Thank you for standing by. This is the conference operator. Welcome to the Vext Science First Quarter and Fiscal 2024 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 an operator by pressing Star then zero. I would now like to turn the conference over to Jonathan Moss. Please go ahead, sir.
Thanks, operator. Good morning, everyone, and thanks for joining us today. First 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 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 first quarter 2024 financial results conference call. Today, I am joined on the call by Trevor Smith, CFO of Vext. Since my last update was only a few weeks ago, I will keep my comments brief. Following last year's trend, the first quarter of 2024 was challenging for the legal cannabis market in both Arizona and Ohio, as consumers continued to face significant pricing pressure. Despite this backdrop, our team's strength and experience as an operator continued to shine. We generated revenue of $8.4 million and adjusted EBITDA of $1.9 million in the quarter. Our team continued to drive traffic into our stores by expanding bundle programs at the retail level during the quarter to meet customer demand for value.
While Vext absorbed both revenue and gross margin impacts as a result of the environment, we outperformed state averages. In Arizona, sales reported by the state deteriorated further during the quarter, highlighted by a 10% sequential decline in top-line revenue during the quarter, with reported statewide data indicating a 20% year-over-year drop. While I'd like to see better results out of Arizona, in the context of this significant market headwind, I am satisfied with our team's performance in the quarter. This market will improve. It's a simple matter of supply and demand. Arizona's continued population growth offers a promising foundation for expanding the customer base over time as uneconomic supply is rationalized, and Vext has the ability to withstand the current pressure given its vertical footprint in order to be there when it's ready to turn.
Our Eloy facility is fully operational and offers us significant flexibility to meet our own needs, with optionality to expand if we choose to add to our retail footprint in the market over the next several years. Turning to Ohio, we are particularly excited about what coming months will bring. In the first quarter, our wholesale operations in Ohio continued to grow with an 8.3% increase in sales compared to quarter four 2023, and a 136% increase year-over-year, largely driven by increased cultivation capacity in anticipation of adult use sales. While we experienced an overall decrease in per store sales in Ohio due to increased competition and a reduced customer base, this is transitory and aligned with the experience of other states close to their own adult use transition.
Our dispensaries continued to perform in line with state averages, including our Columbus dispensary, which is operating under the Herbal Wellness Center banner and began consolidating the acquisition on February 29th of this year. We also observed promising regulatory updates in Ohio after the first quarter ended. In early May, the Joint Committee on Agency Rule Review permitted rules to proceed without objection, paving the way for a dual licensing program that will allow existing medical marijuana dispensaries to also sell non-medical cannabis products. While the exact timing remains uncertain, we anticipate the launch of adult use sales in Ohio during the second half of 2024. We are optimistic about this development and have been preparing operationally, continuing with the steps taken during 2023 to solidify our position in Ohio.
Upon completion of the Ohio expansion transaction, which is expected to occur in 2024, Vext will have an operating Tier One cultivation facility, an operating manufacturing facility, and 4 dispensaries in the state. In closing, I am pleased by our team's performance during an ongoing challenging period for consumer-facing companies. With the closing of the pending acquisition and the launch of Adult Use sales in Ohio, we will be a larger, diversified operator with fully vertical integrated footprints across two limited licensed states with significant potential. By consistently executing our plans in Ohio and further optimizing our vertical presence in Arizona, we anticipate improved performance in the upcoming quarters. With that, over to Trevor for a quick review of the financial results. Trevor?
Thanks very much, Eric. In the first quarter of 2024, Vext generated revenue of $8.4 million, flat compared to $8.4 million in the previous quarter and down from $9.1 million in Q1 of 2023. We recorded $1.9 million in Adjusted EBITDA for the first quarter, up compared to $0.5 million in the previous. Adjusted EBITDA margins were 23.3%. Operating expenses were higher in the quarter compared to Q1 of 2023. Aligned with our commentary last quarter, this was primarily due to an increase in depreciation related to the Ohio and Eloy cultivation facilities, as well as non-cash amortization expenses related to acquisitions completed during the last year. We anticipate operating expenses as a percentage of revenue to remain elevated until Ohio Adult Use sales begin.
