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spk00: Greetings and welcome to the first quarter 2021 conference call and webcast for Schwoz. We are being hosted by Justin Dye, Chairman and Chief Executive Officer, and Nancy Huber, Chief Financial Officer. Following the presentation, management will take questions submitted via the web link found on Schwoz'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. The words anticipate, could, enable, estimate, intend, accept, believe, potential, will, should, project, position, objective, determine, vision, and similar expressions as they're related to schwas are as such a forward-looking statement. Investors are cautioned that all forward-looking statements involve risks and uncertainties that may cause actual results to differ from those anticipated by Schwoz at this time. Additional information on factors that could cause results to differ is available in the Schwoz earnings release and on the Form 10-K for the year ended December 31, 2020, and the Form 10-Q for the quarter ended March 31, 2021. In addition, other remarks are more fully described in Schwoz's public filing with the U.S. Security and Exchange Commission, which can be reviewed at www.sec.gov or on the company's investor relations website. I would now like to turn the call over to Justin Dye.
spk03: Thank you for joining us this afternoon. I will provide a business update and some brief commentary on the industry afterwards. Our CFO, Nancy Huber, will review our first quarter financial results in detail before I conclude our presentation with some final thoughts. We would then be happy to take your questions. During the first quarter of 2021, the company announced the completion of its acquisition of Starbucks, bringing our total number of retail dispensaries to 17, including four Mesa organic dispensaries acquired in April of 2020. and now rebranded as Starbucks. During the quarter, we announced a quarter one 2021 revenue increase of $19.3 million compared to $3.2 million during the same period, representing a 504% increase. Proforma revenue calculated as if we had owned all the Starbucks dispensaries from January 1st for the first quarter 2021 was estimated at $26.8 million. The company's adjusted EBITDA for the first quarter of 2021 was $5.8 million. I'm also pleased to report that we also recorded positive cash flow from operations of $1.7 million compared to last year's loss of $2.5 billion. Same-store sales of the 13 Starbucks dispensaries when compared to last year prior to taking ownership of the assets, were $18.8 million, up 38%. Most notably, the average consumer basket size was $58.79, up 19.5% over quarter one of last year. And recorded customer visits have also increased 15.8% to 319,800. The company does not have equivalent prior year data for the four Mesa organic stores acquired in April of 2020, but that data is expected to be included in the next quarter. Since completing all of our acquisitions, approximately 80% of our revenue is derived from retail and 20% from our wholesale business. Through our implementation of the Synergy Realization Office, or SRO, we have been able to effectively contribute to growth and efficiencies that are being factored in retail locations. At our Purple Bees manufacturing division, we saw an increased production output grow from 76 kilograms in April of 2020 to 225 kilograms in April of 2021, 196% increase. At Mesa Organics, we recorded retail product margin growth from 42% to 56% from April 2020 to April 2021. And at Starbucks, our retail product margins increased from 50% to 58% from December 2020 to April 2021. We're still refining and holding our business practices with elevated retail disciplines and product efficiencies. in areas such as purchasing, stocking, and general merchandising. Our best-in-class playbook leverages our in-house M&A integration and synergy office and utilizes our advanced data analytics to realize synergies and operating efficiencies. We expect these practices will continue to positively impact our efficiencies across the board going forward. At this time, we have no comment on the status of federal and state government laws regarding cannabis legislation. However, We are, as always, closely monitoring any federal and state changes that would impact our industry and are poised to make any changes necessary. Our ongoing efforts to increase our retail footprint include the recent application for home delivery of products to Aurora, a suburb of Denver, Colorado. The expectation is that this application will be approved based on previous experience with submittals and approvals. We're planning on quarter three entry into the home delivery marketplace. And now let's move towards the Colorado cannabis market in general and where Schwoz sits in. Based on recent BDS analytics estimates, Colorado sold $557 million of adult use and medical cannabis product during the past quarter, an approximate 25% growth year over year compared to $444 million recorded in the same quarter last year. I'm pleased to report that Schwoz surpassed this number by 13%, for those stores where we have year over year measurement, demonstrating our ability to outpace and capture market share in this hyper growth industry. Colorado's growth was directly driven by an increase in retail units from 59.5 billion units to 76.3 million, representing an increase of 28% year over year. We expect that 2021 will be another record year for Colorado due to the quarter over quarter growth rates from Q4 2020 to Q1 2021. Based on conversations with our customers, as habits have changed along with the entrance of new cannabis consumers, or as we like to