Schwazze, a cannabis company, has reported a slight revenue increase in its second-quarter 2024 earnings call, despite facing market pressures. The company highlighted its market share growth in Colorado and New Mexico, improved wholesale penetration, and operational refinements as part of its strategy for continued growth. Schwazze is also working on completing its delayed 10-Q filing and is aiming to uplist from the OTC expert market to the OTCQX to potentially improve liquidity and share price.
Key Takeaways
- Schwazze's second-quarter revenue rose 2% to $43.2 million, with Colorado and New Mexico showing 6% and 9% growth, respectively.
- The company is refining its retail strategy and driving operating efficiencies, expecting continued growth in the second half of 2024.
- Gross profit dropped to $19 million, or 44% of total revenue, due to pricing pressure and increased third-party purchasing in New Mexico.
- Schwazze closed three underperforming dispensaries in Colorado, leading to annualized savings of approximately $7 million.
- The company is actively expanding its wholesale offerings and developing new products, with plans to release new items in the third quarter.
Company Outlook
- Schwazze plans to improve its retail strategy and operating efficiencies in the latter half of 2024.
- The company is working to complete financial audits and aims to uplist to the OTCQX market.
- Management is focused on restructuring efforts to optimize operations and drive profitability.
Bearish Highlights
- Operating expenses increased to $21.8 million, primarily due to costs associated with additional stores and non-recurring professional service fees.
- Schwazze experienced a loss from operations of $2.7 million, a decrease from income from operations of $5 billion.
- Adjusted EBITDA decreased to $9 million or 21% of revenue.
Bullish Highlights
- The company is seeing healthy growth in the New Mexico market and is working on expanding its product catalog.
- Schwazze has identified six key points to drive growth and value creation, including retail and wholesale strategies and customer engagement improvements.
Misses
- Despite overall revenue growth, the company reported a decrease in gross profit and an operational loss.
- Schwazze faced challenges from the black and gray markets in New Mexico and Colorado, affecting expansion plans.
Q&A Highlights
- The CEO and CFO discussed improving retail operations to support long-term growth plans in Colorado.
- The company is evaluating M&A opportunities and is open to opportunistic real estate opportunities.
- Schwazze is working on refinancing options and addressing regulatory challenges before expanding store presence.
Schwazze has demonstrated resilience in the face of market challenges, with a focus on strategic growth and operational efficiency. The company's efforts to expand its wholesale market presence and develop new products are indicative of its adaptive approach to the evolving cannabis industry. With plans to refine its retail strategy and improve operating efficiencies, Schwazze is positioning itself for continued growth in the second half of 2024. While there are hurdles such as regulatory challenges and market pressures, the company's proactive measures, such as restructuring debt and closing underperforming dispensaries, aim to enhance profitability and shareholder value in the future.
InvestingPro Insights
Schwazze's recent earnings report has provided a glimpse into the company's financial health and strategic direction amidst a challenging market. To further understand the company's position, InvestingPro data and tips offer additional insights.
InvestingPro Data:
- The company's market capitalization stands at $8.02 million, reflecting the market's current valuation of Schwazze.
- Schwazze has reported a revenue increase of 3.85% over the last twelve months as of Q1 2024, indicating modest growth amidst industry headwinds.
- The price of Schwazze shares has experienced a significant return over the last week, with a 46.67% increase, showcasing recent investor optimism.
InvestingPro Tips:
- Schwazze's valuation implies a strong free cash flow yield, suggesting that the company has the potential to generate positive cash returns for shareholders.
- The stock is known to trade with high price volatility, a factor that investors should consider when evaluating the risk associated with the company's shares.
For those interested in a deeper analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/SHWZ. These tips provide further context on Schwazze's financial performance, including insights into profitability challenges and stock price fluctuations over different time frames. With a total of 9 InvestingPro Tips listed, investors can gain a comprehensive understanding of the company's financial health and market position.
Full transcript - Medicine Man Technologies Inc (SHWZ) Q2 2024:
Operator: Good afternoon. My name is Joe, and I will be your conference operator today. At this time, I would like to welcome everyone to Schwazze Second Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Following their prepared remarks, management will take questions submitted via the web link found on Schwazze’s Investor Relations website and in the earnings press Please also note that today's conference call is being recorded. 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: Thank you. Good afternoon, everyone, and welcome to Schwazze’s second quarter 2024 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 forward-looking statements, which are subject to risks and uncertainties. Examples of forward-looking statements include statements regarding legislation and regulation, Schwazze’s future results and financial position and Schwazze’s business strategy and plans for future operations. Such forward-looking statements may be preceded by the words plan, will, may, continue, anticipate, become, develop, expect, believe, project, could 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-Ks for the year ended December 31, 2023, filed with the SEC 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'll now turn the call over to the company's Chairman of the Board, Justin Dye, for opening remarks. Justin?
