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Schwazze SHWZ Stock Forecast & Analysis

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Q Canna
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Nov 11th SHWZ hit a low of .98 cents today Nov 15th we hit a high of $ 1.76 , id say this may have been the most parabolic move in cannabis in the last few days?

This post was modified 2 months ago by Q Canna

   
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TheQueen
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Lawmakers holding a hearing today and we get a spike, but the tumble normally follows.  Hope not this time.


   
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D. H. Taylor
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@aconceptsketchgmail-com we got a solid pop in all cannabis stocks yesterday from the news of the passage of the research bill. This is the beginning of the bigger move back upward on all of these stocks. Strap up… gonna be a ride. That being said, SHWZ being one of my top picks is lighting up nicely and I expect that this stock will continue higher. The visits and new subscriptions may drive the top picks which will create a feedback loop.


   
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D. H. Taylor
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@aconceptsketchgmail-com i think my current run rate for 2023 is $225M. I also have CapEx at about $12.5M TTM.  That may likely increase, though.


   
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Q Canna
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 Significant Insider Purchases by the CEO, always a bullish sign

https://ir.schwazze.com/node/10146/html


   
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Q Canna
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Recreational cannabis sales skyrocket in New Mexico (11/15/22)

The following article on the New Mexico Recreational Cannabis market was published on November 15th, 2022:

************************************************

Recreational cannabis sales skyrocket in New Mexico (koat.com)

Recreational cannabis sales skyrocket in New Mexico
Despite rise in sales, oversaturation is a cause of concern for some.

Jessie Hunt, spokesperson for Schwazze said it's been a boost for the economy.

"We are continuing to see that people are coming into the legal market to purchase their cannabis, which is wonderful. That is exactly what we want to see in the state. We are able to continue to hire staff, pay strong wages in New Mexico and people really want to work in the industry, which is wonderful," Hunt said. "We are opening a few more stores. We're also trying to make sure that we're doing it in a way that is super responsible for the communities that we're in and that are in communities that really still have some high demand."

According to the latest data from the state's Cannabis Control Division, over $25 million in recreational sales was recorded in October — the highest it's been since the legalization of recreational sales in April.

However, there has been a decrease in medical sales.

Eli Goodman, CEO of Best Daze said while continuous growth is great for the cannabis industry, there may be challenges.

"The job growth is huge. I mean, companywide, our company alone has over 100 employees. We're moving through cultivation, manufacturing dispensaries. This is our eighth dispensary opened and we're one of many groups. So, there's a lot of opportunity, a lot of growth and a lot of jobs. That's positive for the economy, gets money in people's pockets and overall generates tax dollars for the state, and we need it right now as a state," Goodman said. "There's no limit on license around production, and there's a question — when does this market stabilize? Does it get saturated? Are there some people that are going to put money into businesses not be able to keep things going, because it's an oversaturated market — not be able to make it through that extension where they need some capital to keep it going."

************************************************

It is clear that the New Mexico Adult Recreational Market has been a boon for the sector and Schwazze is keen on gaining market share to grow with the industry growth with goals of ending this year with at least 16 to 17 dispensaries (versus there starting count of 10 at the close of the R.Greenleaf acquisition earlier in the year) and to have 25 dispensaries by September 2023 (as discussed in a recent interview (see link below for more details):

www.reddit.com/r/SHWZ/comments/ygryev/nms_cannabis_supply_steady_six_months_in_101422/

During the Q3'22 earnings call, management made it clear that the preferred method of dispensary growth in the New Mexico will be "organic" growth targeting key locations (e.g., Border Towns adjacent to Texas and other markets).

We believe that Schwazze, and its vertical integration strategy, will be key in outpacing the overall New Mexico market in growth (both same-store sales and through greenfield stores).

IRR


   
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Q Canna
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Q Canna
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D. H. Taylor
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This will be huge. Lowell has such excellent quality product.


   
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Q Canna
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Q Canna
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 in Reddit.

