Good afternoon. My name is Jenny. I will be your conference operator today. At this time, I would like to welcome everyone to the Schwazze first quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a live question-and-answer session. If you would like to ask a question during this time, simply press star, then the one on your telephone keypad. If you would like to withdraw your question, please press star, then the two. Ms. Jobin, you may begin your conference.
Greetings, welcome to the 2023 first quarter conference call and webcast for Schwazze. We are being hosted by Justin Dye, Chairman and Chief Executive Officer ; Nirup Krishnamurthy, President ; and Forrest Hoffmaster, Chief Financial Officer. Following their presentation, management will take questions submitted via the web link found on 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. Examples of forward-looking statements include, among others, statements regarding federal and state legislation and regulation and Schwazze's future results of operations and financial position, 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 Form 10-Q for the first quarter ending March 31st, 2023. In addition, other information is more fully described in Schwazze's public filing with the US Securities and Exchange Commission, which can be reviewed at www.sec.gov or on www.sedar.com or on the company's investor relations website.
Schwazze may discuss non-GAAP financial measures during today's call. A reconciliation of the differences between the non-GAAP financial measure 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 CEO and Chairman, Justin Dye.
Hello, thank you for joining us this afternoon. Our company is off to a strong start in 2023. We are clearly seeing increased strength in our core operations and complementary acquisitions that continue to solidify our position as a best-in-class operator in Colorado and in New Mexico. We're happy to be here today sharing the results of the first quarter 2023 with you. I will start off by providing a brief business overview, and our President, Nirup Krishnamurthy, will provide operational details before turning the call over to our CFO, Forrest Hoffmaster, who will review our quarterly financial results in detail. I will then offer concluding thoughts, and afterwards, we'll be happy to take your questions.
I'm pleased to report that Schwazze had a solid first quarter 2023 in both Colorado and in New Mexico, with total revenues of $40 million, which represents 26% growth compared to the same quarter last year. Adjusted EBITDA of $14.5 million or 36.3% of revenue, almost doubling prior year results of $7.9 million or 24.7% of revenue. Regardless of the marketplace dynamics, we have quietly and consistently grown market share, increased profitability, and continued to deepen our footprint in intensely competitive states. It is encouraging to hear that Washington D.C. is taking industry reform seriously and that progress is happening with the SAFE Banking Act.
Our focus remains on delighting our patients and customers. Our results indicate that we are not only continuously improving core operations, but capably integrating synergistic acquisitions while generating free cash flow with the discipline to meet our ongoing debt, capital, and tax obligations. We will continue to execute our regional strategy to go deep in our operating states and gain customer loyalty and market share. Our long-term plans of building a regional powerhouse with a differentiated approach of delivering a wide assortment of high-quality products with exceptional customer service backed by our operating playbook has proven to be a winning combination for our customers, employees, and shareholders. Lastly, I would like to thank our Schwazze team. I'm extremely proud of their commitment and disciplined approach to building a best-in-class operation. They are one of the most talented and strongest teams in the industry today, and the results show it.
I would like to turn the call over to our President, Nirup Krishnamurthy, to take us through some of the accomplishments for the quarter.
Thank you, Justin. It's been a productive quarter for our company. The current market dynamics play well on our strengths, and on our strategy to go deep into concentrated areas, taking full advantage of a lean support infrastructure. We are excited to announce three new acquisitions at the start of this year. In January, we announced the Smokey's acquisition, marking our entry into Fort Collins and Garden City, Colorado, where we will operate two high-potential dispensaries in markets we have not served. In April, we announced the acquisition of Standing Akimbo, which is a large medical dispensary in Colorado, opening the door to a $200 million untapped channel for us in this market. Also in April, we signed a definitive agreement to acquire the assets of Everest Apothecary, a prominent New Mexico cannabis operator with 14 dispensaries, one manufacturing plant, and one cultivation facility.
During the quarter, our New Mexico team also successfully opened two new stores in Albuquerque and Carlsbad, increasing our diversified presence in the state. With these openings and new additions to the Schwazze portfolio, we will now be operators of a total of 60 dispensaries, three manufacturing facilities, and six productive cultivation facilities. In Colorado, dispensary license counts remain flat. Like others in our market, we are affected by surrounding state legislation in Montana, New Mexico, Arizona, and the improvements in the Utah medical program. Our attention to customer retention and volume growth, combined with excellent in-store experience and thoughtful promotions, continue to yield improvements quarter-over-quarter. In New Mexico, the overall market continues to show steady growth. While Q1 revenues are generally lower than the rest of the year, we continue to experience steady top-line growth.
