Thank you for standing by. This is the conference operator. Welcome to Vext Science's Fourth Quarter 2022 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 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and 0. 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 Fourth Quarter 2022 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 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 the 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 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 US dollars, and the results discussed during this call are in US 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 2022 financial results conference call. I am joined on the call today by Steven Van Hoose, CFO of Vext. I will start by providing a brief overview of our results before turning it over to Steven for an update on our financial performance.
Through 2022, and particularly during the second half of the year, most consumer-facing companies continued to experience a challenging economic environment driven by record high inflation rates and resulting pressure on consumer discretionary income. As a result, sales revenue in Arizona, our core market, were down slightly compared to last year. Against this backdrop, our team was able to stand its ground and execute on our strategy. I am very pleased with our performance in the fourth quarter and full year 2022.
For the full year 2022, Vext generated revenue of $35.4 million. First and foremost, we are operators. Our proven experience continues to translate into the delivery of efficiency. In 2022, we recorded adjusted EBITDA of $15.1 million, which is up 12.8% over 2021. Adjusted EBITDA margins were 43% in 2022 compared to 36% in 2021.
Turning to the overall Arizona market for a moment. According to State Data, overall sales in Arizona were down 2% compared to 2021. Several factors contributed to this. To begin with, medical sales fell by 33% and recreational sales increased by 47% during the year. Medical customers can purchase more than recreational, rather than pay to maintain their licenses, patients shifted into the recreational market and moved to smaller basket sizes.
The oversupply of dried flower negatively impacted the wholesale market, and while less impactful to us, it drove lower retail pricing across the board. These factors, combined with the sustained pressure on consumer wallets, resulted in market pressure throughout the year. During 2022, we consistently brought traffic into our stores given their strategic locations and targeted promotional activities.
I am pleased to share that we saw a 22% increase in return customers as well as growth in new customer count, not just shifting from medical to recreational, which speaks to Vext operational excellence. The wholesale side of our business was also pressured during the year as retailers, including Vext, stocked off for more of their own products to maximize margins. We do not sell any flower in this segment of our business, only value-added products such as cartridges and edibles.
In 2023, we expect the downward pressure on wholesale to continue and expect fewer new brands to enter the Arizona market given consumer price sensitivity. In these market conditions, operators that can offer consistent selection, quality, and value to the customer will benefit from sustained loyalty. Vext portfolio is purposely built to fit these requirements.
During 2022, we launched Vapen Black, our line of distillate cartridge and THC-infused toppings, which have been moving well. Edibles, we believe, will continue to grow as a category, and in 2023 we are looking at a rebranding exercise to differentiate our products further.
We are continuing to focus on developing innovative products and bringing them to market at the right price point to both drive revenue, maximize margin, and expand customer base. Moving on to cultivation, we continue to be well-positioned.
Last month, we were granted a certificate of occupancy by the city of Eloy for our 17,000 sq ft cultivation space in that city. We plan to have plants in place during Q2 2023 and anticipate a first harvest in the 3rd quarter of the year.
With this additional capacity coming online, we expect to be able to supply 100% of the dried flower needs for our retail storefronts as well as all of the current requirements of our Vapen product line, maximizing our gross margin. As I've mentioned on previous calls, we have been very strategic with our cultivation footprint to allow for modularity as the Arizona market develops.
We have the option to expand our cultivation footprint by another 17,000 sq ft, bringing total canopy on site to 34,000 sq ft in Eloy. We will explore exercising that option based on market needs. We have no interest in becoming a wholesaler of dried flower in a market that is already over capacity. The expansion plans for our retail and manufacturing footprints remain on track.
Discussions are ongoing 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. We are currently awaiting a use permit. Once complete, both these builds will support the growth of our wholly owned vape and products as well as our third-party partner brands.
The timing of these initiatives is based upon permitting as well as improvement in the economy. Let's turn to Ohio. As I noted on our past couple of calls, Ohio has exhibited better supply-demand dynamics than many other markets, including Arizona. Given its structure and stage of development, we see it as our next key leg of growth.