Justin Dye: Thank you, Sean, and good afternoon, everyone. Thank you for joining us to discuss our financial and operating results for the second quarter of 2024. As we assess the U. S. cannabis landscape, Schwazze is actively gaining market share in two of its most competitive markets. Our focus has always been and will remain centered on understanding and adapting to our consumers' dynamic needs and preferences. This principle has distinguished Schwazze as the consumers retail of choice in both Colorado and New Mexico, as we consistently delivered on our brand promise of offering the best assortment of high quality products with exceptional customer service. In Colorado, there were 677 active adult use licenses as of quarter end. Underscoring the importance of delivering a unique and differentiated customer experience focused on driving customer acquisition and retention. Our hard work is paying off. As we've outperformed the Colorado market on both a year-over-year and quarter-over-quarter basis, these results are a testament to the strength of our operating playbook and team. And we're focused on continuing to thrive and win in these challenging markets. In New Mexico, the increase in new licenses continued to exceed the growth of state cannabis sales in the second quarter. The state's regulatory body has reinforced its commitment to license enforcement by increasing the number of inspectors and accelerating compliance checks. These actions plus the per unit economics for many of the state's operators led to 71 closures and a sequential reduction in net new store openings in quarter two. We anticipate this trend to continue, eventually shifting net new store growth from positive to negative in the latter half of the year. Like Colorado, we believe we have the right market strategy, operating playbook and team to win in this market. Before handing it over to Forrest, I'd like to convey my appreciation to him and the entire Schwazze team for their wavering dedication. Despite the many hurdles we face, their commitment to excellence has positioned Schwazze for long-term success. I'm confident that we have the right team in place execute on our growth and profitability objectives ahead. Forrest, over to you.
Forrest Hoffmaster: Thanks, Justin. Before diving into quarter two results, I want to extend my gratitude to the entire Schwazze team for their commitment and exceptional performance over the past year. Their relentless efforts have built a solid foundation for our business in two of the most competitive retail markets in the country. I'm proud of what we've achieved together and believe that our continued commitment to our customers and the health of our business will enable us to drive long-term sustainable growth and profitability. We made solid progress on our growth and optimization initiatives in the second quarter, while generating sequential quarterly growth across all financial metrics. To further advance our retail strategy, we are deepening our understanding consumer behavior and the competitive landscape in each of our unique operating markets, enabling us to sharpen our pricing and promotional strategy, enhance the in store experience, improve our assortment and in stock positions and refine our loyalty offerings. These efforts drove increased store traffic and market share expansion in both Colorado and New Mexico. In our wholesale business, we generated our second consecutive period of quarter-over-quarter growth with improved penetration and catalog expansion in both states, while improving wholesale margins. Moving into our markets, starting with Colorado. To drive growth in the competitive Colorado environment, we continue to elevate the retail experience and service with more personalized and impactful loyalty offerings. As a result, we generated 6% growth in a market that declined 11% during the same period. We will continue to drive improvements in customer acquisition, retention and loyalty responsiveness to further increase our share in the state. Our wholesale penetration in Colorado increased to 34% of total doors in the state. For perspective, wholesale penetration is up from 21% in the beginning of January and 30% at the end of March, demonstrating our team's consistent sales efforts to expand our wholesale reach quarter after quarter. As part of our restructuring initiative, we closed three underperforming dispensaries in Colorado that no longer met our high margin threshold. We also closed our Colorado DC and shuttered our non-plant touching wholesale operation, the Big Tomato to prioritize our efforts on core operations. Additionally, we streamlined our corporate office support structure to strengthen our retail forward strategy. We will continue to evaluate the performance of our assets to best position us for sustainable growth and profitability over the long-term. Switching gears to New Mexico. The state's cannabis sales were up 7% across the store base that was 20% percent higher year-over-year in quarter two. Our consistent efforts to optimize our pricing and promotional strategy, expand assortment in all categories with high quality flower at all tiers and deliver an enhanced customer experience are gaining momentum. In the second quarter, we grew revenue 9% sequentially compared to the state's 2%, increasing our share in the state and demonstrating the effectiveness of our operating playbook and team's ability to compete in challenging environments. We are seeing sequential improvements in store traffic and expect this trend to continue in the back half of the year. From a wholesale standpoint, in quarter two, we grew penetration to 35% of total doors in the state, up from 19% at the beginning of the year and 30% at the end of quarter one. We also