Medicine Man Technologies, Inc.
Q4 2020 Earnings Call Transcript

Published: 30 Mar 2021

[Operator:]

Greetings, and welcome to the Fourth Quarter 2020 Conference Call Webcast for Schwazze, formerly operating as Medicine Man Technologies, Inc. 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 from Schwazze’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, expect, believe, potential, will, should, project, position, objective, determined, vision and similar expressions as they are related to Schwazze are, as such, a forward-looking statement.

[Justin Dye:]

Hello, and thank you for joining us this afternoon. I will provide a business update, some brief commentary on the industry and wrap up my remarks by welcoming our two newest Board members to the company. Afterwards, Nancy will review our annual financial results in detail before I conclude our presentation with some final thoughts. We would then be happy to take your questions. Earlier this month, we completed our acquisition of Star Buds. One of the most recognized successful retail cannabis operators in the United States based on revenue per location and profit. This transaction positions Schwazze as the leading vertically integrated cannabis company in Colorado. As you are likely already aware, the asset purchase of Star Buds’ 13 dispensaries in Colorado was realized through three separate transactions that began last December. Total consideration for the final transaction was $118 million, and this consisted of $44.25 million in cash, $44.25 million in seller notes and $29.5 million in preferred stock. Please see the 8-Ks for these transactions for all of the specifics. The Star Buds acquisition and the preceding Mesa Organics Purplebee’s acquisition completed last April have substantially increased Schwazze’s size and have made us among the first publicly traded companies with full seed-to-sale operations in Colorado, consisting of 17 dispensaries, one cultivation site and one manufacturing campus.

[Nancy Huber:]

Thank you, Justin. I would now like to review our financial results for the fiscal year ended December 31, 2020, compared to the fiscal year ended December 31, 2019. Revenue totaled $24 million and consisted of product sales of $22.5 million and consulting and licensing fees of $1.4 million and other operating revenues of $33,000. This represented a nearly 94% increase year-over-year compared to the revenue of $12.4 million in 2019.

[Justin Dye:]

Thanks, Nancy. 2020 was a foundational year for Schwazze as we became a plant-touching operation. The company has tremendous momentum exiting 2020 as we are generating free cash flow in 2021. We finalized a successful capital fundraise, completed two cornerstone acquisitions, built our operating system and developed an extensive acquisition and organic growth pipeline. This, of course, was accomplished amid a global pandemic that certainly made everything that we were able to execute more challenging than we could have ever expected. We thank our employees for their hard work, passion and perseverance on behalf of our shareholders as well as the communities and customers that we serve. Our recent acquisitions of Mesa Organics, Purplebee's and now Star Buds are already benefiting from our operating system. We are confident that we will continue to drive operational and financial synergies. Looking now ahead to the future, we think 2021 is going to be a great year as we move forward in realizing our vision of becoming a leading, vertically integrated platform and, ultimately, the most admired cannabis company in the world. We've already assembled a great team of experienced, profitable cannabis operators that we intend to expand as we bring other cultivators and manufacturers and retailers under the auspices of our publicly traded company. Our growth pipeline is robust and continues to develop. With our performance and a more cannabis friendly regulatory environment, we expect capital raising to become easier. And capital costs to continue to decline, which bodes well for our future outlook. Nancy has already provided our outlook for 2021 with respect to our current operations. But I think it is important to reiterate that our goal is to double pro forma revenue over the next 12 months through accretive acquisitions and internal growth. I am energized and confident that we will be able to do so and look forward to sharing additional details on our progress throughout the year as we pursue these opportunities. Thank you all for your continued support, encouragement and interest in Schwazze. 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 submit.

[A - Raphael Gross:]

Wonderful. I'm looking at the questions now. And the first question that's come in is, do you view your recent financing as relatively expensive but necessary? Or is it consistent with what you're seeing across other operators within the industry or within the state of Colorado?

[Justin Dye:]

Thank you, Rae. That's a great question. We really see this last fundraising exercise as very, very positive for the company. We attracted some incredibly high-quality investors. That bring talent and expertise with them and that will be helping Schwazze continue to effectuate our business plan. They all have a long-term focus and long-term growth that really are bought into the system that we're building and what our long-term value can be. I also would point out that we were one of the few companies that were successful in raising capital across the country, in particular, in Colorado. So we're one of the few. And I really view this growth capital enabling us to continue to execute our organic growth plan, which will include new stores, new dispensaries, new capabilities. And in the grand scheme of things, we do believe our cost of capital – as we grow and continue to execute and outperform, our cost of capital will continue to go down.

[Raphael Gross:]

Okay. Another question on capital. Should we expect the capital raise ahead of each transaction going forward? And given the fragmentation of the industry, is it reasonable to assume that each stand-alone acquisition would be smaller than Star Buds?

