Emerge Commerce Ltd

XTSX:ECOM

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to the Emerge Commerce Fourth Quarter and Year-End 2021 Results Conference Call. [Operator Instructions] This call is being recorded on May 2, 2022. Your hosts 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, expectations, beliefs or projections in the forward-looking information. Certain material factors and assumptions are applied in drawing a conclusion or making a forecast or projection as reflected in the forward-looking information.

We caution investors not to rely in 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 make a forecast or projections 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'd like to turn the call over to Mr. Ghassan Halazon, Founder and CEO.

[Ghassan Halazon, executive]

Thank you very much, operator. Good morning, everyone. We appreciate you taking the time to participate in our fourth quarter and year-end conference call. Joining me today is Jonathan Leong, our CFO.

This morning, I will walk you through the terrific progress we are making at Emerge and share some insights on our business, including our recent acquisitions and upcoming pipeline as well as our 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.

During our first year as a public company, our revenues more than tripled, and we delivered 3 quality acquisitions, significantly enhancing the portfolio scale, profitability and diversification. Perhaps nowhere is our progress more evident than in the Q4 results we reported this morning, the culmination of the team's hard work all year round.

Q4 2021 was by all means a transformative quarter for Emerge. We completed 2 profitable acquisitions and delivered exceptional results overall. During Q4, gross merchandise sales or GMS, grew to $26.2 million from $8.3 million. Q4 revenue grew to $14.9 million compared to $2.4 million, an increase of 531%. Adjusted EBITDA grew to -- sorry, adjusted EBITDA grew to $1.4 million from $0.1 million, an increase of 1,229%. Cash flow from operations grew to $2 million compared to $1 million in Q4 2020.

We are pleased to share that our Q4 results came in at the high end of the preliminary ranges we previously announced in February 2022. Ultimately, we are most proud of the record adjusted EBITDA result and strong positive operating cash flow during the quarter. It is worth noting that Q4 results reflect only partial periods for BattlBox Group and WholesalePet, which were acquired on October 6 and November 15, 2021, respectively.

On a pro forma basis, assuming both acquisitions were completed before the period, adjusted EBITDA for the quarter would be closer to $1.8 million. We plan to continue to prioritize profitability in 2022, particularly in this macro climate. While the power of the pro forma platform in place today are most evident in the fourth quarter, our full year results also paint the picture of a business that made great strides in our quest to graduate from marginal scale and profitability to meaningful scale and profitability.

For fiscal 2021, annual revenue more than tripled to $34.8 million from $9.2 million in 2021 -- in 2020, excuse me. Emerge reported adjusted EBITDA of $1.2 million in 2021 versus $0.8 million in the prior year, a 53% increase. Emerge entered 2022 with a pro forma business that comfortably eclipses $100 million in gross merchandise sales with substantial growth in revenue and adjusted EBITDA.

Looking ahead, Q1 2022 marks the company's first full quarter with the BattlBox Group and WholesalePet under Emerge ownership. Management is pleased with the performance of both businesses during their first full quarter based on preliminary results. Our Q1 results will be reported later in May, but we are comfortable sharing a high-level update on today's call that we believe investors will appreciate. Despite unprecedented macro challenges facing businesses globally in Q1 2022, Emerge drove record GMS exceeding Q4's GMS based on preliminary unaudited results. The business benefited from a diversified e-commerce portfolio and a multifaceted customer acquisition strategy in the wake of a volatile digital advertising landscape.

Q1 is traditionally a seasonal month for a number of Emerge's verticals. Notwithstanding, the company was also able to achieve excellent revenue growth and strong positive adjusted EBITDA overall, exceeding management's expectations based on preliminary unaudited results.

Moving on to M&A. As expected, acquisitions have been the propeller of our tremendous growth in 2021. Our team has proven that we can source, close and integrate highly accretive acquisitions while delivering exceptional value to our members. Since our public listing in December 2020, our M&A team has executed 3 transformative acquisitions, truLOCAL, BattlBox Group and WholesalePet. These acquisitions embody the type of disciplined, profitable growing businesses that Emerge aspires to acquire.

