Medicine Man Technologies, Inc.
Q3 2020 Earnings Call Transcript

Published: 16 Nov 2020

[Operator:]

Greetings, and welcome to the Third Quarter 2020 Conference Call and Webcast for Schwazze, formerly operating as Medicine Man Technologies, Inc. This conference call and webcast is being hosted by Chief Executive Officer, Justin Dye; and Chief Financial Officer, Nancy Huber. Following the presentation, management will take questions submitted via the web link found on Schwazze's Investor Relations Web site and in 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, expect, believe, potential, will, should, project and similar expressions, as they relate to Schwazze, are as such, a forward-looking statement.

[Justin Dye:]

Good afternoon and thank you for joining us. Today I would like to begin with some thoughts on recent industry news, share brief comments on our quarterly performance and wrap up with a business update. Afterwards, Nancy will review our financial results in greater detail. While there were certainly many takeaways from the recent election, I think it is safe to say that cannabis was a big winner across the board. This election confirmed that cannabis legalization has not only become a popular issue across vastly different regions of the country, but has also become less and less of a partisan issue. Overall, our industry secured wins on election day as voters in five states, Arizona, Mississippi, Montana, New Jersey and South Dakota, legalized medical or recreational cannabis. The number of states with a legal medical cannabis market increased to 36. In the number of states with adult use cannabis increased to 15. With these victories congressional lawmakers in those states will have additional political cover on voting for this issue, while the case for descheduling cannabis has emerged stronger than ever.

[Nancy Huber:]

Thank you, Justin. For the third quarter revenue was $7.4 million, a 39% increase over the same period last year of $5.3 million. Notably, product sales rose nearly 168%, which can largely be attributable to the revenue associated with the acquisition of Mesa Organics in April 2020. In the year ago quarter, we benefited from nearly $1.8 million in litigation revenue that we view is non-recurring. In addition, as referenced on our last conference call, we refocused professional services and cultivation services expertise into internal projects. This led to a reduction in revenue from our consulting and licensing services during the third quarter, as demonstrated in our financial tables. Still, we feel that this investment in ourselves will pay dividends long into the future, even as it limits top-line contributions from this segment in the near term. Cost of goods and services totaled $4.6 million, compared to $2.8 million in the year ago period. The 67% increase was due primarily to increased sales of products. As a percentage of revenue cost of goods and services increased 11 percentage points to 63% versus 52% in the prior year, third quarter. Gross profit was $2.8 million, compared to $2.6 million for the third quarter last year. Gross profit decreased to 37% of revenues from 48% of revenues during the same period in 2019. However, excluding the $1.8 million in revenue awarded in litigation during the third quarter 2019, gross profit increased by $2 million, while gross profit margin increased by approximately 15% from an estimated 22% gross profit. This was mostly driven by the strength of the Mesa Organics acquisition. Operating expenses were $6.4 million compared to $3.5 million in the same period last year. The increase was primarily attributable to activities related to building infrastructure and ensuring a seamless integration of future acquisitions, while supporting organic growth. These costs consisted of increased SG&A, professional service fees, salaries, benefits and related employment costs, and non-cash stock-based compensation. Net other income totaled $0.7 million, compared to net other expenses of $0.9 million for the third quarter last year. This represented an improvement of $1.6 million. The increase in other income net was primarily due to an unrecognized gain and derivative liabilities, coupled with an unrealized gain on investments.

[Justin Dye:]