[Justin Dye:]

Let me answer – let me take that one. With – Star Buds was a large operator. We paid $118 million for the business in the form of equity, cash and a seller note that they provided to us. So it was a large acquisition. There, I would say, most acquisitions that we're looking at are smaller, some of which are larger. And it really depends upon the acquisition of how much stock we negotiate versus cash. But some acquisitions, we will not raise more capital. There will be others that we'll anticipate that we will need to raise capital and cash for the cash component. But I think it's also important to say, we do have cash on the balance sheet. We're in a great place. We're going to continue to be very thoughtful about our liquidity, and we're going to be looking at very good acquisitions that fit our criteria that add capabilities that add innovation that we can create shareholder value, and they will be accretive to us.

[Raphael Gross:]

Okay. How many targets are currently in your pipeline? And how are you sourcing potential transactions?

[Justin Dye:]

Well, we're unable to talk about the specific number. But as I said, we feel very upbeat and positive about our ability to double pro forma revenue this year through acquisitions and with our organic growth. A lot of the companies that we're meeting, we do our homework. We certainly look at the market. We look at areas of the state that we don't cover from a retail perspective. And we have – we only cover a very small part of the state today. So we see enormous opportunities to continue to grow at retail as well as products and on the manufacturing and cultivation side.

[Raphael Gross:]

Okay. So I guess a related question here was, are you leaning in any one direction between cultivation, manufacturing or retail? But it seems like you're indifferent.

[Justin Dye:]

Well, we clearly are looking in terms of priority, we're certainly looking at retail and dispensary locations as we continue to meet customers' needs across the state. We are also looking at really good brands and product companies to continue to bring that into our stores and produce that. We're also developing some of our own brands. And cultivation is important. We – our target is to have a portion of our cultivation in-house, and a portion of it, we will contract out with very good growers. So we derisk our supply chain. And we also don't have to dedicate all that capital to the cultivation and indoor greenhouse and outdoor growing capabilities. But we want to be balanced and contract some and be able to grow our own as well. So that would presume that we are looking at cultivation as well from an acquisition perspective.

[Raphael Gross:]

Have asset prices risen since the onset of COVID?

[Justin Dye:]

It’s interesting. When you look at different parts of the state and you look at different geographies, some geographies perhaps are today medical and are looking to move to adult or recuse when the values have remained relatively constant. Where we’re seeing some inflation is when a jurisdiction switches from medical to rec with those licenses going up a little bit. But in general, I would say it’s been relatively constant in terms of what individuals are looking for, for compensation from a seller perspective. But it varies. It varies depending on size and scale and location.

[Raphael Gross:]

One other question on COVID came in. Has COVID in any way been a negative for you or the industry? It seems like it has brought a lot of customers to experiment with cannabis and has greased the wheels towards legalization, given the potential tax revenue it could generate. Is there anything I’m missing here?

[Justin Dye:]

In general, from an operating perspective, it has brought a number of new consumers to the category, which is great for the cannabis business. Those customers in the category today, we’re seeing larger baskets and buying more units as well. So we’re getting a deeper relationship with our existing customers. So we’re growing both ways, which is incredibly exciting. And I would say COVID probably had – the biggest issue with the business was raising capital. You had capital markets frozen for a period of time with the Canadian cannabis reset for public companies. And then a number of high net worth individual family offices that have a number of investments in companies and real estate. We’re really standing on the sidelines, trying to figure out what was going to happen with the economy with COVID and which industries were going to be impacted. We’ve seen that move dramatically. So we’re – outreach and capital seems to be freeing up quite a bit with the election in November and certainly the Senate flipping democratic. So we think that all bodes well for the industry. But certainly, COVID created a lot of issues from a fundraising perspective.

[Raphael Gross:]

Okay. Well, could you tell us about the current unit economics for Star Buds in terms of average annualized sales per location, the store-level margins and the average consumer spend?

[Nancy Huber:]

Rae, I’ll take that one. So we’re working right now on normalizing historical information for those stores. Remember, we just took over the last five of them, not less than a month ago. So we will, over the next couple of months, probably throughout the year, start providing those comparisons where we’ll do year-over-year information. That we believe will be helpful to our investors to understand, but we’re not quite in the place to talk about that today, but look for that to come in our future calls.

[Raphael Gross:]

Okay. Related question, how much in incremental sales and margins do you think you could generate by executing your playbook? And how much does it cost to actually execute your playbook?

[Nancy Huber:]

Again, we don’t have a lot of history there. So as we get a little further down the road with Star Buds, we’ll have better data. We have seen improvement in product margins at Mesa Organics, along with basket size and customer visits. But we’re not providing the specifics yet. Again, we’ll start providing those in the future, and you’ll be able to see those measurements.

[Raphael Gross:]

Okay. Is the integration of Mesa Organics, Purplebee’s complete at this time? Is the normal time frame to integrate an acquisition less than four months?