Our acquisitions have generally skewed larger and more profitable with time, mainly because we have gained credibility with our investors, lenders and ultimately with high-caliber prospective sellers who now have the benefit of seeing that we have successfully acquired and partnered with quality e-commerce businesses, management teams and brands. We believe that continuing to build our track record will grant us access to high-quality acquisitions opportunities as we progress.

Although each of our businesses may seem different on the surface, there are often similarities, which we believe are excellent indicators of future success. We tend to look for bootstrap e-commerce companies that have a multiyear track record of organic growth and profitability and typically a market leadership position or a real shot at it in their respective niche. We look to partner with proven management teams and to supplement their skill sets and resources with ours.

So far, Emerge has largely spent the early years of acquiring anchor businesses and capable management teams across our 5 verticals: pets, golf, premium meat, outdoor gear and local experiences. Now that a number of core verticals have been cemented in this next phase, we plan to pursue tuck-in acquisitions to bolster existing verticals in addition to continuing to launch new verticals. Tuck-in acquisitions, in particular, are especially conducive to a deeper level of synergy between the brands.

Extracting synergies is a big operational theme for 2022 in particular, and we are keen to drive savings and upside across the portfolio. The current pipeline of M&A opportunities remains robust. With multiple signed LOIs, the company anticipates the recent macro climate could result in more attractive acquisition opportunities and pricing. Emerge successfully leveraged its $25 million debt facility to finance various acquisitions. The company anticipates refinancing and upsizing the debt facility, paving the way for additional acquisitions with minimal dilution to shareholders.

Despite the various market dynamics facing some of our verticals and the e-commerce sector at large, our diversified model, which now includes 5 verticals, coupled with our accretive acquisition strategy has helped us navigate this micro climate better than most, delivering our strongest quarter ever in Q4 and an excellent start to 2022 based on preliminary results.

Our go public transaction was designed to accelerate our growth by raising the capital needed to consolidate niche assets in the e-commerce space. Our thesis was we could acquire customers at a lower cost and achieve better economics by buying niche businesses instead of building them ourselves. We believe that a public listing would not only give us the currency, but also the increased awareness to build out a strong pipeline of M&A targets. In the past year, we believe we have proven our thesis and dramatically derisked our acquisition strategy. Our 3 recent acquisitions demonstrate that we can acquire high-quality, growing, profitable e-commerce businesses in the 4 to 6x EBITDA range and drive platform synergies with our shared services model.

With our first 3 acquisitions now behind us, a robust pipeline, we believe we are in an excellent position to continue to execute on this existing strategy. We are confident that there's a tremendous opportunity in front of us to acquire profitable growing businesses and help accelerate their growth. As we continue to expand our pipeline, we will continue to make strategic investments into our HQ team and systems to position us for long-term growth. Given the diverse nature of our asset base and our acquisitive strategy, we are confident that Emerge can continue to deliver excellent growth overall.

2022 is shaping up to be another transformative year for Emerge despite macro headwinds, and we believe the work and the investments we have made in 2021 lay the foundation for a strong 2022. I am proud of what Emerge accomplished in 2021, and I'm incredibly excited about the opportunity ahead to leverage the power of the platform that we are building and drive future growth, profitability and operating cash flow.

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

[Jonathan Leong, executive]

Thanks, Ghassan. Good morning, everyone. We closed 2 acquisitions during Q4, including the BattlBox Group and WholesalePet, which had a meaningful impact on our results. However, please keep in mind that our reported results only include BattlBox and WholesalePet from the date of acquisition in October and November of 2021, respectively, through to December 31, 2021. Our gross merchandise sales, or GMS, for the fourth quarter increased 216% to $26.2 million, up from $8.3 million in the comparative period last year.

For fiscal 2021, GMS increased to $58.3 million, an increase of 98% compared to 2020. GMS is a non-GAAP measure and represents the total dollar value of customer purchases -- purchase of goods and services through our brands, excluding applicable taxes and net of discounts and refunds. We report revenue on a gross basis for some of our brands and on a net basis for others, which is why we like to present both the GMS and revenue figures. As an overview, our wholesale pet under par, WagJag and BeRightback brand generally report on a net basis, while our BattlBox, truLOCAL and Carnivore Club brands report on a gross basis.

