Good morning, everyone. Welcome to Vext Science's first quarter 2022 financial results conference call. As a reminder, this call is being recorded today, May 31st, 2022. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, and instructions will be provided at that time for research analysts to queue up for questions. If anyone has difficulty hearing the conference, please press star followed by zero for the operator assistance at any time. I would now like to turn the call over to Jonathan Ross. Please go ahead, sir.
Thanks, Michelle. Good morning, everyone, and thanks for joining us today. Vext's first quarter 2022 financial results were released yesterday. 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 the forward-looking statements are included in today'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. 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, Jon. Good morning, everybody, and thank you for joining our quarter one 2022 financial results conference call. I am joined on the call today by Vahan Ajamian. I will keep my remarks shorter this morning to leave more time for your questions, given we just recently held our quarter four and 2021 annual call. On January first, we transitioned to a for-profit model. As quarter one is the first quarter we are reporting under this model, I will offer some highlights regarding the transition at the end of my prepared remarks. I am pleased with our team's performance during the first quarter of the year. Vext generated revenue of $10.8 million, up 18% compared to the same quarter last year and 16% compared to quarter four of 2021.
I would just highlight that sales are a little higher in quarter one than if we had reported under the not-for-profit model, given the full consolidation of the operating dispensaries for the full quarter. Even more importantly, we continued to translate revenue into robust Adjusted EBITDA margin of 36% in the quarter. Vext cash flow from operations continued to be positive to the tune of $3.1 million for the quarter. The first quarter marked a 5% sequential drop in Arizona's medical and recreational cannabis sales revenue, given inflationary pressure that are hitting into consumer budgets. As I mentioned on our quarter four call last month, we expect inflationary pressures will continue to impact consumer discretionary spending for the foreseeable future.
In an environment like this, we are confident that Vext's proven track record of execution and culture of operational excellence positions the company to continue generating results. Our dispensaries continue to see solid traffic in quarter one, owing to the proximity to their core customer bases. The strength and price competitiveness of the brand portfolio and seasonal targeted promotional campaigns. We see an opportunity to continue growing share while generating profit for shareholders. Companies that can promote effectively and offer consistent selection, quality, and value to the consumer will foster enduring loyalty. In quarter one, we completed the expansion of our Prescott Valley cultivation facility, bringing total indoor cultivation to 24,000 sq ft.
Over 2021 and through the first quarter of 2022, we have been absorbing all the flower we produce, and the production coming out of this build will also be completely absorbed by our current vertical operations. As discussed last month, we have split our Eloy cultivation expansion into two phases to better match our current flower absorption rate with footage expansion. Phase 1 is on track, and we expect completion by the third quarter of 2022, which will bring us to approximately 17,000 sq ft under canopy in that facility. We will not green light Phase 2 until we see construction costs moderate and bulk flower costs stop falling. Through most of quarter one, we were able to fully leverage our own supply at retail.
We anticipate that during quarter two, we will have to go to the market for product of about 30%-35% of our flower consumption. It is an opportune time for sourcing flower in the market. However, this will have a slight impact on margins. Once Eloy Phase 1 comes in on quarter three, we would expect this to be less of a factor in quarter two next year. The expansion plans for our retail and manufacturing footprint 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 of these builds will support the growth of our wholly owned vaping products as well as our third-party partner brands.
One trend that began to take shape during quarter one is a shift from the medical market to the recreational market. In Arizona medical sales decreased during that quarter and have dropped for five consecutive months, largely in favor of recreational sales. Margins are lower overall in the rec market, but we are well ahead of this move. Our manufacturing and kitchen expansion will enable us to continue to grow the Vext product portfolio and rapidly get new products onto the shelves of the majority of the dispensaries in Arizona. Edibles are a rapidly growing segment in the rec market and generate relatively high average margins. During quarter one, we introduced six new gummy flavors, and we will continue to innovate during the remainder of 2022.
Edibles also come with solid margins, which will contribute to margin in the price-sensitive market while retaining our consumer base through an increased focus on store performance and customer loyalty. Turning to Ohio, we continue to have confidence in the upside of that state. As mentioned on our last quarter conference call, we have already made significant progress towards becoming vertically integrated there. Currently, we are operating primarily through our joint venture in the state. As announced early last year, we have an LOI in place to establish another JV, which relates to a dispensary license in Columbus. Through the LOI, we are on track to apply to transfer that retail license to a JV to be established immediately after approval.
An affiliated entity of our JV partner in the state received a level one cultivation provisional license in Q4 2021, and arrangements are ongoing to build out an initial cultivation area of up to 25,000 sq ft, with the potential to expand up to 50,000 sq ft after one year of operation. Last quarter, we also announced that through our JV partner, we had received approval from the state and have been granted ownership of the existing manufacturing license in Jackson, Ohio. Vapen brands are available on the majority of dispensary shelves in the state. In the state, through our JV partner and our partner, sales continue to grow. In fact, March and April were the best two months in their operating history.
