencies every day.
2023 was a preparation for Vext, and with Ohio adult use expected to come online during 2024, we are well positioned for significant growth. During the year, we enhanced our balance sheet flexibility, positioned our Arizona operations for long-term growth and profitability, and built out our footprint in Ohio. We generated revenue of $34.8 million for the full year 2023 and Adjusted EBITDA of $5.5 million. Considering the ongoing challenges in the Arizona market, as outlined earlier, and the yet-to-be-realized potential for Ohio's adult use program, I am satisfied with our financial performance both in quarter four and in 2023. Our ability to continue to deliver profitability and positive cash flow during a very tough year for the Arizona market and for consumer-facing companies overall underscores the effectiveness of our go-to-market strategy and consistent efficiency measures. From an operational perspective, it was a busy year.
In Ohio, we now have 2 operating dispensaries and an operating Tier 1 cultivation and manufacturing facility. In quarter four, we took steps to add 2 additional dispensaries, which we expect to close on during 2024. We are already seeing increased sales in our wholesale channel validating our investments in the state. Our vertical position will enable us to capture market share and generate significant cash flow as the market turns to adult use. We also expect to have the potential for 3 additional adult use licenses based on proposed new dispensary caps in Ohio, which could give us the opportunity to operate a total of 7 dispensaries in the state. Exiting the year, Vext is in a strong position despite ongoing market pressures. We have a solid balance sheet that gives us the flexibility to execute both our plan and on opportunities as they arise.
We also strengthened our leadership team and board during the year, ensuring that we have the insight and experience we need as we look to capitalize on the platform we have built across Arizona and Ohio. Diving into the Arizona market, cannabis sales reached more than $1.4 billion in 2023, the second consecutive year of sales growth since the launch of recreational sales. A slight increase in total dollars spent was offset by an additional 12 dispensaries launching operations. This translated into lower sales in the overall market on a per-store basis. In addition to the new dispensaries, the market witnessed a decline in overall pricing as a result of the overall economic factors and oversupply in the market. By our calculations, revenue per store overall for the state is back to roughly the level it was at just prior to recreational legalization.
Despite these headwinds, Vext remained focused on leveraging the efficiencies available through our vertically integrated footprint to ensure that our cultivation footprint matched demand within our own retail footprint while executing to drive throughput and doing everything possible to extend baskets even from lower recent levels at retail. Our Arizona dispensaries continue to outperform the state average. Through 2023, Herbal Wellness Center locations recorded improved customer traffic, transactions, and unit sales. We attribute this to the store management recognizing changing customer patterns and targeting promotional discounts to meet this. We anticipate continued hangover for 2023 challenges into 2024. We see the potential for some price recovery toward the end of the year and into 2025 as cultivators and processors without their own retail doors exit the market and bring supply and demand back into balance. Our view is that there is more shakeout needed in the market.
We don't anticipate pursuing any opportunities to add to our retail doors in Arizona in the short term as vendor expectations are still higher than what the market conditions would justify. We do believe that as the exit of weaker players continues, additional opportunities may arise, and we will look at those with the price and timing making sense. For now, we would prefer to allocate incremental capital to the Ohio market. Turning to Ohio, 2023 was a milestone year with voters endorsing the adult use initiative during quarter four. Per the ballot measure, we expect adult use sales to commence by quarter three 2024. Despite well-telegraphed early market choppiness, including additional dispensaries coming online and reduced medical card activity, Ohio is projected to become a $4 billion market by 2028 as reported by MJBizDaily.
We were early to identify the state's potential and expect Ohio to be a big driver of growth for us over the next several quarters. We have been preparing for the rollout and have taken several important steps during 2023 to solidify our position in Ohio in preparation for the launch of the adult use program. Upon completion of the Ohio expansion transaction, which is expected to occur in 2024, Vext will have an operating Tier 1 cultivation facility, an operating manufacturing facility, and four dispensaries in the state. The transaction is progressing on track. From a retail perspective, 2023 marked the first full year of operations for our Jackson dispensary, and we are pleased with its performance. In early 2024, we completed the acquisition of our Columbus, Ohio dispensary.
