Good morning. Welcome to the EMERGE Commerce Third Quarter 2022 Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question and answer session for analysts. If at any time during this call you require immediate assistance, please press star followed by zero for the operator. This call is being recorded on November 29, 2022. Your hosts today are Ghassan Halazon, Founder and Chief Executive Officer, and Jonathan Leong, Chief Financial Officer. Before we begin, I'm required to provide the following statement respecting forward-looking information, which is made on behalf of EMERGE and all of its representatives on this call. Certain statements made on this call will contain forward-looking information.
These forward-looking statements generally can be identified by the use of words such as intend, believe, could, expect, estimate, forecast, may, and other words of similar meaning. This forward-looking information is based on our opinions, estimates, and assumptions in light of our experience and perception of historical trends, current conditions, and expected future developments, as well as other factors that we currently believe are appropriate and reasonable in these circumstances. Actual results could differ materially from a conclusion, forecast, expectation, belief, or projection in the forward-looking information. Certain material factors and assumptions were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information. We caution investors not to rely on the forward-looking information.
Additional information about the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking information and material factors or assumptions that were applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information are contained in EMERGE's filings with Canadian Provincial Securities Regulators. During today's call, all figures are in Canadian dollars, unless otherwise stated. With that, I'd like to turn the call over to Mr. Ghassan Halazon, Founder and CEO. Please go ahead.
Thank you very much, Colin. Good morning, everyone. We appreciate you taking the time to participate on our Third Quarter Results Conference Call. Joining me today is Jonathan Leong, our CFO. This morning, I'll walk through EMERGE's third quarter results and share some insights on our business, as well as our key priorities for the balance of 2022 and into 2023. Following my remarks, Jonathan will provide further details on our financial results, and we will conclude by opening up the call to analysts for questions. In Q3, EMERGE drove triple-digit revenue growth, along with our fourth consecutive quarter of positive adjusted EBITDA. Our results highlight the continued resilience of our diversified brand portfolio, despite this quarter traditionally being seasonally challenging for some of our key businesses and despite the challenging macro backdrop.
Gross merchandise sales, or GMS for short, which represents the total value of purchases on our platform, increased 191% year-over-year to CAD 26.8 million. Q3 revenue grew to CAD 12.1 million, a 100% increase from CAD 6.1 million in the prior year. Q3 adjusted EBITDA grew to approximately CAD 756,000 from a loss of CAD 512 ,000 in the prior period. I am particularly proud that we have continued to build on our trend of positive adjusted EBITDA as Q3 marks the company's fourth consecutive quarter of positive adjusted EBITDA and the 10th out of the last 11 quarters. The company recorded Q3 positive net income of CAD 1.8 million for Q3 2022, compared to a net loss of -CAD 1.1 million in the comparative period.
The Q3 net profit is mainly attributable to forex and other gains, as well as a fair value change in contingent consideration. With respect to forex, it is worth noting that a large portion of our sales are derived from our U.S. businesses in USD, while a large portion of our expenses are in Canadian dollars, given our HQ operations are based here in Canada. As such, the favorable forex environment is proving to be a tailwind for EMERGE. I will now provide a brief update on some of our progress subsequent to quarter end. Yesterday, we announced our successful Black Friday results, exceeding management's expectations.
In total, EMERGE's e-commerce brand portfolio combined to achieve GMS of CAD 846,000 during this year's Black Friday event, which was held on November 25, 2022, compared to CAD 723,000 during Black Friday 2021, representing year-over-year organic growth of 17%. In comparison, according to Adobe, overall online sales for the sector were up 2.3% year-over-year. A number of EMERGE brands achieved double-digit organic GMS growth year-over-year this Black Friday, including Wholesale Pet, UnderPar, Just Golf Stuff, and WagJag. Notably, our main discount-driven brands performed exceptionally well, which we believe stand to gain in a weaker economy as consumers seek more deals. We believe these positive early results bode well for the Black Friday/Cyber Monday week and the peak holiday season to follow for shopping.
