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spk01: Good afternoon. My name is Pam and I will be your conference operator today. At this time, I'd like to welcome everyone to the Schwoz third quarter conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a live question and answer session. I would now like to turn the conference over to Joanne Jobin, Investor Relations Officer. Please go ahead.
spk03: Greetings and welcome to the third 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 their 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 September 30th, 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 viewed at www.sec.gov or on the company's investor relations website. I would now like to turn the call over to CEO and Chairman Justin Dye.
spk04: Hello and thank you for joining us this afternoon. I will provide a business update. Our CFO Nancy Huber will review our third quarter financial results in detail before I conclude our presentation with some final thoughts. We would then be happy to take your questions. The business continues to demonstrate strong operating momentum and our operating playbook is proving effective. Our growth plans remain on schedule and we're enthusiastic about our future. These factors give us confidence that we're building a differentiated dynamic business at Schwoz and point for profitable growth. During the third quarter of 2021, the company announced closing the acquisition of Southern Colorado Growers, which includes 34 acres of land with outdoor cultivation capacity, as well as indoor greenhouse and hoop house cultivation facilities and equipment. This purchase is the company's first move into cultivation, which will provide high-end premium cannabis directly to our Starbucks dispensaries and significant production of biomass for its Purple Bees extraction and manufacturing facility. We also launched Starbucks home delivery services in Aurora with the second delivery phase expected later this year. We signed an agreement to acquire the assets of Brow 2 LLC, another cultivation asset located in Denver, which includes a 37,000 square foot building for indoor cultivation and equipment. During this quarter, our revenue increased to $31.8 million compared to $7.4 million during the same period last year, representing a 328% increase. The company's adjusted EBITDA for the quarter was $8.8 million, representing 27.6% of revenue. I'm also pleased to report that we generated positive operating cash flow during the quarter, $3.4 million and $4.8 million in operating cash flow for the first three quarters of 2021. Same-store sales of the 17 Starbucks dispensaries when compared to last year prior to take ownership of the assets were $20.7 million, up from $1.1 million the prior year. Average basket size increased to $59.05, up 7.3%. Customer visits totaled 353,370, down by 5.8% compared to the prior year due to the cycling through COVID impacts. However, year-to-date visits were $1 million 46,232, up 5.1% over prior year. This data now includes our four Mesa organic stores acquired in April of 2020. We are pleased to report that these revenues are steadily trending upwards quarter over quarter since completing our acquisitions. This quarter will generate approximately 65% of our revenue from retail and 35% from wholesale products. We expect the wholesale side to continue to increase over the next few quarters with recent acquisitions of SCG and Brow 2. Through the implementation of our operating playbook, we've been able to effectively contribute to growth and efficiencies in our manufacturing and retail locations. At our Purple Bees manufacturing division, we implemented our MRP system, improving our ability for production planning and make costing decisions with real-time information. We held our first vendor summit in September, attended by approximately 83 suppliers from across Colorado, reviewing our product plans and discussing partnering opportunities. In retail, we are reviewing our product categories, aligning product assortment across our dispensaries. Along with strong revenue growth and adjusted EBITDA results, we continue to be encouraged with our retail results. With our two-year stack, identical sales at 49.4%, which we believe better represent market growth due to COVID impact and demonstrates that we outpace the Colorado market as reported by BDS analytics by 31.8%. Wholesale results led by Purple Bee's distillate business also had another record-breaking sales quarter. We also continue to strengthen our management team. I'm delighted to announce the following additions to our leadership team at Schwoz. Vice President of Manufacturing, David Kaufman. Vice President of Cultivation, Robert Pizzoli. Senior Director, Controller, Ashley Barnes. And then Director of FP&A, Eric McQueen. All come with great experience in their respective fields. and will add necessary horsepower to critical areas to drive growth and support our acquisitions. As for the federal and state government laws regarding cannabis legislation, there continues to be a lot of discussion, but no significant movement or changes on any of the acts. We expect that all parties will continue to look at financial reform in our cannabis laws in order to pass the Safe Banking Act so that we can continue to invest and reinvest in our customers and our communities. As always, we will closely monitor any federal and state changes that would impact our industry and are poised to make any changes necessary. We can report that in the recent Colorado election, the state voted down a tax increase on cannabis, which we see as a positive sign of support for cannabis by the general public. We have recently started home delivery products to Aurora, a suburb of Denver, Colorado. and are looking to expand the service into other jurisdictions as delivery is approved. Now, let's move into Colorado cannabis market in general and where Schwoz fits in. Based on recent BDS analytics estimates, Colorado sold $588 million of adult use of medical cannabis product during the past quarter, representing approximately a 10.5% decline year over year compared to $657 million recorded for the same quarter last year. We believe that slight decline in Colorado's growth was directly driven by COVID cycling through the quarter. However, I'm pleased to report that Schwab's outpaced the state by 11.5%, which includes stores where we have year over year measurement continue to demonstrate to the market that we can outpace and capture market share in this hyper growth industry. Turning to the future, we continue to evaluate additional opportunities across the cannabis industry in the areas of cultivation, manufacturing, and dispensaries, not just in Colorado, but in other states as well. Our current criteria for potential acquisitions 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 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 continues to represent attractive geography to build out our platform as 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 cannabis industry. And now I'd like to turn the discussion over to Nancy to continue our third quarter financial review.
