Medicine Man Technologies, Inc. (SHWZ) Q1 2023 Earnings Call Transcript
Good afternoon. My name is Jenny and I will be your conference operator today. At this time, I would like to welcome everyone to the Schwazze First Quarter 2023 Conference Call. [Operator Instructions] Ms. Jobin, you may begin your conference.
Greetings and welcome to the 2023 first quarter conference call and webcast for Schwazze. We are being hosted by Justin Dye, Chairman and Chief Executive Officer; Nirup Krishnamurthy, President; and Forrest Hoffmaster, Chief Financial Officer. Following their presentation, management will take questions submitted via the web link found on Schwazze’s Investor Relations website and in the earnings press release.
I would also like to remind you that management’s prepared remarks and answers to your submitted questions may contain forward-looking statements, which are subject to risks and uncertainties. Examples of forward-looking statements include, among others, statements regarding federal and state legislation and regulation and Schwazze’s future results of operations and financial position, business strategy, and plans and objectives for future operations. Such forward-looking statements may be preceded by the words, plan, will, may, continue, anticipate, become, build, develop, expect, believe, poised, project, approximate, could, potential or similar expressions as they relate to Schwazze.
Investors are cautioned that all forward-looking statements involve risks and uncertainties that may cause actual events, results, performance, or achievements to differ from those anticipated by Schwazze at this time. Additional information concerning factors that could cause events, results, performance, or achievements to differ materially is available in Schwazze’s earnings release made available before this call and available on Schwazze’s Investor Relations website at in auto Form 10-Q for the first quarter ending March 31, 2023.
In addition, other information is more fully described in Schwazze’s public filing with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov or www.sedar.com or on the company’s Investor Relations website. Also, Schwazze may discuss non-GAAP financial measures during today’s call. A reconciliation of the differences between the non-GAAP financial measure discussed during the call and with the most directly comparable GAAP measure can be found in Schwazze’s earnings press release made available before this call and available on Schwazze’s Investor Relations website.
I would now like to turn the call over to CEO and Chairman, Justin Dye.
Hello and thank you for joining us this afternoon. Our company is off to a strong start in 2023. We are clearly seeing increased strength in our core operations and complementary acquisitions that continue to solidify our position as a best-in-class operator in Colorado and in New Mexico. We are happy to be here today sharing the results of the first quarter 2023 with you.
I will start off by providing a brief business overview and our President, Nirup Krishnamurthy will provide operational details before turning the call over to our CFO, Forrest Hoffmaster who will review our quarterly financial results in detail. I will then offer concluding thoughts, and afterwards, we’ll be happy to take your questions.
I am pleased to report that Schwazze had a solid first quarter 2023 in both Colorado and in New Mexico, with total revenues of $40 million, which represents 26% growth compared to the same quarter last year. Adjusted EBITDA of $14.5 million or 36.3% of revenue, almost doubling prior year results of $7.9 million or 24.7% of revenue. Regardless of the marketplace dynamics, we have quietly and consistently grown market share, increased profitability and continue to deepen our footprint in intensely competitive states. It is encouraging to hear that Washington, D.C. is taking industry reform seriously and that progress is happening with the SAFE Banking Act.
Our focus remains on delighting our patients and customers and our results indicate that we are not only continuously improving core operations, but capably integrating synergistic acquisitions while generating free cash flow with the discipline to meet our ongoing debt capital and tax obligations. We will continue to execute our regional strategy to go deep in our operating states and gain customer loyalty and market share.
Our long-term plans of building a regional powerhouse with a differentiated approach of delivering a wide assortment of high-quality products with exceptional customer service backed by our operating playbook has proven to be a winning combination for our customers, employees, and shareholders. Lastly, I would like to thank our Schwazze team. I’m extremely proud of their commitment and disciplined approach to building a best-in-class operation. They are one of the most talented and strongest teams in the industry today and the results show it.
Now, I would like to turn the call over to our President, Nirup Krishnamurthy to take us through some of the accomplishments for the quarter.
Thank you, Dustin. It’s been a productive quarter for our company. The current market dynamics play well on our strengths and on our strategy to go deep into concentrated areas, taking full advantage of a lean support infrastructure. We are excited to announce 3 new acquisitions at the start of this year. In January, we announced the Smoking acquisition, marking our entry into Fort Collins and Garden City, Colorado, where we will operate two high-potential dispensaries in markets we have not served. In April, we announced the acquisition of Standing Akimbo, which is a large medical dispensary in Colorado, opening the door to a $200 million untapped channel for us in this market. Also in April, we signed a definitive agreement to acquire the assets of Everest Apotea, a prominent New Mexico cannabis operator with 14 dispensaries, 1 manufacturing plant, and one cultivation facility.