We have expanded product offerings both in the vaping line as well as introducing third-party manufactured and distributed brands like WINK and MAJOR to the Ohio market. We will continue to expand those offerings to continue to grow the company's market share in the state. Now, I'll walk through some of the changes related to our transition to a for-profit model of operations. I'll address major balance sheet and P&L items and leave you to project those items onto the cash flow statement, which obviously has some significant one-time movements given the moving parts in the other two statements. As I mentioned earlier, sales are a little higher in quarter one than if we had reported under the not-for-profit model, which also boosted our gross margins for the quarter.
Because the operating entities are now fully consolidated, we would expect both of these line items to remain higher than in the past on a normalized basis. One of the most notable one-time impacts resulting from the transition is the inventory line. Because of the way inventory flowed under the not-for-profit model, it would be billed immediately to the dispensary customer under the product sales line item in our P&L. When we consolidated and transitioned under the for-profit model, we could only book a certain value as inventory, which depressed not only inventory in the quarter, but artificially reduced cost of goods sold and therefore inflated gross profit.
We have provided an adjusted gross profit number for quarter one, which takes this one-time impact into account, as well as the impact to the P&L from their fair value of biological assets, which is a standard practice in the industry and better reflects the underlying gross profit and gross margin trends. Accounts receivable came down significantly as expected, given the fact that at the Vext level, this AR was really related to the billing to the dispensaries and was captured by the additions to intangibles under the for-profit model, which primarily reflects the value of the licenses under the new model based on the consideration given for Vext during the shareholder acquisition of the dispensaries. Going forward, we expect the shift to reporting as for-profit will make it simpler for the broader market to understand our story and make Vext more comparable to other players in the space.
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. Before I pass the call over to Vahan, I wanted to personally thank him for his friendship and all that he's done to help the company and is transitioning to Daniel Engel taking over. Daniel's listening to the call, but not participating this time, but he will be in the future. Vahan, I turn it over to you for the last time. Thank you for all you've done.
Thank you so much, Eric. The shift to a for-profit model makes direct comparisons to prior periods more challenging for Q1. Vext continued to demonstrate solid financial performance in the first quarter of 2022. Revenue during the quarter was $10.8 million, a 16% increase over Q4 of 2021, and up compared to $9.2 million in Q1 of 2021. Gross profit before the impact of biological assets was $8.1 million in Q1. 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 $6.2 million in the quarter. This compares to the gross profit of $4.1 million in the prior year period and $4 million in Q4. Adjusted gross margin was 57%.
Adjusted EBITDA margins for the quarter were even with Q4 at 36% and up from 33.4% in the prior year period. As Eric mentioned, we continue to generate steady cash flow, with cash flow from operations coming in at $3.1 million during Q1. Vext ended the quarter with a solid balance sheet. We had $3.8 million in cash at March 31st, 2022, and the expansion plans we have outlined for the rest of the year are fully funded between that cash balance as well as internal cash generation. Thanks, everyone, for joining us for our Q1 financial results conference call. I'll now turn it over to the operator for your questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session for research analysts. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by the number two. Please stand by for your first question. Your first question comes from Russell Stanley of Beacon. Please go ahead.
Good morning and congrats on the quarter and the for-profit transition. Just a question, Eric, around the comments made in the press release and during your prepared remarks around a number of Arizona brands, I guess, focusing on the premium segment and drawing a comparison with your own. Maybe could you elaborate, I guess, on how you're positioning the brands in an inflationary environment? I guess, the second question around that is, are you seeing consumers start to forgive the term, come down market to the benefit of brands that are more competitively priced?
Well, we've always kind of priced the brand. You know, I always use the analogy of Target, not to give them a plug, but that's kind of how we've always seen the brand. We didn't think that, you know, being a Nordstrom brand or a top-level brand really gave you enough consumer base. In particular, that happened as we originally started in 2013, our store's located in a very urban setting, and any of you that's been there, you know, you can see it. It's a great market, it's loyal, but that consumer base has less discretionary income, so we always had to price the brand in that realm. Yeah, I think you're seeing that.
What I really think the trend is on the consumer demand, and Russ, is that, as fuel's gone up, you know, you're at about $5.50 a gallon here in Arizona, and our stores are located in the Phoenix metro, that what you see is consumers are less likely to drive. That there's that spread between, you know, what they can get down the street versus what they can get at our store. If that spread's not that much, that customer's really sticky and loyal because they come in and get the good service, and they get that rapid speed that that's been beneficial to us.
