Medicine Man Technologies, Inc. (SHWZ) Q3 2022 Earnings Call Transcript

Medicine Man Technologies, Inc. (OTCQX:SHWZ) Q3 2022 Earnings Conference Call November 9, 2022 5:00 PM ET

Company Participants

Joanne Jobin - Investor Relations

Justin Dye - Executive Chairman & Chief Executive Officer

Nirup Krishnamurthy - President

Nancy Huber - Chief Financial Officer

Conference Call Participants

Operator

Good afternoon, ladies and gentlemen. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the Schwazze Third Quarter conference Call. Please note all lines have been placed on mute to prevent any background noise.

I would now like to turn the call over to Ms. Joanne Jobin. Please go ahead.

Joanne Jobin

Greetings, and welcome to the 2022 Third Quarter Conference Call and Webcast for Schwazze. We are being hosted by Justin Dye, Chairman and Chief Executive Officer; Nirup Krishnamurthy, President and Nancy Huber, 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's. 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-K for the year ended December 31, 2021.

In addition, other information is more fully described in Schwazze's public filings with the US Securities and Exchange Commission, which can be viewed at www.sec.gov on www.sedar.com or on the company's Investor Relations website. Also, Schwazze's 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 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.

Justin Dye

Hello, and thank you for joining us this afternoon. I will provide a brief overall business review and our newly appointed President, Nirup Krishnamurthy, will provide operational details before our CFO, Nancy Huber, reviews our quarterly financial results in detail. I will then conclude our presentation with some final thoughts. And afterwards, we would then be happy to take your questions.

For the third quarter of 2022, Schwazze continued to outperform the Colorado market. Despite a continuing challenging environment, I'm extremely proud of the Schwazze team for their commitment and dedication over the past year.

Despite a challenging economic backdrop, we outperformed our markets in Colorado by 12%. We've worked hard to continue to grow our market share, increase our profitability rate and generate free cash flow from operations, and that's after paying taxes and CapEx, placing us in an exclusive club within the cannabis sector.

Our team continues on our vision and journey to become the most admired cannabis company, by making a difference in our communities and providing trusted products, brands and experiences that improve the human condition.

Our growth plans remain on track and despite challenges for the entire industry we maintain our conviction in our long-term plan of building a regional powerhouse. Developing scale with a customer-first approach, curating a distinguished house of brands that are driven by passion for innovation, craftsmanship, efficiency and teamwork and leveraging data analytics and technology to drive decisions.

And now, I would like to officially welcome newly-appointed President, Nirup Krishnamurthy to take us through some of our accomplishments this quarter and since the beginning of the year.

Before we continue, I would like to say that a President, Nirup is assumed oversight and responsibility for strategic planning, growth initiatives in our core markets and operational execution.

He works directly with the executive leadership team to accelerate innovation, growth and our performance. Nirup joined Schwazze in 2020, bringing more than 25 years of experience in innovation, technology, retail operations with M&A at Fortune 500 companies.

Nirup has played an integral role in building the Company and growing revenue from $9 million to a run rate of $176 million in run rate EBITDA of $60 million. Under his leadership, Schwazze has grown from less than 20 employees to over 725 today.

Prior to joining the Company, he held C-level roles with United Airlines, Northern Trust Bank and former national grocery retailer A&P. He earned a bachelor's in Mechanical Engineering and a doctorate in Industrial Engineering from State University of New York, Buffalo.

Nirup Krishnamurthy

Thank you, Justin. As you mentioned, I have been with the company almost since inception, and I'm very proud of the team we have assembled and what the team has accomplished to-date. There is still much more to do as we navigate and continue with our unique skill set and strategy to be a leader in the markets that we enter.

And now let's look at the past quarter and discuss our challenges and successes, of which there have been quite a few. We, like the rest of our industry partners, are continuing to navigate the ongoing effects of the pandemic, as well as the broader economic conditions in our country in both our markets in Colorado and New Mexico.

Despite these challenges, our team delivered another record quarter in terms of revenue and adjusted EBITDA growth. I would like to thank all our team members for their commitment to our customers, hard work, enthusiasm and operational excellence.

Since December 2021, Schwazze has added 15 cannabis dispensaries, 10 in New Mexico and five in Colorado; five cultivation facilities, four in New Mexico and one in Colorado and one manufacturing asset in New Mexico. This year, we also opened two new dispensaries in New Mexico. This brings our total dispensary count to 35 across our two markets.

