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

Medicine Man Technologies, Inc. (PNK:SHWZ) Q4 2023 Earnings Call Transcript March 27, 2024

Medicine Man Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.43 EPS, expectations were $-0.13. Medicine Man Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Ina, and I will be your conference operator today. At this time, I would like to welcome everyone to Schwazze’s Fourth Quarter and Full Year 2023 Conference Call. All lines have been placed on mute to prevent any background noise. Following the prepared remarks, management will take questions submitted via the web link found on Schwazze’s 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 Mansouri with Elevate IR. Sir, please go ahead.

Sean Mansouri: Good afternoon. And welcome to Schwazze’s fourth quarter and full year 2023 earnings conference call. Joining me on the call are Forrest Hoffmaster, Interim Chief Executive Officer and 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 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, among others, statements regarding federal and state legislation and regulation, Schwazze’s future results of operations and financial position, and Schwazze’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 Schwazze. Investors are cautioned that all forward looking statements involve risks and uncertainties that may cause actual events, results, performance or achievements to differ from those anticipated by Schwazze at this time. Additional information concerning factors that could cause events, results, performance or achievements to differ materially is available in Schwazze’s earnings release made available before this call and available on Schwazze’s Investor Relations website and in Schwazze’s 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 Schwazze’s public filings with the U.S. Securities and Exchange Commission, which can be reviewed at www.sec.gov or on sedar.com or on the company’s Investor Relations website. Also, Schwazze may discuss non-GAAP financial measures during today’s call. A reconciliation of the differences between the non-GAAP financial measures discussed during the call and with the most directly comparable GAAP measure can be found in Schwazze’s earnings press release made available before this call and available on Schwazze’s Investor Relations website. I would now like to turn the call over to the company’s Chairman of the Board, Justin Dye, for opening remarks. Justin?

A close-up of a distribution center, with stacks of boxes ready for delivery of cannabis products.

Justin Dye: Thank you, Sean. Good afternoon, everyone. And thank you for joining us to discuss our financial and operating results for the fourth quarter and full year 2023. As many of you are aware, cannabis operators across the country have been contending with increased competition and pricing pressure. Our markets were not immune to these challenges. In Colorado, there were roughly 690 active adult-use licenses as of year-end, which is up from the prior year, competing in a market that declined approximately 15% year-over-year during the fourth quarter. While competition remains strong, I’m proud of our team, outperforming the Colorado market during the quarter with high single-digit sales growth compared to the prior year, demonstrating our ability to thrive in challenging retail environments.

In New Mexico, the proliferation of new licenses has continued outpaced market growth and although the illicit market in New Mexico has been pervasive, the state’s regulatory body has increased their license enforcement in recent months, as well as upgraded the severity of illicit market sales from a misdemeanor to a felony charge. Their efforts have resulted in an increase in store closures and we expect this trend to continue throughout 2024. We’ve always prided ourselves on being good stewards of capital while striving for operational excellence in our markets. This has been the driving force behind our solid adjusted EBITDA margins and consistent cash flow generation. Our mindset remains unchanged as we continue to navigate the prolonged challenges in Colorado, New Mexico, while improving our capabilities become even more competitive.

We are optimistic about federal reform in the near- to medium-term and are poised to benefit in the long-term. In the meantime, we are committed to operating our business and driving profitable growth without the benefit of rescheduling of SAFER. Before I pass the call over to Forrest, I’d like to take a moment to acknowledge his appointment to Interim CEO. I’ve worked with Forrest for the past six years from our time at New Seasons Market, where he successfully led the company through one of the most disruptive periods in the retail grocery industry. With Forrest as CEO, he implemented a focused growth and cost optimization program, which enabled the company to grow EBITDA by over 30% in two years. I’m confident that with Forrest’s proven track record and deep retail expertise, we have the right leader in place to see us through this period and execute on our growth and profitability objectives.

Forrest, over to you.

Forrest Hoffmaster: Thanks, Justin. To begin, I’d like to convey my appreciation to you, along with the entire Board of Directors for entrusting me to lead the organization as interim CEO. I’d also like to acknowledge the talent, passion, commitment of our exceptional growers, producers, retailers and support teams that make up team Schwazze. We have a lot to be proud of, and I’m looking forward to working alongside you in the coming months. Now on to the results. We delivered solid growth in 2023 in two highly competitive markets with 31% adjusted EBITDA margins and improved operating cash flow. We continue to sharpen our retail strategy while expanding our store footprint by more than 50% to 63 dispensaries across our two markets.