Now, that said, your average ticket prices are definitely declining, and that's partly a function of the medical switch from medical to recreational because there's more limits that are placed on the recreational customer of what they can buy and how much they can buy at a transaction. We are seeing some of that impact, you know, on the retail. As you know, we talked about in the comments earlier, you know, the traffic's been good and, you know, sales remain solid. It's just you're doing more transactions to get to that sales volume.
Got it. That's great color. Maybe just to follow up, on your remarks around edibles, you talked about gummies, but in Arizona, I guess, can you update us on how WINK and MAJOR are performing relative to your expectations and what you're seeing there?
MAJOR's exceeding my expectations. WINK is more of a product that's gonna take a little bit of time. It's in the seltzer class, and there's been a couple other people introduce seltzers into the marketplace, in Arizona. It's a lower dose product, and I think it's more difficult, especially with the inflationary pressure, you know, because with WINK, you're marketing something that's an alternative that's gonna go to, you know, let's take it to a party and instead of having a six-pack, you have, you know, four or five WINKs, and you end up with your 10 milligram dosage that you would get out of a normal edible. Its price point's a little bit more dramatic per milligram than some of the other product lines.
I think it's gonna take a little bit more time to get that type of a product, have a broad consumer base. The MAJOR sells very well. In fact, we sell out of it, so we're increasing our production levels on MAJOR right now. Same thing in Ohio with MAJOR. It's a great product. We're really happy with that product.
Maybe just one more before I get back in the queue. Just a question around, I guess the state just issued 26 social equity licenses, and that represents, I guess an expansion of the addressable wholesale market. I guess, when you envision, you know, stores starting to come online there and how much of a lift are you hoping for there?
You know, I think it's 18 months before the stores come online, and it depends, you know, how well they do with zoning to get the stores. I think that's gonna be, you know, a challenge, you know, getting through the zoning and everything with all the activity going on in the valley, you know, as far as semiconductor builds and stuff like that. I think that'll be interesting to see how that goes. That said, you know, I think a lot of people that get these licenses, you know, think that, you know, they'll build cultivation at the same time. I think it's still a 12 to 18 month proposition before you see all that cultivation expansion that's gone on absorbed into the market.
I also think I don't think we're unique as far as being vertical and trying to watch our margins and control what our, you know, our margin is, you know, 'cause that's really what you know. You don't see it in the, you know, stock price, but that's how you're rewarded in the marketplace. It's how, what you do on your margins and translate it down to the bottom line. I think that everybody else will be doing the same thing. That said, if you're one of the people that have been operating the lease licenses or just doing a cultivation.
That's behind you. I joined a little bit late, so apologies if I got two questions here, one was covered earlier. I wanted to follow up on your comment on the Ohio market, where you commented March and April were the best two months that they'd had in their history. You know, maybe what you sort of just answered with Russ with respect to the Arizona market. Are you seeing the similar sort of trends in Ohio, just, you know, smaller basket sizes but increased volumes that sort of led to that? A little bit surprising that it was the best ever. Obviously it's coming off January, February slow, but, you know, in this sort of inflationary environment, what you're seeing in Ohio.
Well, Neil, good morning. Yeah, the transition to for-profit and biological assets, that was a lot of fun. You know, we went right up to the deadline to get that thing taken care of. We're through it now and the team did really well. The accounting team did a great job, and we had some nice help from Grant Thornton, so that was good for us. That said, in Ohio, I think there's a couple things going on with Ohio. One is, I think that market, based upon how the state's done their limited license, and it's coming into year three of the program, they're seeing more growth and talk around recreational and more acceptance and everything. I think that's helping it.
I really think the biggest thing that we've done in Ohio is we're getting our team established out there, and that team's starting to click. You know, I'm a firm believer everything starts with sales. We have a good sales team out there and good leadership, and the managing partner that's out there has, you know, got a good background and that's really kicking in. On the vaping side, with what we bring, you know, the SOPs, you know, are designed for production level volume, not for, you know, two of these, three of these, and that's why the vaping brand's been targeted.
You know, it's been set up for efficiency and operations and stuff like that, and those things are starting to kick, click into place there and, you know, you get sales people and you're priced competitively, now you've got sales. I think that's been it. You're seeing a little bit more biomass available so that you can do a distillation product instead of doing a more of a live resin type of product or, you know, some of those types of product lines can go there. We've expanded the gummy lines. We've expanded the chocolate bar offerings. We've added the MAJOR beverages. You know, we're doing other product lines that we think will continue to help with Ohio.