saw wholesale revenue increase 16% over quarter one, driven by greater penetration and new account growth. In our wholesale catalog, we expanded our offerings with the launch of Lowell Farms pre rolls in April. Additionally, our customer favorite gummies brand, Wana, generated 28% sequential unit growth. We're pleased with the momentum we're gaining with this brand and look forward to expanding our catalog further in the state. In June, we announced the grand opening of a medical and recreational dispensary under the Our Greenleaf banner in Bernalillo, New Mexico. With this new store, we now have 35 dispensaries across the state between our two banners, Everest and our Greenleaf. We look We look forward to delivering on our brand promise of offering a wide assortment of high quality products with exceptional customer service, as we serve both the patients and customers of Bernalillo. On the regulatory front, we are pleased with the New Mexico cannabis control division's increased enforcement efforts against the illicit market. In quarter two , the state saw nine net new store openings compared to 16 in the first quarter of 2024, with 71 closures in the second quarter of 2024. As Justin mentioned, we anticipate this trend will continue, eventually flipping net new stores from positive to negative in the back half of the year. Turning to cultivation and manufacturing. We made solid progress on optimizing our cultivation and manufacturing operations during the quarter. As we've mentioned before, we are leveraging real time sales and inventory demand data from our retail stores and wholesale team to more closely align our manufacturing and grow operations with consumer demand. To improve output, we implemented new LED lights in our brow indoor grow facility, which we anticipate will generate a double-digit improvement in yield. From a corporate standpoint, we recently brought in a new VP of Cultivation to support our facility leaders and improve consistency across cultivation operations, uncover synergy opportunities through operational best practices and support SKU and facility rationalization for improved margins. As many of you are aware, in July, we announced that our common stock would be transitioned to the OTC expert market due to our delayed 10-Q filing for Q1 2024. This delay stems from work required to become compliant with the SEC as a result of their order against our previous order, BF Borgers. Our decision to dismiss BF Borgers prior to the SEC order was a strategic move to bolster our accounting rigor, which proved to be the right decision given the SEC's subsequent charges. We are working diligently with our new auditing partner, Baker Tilly, to complete the re-audit process as quickly and efficiently as possible. We are also pursuing recoveries for all fees related to BF Borgers. We also announced a debt restructuring in July as we extended the maturities for our original $15 million Altmore loan agreement and $17 million Rental, Greenleaf and associates promissory note from February to November 2025 and a step toward addressing future debt obligations. This restructuring marks a pivotal accomplishment for us as it provides us with the financial flexibility to execute on our strategic growth initiatives. We appreciate our lenders for their support and confidence in our strategic vision. Let's quickly touch on our quarter two 2024 financial results. Total revenue in quarter two increased 2% to $43.2 million driven primarily by the growth from new stores, partially offset by lower wholesale revenue on unit pricing and retail pricing pressure along with the proliferation of new licenses in New Mexico. Gross profit for the quarter was $19 million or 44% of total revenue compared to $23 million or 54% of total revenue last year. The decrease in gross margin was primarily due to the aforementioned pricing pressure and greater mix of third party purchasing in New Mexico to expand our offerings in the state as well as higher medical sales mix in Colorado. Operating expenses for the second quarter of 2024 were $21.8 million compared to $18.1 million in the year ago period, with the increase primarily driven by four-wall SG&A costs associated with the five additional stores in Colorado and New Mexico. Additionally, quarter two was impacted by non-recurring professional service fees related to prior period work paper review required to comply with the SEC's order against BF Borges. Loss from operations in quarter two 2024 was $2.7 million compared to income from operations of $5 billion. Adjusted EBITDA was $9 million or 21% of revenue compared to $13.8 million or 33% of revenue last year, with the decrease primarily driven by lower gross margin and higher operating expenses. As of June 30, 2024, cash and cash equivalents were $12.3 million. Total debt stood at $163.4 million as of June 30, 2024. Looking ahead, we will continue to refine our retail strategy, while further driving operating efficiencies across our retail cultivation and manufacturing assets. Over the past year, our consistent efforts to optimize our operations have established a solid foundation, positioning us for continued growth and stronger levels of profitability in the second half of 2024. That concludes our prepared remarks. I'd like to now pass it on 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. Before opening the call for live Q&A, we're going to address questions that have come in via e mail over the past couple of weeks and even the past hour since issuing our results. So to kick things off, Forrest, Justin, when do you anticipate filing your first and second quarter 10-Qs and uplifting from the OTC expert market to the OTCQX? And ultimately, what are you doing to improve the company's share price?