Although the Colorado and New Mexico markets were pressured during the year, we have built a solid foundation and will continue to evolve how we serve our patients and customers to stay well ahead of our competitors. Internally, we are relentlessly focused on maximizing operating efficiencies and the output of our manufacturing and cultivation facilities while driving overall cost savings in asset utilization. Let’s get into each of our markets, starting with Colorado. As Justin mentioned, the state ended the year with nearly 690 active adult-use licenses, underscoring the importance of our investment in and focus on elevating our store experience with key points of differentiation. Early signs of our efforts have been positive as we once again outpaced the market in quarter four on a sequential and year-over-year basis.

We expect to continue driving improvements in customer acquisition, retention, loyalty and the overall retail experience while increasing our market share across the state. We have also begun to see wholesale pricing more broadly stabilized through Colorado as flower AMR has maintained an average price around $750 per pound in quarter four, which was consistent with quarter three levels and up from $703 per pound in quarter two. Our wholesale portfolio has continued to generate momentum, demonstrated by the more than 250% growth in 2023 of our licensed pre-roll brand, Lowell Farms, which is currently the number one pre-roll in Colorado, selling into six of the largest accounts in the state. We are pleased with Lowell’s growth and look forward to expanding our distribution as we prepare for our April launch in New Mexico.

Moving on to New Mexico, the proliferation of new licenses has led to increased competition and aggressive pricing strategies from other operators. Legal cannabis sales in the state were up 18% year-over-year in quarter four. However, total store count was up over 50%, leading to lower revenue per store. Approximately 225 new stores were opened in 2023, bringing total stores up to more than 675 as of December 31st. While net new store growth is beginning to slow down, we anticipate this will be a challenging market ahead. Our team remains focused on cost optimization and asset utilization while implementing a balanced pricing and promotional strategy to drive increased traffic into our stores, where we can introduce them to a broader assortment and an elevated retail experience.

In early December, we rolled out new flower pricing with greater variety while also implementing a tiered pricing strategy for our CPG and branded products. The early results have been positive. Our business model is well positioned to succeed in New Mexico over the long-term and we will continue to evaluate our pricing structure to ensure we are competitively priced without sacrificing brand quality and service standards. While price is only one aspect of our strategy, we continue to focus on the in-store experience by enhancing assortment, storytelling, events and product knowledge to create unique points of differentiation to set ourselves apart from competitors. These efforts are further aimed to increase customer loyalty and retention, which we believe are key drivers to success in the New Mexico market.

From a wholesale standpoint, we generated 18% year-over-year growth in the fourth quarter across both states. We have also made solid progress with our fan-favorite gummies brand, Wana, which grew 48% in 2023 and is now in 130 doors with eight of the top 10 accounts in the state. While still in the early stages of our expansion into the New Mexico market, wholesale sales there in quarter four have grown to 28% of our total wholesale business, compared to 22% in the prior quarter. We are encouraged by the early momentum and believe we are well positioned to capitalize on the wholesale opportunity in the state. Subsequent to year end, we began to see a change in license issuance trends in New Mexico, in which net new stores have started to decline as store closures increase.

For context, in February, the state experienced 31 store closures, which is the highest on the state’s record and led to the lowest net new store increase over the last two years as the market adjusts. While we expect continued competitive pressure, we believe these early trends suggest we are entering a shakeout period for New Mexico, which should bode well for our operations in the state as we look to the future. In both Colorado and New Mexico, we increased wholesale penetration by over 3 times in 2023 to more than 27% total door penetration in both states. We have also been focused on refining our wholesale product offerings as we aim to provide the best assortment of high quality products with exceptional customer service. In the second quarter, we will be expanding our catalog with the Lowell Farms launch in New Mexico and our own pre-roll brand, Everyday Weed, in Colorado.

We look forward to providing this expanding catalog of fan-favorite products to the patients and customers across Colorado and New Mexico in the coming months. Turning to our cultivation and manufacturing operations, our cultivation and manufacturing leaders have continued to generate improvements in all phases of our indoor and outdoor grows, as well as our manufacturing environments. With our acquisition in New Mexico, we revamped our outdoor grow, closed our 301 grow and realigned demand and production to improve fulfillment and our overall inventory position. As we mentioned on the last call, we implemented a new ERP system across our cultivation and manufacturing facilities, which led to an inventory adjustment in quarter four. Although this impacted gross margin for the quarter, we now have better visibility and control over our inventory levels and expect to uncover additional supply chain efficiencies and cost savings opportunities in the future.

