Medicine Man Technologies, Inc. (PNK:SHWZ) Q4 2022 Earnings Call Transcript

Medicine Man Technologies, Inc. (PNK:SHWZ) Q4 2022 Earnings Call Transcript March 29, 2023

Operator: Good afternoon. My name is JP, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schwazze’s Fourth Quarter Conference Call. All lines have been placed on mute to prevent any background noise. Thank you. Ms. Joanne Jobin you may begin your conference.

Joanne Jobin: Greetings, and welcome to the 2022 fourth quarter and year end 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 and in Schwazze’s Form 10-K for the year ended December 31, 2022.

In addition, other information is more fully described in Schwazze’s public filings with the U.S. Securities and Exchange Commission, which can be viewed at www.sec.gov on 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 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. I will provide a brief overall business review and our President, Nirup Krishnamurthy, will provide operational details before turning the call over to our newly appointed CFO, Forrest Hoffmaster, who will review our quarterly, and year-end financial results in detail. I will then conclude our presentation with some final thoughts. And afterwards we would then be happy to take your questions. I am pleased to report that for 2022, Schwazze once again outperformed the Colorado market. We successfully entered the New Mexico medical and recreational market and increased our total revenues by 47% year-over-year, with retail sales growing 92% over prior year. We also generated $11.4 million of after tax cash flow from operations in 2022.

Through hard work, diligence, our dedicated attention to detail, we continued outperform our markets despite an ongoing challenging environment. I am extremely proud of the Schwazze team, which I believe is one of the best and strongest in the industry today. We’ve worked hard to continue to grow our market share outperforming our markets in Colorado by 11%, increasing our profitability rate with ongoing improvement, and we continue to generate free cash flow from operations after paying taxes and meeting our capital spending and debt obligations. Our team continues to deliver on our vision to become the most admired cannabis company in the industry providing trusted products, brands, and exceptional customer experiences. Schwazze continues to execute its strategy to go deep in our operating states and build customer loyalty and market share.

Our long-term plans of building a regional powerhouse, delivering a wide assortment of high quality products with exceptional customer service backed by our operating playbook is a winning combination for our customers, our employees, and our shareholders. And now I would like to turn the call over to our President, Nirup Krishnamurthy, to take us through some of our accomplishments for 2022.

Nirup Krishnamurthy: Thank you, Justin. Let’s review the highlights of the fourth quarter of 2022, followed by the highlights of our annual performance. Like the rest of our industry partners, we continue to navigate broader economic conditions in our country, impacts of the failure of the SAFE Banking bill, as well as dynamics in our core markets in Colorado and New Mexico. Despite these challenges, our team delivered another record year and quarter in terms of revenue and adjusted EBITDA growth. We have an experienced and dedicated team, and I would like to thank all of our team members for their hard work, enthusiasm, operational excellence, and most of all, their commitment to our customers. In 2022, the company completed seven acquisitions and opened six new stores not related to acquisitions, which increased the company’s retail presence from 18 dispensaries in 2021 to 41 dispensaries as of December 31, 2022, 16 in New Mexico and 25 in Colorado.

The company now has five operating cultivation and two manufacturing facilities in Colorado and New Mexico. All these accomplishments are too numerous to go through one by one on this call, but they’re listed in our financials and of course, in our press release. The first quarter of 2023, we continue to roll out our plans. We rolled out the enhanced custom e-commerce platform in New Mexico for our Greenleaf customers. We opened two new all-green locations in New Mexico, one located in Albuquerque and the other in the southern town of Carlsbad and in Colorado, we signed a definitive agreement to acquire retail locations in Fort Collins and Garden City, two attractive markets whose customers they currently do not serve. We have previously announced our licensing agreement with Lowell Farms and have now successfully launched their premium line of pre-roll joints to dispensaries rates in Colorado and New Mexico.

In addition, we are introducing a Schwazze brand called EDW, which stands for Every Day Weed. The first product being launched in the second quarter under this brand in both our markets will be a half-ounce, full flower, roll your own joint for our core customers. We are excited about our multi-year house of brands strategy designed to meet the needs and growing demand of customers in our markets. On April 1, 2022, Schwazze commenced selling both recreational and medical cannabis in New Mexico. We opened six new stores in New Mexico last year and two more in the first quarter of 2023. These stores increase our presence in key markets, including Albuquerque and Southern New Mexico cities such as Sunland Park, Ruidoso, Alamogordo, and Carlsbad.