We plan to balance our push to drive sales and ultimately a strong focus on the bottom line as a top priority. On October 17, 2022, the company announced a CAD 1 million cost optimization and synergies initiative commencing in Q4 2022 in an effort to enhance cash flow generation. The company is pleased to share that the aforementioned savings have now largely been executed with an estimated CAD 500,000-CAD 1 million in additional annual savings being reviewed. For a total potential of CAD 1.5 million-CAD 2 million annual savings and reduced overhead expenses in 2023. In addition to our cost optimization plan, on October 28th, the company amended its CAD 25 million credit facility with an initial 12-month term, plus an additional nine-month extension option for a term of up to 21 months total.
Inclusive of the extension option, the maturity of the debt facility would be July 2024. The company remains in good standing with the existing lender, which it has worked with since November 2019. The company and the lender have agreed to reduce the debt facility from CAD 25 million - CAD 19 million over the next 12 months, inclusive of principal payments and amortization. EMERGE continues to explore various options for debt refinancing and or debt paydown in 2023, with the goal of doing so sooner rather than later. We intend to use this time wisely to start reducing our debt with the lender and ultimately strengthening our balance sheet in preparation for this next phase of growth. EMERGE has proven it can be adjusted EBITDA positive consistently, with 10 out of the last 11 quarters being positive.
Despite this, EBITDA to cash flow conversion is weaker than we would like, in large part due to the interest payments associated with our debt. The rising interest rate environment has us reconsidering the level of debt we are comfortable operating with. We are exploring various options to reduce our senior debt with the ultimate goal of improving EBITDA to cash flow conversion. On November 24, 2022, the company completed a CAD 2.78 million convertible debenture financing. Use of proceeds is primarily to pay down debt from the existing lender and for working capital and general corporate purposes. The interest rate is a fixed rate of 10%, making it cheaper than the debt it is partially repaying with its existing lender.
With respect to contingent consideration, certain acquisitions at EMERGE were eligible for earn-outs during 2022, conditional on meeting certain minimum revenue and EBITDA growth targets. The company confirms that no earn-outs have been achieved for 2022, with no contingent consideration payout expected for the 2022 fiscal year. With the persisting challenges in the macro climate, management's operational priority for the balance of the year and into 2023 remains to optimize profitability and cash flow. Although the company continues to monitor a number of acquisition opportunities, its near-term focus will be on improving liquidity, driving organic growth, synergies, and savings. We have made good progress with our strong start to the holiday shopping season, including a record Black Friday with strong organic growth of 17%.
Our cost reduction efforts, our renewed credit facility, the recent infusion of cash from the debenture offering, all great progress. There is still a lot of work to be done to position the company for strength in 2023 and beyond. To wrap up, I would like to sincerely thank and congratulate our team, board, and trusted partners across North America on another strong quarter and some key milestones achieved to pave the way for our next chapter together. I will now turn the call over to Jonathan for a review of our financial results.
Thanks, Ghassan. Good morning, everyone. Our gross merchandise sales, or GMS, for the third quarter increased 191% to CAD 26.8 million, up from CAD 9.2 million in the comparative period last year. This increase was primarily driven by the BattlBox Group and WholesalePet acquisitions. As a reminder, GMS is a non-GAAP measure and represents the total dollar value of customer purchases of goods and services through our brands, excluding applicable taxes and net of discounts and refunds. For the third quarter, our revenue increased to CAD 12.1 million, up 100% from CAD 6.1 million in Q3 2021. Similar to our GMS, this was primarily driven by our BattlBox and WholesalePet acquisition.
