(Bloomberg) – If like most companies at the end of the loss of boom and bust cycle, Schwazze could turn to the US bankruptcy court to keep its creditors in the Bay in retracting its debt. But unlike most businesses, its products – Marijuana – are still illegal in the eyes of the federal government.
That disadvantage will make it more difficult for Schwazze and other cannabis companies to gain concessions from lenders just like a wave of debt and borrowed the industry in recent years to expand in states where weeds are legal becoming due. The largest companies, those operating in more than one state, have as much as $ 6 billion in debt that matures next year, according to Beau Whitney, a chief economist at Whitney Economics, who specializes in the cannabis market.
The account comes as the industry fails to turn legal weeds into a reliable profit. In 2022 more than 42% of dealers noted that they had made a profit, according to a survey by Whitney. By last year, the number had dropped to about 27%. Some who cannot aggregate will fail and get out of business. Many will be forced to refinance their debt at higher interest rates and onerous contractual covenants.
“There is a huge debt bubble that could have a significant negative impact on the cannabis industry if it is not addressed,” said Whitney. “This cycle will be refinanced at much higher interest rates and the businesses will not have the cash flow to manage it.”
Schwazze from Colorado has employed councilors to help them find out how to restructure debt it took when opening a chain of pharmacies in two states, according to people familiar with the situation. He has been able to push the due date on some of his loans but needs more cash, said the people, who asked for not being identified in discussing a private issue. However, the exercise needs to take place outside the court due to the federal ban.
Nearly half of the US provinces have legalized marijuana, while several others have unleashed the drug or allowed it for medicinal purposes. It remains completely illegal in just four provinces. About 79% of the US population lives in a county with at least one pharmacy, according to the Pew Research Center. Legal cannabis companies employed more than 450,000 people and sold more than $ 30 billion in the product last year, Whitney said.
Federal law prohibits people from moving marijuana across the state lines and treats it as a dangerous drug, Schedule I. Generally, prosecutors do not act against individual users, but the laws still Limit banking services for the cannabis industry. And the US Trustee, the federal watchdog for the US bankruptcy system, has managed to prevent companies from filing for Chapter 11 defense.
Schwazze, whose formal name is Medicine Man Technologies Inc., has engaged Oppenheimer & Co. and Goodwin Procter as Legal Counsel for his conversations, the people said. A group of company creditors work with Paul Hastings, they added.
Discussions come as Schwazze receives default warning in December due to delays in its audited financial reports, according to public disclosures. The company had to change independent auditors and reaffirm annual results for 2022 and 2023 after finding accounting errors. In July, Schwazze pushed back the maturity on a $ 15 million loan with Altmore Capital and a promising $ 17 million note with Reyold Greenleaf & Associates that was supposed to be this month, according to public disclosures.
Among its options, Schwazze is looking to get incremental capital and can seek a potential exchange below PAR, which could lead to equity weakening, the people said.
“It's been like this for years,” said industry lawyer Hilary Bricken with the legal company of Husch Blackwell. “These lenders have the upper hand. The terms given to cannabis companies are onerous and harsh. It is not a friendly environment. “
Last year, the US Department of Justice initiated the process of distributing marijuana as Schedule III, a less dangerous substance, one of the main goals of the industry because it would allow cannabis companies to deduct normal business expenses and push “hundreds, if not thousands, of Businesses to profitability, ”said Aaron Smith, co-founder of the National Cannabis Industry Association.
President Donald Trump's new Attorney General Pam Bondi refused to say during her confirmation hearing last month that would cancel that process. The industry has been working for years to remove as many federal barriers as possible, with limited success, despite most Americans who favor legalization.
Colorado and Washington came the first provinces to legalize leisure marijuana about a dozen years ago, launching a wave of small start -ups run by enthusiastic, but inexperienced entrepreneurs. As more states legalized, either for recreational use or as a medicine, investors stacked and exploded the number of licensed dealers and pharmacies. General sales grew steadily, with a revenue boost striking when the pandemic ended. That's when companies are uploading on the coming debt to come next year.
Today the market has matured with Savvier, more professional operators pushing out the mother-and-pop startups, said Briticker, the marijuana lawyer who has been advising clients since the early days of legalization. Only a handful of remaining lenders are ready to invest in the industry, says Bricken, noting two of the largest, Chicago Atlantic Group Inc. and Altmore Capital Investment Management.
“All the silly money has left the place,” he said.
The representatives for Chicago Atlantic did not return a request for attention. Altmore Capital refused to comment. Messages left with Schwazze, as well as with Oppenheimer, Goodwin Procter and Paul Hastings were not returned.
Cannabis companies have struggled to compete with unlicensed dealers, who can undermine legal sales because they do not pay for a license, comply with regulations or face any said taxes. The United States saw around $ 44 billion in illegal sales last year, according to the Cannabis BDSA market tracker.
“Unless there is a federal intervention, through reform, then the industry is on the fall of fall and large companies from outside the cannabis industry will be in a position to take the lead, for pennies on the dollar,” says Whitney .
-With help from Fiona Rutherford.
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