Emerge Commerce Ltd

XTSX:ECOM

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, and welcome to the EMERGE Commerce Second Quarter 2022 Results Conference Call. [Operator Instructions]

This call is being recorded today, August 25, 2022. Your host today are Ghassan Halazon, Founder and Chief Executive Officer; and Jonathan Leong, Chief Financial Officer.

Before we begin, I am 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 the 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 the 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. And with that, I would like to turn the call over to Ghassan Halazon, Founder and CEO. Please go ahead, sir.

[Ghassan Halazon, executive]

Thank you very much. Good morning, everyone. We appreciate you taking the time to participate on our second quarter results conference call. Joining me today is Jonathan Leong, our CFO.

This morning, I will walk you through EMERGE's second quarter results and share some insights on our business as well as our key priorities for the balance of 2022. 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.

I am pleased to report that EMERGE delivered strong second quarter results. Q2 marks the third consecutive quarter that EMERGE has delivered greater than $1 million in adjusted EBITDA, demonstrating our continued commitment to disciplined operations.

Gross Merchandise Sales, or GMS, for short, which represents the total value -- the total dollar value of purchases on our platform, increased 144% year-over-year to $28 million, which is the best Q2 GMS in the company's history. Q2 revenue grew to $15.1 million, again, a record for Q2 compared to $6.8 million in the prior year, an increase of 120%.

Q2 adjusted EBITDA grew to $1.1 million from $0.08 million, an increase of 1,238%. I am particularly proud that we have established a trend of positive adjusted EBITDA as Q2 was our ninth quarter out of the last 10 quarters with positive adjusted EBITDA. Our second quarter results demonstrate the resilience of our platform and the quality of our brands.

During the pandemic, consumers shifted their purchasing patterns from physical retail to e-commerce, driving strong growth for the sector overall. As the economy has reopened, we have seen some consumers return to physical retail, which has caused the normalization of online spend as well documented.

Despite this, we are pleased to report that our sales volume, driven by our diversified brand portfolio, remains substantially above pre-pandemic levels and is a testament to the quality of the businesses we've acquired and the team's efforts in unlocking this next phase of growth.

In recent months, the macroeconomic outlook has become more uncertain, but we believe that over the long term, e-commerce will continue to gain share against traditional retail as consumers increasingly realize the savings and the convenience of the online model.

Moving on to M&A. Our current pipeline of M&A opportunities remains robust. In the current macro environment, we plan to be diligent but are prepared to act decisively, should we see accretive opportunities that enhance our cash flow profile in the immediate term.

The company anticipates the recent market climate could result in more attractive acquisition opportunities and pricing as entrepreneurs are looking for alternatives to scale in a cost-effective manner, which aligns with EMERGE's disciplined acquisition strategy.

To date, the company has successfully leveraged its existing $25 million debt facility to finance acquisitions. In March 2022, EMERGE entered into an amendment with its existing lender, providing the company with an option to extend its debt facility to June 2023. EMERGE is currently advancing its plans to refinance its current debt facility.

Moving to the remainder of the year. In the wake of the challenging macro environment, management's operational priority for the balance of the year is to optimize for profitability and cash flow, including through synergies and cost savings, where applicable.

To wrap up, I would like to sincerely thank and congratulate our team, Board of Directors and trusted partners across Canada and the U.S. on yet another excellent quarter and rising to the challenge in the face of these trying times.

I will now turn the call over to Jonathan for a review of our financial results.

[Jonathan Leong, executive]

Thanks, Ghassan. Good morning, everyone. Our Gross Merchandise Sales, or GMS, for the second quarter increased 144% to $28 million, up from $11.5 million in the comparative period last year. This increase was primarily driven by the BattlBox Group and WholesalePet acquisition.

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 second quarter, our revenue increased to $15.1 million, up 120% from $6.8 million in Q2 2021. Similar to our GMS, this was primarily driven by the BattlBox and WholesalePet acquisitions. Gross profit for the quarter increased to $6.1 million compared to $3 million in the comparative period, an increase of 106%.

The net loss for the second quarter was $0.8 million compared to a net loss of $2.2 million for the same quarter in the prior year. The decreased net loss for the year was primarily due to lower share-based compensation and transaction costs as well as positive impacts from foreign exchange and remeasurement of contingent consideration. This was partially offset by higher finance costs related to interest expense paid in 2022 compared to 2021.

The company reported adjusted EBITDA for the quarter of $1.1 million compared to $0.08 million in Q2 2021. As Ghassan mentioned, this marks our third straight quarter of adjusted EBITDA greater than $1 million and also is our ninth quarter of positive adjusted EBITDA in our last 10 quarters. Overall, we are pleased with the results this quarter and look forward to continuing to execute on our plans during the remainder of 2022.

I will now pass it back to Ghassan for some closing comments.