[Justin Dye:]

Yes, I’ll take that one. We’re making really great progress. The team has executed against our integration plan very, very well. We have a process and an integration system that’s worked well from – all the way from onboarding new employees in our payroll systems, all the way to converting point-of-sale systems. So we’ve just rebannered the Mesa Organics stores to Star Buds. We’re working on integrating Star Buds as we speak, and we’ll do this very quickly. So the answer is, yes, we will be able to integrate businesses, I would say, much faster than four months. The team has done this. We’ve practiced. We’ve had very good expertise here in-house. It’s done this very often. So we’ve got very good capabilities there. And on the synergy side, too, I would tell you, we feel very, very confident that we will be able to outperform our synergies on these businesses as well as early as – early tells would be Star Buds, Purplebee’s and then also Mesa Organics. So we’re starting to see some of that even with Star Buds.

[Raphael Gross:]

Okay. Do you have a CapEx – capital expenditure budget for 2021 that you could share?

[Nancy Huber:]

Sure, we do. We expect the current businesses, so that includes the Star Buds, Mesa Organics, Purplebee’s and MMT groups to have spend about $1.8 million this year in capital budget. That includes updating the retail spaces, implementing our digital marketing plan. We’re investing in our MIP equipment and continuing to expand our ERP, so all those things are covered in that number.

[Raphael Gross:]

Okay. Can you provide any examples of how you intend to drive innovation with respect to product development and retail trends?

[Justin Dye:]

Yes. I’d be happy to answer that. We have a number of innovation projects that the team is working on, particularly out of merchandising and our marketing group. So for example, we’ve just introduced a new vape CPG product at Purplebee’s. We’re looking at a number of other new products that we can make available in our stores as well as to our wholesale customers. And then one of the things that customers can see today is we’ve rolled out our digital target marketing in stores, which is interactive and does a really great job of storytelling around products and their – how they were made, how they were grown and educating consumers. And we are excited about partnering with our CPG partners on some of those marketing capabilities, and we think we’ll see better sales, and we think we’ll see better margins as well.

[Raphael Gross:]

Okay. Is your goal based on any hard data related to the opportunities you’re currently evaluating in the marketplace or rather an aspiration? And I’m talking about not your specific guidance, excluding acquisitions, in terms of your guidance to double revenue and pro forma.

[Nancy Huber:]

Yes. We’re looking at probably double that number of opportunities. So we think the guidance that we gave to double our revenue is very likely and we’re looking at real opportunities here. I don’t have any number of those like we’ve talked about, but we’ve identified very specific companies we have real estate locations that we’ve identified that fit our targets, and we’re evaluating the price and the return on those. And as Justin mentioned, as soon as we have definitive agreements, we’ll come out and announce those.

[Raphael Gross:]

Okay. Question on what would it take for you to expand beyond Colorado? What’s the impetus to do that? What would drive that?

[Justin Dye:]

Well, we have a relatively small coverage base in Colorado today. If you look at – we have enormous growth opportunities within the state. So we’re excited about continuing to grow organically with new sites, new locations, new products, new services and new capabilities in the state itself. Having said that, our strategy, as we’ve said, is to build a really great business here serving customers with size and scale. And we believe that this is applicable to other states. And as we approach other states, we certainly would look at taking this system and applying it there so where we can build size, scale, create value and to obviously create shareholder value. So we’ll remain open to looking at that. But right now, we’re certainly focused on Colorado.

[Raphael Gross:]

Okay. Related question is what is your target for share of the Colorado market? And how do you intend to get there?

[Justin Dye:]

Yes. I probably won’t use numbers. But once again, I would say orders of – we have orders of magnitude opportunity to grow our share. And that’s going to be driven by customers in ability to service them in unique and differentiated ways, which we’re obsessed with doing. So I think the customer will tell us how much share we deserve, and that’s the way it should be.

[Raphael Gross:]

Okay. Question on e-commerce and delivery. What’s your e-commerce and delivery strategy?

[Justin Dye:]

Yes. We have – we will share more about that as we unwrap that, but there’s a lot of activity inside our company, working on our omni-channel capabilities and plans. So we look forward to launching that in the coming quarter and quarters rather. And we’ll discuss that in more detail.

[Raphael Gross:]

All right. Well, that’s what we got. So I appreciate everyone for submitting questions. Any final remarks from Justin or Nancy?

[Justin Dye:]

No. We’d like to thank all of our shareholders for supporting us. We’d like to thank our employees who have been just incredible going through this pandemic and servicing our customers and taking care of one another. I want to thank our management team that’s done a terrific job of creating a really great company and continue to work incredibly hard. And we’re really excited about cannabis and the opportunity to improve people’s lives and their condition. So we’re excited about that, and I want to thank all of our shareholders and those that are interested friends, partners in supporting our efforts. So thank you, and we look forward to continuing to execute and execute at a high level and look forward to our next conference call. Thank you.

[Raphael Gross:]

Thank you all. Have a good evening.

[Operator:]

And with that, this concludes today’s teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.