During the quarter, our New Mexico team also successfully opened 2 new stores in Albuquerque and Carlsbad, increasing our diversified presence in the state. With these openings and new additions to the Schwazze portfolio, we will now be operators of a total of 60 dispensaries, 3 manufacturing facilities, and 6 productive cultivation facilities. In Colorado, dispensary license counts remained flat. Like others in our market, we are affected by surrounding state legislation in Montana, New Mexico, Arizona, and the improvements in the Utah Medical program. Yet our attention to customer retention and volume growth, combined with excellent in-store experience and thoughtful promotions continue to yield improvements quarter-over-quarter. In New Mexico, the overall market continues to show steady growth.
While quarter one revenues are generally lower than the rest of the year, we continue to experience steady top line growth. The total license count in the state is 633 in March, up 20% from the prior month. With 18 retail dispensaries at the end of the quarter, we now have an 8.6% market share in New Mexico. With the addition of the average retail dispensaries, we will soon be at 32 stores in New Mexico, which will materially increase our market share in the States. In both states, we remain hyper-focused on the customer experience and loyalty to drive revenue with strong data science disciplines. We continue to make inroads, differentiating ourselves with a rationalized broad assortment of high-quality products and a deeply knowledgeable staff. While the overall cost of labor is increasing in our markets, we continue to focus on attracting and retaining the best talent in the market with progressive wages and benefits and employee engagement programs across all our banners.
In the Colorado wholesale market, cloud pricing remains compressed but has begun to show signs of stability. Quarter-over-quarter wholesale sales grew 29% from $3.2 million in the fourth quarter of 2022 to $4.1 million in the first quarter of this year. In New Mexico, we recently began our wholesale activity and given the limited assortment in the state, we believe this is a growth opportunity for the company. Our wholesale portfolio of products includes flower, house-free rolls, vape and roll-your-own pre-rolls. Our brand portfolio includes Purplebees and everyday read as well as licensed brands such as low farms. We believe this is a material growth opportunity for us, which will be a strategic emphasis going forward.
Earlier this month, we announced our new Executive Vice President of Commercial Sales, Chris Driessen. Chris was formerly President and CEO of Front Range Biosciences and has an over a decade of experience in cannabis. Prior to his role at Front Range Biosciences, he held roles as President and Chief Executive at Swan, where he will open into one of the most widely distributed and recognized rate brands in cannabis. This is a powerful addition to the team and will lead the expansion of the Schwazze House of brands, giving material distribution across both of its markets.
One of the key reasons we have been successful despite the industry’s challenges is that within our supply chain, we have a thoughtful approach to cultivation and manufacturing with the right size capital investment, automation, and dedicated expertise and attention to lean improvement that balances working capital and market pricing dynamics. Our continued focus on yield management, demand planning, consolidation, and capacity utilization has helped us improve our internal cost of goods throughout the quarter and will help us unlock working capital for continued investment and expansion. We also began internal distribution of products from our off-premise storage facility and expect full migration of suppliers to the facility by the end of second quarter 2023.
While we build out an even stronger infrastructure, we will continue to evaluate additional opportunities across the cannabis industry in our markets with a primary focus on retail expansion with adequate cultivation and manufacturing assets supporting the expansion. Our criteria for potential acquisitions include dispensaries that complement our footprint and have a loyal customer base, well-branded complementary products and accretive to the bottom line with material synergies. Any announcements regarding expansion intentions will be made once we have signed definitive agreements. And now
I’d like to turn over the discussion to our CFO for Forrest Hoffmaster to continue our financial review.
Thank you, Nirup. As mentioned earlier, first-quarter revenues of $40 million increased $8.2 million or 26% compared to $31.8 million for the same quarter last year. Quarter-over-quarter revenues remained flat as is seasonally typical for the industry. Income from operations was $5.6 million and improved $10.4 million over the $4.8 million loss from operations in the first quarter of 2022. Adjusted EBITDA for quarter one 2023 was $14.5 million or 36.3% of revenue compared to $7.9 million or 24.7% of revenue for the same period last year. We ended the quarter with $35 million in cash. Total cost of goods and services was $17 million compared to $20.8 million for the same period last year, representing a $3.8 million decrease and 18.6%. This was primarily due to overall cost improvements due to vertical integration in New Mexico. As a result, gross profit increased to $23 million or 58% of total revenue compared to $10.9 million or 34% for the same quarter last year, with quarter-over-quarter improvement as compared to $23 million or 57% of total revenue in quarter four 2022.