The total license count in the state is 633 in March, up 20% from the prior month. With 18 retail dispensaries at the end of the quarter, we now have an 8.6% market share in New Mexico. With the addition of the Everest retail dispensaries, we will soon be at 32 stores in New Mexico, which will materially increase our market share in the states. In both states, we remain hyper-focused on the customer experience and loyalty to drive revenue with strong data science disciplines. We continue to make inroads differentiating ourselves with a rationalized, broad assortment of high-quality products and a deeply knowledgeable staff. While the overall cost of labor is increasing in our markets, we continue to focus on attracting and retaining the best talent in the market with progressive wages and benefits and employee engagement programs across all our banners.
In the Colorado wholesale market, flower pricing remains compressed but has begun to show signs of stability. Quarter-over-quarter wholesale sales grew 29% from $3.2 million in the fourth quarter of 2022 to $4.1 million in the first quarter of this year. In New Mexico, we recently began our wholesale activity, given the limited assortment in the state, we believe this is a growth opportunity for the company. Our wholesale portfolio of products include flower, house pre-rolls, vapes, and roll-your-own pre-rolls. Our brand portfolio includes Purple D's and Everyday Weed, as well as licensed brands such as Lowell Farms. We believe this is a material growth opportunity for us, which will be a strategic emphasis going forward. Earlier this month, we announced our new Executive Vice President of Commercial Sales, Chris Bryson.
Chris was formerly President and CEO of Front Range Biosciences, and has over a decade of experience in cannabis. Prior to his role at Front Range Biosciences, he held roles as President and Chief Executive at SLANG, where he built Open into one of the most widely distributed and recognized vape brands in cannabis. Chris is a powerful addition to the team, and will lead the expansion of the Schwazze house of brands, gaining material distribution across both of its markets. One of the key reasons we have been successful despite the industry's challenges is that within our supply chain, we have a thoughtful approach to cultivation and manufacturing with right-sized capital investment, automation, and dedicated expertise and attention to lean improvement that balances working capital and market pricing dynamics.
Our continued focus on yield management, demand planning, consolidation, and capacity utilization has helped us improve our internal cost of goods throughout the quarter and will help us unlock working capital for continued investment and expansion. We also began internal distribution of products from our off-premise storage facility and expect full migration of suppliers to the facility by the end of second quarter, 2023. While we build out an even stronger infrastructure, we will continue to evaluate additional opportunities across the cannabis industry in our markets with a primary focus on retail expansion with adequate cultivation and manufacturing assets supporting the expansion. Our criterion for potential acquisitions include dispensaries that complement our footprint and have a loyal customer base, well-branded complementary products, and accretive to the bottom line with material synergies. Any announcements regarding expansion intentions will be made once we have signed definitive agreements.
Now I'd like to turn over the discussion to our CFO, Forrest Hoffmaster, to continue our financial review.
Thank you, Nirup. As mentioned earlier, first quarter revenues of $40 million increased $8.2 million or 26% compared to $31.8 million for the same quarter last year. Quarter-over-quarter revenues remained flat as is seasonally typical for the industry. Income from operations was $5.6 million, an improved $10.4 million over the $4.8 million loss from operations in the first quarter of 2022. Adjusted EBITDA for quarter one, 2023 was $14.5 million or 36.3% of revenue, compared to $7.9 million or 24.7% of revenue for the same period last year. We ended the quarter with $35 million in cash.
Total cost of goods and services was $17 million, compared to $20.8 million for the same period last year, representing a $3.8 million decrease and 18.6%. This was primarily due to overall cost improvements due to vertical integration in New Mexico. As a result, gross profit increased to $23 million or 58% of total revenue, compared to $10.9 million or 34% for the same quarter last year, with quarter-over-quarter improvement as compared to $23 million or 57% of total revenue in Q4 2022.
Total operating expenses totaled $17.4 million for quarter one, 2023, as compared to $15.7 million for quarter one, 2022, representing an increase of $1.7 million, driven by payroll tax refunds offset by intangible asset amortization related to non-cash purchase price accounting adjustments from 2022 acquisitions reflected in selling, general and administrative expenses. Other income for quarter one, 2023 was $758,000 compared to other expense of $20.7 million for the same quarter last year. Other expense in quarter one, 2022 is driven by the accounting revaluation of the derivative liability related to the convertible note. As a result, Schwazze generated net income of $1.7 million compared to a net loss of $26.8 million in quarter one, 2022.