We have incorporated our operating playbook here as well and are now reaping the rewards; plans to open additional stores throughout the state will be focused on adding coverage to areas where we currently do not serve customers. We’re also focused on our internal operations to ensure we are being as efficient as we can to drive lower cost of goods from our production facilities by applying lean practices and lower operating costs at our dispensaries through efficient scheduling and inventory management, we expect that these efforts, along with our retail playbook will further improve our margins and our positive cash flow from operations this year after meeting our tax and debt obligation along with CapEx spending. Now I would like to briefly give you our view on our two markets.

Colorado in particular saw a material decline in wholesale pricing in 2022, which affected retail pricing, which in turn led to pressure on top line revenues. We as a company have been focused to ensure that our volumes in terms of unit sold, remain steady in these conditions and have been rewarded with our results. We expect pricing pressure to continue in 2023, but we are now well positioned to drive results in these conditions. In the New Mexico, the overall market has been steady since the launch of the adult-use program. However, the number of retail licenses has more than doubled since April, putting pressure on store level sales. But again, our operating playbook combined with our high quality product assortment has meant that our Greenleaf dispensaries, our first choice for customers in the state.

Our combined revenue for the quarter totaled $40.1 million, compared to $26.5 million in the same quarter last year, representing a 51% increase. Here are some key quarterly retail statistics for our Colorado and New Mexico operations. Two-year stacked IDs for Colorado were down 6% and one-year IDs were down by 9% year-over-year. Average basket was $60.86, up 1.5%. Customer visits were 416,717, and that was down 10.5%. The two-year stacked IDs for New Mexico were up 57% and one-year IDs were up by 43% year-over-year. Average basket size was $52.54, down 11.8%, and customer visits were 219,665, up 61.7%. Here are the comparable year-over-year retail statistics for our Colorado and New Mexico operations. Retail statistics 2022 compared to 2021 for Colorado and New Mexico included the following: in Colorado, one-year sales ID were down 10.5% and two-year sales ID were up 0.1%.

Average basket size was 60.32 or down 1.9%. Customer visits were 1.685 million or down 8.8%. In New Mexico, one-year sales ID were up 33.8% and two-year sales ID were up 48.2%. Average basket size was 54.04 or down 11.2%, and customer visits were 734,000 or up 50.7%. We are pleased to report as previously noted that we once again outpace the state of Colorado by 11%, a remarkable achievement when you consider the challenges faced by the industry and in particular, Colorado at this time. We will continue to evaluate additional opportunities across the cannabis industry with a primary focus on retail expansion with adequate cultivation and manufacturing assets supporting the expansion. Our criteria for potential acquisitions include dispensaries that compliment our footprint and have a loyal customer base, well-branded products that compliment ours and accretive to the bottom line with material synergies.

Any announcements regarding expansion intentions will be made once we have reached definitive agreements. Lastly, we have been openly discussing the overall shift away from our consulting business, and late this year we made the decision to completely move away from this business to concentrate our resources and our core business. This is reflected as a loss on disposition at year-end. And now I’d like to turn the discussion over to our newly appointed CFO, Forrest Hoffmaster to continue our financial review.

Forrest Hoffmaster: Thank you, Nirup. I’ll review our financial results for the fourth quarter and year end 2022. As mentioned earlier, fourth quarter revenues of $40.1 million, increased $13.6 million compared to $26.5 million for the same quarter last year, while seasonally lower than third quarter revenues of $43.2 million, the year-over-year quarterly increase was 51% as compared to the year-over-year third quarter increase of 36%. Adjusted EBITDA for Q4 2022 was $13.3 million and 33% of revenue compared to $7.5 million and 28% of revenue for the same period last year. Once again, we generated positive cash flow from operations of $5.4 million after our tax and debt related obligations. For the year ended December 31, 2022 we achieved $159.4 million in revenue, an increase of 47% compared to $108.4 million in revenue in 2021.