Total operating expenses totaled $17.4 million for quarter one, 2023 as compared to $15.7 million for quarter one, 2022, representing an increase of $1.7 million, driven by payroll tax refunds, offset by intangible asset amortization related to non-cash purchase price accounting adjustments from 2022 acquisitions reflected in selling, general and administrative expenses. Other income for quarter one 2023 was $758,000 compared to other expense of $20.7 million for the same quarter last year. Other expense in quarter one 2022 is driven by the accounting revaluation of the derivative liability related to the convertible note. As a result, Schwazze generated net income of $1.7 million compared to a net loss of $26.8 million in quarter 1 2022. We are pleased with our operating results at the start of 2023. Given our recent performance and ability to generate free cash flow in the current macroeconomic and industry-specific conditions, we remain optimistic that we can continue to improve core operations, successfully integrate acquired companies and continue our expansion and M&A plans.
Thank you for your time today. I’d now like to turn it back to Justin, who will open the call to questions and answers.
Thank you, Forrest and Nirup. Before we open the call to Q&A, I would like to thank you all for your continued support, encouragement and interest in Schwazze. We would now be happy to answer your questions. [Operator Instructions] Thank you.
A – Joanne Jobin
Thank you, Justin, Nirup, and Forrest. My name is Joanne Jobin. I’m the IRO for Schwazze, and I’ll be moderating the Q&A on behalf of the team today. And the first submitted question is regarding the Colorado and New Market – can you share more about what you are experiencing in the Colorado and New Mexico markets and how it is impacting the business. Nirup?
Hi, Joanne, thank you. Yes, as I mentioned in the talking points there, Colorado kind of remains depressed at a macro level with continued price pressure and inflationary trends. And so if you look at latest today’s results, quarter one in Colorado was down 14.2% over quarter one of 2022, but down about 4% from quarter 4 2022. So the market is still depressed, but wholesale flow pricing in Colorado is over the last few weeks here has remained steady. It is not – I think the downward slide is kind of staffed and then you are seeing some signs of stability in wholesale flow pricing, which all goes well for the future. I cannot predict when it’s going to go back up. But all I can tell you is that it’s starting to stabilize Also, the cultivation licenses in Colorado are also down since October, about 10% of the licenses have been surrendered. And so that’s also a good rationale for the market in terms of bringing it back to stability for the future.
Schwazze in Colorado, we continue to outpace the market in Q1. We outpaced the quarter by 8% plus. And our margins are remaining healthy, partly driven by, of course, the wholesale pricing, but also due to our operating playbook and our promotional strategy and our points of differentiation and offering a wide assortment of products for our customers. In New Mexico, what we are noticing what we’re seeing is increased licenses. So license counts are at the end of March was 6.33%. And of late, it has gone up from there as well. So there is some pressure in terms of sharing the pie, so to speak, but we are holding our own, and we are well positioned with great real estate and another operating playbook, which we have taken from Colorado, continues to work well in New Mexico, and we expect to have a good year there as well.
Thank you, Nirup. The next one is related to the recent acquisitions. First of all, congratulations on your recent acquisition announcement in Colorado and New Mexico, can you offer an update on your strategy and targeted store growth, Nirup?
Sure. As mentioned, we are currently operating around 42 dispensaries of densities currently. Now with the recently announced deals, we will be at 60 dispensaries total with 28 in Colorado and 32 in New Mexico. Our goal is to continue to grow share. We want to be – we want to have the highest market share in both our markets. We have ambitions to get to 100 dispensaries in Colorado, another 40 to 50 dispensaries in New Mexico through very thoughtful expansion, greenfield expansion and acquisitions. In Colorado, we’re starting to receive more inbounds in terms of opportunities, but we are going to be very delimit about what we look at and then make sure it fits our model and complements our current footprint before we act on it. And New Mexico as well, we are getting a lot of inbound in terms of businesses trying to come and join the Schwazze family. And again, here, too, we have to be patient and focused. And so we are pretty happy with our acquisition portfolio to date over the last several years, and we will continue to look to grow over the next years to come.
Thank you, Nirup. The next question is related to M&A, debt, and liquidity. So with the M&A target of 150 stores that you just spoke about and your debt position, can you give us a little more insight about your cash position and liquidity to meet these growth goals? Forrest?
Yes, I can take that. Thanks, Joanne. Nirup mentioned earlier, thoughtful expansion. So right now, we’re currently meeting our debt and tax obligations just ended the quarter with $35 million in cash, free cash flow of $2.7 million. In terms of the debt position, our leverage has and is remaining steady with the largest obligations coming in late 2025, 2026. So refinancing is always an option if it’s accretive for us. But our focus right now, as we mentioned a little bit earlier in our press release is on improving cash from operations and on operating working capital. And in terms of cash and liquidity and M&A targets, we’ve got a strong balance sheet and tend to keep it that way with rigid cash management disciplines and striving to stay above the $15 million watermark. And I think we don’t really talk enough about what our model allows us to do, which is deploy capital and resources efficiently with less risk exposure and improved conversion on new acquisitions. So we factored that in as well.