spk02: Thank you, Justin. And I'd now like to review our financial results for the quarter ended September 30th, 2021. As Justin mentioned at the top of the presentation, total revenue was $31.8 million compared to $7.4 million for the same period in 2020 and represents an increase of approximately 328%. Also, just a reminder that in the first quarter we changed our segment reporting to align with how we manage and evaluate business performance. We are now reporting by retail, which includes dispensaries, and wholesale, which includes MIPS, cultivation, Big Tomato and Success Nutrients, and Other, which includes revenues from consulting and other small revenue areas. The company's adjusted EBITDA for the third quarter 2021 was $8.8 million, representing 27.6% of revenue. I'm also pleased to report that we generated positive operating cash flow for the quarter of $3.4 million, and $4.8 million in operating cash flow for the first three quarters of 2021. The retail sales were $20.7 million over the quarter, up from $1.1 million from the previous year, and wholesale operations revenue increased to $11 million from $6.3 million the same period last year. Other sales were $0.7 million, up from $0.2 million. The increase in retail and wholesale revenue is attributed to the increased sales in the wholesale segment led by purple bees and the completion of the acquisition of star buds in March 2021. Total cost of goods and services were $16.8 million during the third quarter compared to $4.6 million during the same period in 2020. This increase was due to improve sales from our retail and wholesale operations. Gross profit increased to $15.1 million during the quarter compared to $2.8 million during the same period in 2020. Gross profit margin increased as a percentage of revenue from 37.4% to 47.3% and continued to be driven by the strength of the Starbucks acquisition, our consolidated purchasing approach, and implementation of our retail playbook. Total operating expenses were $11.2 million during the third quarter compared to $6.4 million during the same period in 2020. The higher expenses were due to increased selling, general and administrative expenses, and salaries from the addition of the dispensaries. Adjusted EBITDA for the third quarter was $8.8 million, representing 27.6% of revenue. This is derived from operating income and adjusting for one-time expenses merger and acquisition and capital raising costs, non-cash related compensation costs, and depreciation and amortization. Q3 2021 net income was $1 million, or earnings of approximately two cents per share on a basic weighted average, as compared to a net loss of $2.9 million, or a loss of approximately seven cents per share on a basic weighted average during the three months ended September 30th, 2020. The company had $21.2 million in cash and cash equivalents at the end of Q3 2021. Turning now to the outlook for the remainder of 2021, we have narrowed our 2021 guidance, which excludes transactions that are announced but not closed. Annual revenue guidance is now $110 million to $115 million, with projected annual adjusted EBITDA from $32 million to $34 million. The company remains optimistic for the remainder of the year due to reported results to date, our continued expansion plans, multiple dispensary acquisitions, and the continued integration of the two companies, which is proceeding above expectations. Thank you for your time today. Now I'd like to turn back to Justin, who will open the call to questions and answers.
spk04: Thank you all for your continued support, encouragement, and interest in Schwoz. 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 please submit.
spk03: Thank you, Justin and Nancy. And thank you to everyone who has joined us today. My name is Joanne Jobin. I'm the IRO for Schwoz, and I will be moderating the Q&A on behalf of the team today. And the first submitted question is actually a three-part question. So I'm going to start with the first part, and it involves the new announcement that we put out today regarding smoking gun. What does the smoking gun acquisition bring? Revenue size. While it is nice to see the addition of dispensaries, are there any more sizable potential acquisitions out there that could bring 10 dispensaries in at a time rather than one or two? Justin?
