Vext Science Inc

Thank you for standing by. This is the conference operator. Welcome to the VEX Science Third Quarter 2024 Financial Results Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Should you need assistance during the conference, you may signal an operator by pressing star then 0. I would now like to turn the conference over to Priyam Chakraborty. Please go ahead.

Thanks, Operator. Good morning, everyone, and thank you for joining us today. VEXed third quarter 2024 financial results were released earlier this morning. The press release, financial statements, and MD&A are available on CDAR+, as well as on the VEXed website at vexscience.com. We would like to remind listeners that portions of today's discussion include forward-looking statements and that forward-looking statements are included in today's filings. There can be no assurance that these forward-looking statements will prove to be accurate or that management's expectations or estimates of future developments, circumstances, or results contained therein will materialize. Risks and uncertainties that could affect future developments, circumstances, or results are detailed in the MD&A and vexed other public filings that are made available on CRI+. And we encourage listeners to read those risk factors in conjunction with today's call. As a result of these risks and uncertainties, the development circumstances or results predicted in forward-looking statements may differ materially from actual development circumstances or results. This call also includes non-IFRS financial information and such non-IFRS financial measures are subject to the disclosure and reconciliation included in our press release disseminated earlier today, as well as the MDMA. Forward-looking statements made during this conference call are made as of the date of this call. Next, this claims 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. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX.

Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer of VEX. Eric Offenberger, Chief Executive Officer In typical third quarter seasonality in Arizona, VEX continued to demonstrate its operational strength. Strategic investments and targeted promotions supported by product from our Eloy cultivation facility drove strong unit volume growth, enabled us to sustain and grow market share. Thus, combined those results from the initial rollout of adult use in Ohio led to solid performance. In the third quarter of 2024, we generated $9 million in revenue, an adjusted EBITDA of $2.9 million. A significant mid-quarter milestone further supported our third quarter performance as our Ohio dispensaries began offering adult-use cannabis on August 6th. As anticipated, sales showed strong growth in the weeks following adult-use launch, with total adult-use cannabis sales in the state exceeding $150 million as of November 9th, according to state data. Our Jackson and Columbus locations achieved over 200% sequential growth in the third quarter of 2024, which translated into a 14.2% increase in total sales compared to the second quarter of 2024, driven by higher customer count and order volumes. I'm proud of our team's performance, and as our stores consistently outperformed or matched the state average for comparable locations, As expected, Ohio wholesale sales in the third quarter of 2024 saw a sequential decline, primarily due to significant market stocking in the prior quarter in anticipation of the launch of adult-use sales. Moving forward, we expect to see a return to normal wholesale activity, along with new growth opportunities driven by the anticipated issuance of additional dispensary license. Similar to our approach in Arizona, we view wholesale as a short- to medium-term opportunity, and expect to align its pace with our own anticipated retail needs. Overall, our Ohio operations are growing significantly. We're awaiting state approval to complete the acquisition of two big perm dispensaries, which will bring our retail footprint to four in the state. Combined with our existing cultivation and manufacturing facilities and our 10b allocation, we project operating up to eight dispensaries by early 2026. This will position us with one of the largest vertically integrated footprints in the Ohio market among publicly traded peers. Turning to Arizona, as I previously outlined, consumer-related businesses continue to face significant sales headwinds during the third quarter. Pressure on consumer discretionary spending combined with an oversupply of cultivators and products in the state drove pricing downward and led to a decrease in total sales across both our dispensaries compared to the third quarter of 2023. We have consistently outperformed published state averages in Arizona, and in the third quarter, I'm particularly pleased to report that our targeted campaigns drove strong unit volume growth, surpassing state averages. While state data indicated a 20.5% decline in average first-door sales from April 2024 to July 2024, our Arizona sales experienced a decline of less than 1%. Furthermore, average crop yield and potency at the LA cultivation facility improved significantly compared to the legacy Arizona cultivation facilities. These enhanced cultivation capabilities supported our strategic promotions and were instrumental in capturing market share in Arizona during a typically seasonally slow third quarter. While we anticipate that margins in Arizona will continue to be challenged, we view the state as a strong market with solid fundamentals. With our fully vertically integrated and modular footprint, VEX remains well positioned to capitalize on its potential as weaker operators continue to exit the market. As we build on our performance and strategic initiatives in our core markets, we are also focused on identifying and capitalizing on low capex, high return growth opportunities within our broader joint venture portfolio. In Kentucky, voters recently approved the sale of medical cannabis and the state is set to hold dispensary license lotteries in the coming weeks. We are closely monitoring opportunities to engage in the medical licensing process and are evaluating the potential to transition our existing CBD joint venture into a medical cannabis operation, which could potentially enhance returns. On the whole, during this challenging period for consumer-facing companies, our team remains focused on driving results for shareholders. As 2024 comes to a close, we anticipate steadily improving performance by leveraging our fully vertical integrated footprint in Ohio through our revenue and cash flow from operations, while further optimizing our vertical presence in Arizona. With that, over to Trevor for a quick review of the financials. Trevor?