Justin Dye: Yeah. I'll take that one. As we mentioned on the call, we're working really hard with our new auditing firm, Baker Tilly to complete the re-review process. Unfortunately, that was out of our control that's required. Having said that we're working expeditiously to get it done. This includes re-auditing our fiscal year 2023 financial statements and re-reviewing the closing of our 2022 balance sheet before completing the Q1 and Q2 audits. As of today, we've not uncovered any material misstatements in working with a heightened sense of urgency to ensure we can file in the coming months. Once we submit the delayed filings, they are no longer in delinquency with the OTC, we will complete the application process to uplist back to the OTCQX, which is expected to take about a month from the date of the application. Now having said that, if we were on the NASDAQ or the New York Stock Exchange, we would have had an additional six months waiver to be able to do this. Unfortunately, with the OTC rules tied to the SEC, we were not allowed to do that but we're doing the best we can and the team is making a lot of progress. Regarding the share price, look, no one's more displeased with our share price than myself as we are Schwazze’s largest shareholder at Dye Capital. And I believe the recent volatility of pricing pressure is a function of forced selling due to the circumstances with our prior auditor that was entirely out of our control. There are also impeding factors such as illiquidity of the OTC expert market and getting a real time price that is adversely affected the share price. The good news is temporary. We're actively working to compete to complete our audit and get relisted to the OTCQX, which we believe will drive liquidity and I think we'll have an upward movement for the stock as we just frankly have more liquidity. Further, once we're back on the main exchange, we do expect to ramp up our Investor Relations. Again, we'll be in a position to do that, which we haven't been in the last few months. We plan on participating in a multiple of investor conferences later this year, along with getting back on the road to meet with prospective investors across the country, Vietnam deal roadshows. We have an exceptional company, it's well run. We've weathered a very challenging storm from a regulatory standpoint into really competitive markets. We're coming out of that. We're back on track, improving our fundamentals and the value of the business that it'll show up in our financial performance. So we're looking forward to meeting with many of you, our current, past and future investors in the months to come and we're certainly going to be out there talking about the company. So I look forward to that.
Sean Mansouri: Thanks, Justin. And could either of you provide additional color on the restructuring strategy? Have all phases of the initiative been completed? Or should we anticipate further optimization efforts in the future?
Forrest Hoffmaster: Sean, yes, I can go ahead and take that one. Yes, first of all, the restructuring efforts span the whole company and we have not yet completed all phases. And I think we should just plan to continue to have this part of an ongoing effort of ours, as we narrow our attention on becoming the leading cannabis retailer in Colorado and New Mexico. This particular pass is more of a reflection of what we needed to do in quarter one, quarter two, just as we look forward just to move more efficiently. In retail operations, we talked about this in the script and just evaluated a handful of our stores in Colorado and New Mexico to ensure each one meets our internal expectations. We ended up closing three of those during quarter two, and as mentioned, we'll continue to evaluate our retail assets on a quarterly basis, moving forward more frequently. For cultivation and manufacturing, this is where I see probably our largest opportunity, especially in New Mexico, just as we continue to get the synergies from the acquisitions that we made last year. But for this particular area, we hired new leadership to bring cohesion to the internal supply chain. In general, we are bringing greater alignment to retail, wholesale and consumer demand, so we don't deal with so much of the overproduction issues you hear about across the industry and making sure that we're growing and producing the right things in the right tier at the right time that the customer is asking us for. So that'll enable us to defer the right size supply chain, optimize assets, consolidate assets, skew rationalization, grow the right stuff and then just more productively utilize working capital in wholesale operations. In Q2, we turned our full attention to private label development, third party licensing agreements, you heard a little bit about some of the success we saw in our penetration in both states, largely just a look at the catalog skews that we were making and growing and purchasing in. And so we ended up making the decision to close Big Tomato, which was original asset, it's non-core, non-plan, touching mostly nutrients and grow supplies to the end consumer. So we closed that operation based out of Denver and then to simplify logistics and free up working capital rather than holding tying it up in inventory. We ended up closing our Colorado distribution center in April. And in New Mexico we're working to improve the capacity load on that DC. It's a more immature market, but we're starting to work with vendors there to help relieve some of the capacity that we have there and create a more efficient logistics chain. As part of these changes, we took a hard look at where we were from a corporate office standpoint and streamlined office support structure just to focus our attention and full resources on the retail forward strategy. So our efforts to date were a big part of the gross margin. We improved over 300 basis points on EBITDA, 23% increase from quarter one. Right now, we're looking at annualized savings. These changes that I just walked through, roughly $7 million and we still have a few levers to pull to drive further efficiencies, as I mentioned.