Thanks, Nancy. Our vision is to be the most admired cannabis company in the world. We're working towards this vision by bringing together experienced, profitable cannabis operators into a single publicly traded company and become a leading vertically integrated platform in the industry. These entities like Mesa Organics, Purplebee's and very soon, Star Buds will be supported by our best-in-class team and the infrastructure we've built to promote their strong performance and operating excellence while driving sustainable EBITDA long-term success. We're working hard every day to make 2020 a milestone year for all of our employees, our stakeholders, our communities, and above all our customers. And I remain energized and excited by what the fourth quarter has in store for Schwazze. Without providing guidance, I'm encouraged to see Mesa Organics on track to outperform the third quarter results. We will work through biomass availability issues that might arise for Purplebee's to ensure we're meeting customer demand and our legacy businesses are expected to have strong results. While we still have a few weeks left of the year, I believe it is safe to say that 2020 will be a foundational year for Schwazze. With the backdrop of a global pandemic Schwazze became a plant touching operation, which is no small feat. Additionally, we have built a streamlined data driven platform in integration playbook that enables our ongoing profitable growth. And finally, we're on the cusp of acquiring another banner brand with the Star Buds Colorado locations, which will make Schwazze one of the first publicly traded vertically integrated cannabis companies in Colorado. I continue to be proud of what our teams have accomplished in the short timeframe. But this was truly just the beginning of this story. As we have said in the past, our pipeline is robust and dynamic. And we will continue our focus on organic and inorganic growth to drive long-term success. Let me thank our investors for their continued support and interest and express my enthusiasm for sharing further updates on our progress as appropriate, including our pending Star Buds acquisition and ongoing growth opportunities. We will now be happy to take your questions. To ask a question, please click on the link on the Investor Relations portion of our Web site and submit.

[A - Raquel Fuentes:]

Thank you, Justin. We will start with the first question that's come in. Justin, what do you think will happen to the future of the MSO model if federal legalization happens? Will you be looking immediately beyond Colorado for acquisitions or would that in the near term limit your ability to integrate them profitably?

[Justin Dye:]

Yes, thank you, Raquel. I think we could all agree cannabis was the clear winner in the most recent U.S. elections. That said, I do believe we're on some time away from actual federal legalization and rule. So I see that still being well down the road. We remain laser focused on building a strong business here in Colorado in the short-term. We're always keeping our options open and looking at long-term growth, even outside of Colorado. But we're focused on Colorado at this point in time.

[Raquel Fuentes:]

Thanks, Justin. Another question over to you is, what is the status on Star Buds? Do you think closing could bleed into next year? And what is left to do at this point, now that proof of funds have already been established?

[Justin Dye:]

Yes. There's 14 transactions, which means we have multiple jurisdictions and municipalities to work with on getting immediate approval. We're still waiting on some of the immediate approvals as our goal is Q4 2020, close for all locations at one time. We remain optimistic that we will get this closed this quarter in the fourth quarter. So we look forward to bringing the Star Buds team over partnering with -- we think there's a lot of upsides of joining forces and we remain very, very excited about the opportunity.

[Raquel Fuentes:]

Great. Thank you. Another question that has come in is, I saw the news about Kenya in cultivation, what happened with that deal? And are you still moving forward with Roots Rx?

[Justin Dye:]

Yes. Thank you. So, Schwazze, we have a very process-oriented M&A and due diligence, set of checklists and processes, we dive deeper into all area of the business, including but not limited to 280 taxes and liabilities, there's a lot of work to be done. We look at company's financials and profitability, active licenses. As we are a publicly traded company, we take diligence very serious. In terms of looking at that, the letter of intent for Canyon did expire on September 7, the time lapse caused both parties to reevaluate, ultimately Canyon made the decision to officially terminate those discussions, we certainly wish them well, we will hopefully remain in contact with them. And, you never know what's in the future but great business and that is the letter of intent did expire. With regards to Roots Rx, our term sheet expired on September 7, parties remained in negotiations, at this time Schwazze and Roots have mutually agreed to officially terminate discussions at this time, certainly wish the founders and the team well there, it's a very nice business. And we hope to stay in touch in with them in the future.

[Raquel Fuentes:]

Thank you, Justin. We've gotten a few questions about acquisition targets and financing, over to you. How many acquisition target do you currently have in the pipeline? When can we expect to hear more? And can you discuss the multiples that you're willing to pay for the transaction?

[Nancy Huber:]

Sure, thanks Raquel. As Justin mentioned, we have a number of candidates in the pipeline, we have a very actually pretty robust, long pipeline. We're really looking for profitable cannabis operators in Colorado that fit our culture, have really strong teams and are in strategic markets that we don't cover with the current acquisitions. I can't really discuss who those people are. And we won't announce anything until we actually have signed agreements in place with those candidates. But it's our goal to bring strategic and accretive that's kind of our number one objective is, accretive acquisitions, they have to be profitable and they have to be generating cash flow -- positive cash flow for us to add them to our platform. So that is what we're looking for. Multiple varied depending on what the acquisition is bringing, so we really can't discuss any specific multiples but we will make sure they are accretive at the time we do the acquisition and plan for future accretiveness as we add our synergistic operating playbook to those acquisitions.