Thank you very much, Eric. In the third quarter of 2024, VEX generated revenue of $9 million. representing an 11% year-over-year growth. As Eric outlined, these results were primarily driven by strong initial growth in adult use sales from our Ohio operations, offset by continued softness in Arizona revenue. Looking forward, we expect to see continued, reasonable sales growth in Ohio as customer acquisition accelerates following the launch of adult use sales in the state. We recorded $2.9 million in adjusted EBITDA for the third quarter of 2024, an increase compared to $1.1 million in the third quarter of 2023. Adjusted EBITDA margins were 32%. Our solid adjusted EBITDA results reflect both the transition to adult use sales in Ohio, as well as our team's focus on maintaining strict cost control. As indicated on our last call, operating expenses during the third quarter of 2024 increased compared to the previous quarter. We anticipate total operating expenses to stay relatively flat in future periods, and continue to decrease as a percentage of revenue. As output from the already efficient e-light cultivation continues to improve and our investments into additional inventory are monetized through adult use sales in Ohio. As of September 30th, 2024, cash flow from operations was negative 0.7 million and VEX ended the quarter with 2.8 million in cash. Despite Q3 being our best quarter of adjusted EBITDA since 2022, Cash flow from operations was negatively impacted by the increasing plant counts in both Ohio and Arizona, as well as several annual payments for items like insurance and state licensing renewals. With the launch of adult use sales in Ohio, we expect revenue and cash flow from operations to strengthen further for the remainder of the year, as well as into 2025. Thank you everyone for joining us for our third quarter 2024 financial results call. We look forward to our next update where we expect to discuss the impact of a full quarter of adult use sales in Ohio, along with our ongoing initiatives. I'll now turn it over to the operator for your questions.

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 two. We will pause a moment as callers join the queue. Your first question comes from Matt Bottomley with Canaccord Genuity. Please go ahead.

Matt Bottomley Good morning, everyone. Good to see the acceleration on the back of Ohio. It seems like from the discussions we've had and the Prior earnings, things are trending in the directions that you guys have previously communicated. So from an operational standpoint, no concerns there. But I guess the question that I'm getting throughout all the MSO coverage in the current environment where valuations are is just balance sheets and access to capital. So just given some of the commentary on even this quarter, some increased investment in working capital, whether it was prepaid or some other things, And, you know, a cash balance of $2 million to $3 million, just, you know, where you see sort of the fluctuation of that cash balance going in the coming quarters and, you know, anything strategic, you know, in the front view mirror just with respect to access to additional funding if you need it for growth.

