Medicine Man Tech Inc

Good afternoon. My name is Ina and I will be your conference operator today. At this time, I would like to welcome everyone to Swash first quarter 2024 conference call. Onlines have been placed on mute to prevent any background noise. Following their prepared remarks, management will take questions submitted via the web link found on Swash investor relations website and in the earnings press release. I would now like to hand the conference over to the company's external head of investor relations, Sean Mansourie with Elevate IR. Thank you. Please go ahead.

Thank you. Good afternoon and welcome to Schwoz's first quarter 2024 earnings conference call. Joining me on the call are Forrest Hoffmaster, interim CEO and CFO, and Justin Dai, chairman of the board. The company will begin with prepared remarks and then we will open the call for Q&A. I would 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 statements regarding legislation and regulation, CHOAS's future results and financial position, and CHOAS's business strategy and plans for future operations. Such forward-looking statements may be preceded by the words plan, will, may, continue, anticipate, become, develop, expect, believe, project, could, 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 31, 2023, filed with the Securities and Exchange Commission on March 27, 2024. 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 www.sec.gov or on cdar.com or on the company's investor relations website. 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 gap measure can be found in Schwoz's earnings press release made available before this call and available on Schwoz's investor relations website. I would now like to turn the call over to the company's chairman of the board, Justin Dye, for opening remarks. Justin.

Thank you, Sean. Good afternoon everyone and thank you for joining us to discuss our financial and operating results for the first quarter of 2024. As we review the overall U.S. cannabis market, Schwoz competes in two of the most competitive markets in the cannabis sector. The needs and preferences of our customers continue to evolve and these changes are accelerating. As we assess the environment, We believe that we have a unique opportunity and window of time to take a stronger leadership position by differentiating our business over the next several quarters. Therefore, we're prioritizing investments in the customer experience through strategic discounting, optimizing product assortment and promotions, investing in training and development of our people, and simplifying operations to build new capabilities and competitive advantages for the future. These initiatives take time and we've always maintained a belief that leading the business for the long term is a proper way to create value for our most appreciated loyal stakeholders. I'm very optimistic about our future and confident these investments will translate into Schwoz becoming an even stronger company and competitor in the future. we continue to build one of the most sophisticated operators in our sector. As we monitor real-time progress in Colorado, our focus on the needs of our customers is paying off. Our store teams continue to provide a wide assortment of high-quality products and attractive values for our shoppers. We pride ourselves on providing fast, friendly, and knowledgeable service. These strong fundamentals have enabled our Starbuds, Emerald Fields, and standing akimbo stores to outperform the market. I believe our success against the challenging backdrop in Colorado demonstrates the effectiveness of our operating playbook to perform in the most competitive markets in cannabis. In New Mexico, new license proliferation continued to significantly outpace state cannabis sales in the first quarter. The state's regulatory body has taken actions to further their commitment to license enforcement as they now have 14 inspectors conducting compliance checks at an accelerated rate. In Q1, we saw 72 store closures and a 33% sequential decrease in net new store openings. Furthermore, in April, the state's dispensary count decreased month over month for the first time since adult use was legalized in 2022. We believe this trend will continue and eventually flip net new stores from positive to negative, which will be a tailwind for our business as bad actors get taken out of the market and we have a more regulated environment to compete in. Before handing it over to Forrest, I'd like to quickly touch on the recent news regarding rescheduling. We're pleased with the proposal by the DEA to reclassify cannabis from Schedule 1 to Schedule 3. supporting the initial recommendation from the HHS in August of last year. This news not only benefits Schwoz, but the entire cannabis industry as it marks a significant step towards the removal of the owner's 280E tax burden while opening the door for subsequent overdue legislation. We will closely monitor next steps on the proposed ruling. And in the meantime, we'll continue to operate our business with heightened liquidity disciplines and a focus on profitability as we weight the outcome. Forrest, over to you.