I would like to highlight a few of our key accomplishments this quarter. On September 8, we announced the grand opening of our adult-use dispensary Starbuds located in Glendale, Colorado at 492 South Colorado Boulevard at the corner of Virginia Avenue and Colorado Boulevard.

On September 14, we announced that we signed definite documents to acquire certain assets of Lightshade Labs LLC. This included the adult-use Lightshade dispensaries located at 503 Havana Street in Aurora and that 2215 East Mississippi Avenue in Denver's vibrant Washington Park neighborhood.

On September 28, we announced the opening of R. Greenleaf adult-use dispensary located in the heart of Ruidoso, New Mexico at 360 Sudderth Drive. And on October 4, we announced the opening of our Green Leaf adult dispensary located in Clovis, New Mexico, at 2009 Ross Street in Clovis.

Most importantly, and I cannot stress this enough, our success is built on this cornerstone of our strategy, wherein we continue to develop a decentralized operating system that fosters local management oversight, agility, efficiency and responsiveness to our customers and local communities.

We continue to build our house of retail brands, adding R. Greenleaf dispensaries, expanding the Starbuds and Emerald Fields banners. We expanded our Purplebee’s vape portfolio by introducing our Autograph brand, a premium cannabis terpene-infused vape in Colorado and expect to roll it out in New Mexico early next year.

We also announced a licensing agreement with Lowell Farms to manufacture and distribute Lowell Farms Smokes, a premier line of pre-rolled joints to dispensaries statewide both in Colorado and New Mexico. We expect to begin sales in Colorado in Q4 2022.

We are in our final stretch in the construction of our Colorado internal distribution center, which has been delayed due to city approvals. We expect to begin distribution in Q4, and the distribution center will pay a key role in driving waste out of our supply chain which will benefit our customers, our suppliers and the company as a whole.

We continue to implement lean manufacturing techniques throughout our manufacturing and cultivation areas steadily driving down our internal cost of goods. The margin benefits of this initiative will be fully realized in 2023.

On April 1, 2022, Schwazze commenced selling both recreational and medical cannabis in New Mexico. We can report that New Mexico sales have increased 48.4% over prior year's Q3 for the same-store sales. We are pleased with these results and continue to see sales growth month-over-month.

We have plans to open four additional stores throughout the state this year, following with more openings in 2023, where we will focus on adding coverage to areas where we currently do not serve customers. Our revenue for Q3 totaled $43.2 million compared to $31.8 million in the same quarter 2021, representing a 36% increase.

Colorado two-year stacked same-store sales identicals for Q3 2022 compared to Q3 2021 and Q3 2020 were negative 9.7% and one-year identicals were negative 10.6% compared to Q3 2022 and Q3 2021. Average basket size for Q3 2022 was $60.96, up slightly by 0.1% compared to Q3 2021.

Recorded customer visits for Q3 2022 totaled $452,220, down by 10.7% compared to Q3 2021. Despite lower customer visits, we are pleased to report that we once again outpaced the state of Colorado by 12% in the third quarter, a remarkable achievement when you consider the challenges faced by the industry at this time.

New Mexico, two years stacked identicals for Q3 2022 and compared to Q3 2021 and Q3 2020 for same-store sales were up 52.9% and one year identicals were 48.4% comparing Q3 2022 to Q3 2021. Average basket size for Q3 2022 was $52.67, down by 12.2% compared to Q3 2021, primarily due to lower recreational use baskets.

Recorded customer visits for Q3 2022 totaled $231,137, up by 69% compared to Q3 2021. As stated in our report last quarter, we anticipate growth in the Colorado market to continue to be challenging this year due to increased cultivation capacity in the state, resulting in an oversupply of wholesale cannabis products.

New Mexico, however, continues to grow as we add new markets in the state, especially along the southern and eastern borders. This quarter, we generated approximately 92% of our revenue from retail. We expect the contribution from the retail segment to continue to grow, as we add to our dispensary count and see additional growth in recreational sales in New Mexico.

Through the implementation of our operating playbook, we continue to effectively contribute to the growth and efficiencies at our retail and production locations.

At retail, we continue to review our product categories, aligning product assortment across our dispensaries, partner with our vendors to promote products and optimize the supply chain as we move to a central distribution model. We have rebannered our Colorado acquisitions to either Star Buds or Emerald Fields based on location and demographics.