Okay, great. That's good to hear. My second question is just sort of a follow-up on maybe just Vahan's comment, because I may have missed what you said at the beginning of the call with respect to your CapEx plans on what your CapEx budget is for 2022. You know, obviously that's driven the cultivation in Ohio and expansion in Arizona. If you had a little over $4 million on CapEx in Q1, and just what the expectations are for the balance of the year.
Well, you know, I think it really all gets down to. You know, right now I think the CapEx left is somewhere around $2.5 million is what we have right now that's left, for it. As Vahan made in the comments from anything that we've disclosed, we've got funding as we throw off the cash from operations and the existing cash on the balance sheet and stuff like that. You know, and it, candidly, it's a matter of how fast you go or how slow you go. We're really more in the mode and mindset right now with the inflation, the way the market's going, is we're cautious of what we're doing in Arizona like we normally were, more so than in the past.
You know, it was build it and get it done, and we've gotten those efficiencies, and we're seeing those in sales growth and operating expenses come down. In Ohio, it's you know, how do you get the cultivation up and going as quick as you can because that market's got more you know price for that market, and you've got the opportunity pretty soon to apply to get the store so you can control the vertical chain there and bring up the margins. So that's how we're looking at it. You know, we've kind of gone I don't want to say we've gone back to the bootstrap mindset, but we've kind of gone back to the bootstrap mindset internally of thought of you know, let's not build stuff just to build it, you know. So we've really seen the efficiency and the gain.
I'm gonna put a period to that, and then I'm gonna transition and say, I don't think we'll be able to do anything with the retail until 2023. It's just really tough getting through the zoning use permit stuff within the city right now. They're just backed up and, you know, they still haven't completely came out of COVID. It takes a long time to get stuff through. By the time you get that all permitted and through and make sure the use permits, you know, you're looking at probably a 2023 build, and that's where we'll address expanding the retail stores and cleaning that up.
Okay, great. Thanks very much for that, additional color.
Thanks.
Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one at this time. Your next question comes from Andrew Semple of Echelon Capital Markets. Please go ahead.
Hi there. Good morning, and congrats on the Q1 results.
Morning, Andrew.
Morning. My first question here is on the EBITDA margins. I believe if we go back to our discussion at the end of last quarter, there's maybe some expectation that, you know, we might see some EBITDA margin pressure with the initial conversion or, you know. It seems that margins held up maybe better than anticipated here, and I just maybe wanna dig at that a little bit. Maybe how much of that was an improvement of the underlying business or maybe some conservatism around the initial conversion of the stores to full ownership and the accounting surrounding that?
Well, I definitely think a lot of it had to do with the accounting that, you know, we had a fair market value adjustment. As we mentioned in the comments, you know, we ended up picking up inventory that, you know, when you reduce it to the valuation based upon the assets or the consideration we gave up versus what we got in value on the fairness opinion, we ended up having to push that down. These are example numbers, not actuals. Let's say you had $5 million of inventory you picked up, but you had to push it down to a $3 million value for the fairness opinion because you couldn't go above.
We gave up less than we got in value for the stock of the dispensaries. That's what happened. You pushed it down, and you didn't really. We couldn't really see that until we got to really into the detail of where that valuation was gonna come out on that valuation opinion. That's where you see the intangibles got created, and you drop the receivables and all that, you know, minutiae moving it up and down on the balance sheet. I think that really had an impact. We don't have enough visibility on what its impact is at this time, but that'll continue to happen. Does that address it, or do you wanna try to go at it a little bit more?
No. Expect to have seen, you know, first product from that expanded facility kind of hitting the market in Q2. So there might be some more headroom for, you know, sales and margin improvement there. In commenting on that, could you maybe speak to the benefits you're seeing from that facility being online and, you know, how those first kind of production runs from that expanded facility have gone?
Yeah. You know, that facility, it's like everything else, you know. It's really about the team that's up there and what they're doing, and they continue to expand the strains that we offer. We've really done a good job in the last year of increasing the amount of strains and the variety that we're offering and growing. We've got between Phoenix and Prescott, you know, we have a lot more options than we've had in the past. What you're seeing is not only, you know, for the expansion, better, bigger mother rooms, but more controlled mother rooms so that we can, you know, cycle the plants out and keep the life better on those genetics. We've brought in some new strains. Yeah, we're seeing some impact of that.
As far as, like, the overall production, while it's up, it's not up dramatically at this point yet because you know that's still. You're still bringing that through the manufacturing process. I think there's a potential for margin improvement, but my bigger thing is I think there's a potential for luring more customers in that buy flower by having you know more changes in strains and more frequency of it.
Great. That's helpful. Thank you for taking my questions. I'll get back into queue.
Ladies and gentlemen, as there are no further questions, this will conclude your conference call for this morning. We would like to thank you for participating and ask that you please disconnect your lines.