Sean Mansouri: And could either of you expand on the three store closures in Colorado? What was the impact on Colorado retail revenue in Q2?
Justin Dye: Yes, it's close to about a $0.5 million in quarter two. I do want to point out though, that even though we pulled it out, we still outpaced the market with 4% sequential growth with the closings of those stores. So I think I mentioned at the early part of the call, even though the market dropped 11% year-over-year, our share in the state grew and that is with three fewer stores. So again, just looking at how those operations met our profitability measures, capital return measures and ended up making the hard decision to close them.
Sean Mansouri: And could you walk us through the gross margin impacts that led to the year over year decline?
Justin Dye: Yes, of course. So the big piece, we've talked about this over the last couple quarters, I would say roughly 60% of the basis point decline year-over-year in the quarter was largely due to retail pricing in New Mexico and in Colorado. That's really was our response to just making sure we stayed ahead or stayed competitive within the market continued to drive traffic into the stores, and then at the same time with those pricing investments, making sure that we were expanding our assortment in all tiers, so that we gave customers more options in premium all the way down to the value tier. So again, mostly -- most of that decline was retail pricing. We also had as part of that assortment, we grew third party mix. And we also, because of the Akimbo acquisition, we grew from around one and a half medical sales mix in quarter two ‘23 to a little north of 6%. And that's about half the margin rate of our rec margins. And then we added in the cost of the DC in New Mexico.
Sean Mansouri: And could you maybe give us an update on your current wholesale offerings and future product roadmap?
Forrest Hoffmaster: Yes, absolutely. Really proud of the wholesale team, hitting the ground hard in New Mexico. We saw penetration in both states increase to 34% in Colorado and 35% in New Mexico. So we're well on our way towards our goal. And that's in part due to new accounts, in part due to catalog expansion as I mentioned, as part of that early stage restructuring, we took a hard look at our catalogs and looked at the open opportunities within each of the categories where we could introduce either private label products or third party products. So in New Mexico, we saw healthy growth in the market roughly -- largely due to the low farms pre roll introduction and then the growth in the Wana category. So really excited about what we're seeing there. And then in wholesale Colorado, just pretty steady business year-over-year decline on the bulk side largely due to pricing, but otherwise moving ahead in close to 200 -- over 200 stores in New Mexico, continuing to pursue our catalog growth. We do have some new items coming out in the third quarter, but rather than get ahead of myself, I think we're going to save the third quarter to talk a little bit about those results and are excited about what the team is delivering there. So more to come there.
Sean Mansouri: And this next one is probably geared for Justin. Can you expand on the go forward plan to drive growth and overall value creation?