refer to them, canna-curious consumers, keep in mind that the market was somewhat supported by COVID stimulus and relief checks. Therefore, the growth rate for the remainder of 2021 may be tempered as the relief is eliminated. However, we strongly believe that the underlying Colorado market has changed by an order of magnitude greater than the benefits realized from stimulus relief. For example, 16.9 million more units were sold in quarter one of 2021 compared to quarter one of 2020, demonstrating that Colorado will continue to operate as the second largest legal cannabis market in the U.S. with greater than $2 billion in sales. Turning to the future, we continue to evaluate additional opportunities across the cannabis industry in the areas of cultivation, manufacturing, and retail dispensaries. Our criteria for potential acquisition includes the following revenue growth or growth potential that exceeds Colorado's averages, EBITDA profitability with synergy opportunities, attractive acquisition prices that are accretive to our shareholders, and provides additional products and services in our attractive locations. Any announcements regarding expansion intentions will be made once we've reached definitive agreements with prospective partners. Let me also reiterate that we believe our home state of Colorado represents an attractive geography to continue building out our platform. Since it provides us with the opportunity to acquire targets that are sophisticated and profitable and have already weathered the early boom and bust cycle of the industry. And now I'd like to turn the discussion over to Nancy to continue our first quarter financial review.
spk01: Thank you, Justin. I'd now like to review our financial results for the quarter ended March 31st, 2021. As Justin mentioned at the top of the presentation, total revenue for Schwoz during the first quarter was $19.3 million. representing an increase of approximately 504% compared to $3.2 million during the same period in 2020. With the refocus of our business on plant touching dispensaries, manufactured infused products, or MIPS, and cultivation, we have changed our segment reporting to more closely align with how we manage and evaluate our business performance. We will now be discussing our segments by retail, which includes dispensaries, wholesale, which includes MIPS, Big Tomato, and Success Nutrients, and other, which includes revenues from consulting and other small revenue areas. Retail sales for this quarter were $11.8 million compared to prior year of no retail sales recorded, and wholesale operations revenue, which increased to $7.4 million from $2.5 million and other, which was $0.1 million this period and $0.7 million the previous year. The increase in retail and wholesale revenue is attributed to the acquisition of Mesa Organics in April 2020 and the completion of the acquisition of Starbuds in March 2021. The decrease in other is due to the reduced focus in consulting. Total cost of goods and services were $12.1 million during the three months ended March 31st, 2021, compared to $2.1 million during the same period in 2020. This increase was due to increased sales in retail and wholesale and a one-time $2.2 million purchase accounting charge for writing up inventory to fair market value for purchase accounting for the Starbucks acquisition. Gross profit increased to $7.3 million during the three months ended March 31st, 2021, compared to $1.1 million during the same period in 2020. Gross profit margin increased as a percentage of revenue from 32.9% to 37.5%, mostly driven by the strength of Mesa Organics and Starbucks acquisitions. Adjusted for one-time purchase accounting, the gross margin for Q1 2021 was 48.9%. Total operating expenses were $8.7 million during the first quarter, compared to $5.2 million during the same period in 2020. The higher expenses were due to increased selling, general and administrative expenses from the addition of the dispensaries, professional service fees, and non-cash stock-based compensation. Q1 2021 adjusted EBITDA was $5.8 million, 30.2% of revenue. This is derived from net loss before income taxes, adjusting for other income, one-time expenses, merger and acquisition and capital raising costs, non-cash related compensation costs, and depreciation and amortization. See the financial table in our press release for adjusted EBITDA details for Q1 2021 adjustments from net loss before income taxes for the quarter. Q1 2021 net loss was $3.6 million or a loss of approximately 9 cents per share on a basic weighted average as compared to a net loss of $1.4 million or a loss of approximately 3 cents per share. on a basic weighted average during the three months ended March 31, 2020. During the first quarter, the company generated positive operating cash flow of $1.7 million and $21.7 million in total cash flow, ending the quarter with $23 million in cash and cash equivalent. Turning now to the outlook for 2021, we are updating our guidance projections related to the low end of previous guidance increasing revenue guidance from $105 to $110 million and adjusted EBITDA up from $28 million to $30 million on the low end. Therefore, our revised guidance now includes projected revenue of approximately $110 million to $125 million and projected adjusted EBITDA of approximately $30 million to $36 million. The company remains optimistic regarding the full year based on reported results to date, the completion of the Starbucks acquisition, and the integration of the two companies which is proceeding above expectations. Thank you for your time today and now I'd like to turn back to Justin who will open the call to questions.