Thanks, Justin. I'd like to begin by conveying my appreciation to the Schwoz team for their leadership, execution, and relentless commitment to winning over our customers in two of the most highly competitive retail markets in the country. We delivered another period of revenue growth in the first quarter while contending with the persisting competitive challenges in both Colorado and New Mexico. During the quarter, we continue to sharpen our pricing and promotional efforts while enhancing the in-store experience, widening our assortment, improving our in-stock position, and advancing our loyalty program to attract and retain new customers. We also strengthened our wholesale business with quarter-over-quarter growth while surpassing 30% total door penetration across both states. Moving into our markets, starting with Colorado. As Justin mentioned, the Colorado market remains highly competitive with more than 680 active recreational licenses, underscoring the importance of delivering an exceptional customer experience and fully integrated retail support program. Retail pricing has recently stabilized. However, statewide cannabis sales in the first quarter were down 10% year over year due to lower volumes. With the durability of our operating playbook, we once again outpaced the market generating 9% year-over-year sales growth, and expect to continue driving improvements in customer acquisition, retention, and loyalty to further drive market share in the state. From a wholesale market standpoint, cultivation licenses are declining, and wholesale pricing has continued to stabilize in Colorado, with flour AMR holding at an average price of approximately $750 per pound for the third consecutive quarter. Our wholesale penetration in Colorado increased to 30% of total doors during the quarter, as we are now in approximately 200 doors in the state, contributing to our 15% quarter-over-quarter sales growth in quarter one. Our wholesale catalog continues to grow. Sales from our licensed pre-roll brand, Lowell Farms, increased more than three times quarter-over-quarter in Colorado, where it continues to be the number one pre-roll in the state. We're thrilled with the early momentum from Lowell Farms and are excited about our new product launch roadmap for the remainder of the year. Moving on to New Mexico, new license growth continued to outpace state cannabis sales in quarter one as store count grew to more than 690 retail locations as of March 31st, a 31% year-over-year increase, while the market grew only 13% during the same period. We are driving sequential improvements in store traffic by offering our patients and customers a broader selection of products with high-quality flour at all tiers. Additionally, we continue to sharpen our pricing and promotional strategy as well as enhancing in-store experience and have begun to see positive momentum exiting the quarter and in recent weeks. We will continue to closely monitor our pricing relative to peers to ensure were competitively positioned in the market while maintaining our high standards for quality and exceptional service. From a wholesale standpoint, we doubled sales in New Mexico on a year-over-year basis, while increasing penetration to more than 200 doors across the state. We also made progress with WANA, expanding our New Mexico wholesale catalog, which was up more than two times in sales from the fourth quarter. The early signs of our expansion into New Mexico wholesale market are promising, and we'll continue to capitalize on the opportunity with our new product roadmap in the coming quarters. In March, we announced the grand opening of a medical and recreational dispensary under the Everest Apothecary banner in Las Cruces, New Mexico. With this addition, we now have 34 stores across the state between the Everest and our Greenleaf banners, each serving a unique customer demographic. We are proud to have the opportunity to serve both the patients and customers in Las Cruces with our wide assortment of high quality products and exceptional customer service. On the regulatory front, we are encouraged by the increasing illicit market enforcement by the New Mexico Cannabis Control Division. The state saw 16 net new store openings in quarter one of 2024 compared to 24 in the fourth quarter of last year. with 72 closures in the first quarter of 2024. Per a report from Beacon Securities in April, New Mexico had a month-over-month decrease in dispensary count for the first time in two years with the second highest closure rate on record. We believe this trend will grow and will continue to support the state as it develops its regulatory framework. With regard to cultivation and manufacturing in both states, we continue to focus on optimizing the cost and quality of our supply chain operations. By leveraging sales and inventory demand data from our stores and wholesale team, we are more closely aligning our manufacturing and grow operations to consumer demand, which will enable us to efficiently right-size our supply chain and more productively utilize working capital. While we still have synergy opportunities with facility consolidation in New Mexico, we are making chain-wide progress on quality, yield, and overhead efficiencies. Since entering our first cannabis market in 2020, we've rapidly scaled our footprint through 13 acquisitions, building a leading retail footprint in both Colorado and New Mexico. We are now narrowly focused on optimizing our asset base to drive operating efficiencies while maximizing the output of our retail, cultivation, and manufacturing operations. Over the coming months, we plan to consolidate cultivation facilities and eliminate underperforming stores that no longer align with our high-margin expectations. These efforts will better position us for long-term profitability and sustainable growth. We look forward to providing updates as we work through this optimization cycle. Let's quickly touch on our quarter one 2024 financial results. Total revenue in Q1 increased 4% to $41.6 million. driven primarily by the growth from new stores, partially offset by continued pricing pressure and the proliferation of new licenses in New Mexico. Gross profit for the quarter was $17.9 million, or 43% of total revenue compared to $21.8 million, or 55% of total revenue last year. The decrease in gross margin was primarily due to the aforementioned pricing pressure in New Mexico, as well as higher medical sales mix in Colorado. Operating expenses for the first quarter of 2024 were 20.6 million compared to 16.2 million in the year-ago period, with the increase primarily driven by personnel expenses and full-wall SG&A costs associated with the 21 additional stores in Colorado and New Mexico that are still ramping. Loss from operations in quarter one 2024 was 2.7 million compared to income from operations of 5.6 million last year. Adjusted EBITDA was $7.3 million, or 18% of revenue, compared to $14.5 million, or 36% of revenue last year, with a decrease primarily driven by lower gross margin and higher operating expenses associated with the 21 additional stores that are still ramping. As of March 31, 2024, cash and cash equivalents were $13.2 million. Total debt stood at $159.7 million as of March 31, 2024. Looking ahead, we will continue to enhance our retail points of differentiation as we sharpen pricing and promotional efforts and focus on delivering the right high-quality assortment with exceptional customer service while expanding wholesale penetration in both states. We are also driving operating efficiencies to unlock working capital and EBITDA while further optimizing our asset base. We are narrowing our focus and resources as a retail forward organization, rationalizing vertical operation, and beginning to sunset underperforming stores to protect our margins and wisely preserve capital for high return reinvestment. By leveraging our operational expertise and implementing rigorous cost measures, we believe we will better position Schwoz to return to its strong levels of profitability moving forward. That concludes our prepared remarks. I'd like to now pass it back to Sean, who will open the call for Q&A.