Cash flow from operations was $0.1 million during the first quarter. As I outlined during our last conference call, we expect cash flow from operations to continue to improve during 2024 as Ohio commences Adult Use sales. As of March 31st, 2024, Vext ended the quarter with $4.5 million in cash. Coupled with the $2 million standby credit facility that we announced this morning, this offers the company additional liquidity to fund its operations. Thanks, everyone, for joining us for our Q1 2024 financial results conference call. We look forward to our next update, where we'll delve into the exciting launch of Ohio's Adult Use program and anticipate seeing its full impact in Q3. I'll now turn it over to the operator for your questions.
Thank you. We will now begin the question and answer session. To join the question queue, you may press Star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Star, then two. We'll pause for a moment as callers join the queue. First question comes from Matt Bottomley of Canaccord Genuity. Please go ahead.
Yeah, good morning, everyone. I know we chatted, Eric, as you said, just a few weeks ago, but I'm wondering if you could just kind of give a little more color on what your expectations are if we consider the Arizona environment in terms of pricing and some of the year-over-year declines that we've seen as of late? If that continues into the remainder of the year, can you give us any sort of indication of what the cadence of the Ohio progression will be if that starts tracking along as you've indicated, as well as a potential, you know, could even be a June launch for some operators in adult use?
Yeah, Matt, good morning. I think with Arizona, I think it's, you know, it has to start to stabilize from the supply standpoint. The demand is still there. It's just the consumer is so impacted negatively that the pricing continues to deteriorate, like you see from most consumer industries. Ohio, we think the cadence is really that once it starts, it's going to be pretty exponential and grow quite fast, and it's not going to be as a, the consumer has more money to spend in, Ohio versus Arizona, but you're going to just have a tremendous amount of uptick on the consumer itself, just from a sheer quantity standpoint. You know, you're going to go from 150,000 potential to our rough guess is 1.8-2 million customers.
You know, so we think that's the dramatic increase in Ohio, and we think it just kind of keeps going. And we do think, you know, with our position, that the 2 stores will definitely get it right away. We think that 2 under the LOI will get the Adult Use thing and, you know, you move forward with the next 3 that comes with the Tier One and then try to, you know, get yourself to the 8, 8 very quickly. So that's where we're focused on and where we're trying to grow.
Understood. And, you know, I talked to some other operators in Ohio, who told me that they expect some individual stores to as much as triple overnight. We saw, I think Maryland doubled, but it's a little more of a robust medical market. In terms of your ability to service that potential demand, are there any things to keep in mind going forward, whether it's working capital investment, the, you know, ability to obviously staff these locations in advance or even, you know, incremental CapEx, that'll make a little bit of noise in the coming quarters? I think you had mentioned that, you know, OpEx, in general, remain elevated, but is there anything specific as it relates to Ohio potentially turning on in the next couple of months?
We don't think there's any CapEx that's going to be significant. You know, we just don't foresee that other than as you expand with the new dispensaries, right, for the new licenses. So that—let's push that out to the future. But with the current footprint, no. As far as being able to supply it. The existing stores, for sure. The wholesale market, as we mentioned in the MD&A, you know, we backed off a little bit on some of the customer profiles and stuff along those lines to start, you know, looking more at geographic areas that we can service more efficiently and stuff. It's fully built out. It's running at its max. I think there's a little tweaking that can still be done as far as, you know, what the genetic profiles are and stuff along those lines.
I'll give Trevor a second here, and he can explain that a little bit more because he works closer with that than I do. But, you know, I think it's in great shape. So we're very optimistic that we can support what we have currently in front of us, and we have the liquidity on the working capital needs for the inventory builds and stuff along those lines, that Ohio becomes very accretive, very fast for us on a cash basis.
Okay, thanks, Eric.