Posted by
u/Affectionate_Fox9101
5 days ago

Latest Batch of Schwazze Insider Purchases of Over 500k shares up to $2.10 per share
The latest Form 4 filed earlier today after the close of markets show a continuing buy up of shares by management (via Dye Capital):

newsfilter.io/a/ea6b8166116d6bbe8177057d5f0458e6

This latest round reflects 509,700 shares purchased at an average share price of ~$2/share with a range of $1.79 to $2.10/share.

This purchase of ~$1,019,400 worth of Schwazze common shares are on top of the already ~$1,339,779.8 used to purchase a prior 816,152 shares.

http://www.reddit.com/r/SHWZ/comments/z1mlh6/and_the_schwazze_insider_buying_keeps_on_coming/

In total, Justin Dye (via Dye Capital) has purchased ~$2,359,180 worth of 1,325,852 common shares in Schwazze:

To put this in perspective, Justin Dye's background in the private equity arena (e.g., Cerberus) would lend one to believe that Justin would expect to make a minimum of traditional private equity capital market annual returns of between 35% to 45%. If the highest price he has purchase so far is $2.10/share, than that may imply an expected fair value for those shares of around $3/share in the next 12 months (although granted it does not have to necessarily be linear in its growth of appreciation)

This continues to be one of the strongest showings of commitment and belief in the value of the shares that I have seen in a while with large investments (e.g., 1,325,852 shares or $2,359,180), spread across multiple purchases and days (e.g., across 7 separate days), and increasingly elevated prices (with the latest peak of $2.10/share).

There remains ongoing speculation on why this may be happening:

Shares are undervalued given the significant operating free cash flows the company is generating (generating an estimated annualized $24MM in free cash flows as of Q3'22 and growing to a potentially well over $40MM+ annualized run-rate by Q4'23, driven in large part by planned growth in dispensaries through acquisitions in Colorado and organic growth in New Mexico)

Rumours of Schwazze being approached by another buyer (I have no confirmation or evidence of this, and I highly doubt this is true as it would be considered insider trading for Justin Dye to be trading on such information)

Schwazze is expecting a positive outcome on Safe Plus (i.e., Safe Banking) regulations

Schwazze may be looking to take the company private (this is also the second least likely in our opinion of the five possibilities - 2nd to the rumours of a buyout)

Another possibility to consider is that during Q3'22 Justin Dye/Dye Capital had about ~7.6MM in warrants that expired on 9/30/22 (whose exercise prices were $3.5/share). From Dye's perspective, he is probably getting a bargain at these prices in buying up the shares post the expiration and the earnings call. While I don't necessarily expect he will buy 7.5MM shares now, those warrants may give us some color as to where his mindset might have been at the end of the third quarter. In many ways, he is now actually able to execute on his original plans by purchasing more shares for the same value he may have set aside for the warrants (i.e., ~$32,441,250, net of registration fees), at a much lower price (than the exercise price of $3.5/share with the warrants), and he is doing so without generating any incremental dilution (i.e., since the warrants he previously had would have meant the issuance of new shares, vs. the shares being bought from the open market which he is doing now). Dye may have waited till now for the warrants to expire worthless, and till after the earnings call in order to avoid "MNPI" concerns - Material Non-Public Information.

The above are speculative reasonings to think about in answering the questions of "why?" and "why now?" in regards to Dye's recent and numerous purchases. (

Another factor to consider as a benefit with the new share price levels, is that often times in the past, when acquiring stores, Schwazze has used equity as a large component of the transaction (particularly in Colorado where acquisitions are far easier & possibly cheaper than organic development). Now that share prices have reset to a higher level (and trending higher), this will reduce the dilutive impact of future acquisitions and create more value per share as a result over time.

Another benefit is that a new floor with strong returns are being established over the next 12 months. This will reduce the level of shareholders engaging in "tax loss harvesting" at the end of the year (reducing the downward pressure on the stock price as we might have expected to see towards the end of the year).