Much of our year-over-year revenue growth was driven by our retail segment with the New Mexico entry acquisitions in Colorado and six new store openings in New Mexico. Wholesale revenues continued to be affected by market over supply and price compression. Total cost of goods and services was $74.3 million compared to $59.1 million for the year ended 2021, representing an increase of $15.3 million or approximately 26%. This increase is primarily due to volume from the New Mexico acquisition and subsequent opening of six new stores in 2022. The rate improvement is the result of the company’s vertical integration efficiencies, buying power and retail playbook. As a result, gross profit increased to $85 million or 53% of total revenue compared to $49.4 million or 46% of total revenue during the same period in 2021.

Operating expenses totaled $72.2 million for the year ended 2022 compared to $38.9 million for 2021, representing an increase of $33.2 million. This increase was largely due to increased selling, general and administrative expenses predominately attributable to expenses related to acquisition activity and increased overhead associated with the entry into the New Mexico market, and certain one-time impairment charges of $8 million of goodwill associated with our non-plant touching wholesale businesses serving the broader cultivation markets. Other expenses for 2022 were $16.4 million compared to $8.5 million of other income in 2021. This was largely driven by cash and non-cash debt related interest obligations and a $4.7 million one-time disposition of assets mostly associated with the discontinuation of our consulting business as part of our strategic move to shift our full-time attention to our core segment.

As a result, Schwazze generated a net loss of $18.5 million compared to net income of $14.5 million for the year ended 2021, largely related to the impairment charge, interest expense and disposition of assets. Adjusted EBITDA was $52 million, representing 33% of revenue compared to $32.2 million and 30% for the same period last year. This is derived from operating income and adjusted for one-time expenses, merger and acquisition and capital raising costs, non-cash related compensation costs and depreciation and amortization. Please see the financial table in our press release for adjusted EBITDA details. As already mentioned for the year ended 2022 we generated $11.4 million in positive cash flow from operations compared to $8.4 million for 2021 after meeting our tax and debt obligations and CapEx spending.

We ended the year with cash and cash equivalent of $38.9 million. Given our recent performance and current cash position, we remain optimistic that we can 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

Justin Dye: Thank you, Forrest and Nirup. Before we open the call to Q&A, I would like to thank you and all your continued support, encouragement and interest in Schwazze. We would now be happy to take your questions. To ask a question, please click on the link on the Investor Relations portion of our website and submit. Thank you.

A – Joanne Jobin: Thank you, Justin. Good afternoon, everyone. My name is Joanne Jobin, and I am the IRO for Schwazze, and I’ll be moderating the Q&A portion of the call today. The first question is; how is the New Mexico acquisition performing? That seems to be a big question on everybody’s mind. Justin?

Justin Dye: Yes. Thanks Joanne. Nirup, will you please €“ will you please take that one?

Nirup Krishnamurthy: Sure, Justin. Well as you all know, we closed on the acquisition in New Mexico with 10 dispensaries, three farms and a MIP on February 7 of last year. And on April 1st the state went recreational meaning adult use program. And I will tell you that we have been very happy with what has happened in New Mexico. It has been a fantastic acquisition for us. In addition to the 10 stores since we acquired we will added six more stores in key areas of the state especially around the southern part of New Mexico. And we are seeing a really good performance in all of our stores in New Mexico. We have maintained our market share and we are seeing that our stores are very quickly becoming the first choice for customers over in New Mexico.

We have a new President we appointed in the first part of this year. His name is Ken Diehl. And he has done terrific job in implementing our operating playbook and driving customer traffic and promotional effectiveness across the state. And so we are really happy and we in addition to the six stores we added last year, in the first quarter of this year, we added two more locations bringing the total to 18. And we expect to continue to grow the state and expect to fill in other areas where we currently do not serve customers. So overall, it’s going as well as they can expect it to. Thank you.

Joanne Jobin: Thank you, Nirup. Keeping on with the New Mexico acquisition we’re getting a lot of questions regarding some of the states surrounding Colorado and New Mexico and that those states are considering some form of legalization. Do you anticipate any impact on revenues on your border areas in your dispensaries?

