In for the Long Haul

Fourth Quarter and Full Year 2023 Results

A Management Change

Staying the Course

Joe Gomes

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Medicine Man Technologies Inc

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Third Quarter 2023 Operating Results

Like most companies across all industries, Schwazze was not immune to the broader macro environment, with inflation and pricing pressure impacting consumer wallets. During the quarter, Schwazze continued to focus on what it could control: sales, customers, and cash flow generation, achieved by sticking to its data driven operational playbook.&nbsp;

Total revenue in the third quarter of 2023 increased 8% to $46.7 million compared to $43.2 million for the same quarter last year. The increase was primarily due to growth from new stores compared to the prior year period and increased wholesale revenue, partially offset by pricing pressure from the proliferation of new licenses in New Mexico. Driven by new locations, Retail revenue rose 5.5% to $42 million. Wholesale revenue increased 41% year-over-year to $4.7 million.&nbsp;

Gross profit for the third quarter of 2023 was $21.4 million, or 45.9% of total revenue, compared to $22.5 million, or 52.0% of total revenue for the same quarter last year. The decrease in gross margin was primarily driven by a year-to-date true-up expense reclassification from SG&amp;A into cost of goods sold, as well as increased lower margin medical sales mix in Colorado and lower initial gross margin from the Companyâ€™s acquisition of Everest Apothecaryâ€™s inventory. This was partially offset by improvements to product mix across the Companyâ€™s retail footprint.

Operating expenses for the third quarter of 2023 were $12.5 million compared to $11.4 million for the same quarter last year. The increase was primarily due to four-wall SG&amp;A increases associated with 28 additional stores in Colorado and New Mexico that are still ramping. To call out certain line items, we would note that while up on a year-over-year basis, Salaries declined sequentially from $7.4 million to $4.5 million in the third quarter of 2023 due to aforementioned reclassification of costs. In addition, total operating expenses benefitted from a $2.4 million reversal of certain stock compensation benefits.

Income from operations for the third quarter of 2023 was $8.9 million compared to $11.1 million in the same quarter last year. Interest expense was relatively flat at $8.3 million, while this year saw a $4.5 million benefit ($4.8 million benefit last year) from unrealized gain on derivative liabilities. Net loss was $0.3 million compared to net income of $1.8 million for the third quarter of 2022. After preferred dividends, net loss to common shareholders totaled $1.9 million, or a loss of $0.03 per share, for the third quarter of 2023, compared to breakeven in the third quarter of 2022.

Schwazze reported adjusted EBITDA for the third quarter of 2023 was $14.1 million, or 30.2% of revenue, compared to $15.9 million, or 36.7% of revenue for the same quarter last year. The decrease in adjusted EBITDA margin was primarily driven by lower gross margin and the higher four-wall SG&amp;A associated with new stores that are still ramping. Schwazze generated positive operating cash flow of $6.9 million in the third quarter of 2023, compared to $10.5 million in the same period a year ago.

 
Third Quarter Operating Highlights 
 

During the third quarter, the Company continued to increase its retail footprint, growing to a total of 63 stores in Colorado and New Mexico, while further integrating the Company&#8217;s recently-acquired assets in both states. As mentioned above, wholesale business increased 41% year-over-year as the Company gained momentum in New Mexico and improved penetration in Colorado. When looking at wholesale penetration, Schwazze now sells into 7 of the 10 largest operators in Colorado and New Mexico with its expanding product portfolio.&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-

Highlights for the quarter include:
<div>
<ul>
<li>Launched Coloradoâ€™s first â€œstore-within-a-storeâ€ concept, combining a Star Buds recreational dispensary with the Standing Akimbo medical banner.</li>
<li> Announced the grand opening of a medical and recreational dispensary under the R. Greenleaf banner in Hobbs, NM, increasing the Companyâ€™s New Mexico retail footprint to 33 stores.</li>
<li> Third quarter ecommerce transactions in New Mexico and Colorado increased a collective 28% compared to the second quarter of 2023.</li>
<li> Third quarter customer loyalty members increased 16% compared to the second quarter of 2023 with New Mexico loyalty member penetration growing to 78% of total customers.</li>
<li> Lowell Farms premium pre-roll brand, licensed by the Company, is now in over 130 doors and the #2 pre-roll in Colorado.</li>
</ul>
</div>
Looking at each state, in Colorado, Schwazze is increasing efforts to expand reach to medical patients through the Standing Akimbo banner with new presence in Colorado Springs and Fort Collins. The Company opened a new Star Buds store in Lakewood in August and early results are promising. Alongside new store openings, the Company is currently remodeling and/or relocating certain stores to further enhance customer experience. Pricing and licenses in new jurisdictions continue to put pressure on Schwazze&#8217;s top-line. Year-to-date, cannabis sales in Colorado are down 13% year-over-year and down 31% on a two-year stack. We would note, however, wholesale pricing has begun to more broadly stabilize throughout the state, even returning to modest sequential growth in quarter three. Although not reflected yet in retail pricing, flower average market rate increased 7% from $703 a pound in the second quarter to $750 a pound in the third quarter.&nbsp;During the quarter, customer loyalty members increased 8% sequentially to approximately 477,000 members, while increasing average basket by 5%. In addition, loyalty penetration grew quarter-over-quarter to 63.3% compared to 60.7% in Q2.
In New Mexico, Schwazze worked during the quarter to integrate Everest Apothecary, acquired in June. As of today, the Company has fully onboarded the retail, cultivation and manufacturing assets of Everest onto Schwazze&#8217;s financial and operating systems. While it is still early in the integration cycle, the Company has begun to recognize synergies through consolidating resources and optimizing production facilities amongst other initiatives. In the state, cannabis operators are navigating pricing pressure as a result of the proliferation of new licenses. Legal cannabis states in the state were up 19% year-over-year, while total store count was up 76%, resulting in lower revenue on a per store basis. Approximately 200 retail stores are open year-to-date, bringing the total stores up to more than 650 as of September 30th.
To navigate these market dynamics, Schwazze is strategically investing in the retail experience to attract and retain customers and patients in the state. The strategy is to first further integrate the Everest assets while refining assortment, in-stock position, and standard costs from a combined integrated supply chain. Second, invest in the Company&#8217;s leading retail position by bringing new products to shelves, while sharpening pricing and promotional efforts. Third, support the state as it implements cannabis regulation and enforcement to heighten testing and safety standards. And finally, continue to expand the wholesale business in the state. In spite of the pricing pressure in New Mexico, Schwazze generated 10% year-over-year and 5% sequential growth in retail sales in the state and have outpaced overall market growth. The Company experienced a 55% sequential increase in customer loyalty members in the third quarter to approximately 144,000 members in New Mexico.
Updated Projections 
 
We are seeing small, incremental improvements in the operating environment, but the fourth quarter is typically a weaker quarter. We are estimating revenue of $44.75 million, compared to a prior $51 million as the market has not improved as fast as we had expected. Net loss is estimated at $10.1 million, or a loss of $0.13 per share, compared to our prior net loss of $5.8 million, or $0.08 per share. For the full year, we are projecting revenue of $173.9 million, up from $159.8 million last year. Adjusted EBITDA is estimated at $56 million, compared to $52 million in 2022. Our net loss estimate is $21.2 million, or a loss of $0.33 per share, versus a loss of $26.3 million, or a loss of $0.49 per share, for 2022.

Medicine Man Technologies Inc (SHWZ)

Staying the Course

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In for the Long Haul (SHWZ)

Fourth Quarter and Full Year 2023 Results (SHWZ)

A Management Change (SHWZ)

Staying the Course (SHWZ)

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