spk03: Thank you for all of your continued support, encouragement, and interest in Schwoz. I would like to recognize all of our employees who are doing a terrific job in taking care of customers and helping us build a great company. So thank you. We would now be happy to take your questions. To ask a question, please click on the link on the investor relations portion of the website and submit. Thank you.
spk02: Thank you. Thank you, Justin and Nancy, and thank you everyone for participating in Schwoz's first quarter webcast. Our first question submitted is, you are currently focused in Colorado but have an aggressive expansion plan. Can you discuss what that looks like for Colorado and other markets?
spk03: Yeah, thank you. Thank you for the question, Joanne. Colorado is a $2.4 billion market. It's a very large market, second largest market in the country, grew north of 25% last year. There is plenty of opportunities to continue to grow organically and inorganically in the state of Colorado. So we certainly will be focused to continue to grow our market share there and stay focused on strategy. Now, as we all know, there are other states that are certainly opening to cannabis, both on the medical and rec side. And we'll be very careful and be very thoughtful about how we think about our next state going forward. So I don't really want to put a timeframe on it. I see a number of questions here about that. But we have great opportunities in Colorado. We believe and we've announced that we believe we can double the business in Colorado, taking our revenues well north of $200 million, and we're going to continue to be focused on that. And these are acquisition candidates that are profitable, and we think by putting them together and sharing best practices between the acquisition target as well as us, that we can continue to get better, drive better margins, drive better efficiencies, and drive better competitive advantage. Thank you.
spk02: Thank you, Justin. The next question. Now that we've talked about all of these expansion plans, what does that look like financially? Do you plan to do a raise? If so, how much? Where is the funding coming from now?
spk01: We currently have about – we have a $5 million commitment on debt for a certain asset purchase that we are completing the definitive agreement for. So we have one – bit of debt commitment, and then we have $23 million on our cash balance sheet. So we do have enough cash to complete some of the acquisitions that we're looking at. There are some large acquisitions that we are evaluating, and if those come to fruition, then we will be looking both at the equity and the debt or convertible debt market, and we'll use the most cost-effective solution that we can find That's to our shareholders' advantage at the time.
spk02: Thank you, Nancy. Keeping on the acquisition strategy questions, when do you plan to deploy? Would the new strategy involve individual dispensaries or the takeover of another large group or entity such as Starbucks?
spk03: Yeah, thank you for that question. You know, we remain balanced in how we're thinking about the business. We're a retail-led organization, so we certainly believe retail is the place to start by creating a great opportunity for customers to get great products at a great value with great service. So we'll start there. But in general, we like running an integrated, vertically integrated business. And I think for us to go and, you know, we're not of the mindset today that we would go buy, you know, one or two retail stores and then build out a network within a different state. We would, if, if those opportunities present themselves, we would look at buying a business with some scale that we think would have good synergies with us. So, and I know there's to just add onto that, there's been a question about growing capabilities in our, in our operations. We do have a small 4,000 square foot grow capacity in Denver that became a part of the Starbuds acquisition. We're continuing to look to grow that capability internal, but we also have relationships with over 30 growers in the state where we have great partnerships and we're going to continue to be a good customer with them in acquiring high quality biomass as well as flowers. you'll see us expand into having more of our own capabilities, but we'll also continue to be a large purchaser out there as well.
spk02: Thank you, Justin. The improvements you've seen in product margins is impressive. Do you think you can have that impact in all of your acquisitions going forward? Go ahead, Justin.