spk04: Yeah, thank you, Nancy. Sorry, thank you, Joanne. With today's announcement, we're taking our dispensary count to 20, including those announced. We're very excited about the smoking gun opportunity. It is a great corner in Metro Denver that we think is going to be a very, very good store for us. And, yes, there are other opportunities in the market to acquire multiple stores, and, of course, we explore that. It takes time to get deals negotiated, completed, signed, and done. We do feel very good about our pipeline and will continue to be aggressive but remain disciplined in what we pay for these acquisitions. We think the smoking gun acquisition will be – Certainly, that location will outpace the average dispensary in Colorado.
spk03: Thank you, Justin. Also, how is the integration of the recent acquisitions progressing?
spk04: Yeah, the integrations are going quite well. If you look at Purple Bees, we're on our common ERP system. We've built our processes. We're doing metric reporting, roles, responsibilities, and running that business very, very well and driving efficiencies. And then if you look at Starbucks, we're getting to a common platform on the point of sale, as well as we're starting to work on centralized buying for all of our stores and putting together integrated merchandising plans where we can offer great promotions and and exciting products for our customers. So we're ahead of schedule on the integration side, and the team's doing a good job.
spk03: Thank you, Justin. Finally, what percentage of product will the company be able to supply its dispensaries from the recent cultivation acquisitions, and how will that impact margins? Nancy? Yeah, I will give you.
spk00: Go ahead, Nancy.
spk02: Okay. Thanks, Joe. So we see that SCG is probably going to impact our margins in Q1. We just finished the harvest there and we're in the process of building out the hoop houses that we've talked about. Anticipate our first harvest there as well in January. So we think we'll see impact to the margins at that point.
spk03: Thank you, Nancy. Would you provide more color on the assets and operations for the Smoking Gun LLC acquisition? Justin?
spk04: Yeah, thanks. Thanks, Joe. I'm waiting for you to call the name out, so I don't have to whine here.
spk03: Apologies. I'll be a little more proactive on the name calling.
spk04: That's okay. So, you know, we're excited about Smoking Gun. We believe there's a great opportunity to remodel the store to bring more products and bring our Starbucks playbook to that location. We've got a number of exciting plans from a merchandising standpoint and how we'll remodel the sales floor, et cetera, and excited to add those employees to our team and get them excited about taking care of customers there.
spk03: Thank you, Justin. Next question. We see that retail revenue declined sequentially. Was this expected? Can you add some additional color as to the decline? Nancy?
spk02: Thanks. Yeah, it declined a very small amount, quarter to quarter. There's some seasonality there. as well as the fact that we were cycling a pretty big number from the COVID impact last year. So percentage-wise, the growth was not as big. We had thought we would probably grow a little bit bigger percentage than we did, but we made that up with the wholesale sales, so we feel pretty good about the fact that we have a combination of ways to get to our revenue targets, and we were successful in doing that.
spk03: Thank you, Nancy. Do you anticipate a build-out requiring greater square footage of PBS, Schwoz, biosciences within the next two quarters and beyond the 7,000 square feet reported presently?
spk02: Nancy? Yeah, thanks. That's a great question. We are really in the very early stages of the bioscience exploration. and really feel the current square footage is going to be adequate over the next couple quarters. We'll continue to look at the progress that group makes and determine whether we need to add additional square footage towards the end of next year.
spk03: Thank you, Nancy. Now, here's a question that is, again, two or three questions in one format. What were the initial returns from home delivery? How big can business be in the near term? Justin?
spk04: We certainly think delivery is a big part of our omnichannel strategy. So whether a consumer wants to shop within the four walls of a store, whether they want to order a head pickup for curbside, or whether they want same-day or next-day delivery, We certainly want to serve those customers as they want to be served and meet them based upon the occasion. So I think the customer will dictate that. We certainly think delivery is going to be a key part. I don't see it being a majority of the business, but certainly think it will be a significant portion. And we're going to let the customer guide us to what they want and how they want to be served. And we will match that with our resources and investment, but so far so good. We're happy with our implementation of our, first set of deliveries. I think customers are very happy with the service that they're receiving. Our bud tenders and our drivers are doing a nice job of taking care of the customer.
spk03: Thank you, Justin. Next part of that question, updated top line guidance implies an equal or stronger Q4. Does that go against typical seasonality?
spk02: Nancy? Yeah, thanks, Joe. It's Q3 and Q4 are usually not significantly different. Again, we haven't owned the dispensary businesses for that long, although we have Colorado history to go by. But we think they'll be in that range, right? Equal or just slightly stronger based on our guidance. And again, we have both retail and wholesale to rely on there. So it's just not retail we see. We are selling into the wholesale market, which is sometimes buying ahead.