Gross profit for the quarter increased to CAD 5.2 million, compared to CAD 2.6 million in the comparative period, an increase of 101%. The net income for the quarter was CAD 1.8 million, compared to a net loss of CAD 1.1 million for the same quarter in the prior year. This is primarily due to higher gross profit, a gain on remeasurement of contingent consideration, as well as positive impacts from foreign exchange. This was partially offset by higher finance costs related to interest expense in 2022 compared to 2021, as well as higher amortization of intangibles during the period. The company reported adjusted EBITDA for the third quarter of CAD 0.8 million, compared to a loss of CAD 0.5 million in Q3 2021. As Ghassan mentioned, this marks our fourth straight quarter of positive adjusted EBITDA.
Overall, we are pleased with the results this quarter given the current macro environment and look forward to continuing to execute on our plans for the remainder of 2022 and 2023. I'll now pass it back to Ghassan for some closing comments.
Thanks, Jonathan. In closing, EMERGE is taking key steps to position the company well for 2023 and beyond. With a diversified portfolio of category-defining e-commerce brands, we plan to operate with rigor through the balance of 2022 and beyond. We believe a disciplined capital allocation approach and an inherently bottom line focused playbook will come handy during this macro climate. We have made excellent progress in Q3 and in Q4 to date, as noted. There's still much work ahead of us, and we plan to keep our heads down and do that work. Our aspiration remains unchanged for EMERGE to rise as North America's preeminent acquirer of high-performing niche e-commerce brands, allowing acquired companies to take advantage of the benefits that come with our collective scale, unavailable to any individual bootstrapped e-commerce company with limited resources. This concludes our prepared remarks.
Operator, please open the line for questions.
Thank you. Ladies and gentlemen, we'll now conduct the question-and-answer session. If you'd like to ask a question, please press star followed by one on your touch tone phone. If you would like to withdraw your question, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, your first question comes from Aravinda Galappatthige from Canaccord Genuity. Please go ahead.
Thanks for taking my questions. Just three from me. The first one is pretty simple. I was wondering whether maybe Jonathan can give me what the FX revenue growth was, or just give me what the FX impact was to the 100% revenue growth you reported. Second, I guess it goes on WSP. I know that that was always considered to be the more recession resilient or the more resilient in general of the businesses that you acquired, given sort of the long history. Wanted to see how that was faring in the backdrop of, I think the comment that you made about the absence of any contingent, any earn-outs being paid in 2022
You know, I don't know if you can give any color around whether their performance got close to that benchmark or whether, you know, sort of the overall conditions dragged it down. Lastly, I guess, a more broader question on the balance sheet. Obviously, there's still some work to do to kind of, you know, create some buffer as we kinda look ahead and, you know, potentially uncertain year. Would you consider, maybe taking a step back, maybe divesting one of the assets to kinda give you some breathing space so you can kind of, you know, come back when sort of and recommence your acquisitions when the sort of the conditions start to improve? Thanks.
Yes. Great. Jonathan, why don't you take the first question on forex, if you have that info handy? And then I can jump in on the other two.
Sure. Thanks, Aravinda. I have to calculate the exact number for you. But just to give some color on it, in terms of the foreign exchange that we had for this year-to-date period, we're basically at 1.28 for the U.S. dollar to Canadian dollar exchange versus last year, which is average of about 1.25. I'll get to the exact numbers later, but that's kind of the color in terms of the difference there.
Great. Thank you, Jonathan. I'll jump in on the other two parts of Aravinda's questions. On the WholesalePet side, they did indeed come quite close to achieving the 2022 earn-out. They basically, as you know, Aravinda, we build in minimum revenue and EBITDA growth targets. What you have to keep in mind is at the time we were acquiring these businesses, we were at the sort of peak pandemic levels, the growth expected from those points at the time were more ambitious growth targets for both revenue and EBITDA.
As the world and the e-commerce sector has sort of come down from that peak pandemic level, WholesalePet has in fact been more resilient than all other brands, not only in the EMERGE portfolio, but frankly, most of the other ones we look outwards from an M&A perspective. They've had a very sticky business here in the post-pandemic world that remains highly elevated relative to the pre-pandemic levels. When it comes to the earn-out specifically and the way we've designed these minimum revenue and EBITDA targets, it would have had to grow quite a bit more. The fact that it did not reach it is not a representation of any change in the inherent business. It is still intact.
