Good morning, everyone, and welcome to Vext Science's second quarter 2022 financial results conference call. As a reminder, this call is being recorded on August 25, 2022. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for research analysts to queue up for questions. If anyone has any difficulties hearing the conference, please press Star followed by zero for operator assistance. I would now like to turn the conference call over to Mr. Jonathan Ross. Please go ahead.
Thanks, operator. Good morning, everyone, and thanks for joining us today. Vext second quarter 2022 financial results were released yesterday. The press release, financial statements, and MD&A are available on SEDAR as well as the Vext website at vextscience.com. We would like to remind listeners that portions of today's discussion include forward-looking statements, and the forward-looking statements are included in yesterday's press release. There can be no assurance that these forward-looking statements will prove to be accurate or that management's expectations or estimates of future developments, circumstances, or results contained therein will materialize. Risks and uncertainties that could affect future developments, circumstances, or results are detailed in the MD&A and Vext's other public filings that are made available on SEDAR, and we encourage listeners to read those risk factors in conjunction with today's call.
As a result of these risks and uncertainties, the developments, circumstances, or results predicted in forward-looking statements may differ materially from actual developments, circumstances, or results. This presentation also includes non-IFRS financial information, and such non-IFRS financial measures are subject to the disclosure and reconciliation included in our press release disseminated yesterday. Forward-looking statements made during this conference call are made as of the date of this call. VEX disclaims any intention or obligation to update or revise such information except as required by applicable law. VEX 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 VEX.
Thanks, Jon. Good morning, everybody, and thank you for joining our quarter 2 2022 financial results conference call. I am joined on the call today by Stephan Bankosz, CFO of Vext. Our team continued to execute during the second quarter against the backdrop of a very challenging environment for most consumer-facing companies. Vext generated revenue of $8.8 million, which was down 6.5% compared to the same quarter last year, and 18.8% compared to quarter 1 of 2022. The drop in sales on a sequential basis is related to both seasonal weakness as well as a shift in consumer behavior as record high inflation continues to impact consumer spending across the country and across industries. Within this context, our team balanced promotional activity with mix back to maintain solid gross margins.
We continued to drive efficiencies and all these efforts translated into 27% growth in adjusted EBITDA compared to quarter one and margins of just over 55%. Vext cash flow from operations remained positive in the second quarter. I said it before and I will say it again, we are operators. Over the past three quarterly calls, I have highlighted the potential impact that an inflationary environment could have on consumer disposable income, the cannabis industry overall, and our short-term results. In quarter two, we began to see the first real evidence of this development. Gas prices hit record highs in mid-June, and credit card debt is starting to grow. These trends aren't just related to the cannabis industry, and all the big retailers have reported and have been clear that they are seeing the same trends with further weakness expected.
In Arizona, the state reported that the medical patient count dropped 30% from January through June. These patients have transitioned over to the recreational side of the market, where they will save the cost of a medical card renewal, but they will purchase less and must pay a higher tax on the product they buy. This impact on top of seasonally slower sales during the period caused Arizona cannabis sales to drop roughly 20% across the market from May to June. Sales in the market were down just over 11% from quarter one to quarter two. Consumers are watching their pennies, and we saw evidence of this in the quarter with traffic and customer count relatively steady, but basket size was down.
The wholesale side of our business was down as well as other retailers adjust to lower consumer spending in the short term, and it impacts order volume. As I mentioned last quarter, we expect these pressures to remain for the foreseeable future. We saw this environment coming and are meeting it head on. With operating expenses down 12.2% in quarter two compared to quarter one and customer count stable, we yet again demonstrated the strength of our business model. Vext's proven track record of execution and culture of operating excellence position the company well. Companies that can promote effectively and offer consistent selection, quality, and value to the customer will foster enduring loyalty. This is exactly how Vext's portfolio is positioned in the market and why we have one of the top brands in the state.
From a sales perspective, we consistently bring traffic into our stores given their strategic locations and seasonal targeted promotional activity. We have recently made a key hire to head up sales in Arizona to continue growing what is already an effective sales organization. We also have a proven ability to innovate, bringing products to market that customers want at a solid price point. During quarter two, we released new dessert-style THC-infused syrups, and they are currently available to consumers in Arizona. We also launched Vapen Black, our new line of distillate cartridges offering a premium flavor experience. In addition to live resin disposables and additional cartridge flavors. An all-new range of Halloween edibles will also be released before the end of October. Our recent manufacturing and kitchen expansion will enable us to continue to grow the product portfolio and rapidly get new products onto shelves.
