Justin Dye Archives - Green Market Report

Adam JacksonAugust 12, 2022
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Schwazze (OTCQX: SHWZ) posted positive results on Thursday as the company expands in its quest to become a commanding regional MSO.

The Colorado-based seed-to-sale operator — formerly known as Medicine Man Technologies — delivered its second-quarter financial report card ending June 30, 2022.

Schwazze delivered approximately $44.3 million in total revenue during the period, a 44% gain versus the same period last year — right in line with the Yahoo Finance Average analyst estimate for revenues of $44.26 million.

The company said that the increase was due to rising sales of its products as well as revenue from its new retail acquisitions. Additionally, the company is finding profits in newly-recreational markets such as New Mexico since April.

Schwazze said that wholesale revenues in Colorado decreased due to “increased cultivation capacity in the state resulting in an over-supply of wholesale cannabis materials.”

The company also reported a net income of $33.8 million versus a net loss of $4.4 million in the same period last year. The gain is a reversal after losing $26.8 million in the previous quarter.

Diluted earnings per share in the fourth quarter was $0.24 cents versus diluted earnings per share of eight cents in the same period last year — above a diluted loss per share of six cents in the previous quarter, according to SEDAR filings.

“Similar to the rest of the country, the cannabis industry in Colorado is also experiencing a slowdown in growth compared to the last couple of years,” CEO Justin Dye said. “Schwazze, however, is demonstrating that our regional strategy, built on a customer-first approach, developing significant scale, building brands, and leveraging data analytics and technology is not only sound but gaining momentum as demonstrated by revenue and unit sales growth, customer loyalty and by once again outpacing the legacy market growth by approximately 12%.

We believe this model will travel well to other states as we find attractive opportunities. Despite share price weakness driven by broader market influences, we remain bullish on our business and have conviction that as Schwazze continues to deliver superior operating results that our shareholders will be rewarded.”

Schwazze is lowering its guidance for 2022 revenue, citing “challenging Colorado market conditions.” Schwazze’s new forecasted range for revenue is $175 million$200 million, far below a range of $220 and $260 in the previous quarter. Adjusted EBITDA guidance is estimated to be $60 million$72 million, down from previous quarter expectations of $70 to $82 million profit.

“During Q2 we focused on completing integration of our acquisitions and made sure that we used our resources effectively,” said CFO Nancy Huber. “We are focused on reducing operating and SG&A expenses and judiciously investing growth capital to ensure adequate liquidity and profitability despite difficult market conditions in Colorado, which we believe to be transitory and temporary. Our balance sheet remains strong, and we have ample liquidity.”

“We are focused on delivering positive cash flow net of acquisition costs for the year while driving organic growth and making smart acquisitions,” she added.

Adjusted EBITDA was $15 million in the second quarter of 2022, versus earnings of $10 million in the same period last year.

Seeing It Through

The dialogue from leadership this quarter is one a bit more optimistic than the previous.

“As we continued our successful transformation into a Regional MSO in the first quarter of 2022, we met certain challenges, including the comparison cycling of an inflated Q1 2021, which was aided by stimulus checks and COVID lockdowns,” Dye said at the time. “Colorado’s high COVID rates during Q1 2022 also impacted sales and internal staff. The devastating Marshall Fires in and around Boulder in January of this year, caused one store to temporarily close and the store has been further impacted due to a displaced population in and around Boulder County.

Also, overall sales and a decrease in wholesale revenue was largely impacted by wholesale distillate pricing pressure and over-supply in the state of Colorado.”

Dye at the time did, however, express that he remained optimistic that the company would see rising profits as its expansion efforts bore fruit in emerging state markets.

Cannabis deal tracker Viridian Capital Advisors issued a “Buy” rating at a $2.55 price target for the company in last September, calling Schwazze a “profitable and cash generating operator in Colorado with a meaningful and scaling presence in the to-date fragmented state,” wrote Director of Equity Research Jonathan DeCourcey.

“We expect MSOs to increasingly target large established markets like Colorado to support growth in the absence of interstate sales,” DeCourcey wrote. “Furthermore we expect expansion to come in the form of large scale acquisitions of companies that can be plug-and-play contributors to results in order to excite investors and boost valuations. We believe GAGE’s recent takeout by Terrascend and Harvest’s Trulieve deal highlight this theme.

In our view, Schwazze would be a solid takeout candidate for any MSO with Colorado aspirations. We believe even the perception of an acquisition is likely to drive upside in the stock from current levels.”


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