We are pleased with our operating results at the start of 2023. Given our recent performance and ability to generate free cash flow in the current macroeconomic and industry-specific conditions, we remain optimistic that we can continue to improve core operations, successfully integrate acquired companies, and continue our expansion and M&A plans. Thank you for your time today. I'd now like to turn it back to Justin, who will open the call to questions and answers.
Thank you, Forrest and Nirup. Before we open the call to Q&A, I would like to thank you all for your continued support, encouragement, and interest in Schwazze. We would now be happy to answer your questions. To ask a question, please click on the link on the investor relations portion of the website and submit. Thank you.
Thank you, Justin, Nirup, and Forrest. My name is Joanne Jobin. I am the IRO for Schwazze, and I'll be moderating the Q&A on behalf of the team today. The first submitted question is regarding the Colorado and New Mexico market. Can you share more about what you are experiencing in the Colorado and New Mexico markets, and how it is impacting the business? Nirup?
Hey, Joanne, thank you. Yeah, as I mentioned in the talking points there, you know, Colorado kind of remains depressed at a macro level with continued price pressure and inflationary trends.
If you looked at latest today's results, Q1 in Colorado was down 14.2% over Q1 of 2022 and down about 4% from Q4, 2022. The market is still depressed, but wholesale flower pricing in Colorado is over the last few weeks here has remained steady. I think the downward slide has kind of stopped, and we are seeing some signs of stability in wholesale flower pricing, which all goes well for the future. You know, I cannot predict when it's going to go back up, but all I can tell you is that it's starting to stabilize. Also the cultivation licenses in Colorado are also down.
Since October, about 10% of the licenses have been surrendered. That's also a, you know, good rationale for the market in terms of bringing it back to stability and for the future. Schwazze in Colorado, we continue to outpace the market. In Q1, we outpaced the quarter by 8%+, and our margins are remaining healthy, partly driven by, of course, the wholesale pricing, but also due to our operating playbook and our promotional strategy, and our points of differentiation and offering a wide assortment of products for our customers. In New Mexico, what we are noticing or we're seeing is increased licenses.
License counts are at the end of March was 633, and of late it has gone up from there as well. There is some pressure in terms of sharing the pie, so to speak. We are holding our own, and we are well positioned with great real estate, and on an operating playbook, which we have taken from Colorado, continues to work well in New Mexico, and we expect to have a good year there as well.
Thank you, Nirup. The next one is related to the recent acquisitions. First of all, congratulations on your recent acquisition announcement in Colorado and New Mexico. Can you offer an update on your strategy and targeted store growth? Nirup?
Sure. As you mentioned, we are currently operating around 43 dispensaries currently. Now, with the recently announced deals, we will be at 60 dispensaries total, with 28 in Colorado and 32 in New Mexico. Our goal is to continue to grow share. We want to have the highest market share in both our markets. You know, we have ambitions to, you know, get to 100 dispensaries in Colorado and around 40-50 dispensaries in New Mexico through very thoughtful expansions, greenfield expansion and acquisitions. In Colorado, we're starting to receive more inbounds in terms of opportunities, but we are going to be very deliberate about what we look at, and then make sure it fits our model and complements our current footprint before we, you know, act on it.
In New Mexico as well, we are getting a lot of inbound in terms of businesses trying to come and join the Schwazze family. Again, here too, we'll have to be patient and focused, you know. You know, we are pretty happy with our acquisition portfolio to date, over the last several years, and we will continue to grow, to continue to look to grow over the next years to come.
Thank you, Nirup. The next question is related to M&A debt and liquidity. With the M&A target of 150 stores that you just spoke about and your debt position, can you give us a little more insight about your cash position and liquidity to meet these growth goals, Forrest?
Yeah, I can take that. Thanks, Joanne. Nirup mentioned earlier thoughtful expansion. Right now we're currently meeting our debt and tax obligations just into the quarter with $35 million in cash, free cash flow of $2.7 million. In terms of the debt position, our leverage has and is remaining steady with the largest obligations coming in late 2025, 2026. Refinancing is always an option if it's accretive for us. Our focus right now, as we mentioned a little bit earlier in our press release, is on improving cash from operations and on operating working capital. In terms of cash and liquidity and M&A targets, we've got a strong balance sheet and tend to keep it that way with rigid cash management disciplines and striving to stay above the $15 million watermark.
You know, I think we don't really talk enough about what our model allows us to do, which is deploy capital and resources efficiently with less risk exposure and improved conversion on new acquisitions. We factor that in as well.
