(Bloomberg) – If it were like most companies at the losing end of a tree and bust cycle, Schwazze could simply turn to the American bankruptcy court to keep his creditors at a distance while they again negotiate his fault. But unlike most companies, the product – marijuana – is still illegal in the eyes of the federal government.
That disadvantage will make it more difficult for Schwazze and other cannabis companies to win concessions from lenders, just like a wave of debts that industry has borrowed in recent years to expand in states where weed is legal. The largest companies, which operate in more than one state, have, according to Beau Whitney, Chief Economist at Whitney Economics, who specializes in the cannabis market.
The settlement is because the industry has failed to make legal weed in reliable profit. In 2022, more than 42% of dealers reported to make a profit, according to a Whitney study. Last year the number fell to around 27%. Some who cannot consolidate will fail and go bankrupt. Many will be forced to refinance their debt for higher interest rates and heavy contractual covenants.
“There is a huge debt bell that can have a considerable negative influence on the cannabis industry if it is not tackled,” Whitney said. “The refinancing of this cycle will have much higher interest rates and the companies will not have the cash flow to manage it.”
Schwazze, based in Colorado, hired advisers to help find out how to restructure the debt that it took when opening a chain of pharmacies in two states, according to people who are familiar with the situation. It has been able to press the expiry date on some of his loans, but it needs more money, said that the people who asked not to be identified about discussing a private issue. However, the training must take place outside the court due to the federal prohibition.
Almost half of the American states have legalized Marijuana, while a number of others have decriminalized the medicine or allowing it for medicinal purposes. It remains completely illegal in just four states. About 79% of the American population lives in a province 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 product last year, Whitney said.
The federal law forbids people to relocate marijuana about state lines and treats it as a dangerous, schedule I -Medicijn. The prosecutors generally do not take action against individual consumers, but the laws still limit bank services for the cannabis industry. And the American Trustee, the federal watchdog for the American bankruptcy system, has successfully blocked companies to submit chapter 11 protection.
Schwazze, whose formal name Medicine Man Technologies Inc. is, Oppenheimer & Co. And Goodwin Procter engaged as a legal adviser for his conversations, the people said. A group of creditors from the company works together with Paul Hastings, they added.
The negotiations as Schwazze received a standard message in December due to delays in the controlled financial reports, according to public disclosures. The company had to change independent auditors and reformulate the annual results for 2022 and 2023 after the discovery of accounting errors. In July, Schwazze was able to reduce the term on a $ 15 million loan with Altmore Capital and a promotion of $ 17 million with Reynold Greenleaf & Associates that would owed this month, according to public disclosures.
Schwazze wants to get incremental capital from the options and can search for a potential under-par exchange, which could lead to a dilution of fairness, people said.
“It's been like that for years,” said industrial lawyer Hilary Bricken at the Husch Blackwell law firm. “These lenders have the upper hand. The conditions that are given to cannabis companies are heavy and draconic. It is not a friendly environment. “
Last year, the US Department of Justice started the process of classifying marijuana as schedule III, less dangerous substance, one of the primary goals of industry because it would enable cannabis companies to subtract normal operating costs and “hundreds, so Not thousands of pushing companies into profitability, “said Aaron Smith, co-founder of the National Cannabis Industry Association.
The incoming attorney general of President Donald Trump, Pam Bondi, refused to say during her confirmation hearing last month whether she would cancel that process. The industry has been working for years to remove as many federal obstacles as possible, with limited success, despite most Americans who prefer legalization.
Colorado and Washington became the first states to legalize recreational marijuana about a dozen years ago and launched a wave of small start -ups run by enthusiastic but inexperienced entrepreneurs. As more states are legalized, either for recreational use or as a medicine, investors are piled up and exploded the number of recognized dealers and pharmacies. The total turnover grew steadily, with a boost of sales when the pandemic ended. That is when companies have loaded the debt that will be due next year.
Today the market has grown up with Savvier, more professional operators who push the mother-and-pop startups, said Bricken, the Marijuana lawyer who has been advising clients since the early days of legalization. There are only a handful of lenders who are willing to invest in industry, said Bricken, referring to two of the largest, Chicago Atlantic Group Inc. And Altmore Capital Investment Management.
“All the stupid money has left the space,” she said.
Representatives of Chicago Atlantic have not returned a request for comments. 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 difficulty competing with dealers without a permit, which can undermine the legal sale because they do not pay for a license, comply with regulations or are confronted with taxes. The US saw around $ 44 billion in illegal sales last year, according to Cannabis Market Tracker BDSA.
“Unless there is federal intervention, due to reform, the industry is in the abyss of collapse and large companies from outside the cannabis industry will be positioned to take over, for money on the dollar,” said Whitney.
-With help from Fiona Rutherford.
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