Medicine Man Tech Inc

Good afternoon. My name is Lester, and I will be your conference operator today. At this time, I would like to welcome everyone to Schwoz's third quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. Following their prepared remarks, management will take questions submitted via the web link found in Schwoz's investor relations website and in the earnings press release. I would now like to hand over the conference to company's external head of investor relations, Sean Mansuri, of Elevate IR. Sir, please go ahead.

Thank you. Good afternoon and welcome to Schwoz's third quarter 2023 earnings conference call. Joining me on the call are Nirup Krishnamurthy, Schwoz's chief executive officer, Forrest Hoffmaster, chief financial officer, and Justin Dye, chairman of the board. The company will begin with prepared remarks, and then we will open the call for Q&A. I'd 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, CHOAS's future results of operations and financial position, and Schwoz's 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 Schwoz. 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 Schwoz at this time. Additional information concerning factors that could cause events, results, performance, or achievements to differ materially is available in Schwoz's earnings release made available before this call and available on Schwoz's investor relations website and in Schwoz's annual report on Form 10-K for the year ended December 31st, 2022, filed with the SEC on March 29th, 2023. In addition, other information is more fully described in Schwoz's public filings with the U.S. Securities and Exchange Commission, which can be reviewed at sec.gov or www.cdar.com or on the company's investor relations websites. Also, Schwoz may discuss non-GAAP financial measures during today's call. A reconciliation of the differences between the non-GAAP financial measures discussed during the call and with the most directly comparable GAAP measure can be found in Schwoz's earnings press release made available before this call and available on Schwoz's investor relations website. I'd now like to turn the call over to the company's CEO, Nirup Krishnamurthy, for opening remarks. Nirup.