[Raquel Fuentes:]

Thanks Nancy. Another question over to you, Nancy is, does the capital raise that you're doing provide liquidity to complete additional transaction? Or is it limited to Star Buds alone?

[Nancy Huber:]

First, we've talked about, we're really laser focused on Star Buds at this time and we're looking at capital raising transactions in the form of equity and debt that's going to get that transaction specifically done. We're certainly looking for additional capital. And as that appears on the headline, we'll take that into account as we add other acquisitions will generate positive cash flow from Star Buds. So we anticipate we'll also be looking for opportunities to put that cash to work as well.

[Raquel Fuentes:]

Great. Justin, a question over to you is about the consulting side of the business. Can you discuss these the internal projects that your team is working on which prevented the booking of consulting fees? Are you no longer pursuing consulting projects?

[Justin Dye:]

Great, thanks, Raquel. With regards to our consulting business, COVID has certainly put a damper in terms of new prospects at this time to do that it's temporary. We are continuing to look at engagements with new clients, particularly on the cultivation side. And we're optimistic about that. But I would say certainly the pandemic has created a little bit of a dry spell with regards to the consulting business. I would also say we have pivoted and use many of these really talented folks on our team, to work on things in manufacturing and to work on new layouts and work on internal processes, and things internally to Schwazze to help continue to build our capabilities and build muscle here. So the team's doing a good job. But now we're in the consulting business and we look forward to expanding our customer list here in the coming months.

[Raquel Fuentes:]

Thank you, Justin. A question over to you, Nancy. If you were to isolate the Mesa Organics and Purplebee's acquisition, how much did it contribute to gross profit in Q3? Was it incrementally higher than Q2?

[Nancy Huber:]

So, we're not breaking out our businesses at this time. We just do our segment reporting, which is by products, consulting, and then the corporate infrastructure and other. What I can say is that, we're looking at those segments as we acquire Star Buds, I think we'll be reevaluating our segment reporting so that we can provide kind of better information to the public that's more in line with the way we'll be thinking of units in the future.

[Raquel Fuentes:]

Thanks, Nancy. Justin, I'll give you the final question. And then you can wrap it up after you answer. Do you believe that another round of pantry loading is possible if COVID cases continue to rise? And how are you prepared for that possibility?

[Justin Dye:]

Well, the unfortunate implications of the pandemic with all the health concerns, et cetera, certainly made life difficult on many of us and our families. Having said that, it is important to note that it's been very good for the cannabis business from a demand perspective. So the businesses -- most businesses are up across the state in Colorado, I'm also hearing very positive demand trends in other states as well. Obviously, cannabis has been deemed essential and essential business here in Colorado, which is a huge shot in the arm. I think demand will remain strong in terms of that, that sort of spike in demand right before anticipation of a shutdown. From a business perspective across multiple businesses, I don't know that we're going to see a sharp increase in terms of pantry loading, I think the consumer and patients understand that the dispensaries will most likely remain open barring any -- buying any other legal notices from the state or from local municipality. So I don't expect as much but I do think demand is going to continue to expand and grow as cannabis has been deemed essential. So it's been good for cannabis. And I think, it'll be good long-term for cannabis as an essential business.

[Justin Dye:]

And with that, I'd like to first and foremost, I'd like to say everyone for your interest in Schwazze and for joining us today. I'd also be remiss if I didn't thank all of the Schwazze teammates on the team that are working incredibly hard in building the company, building capabilities, working on new innovative products, experiences and doing things the right way and building a great company. So I just want to thank -- the pandemic is certainly caused disruption for many of our team members in terms of work and working remotely, as well as the rest of the communities that we serve. So I just want to really thank our teammates, they're doing a terrific job in building the company and we're grateful for all of their hard work and their dedication. We look forward to providing any additional information on our business in the future. And with that, I want to thank everybody very much for your time. Thanks.

[Operator:]

Ladies and gentlemen, this does conclude today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.