Yep.
The next question comes from Pablo Zuanic, Zuanic & Associates. Please go ahead.
Thank you. Good morning. Eric, can you just maybe more clarity in terms of what you have there? You talked about a closing date. You talked about two stores and two under LOI. So just exactly what has closed so far, what has yet to close, and maybe more clarity in terms of the closing date. I think you said sometime in the second half, but just more clarity there. And if you can remind us also your total capacity in Ohio in terms of what you built out. Thank you.
Sure. Thanks. Yeah, Pablo, it's a Tier One, so we have a 25,000 sq ft cultivation, and the facility itself has the potential for expansion to go up to 100,000 sq ft. Obviously, the statute wouldn't let that happen at this point in time, but the point is, is that we have plenty of expansion capability. Two of the retail stores are fully consolidated and are part of Vext's operations. Two are under LOI, and per Ohio statute, have to be open for a year before you can apply for the ownership change, and I think that happens late September, is where that would become applicable. At that point, you know, we'll do what's appropriate within the state to file and get those to change.
In the interim, we're doing, as we disclosed previously, we are working with those operations and in conjunction with them in supplying our product lines through it and the working capital and, and those types of things. So we basically are supporting four retail stores. We can't consolidate two of them, but you're seeing it into the wholesale market sales. So that, that's going. So we think then-
Go on.
Go ahead. I'm sorry.
No, go on. Go on. I'm sorry. Go on, go on.
Yeah, the Tier Ones will get three more licenses per the regulations. We don't expect to see that happen until September, and we're actively working on where those locations could be. So that's actively what's going on in Ohio. We might do... We'll be applying to the state to be able to expand the cultivation, but we'll look at that based upon what happens in an activity level within the state of what our timing will be on that.
Right. And then just to be clear, you talked about a total of eight. As a Tier One license, you have the right to five and then three more that you can add, but where is the fifth one right now? Because you have four, as you said, two consolidated, two LOI. What’s the fifth one here to get you to eight?
Well, that would be something we'd have to try to, you know, see how it set, how it comes out within the law and the way the LOIs are written and, you know, what's gonna happen within the state, whether we have to pick up an additional license or how it all shakes out. We're not really sure yet. We're waiting for clarity from the state on that.
Right. Understood. And then just more general questions about Ohio. You know, other operators have said that initially the state may be starved for capacity, that people haven't really built out to prepare for the rec market. Do you share that view, or because others are saying that there's already enough capacity? And then in terms of the timing, you know, some reports have talked that it could be as early as June, July, but you're saying you sounded less optimistic about that. You said second half. Maybe more color in terms of the big picture on how the market plays out. Thanks.
Yeah, we think, you know, we're reading the same things and hearing the same things. We're anticipating mid-June, but as far as what we know, we know it's the second half. So that we know by the statute. So until they actually put out the license on June seventh, and then they go forward and do what they're anticipating to do, you know, we're not gonna say publicly what that is other than what we do know. But we do... All indications are it's in June, but, you know, we'll see. As far as the capacity in the state and the build-out, no, I don't think any state, when it goes recreational, has the infrastructure in place for supporting the potential demand that's gonna occur in the marketplace. I just haven't seen that anywhere yet.
So yeah, I think it's gonna be tight on supply, and there'll be some shortages. I think that's the natural thing. But I do think with what Ohio has done as far as the statute and how they're progressing with the program, I think supply starts to catch up and it gets balanced. You know, but it doesn't get into an overcapacity, which is what you see in most of the markets where it deteriorates. You know, kind of what we're seeing in Arizona, where you overproduce on cultivation. That seems to be the common theme. So we don't see that structure within Ohio, and we think that's why it makes it a more robust program long term.
Right. And the very last one, in terms of your four stores, again, if you can give more granularity, I mean, of course, we have the addresses, we can find them in the map, but just some color in terms of, you know, how big or small are they? Are they surrounded by a lot of competitors? You know, are they border stores or in the middle of the state? Just whatever color you can give about your four stores. Thank you, and that's it.