Thanks, Forrest. All right. The next question is related to the recent news in Washington, D.C., always a hotly debated topic. There have been some pretty big announcements related to scheduling and descheduling of the SAFE Banking Act. Can you offer your perspective on the regulatory environment and these recent activities? Justin?
Yeah. Thanks. Thanks, Joanne. Good question. With regards to, you know, Washington SAFE, you know, SAFE Banking is really what I think is the next hurdle for us. I think it's gonna come down to really criminal justice reform, and the sides that are negotiating those provisions are continuing to have discussions and dialogue around that. It's no secret that, look, the business running on all cash is not safe, not safe for the workers and for the patients and the customers. We really need to get this addressed, and I think it will get addressed if both sides of the aisle are somewhat reasonable with the expectations. I think the really linchpin is gonna be criminal justice provision in that.
Obviously, you know, Senator Merkley and Senator Daines are taking this up in the Senate Banking Committee, which is a strong positive. We feel good about that. Representative Joyce has been a strong advocate, really centered around, you know, the healthcare benefits associated with our veterans and having access to cannabis as a medicine. You know, we're seeing that continued dialogue at Washington. We remain hopeful. I think there's still, you know, a lot of conversations, a lot of work to do. The main thing is we're gonna continue to run our business the way we're running it, continue to work on the things that matter, which is taking care of customers and becoming more and more efficient so we can serve those customers better. Thanks, Jo.
Thank you, Justin. While we're on the topic of Fed laws, do you think you or Forrest could answer the question regarding how much of an impact on cash flow do the Fed laws have on marijuana?
I'm happy to take that, Joanne. Yeah, we, short answer is we take a pretty conservative view to our allocations. Just looking back at 2022 results, we expect improvement of around 5%-10% of revenue.
Thank you. All right, next question. We're getting a lot of questions on the off-premises storage facility or the distribution facility. Can you please talk about the facility and your expectations over the next year? Nirup?
Yes, Joanne, I will. You know, we've been working on this off-premise storage facility, which is primarily gonna be used for internal distribution of products for our retail stores. We, you know, went through all the regulatory and the, you know, the Denver County needs to make sure that we are safe to operate, and we opened the facility in March. We've been transitioning suppliers, you know, week over week into the facility and distributing from the facility. That transition is gonna take four months, which basically means by the end of the Q2, we'd have all of our suppliers delivering to the off-premise storage facility, and then we will handle delivery to our stores from there.
We see this as a very strategic advantage for the company as a whole. You know, in terms of expectation, you know, there's gonna be several benefits to having this kind of a model, you know, operating for us. One, we have greater buying leverage, right? We, you know, we have significant operational efficiency and reduced operating costs, not only for us, but for our suppliers as well. And finally, you know, we're gonna have the ability to react quickly to product availability at stores. In-stock position in store with inventory visibility and fulfillment improvement will be a key kind of benefit of this facility. We are excited about this. We're starting the process here.
You know, the way we have built our facility is it can handle growth, you know. It can handle up to the 75- 100 stores, we are very excited to get started on it.
Thank you very much, Nirup. Next question, regarding business and working capital improvements. You earlier mentioned core business and working capital improvements. Can you share a bit more about that? Forrest?
Sure. Yeah, thank you. In terms of core business improvement, it's primarily supply chain integration, grow-to-shelf integration with attention to our capital efficiency, which I mentioned earlier, grow yields, buying leverage, lean manufacturing, the four-wall retail excellence and integrating what we're learning from the customer through e-commerce, the customer loyalty program, and our data science team. In terms of working capital, our primary focus is on inventory efficiency across the system, supply and in store through the off-premise facility that Nirup mentioned a moment ago, with improved ERP, demand planning and again, a more mature off-premise facility over the next couple quarters. We're also focusing on supplier relationships and payment terms. Bringing days payable into a steady position, and we think both will help free up cash.
Thank you, Forrest.
Mm-hmm.
Next question. Nirup, how did the company do on 4/20, and what are you learning about your customers in both states?
I mean, clearly with the, you know, growth in the number of dispensaries we have had, and also the growth in the New Mexico market. You know, we had our best 4/20 yet at Schwazze in the last four years in terms of total top line. You know, you know, we are trying to perfect the art of managing our customers and retaining our customers. You know, we have a loyalty program called Gratify. This program cuts across all our banners across both states, giving it the ability to communicate with our customers in a very specific manner with promotions that offer the deals that they want, that individual wants.
Our data science focus gives us deeper insights into customer patterns, and we're beginning to get traction on targeted promotions and redemptions, which not only helps us meet the needs of the customer, but also helps us retain them, and become loyal to, you know, our brands across both our states. We believe that this kind of focus on data science and our customers over the last couple of years, is going to help us in the long run in tough markets. When the going gets tough, investments like these really pay dividends, and we are seeing some of that happen.