Furthermore, in March 2024, we acquired real property associated with the cannabis dispensary in Athens, Ohio, which gives us the future optionality that comes with owning our own real estate. We saw a revenue lift in Ohio propelled by wholesale and ownership of the Jackson dispensary. We expect this growth to persist over the next two years with the introduction of adult use before it eventually stabilizes at a much higher level. Having successfully navigated markets from entry to maturity, we are prepared to generate profitability and cash flow at each point in the cycle. In closing, I am pleased by our team's performance during a particularly challenging period for consumer-facing companies. With the closing of the pending acquisitions and the launch of adult use sales in Ohio, we will be a larger diversified operator with fully vertically integrated footprints across two limited licensed states with significant potential.
While we cannot control market forces, Arizona has the potential to return to more balanced conditions likely in late 2024 or early 2025, which would be a positive driver to cash flow just as Ohio is really starting to ramp up. We are very well positioned to derive results over the next several quarters. With that, over to Trevor for a quick review of the financials. Trevor?
Thank you very much, Eric. For the year 2023, Vext delivered revenue of $34.8 million, a 1.7% decrease from $35.4 million in 2022. This decrease is mainly attributed to weakening in revenue from our Arizona operations, which was offset from inclusion of revenue from retail in Ohio and three months of Ohio cultivation and processing revenue. We recorded $5.5 million in adjusted EBITDA for the year, which was down compared to $15 million in 2022. Adjusted EBITDA margins were 16%. Looking at the fourth quarter 2023, our results included the addition of Ohio retail and three months of cultivation and processing sales from Ohio. Vext recorded revenue of $8.4 million, a 2.9% increase compared to $8.2 million in Q4 of 2022 and up 4% from the $8.1 million in Q3 of 2023. In Q4, adjusted EBITDA was $0.5 million, and adjusted EBITDA margins were 7%.
Operating expenses were higher in quarter four as compared to quarter three due to an increase in depreciation related to investments made in the Ohio and Eloy cultivation facilities, non-cash amortization expenses related to acquisitions completed during the year, as well as costs associated with acquiring and consolidating our Ohio operations. We anticipate operating expenses as a percentage of revenue to remain elevated for the first half of 2024 as we incur necessary expenses to take full advantage of the coming Ohio recreational market in advance of those sales actually occurring. Cash flow from operations was $4.4 million at December 31st, 2023. We expect cash flow from operations to continue to improve during 2024 as margins stabilize in Arizona and Ohio assets are progressively added into the P&L.
From a free cash flow perspective, it's important to note that we don't have any material unfunded growth capital expenditures planned for the year as the expansions in Ohio and Arizona have already been completed or are fully funded. Vext ended the quarter with $8.7 million in cash as of December 31st, 2023. Our balance sheet is solid entering 2024. During 2023, we raised debt at attractive rates, showcasing the strength of our strategy to keep control of our real estate, closed the sale of our Prescott Valley cultivation facility in Arizona, generating $6.5 million in cash, completed a private placement for net proceeds of $11.5 million where insiders purchased over 60% of the offering and announced a debt conversion transaction, exchanging $4.6 million of debt for common shares. These strategic moves demonstrate our insiders' confidence in the business, enhance our financial flexibility, and allow us to continue to execute.
Thank you, everyone, for joining us for our Q4 and fiscal 2023 financial results conference call. I'll now turn it over to the operator for your questions.
Thank you. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Andrew Semple with Echelon Capital Markets. Please go ahead.
Good morning. Thanks for taking my questions. First off, this was the first quarter with the Ohio cultivation assets being fully consolidated. Would you mind maybe clarifying what sort of EBITDA impact this would have had within the quarter? I think the revenue contribution from that is disclosed in the filings, but a bottom line impact as well would be helpful.
Trevor, do you have that handy?
I don't look at that on an isolated basis, but certainly something I can follow up with.
Yeah.
Okay.
Can I get back to you on that?
Yep. Yeah. That's fine. Appreciate that. Next question would just be, Eric, you're speaking of more balanced conditions in Arizona later this year or into early 2025. What's your thoughts on the Arizona asset performance until then? Are you expecting that to remain fairly steady from current levels, or do you think that we'll see some ongoing pressure in the first few quarters of 2024?
Oh, I think we definitely are going to see ongoing pressures in the first quarter of 2024. You see the state data, you see what the sales are on a macro basis. You follow the general consumer economics as I do. It's a tough consumer market right now. That said, the fundamentals of foot traffic and market share and everything are solid and good. It's just a matter of the recovery of the economics. So yeah, I think it's going to continue to be challenging, no doubt about it.
