EMERGE Commerce Ltd. (ECOM) Earnings Call Transcript

Good morning, and welcome to the EMERGE Commerce Second Quarter 2026 Results Conference Call. [Operator Instructions] This call is being recorded on August 27, 2026. Your hosts today are Ghassan Halazon, Founder and Chief Executive Officer; and Mike Murphy, 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 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. And with that, I would like to turn the call over to Mr. Ghassan Halazon, Founder and CEO.

Thank you. Good morning, everyone. We appreciate you taking the time to participate in our second quarter 2026 conference call. Joining me today is Mike Murphy, our CFO. This morning, I will walk through our exceptional Q2 results at EMERGE and share some insights across our key businesses as well as our priorities for the balance of 2026. Following my remarks, Mike will provide additional details on our financial results, after which I will conclude the call with some closing remarks and open up the line for questions. Historically, Q2 has been our strongest quarter at EMERGE. This Q2 proved to be no different. In fact, in many ways, this was our best quarter in years across revenue, gross margin and adjusted EBITDA with positive cash flow generation on full display. Let's dive in. Q2 revenue grew by 7.4% to $9.1 million, our ninth consecutive quarter of positive revenue growth. This is the first time EMERGE has eclipsed $9 million in revenue since early 2023 at the start of our turnaround efforts. Worth noting, Tee 2 Green or T2G for short, was acquired in early April 2025. So Q2 growth this year is more apples-to-apples as a result. As outlined in my shareholder letter at the start of 2026, the current EMERGE strategy entails combining moderate, stable organic growth from our existing portfolio with higher growth rates driven by accretive acquisitions. Speaking of acquisitions, Q2 was Viral Loops' first full quarter under EMERGE ownership following our acquisition that was completed in late Q1. With that said, Viral Loops is a relatively low revenue contributor with approximately $1 million annual revenues and was primarily acquired to enhance our overall financial profile, namely to contribute positively to margins, profitability and cash flow in addition to driving customer acquisition across our consumer e-commerce portfolio, all of which it did in Q2. Gross margins increased by 2.5% to 39% from 36.5%. Management anticipates that the year-over-year gross margin improvements achieved in Q2 2026 to continue in Q3, in part because of the higher margins contributed by Viral Loops, in addition to the conclusion of the fair value of inventory accounting at T2G that adversely impacted EMERGE's gross margins for most of 2025. Adjusted EBITDA improved to $1.03 million versus $962,000, marking the seventh consecutive quarter of positive adjusted EBITDA. Notably, this is the first time our adjusted EBITDA has officially eclipsed the $1 million mark since Q4 2021, which feels like a lifetime ago. Our cash position grew to $4.8 million at June 30, 2026, from $3.5 million last Q2, an increase of $1.3 million year-over-year. We're especially pleased that the business achieved positive all-in cash flow in both Q2 and year-to-date as we continue to build a stronger, more durable EMERGE. Now a few updates from some of our key brands. First, T2G. Now in its second year under EMERGE, T2G continues to validate our EMERGE acquisition and integration playbook. Since acquiring the business in April '25, we've applied our operating model and digital capabilities to substantially accelerate growth, enhance profitability and improve cash flow generation. Leveraging our broader golf ecosystem, including over 400,000 golf subscribers, helped drive T2G's revenue growth rate to nearly 10% -- or rather 10x its pre-acquisition growth rate. I'll say that again, to nearly 10x its pre-acquisition growth rate. The transaction's 8-year inventory payment structure also meaningfully strengthened our cash flow profile and balance sheet. In year 2 or so, so far, the business continues to perform exceptionally, and we continue to see additional growth opportunities through further optimization and deeper integration within our golf portfolio. Second, an update on truLOCAL, our leading premium meat and seafood subscription service across Canada. TruLOCAL was a big benefactor in 2025 with a Buy Canadian movement, gaining an influx of new customers, driving strong cost-effective growth, in turn, allowing us to reduce our ad spend and capture more profits. That resulted in truLOCAL more than doubling its adjusted EBITDA in 2025. As the benefits and enthusiasm around peak SupportLOCAL subsided in Q1 and Q2, we are starting to see truLOCAL's cost per acquisition revert back to its historical norms. The brand still exhibits highly favorable CLTV to CAC ratios, just not as attractive as the peak levels we saw last year. We will continue to prioritize high ROI marketing initiatives. On the margin side, truLOCAL continues to see some COGS pressures, including the rising cost of meat and some fuel surcharges as a result of the conflict in the Middle East. In general, truLOCAL has exhibited strong pricing power with its loyal member base, and the team has already actioned various gross margin and SG&A reduction initiatives aimed at offsetting some of these variable costs. 2026 is truLOCAL's 10th year in business, and we have launched a number of initiatives and giveaway contests powered by Viral Loops to drive customer acquisition and celebrate this milestone with our members and suppliers. Now for an update on the debt side. Our senior credit facility matures in October 2027. The current outstanding balance on the credit facility is $5.85 million, down from $25 million originally. The variable interest rate currently sits at 11%. For clarity, this amendment does not preclude EMERGE from refinancing its credit facility at a cheaper rate at any time should we secure more favorable terms. EMERGE is making meaningful progress towards refinancing its senior debt, which remains one of our key priorities. Management is increasingly encouraged by the developments to date and believe the significantly improved financial profile of the business puts us in a strong position to secure a materially lower cost longer-term financing facility. Management views this as an important step in further strengthening our balance sheet and supporting EMERGE's long-term growth objectives. We continue to maintain a strong long-term relationship with our lender dating back to 2019 and remain in excellent standing. Our focus now is on reducing our cost of capital, lowering interest expense and directing incremental cash flow into organic growth opportunities and highly accretive acquisitions. Next up, I'll share our Q3 outlook. For Q3 '26, EMERGE expects to deliver another quarter of revenue growth, improved gross margins and positive adjusted EBITDA. Management anticipates that the year-over-year gains in gross margin that we saw in Q2 will continue in Q3, in part because of the higher margins contributed by Viral Loops in addition to the conclusion of the fair value of inventory accounting at Tee 2 Green that adversely impacted EMERGE's gross margins for most of '25. The company continues to make targeted investments across its portfolio, including at the HQ level to drive and support current and future growth, both organic and inorganic. Q3 is a seasonally strong quarter for the golf business, particularly Tee 2 Green, while it is generally a slower period for truLOCAL during the summer holiday period, seasonality at Viral Loops is less pronounced. Now I'll turn it over to Mike for some financial commentary.