Justin Dye: Yes, of course. I'm happy to discuss that. This is frankly what we're spending most of our time working on is driving shareholder value, driving more units, driving market share and taking care of the customers. We framed it. We have basically six -- kind of six key points. Within the organization, we're certainly driving value through the supply chain. Things such as, so number one would be supply chain. So rationalizing vertical integration, bringing more of that margin efficiency in house, implementing energy efficient LED lights at our Brow facility is an example, optimizing our strain portfolio to maximize yields and demand consumer demand, facility rationalization and also developing wholesale brands that we can sell to other retailers. And looking at new licensing agreements that with other brands within these states that have been very beneficial to us. So there's a comprehensive plan and an execution strategy against that. Number two is really looking at retail and merchandising. We've identified and started several efforts designed to drive further growth and value. First, we're deeply focused on consumer needs, really understanding the form functions of the different products, looking at larger sizes, looking at what the needs are both in Colorado, New Mexico, we're looking at price pricing and certainly looking at key value item pricing to be competitive and to drive loyalty with our customers. Looking at product assortment as we continue to do, look at the products that are selling best, looking at new products, discontinuous products that are not selling. And that's a continuous process that it's a system of category management that the team executes against. And looking at promotions, working with our vendors and supplier partners to contribute and to promote to drive revenue units and gross margin dollars for both of our companies. And then if you look at number three, we're spending in order amount of time looking at our loyalty program and implementing new benefits and we're seeing some benefit associated with doing that. Getting very close to our consumers. So they want to shop at our brands principally. Within the four-walls of a store, Number four, we've implemented comprehensive budtender training. So we have one voice to the customer that is well educated, that could really sort through the needs, wants requirements of our consumers and can lead them to not only getting what they want, but also trying new products and creating a bit of a treasure hunt as we're finding new things to bring to the stores and bringing some excitement. So a lot around product knowledge and how to take care of customers and treating them best in market with our service, you know. Number five, we've looked at and implemented a new community marketing program which this sector is really challenging its ability to market and advertise. So we have -- we've really kind of, I think, crack the code with regards to getting into these local neighborhoods, these local MSAs and cities, and really working neighborhood by neighborhood to let folks know the quality of our products, to let them know the quality of the service, as well as being able to really partner with them to drive community involvement and do great things for the community and for our customers. So I'm really happy with that I'm not going to get into all of it. We're testing and measuring a lot of different efforts in different markets, but it shows a lot of progress. And then number six is just kind of classic. Looking at our fleet of stores and looking at refresh programs, looking at our footprint, refreshing store aesthetics, bringing in some -- bringing in new products, some new shelving things to get product out in front of our shopper and really create excitement. So a number of those initiatives are on the list to execute. So the team's busy. So those six points, we're driving very hard with scorecards to go move the needle and to create value.
Sean Mansouri: Very helpful, Justin. That concludes the review of the questions that came in via email operator, over to you for live Q&A.
Operator: Thank you. We will now begin the live question-and-answer session. [Operator Instructions] At this time, we will take our first question, which will come from Russell Stanley with Beacon Securities.
Justin Dye: Russ, if you're on, we can't hear you.
Russell Stanley: Can you hear me now?
Justin Dye: We can. Got you now.
Russell Stanley: Sorry about that, Justin. With respect to your point number six there around the retail footprint and refreshing. I'm just wondering, given you've closed those three sites in Colorado, wondering how you feel about the retail footprint in both markets now, might we see additional closures or are you essentially happy with the team that you have in terms of the sites and how they're operating?
Justin Dye: Forrest and I talked quite frequently about that when you look at the network of stores. We feel really good with our position right now. We have a quarterly process where we evaluate every store based on growth, profitability, what we need to be doing to optimize those stores. So that's a continuous sort of evaluation process that will continue. We don't see any immediate closure in the future. We like what we have. I do think we are going to continue to look for opportunities for new stores and new locations. And as opportunities permit themselves in the real estate market, if we have an opportunity to move a store to a better location, that's going to have better traffic, better street, curb appeal, et cetera, we will continue to look at that. And we've got a team working on that.
Russell Stanley: Maybe if I could just moving to wholesale, and congrats on the increase in penetration year today. Wondering if you can talk to what your targets might be for penetration looking, I don't know, six months or a year out, where you'd like to be in each market.
Forrest Hoffmaster: And right now our internal target is 40%. My guess is we'll see ourselves probably at the end of Q3, wanting to touch that up and increase it a bit, just to push the team a little bit. Again, seeing good growth in both states, more accelerated growth in New Mexico. But I think with the new product offerings that we have coming online in both private label catalog as well as third party catalog with some exclusive licensing deals, we feel pretty optimistic or very optimistic we hit those targets great.
Russell Stanley: Maybe one last question for me before I hop in the queue. Sticking with wholesale, just on the number of doors. Great growth there. I'm wondering how you're thinking or prioritizing share of shelf at the same time. Tough to go in both directions at once, but it sounds like the [world] launch in New Mexico, for example, has gone well. And wondering how much emphasis you're putting on getting additional product onto existing stores or we're grabbing new beachheads, new doors.