Thank you, Nirup. All right, next question. Can you share more about the go deep strategy that you're always talking about in the unrestricted licensed markets versus entering limited licensed markets? Are you looking to enter into any other states? Justin?
Yeah. Thanks, Jo. With regards to what the strategy is a retail-forward strategy. It's putting, you know, great stores, really capable people in those stores in high traffic areas to take care of patients and customers. We're continuing to look at, there's a lot of real estate opportunities, a lot of license opportunities still in Colorado. There's still north of 650 retail licenses out there. We'll be close. We'll be having about 28 stores with the things that we have in progress. We have a long way to go. There's still things that we haven't started really pursuing yet that requires us to have even more scale than what we have today in Colorado.
You're gonna continue to see us working hard and growing our base, store base, product offering and capabilities in Colorado, and we'll be doing the same thing in New Mexico. Will we look at other states in the future? Yes, we will. As we've said before, are we focused on Colorado and New Mexico? We are. There is still a lot to accomplish. We have terrific competitors in Colorado. We have very strong competitors in New Mexico. You know, if you look at one of the larger companies still has a number of more stores than we do in terms of Ultra Health. You've got, you know, you've got people out there that are doing really good stuff with their businesses.
We just have to continue to, you know, work on taking care of the customers and working with the industry in those states. We will look at other states down the road. You know, for us to do that, it'd have to be really, really compelling. We're gonna keep doing what we've been doing.
Thank you, Justin. The next question is related to continued growth and liquidity. Can you talk about the recent acquisition activity and the effect on stock dilution, as well as your ability to meet your pending debt obligations? Justin?
That's obviously an important topic for shareholders as we think about the number of fully diluted shares and what's happening with the share price, which drives equity value in the business. The thing that we've really been working on and staying very disciplined is, you know, the work that we're doing on the M&A side and on the real estate side. Ensuring that we're buying really high quality businesses with good people, with good EBITDA, and we're buying EBITDA, you know, at a multiple less than where we're trading at. Then we, you know, we bring those acquisitions in and we try to make them, you know, we try to make them better and grow sales as well as grow EBITDA.
As long as we're acquiring businesses and then putting synergies on top of that accrete to the EBITDA and net income line, we're continuing to create shareholder value. That's very important. We're also very thoughtful about how we allocate the purchase price. You know, we tend to wanna use some equity, some cash, as well as seller notes. We think that's a creative way of getting realistic financing with realistic rates versus, you know, where the debt markets are today with cannabis. You know, I think, I think we're definitely bouncing on the bottom in terms of, you know, being able to buy really good businesses at attractive multiples.
I think, you know, that'll prove out to be a real benefit for us as we go and we get higher multiple expansion and we grow the business. We're staying very disciplined around that. We have plenty of liquidity. In terms of cash, as Forrest said, we have plenty of cash and, you know, we're meeting our commitments on the debt and tax side, and we're generating free cash flow from operations. You know, that's a real benefit. To the extent, to the extent that we ever had an issue, we could slow down CapEx investment and, you know, hunker down and be a little tighter on expenses. You know, this, we really think Schwazze is built to win in the long, in the long haul, and we'll keep doing that.
Obviously, we need to take care of our shareholders as well as customers.
Thank you, Justin. We're pretty much at the quarter of the hour now, and that is all the time we have for questions today. Justin, do you have any final remarks before we end the call today?
No, I just wanna, as always, I wanna thank, I wanna thank our frontline associates that are taking care of customers or growing medicine or that are distributing and producing our products. They've done a great job. They've, they continue to wanna do more and do a better job, and they're very passionate about taking care of the customer. I wanna thank them, thank our management team. Certainly wanna thank our shareholder base for their continued interest in us. We're gonna continue to try to grow that. I think good things are around the corner. It's one of these where, you know, it's Colorado's in a difficult shape right now from a market growth perspective. You're seeing a lot of competition in New Mexico with new licenses.
I think we're up for the challenge, and we're showing that in the first quarter. We'll continue to work in delivering value. I just wanna thank everyone for supporting us. We'll keep working hard at it. Once again, go Schwazze.
Thank you, Justin. For those people we didn't get to today, if you would like to email me your questions at ir@schwazze.com, I'll make sure that everyone's questions were answered. I'd like to remind everyone that this webcast is available on the Schwazze website. Once again, thank you for joining the Schwazze first quarter webcast. Good day, everyone.