In line with this, in Q4 2022, we announced an agreement to acquire our joint venture partner, Appalachian Pharm Processing, including its subsidiaries and affiliated companies. On closing, the acquisition will create a diversified, fully integrated entity with up to 25,000 square feet of cultivation, built-out manufacturing facilities, and a strategic retail footprint across Ohio, a 100% owned by Vext. During 2022, Ohio's medical cannabis sales surpassed the $1 billion mark since going into effect in 2019, exceeding projections.
The state saw a 44% increase in number of patients with active recommendations and active registrations over the past 12 months ending December 31, 2022, according to state data. This growth, in addition to the state's highly regulated vertical structure and potential for a future transition to adult use, makes it a very attractive market in our view.
Following the close of this acquisition, expected by the end of Q2 2023, Vext will have access to a Tier 1 cultivation facility in Jackson, Ohio, with an initial cultivation area of up to 25,000 sq ft, with the potential to expand up to 50,000 sq ft. In this market, controlling cultivation licenses is to our advantage and has been a key focus for us.
In Q3 2022, we received all necessary approvals in association with our partners in Ohio, Appalachian Pharm Processing, and are fully funded to finish the build-out of this cultivation space. Last month, we achieved our first harvest of the facility, a major milestone towards profitable operations in a state with limited cultivation capacity like Ohio.
Through the acquisition, Vext will gain strategic access to a fully built-out and operating manufacturing facility in Jackson, Ohio, adequate to meet the company's needs in Ohio for the foreseeable future. This facility will continue to support the availability of Vapen brands on a majority of the dispensary shelves in the state, complementing the Appalachian Pharm flower brand and providing medical consumers in Ohio access to best-in-class products. Moving on to retail. The proposed acquisition will also provide Vext with the framework for a strong retail foothold in Ohio.
In Q4 2022, we received approval from the Ohio Board of Pharmacy to transfer ownership of the license of the strategically located, fully operational cannabis dispensary in Jackson, Ohio. The current dispensary is operating as Herbal Wellness Center, aligned with our Arizona retail branding, and we expect to be able to consolidate its results beginning in Q1 2023. On closing of the proposed Ohio acquisition, we will expand our retail footprint and gain ownership of another cannabis dispensary based in Columbus, Ohio.
We intend to apply to the regulators for an ownership transfer shortly afterwards, enabling us to consolidate our vertical operations further and subsequently grow market share in Ohio. We're also keeping a keen eye on interesting market developments in other areas of our JV portfolio. Kentucky, specifically, is starting to look promising.
As you would have seen, last week, the Senate committee passed a bill to legalize medical marijuana in the state. Our 50/50 partner there has an operating manufacturing facility and is located in a high-traffic area not far from the borders of Tennessee. We expect them to benefit from this development. As a reminder, we have a right of first refusal to buy these operations, just as we did with Ohio.
We have assembled a unique portfolio that provides embedded growth potential in high-opportunity markets by getting in early and leveraging our expertise and IP into joint ventures that give us optionality in the future. While our current focus remains principally on our Arizona and Ohio operations, we are well positioned to continue executing on these opportunities as they arise.
Overall, the combination of our established cultivation, manufacturing, and retail presence with Vext experience as a profitable operator and the strength of the Vapen brand will enable us to establish a firm footing in this high-growth market while being well positioned to take advantage of the growth in the market should Ohio move to adult use.
The proposed Ohio acquisition will enable us to extend our success in Arizona into a new market rapidly and at scale. With a significantly larger population, steady growth in patient count, and potential for future adult use transition, we expect Ohio to propel growth for Vext, contribute meaningfully towards revenue, profitability, and cash flow over the next few years.
In closing, I will reiterate that while the underlying effects of the current consumer environment will persist through at least mid-2023, Vext track record of consistently innovating, driving efficiencies, and offering a broad range of value price products will enable us to continue generating results as we continue to focus on building value for our shareholders. With that, I will now pass the call to Steven for a quick review of the financials. Steven?
