Schwazze Stock: Performing Well in Difficult Economic Conditions (OTCMKTS:SHWZ)

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Schwazze (OTCQX:SHWZ), formerly Medicine Man Technologies, Inc., has performed well in 2022 amid challenging economic conditions that have hit the cannabis sector hard.

The stock price has fallen from around $3.25 in January 2021 a 52-week low of $0.8665 on July 13, 2022, In response to the last few earnings reports, it has bounced to higher lows and higher highs as the company continues to cut costs, grow sales and rapidly expand its footprint New Mexico.

The Company also generated positive cash of $4 million for the quarter and expects to be cash flow positive for the year before acquisitions, one of the few companies in the cannabis sector to do so.

In this article, we look at the company’s latest earnings report, its future performance prospects, and future growth drivers.

Latest Earnings

Revenue for the third quarter was $43.2 million, an increase of 36 percent over the $31.8 million revenue for the third quarter of 2021. Revenue for the first nine months of 2022 was $119.2 million, an increase from $81.9 million in revenue for the same quarter in 2021.

Most of the increase in sales is due to the acquisition of SHWZ.

Net income was $1.8 million for the period, compared to $1.0 million year-over-year.

Adjusted EBITDA was $15.9 million, representing 36.7 percent of revenue, compared to Adjusted EBITDA of $8.8 million in the third quarter of the prior year.

Gross profit margin increased to 60.1 percent in Q3 2022 from 47.3 percent in Q3 2021, primarily due to an increase in the share of retail and vertical product sales in New Mexico.

Operating expenses were $14.8 million for the third quarter, an increase of $3.6 million from $11.2 million in operating expenses in the third quarter of 2021. The increase in costs was due to acquisitions and related operating costs related to the businesses.

Other expenses were $3.7 million, an increase of $2.2 million, or 139 percent, from $1.6 million in other expenses year-over-year. This came from paying higher interest payments due to the increasing debt burden.

SHWZ is forecasting full year 2022 revenue in the range of $155 million to $165 million and Adjusted EBITDA of $51 million to $56 million.

The revised sales outlook came from wholesale sales that fell short of expectations and delays in new store openings in New Mexico related to construction issues.

Colorado and New Mexico

SHWZ operates in the states of Colorado and New Mexico. In this section of the article, we look at each of them and their prospects for the future.

Colorado

In 2022, the company will have 5 more cannabis dispensaries and one more cultivation facility.

On September 14, it also announced that it had signed definitive documents to acquire some of Lightshade Dispensaries’ assets for $2.75 million in cash. That will add a few more dispensaries in Colorado, bringing the total to 25 at this point. The deal is expected to close sometime in the first quarter of 2023. SHWZ has also entered into “a licensing agreement with Lowell Farms to manufacture and distribute Lowell Farms Smokes, a premier line of pre-rolled joints to dispensaries across the state.” Sales start is expected in the fourth quarter of 2022.

Following delays associated with city approval, construction of the Colorado internal distribution center is nearing completion and should be operational in the fourth quarter. Management stated that the center will remove a lot of waste from its supply chain.

Same-store sales fell 10.6 percent year-on-year, coinciding with the decline in total customer visits to 452,220, down 10.7 percent from the third quarter of 2021. Despite the slowdown, the company outperformed the Colorado market by 12 percent over the period.

Finally, due to oversupply in the market, wholesale revenues in the state continue to fall, resulting in downward pressure on prices.

New Mexico

So far in 2022, Schwazze has increased the number of its dispensaries in New Mexico by 10 and added an additional four in-state cultivation facilities. Another production facility has also been added to the market. New Mexico is also part of the licensing agreement the company has with Lowell Farms for the sale of its pre-rolled joints. A date when the sale will begin has not been given.

In April 2022, SHWZ began selling both recreational and medicinal cannabis in New Mexico, with third-quarter same-store sales increasing 48.4 percent year-over-year. Since then, sales have been increasing month by month.

Going forward, New Mexico will also continue to grow as it adds dispensaries to new local markets across the state, with a primary focus on its southern and eastern borders. Leisure sales are also expected to continue growing in the coming quarters.

Revenue in New Mexico was $43.2 million for the third quarter, up 36 percent from $31.8 million year-over-year.

Conclusion

SHWZ successfully lowers expenses and costs while investing in growth in the Colorado and New Mexico markets. It has had a great run since its earnings report, where investors liked what they heard.

For this reason, it would probably be best to wait for the stock price to drop before entering a position.

I think the company is well positioned to continue growing sales in 2023 and could outperform as it gets closer to generating free cash flow before acquisitions, possibly on a constant basis. It lowers its internal costs and the benefits of greater margin are expected to be “fully realized in 2023.”

If things go this way, earnings and free cash flow will improve as the company grows its revenue from the steps it’s taking in Colorado and specifically in New Mexico, which has plenty of momentum going into 2023.

What impresses me is that SHWZ is doing this under very difficult economic conditions and doing a lot of it with private customers. Being able to sustain growth in retail customers is a competitive advantage due to higher pricing power and higher margin.

Assuming this can continue into 2023, it will surprise many people on the upside, especially if inflation falls significantly, the Federal Reserve halts or significantly reduces interest rate policy, and consumer sentiment begins to improve. If so, the second half of 2023 could be a big one for the company.

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