From a cultivation perspective, we are also well positioned. The recent expansion at our Prescott Valley cultivation facility will be totally absorbed by our current vertical operations. With phase one of Eloy coming on by quarter three, we won't have to rely on the market for any material flower purchases for our current retail base. While any excess production can be allocated to our higher value in-house lines of extracts, edibles, and other products to sell in the wholesale market. We aren't dried flower wholesalers, and we never will be. Until Eloy comes online, we're still relying on the market for a portion of our dried flower needs. During quarter two, we purchased roughly 20% of the flower we used at wholesale. While it is an opportune time to do this, given the decline in bulk flower prices, it isn't a position we want to be in long term.
We can produce flower cheaper internally at what we believe is higher quality, while ensuring we aren't subject to the swings of the market. The expansion plans for our retail and manufacturing footprints remain on track. We are in discussion with the City of Phoenix to expand our central Phoenix dispensary to 5,000 sq ft and to add another 6,000 sq ft of manufacturing to our current operations in the city. Both these build outs will support the growth of our wholly-owned vapor products as well as third-party partner brands. We are working on some targeted wholesale sales initiatives to grow the customer base as well. We have a competitive advantage with one of the top brand portfolios in the state, an efficient operating model, and the ability to leverage existing capacity through our kitchen and manufacturing facilities without any additional CapEx.
Turning to Ohio, we continue to have confidence in the upside here. Currently, we are operating primarily through joint venture in the state. As I noted on our past couple of calls, we've already made significant progress towards becoming vertically integrated in Ohio. In September, we expect to file to transfer a dispensary license in Columbus to a JV that will set up immediately after approval. We anticipate receiving it by the end of the year. Ohio has exhibited better supply-demand dynamics than many other markets, including Arizona, given its structure. While still a developing market, so far in 2022, Ohio's patient count has seen an increase of 21% according to state data. While this doesn't mean we won't experience a slowdown in consumer discretionary spending in Ohio, it does help mitigate some of the impacts.
In quarter four of last year, an affiliated entity of our JV partner in the state received a level one cultivator provisional license, and arrangements are ongoing to build out an initial cultivation area up to 25,000 sq ft, with the expansion of up to 50,000 sq ft after one year of operation. We expect to receive the certificate of operation by September 2022 and achieve first harvest by the end of the year. As a reminder, also in quarter four, we received approval from the State of Ohio and are granted ownership of an operating manufacturing facility in Jackson, Ohio, through a JV. In quarter two, Vapen brands were available on over 95% of the dispensary shelves in the state through our JV partner, and our partner sales continue to grow as the customer base expands.
In the second quarter of 2022, sales were up more than 50% as compared to quarter 2 of last year. We have made strategic investments in our sales team, expanded product offerings both in the Vapen line, as well as introduced third-party manufactured and distributed brands like WYNK and Major to the Ohio market. We view Ohio as a growth opportunity and look forward to expanding these offerings to continue growing the company's market share in the state. In closing, I just reiterate that while the current market environment is difficult, Vext is well positioned. We have the balance sheet, cash flow, operations, and team to continue gaining share and making strategic investments that we expect will pay significant dividends for shareholders as macro pressures moderate. I'd also like to welcome Stephan Bankosz as the company CFO.
Stephan has been the CFO of our operating subsidiary in Arizona since January of last year and stepped into the Vext CFO and corporate secretary roles in June. I'll now pass the call to Stephan for a quick review of the financials. Stephan?
Thanks, Eric. As a reminder, the shift to a for-profit model as of Q1 2022 makes direct comparisons to prior year periods more challenging until we lap that event in Q1 2023. Vext continues to demonstrate solid financial performance in the second quarter of 2022. Revenue during the quarter was $8.8 million, an 18.8% decrease compared to Q1 2022 and lower compared to $9.4 million in Q2 2021. Gross profit before the impact of biological assets was $5.7 million in Q2. Adjusted gross profit, which also accounts for the one-time fair value adjustment for inventory and is a more accurate representation of underlying gross profit, was $6.5 million for the quarter.