Thanks, Eric. As a reminder, we shifted to a for-profit model as of Q1 2022, making direct comparisons to prior years more challenging until we lap that event at the end of this next quarter, Q1 2023. For the year 2022, Vext delivered revenue of $35.4 million, a 5% decrease from $37.2 million in 2021.
We continued to increase profitability in 2022, recording $15.1 million in adjusted EBITDA for the year, up 13% compared to $13.4 million in 2021. Adjusted EBITDA margins for the year were also strong at 43% compared to 36% in 2021. Adjusted gross margin for 2022 was 59%, up compared to gross margin of 44% in 2021.
Looking at the fourth quarter, we saw the market partially recover from the previous quarter on a seasonal basis, as well as witnessed a slight easing in consumer inflation, recording revenue of $8.2 million, with a 12% decrease compared to $9.3 million in Q4 of 2021. Vext was up 7% from $7.7 million in Q3 of 2022. In Q4, we generated adjusted EBITDA of $3.2 million, which was down slightly compared to Q4 2021. adjusted EBITDA margins were 39% compared to 36% in Q4 of 2021. Growth and adjusted EBITDA margins were achieved by driving gross margin dollars and increasing efficiencies.
We also drove adjusted gross margins of 50% in quarter four by focusing on value products, rapid innovation, and targeted promotions to generate traffic to our stores, which enabled us to continue to increase basket size. Cash flow from operations came in at $2.8 million during Q4 due to the reasons Eric outlined previously regarding biological assets and a reduction in sales. Vext ended the quarter with $5.9 million in cash at December 31, 2022.
That is adequate to execute our business plans. As I mentioned in our Q3 conference call, our debt refinancing lowers our cost of capital while giving us additional flexibility to execute on our plans in Arizona and Ohio. As Eric mentioned, expansion into the Ohio market is expected to be Vext next step for growth, and we anticipate reporting results from the Jackson dispensary beginning Q1 of 2023.
We are expecting to fully consolidate cultivation and manufacturing operations in Ohio, pending state approvals, into our financial results by the end of Q2 2023. We look at cash flow, we are expecting to increase through 2023 as we get permission from the state to consolidate the Ohio operations. In the interim, we are operating under a management agreement which doesn't allow a direct comparison in terms of any debt to cash flow.
This factor is important to keep in mind when looking at our capital and debt structures. Thanks, everyone, for joining us for our Q4 and year-end financial results conference call. 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 1 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 2. We will pause for a moment as callers join the queue. The first question comes from Andrew Semple with Echelon Capital Markets. Please go ahead.
Hi there. Good morning, and congrats on the Q4 results.
Good morning, Andrew.
My first question. I just wanna ask on the affiliated entity in Ohio recently completed its first harvest in that state. Could you maybe speak to how the sales pipeline is being developed for that first harvest? Are you seeing any indications that you'll be able to move all of that product on a wholesale basis and that the market can continue to absorb capacity as you ramp up production?
Yeah, so far it's been very favorable from the customer base. You know, since we've been there for a couple of years with the Vapen brand, we already have like the sales network and the distribution network to support it. It's just gonna go naturally within that channel. That's a good thing.
On the actual product, the fact that we brought out new genetics to the Ohio market, that doesn't seem to be comparable genetics out there from our, you know, history, we're getting some favorable results. The preliminary first pass THC tests were really high. We expect the second pass to be even better from what we saw. We're anticipating having sales recorded this month on that first harvest.
The second harvest is down, and it's in the, you know, drying stages and stuff like that. We're now starting to cycle, and we still plan on being in full room production by the end of the second quarter. Yeah, that looks good right now.