The growth, the EBITDA, and ultimately the cash flow remains very, very strong for WholesalePet. It just has not achieved those ambitious growth targets. They actually came quite close. It was a final determination in sort of recent weeks and I would call it in the last month. That's how close it came to doing so. However, they did not meet that earn-out. Of course, they still have a chance to catch up and do an earn-out in year two. As for the third question on the balance sheet, as I noted in my remarks, we are, we have demonstrated a clear trend here of strong EBITDA results, and 10 out of our last 11 quarters have been positive.
That EBITDA to cash flow conversion is weaker than we would like, that's mainly because of these larger than we would like interest payments. To your point about the potentially divesting assets, certainly we are pragmatic, right? You have to be in this sort of market. We have nine brands at varying levels of revenue, profit, and ultimately cash flow. You know, in this market I think it is prudent and it is something we are open to and in fact, exploring at all times, frankly, whether certain assets belong in the EMERGE portfolio or otherwise. Generally, when we acquire companies, our goal is to hold long-term, you know, perpetually.
If certain assets are doing way better and we are learning new things about what models work best, what's stickier, what's a better cash flow conversion, what requires less cash investments, these are models that, you know, we would be keen to doubling down on. In other cases, if certain models are challenged for whatever reason, whether it's the macro, whether something's fundamentally changed since we acquired them, these are all reasonable thoughts to have, and we are certainly being open-minded about what that could look like. You know, noting of course, that the peak pandemic highs have come down generally for the sector.
Obviously as we have a very long-term view on the industry, on e-commerce, three years, five years, 10 years out, we believe a lot of the businesses we're sitting on are well-positioned. As I said, we will be pragmatic, and we are exploring different options that may yield us bigger cash amounts to pay down more debt and to double down where we're winning.
Thank you. I'll pass the line.
Ladies and gentlemen, as a reminder, should you wish to ask a question, please press star followed by one. Your next question comes from Andy Nguyen from Raymond James. Andy, please go ahead.
Hi, Ghassan. This is Andy on for Steven. Given the market conditions, could you provide some more color on the progress of some of the existing, organic growth initiative or some of the new ones, that EMERGE is executing?
Andy, thank you for the question. In terms of organic growth, as you know, we don't officially break those out per business, but I can comment in general. Firstly, I wanted to note, you know, double-digit organic growth that we saw on Black Friday, obviously historically, one of the two biggest days of the year. We were quite pleased to see a number of the discount brands that I highlighted, come out with double-digit growth, including WholesalePet, UnderPar, Just Golf Stuff, and WagJag. Of course, that, as I said, is only one day. It's a big one, but it's one day still. you know, as we think of organic growth, we look at, you know, a few areas.
And I'll give you a couple of examples that we've probably pointed to in the past at varying levels. For example, with WholesalePet, one of the areas we are looking at propelling is their marketing engine. To date, WholesalePet has done very minimal marketing. And of course, as a B2B platform, there's certainly a long tail and, you know, a certain amount we believe we can capture in growth from marketing. These are early tests. We've done about a quarter and a half now worth of some early marketing tests that seem to be positive.
We think that's a big theme for 2023's growth trajectory for WholesalePet, which by the way, was a company that was organically growing at a CAGR of 20%, and last year grew 45%. Therefore this year growth is moderate, or sort of, you know, much closer to where it was last year. You know, next year we think marketing is a big theme there. There is the possibility of geographical expansion, of course. It's something we're exploring, bringing WholesalePet to Canada, as we did with BattlBox this year. Again, still early, but we're seeing some nice early results for BattlBox Canada on that front. Obviously they've expanded into Wanlow, which is their kids adventure box or outdoor box.