[Ghassan Halazon, executive]

Thank you, Jonathan. In closing, we continue to make tremendous strides in scaling our business and graduating it from a marginally profitable business to a meaningfully profitable one. With a diversified portfolio of category-defining e-commerce brands as evidenced by the excellent growth in both revenue and adjusted EBITDA in the second quarter and the first half of the year versus 2021, 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.

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 bootstrap e-commerce company with limited resources.

This concludes our prepared remarks. Operator, please open the line for questions.

[Operator]

[Operator Instructions] Your first question will come from Andy Nguyen of Raymond James.

[Andy Nguyen, analyst]

Congrats on another great quarter. So my first question is, could you give us some more color on the organic growth for truLOCAL and BattlBox for the most recent quarter?

[Ghassan Halazon, executive]

Thanks for your questions. Good to hear from you. Yes, certainly, as you know, we don't give explicit guidance per vertical but happy to share a little bit of color around some of our units, specifically truLOCAL and BattlBox as you're asking here.

So the big picture, Andy, is that truLOCAL, alongside both the direct-to-consumer business as well as the add-on initiatives that we've discussed in the past including B2B trading and otherwise, was -- it came out ahead on a quarter-over-quarter -- or year-over-year comparison rather. So generally, I think we're pleased with the overall picture of truLOCAL.

But that said, the B2C portion of the business continues to battle some of the issues that we've discussed in the past, including inflation, rising price of meat, et cetera. But I would say, overall, the organic picture is still intact that we discussed.

I think similarly with BattlBox, we don't see necessarily different headwinds that I just mentioned: inflation, supply chain, customer acquisition. All of those things remain challenges in the business. But I would say, overall, it was slightly down for the quarter, but I think, generally, what we're looking at from a profitability perspective, BattlBox came out quite strong.

[Andy Nguyen, analyst]

Got you. And I just want to hone into truLOCAL. And I think you mentioned one of the strategy that you employed to mitigate the inflation risk to raise the subscription price. And what are you seeing so far in terms of the consumer reaction? Are you seeing a lot of pushback, resistance or consumers are not that sensitive to that price change so far?

[Ghassan Halazon, executive]

Yes. So it's a great question, and as some of the listeners might recall, we raised prices back in October of 2021. In fact, we raised the price per box by about $10, which equates to about 4% increase.

We were, at first, very careful with testing and figuring out what levels made sense, but thankfully, I must say that -- and this is a testament to the truLOCAL brand and community that the price increases were well received. We did not see any unusual impact to churn or to any of the key metrics of the business related to that price increase. And we can now say a bit more definitively as time has passed that the price increase has not resulted in any meaningful differences to the metrics we've already been monitoring.

And I think, again, it's a function of the truLOCAL brand, the way they've communicated transparently with their customers. Their customers actually, believe it or not, appreciated the fact that prices hadn't gone up in so long. So there's tremendous buying or rather tremendous purchasing power at truLOCAL.

It does not preclude us from exploring further price increases or increases elsewhere in the business model in terms of other charges or things that we could pass on to consumers. So we are exploring all of these options. But right now, I can say that, that price increase has not resulted in any meaningful change to churn dynamics or other key metrics.

[Operator]

Your next question comes from Aravinda Galappatthige of Canaccord.

[Aravinda Galappatthige, analyst]

I wanted to -- actually maybe for Jonathan. I wanted to actually answer you -- obviously, I wanted to clarify sort of the debt situation. I'm not sure if I misheard you. Have you already exercised the option to extend the facility to June 29 at this point -- 2023 at this point? Or it's still there, but you haven't pulled the trigger on it?

[Jonathan Leong, executive]

Yes. So our debt, we have the option. We haven't exercised that option yet, but we do have the option to extend it to June 2023. But prior to that, we are looking at potential options to refinance the debt in its entirety.

[Aravinda Galappatthige, analyst]

Okay. Okay. Is -- I guess, I mean, just looking at the risk side of things, is there any kind of risk that if you're not able to achieve that, given, I don't know how kind of -- how cautious banks are these days. But is there any risk that if it doesn't get extended, you might have to look for an alternative facility elsewhere?

And I know that in the notes to the financial statements you talk about, it's payable in cash or stock. Maybe just give us some insight as to what the terms are if you need to pay that back.

[Jonathan Leong, executive]

Sure. So in terms of the option to extend, so if we exercise that option, there is an extension fee, which is at our discretion, payable in cash or shares. So depending on what makes the most sense at the time, we exercise that option. We can pay in either shares or cash.

Prior to that, though, to your previous question, we are looking at various different options, whether it's with the Canadian banks or alternative lenders. But even with our existing lenders as well, we are exploring what makes the most sense in this macro environment.

[Aravinda Galappatthige, analyst]

Understand. That's really helpful. So to be clear, Jonathan, if you want, you can pay the entire thing in stock. You have that option? Just theoretical, but I want to make sure that, that -- those are the exact...