This compares the gross profit of $4.2 million in the prior year period and adjusted gross profit of $4.8 million in quarter one. Adjusted gross margin was 75% in quarter two, compared to 44% in quarter one.
I'd like to quickly flag there were a few immaterial changes in some of our quarter one numbers as a result of a review for the for-profit transition we executed last quarter. These changes to amortization, depreciation, and cost of goods are primarily related to a true-up of acquisition date inventory following the completion of the dispensary's year-end audit. Adjusted EBITDA margins for the quarter were 55% in quarter two as compared to quarter one 2022 at 35% and quarter two of 2021 at 37%. As Eric mentioned, we continue to generate positive cash flow, with cash flow from operations coming in at $0.9 million during quarter two.
Vext ended the quarter with $1.5 million in cash at June 30, 2022, and the plans we have outlined for the rest of the year are fully funded between that cash balance as well as internal cash generation. On July 8, we announced that we had entered into a $22.2 million credit facility with the primary purpose of retiring certain higher rate secured debt. This credit facility lowers the company's cost of capital while giving us additional flexibility to execute our plans in Arizona and Ohio. The fact that we're able to secure this facility at a very reasonable rate of 7.5% at the time of signing speaks to the company's track record of profitability and cash flow, as well as the attractiveness of its assets. Thanks, everyone, for joining us for our quarter two financial results conference call.
I'll now turn it over to the operator for your questions.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you have a question, please press star followed by one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pooled in the order they are received. Should you wish to decline from the pooling process, please press star followed by two. If you're using a speakerphone, please lift your handset before pressing any keys. One moment for your first question. Your first question comes from Russell Stanley with Beacon. Please go ahead.
Good morning, thank you for taking my question. First, congrats on the EBITDA performance and the margins. With respect to OpEx and G&A in particular, looks like that came down by about $ half a million quarter-over-quarter. I guess, can you elaborate, I guess, on where the savings were and how sustainable the Q2 level is, looking out into the second half?
Well, Russ, thanks. Yeah, I believe it's sustainable. I actually think we can accelerate it a little bit. You know, we're seeing some of the results of the capital investments as we talked about in the first quarter, where we're picking up, you know, operating efficiency and gaining traction that way. I think that's really driving it. Plus, candidly, just an awareness of what's going on in the market and trying to, you know, turn the orders over faster in the stores and really, you know, better focus on, you know, what adds value, what doesn't add value. We've done some further reductions in headcount as we go, and we look at it constantly that way. You know, if we have an opening, you know, do we fill the opening type of thing.
We really have that mindset here and always have that we want to operate at lean. It's just now, you know, the necessity is more prevalent now that you have to save as much as you can and figure out how to do it for less. I mean, it's just really we're in like a stagflation era, you know, within the cannabis space right now in Arizona. In Ohio, it's a little bit different. There, you know, we are gaining sales and stuff along those lines and keeping those expenses tight as we had from startup mode.
Thanks for that. That dovetails into my next question, I guess, just from the consumer base. You talked about in Arizona having, you know, seeing a lot of medical patients transition to becoming adult use patients, you know. Ohio is still medical only. Would you characterize that customer base as perhaps being a bit more resilient, perhaps in terms of their spending on cannabis, given that, you know, they've only got that medical option to them?
You know, Russ, while I'm no expert in all of the psychology of consumers and people like that, what I am noticing, and it continues to trend this way, is it really depends on the demographics of the store and where it's located. If you look at our main store, and you've been out here to see it's in that urban setting as I've talked about previously. What we see there is that patient count, they will continue to buy, and they don't view it as a discretionary spend as much as a staple. It's a consistent co-consumer base in that. What they do is they have the pressures of fuel costs and other necessities that they're doing, so they will allocate their dollars. They will be in at the same frequency rate, spending less.
That's what happens on that recreational, is that the limits are set less on the state, and that's why you see the basket size drop, but the average count is the same. That's part of the way we can gain the efficiency too, is because they're buying less items, so it's easier to get them in and out. On the Deer Valley store, what you see is the demographics a little bit higher on disposable income. Instead of coming in three times a month, they'll come in two times a month. The basket size, while going down because it's more recreational than medical, it's not as dramatic of a decrease. That's what we're seeing. You got less frequency there, but a higher spend. In Ohio, what we're seeing is the medical patients continue to grow.