So that's also still early, but we are looking at strategically whether BattlBox Canada and Wanlow could play, you know, a bigger role on those two fronts. You know, with truLOCAL, we're building out more assortment. We are also looking at private label initiatives to improve margin. We are also adding, you know, sort of adjusting the overall experience. We're testing a service fee right now on checkout as well that might add some margin, right? These are some examples from our latest three brands. There's no shortage of different initiatives. I also wanna highlight in tandem with our organic growth push, the cost reduction side is substantial. We talked about the CAD 1 million that pretty much have been executed and now in place starting Q4 on an annual basis.
There's an additional, you know, CAD 0.5 million - CAD 1 million that we expect to come into play shortly. We are looking at really strengthening that overhead picture and reducing non-revenue impacting investments that we had in the past during a different time and market. We're really looking to strengthen or tighten our belt there and give us some further room because of course, that will flow straight to the bottom line in conjunction with all the organic growth initiatives.
Gotcha. Thank you for that. I just wanna switch gear and just wanna talk about like, does supply chain remain a headwind to companies like, BattlBox? Do you see like the consumer spending, remain resilient, or it's sort of like, deflated post-COVID?
It's a good question and a fair one at a time like this. firstly, I like to point out, and as we look at sort of, the subscription brands you mentioned, I think you said truLOCAL, BattlBox, but also WholesalePet, really all our three acquisitions from last year, from 2021, which make up the majority of our GMS and our revenue, of course, company-wide. Our subscription brands and our B2B brand. They all, first of all, remain substantially higher than where they were pre-pandemic in 2019, okay? This is a collective business in 2019 that had pro forma revenue numbers of close to CAD 36 million back then, collectively as a group.
We are way closer, you know, we're not giving exact guidance yet, but, you know, if you can, you can do the math. We are way closer to, you know, sort of the, you know, CAD 57 million-CAD 60 million range than we are to the CAD 36 million range back in 2019. Generally, these businesses are still well ahead of their pre-pandemic levels. When you look at sort of some of these challenges and the macro, I think they have varying levels of impact. I do certainly think BattlBox is, is more prone, in this climate to, you know, being more of a discretionary spend category. Of course, the enthusiasts on BattlBox may differ and say that this is a way of life, right?
There's a tremendous amount of enthusiasts on that platform, including on TikTok, where they have north of seven million likes. At the same time, we think truLOCAL grocery, for example, I can comment there and say that the business has continued to be very stable here in recent months. We're trying to improve the cost side of it and improve the margin of it, but we're actually making great progress on churn metrics that we don't really disclose. I can say at a high level, even in as late as this month, we are seeing one of the best sort of net churn metrics that we have seen overall.
We're liking the stability we're seeing in truLOCAL, keeping in mind we raised prices, so we passed along some of the inflation impact on meat prices to the consumer. Now, this is a business we think that should be more profitable and we're taking some cost side measures, but there's some good stability there. As I said, with WholesalePet, when you grow 45% last year, and you were able to capture that pretty much this year with potentially some growth in the calendar year, that's a big win for us. And then of course our discount brands, WagJag and UnderPar/ Just Golf Stuff. You know, these are businesses that got severely hurt during the pandemic, and we are starting to see like, nice signs.
As you saw on Black Friday, those were all names that were up double-digit versus last year. you know, frankly, discount brands will stand to gain in this climate, we believe. A number of these have been actually built in the last recession, 2008-2010. You know, UnderPar, WagJag, and the broader savings world online, like really started, that was their big moment. We think this is another big moment for discount brands. We think these ones that have been hurt during the pandemic, you know, may result in growth again. We saw that on Black Friday.
Sounds like. Thank you for the color.
There are no further questions at this time. I'll now turn it back to Ghassan for closing remarks.
Thank you very much for joining us today, everyone, and for your continued interest in EMERGE Commerce. We look forward to reporting on our progress throughout the balance of the year and beyond. Thank you. Take care, and stay safe.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.