Thank you, Justin and Forrest, and thank you everyone for participating in the conference call. We'll now begin the live Q&A session. After we conclude the live Q&A, we will address questions that have come in via email over the past couple of weeks and even the past hour since issuing our results. Operator, over to you.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your telephone keypad. You will hear a three-tone prompt acknowledging request. Questions will be taken in the order received. Should you wish to cancel your request, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Russell Stanley from Decon Securities. Please go ahead.

Good afternoon and thank you for taking my questions. I guess first on the retail front and the plans to look at eliminating some underperforming stores, wondering if you have preliminary thoughts you can share around how many stores might be impacted, and secondly, I guess, whether there may be candidates or the potential for relocation rather than full closures. Any call there would be helpful.

Yeah, Russ, happy to take it. We We currently have three that we are looking at and we'll soon announce the closures of those. Those are in Colorado. And we see those as candidates for reallocating the license versus full closure. Just taking the opportunity of starting that process now.

Great. And maybe moving on to wholesale, congrats on the On the growth there and the improvement in penetration, I imagine Roll and Juana have helped you get on shelves. I'm wondering now if the growth focus is really about adding more doors in each state, or if you'd like to focus more on getting more of your own house brands onto each shelf, focusing on share of shelf. I imagine you want to expand both. Any thoughts on which one is favored at this point would be helpful.

Thanks. Yeah, good question. We're excited, really excited about what's happening in wholesale with the penetration growth that we're seeing in both markets, in particular New Mexico. But the team has been focusing on not just expanding doors. We have increased the size of our sales team, but But I so so they're out expanding doors, but we're also working on the portfolio growth we've seen really solid success with waller co. The one of gummies we feel like we have legs there as well and we'll start to unveil the additional products across all form factors in the coming quarters and. I think you saw in quarter one we launched the stay asleep and the pre roll packs in New Mexico. Um, we've got the one to one to one wanna pineapple. Um, and then we've got, uh, the everyday weed, full flower joints and rosin, a few joints in Colorado with plants, expanding Mexico after that. So, uh, it's a little bit of both, um, in quarter three, what we're going to follow that with, uh, a new form factor with the, we've got an exclusive distribution rights with air graph vaporizer platform. Um, and we'll. sell that under several well-known brands in both markets so just just building depth across the categories where we see people moving from flour into other categories so making good progress more doors making good progress on on the expanded catalog that's great maybe one last one for me and i'll get back in the queue uh new mexico it's encouraging to see the

the turn as it looks in stores, net additions. I'm wondering, early in the process, I'm wondering how you'd even try to forecast this. Do you have a sense as to how long you think it might take to wind that store count down to a healthy level, a happy medium, if you will? Any thoughts on that would be helpful. Thank you.

Yeah, you bet, Russ. I mean, we've always, as we've talked about in the past, we just, we didn't see the market economics holding up, you know, half the volume in these dispensaries versus what we're seeing in Colorado and just an accelerating market starting to mature very quickly, much quicker than we saw in Colorado, pricing the wholesale side dropping, competitive pricing dropping. One of our biggest issues, as you know, has just been the illicit market. We're starting to get the help of the Cannabis Control Division increasing their efforts to To subdue that, we are starting to see more and more closures and chain doors. So beyond that and just the overall market equilibrium, we've seen closures increase 36% sequentially from quarter four to quarter one. And April was our first recorded month of negative net view stores with 26 closures. We actually see, I think we had 72 closures in quarter one We started to see a reduction in openings as well. So our forecast suggests that we expect to flip negative in quarter two. We're already seeing a pretty, we've gone from 11% store count growth quarter over quarter in quarter three to 4% quarter four to 2% in quarter one. And so based recent activity suggests that'll flip.