You know, it's really tough to determine. We don't have as good of retail records there at this point. It's tough to determine whether the spend on the basket size is going down or what exactly is happening. We do know that some of the wholesale numbers are falling, and it's a little bit more competitive. My suspicion is that there's, you know, some more price sensitivity on the retail side there. That said, you know, if you look at June, when you look at Arizona numbers, June's where the big drop was. Coincidentally, June fourteenth was the highest on record for gas prices in the United States history. Phoenix has had one of the higher inflationary rates in the country. You saw that kind of coming together.
I'm just a firm believer that everything tracks off of fuel. With fuel coming down, you know, you're gonna start to see some consumer spending come back. People have more disposable income. I don't think it goes back for quite a while, but, you know, to a better level. We did see some increase in some sales numbers in July.
Got it. That's great color. Thanks for that. I'll get back in the queue.
Your next question comes from Neal Gilmer with Haywood. Please go ahead.
Yeah, thanks very much. Good morning. Maybe just to follow on pretty much your last comment there, Eric. I was just sort of curious, you know, obviously we're towards the end of August here in July and August, have you seen any of the average basket size, you know, rebound a little bit? You just commented that you saw some increase in sales in July, but just wondering whether you sort of think that, you know, the June level was sort of the trough for basket sizes. It may sort of hold at that level or whether you're seeing any sort of increase whatsoever.
Yeah. Thanks, Neil. Yeah, I think so. I think that June was the low point. You know, you had the heat, but I think just psychologically, you know, the news was so terrible in the month of June and the downturn in spending, and you started really building that in May and, you know, inflation, and then the Fed hiked the prime rate by 0.75, you know. You had all of these nasty things going on and that consumer psychology. Yeah, I think you saw a little bit of a rebound in July, and it's continuing into August.
Is it, you know, where you go, "Hey, I'm out of the woods?" No, because you're also dealing with the summer blues in Arizona, too, where it's, you know, you Canadians won't get this, but, you know, it's 115-118 degrees Fahrenheit, so it's pretty damn hot. You don't see as many people there. Yeah, I think it's gonna rebound, and then we'll start to come into the winter months, which will be good. That's solid. I do think you'll continue to have some price pressure on the wholesale front, you know, as October crop comes in again this year, that you'll see that pressure.
On the retail side, I think you'll get the consumer back in and, you know, you try to make sure you capitalize on any of the tourism coming back. Then we do have the Super Bowl here this year coming up, too, so it should be exciting.
Yeah, fair enough. Okay, thanks for that. Wanted to chat a little bit on the gross profit side of things, that obviously it certainly came higher than my expectations. You did cite in the MD&A, you know, less purchase of wholesale product helped to contribute to that. You know, and then I think in your prepared remarks, you talked about 20% was still purchased wholesale, then Eloy coming online, you won't need to do that anymore. What should we be expecting for sort of the adjusted gross margin going forward? It seemed, you know, very, very high in Q2. Just wondering whether that's sustainable or whether there was any sort of one-time items that helped to contribute to that performance in the quarter.
That's a good question. Stephen and I went through that a lot ourselves, too. I think really what's happening is we've brought on the additional capacity of flower rooms, as you know, we've been talking about. The operations continue to get smoother and more streamlined and, you know, run like a manufacturing. We've been doing it for about three years now, and we're getting it down to, you know, like a manufacturing base, not as much of an agriculture or, you know, a boutique type of thing, but manufacturing. That's really starting to translate into the actual costs that are coming down dramatically. We've done a lot of improvement to the acquired asset of RDF when we bought that in 2020, and those are starting to come through. That cost structure is coming down.
On the other side, we've been doing a lot of contract manufacturing because we made the investments in our manufacturing capabilities and kitchen capabilities. As most of you realize, that when I do contract manufacturing, that's damn near 100% margin, because all you're really doing is sucking out a labor, so you don't have a really a raw material cost. Then with raw material dropping, in the wholesale market, and we're not having to go out and buy as much biomass or an input on the distillate side that's translating into the kitchen. To answer your question, and I went a long way around it, yes, we believe it's sustainable. We think, it's real. As long as we can continue to execute, it should be something that continues to happen.