That's helpful. And then maybe flipping back to Ohio, as you're getting a better handle on the state and consolidating more and more assets there, how are you feeling about your preparedness for the early days of adult use in that market later this year? Do you feel like you've got the capacity to meet what we could see on the demand side, and how are your stores situated to handle the potential increase in traffic volumes there?
Well, from our perspective, we don't think that you're going to be able to meet all of the demand immediately within the state, but we do feel like we're in pretty good shape. It really depends on what the level is and how fast it takes off. I think the way that the program looks right now, that they start sometime in the middle of June, I think that the demand will be met in the short term because I think it'll take a while for the consumer base to continue to grow. So we are at max capacity in the cultivation facility. The rooms are doing very well. Our manufacturing is doing very well, and the stores are getting well positioned. The fact that the consumer's backed up and you've had less customers in that marketplace, I think, has been very what we had anticipated and expected.
So we feel good. We think we've got the right team in place, and we're putting on additional staff into those retail stores now as we speak to be able to handle the increased volume. So I think we feel pretty good about that. Trevor might have some insight too because he obviously works a lot with what's being produced and stuff along those lines. So Trevor, would you add anything to that?
Yeah. Just kind of as what I alluded to in the statement earlier, we're fully funded. So all of our additional capacity has already been built out. Rooms are operational. The biology is in the process of the veg and flower cycles. So we've already started ramping our production. We feel very good about the facility. We feel very good about the team. We feel very good about all of the soft goods orders. So the supply will be there. We're ready to meet demand as soon as it comes in once the state of Ohio lets everybody start participating in the rec market.
That's great. And maybe just one quick final one, if I may, would just be on the plans to build inventory in Ohio ahead of adult use. Do you think we'll see a bit of a step up in inventory levels in the first few quarters of 2024 as that opportunity approaches, or are you happy with inventory levels as they stand today?
We manage inventory.
Sorry to cut you off, Eric. Yeah. They'll absolutely build up, and that's kind of where the higher operating expenses are going to come in. You'll see that hit the balance sheet on the inventory. It will be offset by reducing the inventory in Arizona. As you know, we've sold one of our cultivation facilities, and the second facility just came online, had its first successful harvest in Q2 on a full room. So we're taking inventory levels down in Arizona, building them up in Ohio. I expect on a net basis for it to increase.
Great. That's it for me. Thanks for taking my questions. I'll get back to you.
The next question is from Yewon Kang with Canaccord Genuity. Please go ahead.
Hi. Good afternoon. This is Yewon Kang on behalf of Matt Bottomley. Thank you for the question. So if I may, could just start off the question regarding the Adjusted EBITDA for the quarter. There was a pretty steep step down quarter-over-quarter. And I know you mentioned about the non-cash charges as part of the prepared remarks. Could you provide more color behind these charges, just trying to understand the nature of these charges and the recurrence of them? Thank you.
Trevor, do you want to give? I mean, the obvious ones are we did the severance with Thai, who had been the Executive Chairman. He stepped down from being employed. We took some reserves for some debts, bad debt potentials, just standard cleanup items that as the markets shifted and changed, I think that was really the biggest driver. Other than, as Trevor mentioned in his notes about the financials and we've talked about the store sales, obviously, we continue to see pricing pressure in Arizona. And as we started to consolidate into Ohio, you have the typical patient count go down from when a medical program transitions to an adult use. So I think just that quarterly stuff was more of what occurred and what had been happening with Arizona. Trevor, would you add anything to that?
Yeah. I would add the depreciation impact of consolidation of the Ohio assets. So as I mentioned, we've fully built out, fully funded. Things are up and operational. We're taking full hit of depreciation, but at least in Q4, we're only at half capacity. The demand in the Ohio market just wasn't there for us to grow 100%. We've turned on all of the grow rooms, and so those margins will come more in line, probably late Q2, Q3, as we start to see the adult u se market pick up and absorb all that inventory.
Great. Thanks. Just my next question is on Ohio. So been hearing some mixed accounts from media reports and some of your peers in the space. How are you guys thinking about the adult use launch? I think in the proposed regulations, it said that the retail sales are expected to launch early fall, late summer, but some of the accounts are now saying that it might occur as early as June. So just wondering how you guys are thinking about the retail sales launch and how that's been going on for you guys in terms of preparation for it? Thanks.