We expect to complete the ERP implementation in our cultivation facilities this year. Let’s quickly touch on our quarter four financial results. Total revenue in quarter four increased by 8% to $43.3 million, driven primarily by the growth in new stores and increased wholesale revenue. Gross profit for the quarter was $7 million or 16% of total revenue. As I mentioned previously, the margin decrease was the result of one-time non-cash inventory adjustments of approximately $13.1 million, comprised of $3.1 million of product consolidation, obsolescence and shrinkage expenses, $4.3 million of net realizable value adjustments and $5.8 million of fair value adjustments on acquired inventory in New Mexico in 2023. Adjusted gross profit, which excludes the non-cash inventory adjustments, was $20.2 million or 47% of revenue in the fourth quarter of 2023.

Operating expenses for the fourth quarter of 2023 were $23.3 million, compared to $24.2 million in the prior year, with a decrease primarily due to a lower impairment charge in the fourth quarter of 2023. This was partially offset by an increase in four-wall SG&A expenses associated with 22 additional stores in Colorado and New Mexico that are still maturing. As a percentage of revenue, operating expense was 54%, compared to 60% in the year ago quarter. Loss from operations in quarter four of 2023 was $16.2 million, compared to $2.5 million last year, again primarily driven by the non-cash inventory adjustments. Adjusted EBITDA was $11 million or 25% of revenue, compared to $13.3 million or 33% of revenue last year, with a decrease primarily driven by the higher operating expenses associated with the 22 additional stores that are still maturing.

We generated another period of positive operating cash flow of $3.5 million during the fourth quarter, which led to $12.2 million of operating cash flow for the full year. As of December 31, 2023, cash and cash equivalents were $19.2 million. Total debt stood at $156.8 million as of December 31, 2023. Looking ahead, we plan to maintain our prudent approach to capital allocation, while enhancing the customer experience, improving loyalty penetration and optimizing the efficiency and output of our assets. We will also continuously evaluate our pricing structure in New Mexico to ensure we are well-positioned in the market. We expect to realize the benefits of these initiatives in the back half of the year. Our team has a demonstrated track record of executing in competitive markets like Colorado and believe New Mexico will be no different in the long run.

That concludes our prepared remarks. I’d like to pass it back to Sean, who will open the call for Q&A.

A - Sean Mansouri: Thank you, Justin and Forrest, and thank you everyone for participating in the conference call. We will now begin the Q&A session. As we gather the queue for live questions, we’d first like to address questions that have come in via email over the past couple of weeks, as well as questions that have even come in over the past hour via email and via the webcast. So, to kick things off, you mentioned the proliferation of new licenses has led to increased competition and aggressive pricing strategies from other operators. What actions has Schwazze taken to stand out against the competition?

Forrest Hoffmaster: Yeah. Thanks, Sean. In New Mexico, it’s still a young market, and as we mentioned on the call, sales have increased 18% year-over-year in quarter four, but store count was up over 50%. So, that’s led to about 20% lower revenue on a per-store basis to levels that we believe cannot be sustained as they’re roughly about 50% of the Colorado market. We’re seeing closures trend upwards in recent months and starting to see net growth rates decline, so all of that is encouraging for us. Pricing is competitive. Flower still remains slightly above the Colorado market, but most of the rest of the categories are in line with Colorado. It’s just one point of our strategy and we’re carefully balancing the retail pricing and promotional strategy to drive traffic, and also increasing our flower and CPG assortment for greater choice.

Beyond pricing, we’re focusing on the in-store experience. That’s where we are in terms of we’re just retailers at heart and that’s the team that we have in place down there in New Mexico, as well as Colorado, and so we’re focusing just on the key retail points of differentiation, but tender education, like I mentioned on the call, focused on storytelling, product knowledge, customer education, all our items or areas that we believe will help us stand apart in the New Mexico market. Lastly, we’re evaluating new methods to grow our customer loyalty program. We’re seeing growth and penetration there, growth in our basket, growth in new loyalty sign-ups. We believe that’s a critical factor in driving traffic into the door, so those are some of the key areas that we’re focused on now.

Sean Mansouri: Perfect. And could one of you provide an update on both the retail and wholesale markets in Colorado?