For the fourth quarter, our revenue increased significantly to $14.9 million, up 531% from $2.4 million in Q4 2020, while our -- for fiscal 2021, our revenue increased to $34.8 million for the year, up 278% from $9.2 million in 2020. Our Q4 results reflect the contributions from truLOCAL, BattlBox and WholesalePet. Gross profit for the year increased to $15.1 million in 2021 compared to $7.2 million in the prior year and increased 228% to $6.4 million for Q4 2021 compared to $2 million in Q4 2020. While gross margin as a percentage of revenue decreased compared to the prior year, this is mainly due to how we report our revenue with some of our newer brands such as truLOCAL and BattlBox reporting on a gross basis rather than net basis.

The net loss for Q1 -- sorry, Q4 2021 was $1.2 million compared to $2.6 million in the prior year. The decrease in net loss is primarily related to the addition of results from the acquisition of the BattlBox Group and WholesalePet in Q4 2021 as well as some timing of transaction costs related to the company's public listing reverse acquisition in Q4 2020 including a noncash cost of $888,988 in 2020.

The net loss for the year was $6.6 million compared to a net loss of $4.4 million for the year ended December 31, 2020. The increased net loss for the year is primarily due to the higher amortization and depreciation of transaction costs related to the acquisitions of truLOCAL, BattlBox Group and WholesalePet as well as the re-measurement gain on contingent consideration recorded in 2020 as compared to the amount recorded in 2021.

The company reported adjusted EBITDA for the fourth quarter of $1.4 million compared to $0.1 million in the comparative period, an increase of 1,229%. For the year, the company reported adjusted EBITDA of $1.2 million in 2021 compared to $0.8 million in the prior year. Overall, we ended the year on a high note with 2 great acquisitions combined with strong results. We're pleased with the performance of our latest acquisitions to date and look forward to continuing to execute on our acquisition pipeline in 2022.

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

[Ghassan Halazon, executive]

Thanks, Jonathan. In closing, 2021 was a phenomenal year for Emerge and Q4 in particular showcases the team's progress with record revenue, adjusted EBITDA and operating cash flow. We have made tremendous strides in scaling our business and graduating it from a marginally profitable business to a meaningfully profitable business with a diversified portfolio of category-defining e-commerce brands.

Further to that, we are off to an excellent start in 2022 during a time of tremendous macro uncertainty. We look forward to reporting our results for Q1 later in May. Our aspiration remains the same for Emerge to become North America's prominent, 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.

We remain focused on our goals of, one, making additional acquisitions of niche e-commerce brands with a track record of growth and profitability; 2, achieving organic growth for the existing portfolio; 3, investing in the team and infrastructure to support further acquisitions and scaling; 4, driving the business from marginal to meaningful profitability and ultimately enhancing shareholder value.

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

[Operator]

[Operator Instructions] Your first question comes from Aravinda Galappatthige with Canaccord.

[Aravinda Galappatthige, analyst]

Congrats on the quarter, Ghassan and team. I wanted to start with I guess maybe developing on a comment you made about sort of expanding your credit facilities, naturally recognizing sort of the conditions in the market, we don't know exactly when that's going to change. You would naturally sort of would have to rely on debt to kind of expand -- to move ahead with M&A for the time being.

Can you give us a sense of your level of comfort with respect to leverage, how far you would want to go maybe in terms of a multiple EBITDA? And then connected to that, just so that we can have a decent gauge of what the balance sheet would look like in the next 6 to 12 months, can you just remind us of where things stand in terms of some of the chunkier earn-outs and deferred consideration -- well, deferred consideration we know, but the earn-out elements, particularly for WSP because I know that's a bit chunky.

[Ghassan Halazon, executive]

Yes. Sure. I guess I'll start off on the debt side and then Jonathan can discuss some of the earn-out potential obligations later. So firstly, on the debt side, our debt facility is currently at $25 million. Of course, we've used the facility for the various acquisitions, and it's worked out quite nicely. We scaled up the facility from what was originally $5 million a couple of years back to $8 million at the time of truLOCAL and then ending last year following BattlBox and WholesalePet drawing on the remainder to get to the full $25 million.

We are now actually having multiple formal discussions on the debt side, and we do have multiple term sheets that we are exploring with what I would consider as sort of a graduation in terms of the amounts available, the terms generally are, I would say, more reflective of the pro forma business that we've arrived at. It's one thing to look to access that when you have marginal or close to 0 EBITDA, and it's another thing with the level that we've arrived at and the scale we've arrived at.