SAFE BANKING

The Financial Crimes Enforcement Network states, only 755 banks service the cannabis industry out of 4,200 FDIC-insured banks across the country in 2021 with less than 1% offering lines of credit to the industry. This is in large part due to the Schedule 1 classification of cannabis.

Passage of Safe Banking or Safe Plus will provide, most notably, an improved cost of capital which, that may yield an improvement in rates down to an estimated 8% to 10% on large ticket items such as the convertible debt that Schwazze currently maintains (i.e., $98.137022MM @ 13% interest). Those debts carry a current interest rate of 9% in cash and 4% in PIK (i.e., 13% in total). If that debt and the other high interest debts (e.g., the Term loan of 15%) can be refinanced down to a term loan of 8% to 10%, this will yield a savings of ~$3MM to $5MM in reduced interest expense (i.e., generating an increased value of an estimated $30MM to $50MM).

IMPORTANT: PARTIAL ROADBLOCK ON REFINANCING CONVERTIBLE NOTE

The convertible notes referenced above (aka "Investor Notes" in the SEC filings) allow for a conversion at $2.24/share subject to the below early redemption penalty.

Unfortunately, The Investor Notes have the following early redemption penalty which may make it a difficult matter for conversion of the notes by Schwazze for some time (i.e., the next two years) or until the share price achieves a certain level higher than conversion price as noted in the prior 8-K report filed on December 9th, 2021 (see link and excerpt paragraph below):

ir.schwazze.com/static-files/6dc8709b-3755-4f11-acdb-4e9a60b5d27e

" The Company may, at its option, elect to redeem all, but not less than all, of the Notes for cash, subject to certain conditions, at a repurchase price equal to the principal amount of the Notes plus accrued and unpaid interest thereon on such date, plus the greater of: (i) the sum of the present values or the remaining scheduled interest payments that would have been paid on the Notes from the repurchase date to the third anniversary of the Issuance Date or (ii) the lesser of (a) the sum of the present values of the scheduled interest payments that would have been paid (assuming such payments are made in cash) on the Notes from the redemption date through the one-year anniversary of the redemption date or (y) the sum of the present values of the scheduled interest payments that would have been paid (assuming such payments are made in cash) on the Notes from the redemption date through the maturity date. If the Company elects to redeem the Notes, holders of Note may require the Company to convert their Notes in lieu of receiving cash in the redemption. "

In calculating the "greater of" present values referenced in the above excerpt, this would effectively mean that the SHWZ shares would need to trade above ~$2.60/share (i.e., the conversion price + the present value of payments) in order for it to be worthwhile for the Investor Note holders to convert rather than accepting the cash payment. If the Investor Noteholders refuse to convert, than SHWZ would be required to pay an early penalty of over ~$15MM to $16MM today.

Additionally, there may be a conflict of interest in that four of Schwazze's Directors are investors in the convertible note instruments (as noted in the previously mentioned 8-K filing - see excerpt paragraph below):

" Three of the Company’s directors, Jeffrey Cozad, Jeffrey Garwood and Pratap Mukharji, were Investors in the private placement on the same terms as the other Investors. Also, Marc Rubin, an individual affiliated with CRW Cann Holdings, LLC, an entity controlled by Marc Rubin and Jeffrey Cozad and a significant holder of the Company’s Series A Convertible Preferred Stock with the right to designate one director, was an Investor in the private placement on the same terms as the other Investors."

It is unclear to me if the four directors noted above would or would not act in their own self-interest in deferring the redemption/refinancing of the Convertible Note even if the shares traded above the ~$2.60 threshold (so as to retain an ongoing high yield of 13% interest of which 4% is a PIK). We will have to wait and see how SAFE Banking plays out and what the share price is at that time if and when refinancing becomes an option.

In the meantime, Schwazze, already generates operating free cash flows, net of one-time expenses, of ~$6.1MM/quarter or, alternatively, $4.1MM/quarter if you include the one-time items as per GAAP accounting:

http://www.reddit.com/r/SHWZ/comments/yodjhj/schwazze_q322_revenue_ebitda_forecast_estimate/

Post-safe banking passage we can expect actual Free Cash Flows to improve by ~$1.6MM to ~$3.8MM per year (or, equivalently, to ~$24.4MM to ~$28.2MM when combined with annualized the operating free cash flows) due to lower rates of financing for all debt instruments including the Investor Notes (with the expectation that rates could be refinanced to a range of 8% to 10%).