Of the two drift dispensaries, one is now Star Buds and other Emerald Fields. The smoking gun store on Colorado Boulevard has been completely remodeled into a flagship Star Buds dispensary. All three dispensaries are experiencing increased revenue and traffic that we attribute to these activities. We're actively working on remodeling our Emerald Fields Highlands location, which we purchased in the second quarter.

We introduced universal gift cards that can be used in all our retail banners in time for the holiday season. And have launched a customized Star Buds e-commerce site at starbudscolorado.com. The launch was very well received by our customers as evidenced by surveys.

We will continue to evaluate additional opportunities across the cannabis industry with a primary focus on retail expansion with adequate cultivation and manufacturing assets supporting the expansion. Our criteria for potential acquisitions, includes dispensaries that complement our footprint and have a loyal customer base, accretive to bottom line with material synergy opportunities, well-branded products that complement ours. Any announcements regarding expansion intentions will be made once we have reached definitive agreements with prospective partners.

And now, I'd like to turn the discussion over to Nancy to continue our financial review.

Nancy Huber

Thank you, Nirup. I would now like to review our financial results for the third quarter of 2022. As Nirup mentioned earlier, Schwazze reported a record revenue of $43.2 million, an increase of 36% compared to $31.8 million in third quarter ended September 30, 2021.

I am also very pleased to report that we reported a nine-month revenue increase of 46% and to $119.2 million, compared to $81.9 million. Total revenue for the quarter included retail sales of $39.8 million, wholesale sales of $3.3 million and other operating revenues of $96,000.

When comparing year-over-year revenue, remember, we added Emerald Fields, Drift, Brow 2 and New Mexico in late January to mid-February of this year as well as urban wellness assets in Q2. In addition, New Mexico added recreational sales in Q2 of 2022. Much of our revenue growth this quarter over the prior year is due to these acquisitions and change in regulation. Wholesale revenues once again decreased due to an oversupply of wholesale cannabis driving down pricing and an overall decrease in the Colorado market.

Total cost of goods and services for the quarter totaled $17.2 million compared to cost of services of $16.8 million for the same quarter in 2021, representing an increase of $0.4 million or 3%. The increase in cost of goods is driven by the increase in revenue, however, not at the same rate.

In the quarter, the company experienced a reduction in costs driven by vertical integration and third-party price negotiations. Gross profit margin increased as a percentage of revenue from 47.3% to 60.1%. This positive result reflects a higher percentage of retail sales, our consolidated purchasing approach, the implementation of our retail playbook, and vertical product sales in New Mexico.

Operating expenses for the quarter totaled $14.8 million compared to operating expenses of $11.2 million during the same quarter in 2021, representing an increase of $3.6 million or 32%. This increase is due to increased selling, general and administrative expenses, professional service fees, salaries, benefits and related employment costs, driven by growth from acquisitions, offset by stock-based compensation.

Operating expenses decreased as a percentage of revenue from 35.2% to 34.4% as we continue to focus on expense rationalization. Other expense for the quarter totaled $3.7 million compared to $1.6 million for the same quarter last year, representing an increase in other expenses of $2.2 million or 139%.

The increase in other expenses is due to higher interest payments on the company's debt obligations due to higher debt balances, which was partially offset this quarter by the revaluation of the derivative liability related to the investor notes issued in December of 2021 that was recognized as an unrealized gain in the three months ended September 30, 2022.

As a result of these factors, Schwazze generated net income for the quarter of $1.8 million compared to net income of $1 million for the same quarter in 2021. After accumulated preferred stock dividends for the period basic and diluted earnings per share was $0.00 for Q3 2022 versus $0.02 for the prior year.

Adjusted EBITDA for the quarter was $15.9 million, representing 36.7% of revenue compared to $8.8 million and 27.6% of revenue for the same period last year. This is derived from operating income and adjusting onetime expenses, merger and acquisition and capital raising costs, non-cash related compensation costs and depreciation and amortization. See the financial table of adjusted EBITDA for the details.

For the three months ending September 30, 2022, we generated $4 million in positive cash from operations and we expect to generate positive cash flow before acquisition costs for the year. We feel this focus puts us in a select class as one of the very few cannabis companies expecting to generate positive cash flow before acquisitions.

For the nine months, the company has used cash for operations of $4 million compared to generating cash of $4.8 million for the same period in 2021. The Schwazze currently has cash and cash equivalents of $38.7 million at the end of the third quarter.