Thank you, Forrest. Alright. The next question is related to the recent news in Washington, D.C., always a hotly debated topic. There have been some pretty big announcements related to scheduling and descheduling and the SAFE Banking Act. Can you offer your perspective on the regulatory environment and these recent activities, Justin?
Yes. Thanks, Julianne. Good question. With regards to Washington, SAFE banking is really what I think is the next hurdle for us. And I think it’s going to come down to really criminal justice reform. And the two sites that are negotiating those provisions are – continue to have discussions and dialogue around that. It’s no secret that look, the business running on all cash is not safe, not say, for the workers and for the patients and the customers. So we really need to get this addressed. And I think it will get addressed if both sides of the aisle are somewhat reasonable with the expectations. But I think the really linchpin is going to be criminal justice provision in that. Obviously, Senator Mercy and Senator Danes are taking this up in the Senate Banking Committee, which is a strong positive. So we feel good about that. Representative Joyce has been a strong advocate really centered around the healthcare benefits associated with our veterans and having access to cannabis of medicine. So we’re seeing that continued dialogue at Washington. So we remain hopeful, but I think there is still a lot of conversations, a lot of work to do. The main thing is we’re going to continue to run our business the way we’re running it, continue to work on the things that matter, which is taking care of customers and becoming more and more efficient so we can serve those customers better. Thanks, Joa.
Thanks. Justin. And while we are on the topic of Fed laws, do you think you or Forrest could answer the question regarding how much of an impact on cash flow, do the Fed laws have on marijuana?
I am happy to take that, Joanne. So, we – short answer is we take a pretty conservative view to our allocations. And just looking back at 2022 results, we expect improvement of around 5% to 10% of revenue. Alright.
Thank you. Alright. Next question, and we are getting a lot of questions on the off-premises storage facility or the distribution facility. Can you please talk about the facility and your expectations over the next year, Nirup?
Yes. Joanna, I will. We have been working on this off-premise storage facility, which is primarily going to be used for internal distribution of products for our retail stores. And we went through all the regulatory and the general accounting needs to make sure that we are safe to operate and we opened the facility in March. And we have been transitioning suppliers week-over-week into the facility and distributing from the facility. So, if that transition is going to take four months, which basically means by the end of Q2, we would have all of our suppliers delivering to the off-premise storage facility, and then we will handle delivery to our stores from there. So, we see this as a very strategic advantage for the company as a whole. In terms of expectation, there is going to be several benefits to having this kind of a model operating for us. One, we have greater buying leverage, right. So, we have significant operational efficiency and reduced operating costs, not only for us, but for our suppliers as well. And finally, we are going to have the ability to react quickly to product availability at stores, our in-stock position in store with inventory visibility and fulfillment improvement will be a key kind of benefit of this facility. So, we are excited about this. We are just starting the process here. And the way we built our facility is it can handle growth. It can handle up to the 75 stores to 100 stores. And we are very excited to get started on it.
Thank you very much Nirup. Next question regarding business and working capital improvements, you earlier mentioned core business and working capital improvements. Can you share a bit more about that? Forrest?
Sure. Thank you. In terms of core business improvement, it’s primarily supply chain integration, grow-to-shelf integration with attention to our capital efficiency, which I mentioned earlier, grow yields, buying leverage, lean manufacturing, the four-wall retail excellence and integrating what we are learning from the customer through e-commerce, the customer loyalty program and our data science team. And in terms of working capital, our primary focus is on inventory efficiency across the system, supply and in-store through the off-premise facility that Nirup mentioned a moment ago with improved ERP, demand planning and again, a more mature off-premise facility over the next couple of quarters. We are also focusing on supplier relationships and payment terms. So, bringing days payable into a steady position and we think both will help free up cash.
Thank you, Forrest. Next question, Nirup, how did the company do on 4/20? And what are you learning about your customers in both states?
