Headquartered in Denver, Schwazze (rhymes with Oz) is a vertically-integrated cannabis company. Schwazze has a unique regional focus with deep roots in Colorado. They recently announced a $95 million capital raise and are making moves in the soon-to-be adult-use New Mexico Market. This inspired me to take a deeper look at this rising MSO.
Schwazze has 32 retail locations, indoor, greenhouse and outdoor flower facilities, plus a large manufacturing complex. Through this structure, they are able to grow flower at multiple price points, manufacture concentrates and sell these through their retail locations.
Being vertically integrated is an excellent way to enhance margins (it’s cheaper to grow your own flower than buy it) and gain greater control over the supply chain. In addition to the vertical platform, Schwazze is the leading producer of distillate thanks to their April 2020 acquisition of Purplebee’s, Colorado’s leading pure CO2, ethanol extractor & distillate producer.
Since closing, Purplebee’s manufacturing output has increased 191%, making them the largest producer of distillate (the primary ingredient in most vape cartridges and edibles) in Colorado. This also plugs in an additional wholesale revenue source for the company, as it is unlikely they can use all of the distilliate production for in-house products.
Schwazze is run by a highly competent team with meaningful experience in grocery and food-related businesses. CEO, Justin Dye, led the growth of Albertsons from $10 billion to over $60 billion in sales with over 2,300 stores. Nancy Huber, CFO, was senior executive at Forward Foods where she helped manage the Chapter 11 turnaround, and went on to grow revenue and margins for their protein bars and marketing businesses. President, Jim Parco, has a deeper cannabis background, having founded Mesa Organics (Purplebee’s) in 2014.
Understanding the roots and core competency of the management team provides hints at where the business might execute best. In the case of Schwazze, it is not coincidence they’ve excelled at expanding retail, both in terms of the footprint and getting more from each store. For example, since acquiring Mesa Organics, product margins have increased form 41.8% to 55.7%, a 13.9% change. Justin’s experience in maximizing retail grocery outlets has likely played a big role in their ability to optimize each retail location.
On December 3rd, Schwazze announced they raised $95 million. The capital comes from senior secured convertible notes with a 13% interest rate, 5-year maturity, and they are convertible into Schwazze common stock at $2.24/share. The notes are secured by a 1st lien on unencumbered assets and a 2nd lien on encumbered assets.
While 13% is competitive for a business like Schwazze, it is 5% higher than the recent raise by industry giant Curaleaf. They were able to secure $425 million at 8%. Due to the lack of traditional banking options, size and a strong balance sheet are abnormally helpful in the cannabis industry.
Schwazze intends to use the proceeds to fund expansion into New Mexico along with additional M&A in Colorado. Just before announcing the debt deal, Schwazze shared they are acquiring Green Leaf, the second largest operator in New Mexico for $25 million in cash and $17 million in sellers notes. Greenleaf operates ten dispensaries, three grow facilities and a manufacturing facility. The deal is expected to close in early '22 and will add another cash-flow positive piece to the Schwazze puzzle.
New Mexico is in the cannabis-investing sweet spot: a medical market flipping to recreational sales. The means you no longer need a medical card and anyone over 21 can buy cannabis from a licensed dispensary. New Mexico currently has about 125,000 people in their medical program and a population of just over 2 million people. Typical adult use is about 18% of the population, which would equate to closer to 360,000 people visiting dispensaries—a 3x increase from the current medical crowd. This does not include organic growth or normalization of cannabis use.
Schwazze is positioned to become a regional powerhouse focused on Colorado and New Mexico, with potential expansion into neighboring states like Arizona, Nevada and Oklahoma. Through acquiring 32 dispensaries and seven grow operations in under 24 months, they have shown they know how to build out a business. Only half of these acquisitions are complete and the remainder should close in the first half of ’22—providing a meaningful boost to revenue. Following all these transactions, they still have about $55mm to spend on additional assets.
While Schwazze has been busy making acquisitions, they may also be an acquistion target. In 2019, Colorado amended their laws and now allow investments from companies outside of Colorado. This paved the way for Columbia Care to acquire The Green Solution, Colorado's largest vertically intergrated operator. I don't sense that Schwazze is looking to be sold right now, but their combination of assets, management team, and track record makes them a compelling target for tier one MSOs looking to expand their footprint.
Stayed tuned for more on Schwazze. In early Janaury, I'm interviewing their CEO, Justin Dye, for Seeking Alpha's CEO Interviews series. Have a question to ask, or a topic you'd like explored? Send me an email or hit me up on Twitter.