That's great, Collin. I appreciate it. Thank you. I'll hop back in the queue.

You bet, Russ. Thank you.

Thank you. And your next question comes from the line of Joe Gomez from Noble Capital. Please go ahead.

Good afternoon. Thanks for taking my questions.

Hey, Joe.

I was wondering, you talk about the customer acquisition, retention, loyalty. Can you point to some data, give us some data points on what you're seeing there in terms of the improvements quarter over quarter or year over year?

Not as good as we'd like, honestly, Joe, which is why we're focusing on it. One of the biggest issues we've had within our loyalty program is the platform and just the way we reach our customers through text messaging and the stability of that. Really, we're looking at the platform overall. We're looking at making sure our messages are reaching our customers, but we also have a lot of really good data to help us start measuring the accuracy of our, uh, or not just the accuracy, but the effectiveness of our promotional programs and then the elasticity of those. So, uh, from a penetration standpoint, we've seen growth in Colorado, you know, steadily move. I think we were something like 37% in quarter one this time last year, we're at 68%. We have a big effort with, with new, uh, new customer signups. We are working to win back customers who, who we've seen, um, come and go and just making sure we're securing their loyalty. In New Mexico, we have over 70%. They're more around 74%. So we have a really strong, from my years in retail, just having this kind of penetration is pretty incredible. We've got an active base of loyal customers. I think those are statistics. The you know, the qualified information is more about what we're doing next. And that's stabilizing the platform, improving our business intelligence, and making sure we're understanding a little bit more about the customers so we could segment them appropriately and carry them along on the journey and just reach them with more effective promotions.

Okay, thanks. One of the things you talked about, you know, the gross margin, impacting gross margin was the higher medical sales mix in Colorado. And I was wondering if you could give us a little color out, you know, what's the margin differential between medical and recreational? What percent of revenues is medical today in Colorado and what kind of growth rate are you seeing on the medical side versus the recreational side or any additional Insight you can give to us on that would be appreciated.

Yeah, good question. Obviously anticipated this one. When you look at year over year, quarter one last year, let's not forget that some portion of that included an allocation that was part of that ERTC, that payroll credit that we received. That was about $900,000. big chunk of this is also the price investments that we're making in New Mexico and Colorado. And then, as you mentioned, about 190 basis point impact is our medical business, the standing akimbo acquisition and the growth in medical overall. To answer your question of the percent mix, we run about 8% total medical sales. We are seeing that growing. It's becoming a bigger part of our portfolio, just as we focus on operational execution of the standing akimbo banner. the percent margin is closer to 35%. So when you look at our overall gross profit margin in quarter one, 23, that was closer to 55%. You can start to see the weight of that.

Okay. And one last one for me, I'll get back in queue. So you had a use of cash flow from operations about $3.7 million versus about $880,000 last year. Cash is down to about $13 million from $19 million at year end. One, I guess, are we going to see cash flow turn back positive here in the second quarter? Secondly, how comfortable are you at that $13 million cash position, does that give you enough firepower to do what you're planning on doing here going forward?

It does. And, you know, what we're focused on right now is, you know, I think we've been talking about the price investments that we needed to make in quarter four and You know, we responded a couple months late to the game, and we went after it, and we knew it would take a little bit of time to get the bounce back on these price investments. We're starting to see 12 to 14-week bounce back on units. We made our flyer investments in December and other investments trickling in most of our investments in quarter one. So in terms of cash used, You know, we used it, we made major investments, as Justin mentioned early on, in the customer experience, in pricing, and we brought in, to offset the pricing impact, we brought in third-party vendors, which carry a bit of a higher cost profile. We've improved the product assortment, though, improved our in-stock position, gave the customers a better experience with more selection. We've also been investing in training and development. And so when you take those investments and you start to cycle those out, I expect to see our margin increasing off of where it is today. I'm not going to tell you that we're going to get back to 55% margins. This is the new reality in New Mexico, what it takes to compete for market share. And we're moving from the heels to the toe and we're going after it. So In terms of other areas to offset the working capital, we're definitely focused on freeing up cash through inventory management. We're starting with retail, making sure we got our sets right, our assortment, our end stocks, and that's translating to what we produce and cultivate and getting that supply chain right. And so I'll free up cash that way. And then I think we'll see more of a fulsome review in quarter two about the restructure costs that have helped us make sure that we're We're freeing up cash there as well and putting all of our attention and investments on the customer and the customer experience.

Thanks, Forrest. Appreciate the insight. I'll get back in queue.