Nirup Krishnamurthy: Yes. I don’t know which states we are considering here, but if you look at surrounding states we have Arizona, Nevada, which are already legal and we have Texas, which €“ where the medical program is legal. And so at least in the short-term I do not expect any material impact to our sales in both these states.

Joanne Jobin: Thank you, Nirup. Thank you. The next question is the €“ you mentioned the launch of EDW and your partnership with Lowell Farms. Can you tell us more about that and any other brand activity, and can you update us on how Autograph has been going?

Nirup Krishnamurthy: Sure, Joanne. We in terms of our retail footprint we have 43 locations that are currently operating in both these states. This kind of serves as a platform for us to embark on a multi-year product strategy or a product brand strategy that allows us to develop unique products within our own brand portfolio, and we are starting to do that. Today in Colorado we sell flower, we sell pre-rolls, we sell a vape line using Purplebees, and we are starting to introduce other products. So as announced in the last call we entered into a partnership with Lowell Farms, and I’m happy to announce that we have launched it in both states in different fashion. In Colorado we decided to go outside of our network to begin with, to generate more revenues and we are happy with the demand and we are actually ramping-up our production in Colorado to meet our demand.

So the demand has been solid, and April next month we’ll be launching it internally in our own footprint with a big €“ with a big promotion for 420. So the overall, the Lowell Farms operations in Colorado has gone really well and really we are ramping our production to meet demand. In New Mexico we went the other way. We launched it in our stores in New Mexico, and now we are starting to expand outside our footprint. So the margin profile €“ the price points are a little higher because Lowell Farms is a premium product, and there is €“ and we are seeing very good demand for the product at this point in time. In addition we are launching EDW, everyday weed in Colorado this month or end of this month, early next month. And essentially that is a product where you can make your own €“ roll your own pre-rolls on ground flower.

And it’s a very unique product that is not available in the marketplace today in our two states, and we are anxious to see how it performs. We expect it to go really well. And this is all part of a multi-year program, as I mentioned before, and so we are pretty happy with the progress to date.

Joanne Jobin: Okay. Thank you, Nirup. Okay. We are going to swing over to finance now. Forrest, this is a question very much for you regarding cash flow and EBITDA?

Forrest Hoffmaster: Yes. EBITDA, thank you Joanne. EBITDA certainly had a strong year. Finished the year with $52 million in EBITDA and 33% on the bottom-line, so much improved over €“ year-over-year, and adding more efficient acquisitions with €“ through the year. In terms of cash, we ended the year with $38 million, so ended strong. We’re generating or generated $11.4 million in operating cash flow at the end of the year which is $3 million over last year, after considerable spending on acquisitions and CapEx and also satisfying existing debt and tax obligations. Our balance sheet remains strong. This is obviously a big topic for the industry. It’s a big topic for us. We’re looking at it daily. We have ample liquidity, good working capital to pursue the strategy, and they’re also aggressively improving ways we can operate and support scale through cost takeout measures and some of the synergies that we have as well as accelerating the integrations of future acquisitions.

So right now we’re focused on delivering positive cash flow, net of the acquisition costs for the year while driving organic growth and yes, continuing to reinvest that back into the business.

Joanne Jobin: Thank you, Forrest. Can you continue on and talk a little bit about cost controls and what you’re doing to tease out a little bit more in your cost control systems?

Forrest Hoffmaster: Sure. Thank you. I think I should just start with the strength of the team that we have here in the organization. Just deeply experiencing retail, manufacturing, cannabis, they know how €“ they know where the levers are and they know how to operate in challenging environments. So just really top to bottom focused on retail efficiencies, all the retail playbook aspects of operating a solid retail business unit from labor and product cost management. Making sure that we’re creating an excellent customer experience and then focused on passing through cost efficiencies and the improvements in our cultivation and manufacturing facilities. So a lot of expertise there, working on making sure that we’re continuously improving costs and passing that through, and then making sure that we’re improving the SG&A in the business.

So constantly looking at how we’re supporting both states where our sale or where our G&A is going and how we’re using it, and where we can find more efficiencies. And then lastly, just working on how we’re accelerating. I think I mentioned this earlier, the integration of future acquisitions, making sure we’re getting them to profitability faster and creating the synergies that we need to make them successful.