Justin Dye: Yeah. Thanks, Sean. I’ll take that one. In terms of the retail market, Colorado sales were down approximately 15% on a year-over-year basis compared to our growth of almost 8%. Population in the state remained flat year-over-year, with overall store count down 3%, driven really by a reduction in medical dispensaries and also offset by low single-digit growth in the recreational stores. Sales volume was down about 15% year-over-year in Q4 and we’re seeing sequential improvement and we’re in a developed market and certainly going through some growing pains as demand and supply kind of normalize. But we’re built really to withstand this and I love the opportunity for us to compete in a tough, challenging market, and I think, things are certainly going to improve.

From a wholesale perspective, cultivation licenses count in Colorado have come down roughly 22%, which is a sizable move from approximately 1,200 licenses at the end of 2022 to over 920 as of Q4 2023, which is below pre-COVID license counts. We’re starting to see pricing stabilization, as Forrest mentioned, in the state with flower AMR remaining around $750 in Q4 and plant counts back to 2018, 2019 levels. So we’re certainly starting to see stabilization and we believe there’s improvement around the corner, but we’re going to continue to execute, we believe, in the short-term in a tough market. To summarize, we believe it’s going to be leveling out with steady flower AMR and believe shows stability regardless of how we really think about retail pricing pressure.

We feel good about where we’re headed from a wholesale perspective standpoint. Looking ahead, we believe we can maintain solid retail margins, utilize the wholesale penetration growth to protect our CPG margins and we’ll benefit from modest increase in wholesale pricing as supply settles down. This could be a shakeout year for Colorado and our lightweight capital model, strong retail capabilities, we believe position us very well to continue to grow share of wallet from our customers. We’re going to continue to focus on retail execution and optimizing customer acquisition with loyalty and retention and unlocking liquidity through our current asset base.

Sean Mansouri: That’s great color. Thanks, Justin. And what’s your perspective on future M&A? Is the team evaluating new targets?

Justin Dye: Yeah. I’ll take that one. Over the last year, we’ve increased the retail footprint by more than 50%. So we’ve gone from 41 to 63 stores largely through acquisition. Our team is focused on optimizing that store count with a number of optimization and lean initiatives to support the expanded asset base over the two states. We believe there will be material cost savings and synergy opportunities remaining in New Mexico, where our focus is building out the retail assortment within the stores along with optimizing manufacturing and our cultivation assets. So there’s more work to do, but we feel like there’s lots of opportunity there. Internally, we’re looking at unlocking liquidity and capital optimization with the right retail spaces in the right locations.

So, we believe there’s going to be a shakeout. Clearly in Colorado, we think we’re going to be well positioned to take advantage of that as smaller, less capitalized, worse capitalized companies struggle and leave the market. We’ll continue to monitor and our goals to pick up assets at attractive values that fit really our game plan of going very deep in Colorado and New Mexico. So we’ll play offense where there’s an opportunity while we’re optimizing the business.

Sean Mansouri: Great. And this is Juan [ph] from the webcast. Can you expand on the initiatives in place to improve flower yields and quality while lowering input costs?

Forrest Hoffmaster: Yeah. I can take it, Sean. So with the Everest acquisition midyear, we added a cultivation and a manufacturing facility. Both allowed us to improve our overall assortment in New Mexico for internally cultivated items. More importantly, we’ve got a really strong New Mexico cultivation team and they’re just focused on continuous improvement and sharing the best practices, growing the right strains, improving overall yields, and also yields into higher margin tiers that give us a competitive retail advantage while creating cost efficiencies and buying leverage just by having the expanded grows. We do -- we are continuing, I think I mentioned this in the last call, to focus on 5S, lean training, standardized SOPs in all facilities.

We are rolling out the ERP system in Colorado. We’ve already rolled that out to manufacturing and distribution and we’re going to hit the grows this year as well just to give us more visibility through the system. We’ve invested in automation where it matters and we’ll just continue to evaluate cost efficiencies at all stages of the grows and manufacturing as well and a lot of that will come through ERP as we’ve already seen improve operations in Colorado grows, getting our costs well beyond competitive levels. So -- and we’ll continue, we did end up closing a grow this year, the 301 grow and we’re continuing to consolidate manufacturing and rationalizing our grows there just to ensure high asset utilization. So all those efforts will continue we believe give us a competitive advantage.

Sean Mansouri: Great. And this one came in via email. Regarding your balance sheet, the tax liability appears to have increased $25 million. Can you share more about your position and how you’re viewing the recent 280E approach taken by other MSOs?