Turning now to the outlook for 2022. Projected revenue and adjusted EBITDA guidance was revised to reflect the current industry challenges. Guidance for revenue for the entire fiscal year 2022 is projected to be $155 million to $165 million and the projected fiscal year 2022 adjusted EBITDA is projected to be from $51 million to $56 million.

We are on target to deliver the lower end of the range for adjusted EBITDA and which was a fourth quarter annualized run rate of $60 million to $72 million. We expect to be slightly below the projected fourth quarter annualized run rate of $175 million to $200 million for revenue. This lower-than-expected revenue in the fourth quarter is due to lower-than-expected wholesale sales and construction delays in the new store openings in New Mexico.

Despite industry pressures, we remain optimistic that 2022 will continue to be another pivotal year as we integrate and synergize our acquisitions and continue our expansion and M&A plans.

Thank you for your time today, and I'd now like to turn back to Justin, who will open the call to questions-and-answers.

Justin Dye

Thank you, Nancy, and Nirup.

Before we open the call to Q&A, once again, I would like to 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. Thank you.

Question-and-Answer Session

A - Joanne Jobin

Thank you, Justin, Nirup and Nancy, and thank you, everyone, for participating in Schwazze’s third quarter webcast this afternoon. My name is Joanne Jobin. I am the IRO for Schwazze and I will be moderating the Q&A on behalf of the team today.

So the first question submitted as everyone can probably guess has to do with cash position. Nancy, it's a big topic. Do you have enough cash? And are we generating cash?

Nancy Huber

Thanks, Joanne. That's a great question. Yeah, the company generated $4 million in cash from operations in the third quarter. And for the year, we expect to generate positive cash flow before acquisitions for the year. As I said in the call, this is exceptional for most cannabis companies. We are one of very few that are generating positive cash flow. And we're doing that through maintaining our efforts in controlling costs.

So you'll hear us talk a lot about things like implementing an internal DC to improve margins and making sure we're using our SG&A as cost effectively as we can. We have a playbook that helps our stores understand how they should be putting labor in their stores, et cetera.

So we're continuing to focus on those operating expenses and SG&A expenses, every single day.

The other thing you'll hear from some of the cannabis companies more recently is they're starting to use green in their operations, et cetera. We've been using that technique since we started doing plant-touching activities.

And so, although you're not going to see a huge improvement, because we've been implementing that all along, you will see continued improvement every quarter as a percent of revenue. We're very targeted on that. So for example, this quarter, our gross margins and our SG&A are a lower percent of revenue than they were the quarter before.

We will continue to look at delivering positive cash flow every year. That is one of our major focuses. And we're using that cash to drive organic growth as well as make smart acquisitions.

I saw one of the other questions that was asked, was about looking for financing. We'll do that as the opportunity presents itself with an M&A activity. But today, our debt is probably priced as good as we can do in the market today given inflation.

Joanne Jobin

Thank you, Nancy. Next question up for Nirup. Maybe we can talk a little bit about the new products, the launch of Autograph that you mentioned in the call? And can you tell us about that, and any other brand activity that's been going on in the past quarter?

Nirup Krishnamurthy

Thanks, Joanne. Autograph is a brand extension of our Purplebees brand, which is a well-recognized value-priced, botanically derived the big brand. We introduced Autograph this quarter. This is our new Signature Series premium Wakelin, made from cannabis-derived tokens versus the botanical one we had before. Product is now available in a 0.5 gram and 1 gram across all our stores in Colorado.

We are very proud of the fact that we introduced conscious sustainable packaging for this product. This includes the child-resistant 100% recyclable tubes that hold the products and they're sourced from ocean-bound plastic, which is utilized in a manner that makes it biodegradable over five years.

The second, repackaging, the outer marketing layer is also fully recyclable. So, we launched new brand in Q3, and then we would continue to expand it to the wholesale market in 2023.

We also have an agreement with Lowe Farms. So, Schwazze is the exclusive licensing, manufacturing and distribution partner in Colorado and New Mexico for Lowe Farms. Lowe Farms is a premium California-based artisan craft cannabis brand that offers an extensive portfolio of award-winning original and licensed brand for licensed retailers statewide.

Products are now available in all our dispensaries. And we also -- I'm happy to note that we have made our first wholesale sales this quarter as of this week. So we are very happy to partner with Lowe Farms, and I think there is a lot of legs to that product. And we'll be taking it to New Mexico the fourth quarter of 2023.