Thanks, Ghassan, and good morning, everyone. As Ghassan mentioned, EMERGE had a very successful second quarter where we continued this trend of year-over-year revenue and adjusted EBITDA growth. Our gross merchandise sales, or GMS, grew 4% to $11.8 million compared to $11.4 million in the first quarter of 2025. As a reminder, GMS is a non-GAAP measure that provides useful measure for the dollar value of e-commerce transactions made through our platforms. This gives additional insight into business performance. GMS represents the total dollar value of customer purchases of goods and services through our brands, excluding applicable taxes and net of discounts and refunds. Note that GMS does not consider any retail sales, which is a growing part of our business via Tee 2 Green. Revenue for the quarter grew over 7% to $9.1 million from $8.5 million in 2025. Revenue growth for the quarter was primarily driven by strong performance from Tee 2 Green as well as inclusion of the Viral Loops' results for the first full quarter of operations post acquisition. Overall, EMERGE achieved positive overall organic growth in Q2. Gross profit for the quarter increased by $3.5 million -- to $3.5 million versus $3.1 million in 2025. Gross margin percent for the quarter was 39% versus 36.5% in 2025. Excluding onetime noncash inventory fair value increment adjustments related to Tee 2 Green, purchase equation of approximately $41,000 in the quarter, gross margin would have been approximately 39.4% for the second quarter of 2026. Note that all of Tee 2 Green's fair value increment has now been recorded in cost of sales, and we expect Tee 2 Green's and the company's gross margin profile to revert back to historically higher levels. Net income from continuing operations for the quarter was $0.2 million, which is comparable to where it was in the first quarter of 2025. And for the quarter ended June 30, 2026, EMERGE reported adjusted EBITDA of $1.03 million compared to adjusted EBITDA of $0.96 million, an improvement of $0.07 million, an increase of 7.3%. This reflects the company's efforts to prioritize a disciplined approach to managing overheads and marketing budgets in addition to making accretive acquisitions and importantly, constantly focusing on operational improvements. Q2 is historically a period of cash inflow as the golf vertical hits its peak golf season. During the quarter ended June 30, 2026 and '25, the company generated $1.5 million and $2.1 million, respectively, from operating activities. The prior period cash flows were higher in large part due to the impact of the 8-year inventory payment plan associated with Tee 2 Green acquisition, which resulted in minimal cash flows used for inventory purchasing in the prior quarter 2025. Q2 2026 cash flows from investing activities were negative $0.2 million, driven mainly by a payment related to the -- deferred payment related to the Tee 2 Green acquisition and cash flows used in financing activities were $0.6 million, which included interest payments accretion related to long-term debt, convertible debentures and deferred acquisition costs as well as the payment of some of the inventory payment plan related to the Tee 2 Green acquisition. Finally, cash on hand has improved in line with the improvement in the business. At June 30, 2026, it was $4.8 million versus $3.5 million at the end of Q2 2025. I will now pass the microphone back to Ghassan for some closing comments.