spk01: Okay, so... We really appreciate that question. It's very on point in terms of our strategy. We're really happy with the results from implementing our operating playbook and systems in the acquisitions that we've made and Justin talked a little bit in his remarks about how much of an impact that's had. That said, every acquisition is different. Everybody's operating at a little bit different levels and some are much further along the growth path than others. We do believe as we look at all of the acquisitions, you know, we are focused on acquisitions where we can affect synergies, but every level is going to be different. So I think we'll see potentially more with some than we've seen with the current ones. StarBuds was certainly operating very efficiently and less with others. So hard to say.
spk02: Okay. Thank you, Nancy. Justin, did you wanna add to that?
spk03: No, Nancy said it well. It really depends on the opportunity and we'll take our best practices and take the other operators' best practices and look to see where we can create value.
spk02: Okay, next question. How fully integrated do you plan to be in Colorado? Do you intend to focus on cultivation, retail, or both? And are you committed to or planning to be fully integrated in other markets and states?
spk03: Yeah, as I said earlier, in Colorado, you'll see that we'll have our own growing capabilities in addition to partnering with other growers. So I think you can see a balanced approach there. Our intention is not to have 100% of our own cultivation capabilities. One, I think there's there are really good partners out there in the supply chain that we want to continue to work with. And also, I think we can deploy capital more intelligently in our retail banners as well as in our brand development and our manufacturing.
spk02: Thank you, Justin. Okay, let's switch gears. The next question is, you announced May 11th that you were forming a biosciences subsidiary. Can you please elaborate on that and what it means for the company going forward?
spk03: Yeah, great question. The company's generating free cash flow. We will fund the R&D capabilities, and it's both R&D and new product development, which is a part of innovation, which I think for any of these businesses is very important as we think about launching new products, new capabilities, doing research on different cannabinoids, and then making those available through our products. So, I think that's an important piece of it, and we'll look for rapid application to bring those to market in products. And we're very excited about that. So that'll be both innovation as well as R&D. And it's a bite-size investment, but we think it makes a lot of common sense in how we're deploying capital and investment there, and the company's operations will pay for it. So it's not too big of an investment.
spk02: Okay. Thank you, Justin. Next question is, looking at the balance sheet, in addition to the $40 million of goodwill, there is a $97 million charge in intangible assets. Could you give some color on how those intangibles are being qualified?
spk01: Sure. If you look at our 10-Q, there's a detail on that in – Section 5, that breaks out those intangible assets. About $88.7 million is license value. So with the acquisition of Starbucks and Mesa, the licenses for those dispensaries, as well as the GROW and the MIP, have a license valuation attached to them. And that's about $88.7, as I said. And then there are smaller de minimis amounts for trade name and customer relationships. non-competes and some other things, but they are detailed in the 10Q.
spk02: Thank you, Nancy. Next question is, what is the fully diluted share count assuming all classes, warrants, and options?
spk01: So we did a recent calculation when our stock was about 260, looking at warrants and options that were vested in the money, and it resulted in about 120.2 million shares. That includes the preferred shares being converted into common as well as our common stock.
spk02: Okay, thank you. Another question on stock. Your stock seems to be very thinly traded. Are there plans to improve liquidity and how will you accomplish this?
spk01: So we are working on telling our story. We recently have become the company we are. In fact, it just concluded in March the acquisitions of Starbucks. So we have been working on getting out two conferences and making sure people are aware of who we are. We believe that will help in terms of trading interest and getting out to a wider audience so that we are reaching more and more people who might be interested in cannabis in the Schwoz name. And then as we raise capital, we'll evaluate the opportunity to improve liquidity. We have just so many shares that we've issued at this point and number of people are holding on to them so there's not as much trading as we'd like to see but as we have the opportunity to add capital structure and improve the liquidity we will Thank You Nancy the next question is can you comment on the pricing trends in the Colorado market yeah we've seen you know on the
spk03: On the wholesale side, in terms of flour, things have remained fairly constant. So we've not seen a great deal of inflation. We do expect to see some more inflation during the busier times of the year this summer from a cyclicality standpoint. But in general, the market has remained fairly constant, both at retail. We've seen very consistent pricing. retail and then coming through the supply chain as well. Now, on the distillate, regarding the distillate market, it is fairly tight right now. We have certainly seen some growing pressure with biomass, but we've been able to offset that through passing that through to the customers. So we haven't seen any major, we haven't really seen that sort of focus and flow through to retail. And I think that I think you're seeing more and more supply coming online on the biomass side, and I think that'll kind of remain fairly stagnant.