Sure. Thanks for the question. Cash balance for the quarter, as we said, was negatively impacted by some timing issues. So you have annual license fees. You have major insurance payments that are annual for lower rates. We didn't take on financing for those items. So we're comfortable enough to kind of make some annual payments, particularly on insurance that we otherwise could have financed, could have taken on an interest rate. So we're comfortable with where we were. You know, we had that standby facility earlier in the year to get us through the low period. We really expect improvement from ops, as we said, for Q3 or sorry, Q4 and beyond. So we have the big perm acquisition coming up at two more locations in Ohio and We're comfortable to be able to finance those without having to take on any additional capital sources.

Okay, and then maybe just on more of the operational front, can you speak a little bit more to the dynamic in Arizona with respect to when we might expect more of a steady state? It's a tricky market just with the seasonality that we've seen. It looks like September this year was particularly rough with weather and then in some of the state-level data. notwithstanding that you guys outperformed the macro trends. But just in terms of where pricing is, Eric, I think you mentioned potentially, you know, some of the, you know, I forget the terminology, but, you know, the lower capitalized or some of the lower end players that might not be able to withstand the current environment. You know, we see this a little bit in Canada as well. Are we expecting, you know, any sort of cadence to the drop off of competition and where you think ultimately pricing is on the curve right now with respect to where the bottom might be?

Well, Matt, I don't think we can call bottom yet because, you know, we would have missed it like everybody else so many times, you know, that we can't call bottom. But we do think there's some stability and stuff along those lines. It's definitely, if you don't have good retail locations and you don't have a proper balance, you're in trouble. There's no doubt about it. With the... you know, the hemp-derived product in the marketplace, the black market, the overcapacity, it's going to continue to put tremendous pressure on the margins. That said, you know, our model works pretty well within that environment because we've kind of always approached it as a commodity, not as a, you know, have a big brand. So we're pretty efficient, pretty low cost within the SG&A side. and all of those items that we've always controlled, it helps in that type of a climate. That said, I anticipate, you know, I hate to be too optimistic, but I think that some of our political uncertainty down here is going to help us with getting some things going along the right direction, and that's going to continue to help, and we're coming into the season where we have tourism, and people are still spending money on tourism down in the United States, so we'll have more visitors and hopefully, you know, you guys from Canada will continue to come down and want to warm up. So, you know, we'll have plenty of supply for you.

Okay. Thanks for that. I'll get back with you.

The next question comes from Andrew Semple with Venture Financial.

Please go ahead. Good morning. Thank you for my questions and congrats on the Q3 results. Eric, maybe just a quick one for you for starters would be any updates on when you expect to see that 10-B license allocation for the additional retail stores in Ohio? Have you heard any additional color in the last few weeks from regulators? What's your thoughts around that process?

Well, we have pins in the map. We're waiting right now. We're at the regulators waiting for the big perm to be approved. So all the paperwork's been filed on that as we talked about in the MD&A. So once that timing happens, we'll start to have a little bit more clarity. So we have pins in the maps. We have projects going ongoing as far as zoning, regulatory approval, and stuff along those lines. We hope to be able to start sharing that early in the first quarter and of where we have the provisional authority from the state. So we're actively working on that. We see that as something we're going to really put our foot on the accelerator and get those stores open as quick as we can in the marketplace. So we've got the build out and everything along those lines. So we're pretty bullish on that. I think as everybody knows, we brought on general counsel in the spring of last year that had been heavily involved in the Ohio market on the credit side and in the banking side in Ohio and been doing a lot of financing packages and stuff like that. We brought him on specifically to help with real estate transactions and property transactions all around this 10B stuff. And that's proven to be a very good strategy from us. We're very excited about that and very happy. I just don't have anything I can tell you because of the regulators at this point in time other than, you know, you saw we put out that we've got eight. So, you know, we're comfortable with our pins in the map now.

Great. And my follow-up question here would be on margins. So, gross margins were up a fair bit in the third quarter. Obviously, great to see. You know, could you point to some of the drivers behind that? But also while we're on the topic of margins, margins have been fairly volatile the past few years. Just wondering if you have some thoughts on where you think the margin profile might settle in at or what VEX would be targeting as kind of its average margin level as we start to sharpen our pencil into 2025 and into future years.