Thanks, Mike. To wrap up, I would like to highlight 3 things. First, we are continuing to demonstrate that EMERGE's turnaround is translating into durable profitable growth. Q2 was a particularly strong quarter with revenue growth, gross margin expansion, adjusted EBITDA eclipsing $1 million for the first time since Q4 2021 and positive all-in cash flow this quarter and year-to-date. Second, while there's still work to do, our balance sheet is in a meaningfully stronger position than it was a few years ago. Our next priority on this front is to lower our cost of capital and ultimately reduce interest expense and improve cash flow to drive future growth, both organically and via opportunistic acquisitions. Third, we remain focused on executing the EMERGE 3.0 strategy with precision, driving healthy organic growth overall while selectively pursuing accretive acquisitions that can supercharge top line margins and cash flow. We believe the progress we have made over the past several years has put EMERGE in a much stronger position, and we are excited about the opportunities ahead. As always, I would like to take this opportunity to thank our Board, employees, customers, suppliers, vendors and shareholders for their unwavering support. With that, operator, we can now open the line for any questions.

[Operator Instructions] And your question is from Fred [indiscernible].

It's Fred from [indiscernible]. I'm going to make a quick -- just a couple of questions, please. First of all, congrats on a great quarter. Now with the recent outcomes of the trade war between Canada and the U.S., are you starting to see positive impacts for truLOCAL as you had last year?

Thanks. Appreciate it, Fred. Nice to hear from you. It is an interesting one. I mean, we are obviously watching all the trade wars and the tariff headlines and the real impact it's having in real time, I might add. And from our business perspective, particularly truLOCAL, I would say it's still a little too early to tell. I mean we don't want to get ahead of ourselves. We obviously see spikes in traffic for searches related to local, local food. It's a bit early to call out major impact on customer acquisition or anything like that, but it's definitely something we're eyeing. It doesn't look like it's -- this rhetoric and frankly, some of these actions that are being taken now. It doesn't look like that's about to cool down anytime soon. So we're watching it closely. And if it continues, there might be a sort of a similar round 2 to that madness, which ultimately, as everyone knows, benefited truLOCAL and other local DNA companies. I will say, though, that regardless, as I pointed out earlier, the customer lifetime value metrics that we're seeing on truLOCAL relative to their customer acquisition cost remain very favorable. So in a sense, we're seeing that $2,000-plus CLTV on customers relatively -- relative to, I would say, broadly the 150 to 175 customer acquisition cost range. So we're deeply in the money with customers. And if anything, we're already regardless of whether we get an additional macro bump or not, starting to think about and drive higher marketing to build in more subscribers to a business model and a brand that we think deserves to scale more. So we are on it, and we're monitoring the situation.