That said, that was one, always one of the big challenges we had when we were a not-for-profit was, you know, how do you, how do you really show what a gross profit is when you're doing, like, you know, managerial fees and stuff like that, where, you know, you're seeing more this year how well the operation actually performs and what the team does. You know, we're just very fortunate that we have a great team that executes it.
Okay, great. Thanks for taking my questions.
Thank you.
Ladies and gentlemen, as a reminder, if you do have any questions, please press star one. Your next question comes from Andrew Semple with Echelon Capital Markets. Please go ahead.
Hi there. Good morning, and congrats on Q2 results. Just wanted to.
Thanks, Andrew.
Go back and ask about seasonality, which is, you know, something that's come up, maybe in prior calls. Did you see any impact of that in the second quarter? Are you seeing that in the third quarter? Or is that kind of impact just being overwhelmed this year with what we're seeing from the macroeconomic pressures within the quarter?
Well, my guess is it's all of the above, but you know, really the biggest impact we're seeing is on the macro. So on the macro side, you know, people have just less disposable income. I mean, you know, I look at it this way, kind of going my demographic's different than our average consumer in our stores, but I notice how much fuel cost is, I notice what grocery costs are and stuff along those lines. You know, I don't think our customer base is immune to it. There's not that much stimulus money that's gone into the economy until yesterday, you know. So I think that's, you know, dried up a little bit and the Fed's obviously been making moves and that's starting to work too. It's hard to say whether there was seasonality.
Now, it's been a hot summer, but you know, I think it's more of the macro. That said, what I do think is happening, and I think it's gonna continue to happen is, you know, we've always talked about customers staying within a radius. I think they're doing that more frequently now. Where our stores are located being in urban centers, you know, there's a lot of competition around us, but people don't drive as much for bargains. As long as you have to be competitively priced, and it makes a lot more pressure on you from a retailing standpoint of pricing your product correctly. Your consumers are more sticky, you know, so they stay there. They aren't gonna shop, you know, and drive. You're not gonna drive for $2 or $3.
You know, it's just not gonna happen. That's nice. You keep them at home and, you know, that keeps the patient count up. Even if the basket size is down, you're not, you know, having both, or your basket size is down and your customer count's down. You know? That would really be a challenging environment.
That's great. Thank you. My next question here, and you know, hopefully I understood this right, but about 80% of your sales already at the stores are your own branded products. With Eloy coming online, is there room to move that ratio materially higher? I'm just kind of you know, assuming that with the scale of Eloy, that might put you in a situation where you've got a fairly large supply surplus and might be more active in the wholesale markets than maybe you were previously. Can you comment on that? You know, just trying to pin down how we should be modeling Eloy in terms of revenues and margins in the upcoming year.
Okay. When you're talking about the 80%, that's our own flower. Our position's always been, we wanted to sell our own flower in our store. Okay. That's been it. As far as like the concentrates, extracts, edibles and that, we carry a wide variety of products in that line, in those lines, Andrew. If you think flower's roughly 52% of sales, you know, in the general realm, just like in most markets, you know, flower still has that position. You still have 48% that's a wide range of products. It's not 80% of the products sold is our product in the stores. I wanna clear that up to start with. I don't have the percentages off the top of my head. We can, I'll circle back on that if you'd like to.
When Eloy comes on, our thought process is this. Yes, we can absorb the flower into our stores. If we continue to execute at a lower cost point and stuff along those lines, there might be an opportunity here or there with some of the contract manufacturing that we do to provide some white label flower opportunities if they arise. We really think the opportunity for us is to introduce some new strains 'cause we'll have more capacity and more room into the marketplace or continue to develop the Vapen Black product that we talked about on the call, which is a live resin product. It's a, you know, fresh frozen type of deal where we haven't had the capabilities in the past to do that consistently with that product line because we didn't have the growing capacity.
If we were absorbing it all in the store and buying out on the open market, we were hit and miss in that product line. There's some new developments that the lab guys, the organic chemists have of different extraction things that are coming into play, where we think we can, you know, maybe move up a price point and introduce that Vapen Black a little bit stronger.
Great. Thank you.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.