I mean clearly, with the growth in the number of dispensaries you have had and also the growth in the New Mexico market. We had our best 4/20 yet at Schwazze in the last 4 years in terms of total top line. We are trying to perfectly out of managing our customers and retaining our customers. We have our loyalty program called Gratify. This program cuts across all our banners across both states, giving it the ability to communicate with our customers in a very specific manner with promotions that also the deals that day one that individual wants. And our data science focus gives us deeper insights into customer patterns, and they are beginning to get traction on targeted promotions and redemptions, which not only helps us meet the needs of the customer, but also helps us retain them and become loyal to our brands across both our states. And so we believe that this kind of focus on data science and our customers over the last couple of years is going to help us in the long run in a tough market. When the going is tough, investments like these really pay dividends and we are seeing some of that happen.
Thank you, Nirup. Alright. Next question, can you share more about the go deep strategy that you are always talking about in the unrestricted license markets versus entering limited license markets? And are you looking to enter into any other states? Justin?
Yes. Thanks Joanne. With regards to what is the strategy is a retail forward strategy, it’s putting great stores, really capable people in those stores in high-traffic areas, take care of patients and customers. So, we are continuing to look at – there is a lot of real estate opportunities, a lot of license opportunities still in Colorado. They are still north of 650 retail licenses out there. So, we will be close. We will have about 28 stores with the things that we have in progress. So, we have a long way to go. And there are still things that we haven’t started really pursuing yet that requires us to have even more scale than what we have today in Colorado. So, you are going to continue to see us working hard and growing our store base product offering, and capabilities in Colorado, and we will be doing the same thing in New Mexico. Will we look at other states in the future, yes we will. As we have said before, are we focused on Colorado and New Mexico, we are. And there is still a lot to accomplish. We have terrific competitors in Colorado. We have very strong competitors in New Mexico. If you look at one of the larger companies still has a number of more stores than we do in terms of Ultra Health. So, you have got people out there that are doing really good stuff with their businesses. And we just have to continue to work on taking care of the customers and working with the industry in those states. And we will look at other states down the road, but for us to do that – for us to do that, it have to be really, really compelling. So, we are going to keep doing what we have been doing.
Thank you, Justin. The next question is related to continued growth and liquidity. Can you talk about the recent acquisition activity and the effect on stock dilution as well as your ability to meet your pending debt obligations? Justin?
Yes. That’s obviously an important topic for shareholders as we think about the number of fully diluted shares and what’s happening with the share price, which drives equity value in the business. So, the thing that we have really been working on and staying very disciplined is the work that we are doing on the M&A side and on the real estate side. So, ensuring that we are buying really high-quality businesses with good people, with good EBITDA, and we are buying EBITDA at a multiple less than where we are trading at. And then we bring those acquisitions in, and we try to make them better and grow sales as well as grow EBITDA. So, as long as we are acquiring businesses and then putting synergies on top of that, that accrete to the EBITDA and net income line will continue to create shareholder value. So, that’s very important. We are also very thoughtful about how we allocate the purchase price. And we tend to want to use some equity, some cash as well as seller notes. We think that’s a creative way of getting realistic financing with realistic rates versus where the debt markets are today with cannabis. So, I think we are definitely balancing on the bottom in terms of being able to buy really good businesses at attractive multiples. And I think that will prove out to be a real benefit for us as we go and we get higher multiple expansion and we grow the business. So, we are staying very disciplined around that. We have plenty of liquidity. So, in terms of cash, as Forrest said, we have plenty of cash, and we are meeting our commitments on the debt and tax side, and we are generating free cash flow from operations. So, that’s a real benefit. So, to the extent that we ever had an issue, we could slow down CapEx investment and hunker down to be a little tighter on expenses. So, this – we really think Schwazze is built to win in the long haul and we will keep doing that. And obviously, we need to take care of our shareholders as well as customers.
Thank you, Justin. We are pretty much at the quarter of the hour now, and that is all the time we have for questions today. Justin, do you have any final remarks before we end the call today?
No, I just want to – as always, I want to thank our frontline associates that taking care of customers or growing medicine or that are distributing and producing our products. They have done a great job. They have – they continue to want to do more and do a better job and they are very passionate about taking care of the customers. So, I want to thank them. Thank our management team. Certainly, want to thank our shareholder base for their continued interest in us. We are going to continue to try to grow that. And I think that things are around the corner. So, it’s one of these where it’s – Colorado is in a difficult shape right now from a market growth perspective. You are seeing a lot of competition in New Mexico with new licenses. So, we are – I think we are up for the challenge, and we are showing that in the first quarter. We will continue to work in delivering value. So, I just want to thank everyone for supporting us. We will keep working hard at it and once again build trust.
Thank you, Justin. And for those people we didn’t get to today, if you would like to e-mail me your questions at firstname.lastname@example.org, I will make sure that everyone’s questions were answered. I would like to remind everyone that this webcast is available on the Schwazze website. And once again, thank you for joining the Schwazze first quarter webcast. Good day, everyone.
Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.