Justin Dye: Yes, I would say without specificity on the shelf percentage, we're looking for more shelf space, particularly just given some of the churn that we're seeing in New Mexico. So our goal is to create strong working relationships with the accounts that we have and to expand from there. And just given the lifecycle of products and customer preference shifts that's where our focus is. If I can still follow-up on that. I think it is worth mentioning too. One of the things we're seeing in terms of shelf is I'd be remiss and not miss talking a little bit about just how we're looking at the catalog and making sure that within the catalog, if we see openings based on customer preferences or consumer psychographic or demographic in a particular market that gives us an opportunity to take advantage of the white space within the catalog. So I guess that speaks to your shelf market share Russ. We look at it from a catalog standpoint. Where can we build a more robust catalog in all categories and across all tiers within that category. So anyway.
Operator: Our next question will come from Joe Gomes with Noble Capital.
Joe Gomes: I wanted to start out on the distribution center and just trying to get a better feel or understanding of if we look back two years ago or so, that was a great thing, and it was going to lead to all kinds of synergies and lower costs and on and on. And now, we're probably not even two years after that was fully opened and now closed and just trying to get a little better understanding of that cycle of how we came to that determination so quickly.
Justin Dye: So I think the way I'm looking at this is in 120 day chunks, Joe, and where we are right now, as well as where we are heading over the next 18 months or 24 months and seeing where the market it's going and what our opportunities are. So right now, I think you remember where we were in quarter three, quarter four after the acquisition of New Mexico and really all of a sudden that that fire got pretty hot over there. We really needed to tend to it, making sure that we put our resources, our time and energy on fighting that front. And I think we've done a very good job of strengthening our position there in the market, creating a strong foundation there, not just through pricing but overall retail execution, budender training, all of those efforts. But it was very retail forward focus and then making sure we were staying on top of the quarter three, quarter four, deep promotion and what I would consider now, in hindsight, pretty unreasonable pricing approaches that ultimately rebounded in Colorado, but it really became more of a retail forward focus in both of those states to make sure that we executed the core plan very effectively. And so we closed the DC, we still have that lease. We more or less, we'll call it mothballing or shuttering it. Right now we have a very mature market in Colorado to help us with distribution and logistics. It just allowed us to free up resources, free up working capital, take that off the table. In terms of an overall implementation, it does take considerable effort to open up the distribution center and streamline logistics and make sure your pick pack and speed to shelf and all those metrics are taken care of and making sure that we're also creating a good in store staff and customer experience. And so at the moment made great sense, especially given our long term ambitions that we have around retail growth in the state of Colorado. It was just more or less at that time, and in hindsight, definitely did make good sense for us to pay attention to the retail facing part of the business.
Joe Gomes: And maybe you touch a little bit on, you've talked about you're sharpening the pricing. Obviously it's not done in a vacuum. What kind of reaction have you seen from the competitors to your sharper pricing and promotion that you've been putting out there?
Forrest Hoffmaster: I think in New Mexico, we continue to see price competitiveness especially with a couple of different retailers. Nothing right now that's extraordinary. We're continuing to see retail pricing hold above $5 a gram. I think it was $5.84 last quarter. It's $5.33 this quarter. So that the decline in overall pricing is still -- it's softening a bit on flour, it's softening quite a bit on non-flour price per unit. So overall, the response has been modest. What we're doing though is New Mexico, and I've mentioned this on a couple of occasions, it's many markets within a state, we talk statewide metrics but this is really, we see it as seven to ten different microclimates with different psychographic and demographic behaviors that we have to respond to more precisely. So what we're looking at now is just how do we control pricing in each of those markets with greater precision across the categories, across the assortment to make sure that we meet the needs of that consumer and also address the competitive environment in each of those unique markets.
Joe Gomes: And then one last one for me. I know you talked a lot about the retail base and obviously, in the past, M&A has been a big avenue for you guys. Just wondering, what kind of your thoughts are right now on the M&A market and what you're seeing out there?
Forrest Hoffmaster: So I'll probably hand this over to Justin a little bit more on this speak at a high level since he’s tracking the global markets. But right now, our main focus, Joe has been on ensuring that we're growing the core strength and health of the business, which we are. And we're going to see that continue to grow over the next couple quarters. Where we're looking at, obviously, we're looking at opportunistic real estate on a one, two, three scale not yet at a big scale but certainly are open and looking and listening for more transformational opportunities down the road.