Sure. Let me start with the first one. Margin in Q3 was improved. Really, it's two factors. One, the Ohio pricing unit economics improved significantly post the immediate launch of adult use. That's since tempered down a little bit due to competition with the state of Michigan. But I think that drove a lot of it in addition to a lot of the cost-cutting measures that have been implemented as VEX has gone through kind of its lower periods over the last several quarters. So just because revenue is expanding, we're not expanding the cost structure. So To your second question, I'd probably expect margins to stay more consistent with Q3. You might see some improvement through Ohio and other kind of cost-cutting measures as well as some recovery in Arizona eventually, but I would probably set the Q3 margin as more of a go-forward rate.

Great. That's helpful. Thanks for taking my questions. I'll get back into the queue.

The next question comes from Pablo Zuenick with Zuenick and Associates. Please go ahead.

Thank you. Good morning, everyone. Eric, can you remind us regarding Kentucky, you know, just some call. I've been following the story there, but, you know, how many licenses are being issued? Are they vertical or are they, you know, separate retail and cultivation? How many are being issued? You know, how are you feeling about your prospects of getting one? I realize it's a lottery, but if you don't get a license or licenses, Can you go and acquire them? Are there rules on holding period, or can the lottery winners flip the licenses quickly? Thank you.

Good morning, Pablo. I'll tell you what I understand. Obviously, I'm not a lawyer, so again, our council's been working on that. They've awarded the cultivation licenses. Our partners did not get that. We filed as VEX for the retail dispensary's And that process won't be until next week that the first lottery will occur on those. The partners, you know, look favorable on the processing at this point in time. They were granted a favorable on that, so we'll see how that all works out and everything. From what we've seen preliminary on the state is you can acquire and you can – buy these things, and they're transferable with state approval in that. What that process is, what that looks like, unclear at this point in time. That said, I think everybody that's involved in this process in Kentucky is waiting to see what they get on retail. So nobody could go vertical technically on the licenses where you could own them or you could control them and stuff along those lines. You weren't able to do that. I'm sure that, you know, just like every other market, people are trying to align and get their partnerships and all of that stuff so that they are pseudo-vertical until licenses can transfer or whatever. So we're going to see how that plays out. But at this point in time, the people that we're aligned with or have been affiliated with directly, none of us got a cultivation, but they did get a processor license.

Got it. Thank you. And look, just moving on to Ohio, and correct me if I'm wrong, at the moment you have four stores, right, two that you own and two that are under MSA. You know, so what's the time? So I'm not talking about the other stores you will open later, but about the MSA ones. When can you transfer them fully into the books? What are we pretty much seeing the equivalent of four stores in the books right now? And also remind me if there's any payments pending for in terms of acquisitions you've made in Ohio. I'm not talking about CapEx or expansion, but acquisitions. Thank you.

Okay. So on the two stores that we do not consolidate that are operating as like an MSA, we do not have a clear site from the state of when they're going to give us the approval. We're before them. We anticipate at any time between now and early January. So we're ready. We want it as soon as possible. The seller wants it as soon as possible. But obviously the state's kind of backed up with trying to get the adult use rules out. We owe $2.4 million left to pay on that acquisition. And as Trevor said, we have those funds and we have clear sight on the cash on all of that. So we feel pretty comfortable about that. about our possibilities on that. And we're hoping, again, that by January, we're hoping to start showing that in the financials as it consolidated. So we're just waiting.

Got it. Thank you. And the last one for Trevor. Remind us of your stance on 280E. I mean, a number of companies have filed amended returns for 2020 to 2022. Some have been able to get refunds. some are being audited, where are you with your policy regarding to ADE and if you file for amendments, how much cash inflow would you expect?

I hate to dodge your question, but we're actively working with council on all that, so I don't want to get ahead of council on any of those items. Got it. All right. Thank you.