spk02: Okay. Thank you, Justin. The next question is a comment. Can you comment on the Safe Banking Act movement, Section 2280E? Yeah, let me handle that.
spk03: We obviously spend a lot of time working on legislation and working on lobbying and making sure our voice is heard at the federal level, as well as the state and local level. We think it's likely. It's not for sure, but we think it's likely we could see safe banking with the ability to take action. credit cards, as well as open up banking services to the industry. We think that could happen as early as the end of this year, perhaps early next year. With regards to Section 280E from a tax perspective, it's our general view that we think we'll have to see decriminalization at a federal level and having cannabis be descheduled. So we think that's probably a little bit farther down the road. But, you know, we remain optimistic. I think from a regulatory standpoint, things have never looked brighter for the industry. We have lots of momentum for action at the federal level. And, you know, I think you're going to see some meaningful in the coming months and years.
spk02: Thank you, Justin. This next question is a multi-part question on M&A. This week, Trulieve announced the acquisition of Harvest Health. There have also been a number of other consolidation announcements in the space. How does this affect Schwoz's expansion plans going forward?
spk03: Great, great, great question. Obviously, that was a very large blockbuster deal. I believe it was well over $2 billion between the two companies, so it looks like they're They're emerging, and we'll look to try to create value. I think you're going to continue to see consolidation within states as well as across state borders as companies are looking to get better and as capital markets are opening up. We're seeing a very good progression from a capital market standpoint with more dollars flowing into the industry and cost of capital coming down. With regards to how it affects us, it doesn't. We're going to continue to work on our strategy. We're going to continue to work on our operating model, taking care of customers, driving revenue, driving margins, driving capabilities, and continue to wean up our supply chain so we're very efficient. We'll continue to do that as well as we start to tack on new acquisitions and continue to bulk up in Colorado.
spk02: Thank you, Justin. Do you have any comments on the labor market outlook?
spk03: From our perspective, labor is a little bit tight, but we're not seeing any major issues with regards to getting people landed at our retail operations or within our supply chain jobs today. We'll obviously continue to monitor and watch that, but we're certainly for providing a very fair wage so folks can – Folks can have a good living standard, et cetera, with their lives. We continue to see, you know, a growth need, and we continue to be hiring as we expand our business. So we'll continue to watch it, but so far, so good.
spk02: Excellent. And I think the final question here is, what do you attribute the exponential growth on your retail and manufacturing sectors to?
spk03: Well, I mean, two things. One is we obviously acquired the Starbucks assets, 13 stores over the course from December to March. So obviously that gave us a real shot on the retail side. So we went from four stores to 17 stores. On the manufacturing side, we have grown that business by, You know, we've got a great sales force that's going out and driving business with partnering with customers out there and providing them really high quality distillate and products. So we continue to work with them to do that, providing a good solid supply chain with great products. And on the retail side, you know, as we've taken over Starbucks, we've taken a lot of their best practices seriously. and have applied those to our other four Mesa organic stores, which we re-bannered to Starbucks. But also I think we get better as we scale and continue to put our playbook in place with regards to merchandising, promotions, pricing, assortment, being in stock, making sure that we've got the right labor equation when we're servicing our customers at retail locations. So I think all those things have helped us continue to grow sales and drive margin. I think we'll continue to do that and continue to try to get better.
spk02: Okay. Thank you very much. That seems to be all of the questions that we have today. Justin, do you have any final remarks before we end the call?
spk03: Thank you. We'd like to thank Joanne. We'd like to thank all of our investors for supporting us. We're very, very excited about our operating momentum. We're excited about capital markets opening up and our cost of capital being driven down. We're very excited about our acquisition opportunities, and we're very excited about being able to announce a few of these here in the coming weeks. And I want to just thank all of our employees and our customers for supporting us and We'll continue to work hard and continue to try to grow the company. Thank you.
spk02: Thank you, Justin. I'd like to remind everyone that the webcast is available on the Schwoz website. Once again, thank you for joining the Schwoz first quarter webcast. Thank you.
spk00: All parties may disconnect.
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