Medicine Man Technologies, Inc. (PNK:SHWZ) Q1 2023 Earnings Call Transcript May 11, 2023
Operator: 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.
Joanne Jobin: 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.
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.
Photo by CRYSTALWEED cannabis on Unsplash
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.
Nirup Krishnamurthy: 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.
Forrest Hoffmaster: 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.
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Q&A Session
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Justin Dye: 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?
Justin Dye: 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.
Joanne Jobin: Thank you, Justin. And for those people we didn’t get to today, if you would like to e-mail me your questions at info@schwazze.com, 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.
Operator: Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.