That's all.

The next question comes from Paul Penny with Partner Group. Please go ahead.

Good morning, Eric and Trevor. I know it's early, but can you give more detail on the uplift in Ohio in terms of basket size, traffic, transaction volume? I know it's early, but any detail there?

Yeah. Paul, on basket size, it's up slightly, but not really noticeable. It's more on the count of the customers or patients you're seeing through the doors. And that's a significant uplift. We're seeing quite a bit of traffic on that. When the first, you know, we're no different than I think anybody else that's talked about Ohio. I think everybody kind of anticipated that they were going to have a higher pricing model in Ohio than they did. It's higher than it was under the medical because you have more customers available to you and stuff like that. But it's not what everybody originally anticipated. And you're seeing the market get back into an equal rebate. equilibrium point. And as Trevor mentioned, I don't think any of us realized exactly the bleed over into Michigan from the Ohio count that we didn't anticipate that once they had adult use into Ohio, they would continue to drive to Michigan. A lot of people still did. And you saw that because Michigan sales were up in August. And then in September, Michigan sales started to come down and stuff like that. So the pricing is starting to find the model where It's not advantageous for somebody in Ohio to drive to Michigan if they've got to make a two-hour drive. So I think the market's found that price point. So that will continue to increase. And the customer count's there. The stores are there. Advertising's not there yet. So it's hard to reach out and let people know where you're at on the store if it's not in a larger area. So we're seeing some of that build, and we're seeing those customers build in the frequency of visits building. Everything's positive. It's just a matter of, like everything, it's slower than you want it to be, and it takes a little bit more time.

Understood.

And what are some of your primary lessons or learnings that you're taking to Ohio from your extensive operating experience in Arizona? Well,

I'd like to think that, you know, primarily on inventory management, I mean, we don't fall in love with anything and we've always kind of operated as a commodity. So I think that's really been the approach was not to hold our cards too tight to the vest too long. We recognized quickly that that pricing model wasn't going to work at that high of a level and made adjustments that, you know, so we're, We're getting that volume through and trying to push it. So I think that was one of the things that we learned from Arizona. One of the mistakes we made from Arizona, too, and I think it's always important to recognize some of the stuff that you got wrong, was that, again, we missed the Michigan thing. I think the whole market missed the Michigan thing, but we missed it. We anticipated that as soon as you turned on the adult use, you would be you would see that influx of customer base like you saw in Arizona or other markets not really taking into account, which is obvious after the fact, that it's not like these cannabis consumers weren't getting product before. So all of a sudden, there's no novelty associated with it. There's no cannabis tourism or something like that. People that use cannabis were already driving into Michigan. It wasn't a novelty to go into a cannabis shop. They've been there. They've seen it. They've done it. They've done all that stuff. So they had the curiosity of coming into the store, but not the curiosity as much as we had in Arizona in 2021. And then you had the COVID impact in Arizona at the time, too, where people weren't able to go do as much. They were confined. So you had those things going on. Those are things we've learned and adjusted very quickly because of, again, the way we've ran the business all along.

That's very, very helpful. Last one for me. Will the continued disruption and competitiveness in Arizona lead to potential distressed acquisition opportunities?

I think so. I think that'll happen. You know, as Trevor alluded to, you know, we're focused right now on generating cash out of the Ohio assets. You know, we've made big investments there and everything. So as we keep doing that and looking at, and we talked about in the comments that we'll look for a creative opportunities and stuff along those lines, as we generate cash, whether we're paying down debt or we're deploying it into other assets, we do think that there's going to be some potential. I think you have to really be careful with what the multiple is. And as we've talked multiple times in Arizona, we want to make sure we don't pick up a cultivation asset on an acquisition that you're kind of it's an anchor around you as the market shifts and tries to get into balance we don't want to get tied with one of those perfect thanks gentlemen this concludes our question and answer session and today's conference call you may disconnect your lines

Thank you for participating and have a pleasant day.