Yeah. Okay. So the stores, obviously, we have the Columbus store, and then the other ones are more what I would consider to be southern Ohio. So it's close within the manufacturing facility. So we ideally want to be within a couple of hours of the manufacturing and distribution center so that we can be more efficient in what we do and, you know, keep our operating costs. We also like stores that have more of a rural setting because we think the margin protection and the store itself has a better profile for consistent demand. So we have one in Athens that's under the LOI, and that's a college town that has a good following as far as the college setting and stuff along those lines. So we think that's a good consumer base.
One is in Jackson, which is right by the manufacturing, and we've been there for a while, and that was the first acquisition. That's a nice environment. It's about 1.5 hours -2 hours from the Kentucky border, so it's really not a border town, but it's in the Appalachian area. And then we have one that's outside of Columbus, where in Jeffersonville, it's under the LOI, and that has a Honda battery manufacturing facility being built, and we think that's got a good potential, too. So as we look, we look at Southern Ohio and within a 2 hours -2.5 hours radius of the store for where we want to be located.
Thank you.
The next question comes from Ty Collin of Eight Capital. Please go ahead.
Hey, good morning, guys. Thanks for the questions. Eric, you and Trevor both have spoken about the step up in cash flow that you're expecting coming out of Ohio and that adult-use. Not to put the cart ahead of the horse here, but what are your priorities in terms of deploying that cash flow? How much of that gets reinvested, for example, or does some of that get to put towards debt reduction? Just wanted to get your musings on that.
Well, the first thing is, is that, you know, we have, we have it, at the end of the year, we have to make the final payment on Big Perm with the change of ownership and stuff along those lines, as we've discussed earlier. So we want to make sure we have that taken care of. After that, it becomes priority of the build-out of the new stores under the new licensing and retiring debt, you know, and we think that all, all of those things are going to be relatively accomplished fast. That's my take on it. Trevor, do you have any more insight you'd like to share?
No, I think you covered all the areas.
Okay, great. And is there a level of debt or a level of leverage that you'd like to keep in the business? Or basically, if you know, if there are no opportunities or no needs for reinvestment, you'd put excess cash flow towards debt reduction.
Well, I think you have to look at the overall structure, Ty, of how we've done the business. Since we control the assets and own the assets and have optionality to acquire the rest of them, depending on what happens with rescheduling and how the market structures and stuff like that, from our standpoint, we just continue to utilize the balance sheet really to finance the business as we need to go forward. So with the cash flow or redoing the debt package, that's something that's more favorable or taking and putting more of the assets up underneath it, that would be what we would look to do. You know, and if you look at the board, we've got, you know, the board's got a lot of experience in that area, and they provide counsel to us for that.
That's one of the things we've, you know, really worked on structuring, was keeping that flexibility of how we, how we finance the business.
Okay, got it. That's helpful. And then, in terms of your cultivation and production capacity in Ohio, you know, I mean, you mentioned the 25,000 sq ft that you have in place right now. Looking a little bit out into the future, once you've got your 7 or 8 retail stores up and running, how big of a wholesale business could that facility, a third-party wholesale business, rather, how big of a third-party wholesale business could that facility support while also supplying all of your stores? And what's kind of the thinking around when it might make sense to invest in an expansion there?
I'll let Trevor cover that one. I think he's, you know, been working on that thought process more than I have.
Yeah, Ty, it's really hard to forecast just how big of a ramp, you know, everybody's kind of guessing at, you know, what the multiple is in Ohio in terms of demand. So our priority, obviously, is to staff our or stock our retail stores first. Any excess capacity, particularly for the rest of the year, I don't know that we're going to look to wholesale immediately. It'll obviously be towards retail.
... so it's from our view, whether it goes to, you know, true arm's-length third party or internal, as long as it's leading and monetizing, we're, we're gonna be happy for this year.