So companies that we've acquired like WholesalePet that have a history of cash flows and profitability, that's a very conducive addition to our portfolio, not only from a business sense, but from a debt perspective. So we feel quite confident with the number of options that are available to us, and it is our goal to not only upsize the facility, but also to access cheaper and longer term debt, all of which are currently available to us via some of these term sheets that we are exploring. Of course, nothing is definitive. But this is a priority of ours. We've talked about it for a while. We certainly are looking to get something done here in terms of a refinancing and upsize of the facility.

Our comfort level, I wouldn't say has changed too much. I think we are centered in and around the 3.5 to 4x debt-to-EBITDA levels that we've talked about before. These are the levels we would like to maintain sort of our leverage. And so that's what we anticipate we will continue with.

Before I share -- before I pass it on to Jonathan to comment on specifics, obviously this is an interesting year from a macro climate, given some of the challenges that all businesses and e-commerce businesses, in particular, have had to face, whether that's the advertising landscape, whether that's inflation, whether that's other things. Now we've managed to make significant progress with our overall portfolio. But I think as it pertains to earn-out, it's still a little early to see what that all looks like. But I'll let Jonathan give you a bit of particulars around what the details entail. Jonathan?

[Jonathan Leong, executive]

Yes. So as Ghassan just mentioned, there are a wide range of outcomes for the earn-outs, which it's still too early to tell exactly where they'll land, but I can definitely give color in terms of the potential earn-outs and the deferred consideration as well.

So on the deferred consideration side, if we look at the last 3 acquisitions we did, we have a couple of deferred consideration payments that are required. And we have truLOCAL, which has about $1.5 million owing on that, which is coming due kind of at the end of this year. BattlBox, we have deferred consideration of USD 1.5 million, and that's payable over 3 years, so it's $500,000 each year. With WholesalePet, we have deferred consideration of USD 2 million, which is paid over a 2-year period to $1 million each year.

On the earn-out side, we have BattlBox, which had an earn-out of up to USD 2.4 million per year with half cash, half shares each year US dollars. We have WholesalePet, which has a 2-year earn-out and each of those years is up to USD 4.5 million per year. And then we have truLOCAL with the earn-out this year, which is up to $3 million, which, again, $1.5 million cash, $1.5 million shares.

[Ghassan Halazon, executive]

And the one thing I'll add -- thank you, Jonathan. The one thing I'll add, of course, is all of our earn-outs are designed with a minimum level of revenue and EBITDA growth. So none of it is just sort of high-level metrics. It's very specific to a certain level of EBITDA. These are companies -- when you look at WholesalePet and BattlBox, these are companies that are in and around the $3.5 million EBITDA range, pre the type of growth we are looking for in some cases. So I just wanted to point out that the anticipation is if these companies were to achieve their earn-outs that they would make significant EBITDA and ultimately cash flow for the company.

[Aravinda Galappatthige, analyst]

Just a quick second question [indiscernible] line. Obviously with sort of -- you talked about macro conditions and I think in the U.S., there's some sort of initial concerns around a more general slowdown. You have a predominantly subscription business, which is helpful. Anything that you're seeing in terms of sort of churn profiles as you sort of observed the last several months, I know that the different business have different levels of sensitivity to macro conditions. Anything that you want to call out? And then connected to that, I guess like maybe just talk about your synergistic like initiatives. Some of these assets have been with you for maybe 5, 6 months. Is there anything that you're seeing that you can kind of build off of as far as new initiatives are concerned?

[Ghassan Halazon, executive]

Yes. So we can talk a bit about some of the macro headwinds that are impacting really all businesses these days. But one data point is on the truLOCAL front, of course, the price of meat has gone up substantially and sort of one of the headline categories that we all see and read about these days in the news and are impacted by, in many cases, as customers. What we've done with truLOCAL, and we mentioned this sort of midway through Q4, is we've adjusted the prices upwards. We've increased the average price from $249 to $259 for the large box, which is sort of the most popular box we have. That's about a 4% increase in price.