Thank you, Sean. Good afternoon, everyone, and thank you for joining us to discuss our financial and operating results for the third quarter of 2023. I'd like to start by quickly touching on the broader macro environment. Inflationary and pricing pressure has continued to impact consumer wallets across most industries in the third quarter. Our industry is not immune to these pressures either. Nevertheless, we continue to focus on our sales, our customers, and cash flow generations in our operations. We have always prided ourselves in our ability to run a lean operation while being good stewards of capital, which has materialized in our strong adjusted EBITDA margins and consistent cash flow generation, even in challenging market conditions. While the industry awaits potential legislative change, we will continue to implement the Schwarz Operating Playbook to profitably scale our regional footprint regardless of outcomes in D.C. Now let's dive into our results. In Q3, we continued to increase our retail footprint in both Colorado and New Mexico while further integrating our recently acquired assets in both states. In New Mexico, we worked diligently during the quarter to integrate Everest Apothecary which we acquired in June. As of today, we have fully onboarded the retail, cultivation, and manufacturing assets onto our financial and operating systems. While it is still early in the integration cycle, we have begun to recognize synergies through consolidating resources and optimizing production facilities amongst other initiatives. In Colorado, we have increased efforts to expand our reach to medical patients through the standing Akimbo banner with new presence in Colorado Springs and Fort Collins. We also opened a new store in Lakewood in August and are seeing promising early results. Alongside new store openings, we are currently remodeling and or relocating certain stores to further enhance customer experience. Although we have made significant progress on integrating our newly acquired assets, We were not immune to the broader macro pressures in either Colorado or New Mexico. In Colorado, which has almost 680 active adult use dispensaries across the state, pricing and licenses in new jurisdictions have continued to put pressure on our top line. Year-to-date cannabis sales in Colorado are down 13% year-over-year and down 31% on a two-year stack. We, however, continue to focus on our operating playbook and on customer acquisition while enhancing our in-store experience and optimizing our operating costs. Wholesale pricing has begun to more broadly stabilize throughout the state, even returning to modest sequential growth in quarter three. Although not reflected yet in retail pricing, flower average market rate increased 7% in from $703 a pound in quarter two to $750 a pound in quarter three. In New Mexico, cannabis operators are navigating pricing pressure as a result of the proliferation of new licenses. Legal cannabis states in the state were up 19% year-over-year in quarter three, while total store count was up 76%, resulting in lower revenue on a per-store basis. Approximately 200 retail stores are open year-to-date, bringing the total stores up to more than 650 as of September 30th. To navigate this market dynamics, we are strategically investing in the retail experience and are committed to attracting and retaining our customers and patients in the state. Our strategy is to first further integrate the Everest assets while refining assortment in stock position, and standard costs from a combined integrated supply chain. Second, invest in our leading retail position by bringing new products to our shelves while sharpening pricing and promotional efforts. Third, support the state as it implements cannabis regulation and enforcement to heighten testing and safety standards. And finally, continue to expand our wholesale business in the state. While our quarter three results reflect some of these investments and market dynamics, we are well positioned to leverage our footprint to be the preferred retailer of choice in New Mexico in the future. Now, let's take a deeper dive into operational updates within each of our markets, starting with Colorado. In late October, we launched the state's first store-within-a-store concept in Fort Collins. This idea was conceived through a survey of northern Colorado customers, which revealed they wanted to experience characteristics from both StarBuds and Standing Akimbo. The model combines a StarBuds neighborhood dispensary with the Standing Akimbo medical banner, allowing us to serve both medical and adult use consumers under one roof. Although we just opened, initial customer feedback has been strong. and we are excited about progress to date. During the quarter, customer loyalty members increased 8% sequentially to approximately 477,000 members, while increasing average basket by 5%. In addition, our loyalty penetration grew quarter over quarter to 63.3% compared to 60.7% in Q2. As we have stated before, we are focused on enhancing our consumer experience to maximize customer loyalty and retention across our retail footprint. Moving on to our New Mexico operations. In August, we announced the grand opening of a medical and recreational dispensary under the Our Green Leaf banner in Harbs, New Mexico. We acquired the Our Green Leaf banner in February 22, 2017. and I have since opened nine additional all-green leaf stores across the state. With the most recent opening, our New Mexico footprint stands at 33 dispensaries, each serving the needs of both medical patients and recreational customers. Despite pricing pressure in New Mexico, we generated 10% year-over-year and 5% sequential growth in retail sales in the state, and have outpaced overall market growth, increased our share primarily through acquisitions. We are focused on integrating the assets and implementing our operating playbook to increase same-store sales and drive customer traffic. We continue to believe that New Mexico provides a unique opportunity to address a highly fragmented market and will continue to optimize our operations as we grow market share in the state. We experienced a 55% sequential increase in customer loyalty members in the third quarter to approximately 144,000 members in New Mexico as we integrated Everest Apothecary into our operations. Similar to Colorado, we believe there is an opportunity to capitalize on customer loyalty and will continue to develop the program across the state. Our wholesale business grew 41% year over year, primarily due to our entry into New Mexico. New Mexico wholesales in quarter three now approximately is 22% of our wholesale business and growing. In Colorado, we have expanded our wholesale portfolio, and our current offerings include flour, pre-rolls, and vapes, along with bulk distillate. Schwarz now sells into seven of the ten largest operators in each state. Our licensed premium pre-roll brand from Lowell Farms is now in over 132 doors in Colorado and has become the number two pre-roll in Colorado by the end of Q3. Turning to our cultivation and manufacturing operations, our divisional cultivation leaders have made solid progress on improving both our indoor and outdoor grows, leading to higher flower yields, quality, and lower cost of goods. In addition to improved quality, These efforts resulted in a 16% sequential reduction in our average cost of flour in Quarter 3. We are in the process of optimizing our inventory across the system through a new ERP implementation across our acquired cultivation and manufacturing facilities. As many of you know, these projects are not quick and easy to implement. They take time and careful diligence to ensure an effective deployment, and these efforts will enable us to improve our visibility and control of our inventory levels, enhance supply chain efficiencies, and uncover various cost-saving opportunities in the future. Before passing the call on to Forrest to review our financials in more detail, I'd like to take this opportunity to thank the entire Schwarz team across Colorado and New Mexico. Their dedication to executing our operating playbook to drive results, regardless of the challenging market conditions, is a testament to the quality and culture of our team. Forrest, over to you.