Joanne Jobin

Thank you, Nirup. Next question. Nirup, you’re still on. Can you discuss the Colorado market and what the state of the market is at this point? And how Schwazze fits into that market?

Nirup Krishnamurthy

The Colorado market in terms of retail as the most of us know, is having a tough year. So, Colorado market as a whole was down 20% to 25% year-to-date. And it invested in cycling COVID and also in a tough economic environment. So, having said that, I'm very happy to note that we -- as in Schwazze outpacing the state by 12% once again this quarter.

We have had seven quarters in which we outpaced the state and we continue to do that. We apply our retail playbook, to run our retail operation. So, we have three main focus areas, one, we have the best assortment in our stores. to we are the highest quality products, and we want to be the best service possible to our customers.

So -- and I'll tell you this year, our suppliers and the supplier community have been very, very collaborative and have worked very closely with us to provide customers a great products at a good price, which has driven good volume, and our customers have remained loyal through this period. So Colorado is still a large market nearly $2 billion, and we will continue to cultivate that market, and we expect to continue to grow in this market to be the most admired cannabis company in Colorado.

Joanne Jobin

Thank you, Nirup. And while we're at it, we're going to ask you another question here. Regarding wholesale, -- there's a lot of people asking about wholesale numbers that are down dramatically, particularly in Colorado. And some companies have even announced that they're exiting the wholesale market. So what is Schwazze strategy?

Nirup Krishnamurthy

The wholesale market in Colorado was driven down primarily due to overproduction of flower in 2021. We are a glute in the marketplace. Again, cycling COVID. There's a lot of alteration that happened last year, which resulted in number; one, excess slow, but we wholesale lower down. Number two, it affected the excess distillate in the market that is essentially used across a lot of CPG directs, like rates, et cetera, gaming.

And so we saw significant pressure on distillate pricing this year versus last year. Distillate pricing in Colorado was almost down 60% over last year. But in spite of that, we have maintained our volumes, we have maintained our tonnage in terms of number of kilograms sold per month of distillate in the marketplace.

So, we don't believe the market is going anywhere. I think it's going to come back over a period of time. And we value our relationships, we provide distillate to adopt manufacturers across all categories. and we have healthy relationships that will continue in the years to come.

And we also expanded our CPG portfolio -- we are not in too many dollars with our great brands last year. But this year, our goal is to expand across over $100, and we continue to expand that portfolio on the low farms and coming online, and we have other plans to develop new brands, be it on the CPG side or on the flower side, we believe that the wholesale market has good potential in the long run -- the medium to long run. So we believe this is a temporary kind of depression in the wholesale market. But we are happy with where we are at this point

Joanne Jobin

Thank you, Nirup. Justin, here's a question for you. Can you speak to inflation and how that is impacting sales or expected to continue to impact sales for the next quarter?

Justin Dye

We obviously are concerned about it. When you look at what's going on with the consumer, inflation is still running at a healthy clip, roughly around 8%, wages are under pressure. So people are having a tougher time having their dollar go further. So it's really important for consumer product companies to provide value and provide deals. So we continue to watch that. I think this is an emerging category in terms of cannabis. We're seeing that we're perhaps not completely insulated, but we're certainly resilient as a category. So I think that's certainly encouraging.

So we're watching how consumers are behaving, what tree or flower they're purchasing, certainly looking to seeing, how they're participating in deals, maybe they're buying, buy one, get one free deals in our dispensaries. So we're making those more available. So certainly, it's a concern. And you're looking at more debt, particularly mortgage debt is becoming more and more expensive for homeowners.

So we're in the state where it's concerning -- but yet, we've got a low unemployment rate. So we're going to have to continue to watch and see what's happening with our customer and keep our finger on the pulse. So interesting times. Obviously, we'll see what happens with the rest of the vote count. I don't think we have a decisive really decisive view of what happened with the House and the Senate from last night. So we'll see what happens there as well. But certainly, we're watching and we're concerned about the economy.

Joanne Jobin

Thank you, Justin. Nirup now that we are fully vertical with grow operations in Colorado and New Mexico, can you discuss how you expect this to impact your sales and products going forward?

Nirup Krishnamurthy

We have this year, acquired two bills in Colorado. So with that, we are now rolling out new products, and we are selling flower now on the wholesale side. We are also developing new products like we said, autographs and we're also launching a new product in the fourth quarter that I can't quite talk about yet.