Additionally, major credit card companies currently don’t service the industry, which means most transactions at state-legal marijuana stores in Colorado and New Mexico are in cash. SAFE Banking has also the potential to enable credit card usage by Schwazze Customers who are currently limited to Cash, Debit, Apply Pay and other similar type methods. If SAFE banking is launched, this new ability to accept credit cards will broaden the customer base and potentially lead to more customers, more orders per customers, larger basket sizes per order, and stronger revenues overall.

On top of that, SAFE Banking, Schwazze may be able to open checking accounts, lines of credit, and pay taxes electronically,

In general, multiples on MSOs will likely trade upwards on the news of Cannabis reform (even if it is just SAFE Banking) and the rising multiples will help elevate Schwazze even further.

280(e)

This remains the elusive golden goose which, if Marijuana is ever declassified from a Schedule (1) drug, would potentially boost free cash flows by an estimated ~30% to ~40%. There is little indication of any significant effort to declassify Marijuana in the lame-duck session of Congress which will likely mean that it will be an item to be addressed in 2024 or 2025.

FREE CASH FLOW (FCF) ANALYSIS

I wanted to determine what the free cash flow yield at current prices would look like under two different scenarios.

Two Scenarios:

Scenario One: "AS IF CONVERTED": Let's start with a fully diluted "as-if converted" shares of ~192MM at the end of Q3'22 (see table below). We also have an idea of what the Operating FCF (excluding one-time expenses) is around $6.1MM per quarter and annualized around $24.4MM. We then add back the Annual Interest Expense of $8.744833MM associated with the Convertible Note (and note: we do not need to adjust for taxes, since interest is not tax deductible under 280(e)). Then with we can take all that information combined with the current share price of $1.95/share, to calculate a FCF Yield of ~8.9%. Which is

Scenario Two: "PARTIALLY AS IF CONVERTED": Alternatively, if we leave the Convertible Note uncoverted, then the fully diluted "partially as-if converted" share count would be ~147.78540MM shares and using the operating FCF of $24.4MM, we can calculate an ~8.5% FCF Yield.

r/SHWZ - Latest Batch of Schwazze Insider Purchases of Over 500k shares up to $2.10 per share
These operating free cash flow yields will continue to grow as Schwazze acquires more assets in Colorado and develops organically more assets in New Mexico over the next twelve months (estimated to be between 55 to 60 dispensaries by the end of Q4'23 of which 25 will be in New Mexico and an estimated 30 to 35 in Colorado by Q4'23 - see link below for more details).

http://www.reddit.com/r/SHWZ/comments/ygryev/nms_cannabis_supply_steady_six_months_in_101422/

COLORADO & NEW MEXICO MARKET ACQUISITIONS & DEVELOPMENT STRATEGIES

Colorado growth can be funded from both their existing balance sheet ($ 38.725187MM) and recurring quarterly FCFs (i.e., between $4MM and $6MM each quarter) over the next 12 months. This would provide ample capital of between ~$55MM and $63MM in cash available to more than fund the acquisition or development of the additional dispensaries noted above.

If we assume Colorado Market TAM is $1.8Bn/annum (returning to Pre-pandemic levels) with ~655 Adult Use stores, and an average EBITDA margin of 15% to 25%, with management target acquisition prices ranging from 3.5x to 4.5x EBITDA (although, in today's environment, we would hope for pricing to be towards the lower end of that range), then we can calculate the following items:

Average Revenue / Adult Use Store: $2.75MM per annum (although we are aware that SHWZ stores typically average close to $5MM per annum, but that may not be the baseline of what they are purchasing).