We're prepared for it. We think it's every indication we have is it's mid-June, mid- to late June, starting in July. So we're ready to go. We have the stores ready to go, the supplies ready to go, as Trevor mentioned earlier comments. So we're ready. We're optimistic. We think we're in good position, and we've made a hell of a lot of investment into that marketplace. So we think it's a good program.
Got it. Thank you for the caller. I'll jump back into the queue.
Once again, if you have a question, please press star then one. The next question is from Pablo Zuanich with Zuanich & Associates. Please go ahead.
Thank you. Good afternoon, everyone. Look, just regarding the Ohio stores, and forgive me here for not knowing this, but there's Tier 1 licenses, and those people have 5 stores, and they can add 3 more. And then there's Tier 2. You have 1 store. You're going to add 1 more. I know you've been building Ohio through acquisitions, but how does that play in your case? I mean, you're going to have 4 stores. That means that you're going to get to 5 and add 3, or if you can explain the type of license you have there, please, first. Thank you.
Yeah. Pablo, we have a Tier 1. So the way it looks, we're going to get 3 additional. So we'll have 7 total under that program, the way that that's stacking out. We're not sure exactly where it all reaches, but we would like to max out the licenses at 8. That's our ultimate goal, is to be full in the state of Ohio. And we have the resource to be able to support it.
Understood. And then just to be 100% clear, in terms of the four existing stores, will they be all up and running by June when rec starts sales, begin sales, or you will only have two up and running then? I'm sorry if you said that already.
No. 4 will be up and running, but 2 of them will not be consolidated. They're still under the Ohio statute that they have to operate a year before you can transfer, apply for transfer of ownership, and stuff. So they're under that binding LOI that we've disclosed, but we do not consolidate them.
Right. Understood. And then obviously, we can all see where the competition is, and we can look at the map. But you want to just big picture in terms of the four stores, how would you compare their location with competitors? Meaning, do you have a lot of competition nearby? Some people are very close to Michigan. Other people are close to Kentucky, right? Very different dynamics. How would you characterize the location of your four stores?
Well, they're in Columbus, outside of Columbus, Athens, which is a college town. So they're away from Michigan. One of them's closer to the Kentucky border, an hour and a half from Kentucky, but not right at the border. Some of them have more of a rural setting, which we think is a positive, but we don't view it as negative. We aren't close to competitors where they're right on top of you. We feel like it's a good position. And we're also, candidly, Pablo, we're within two hours of distribution point from the manufacturing and the cultivation, which we see as a competitive advantage to us.
That's great. And then just moving on to Arizona, I don't know if my numbers are right, but you do disclose gross margins by state, right? And I think there was a big uptick between third quarter and fourth quarter if I'm looking at the right numbers. But how much room do you have to further improve gross margins in Arizona despite all the challenges there? For example, can you allocate more own production to your stores? Just if you can comment on that. Thank you.
Yeah. I think Trevor mentioned that Eloy came on, and we see that as more productive assets than the previous assets that we've had. And that's part of our rationalization and what we did strategically. So we think there's room for margin improvement in Arizona. The real issue within Arizona is going to be the downward pricing compression that's still ongoing and very competitive in the marketplace. The consumer's pressed. I mean, there's no doubt about it, that the consumer has less money. So you're still seeing a lot of foot traffic. And I've met you before, so I know you studied this, and you're an older gentleman too that's been around for a while. It's like 1979, 1980, where you have a decreasing consumer base that has less money on increasing inflationary pressure and incomes. I mean, it's a tough competitive environment.
Our stores run very well, and our management team does a great job. It's not an easy model. But Arizona is still a solid state. So as you go through the model, you still have an asset that's of value to you. It's not like it's a depreciating asset. It's just a tough economic macro condition.
Right. But given all those challenges, I mean, I realize that the Trulieve and Curaleaf of the world, they have a large number of stores, right, near 20 in some cases. But the smaller operators, with one or two stores, they may be struggling. Are you beginning to see better pricing in terms of M&A opportunities for stores in Arizona or not yet? And no rush for that given that you are focused on Ohio. Thanks.
Well, yeah. Obviously, we'd always like to be able to add some additional ones that are creative to it and stuff. But most people on the license on the value for the retail, they still have a good value because they're still bringing in a lot of customers. It's the people that have a lot of overhang of cultivation assets or excessive capacity and stuff along those lines that are challenged. So for us, the retail is where it makes the most sense, and it's still got a very favorable pricing. That asset's still valuable.
Right. Yep. Understood. Thank you.
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.