spk03: Thank you, Nancy. And the final part of this question, are you seeing challenges in additional M&A from MSOs who are increasingly looking at Colorado? Justin.
spk04: Yeah, great, great question. Well, we certainly have seen a number of MSOs coming to the state with some recent announcements. We think that proves that Colorado is a great place to do business and it's getting some positive attention to Colorado. I think it really depends on the segment of the value chain that you're looking at. Some of the MSOs have come in and bought cultivation and bought farms. Some have bought dispensaries. Some have bought a combination. We like our strategy. We think buying assets in Colorado requires discipline, requires building relationships and a focus. that we certainly have and we would expect to continue to grow our business. And, and, uh, we like our, our set of, uh, our set of acquisition pipeline. And I would tell you the independents and the, and the companies that we're talking with like our strategy, they know who we are. They like our profitability and our ability to execute. And I think that'll play out as we're, as we make our inroads into these other acquisitions as they have choices as well. But I, In general, I think it's a good thing for Colorado that we've had some other companies coming in, and I don't think that's going to deter us from our strategy.
spk03: Thank you, Justin. Next question. Schwartz has been trading at a fraction of other comparable publicly traded companies in the same sector. What are your plans to get more PR and analyst coverage to generate more movement in share price and interest in the stock? Justin?
spk04: Yeah, as we've said, we've started to really tell our story and introduce Schwoz to the retail investor and to other larger investors. We've seen some uptick in the share price. We've been at a number of conferences. We've done a number of analyst meetings. And we're going to continue to do that. I think we're going to build. We're going to be focused on building a really great company, being good stewards of capital. growing share versus the markets that we're in and building a very profitable company. And I think investors in the capital markets will reward us for doing that. We're going to continue to tell our story and continue to work on execution.
spk03: Thank you, Justin. Next question. How do you keep outpacing the state? That's three quarters in a row now. Quite impressive, considering the state is down overall around 10%. Justin?
spk04: Yeah, that's a great question. I think this is a really important discussion. So if you look at it, our retail sales grew 1% for the quarter. We outpaced the state that ran behind 10.5%. So we outpaced the state by 11.5%. And if you look at our two-year stat comps, they're considerable. The two-year stat comps are 49.4%. versus 17.6%. So we're beating the market by 31.8%. And I attribute that to our blueprint, our operating plan of merchandising, running really good dispensaries, working on efficiencies in the supply chain and coming up with innovative products that we partner with manufacturers, et cetera, on doing so. More to come. We've got a lot more work to do. We're working hard on category management, making sure we've got the right products, the right assortment for each one of our respective dispensaries. And we're partnering with some great product companies as well. So I think that's going to, we hope that continues. And I'm really proud of cycling a very, very impressive year next year. And the fact that we're growing on top of the COVID bump from last year, I think is, you know, I think that's a job well done by the team.
spk03: Thank you, Justin. You mentioned two-year growth numbers. Why are you using that number over one-year growth, for example?
spk04: Well, if you look at it, yes, if you look at it, we had such a large comp last year as you really looked at the consumer. The consumer consumed more flour, consumed more products. There were less alternatives for them to spend their discretionary income. So we're cycling very large comparable numbers from last year. So I think the fact that we're continuing to work on our merchandising, working on retail sales, working on really the voice of the customer, I think that's going to continue to pay dividends. And we want to continue to grow market share and continue to be one of the best retail operators in the state. And I really attribute our team and hard work and a lot of the merchandising work that we're doing that attributes to that.
spk03: Thank you, Justin. Does the company plan to have more acquisitions and what does that look like financially? Do you plan to do a raise? If so, how much, where's the funding coming from?
spk02: Um, Thanks, Joe. So as part of the SEG acquisition, we did take down the additional $5 million Altmoor had committed to us as part of our original debt agreement with them. And we have 21 plus million dollars of cash in the bank as of the end of Q3. So we do have some funds available for acquisitions. And then as we look at bigger acquisitions, we're evaluating all options, equity debt, convertible debt, We'll use the one that's most cost-effective, least dilutive, that makes the most sense for our shareholders at the time. So we can't kind of commit to any specific kind of raise, but we are evaluating all sorts of alternatives as we look at M&A opportunities.
spk03: Thank you, Nancy. The improvements you've seen in product margins and revenues continues to be impressive. Do you think you can continue this trend, Nancy?