And as you know, we have launched Lowell Farms. So I think what happens is Schwazze was essentially -- Schwazze in Colorado was essentially a third-party supplier based retail chain last year, and almost 100% of our products was third-party products. And you're going to see a shift from that down a little to our own internally manufactured products over the next year or two.

In New Mexico, we bought a vertically integrated operation, which was essentially 100% products sold was vertically produced. Now as New Mexico market expands, we expect a lot of suppliers to show up in the market, for example, The Clear [ph] has launched in New Mexico, and we are now starting to carry their products. So you're going to see more third-party products come into our stores in New Mexico over time as suppliers enter the market. So at the end of the day, our focus is to give the best set of products available both ours and our suppliers' product to the customers to make sure it's the best shopping experience they have in our stores. So that’s going to be a month going forward.

Joanne Jobin

Thank you, Nirup. Can you tell us how many acquisitions since the New Year has been undertaken by Schwazze both in New Mexico and Colorado?

Nirup Krishnamurthy

Sorry, Joanne, could you just repeat that question again?

Joanne Jobin

Can you talk about how many acquisitions have been made since the New Year in Colorado and in New Mexico?

Nirup Krishnamurthy

Since December of 2021, we have added 15 cannabis dispensaries, 10 in New Mexico and five in Colorado. We also added five cultivation facilities, four in New Mexico and one in Colorado; and we added one manufacturing asset in New Mexico. We also opened two organic stores in New Mexico, we had also in Clovis, and we expect to open four more stores in New Mexico by the end of the year.

So we also have -- obviously, we also have a good pipeline of future targets, whoever, as you can see by the past year, reviewing, announcing and closing acquisitions takes time. In our case, this year, they all closed literally within the same quarter. So this thing comes in waves, and we expect that to continue.

Joanne Jobin

Okay. Thank you, Nirup. I'm going to move over to Nancy. Nancy, the improvements that you've seen in product margins and revenues continues to be impressive, do you think that we can continue this trend?

Nancy Huber

Yes. Thanks, Joanne. That's a good question. And when you look at our adjusted EBITDA as a percent of revenue this quarter, it was the highest number it had been. Our target is kind of mid to high 30s for adjusted EBITDA. So that’s kind of between the gross margin and SG&A. Our gross margin as we move into 2023 will be positively impacted by adding the internal distribution center. We think that will have kind of low single-digit effect. And then this could be offset as Nirup said, as we add third-party products in New Mexico. So they kind of potentially offset each other.

The other thing to understand is as we grow stores organically, they obviously don't start out at the revenues we expect them to be. It usually takes us somewhere between eight to 12 months to get to our full run rate. So things like rent and some of the store costs are being amortized over that revenue will be at a higher percentage. And so that will impact the percent of SG&A as we look at it, as we continue to add those stores in New Mexico.

Many of our -- much of our growth in New Mexico will be through that organic growth. In Colorado, it's a little harder to add organically, although we do have a couple of things in the pipeline for that. But more of Colorado ends up being M&A, which – and which positively hits the P&L because it has full rate run rate for revenue as well as SG&A costs, but obviously, you pay a little bit more for that.

So I think what our expectation is, is that we'll continue to see the EBITDA in that mid- to high 30% range. And we'll continue to work on operations and SG&A to take out as much cost as possible to return that cash to the shareholders.

Joanne Jobin

Okay. Thank you, Nancy. And can you comment on the guidance, which was revised downwards this year? Do you have any additional color on that?

Nancy Huber

Yes. So the guidance on the adjusted EBITDA side was not adjusted significantly. We do expect to hit that low end of that guidance range that we have for Q4 run rate. The year – we gave full fiscal year guidance, which was $51 million to $56 million in adjusted EBITDA. And if you take out the first three quarters, you'll see that the run rate for Q4 would be a target on that low end.

Revenue guidance is a little bit lower hopefully, we're not going to be at the low end of that guidance. We'd like to think we could hit the midpoint or better, but we are seeing wholesale continues to be under significant pressure. And as you know, in October, there's harvest, and so we anticipate wholesale numbers could still go down a little bit as we see product hit the market from that.

And then we anticipated, as Nirup talked about, we think we'll have four more stores open in New Mexico, but we were hoping we would have those stores open slightly earlier than it looks like we are. We are experiencing construction delays, mostly because of approvals from municipalities in terms of inspections and stuff. So I think we have a better handle on exactly what that time line looks like. And as I said, we expect four stores to be opened before the end of the year, but we had hoped they'd be open closer to the beginning of Q4 rather than mid to end of Q4.