Great. That's helpful. Switching to the gross margins, which have shown some volatility in 2022, in the Arizona market. I'm just wondering if you can maybe help us pin down what you would think the normalized gross margin profile in Arizona will be going forward, especially once Ohio is fully ramped up, towards the end of the year. Where, where do you think that gross margin line will settle at in the state of Arizona?
Well, I, you know, I don't have a good feeling for it other than to think that it's going to be, candidly, it should be in the 60% range, you know, on a gross margin basis once we start to absorb more product that we produce ourselves. You know, we're seeing some stability in the wholesale market here, and the retail markets, you know, trends a little bit with that wholesale market.
I think if some of the capacity gets decreased on the flower, you know, we'll start to see some of that translate. You know, you're gonna have, just like every other market, you know, when it expanded too fast that it has an oversupply that'll start to track back.
You know, hopefully in October, we won't have as much crops come in, and that'll continue to allow us opportunity to move up that margin. We're pretty optimistic that we can stay in that, you know, high fifties, low sixties range on that margin, that that's sustainable.
Great. That's very helpful. I'll get back in touch with you. Thank you for taking my questions.
Thanks, Andrew.
The next question comes from Russell Stanley with Beacon Securities. Please go ahead.
Good morning, and thanks for taking my question. On Arizona, just wondering if you can update us on the contract manufacturing business? How's that performing, and, you know, what kind of revenue visibility do you have? In prior quarters, it seems to have been a real driver. Can you provide some color on that?
It continues to be a decent whack for us, Russ. You know, I think there's a little bit of backup, and I think we talked about that in the MD&A, you know, that there's a little bit less brands coming on as the market got a little bit retracted, that there's more pressure in the stores where people are wanting to have their own product there in order to maintain margins. I think that continues to be the case.
We'll continue to do contract manufacturing, you know, continue to drive the revenue source. You know, the margins are nice on that business, obviously. We don't anticipate that the wholesale is gonna recover in Arizona this year.
We think it's gonna continue to be tight, we made that in our, you know, comment that we think the first half of 2023 continues with the economic trend, you know. As you see what's happening with banking, we think that's gonna continue to be, you know, a drag on the consumer economy. We'll see what Powell comes out with today, right?
Absolutely. Maybe just moving on to Ohio. You mentioned the potential for adult use there, I think, a few times in your prepared remarks. Just wondering your level of confidence there. I think there's a bill already in the legislature. I guess the deadline to do something with it is in early May.
I don't think any action's expected. What are your hopes on that reaching the ballot later this year? Secondly, I think there's a medical bill also out there with potential to expand certain parts of the market. You know, any color on your view there on the net net positives and the likelihood of those moving forward?
Well, from our perspective, you know, we like the team that we have in Ohio. As we've mentioned on previous calls, you know, we're in 95% currently stored in Ohio, so we have a good presence. The new stores coming on will obviously help expand and absorb that into the marketplace. With that said, you know, I don't think that anything will go through the legislature from what I'm reading, but who knows?
I was surprised when Kentucky got it through the Senate. I thought that would be a hurdle on Kentucky for the Senate, but that came through too. I'm not sure, you know, what the temperature is. I definitely think if they don't go through the House in Ohio, that it's gonna be on the ballot, and in all likelihood, it'll pass.
You know, you're looking at 2024 with an adult use market, more stores on the path. You know, we'll be able to expand our cultivation in that, in that period of time. I look at that as positive all the way around for us. If it doesn't pass, you know, we have the retail front and we have a good wholesale market and good reputation out there, and as I mentioned earlier, a good team and good focus on sales and operations that, you know, we'll succeed in that environment too. We're still very excited about Ohio.
That's great. I'll get back in the queue. Thanks for the color.
The next question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.
Good morning. Hope everyone's doing well. Yeah, just going back again to Arizona. Appreciate a lot of the color that was already provided in the Q&A and the prepared remarks. I'm just wondering, Eric, if you can comment at all about what you expect the relationship to be between, you know, Vext sales out of that state at the retail level versus, you know, overall state sales.