Average EBITDA: ~$400k to ~700k per annum

Estimated Cost of Acquisition: ~$1.5MM to ~$3MM

Cash Available for Acquisitions: $55MM to $63MM less funds held in reserve of an estimated $15MM to $20MM per loan terms and operations. This would leave $35MM to $48MM available for acquisitions.

Colorado Acquisition Estimates: Estimated # of Stores in Colorado that SHWZ could acquire over the next 12 months: Max: 32 and Min: 11, or a median of 22 dispensaries.

Schwazze, as of the Q3'22 earnings call had 35 operating dispensaries with 23 in Colorado (19 Starbuds, 4 Emerald Fields) and 12 in New Mexico (and has since then has added 1 more dispensaries with 2 to 3 more on the way from New Mexico). They should end the year with 38 to 39 dispensaries in total. Our expectations is that they will acquire between 7 to 12 additional dispensaries in Colorado to reach 30 to 35 dispensaries by the end of 2023 in Colorado and have sufficient capital and cash flows to achieve that goal without further equity dilutive capital raises or debt capital raises.

Transaction Financing Alternatives to Cash: the transactions noted above do not take into account that Schwazze has multiple other levers they can pull to stretch the acquisition and development capabilities of their cash balances, including, but not limited to: a. Seller Note Financing, b. Equity (Common or Preferred) in lieu of cash, and c. Earnouts.

New Mexico: Currently, R.Greenleaf stores average $4MM to $4.5MM in annual revenues per store and has plans to organically add dispensaries over the next 12 months in order to reach 25 total dispensaries by September 2023 (see link below for details on forecast):

http://www.reddit.com/r/SHWZ/comments/ygryev/nms_cannabis_supply_steady_six_months_in_101422/

If Schwazze is successful in achieving these growth targets for its dispensaries in both markets, they should be in a position by the end of 2023 to generate an annualized run-rate of Operating Free Cash Flows of well over $40MM by Q4'23 (possibly even close to a ~$50MM run-rate in operating FCF in Q4'23).

The >$40MM Operating FCFs would lead to a minimum FCF Yield of ~12% under Scenario One and ~13% under Scenario Two, both on a 1 year Forward Basis.

THIS IS ALL without SAFE Banking/Safe Plus 280(e)/Schedule-1-Declassification being enacted.

We maintain our 12-month price target at $3/share which is based on both Adjusted EBITDA multiples as well as FCF yield analyses on the existing operations and cash balances.

With successful growth in further acquisitions/developments of Dispensaries/Revenues; maintenance of existing margins and the passage of Safe Banking or Safe Plus, we can see this target adjusting upwards and drifting closer to $4/share.

Should Cannabis be declassified in the future from a Schedule 1 drug (which we are not expecting in 2023), than we would expect share prices to fall between $5/share to $6/share.

In the end, Schwazze is one of the best run management teams in the cannabis sector and we remain bullish on the prospects of the company over the next twelve months as it continues to outpace its peers in Sales Growth, Gross Profit and EBITDA Margins, Operating Free Cash Flows, and Relative Same-Store Sales comparisons against industry market segment metrics.

IRR

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Q Canna
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D. H. Taylor
(@dhtaylor)
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@aconceptsketchgmail-com Just stopped in and had a look at the store across the street from University of NM.  They picked a bad day to start which, I joked with them on that.  The students left yesterday after finals.  Won't be back until the 2nd of January.  But, this gives them time to finish getting set up - they were still putting things on the shelf.  

Learned two interesting things:

First, the Lowells are available.  But, it is R.Greenleaf strain inside, not Lowell.  Still, packaging is the same with the box and the matches.  There were Schwazze products there, obv.  But, these are grown/produced in NM.  

Second, there are some Cheech & Chong products there and, that means there is a relationship there.  Planet 13 does Cheech & Chong products.  

I can envision many M&A moves in the future.  I cannot see Schwazze being a stand-alone company forever.  This would mean they merge with others, and this would mean future cost savings.  If Planet 13, Lowell, Schwazze, and Ascend were to all combine, that would be powerful.  And, profitable.  


   
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Q Canna
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