You bet, Joe. Thank you.

Thank you. There are no further questions at this time. Mr. Mansouri, please proceed.

Thank you, operator. We'll now run through a couple of pre-submitted questions here. As I mentioned earlier, over the past couple of weeks and over the past hour, a number of these were addressed already on the call today, so we'll keep this succinct. Forrest, Justin, maybe could one of you provide additional color on the initiatives in place to drive efficiencies in your cultivation and manufacturing operations while improving flower quality and yield?

Yeah, I'm happy to do that. Yeah, this is a big area of focus. And first of all, we're seeing New Mexico and supply chain evolve rather quickly. And so mid-tier flour, New Mexico likes local product, but we are starting to see third-party CPG penetration there. We are seeing more affordable mid-tier flour come online. And so, you know, and I mentioned that the biggest piece of what we're doing is making sure we have our demand signals right coming from the consumer into the retail. We've got the right holding power and in-stock position in our retail spaces, and then we've got our wholesale signals right. It's something we've been improving, we've been working on since the Everest acquisition in New Mexico, and we still have some runway there on making sure that we're growing in the right tiers to give us the right margin profile. We are getting the right strains. We're producing the right products. We have the ERP implementation. It's giving us better visibility and control of our inventory levels overall there and understanding where in the value chain we have opportunity. We are looking at LED light implementation in a couple of our grows to work on yields and quality there. And then, like I said, just working on overall synergy work to see where we can consolidate and improve operations.

Perfect. Thanks, Forrest. And then last one here for the submitted questions. Given the recent news on rescheduling, what is your stance on Schwoz's tax obligations going forward?

Yeah, thanks, Sean. You know, during the call, I conveyed the appreciation for the DEA to reclassify cannabis to Schedule III. You know, we, along with the rest of the industry, we view this as a really important step forward, removing 280E and the subsequent overdue legislation. You know, we're working closely with our tax counsel regarding our interpretation of 280E And I would say based on internal discussions, we believe updating our tax position is a good thing to evaluate. I think it will reflect the non-applicability of 280E. And I think that position is becoming stronger and stronger as we go forward. So, in fact, we may be in a position to amend our tax returns for previous years, which we think would be a good thing. Obviously, we're not going to count entirely on that. We're going to continue to work hard on running the business and being efficient as we can. And, you know, look, I think in general, as we look at the business, we're in two tough businesses. We're in two tough markets. There's absolutely a shakeout. And we understand that shareholders are – None of us are super pleased with where the share price is, and I understand that. But if you look at it, there's an absolute shakeout going on in both of these markets, and you've got two choices. You can artificially take margin and hold up margins, or you can play and be really competitive and play for the long game and do the things that are going to make you really competitive and be a winner long-term. that are going to drive EBITDA growth and competitive advantage. And that's what we're going to do. So, you know, for people that want to own a really good company that's going to have market share, going to continue to grow market share and grow value, shareholder value over time, then this is a good bet for people that, you know, want to see quarter to quarter in the short term. You know, we're going to do what's right to build the business. And we've always said that. So, you know, that's really what Forest is doing. The board's really happy with what we're doing now. We're being really competitive. We've invested heavy in pricing, and we're going to keep doing that. We're going to do what it takes to please our customers and consumers, and we're not afraid to compete. And we're going to keep at it. We're going to stay efficient, and we're going to keep doing what it takes to please our customers at wholesale as well as at retail. And we think there's going to be a massive shakeout this year. And we're going to be in that fight. And I think it will pay dividends.

Thanks for that color, Justin. That wraps up the pre-submitted questions. I will turn it back to Justin for closing remarks.

Yeah, thanks, Sean. I just want to say thanks. I want to thank all of our employees. I want to thank management. I want to thank all the participants who are listening to the call. This industry is an exciting industry. We have a lot of good things around the bend with regards to rescheduling to Schedule 3. I believe that's going to take place. And we've got a really good business. And we're developing really good capabilities that will stand up in any market in this country. I'm really proud of what we have. I'm proud of the team. And this is a great business. And I want to thank our shareholders. I want to thank the folks that hold our debt. I want to thank our board. This has not been an easy sector. We haven't got a lot of breaks. And we're building a great company. I think Forrest and the leadership team is doing the right things to take care of customers. And I just want to thank everybody because this is not for the faint of heart. Hard work. retail and wholesale, taking care of customers, takes great attention to detail, and really takes a lot of passion. And I just want to thank everybody for their support. And we're going to continue to work hard, and we'll see you the next quarter. Thanks a lot.

Thank you. That concludes our conference for today. Thank you all for participating. You may now disconnect.