Is it fair to say that it'll be a linear relationship, or is the fact that you're focusing a little more on safeguarding or even improving your margin by not, you know, attacking wholesale channels, could there be some slight underperformance out of Arizona relative to overall state sales as a result?
I don't think so. I think as far as state sales go, the dispensaries will continue to perform above state expectations or state levels. You know, they historically have, and I think they will. They're really well run. They've got a good team there. They're in a nice central urban settings, you know, so they have that. We do a lot of creative sales and marketing, and we've got some stuff in the pipeline that I think will really help drive some more customer base to it.
As we've had in the prepared remarks, you know, we're rethinking how we brand the edibles. We see that as a growth area, and we got some different marketing approaches on that this year. That said, you know, it's still very price sensitive, so we are very price conscious, and we recognize that.
I don't think that the market basket in Arizona. I think it's down significantly for everybody. I don't think anybody reports other than us, that's, you know, that's pretty much standalone right now in Arizona. Yeah, the market basket size is down significantly, and you can see it in the state's numbers.
You know, their revenue's down per store. I think the average in the store with 140 stores active as of the end of December was somewhere around $570,000 per store. You know, we obviously are very fortunate and we perform better than that average, and I think we'll continue to do that.
Got it. Appreciate it.
The one thing I...
Yeah, sorry.
The one thing. Let me just add one comment on that. The one thing that, you know, we keep coming back to, you know, we say we're operators and stuff, and I really don't want to, you know, sound harsh on this, but we don't really make it an option.
We figure we have to perform well every day when we come to work, and we have to perform better than the market. We want our highs to be higher and our lows to be higher. That's just the philosophy that we've always had at the company, and we aren't gonna change that philosophy. That's really why Ohio's gonna do well too, is because the people in Ohio believe the same thing.
I don't know if it's we all drink the same Kool-Aid, but I think it's more like we don't know any other way to be.
Got it. Appreciate that. Just staying on Arizona, just two other maybe quick questions I had on some of the dynamics you're seeing there. Is the impact on travel sort of from the pre-COVID levels to where we are now, is that normalized or is obviously, you know, higher inflation causing, you know, less, proportionately less people to be willing to travel, sort of in the snowbird seasons?
Also just the prospects for maybe not for, you know, Vext specifically, but just overall consolidation in that state, given where valuations are. I imagine it's a lot more attractive than it used to be, you know, access to capital now is a big hurdle for everyone as well. I'm just wondering if you can comment on those two things, to close it out.
Yeah. I think travel has definitely come back and, you know, that's always nice because you get an additional consumer spending. Having been in Arizona for a lot of years and seeing how the economy does, the one difference I will tell you is it's not travel dependent anymore. There's a lot of manufacturing base here, and we continue to expand that way.
From a pure economic standpoint, that's enjoyable. I consider cannabis to be like anything else. To me, it's a commodity. It's got the retail front and stuff along those lines. That said, it gives me a better customer base and more consistency within the market, which I think helps a lot versus in the old days, we, you know, lived and died on travel.
Arizona lived and died on travel and mining and, you know, that's changed, so that's good. As far as consolidation goes, it still makes sense that you will have some rationalization and consolidation. As long as Arizona continues to have that cap, which I don't see it changing, where dispensaries can only be 10% of pharmacy, that you'll still have that setting.
With Arizona, the population densities obviously in Phoenix and in most retail situations, you know, consumers shop within a 5 to 7-mile radius depending on what's around and from a competition and what the miles around and stuff like that. I think that's gonna continue to be this case. I don't think anybody's gonna be a gun at their head to consolidate.
That said, because of the way the licensing system works in Arizona, that a lot of people are operating under a, quote, "lease license" that don't have a retail front. I think that's where you're gonna see a fallout. I think those people are in deep. You know, saying this is, you know, the same saying is, you know, they don't have the door, so they really can't control it.