Joanne Jobin

Thank you, Nancy. One of our listeners is asking us to provide an update on our M&A pipeline. And what does that execution look like? Perhaps Justin can take that.

Justin Dye

Well, without sharing some of our secrets, I think when we set this thing out three years ago, we said we wanted to be number one in Colorado. We wanted to be retail focused, develop good relationships with a broad assortment of suppliers that have the broadest assortment of products, give our customers a lot of choice within those stores, develop brands and products that we create when we listen to the customer and find out what they want. I think autograft and Purple Bs are good examples of that, create work really hard on wing processes, manufacturing, making data-driven decisions, creating really good processes.

So we take cost out of the business, and we can operate at a very efficient level, and that's what we're doing. So we're going to continue to look for organic growth, so stores finding new stores in the state of Colorado. I'll remind everybody there's a little over 650 adult-use stores. We have 23 of those today. And we see a lot of growth. We've seen there's going to be -- there will continue to be consolidation. We will be a consolidator, and we're going to continue to work on that. And we're going to continue to partner with good brands and do that.

And then obviously, in New Mexico, we're opening we've opened two. We've got another four coming this year. We've got a good slate of stores. Our real estate teamshave done a great job working in the local towns and counties in both Colorado and New Mexico, so you'll see us adding more stores. And we want every store to be obviously meet the needs of the local to. We're good stewards. We don't spend a great deal of money on those stores. they're clean, they're nice stores, but we watch our capital closely. -- and we expect them to generate cash flow.

And we're going to continue to do that, and we're stint find good locations. And then there's acquisitions that bringing great retail locations, bring capabilities, bring brands, products to us, and we will look to drive synergies, cost synergies, revenue synergies and leverage our fixed operating costs and SG&A. So it really bring our operating playbook, merchandising what good looks like from a product standpoint in the stores or what we're going to carry, how we're going to price it, how we're going to promote it. And then what we're going to do from a retail and distribution, manufacturing delivery, et cetera, on the supply chain side. So those are -- that's what we're going to continue to work on. Could there be other states that fit our regional our regional strategy. We'll continue to evaluate those types of opportunities. But that's really what we're going to do. I mean goal number one is continue to work on Colorado and continue to work on New Mexico. And that's our strategy. We've got a good balance sheet. We've got cash. We've got cash, and we're in good shape. So that's really where we're headed and what we're up to. Thanks.

Joanne Jobin

Thank you, Justin. We've got a question here. We've had quite a few of them actually regarding the difference between setting up organically in New Mexico and Colorado and why aren't we doing the same thing in Colorado. Nirup?

Nirup Krishnamurthy

Yeah. So in Colorado, we have over 650 recreational dispensaries. And on the – adding new dispensaries is constrained by the local counties where they have is a limited license in state. And so really, there are a couple of areas that have opened up jurisdictions that have opened up for new dispensaries. And for those areas, we will apply for new licenses. However, most of the comedies are pretty much restricted at this point in time. And so really, the way we can get in and grow our footprint in those accounts is through acquisitions at this point in time.

New Mexico is a newer environment and it is a little more open in terms of trying to get new licenses. And we have secured some very good real estate locations, as Justin mentioned. And we're going to launch our Greenleaf stores in those locations. So there's – and I don't think that's going to last forever. And so while the first couple of years of recreational use comes online. We want to make sure we have the best footprint across the state.

Joanne Jobin

Thank you, Nirup. We've got a great question here about labor shortages in the marketplace. Do we see any experiences or challenges to fulfill personnel positions such as managers, Budtenders, et cetera? Nirup maybe you could comment on that.

Nirup Krishnamurthy

Yeah. Labor is always -- in this environment in the country over the last couple of years, it's been a challenge to recruit. And so -- but having said that, our HR function, Dan Bonach, our head of HR. He's put a really good program in place where we have a steady pipeline of prospects. In addition, we have implemented some good programs in terms of benefits for our employees. We have introduced a 401(k) program with matching.

Our benefits are -- are very good in terms of health, dental. And our customers – our Budtenders, for example, we have a very good training program that we are working on to ensure that they are – become part of the family. And so the way we try to hire employees is they've come to us and they want to stay with us for a while. And so creating an environment that allows for that is what we are going after. But yes, hiring is not easy these days.