spk02: Yeah, so... We have the opportunity as we continue to vertically integrate, we believe, to improve our margins. So, as we add cultivation to our plan, as the previous question had suggested, we do, in fact, expect our margins to improve. On the other hand, we could see some pricing pressure, so that gives us some opportunity to have experienced pricing pressure and still keep our margins as they are or better. And we're continuing to work on our combined purchasing plan, as Justin said. We're in the process of doing product reviews. And in that process, we're compressing the number of products we offer across the same number in the store, but we don't offer quite the variety in every store. So what you're going to find when you walk into A Starbucks, for example, is more consistent purchasing, more consistent product availability with still a very wide selection. But by narrowing the number of products we're taking in all of our stores, we're able to get better pricing from our vendors and therefore help our margins as well. So we're looking at all of that. And then, you know, continuing through other acquisitions, we could see additional integration with other products. We're looking at offering our own products in the manufacturing or packaged goods side as well, which does offer opportunity for improved margins as well.
spk03: Thank you, Nancy. Here's a question, again, on products. Some of your best-selling products, what are some of your best-selling products? Are consumers still flour-oriented? Or have trends changed towards vape, oils, or some other cannabis? Justin?
spk04: Yeah, flower is still a big part of our business. It's almost 50%. We continue to see other categories grow. So if you look at cannabis pack like vapes, it's continued to grow quickly. You're also seeing growth in edibles. But flour is still a major part of our business and will continue to be so.
spk03: Thank you, Justin. Now with the acquisition of SCG and Brow2, how much more fully integrated do you plan to be, not just in Colorado, but as you expand your business into other states? Justin?
spk04: Yeah, as we've said, we'd like to probably have about 50% of our flower needs for our stores to be produced in-house. So we've got a long way to go there. And then if you look at our biomass side, we'd like to be north of 50% of producing our own biomass. So I think we have plenty of room to grow with our announced assets. So as we invest in those assets for plant count and productivity and bringing our three of light methodology to that, we see a lot of opportunity and we're going to continue to evaluate new new grows and new opportunities as well to expand our capacity. So that's really what we're working on in Colorado. And to the extent that we look at another state, we would carry a similar discipline and a similar viewpoint on that, being retail forward, working efficiently on the supply chain and cultivation, and then being able to launch our own products while still partnering with good manufacturers in those states. That's still the recipe. That's been the strategy from day one, and we're continuing that strategy, and we hope that continues to bear fruit for us.
spk03: Thank you, Justin. And I think this is going to be the last question of the day. What is the plan for the company in three to five years? Where do you expect you will be? Could a buyout be in the works? Justin?
spk04: You learn in this industry every day is like seven days. So it's a fast-moving industry. Things change. Competitor sets change. The consumer continues to change their preferences and what products they like. So our goal is to stay very close to the consumer, stay very close to our wholesale customer. And I mean that. That will guide the way that we grow the company. And we're going to continue to build a great company that's very profitable, that continues to grow market share and has terrific operations. We're going to keep working on that, becoming more efficient, more customer focused. And I think all those things will contribute to good performance from a growth and profitability standpoint. And will put us in a position to, we can consider what those options are. Those options could be listing companies. on the NASDAQ or the New York Stock Exchange down the road with some federal legislation. It could mean we just continue to do what we're doing in our same capacity and just growing from that. Or it could mean that we could combine forces with someone down the road. But those are all options that good companies with good profitability and good growth and good management tools will have as options. And we'll certainly think about those things but while we continue to operate the business that's really our focus here today and obviously we want to we want to drive shareholder returns and be shareholder friendly and the best way to do that is to execute our strategy thank you justin and that is all of the questions that we have for today justin do you have any final remarks before we end the call today well No, I just want to thank our customers. I want to thank our employees and our team members who are doing a great job. I'm really proud of the team for being able to grow on top of last year's pandemic bump. I think that's quite an accomplishment. The team continues to work on efficiencies and driving profitability, and we're very excited about the next 12 months for us. We've got a very robust team. acquisition plan, and I think we're on track to continue our path to double the business. We've got more things in the works, and we'll announce those things as we can. But I just want to thank our shareholders for sticking with us and believing in us, and we're going to continue to work hard and execute. So with that, we thank everybody and look forward to our next quarter results.
spk03: Thank you, Justin, and thank you, Nancy. Once again, thank you, everyone, for your time and consideration today. If you do have further questions, please feel free to submit them directly to me at info at schwoz.com. This now ends the third quarter conference call for Schwoz. Good day, everyone.
spk01: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.
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