But we've also -- and we've done that, of course, to protect our gross margins. As you might recall, in Q3, we took sort of some hit there, and it was -- it took us about a quarter or so to react and to increase prices. But as I've highlighted previously, the good news is we saw minimal churn, nothing that indicated it was a concern. And in fact, if anything, we were -- with the transparent communication, the truLOCAL approach this with, it was very much a net positive I would say. But we also had to increase, improve and find some efficiencies in shipping and in other areas, which overall kept our margins in the 35% to 37.5% for truLOCAL, which we think are quite healthy for the business.

So we were able to withstand that. We still are till today substantially higher in overall subscriptions and in revenue at truLOCAL versus the pre-pandemic levels. You might recall, truLOCAL grew from about $9 million to $20 million in one shot at the time we purchased it. And of course, last year, we achieved the revenue side. We talked about this. We received the revenue side of the formula. So truLOCAL was able to actually grow slightly year-over-year. But given a bit of the margin that got cut into in Q3, we didn't achieve the EBITDA target at the time. And so this is something for us that we keep monitoring.

I think BattlBox, our other subscription business, I think is kind of doubling as we mentioned before with TikTok and with Netflix and a different customer acquisition avenues. I would say, Facebook, the Facebook environment and the ad, the digital ad climate at large has been something we've had to navigate with both our brands because they do -- even if they have their own channels, they do somewhat spend some money on Facebook and Instagram. And those are channels that have been disrupted, but we found different ways around, and that's why we highlight our diversified customer acquisition strategy as well.

So that's a bit of color there on some of the macro headwinds. It is not an easy time to operate any business right now. We're -- thankfully we're not reliant on China in a big way where there's been tremendous slowdowns for other e-commerce companies. truLOCAL is -- it's a local/regional supply chain. So it works with local farmers here while it has the inflation challenge or headwind, it's been able to not have any impact from the China side. Same thing with WholesalePet, it's a business that is a marketplace model, sits in the middle, and pets has just been a booming business. They're off to such a great start with good organic growth in the first quarter.

Now BattlBox has a bit of China sourcing and relationships. But they've done a lot of planning in anticipation of more difficult channels and higher costs for containers as we all hear about. So they've been able to navigate their gross margins are also very healthy, in fact, a bit healthier than truLOCAL.

[Operator]

[Operator Instructions] With that, your next question comes from Andy Nguyen with Raymond James.

[Andy Nguyen, analyst]

Congratulations on a great quarter. So I just want to touch on the progress of truLOCAL expansion in Quebec and also the B2B initiative. And follow-up on that, what's sort of your growth expectation for truLOCAL this year? Is it somewhere around mid-single digits?

[Ghassan Halazon, executive]

Yes. So starting with, I suppose, truLOCAL, we got the question a couple of times now around sort of the Quebec landscape and how that's going. I think I highlighted this previously, one of the reasons Quebec took a bit longer than these other markets was because truLOCAL was quite reliant on digital-only strategies versus typically markets have had access to gyms and offline partnerships that have helped launch markets.

So now that the world is opening up again, we expect truLOCAL to test some of these strategies in Quebec and start to garner more success. I think overall, I wouldn't say that we expect Quebec to change the game in any way at this moment in time. But we do expect bigger growth than we saw in the prior year. That's one on Quebec.

In terms of B2B, this has been an area of immense early promise for Emerge. Of course, we were inspired by WholesalePet's B2B model, very sticky, very good cash flows, et cetera. So we have been looking at not only truLOCAL, but all of our different brands and figuring out where does B2B angle fit in? And how can we build this background play of very sticky merchant relationships, monetizing that side of the equation, not only the consumer side of the equation. And so with truLOCAL, we have been dabbling with multiple different initiatives. We've highlighted corporate gifts in Q4. We are doing some B2B trading between the farmers. It's still pretty early, but we're very excited about those results.

In terms of truLOCAL overall, right now we are forecasting low double-digit growth. So I wouldn't say with the general macro environment, we still think we can do double-digits, but probably on the low end. So I would say conservatively probably on the 10% range, inclusive of all of our initiatives at truLOCAL.

[Operator]

There are no further questions at this time. Mr. Halazon, you may proceed.

[Ghassan Halazon, executive]

Great. Thank you very much, everyone. We really appreciate your time. We look forward to reporting our progress throughout the balance of the year and our Q1 2022 results in late May. Thank you, everyone. Have a good day.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.