Joanne Jobin

Thank you, Nirup. And we are reaching the top of the hour. So we've got a few more questions here, and then we're going to wrap it up. Justin – do you have any comments about the election results and what it might mean for the cannabis legislation? I know that's on everybody's mind.

Justin Dye

Well, we went into the evening with five stage-up for adult use. You had a blue state in Maryland that voted for cannabis -- you also had a red state in Missouri vote for reg cannabis. Arkansas and the 2 Dakota states did not. So it continues to grow although they're still -- states are still making their own decisions. I think that's positive. I think we're continuing to see momentum. And I think it's still too early to call to figure out what's going to be happening in the Senate and on the congressional side.

So I think it's going to be mixed. I think we're going to have good checks and balances in D.C. And hopefully, the President does what he said he was going to do, which is, I think, the expansion at the federal level and encouraging the governors to do the same thing for those that had minor arrest around cannabis possession. I think that's a good thing for the industry, and it's the right thing to do. And hopefully, we'll start seeing some safe banking discuss some real movement there. We're hopeful.

I think at this point, based on our intelligence, it's more likely than not that we're going to get safe, safe plus between now and end of January, which would be terrific for the industry, being able to not have to deal with cash at the stores, that's a safety issue, being able to have banks being able to lend you money, term loan, bank loans, term loans asset-backed revolvers for your liquidity, being able to actually have custody and hold your money with FDIC insurance.

And just more -- just having more competition and more coverage, being able to have insurance and being able to offer cheaper but better health benefits and 401(k) because you've got a broader set of vendors that could cover you. So I think all that will be very good for the industry. So we're optimistic about that.

Joanne Jobin

Thank you, Justin. And one more question before we end the session. What is the plan for the company? And do you expect any liquidity events as well. We've been getting a lot of questions on that.

Justin Dye

Great. Great question. We've got a very, very countless Board of Directors. We have great investors in the company and all of them signed up to build a great company that is leading towards taking care of customers, being innovative there, giving them what they want, building a really great company that takes care of, not only customers, but our employees and creating great careers for them. And building a business that we're really proud of that create on a relative basis, create more value than competitors in this market and then operation is better. So that's what we're building.

And hopefully, one of these days, we're going to get credit for that from a stock perspective. So we want to build a great company. It's really that simple. And we will get rewarded. There's a great quote that I like a lot from a Greek philosopher nothing great as it has ever been created suddenly, and it takes time, takes vision, takes a plan, takes hard work, takes execution and you got to stay with it. And you got to do it every day. You got to have good team work, and know where you're going, and we do.

We're going to continue to drive Colorado, New Mexico and build a really, really strong company in the Southwest in this region. That's what we want to build and develop. So we've been working on, where that leads us in terms of going public on the NASDAQ or the New York Stock Exchange, if and when that becomes available or something else in Canada or down the road. We don't know.

But we know this, if we continue to be a growth company, if we continue to grow organically, and be -- and do really, really good strategic deals on the acquisition side. We continue to drive operational efficiencies and build competitive advantage in market share. We're going to build something that's really, really valuable.

And right now, we're trading we're trading at roughly in the four times EBITDA multiple in companies and other sectors that look like us that don't have the EBITDA or the growth profiles or trading 20 times EBITDA. And I think that will happen. So we're going to continue to work at it, be patient. We'll have our day, we'll create value, and we'll make sure that we create shareholder value and take care of all of our stakeholders.

Unidentified Company Representative

Thank you, Justin and Nancy and Nirup. That is all of the time we have for questions today. If you do have questions that were not answered today, please e-mail them to my attention via the investor website and will ensure that they're all answered.

Justin, before we sign off, do you have any final remarks before we end the call today.

Justin Dye

As always, I want to first start and thank our customers and patients. We don't get to do this without them. I want to thank all of our team members who were open seven days a week, not 24 hours a day, but darn you're close to it. I want to thank them for their passion and their passion for the industry, making a difference.

I want to thank all of our leadership team for the sacrifices and what they do. They work very, very hard. I want to thank our investors for giving us the capital to be able to do what we need to do. And I want to thank those that follow us and move for us and with that goes to us.

Unidentified Company Representative

Thank you, Justin. I'd like to remind everyone that the webcast is available on the Schwazze's website. Once again, thank you everyone for joining the Schwazze quarterly webcast.