Okay, great. Thanks, guys. Once again, if you have a question, please press Star, then One. The next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
Good morning. Thanks for taking my questions. And good morning to you, Eric and Trevor. Maybe, just for starters, if you could comment on the licensing process in Ohio and what you're expecting to happen come June, if the regulators begin to, you know, look at accelerating the medical cannabis incumbent operators there. Are you expecting to have to go through additional clearances or approvals, or will it be a relatively quick flip of the switch to adult use licensing once the regulators kick off that process?
Well, from what we're hearing in the industry and what the other people are talking about, we think it's gonna be quick. We think it's gonna be, file your paperwork. We're in good standing. You know, it's a minimal fee, and start selling, broaden your customer base and, but, you know, follow the medical rules. So we think, we think it's a non-issue. We've been staffing the stores, and the team out in Ohio has been working very hard about getting ready for this. So we're comfortable, we're ready to go. That said, we do think that there's gonna be market issues. I mean, there always are. When you, when you go from 150 to potentially 2 million, you know, you're gonna have some hiccups.
But I'm comfortable with the leadership and the team out in Ohio that, you know, we're gonna do as well or better than other people in the marketplace for that. And we've got the supply and, you know, the cultivation and everything like that. And we've, you know, candidly, Andrew, you've been with us for a couple on, two and a half years. You know, we've been making significant investment and really putting a lot of effort into Ohio and, you know, we're just glad it's at that point in time where it's gonna start materializing and monetizing.
Great. And then maybe a follow-up there quickly would be on whether you're seeing an increased appetite for wholesale in the current quarter, the second quarter, especially since we've seen that announcement a couple of weeks ago from the regulators. Are you getting more inbound calls on your ability to supply stores? Have you been seeing an uptick in prices? Is there more activity in wholesale in general? What's been going on in the Ohio wholesale market in the past few weeks?
It's been all of the above. You're hearing people wanting to increase their pricing. You're seeing, you know, more inbound and, you know, trying to align and stuff like that, and the team out there commercially has been working on that. You know, and we're, we're setting a structure, you know, what we wanna do and how we wanna do it. That said, pricing in Ohio has not been what I would consider to be robust or fantastic because it has had a really a tough front on the retail market. So you're seeing, you know, some pricing back up on the retail side because you're, you know, if you're at that medical market, that's decreasing in the amount of people that are coming into it.
At the same time, you're ramping up your, you know, staffing costs and all the things ancillarily to it in relationship to that market. So it, that, that's been the trend, and, you know, additional retail operations came on. So it's, you know, it's the calm before the storm, and it's the backup like you see in every one of those markets when it changes, that your actual business deteriorates prior to it accelerating. And that's where we've been in the first half of the year so far. The first quarter is, you know, decreased sales, and that's, you know, that's what you're seeing on the Ohio reporting level. So haven't seen the pricing really go yet, Andrew. You know, I think people are hoarding on the wholesale, the cultivators and stuff like that. I think they're hoarding versus putting it into the stream.
That's helpful. That, that's helpful context there. Maybe just a final question quickly. You know, we saw that you, you announced a Standby Credit Facility this morning. Just a quick comment there, if you're feeling better, if you're feeling good about your liquidity position for the remainder of the year, you know, given that, that announcement this morning.
Yeah, I think that's, yeah, that helps us quite a bit because it gives us some flexibility that's tough to have on cannabis. So, just for any of the timing issues and things that are coming up in Ohio as we're adding inventory and as Arizona's still, you know, you saw the cash flow from operations was positive, significantly less than we're accustomed to. But, you know, Arizona still continues to perform well. It just doesn't perform like it used to. It can only perform so well within the market, and Ohio hasn't ramped up, so this gives us a nice bridge in flexibility during this transition period. So yeah, we're very, very happy about it.
We think that the rates are very attractive on it, and, you know, we're thankful to our lending group and our shareholder base that, you know, bridged the gap.
Great. I'll get back into queue. Thank you, Eric.
Mm-hmm.
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.