Justin Dye: Yeah. Sean, I’ll take this one. We’ve taken what I would consider one of the most conservative views in the industry from a tax perspective, maintaining roughly a two-quarter to three-quarter lag in payments, which is where we were in 2022. With the evolving news in the industry regarding rescheduling SAFER, we believe there is going to be some good news here. We’ve extended that lag more in line. We’re still on the conservative side versus most of the other multi-state operators, but we’ve taken -- we have kind of extended that to five quarters to six quarters. So a lot of these other competitors have looked at their tax approach and have kept 10 quarters or more out there. So you see us kind of moving a little bit more towards that as we start to see maybe become a little more optimistic with regards to 280E, which I think is good, it’s good for us and it’s going to be good for the industry.

Sean Mansouri: Great. And could one of you provide more color on wholesale expansion plans in New Mexico?

Forrest Hoffmaster: Yeah, Sean. Yeah. First of all, year-over-year comparisons on total wholesale is largely pricing and bulk distillate. We’re seeing strong growth, 24%-unit increase overall. In New Mexico in particular really excited about what the wholesale team is doing there, excited about the hard work and progress there. The first approach that they took is just rationalizing the overall catalog, which actually helps us in both states. Identified a clear product development roadmap and expanded our current offerings. Plus, we’ll see new product launches coming out in the pre-roll and vape categories in spring and summer. We’ve already seen penetration grow in New Mexico from 22% to 28% quarter-over-quarter and with a heavy -- with an even heavier promotional focus, we think New Mexico will be a strong contributor for the coming year.

At a brand level, I mentioned Lowell Farms, which we’re really happy about in terms of the pre-roll category in Colorado, taking the number one pre-roll position in Colorado. We’re introducing that into the New Mexico market in April and then that will kick off a sequence of other new item introductions into the state, which should make for an exciting year, on top of what we’re already doing there with the Wana and the gummy category. So we’re excited about wholesale segment overall in both markets and especially New Mexico in the coming year.

Sean Mansouri: Okay. And just a couple left here. How are you approaching the possibility of rescheduling or SAFER banking? Do you have other additional information to share on the regulatory front outside of some of our previously stated comments?

Justin Dye: Yeah. Carefully. No. We are optimistic with regards to several things that are happening, and we remain fairly close to this with various lobbying organizations. And our Head of Government Relations, Dan Pabon, has got his finger on the pulse here. We’re certainly watching what happens in Florida with the ballot initiative. We’re hopeful that in a very large populous state, one that is viewed as red, that adult-use going on the ballot is a real positive, and because of the size of the state, we think that bodes well for really the national cannabis market. So we’re watching that closely and we’re going to know something here, I think, in the next 24 hours. We’re optimistic about rescheduling. Everything that we are hearing creates optimism in the near-term to mid-term around doing that, and obviously that has profound impact on the industry in terms of cash flow generation and the ability to deduct SG&A.

So we think that’s a very big deal. And the SAFER side, I would say, we’re sort of more moderate on. Certainly there’s a lot going on there, but it also has to go through Congress. So where the SAFER or where the rescheduling really is going through the DEA and it’ll be up for comment period, which we think is a relatively short period of time and we should know something here in the next few months, we believe. So we’re pretty optimistic. We think this could be really good for us and good for the cannabis industry. It’s been coming for some time and so we’re pretty optimistic.

Sean Mansouri: That’s great. And last one on the feed Q&A, can you speak to the health of the balance sheet, particularly operating cash flow and your debt schedule? Are you looking at refinancing opportunity?

Forrest Hoffmaster: Yeah. I’ll take it. Justin just mentioned the news that we’re monitoring just that news, as well as the state of the capital markets and certainly welcoming any news on the federal regulatory front. We’ve got our first set of material debt hurdles in quarter one 2025 and so it is part of our ongoing conversation just where we are in overall operating cash flow and what our expectations are for the next four quarters. We did end the year with $19 million in cash and $12 million in cash flows from operations. It’s part of our daily conversation, so that’s in front of us. And so, yeah, we expect to continue to be free cash flow positive after meeting capital and interest obligations regardless of the outcome in D.C., but this is a conversation that we’re definitely having here in 2024.

Sean Mansouri: Thanks, Forrest. This concludes the inbound Q&A. If you want to turn it over to live Q&A. Thank you.

Operator: Thank you. [Operator Instructions] And your first question comes from the line of Joe Gomes from Noble Capital. Please go ahead.

Joe Gomes: Good evening and thanks for taking my question.

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