I think that's where you're gonna see the first impacts. Then, you know, people might get a little bit more willing to be reasonable on their multiples, you know, of what they want. Any private guy, he's not gonna wanna trade at the multiples that the equity market's giving everybody right now, and they're gonna try to hold out.
As long as they've got, you know, decent cash, they'll be fine.
Great. Thanks for all that, Eric. Appreciate it.
Yep.
The next question comes from Neal Gilmer with Haywood Securities. Please go ahead.
Yeah, good morning. Thanks for taking my questions. Eric, maybe just going back to something you mentioned in your prepared remarks, you talked about a sort of rebranding exercise you're hoping to launch in 2023. Just wondering if you could provide a little bit more sort of details on what you're hoping to accomplish there and what sort of timeline you think there's sort of that rebrand or new brands or however you're gonna approach things are maybe coming to the market.
Yeah. You know, candidly, Neal, without giving you too much of it at one time, it's kinda based upon when I look in the mirror and I think really where the market's gonna go and different delivery methods and stuff like that with the edibles and being able to leverage some of the talent we have within the Vapen organization.
You know, as you remember, we received a couple of patents and we're applying for another patent with ASU that we've announced. So I think we have a way to change the edible market. Vapen has been established, but I think as new consumers come into the market, they look at Vapen in an edible and go, "It doesn't really fit.
It doesn't make as much sense. I think that's really what the exercise is to think about maybe separating that brand. That also said, when we go to Ohio, if you think about the structure in Ohio, we're vertical because we acquired multiple licenses.
If you think about that, Appalachian Pharm, that Appalachian Pharm really is gonna have multiple things that it can represent, it can sell into the marketplace and into the stores. We started seeing this as we did the operations with Major and Link on the beverage side, that we really started to identify that we could use our distribution channels and be able to expand the market for what we're into the store so that you're giving somebody a complete ticket.
I think that's gonna be one of the things that we can drive on the, on that wholesale front, is to give people a lower transactional cost. You see that in a lot of industries, obviously. I think it's gonna happen in cannabis, and I think we wanna be out in front of it, that it's cheaper to do business with us 'cause we'll give you a full arrangement of product. I won't just give you edibles. I'll be able to give you edibles, flower, et cetera, in different marketing brands and different price points for it.
Okay. Thanks for that. Maybe on Ohio, you know, obviously, you know, assuming everything closes and stuff like that, by the end of Q2 2023, you've got the cultivation manufacturing facility and the 2 doors. Are you then, you know, in the second half or going into 2024, are you looking to add more doors in that state, or are you just gonna sort of see how the market develops and how things progress on the adult use side?
On Ohio, I don't think I'll have the second door by the end of the quarter. We're kinda waiting to see what happens on the legislation so that we don't file on the second door.
Oh, I see.
-and it switches over to commerce, and we waste a bunch of time and money. We're kinda.
Right. Okay.
-holding out on that until we get a little bit more color. We'll have the manufacturing and everything along those lines. The way the deal's structured, you know, we can't really consolidate it or report it, but the results are, you know, ultimately gonna be ours. I don't know about doors in Ohio. Obviously, we're looking at opportunities and expansion. Is it Ohio? Is it Arizona?
You know, which one's more attractive financially, and how do you pay for it? You know, we're like every other company, Neal, that I think's in the space. You know, we're gonna give you the standard canned speech that says, "You know, we're gonna watch our cash and pay down our debt," and all that kind of stuff, and that's what we're gonna do. The difference is that's what we've always done.
You know, we generate, watch our cash, pay attention to it, and stuff like that. We're not new to that game. This year is, you know, look for opportunity, but really integrate Ohio, generate cash, pay down the debt, and then see where the market starts to go and what opportunities are out there. If something pops up that looks attractive, yeah, we'll figure out how to make it happen and what to do with it. You know, I don't think it's the, "Wow, we're on an M&A attraction right now as much as we're on a make sure we take care of what we have and get Ohio really working well.
Yeah. Fair enough. Okay. Thanks very much for taking my questions.
No, good to talk to 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.