Justin Dye is among the most accomplished mainstream executives to have joined the cannabis industry. A former chief administrative officer at the big grocery chain Albertson’s, he’s now CEO and Chairman of Schwazze (formerly Medicine Man Technologies) which is pursuing an aggressive acquisitions strategy to become a dominant vertically integrated player in Colorado.
While several acquisitions announced before Dye joined the company haven’t closed, Schwazze just announced Q2 performance substantially stronger than the same period in 2019. We discussed the case for vertical integration, the state of Schwazze’s stock and why some deals don’t happen.
This interview has been edited for length and clarity.
WeedWeek: What’s your strategy?
Justin Dye: Our strategy is to become a leading, vertically integrated cannabis company in Colorado. We want excellent retail operations focused on the customer, offering good value and a great assortment of high-quality products from our partners and that we produce. We also will have very solid cultivation.
We closed on our first acquisition in April so we’ve been a publicly traded, plant touching business in Colorado for four months. First and foremost, we’ve been putting together and implementing our operating playbook. We look forward to closing Starbuds, our anchor retail operation, in the coming months. And we’ll be the largest integrated operator in Colorado.
WW: Of any state, Colorado probably has the most competition among vertically integrated players. What do you see as your edge?
JD: In comparison to other industries, we’re in the very early stages. We’ve got a great regulatory framework here. We do not have much of a black market, which allows operators who are focused on compliance and running their businesses according to the state laws, to be successful. The people that have survived are profitable and have generated free cash flow. So we’re buying businesses that are profitable, that have good growth potential, that are growing, that are differentiated. We very much like this state.
JD: Those are all good companies. We’re different, I think, in that we bring professionalism to retail and retail management. I have a retail background where we ran 2,300 grocery stores all over the U. S. We also oversaw a very large supply chain distribution, and had manufacturing, as well. I’m very adept, and our team’s very adept, at managing multiple nodes in supply chain. There’s vast similarities with this business to other businesses that we’ve been involved with.
We’ve got a top-shelf management team. We’re very deep in retail. We’re very deep in product development. We’re very deep in cannabis. We’ve hired, and recruited, and purchased companies with great expertise in cannabis.
WW: I interviewed a consultant the other day, Rob McPherson, who’s a tough critic of the industry, and he said vertical integration is a mistake, in general. Why not just focus on retail? Why do you think he’s wrong?
JD: I don’t know who that is, but totally disagree with that premise. I think you want to be vertically integrated. Over time you emphasize different parts of your value chain, depending on where there’s value to be created. Clearly retail, brands and products are the most important.
But right now you need to have efficient operating capabilities and to control the quality of your supply chain and the biomass that you’re using. There is a ton of variation in the supply chain, from grower to grower. As you’re developing brands and products and experiences with your consumers, and your patient customers, you want to be able to control that. As the industry continues to mature over the next several years, I think you’ll see more and more standardization and probably less variation in quality, but right now we want to be vertically integrated to control the supply chain. I’d be happy to debate that.
“Sometimes deals don’t happen”
WW:According to Marijuana Business Daily, five out of ten deals Schwazze announced haven’t happened, largely due to struggling to raise money. What’s going on there?
JD: That’s not accurate. Let me correct you on facts. So, we have separated and terminated term sheets that were negotiated well over a year ago. It has nothing to do with fundraising. When you sign a term sheet, it’s predicated to get to a deal. You must do due diligence. You must understand 280E taxes and liabilities. You must understand their financials, and understand profitability. You need to understand accrual-based accounting for a publicly traded company. You’re not on a cash basis, so you’ve got to make sure your accounting is right. You got to make sure licenses are active, and that they’re enforceable.
So there’s a lot of due diligence that goes on that people gloss over where we don’t. We’re very detailed in how we do due diligence. And sometimes you find things, and the deals don’t work anymore. So the terms sometimes change, and the terms need to change. We’re going to do what’s right for our shareholders. Those are the facts. We may have an opportunity to do something with them later, and we certainly respect them and wish them well. And, sometimes deals don’t happen.
WW: Here’s a quote from Tim Cullen, founder and CEO of Colorado Harvest Company, which it says terminated a deal with you on June 1st, “Schwazze just didn’t raise the money in time. They didn’t have enough to close at the contract deadline, and we let it expire.” How do you respond?
JD: As we were looking at their business, and we were looking at their financials, and we were looking at the deal, it didn’t make sense for anybody anymore. And it takes two parties to make something happen. I think both organizations are better off for not doing that deal.
JD: We wish [founder] Bob [DeGabrielle] all the best in the world. We couldn’t come to terms on a deal that made sense for Los Suenos and us. We admire that business, but when we look at putting that business in, the terms of the deal have to make sense for our shareholders, and his.
JD: I’m going to have the same commentary around each one of these. Okay?
The stock “will correct over time”
WW: New Cannabis Ventures, American Cannabis Operator Index, which has done a pretty well since March, but you guys haven’t matched that performance. Why do you think you’re underperforming your competitors, stock-wise? Presumably stock performance is going to help you close the kinds of deals you want to close.
JD: If you look at our public float, if you look at how thinly we’re traded, and if you look at the investors that have been in the stock, they have been velocity traders. Every time we have an earnings release, the stock price goes up. We had a fabulous quarter, we’ll continue to have good quarters. You saw the stock price go up.
I think some of it is just size and scale. When you look at some of the companies you’re comparing us to, they have more revenue, they have more coverage, and they have more float out there. So I think all that will correct over time. We’re not a short-term player. We’re building this thing for the long term, and that’ll take care of itself over time.
WW: What would you tell investors to inspire confidence in Schwazze?
JD: We’re executing our plan. The core acquisitions that are the most sizable, that are the most profitable, we’re still in the works of getting those done. I feel very good about that. I think we’ve got a top management team. And we’re going to get Starbuds done, and immediately, we will be a very profitable, publicly traded company with outstanding growth. Roots RX is in process, Canyon Cultivation is in process, and we’ve got a couple of others that we’ve not announced. Going forward, we will announce transactions that once we have a stock purchase agreement signed, or an asset purchase agreement signed, we will not be announcing term sheets like the prior leadership team did.
If you do your homework, and you read the earnings, our core businesses is performing extraordinarily, the businesses that we have acquired are performing substantially ahead of plan versus prior year. And it has a lot to do with the people that we have here. It has a lot to do with the rigor we’ve put in place around lean processes and driving performance. So I’m very happy with where we are.
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