Why Do Schwazze’s Deals Keep Collapsing?

By Alex Halperin
Oct 25, 2020
Schwazze Chairman and CEO Justin Dye

After 11 years running Canyon Cultivation, a Colorado edibles maker, the married owners Morgan and Andrew Iwersen were excited to sell the company and move on to the next chapter in their lives. They had a letter of intent from Schwazze, a company which aspires to be a leading vertically integrated operator, to acquire their company for $5.1M, Andrew said, but the expiry date of September 7, 2020 passed without hearing from the buyer.

“Negotiations stopped,” Iwersen told WeedWeek in late October. He said Canyon asked to reopen discussions with Schwazze but didn’t hear back. In early October, Canyon’s lawyer sent a letter to Schwazze calling off the deal, he said.

The acquisition price was split evenly between cash and stock and Schwazze “didn’t have the cash flow,” Iwersen said. He said members of Schwazze’s executive team had told him the company was “having a hard time raising money.”

“[It’s] for good reason. It’s a tough climate all across the board,” Iwersen said. Canyon is now seeking another buyer. 

In an email, Schwazze CEO and Executive chairman Justin Dye did not directly dispute Iwersen’s assertion that it couldn’t access the necessary capital. Amid the pandemic, he wrote, “the market and investors [are] uncertain of the future.”

Formerly Medicine Man Technologies, Schwazze has ambitions to be a major player in Colorado’s business-friendly cannabis market. The company turned heads in December 2019 when it tapped Dye, a former Chief Administrative Officer of supermarket chain Albertsons, to lead its expansion. The thinking was he’d bring the rigor of a major business to an industry that sometimes lacks it.

Since before Dye joined the company, Schwazze’s strategy involved acquiring existing companies throughout Colorado’s supply chain. The strategy was enabled by a 2019 Colorado law that allowed public companies to invest in Colorado’s cannabis industry.

“Schwazze is a great example of how to capitalize on this legislation in a fragmented market,” Christian Sederberg, founding partner of cannabis law firm Vicente Sederberg wrote in a statement to WeedWeek. “In addition to top notch operations, they have been methodical and focused when it comes to selecting and moving forward with the right acquisition partners, a critical component to ensure success.”

But since Dye took the reins, several of Schwazze’s previously-announced deals have fallen through. These include acquisitions of retailer Strawberry Fields for $31M, concentrates maker Dabble Extracts ($3.75M), grower Los Suenos Farms ($11.9), Medically Correct, parent company of edibles brand Incredibles, ($17.25M) and retailer Colorado Harvest Company ($12.5M).

It’s not clear in all cases why these deals didn’t close. In an August interview with WeedWeek, Dye said the terminated deals have “nothing to do with fundraising,” and attributed them largely to issues arising in the due diligence process.

This appeared to contradict Colorado Harvest Company CEO Tim Cullen who had told Marijuana Business Daily that 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.” (Cullen stood by this statement to WeedWeek.)

Asked about the deal in August, Dye said, it “didn’t make sense for anybody anymore…I think both organizations are better off for not doing that deal.”

Since Dye joined Schwazze in December 2019, its stock has fallen from $2.76 per share to $1.18, underperforming New Cannabis Ventures’ American Cannabis Operator Index, which is now trading at similar levels to 10 months ago.

In August, Dye told WeedWeek, “We’re building this thing for the long term, and [the stock price will] take care of itself over time.”

On Dye’s watch, the company successfully closed a deal for MesaPur, a retailer and concentrates company.

During the August interview, Dye said deals to close Canyon Cultivation and a $15M bid for retailer Roots RX were “in process.” Both have since fallen through, as did a deal for Schwazze to acquire MedPharm Holdings. (Roots RX didn’t respond to a request for comment.) The company’s acquisition pipeline is “dynamic and evolving,” Dye wrote.

Schwazze, which reported a $6.6M net loss for the second quarter of 2020 on $5.4M in revenue, aims to close its biggest announced acquisition yet, a $118M bid for Colorado 13 dispensaries and a cultivation site owned by retail chain Star Buds.

In an email, Dye said he is “confident” the Star Buds deal will close in the fourth quarter of this year. He anticipates it will generate positive cash flow so Schwazze will not have to raise additional capital.

To close the Star Buds deal, Schwazze needed to produce proof of having a reported $59M by July 30. That deadline has now been extended to October 30, this Friday, according to an SEC filing. Dye didn’t confirm or deny the $59M figure and declined to detail Schwazze’s fundraising efforts, beyond saying the company is exploring debt and equity options.

Star Buds owner Brian Ruden didn’t respond to requests for comment.

Correction: This article previous referenced a cancelled acquisition by Schwazze of MedPharm. The proposed acquisition was of MedPharm Holdings. It has been contacted for comment.

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