Justin Dye: Let me kind of give you my perspective. I think the one thing that -- one thing that Forrest brought as he stepped in as CEO, he's had a very, very firm hand with regards to simplifying the business. We probably were trying to do too many things and we're fighting a couple of different front between Colorado, New Mexico. He's brought real simplification of what it takes to drive customer satisfaction, what's going to take to drive growth and we're simplifying operations at store level in the supply chain. So he's brought really great discipline around simplifying what we're going to go do and being very clear around those goals. And then, the opportunity around finding growth opportunities, growth and new stores, et cetera, really, that's, you earn the right to do that. And I think he's done a very good job of being very forceful and clear around what do we have to go do before we're going to go put capital to work in new initiatives. And I think we're moving down that path. We've made some really good progress for first six months of the year and we're on it certainly on an upward tilt. If you look at EBITDA this quarter versus last quarter, as we shared with people, we felt we're going to continue to build momentum. He's doing that. So he and the team have done a nice job and you're going to continue to see us operate what we have and continue to be a very, very challenged or challenging competitor in those markets with our retail assets and be very competitive there. And that's going to, I think, create opportunities for us to play some offense with some new store opportunities, whether it be a brand new real estate deal or whether it's buying some -- doing a small acquisition tuck in or even something larger. So it's sort of principles first things first.
Operator: And our next question will come from [Mohammed Hossein with Zwamek].
Unidentified Analyst: I'll be representing Pablo today. I have a question about your debt maturities. I know you extended some of your debt maturities from 2025, February to November 2025, but what are you updating on how you're applying to pay for them? Is additional refinancing an option or issuing equity?
Justin Dye: The team Forrest and the leadership team did a really nice job of working with very close debt holders in the case of Altmore and our Greenleaf and being able to move those maturities back to the end of November 2025. We have a time in front of us as we evaluate how we're going to and what we're working on to approach some of the debt that will be coming due later next year. We're actively working on that. And as we move forward, we'll share more about that. But operations are improving and I'm optimistic that we're going to we'll find some opportunities to refinance some of the debt. And certainly, we're open to equity as well down the road. But, you know, we'll do what's best for the shareholder in the company.
Unidentified Analyst: And I also have another question. You had some closure this year in Colorado, and in the past you talked about getting to 100 stores in Colorado. Have those plans changed?
Justin Dye: I don't think those plans have changed. I think they certainly have slowed. I think they have slowed down. And the reason I think some of that is if you look at New Mexico, we've had a really challenging regulatory landscape there that we're working, we're working with the regulators, we're working with the state to try to make product safer that makes sure it's tested, making sure smoke shops are not selling illegal THC products to underage kids. There's still work to be done there. There's work to be done in Colorado. So, I would tell you that the black market and the gray market has been very challenging in New Mexico. And we really got to get that tied up and tied down, which we're working on before we start adding a lot of new stores in New Mexico. But I certainly think that's still an opportunity. And I certainly think in Colorado we still have the same opportunity. I think from a time perspective, I think our timeframe is elongated.
Unidentified Analyst: And one more question. Can you update us on your stance on the 280E tax? We'll be asking for refunds for prior years like other companies have done and start making tax provisions with AIFs after ADE.
Forrest Hoffmaster: Yes, we are. We'll plan to make a broader statement on that in quarter three. But, yes, we are working on our amended returns, intend to have those filed. And we believe that the overall rescheduling the impact of cash flow will be very beneficial to us, roughly $15 million of free cash flow and then hoping to see positive news once we file our amended returns.
Operator: And with that, we will conclude the live Q&A portion on today's call. I'd like to turn the call back over to Justin Dye for any closing remarks.
Justin Dye: Yes, I want to thank all of the team members at Schwazze and the various retail banners in our wholesale business and all the store support people. They work extremely hard and we're grateful for that. I want to thank our board, too. Our board is very engaged in working through and supporting management. And then Forrest and the management team, I think they're working smart. They're prioritizing what needs to be done to drive shareholder value, and we're very pleased with where that's going. So I just want to thank our shareholders, help thank our vendors, partners that are very important to us, our shareholders for your patience. We certainly have had challenges over the last nine months. And the team, you find a lot about teams as they go through adversity. And I'm really proud of the team and what they're doing, how they're executing, how they're moving the needle in revenue, how they're improving margins, how they're improving EBITDA, how they're simplifying the business to position us to continue to grow market share in these two markets. So we've been through a lot. We're seeing light at the end of the tunnel in a good way and we're going to keep -- the team's going to keep battling and we think there's still a great opportunity here to create value and we think we've got a great company here. So more to come, as we think about refinancing the balance sheet and there will be more to come about taxes. And we look forward to reporting some of the real good progress that we're making this quarter and next quarter as well. So appreciate everybody.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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