[Jonathan Leong, executive]

Yes, in terms of the extension fee, yes, we can pay the entire extension fee in stock, yes.

[Aravinda Galappatthige, analyst]

Oh, the extension fee. Okay. Okay. Okay. And then maybe just getting to the core business. Maybe just -- I mean you've had some of these assets, Ghassan, enough time for you to kind of maybe go deeper into it. Is there anything that's sort of coming up in terms of product innovation?

Obviously, the founders that built these businesses have developed insights over the years. But with your experience, looking at a broader range of companies, you might be thinking there's maybe new markets for these businesses, taking new product ideas. Anything that's come up along those lines that you get to discuss?

[Ghassan Halazon, executive]

Yes, absolutely, Aravinda. I think there's a couple of things to discuss. We didn't touch on it here on the earnings call, but you may have seen that in this past quarter, for example, BattlBox launched Wanlow, which is its kids adventure subscription box, effectively a BattlBox junior type service that they've rolled out. Of course, leveraging their existing team, resources and facilities. And so that's an interesting dynamic.

We're finding that through the existing enthusiast member base of BattlBox that there was potentially an extension to the product here that applies to kids in a world that's increasingly online. This isn't an application in a subscription box that encourages kids to be offline.

So this is kind of an interesting play there. And it's obviously still very early, but this is something that was launched full force sort of effort that got us to a launch in Q2, Q3 here.

And of course, the other aspect is the geographical expansion. So BattlBox launched in Canada. They were -- just as a reminder, they were available in the U.S. Of course, Carnivore Club, their sister brand, was available in Canada and the U.S., but BattlBox is really sort of did a more formal launch in Canada.

Again, still early days, but leveraging same resources over there, but also our audiences in Canada. That's something that we think BattlBox can see some good growth opportunity.

Similarly, WholesalePet, there's 2 aspects that are worth touching on. Number one, they, too, are looking at the Canadian market, potentially through partnership. That has not obviously officially occurred yet, but the launch of WholesalePet in Canada is something that we think could realistically happen in 2023. Hopefully, sooner rather than later, but again, market dynamics will dictate.

The other aspect to WholesalePet that we're finding some early promise and interest in, by the way, that business continues to perform well, is the fact that, that model historically has not relied on or had any impact from the challenges in the digital advertising landscape.

So things like Facebook marketing, Google marketing, all these themes that we hear about and see a lot of e-commerce companies dabble with and deal with because of the Apple privacy changes and so forth, that's not historically something that WholesalePet has had an issue with.

But what we're seeing lately is a targeted B2B marketing campaign. It could merit and unlock further growth opportunities. So we are starting to consider and starting to spend small amounts, I would say, at WholesalePet, marketing-wise, to see if that could propel growth even beyond sort of their CAGR of 20% over the last 20 years. So that's another area.

And of course, let me just touch on the fact that -- and highlight the fact that when BattlBox and WholesalePet look at and expand into Canada, that's obviously where we have the strongest firepower from an audience and the resources perspective.

So for BattlBox and the consumer brands, obviously, we're sitting on WagJag, and we're sitting on millions of subscribers that we can now sort of at least cross-sell some of these services that were historically in the U.S.

And of course, same thing goes for facilities. So if BattlBox Canada were to grow enough and Wanlow were to grow enough in Canada, we already have warehouses and areas here that we could leverage that we were not able to when they were in the U.S. strictly.

And then lastly, with truLOCAL, I think we've highlighted sort of the corporate gifting and the B2B trading. And these are areas or at least let's just say, sort of part of the B2B area is fast growing. I will say that it does come with growing pains and figuring out the right margin optimization. So it's stuff that we're looking at.

But we really think there is opportunities to unlock by the fact that the supply side, the relationships with our vendors, with our local farmers, there's a lot we can do to connect them and add value to them on a B2B basis. And quite frankly, a lot of that inspiration has come from seeing WholesalePet stickiness, seeing the B2B model and trying to replicate some B2B aspects across the portfolio.

[Aravinda Galappatthige, analyst]

Great. That's really helpful, Ghassan. And then lastly, just on the -- I see that you've made some -- there's been sort of fair value gain on the change in contingent consideration.

I suspect there is instead of a major change to expectations yet at this point in terms of sort of the contingent, the earnout payments that are due for this year and next?

[Ghassan Halazon, executive]

Correct. No change really. Jonathan, I don't know if you want to comment further, but there's nothing material to change in terms of what we're seeing.

[Jonathan Leong, executive]

Yes, there's no major change. I mean, given the macro environment and the current performance, things may be tough for the first year, but there's no major change in expectations there.

[Operator]

There are no other questions. At this time, I will turn the conference back to Mr. Halazon for closing remarks.

[Ghassan Halazon, executive]

Great. Thank you very much, everyone, for joining us today and your continued interest in EMERGE Commerce. We look forward to reporting on our progress throughout the balance of the year and beyond. Thank you.

[Operator]

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.