(Bloomberg) – If it was like most companies at the losing end of the boom and bust cycle, Schwazze could rely on the US Bankruptcy Court to keep creditors at bay while renegotiating debts. But unlike most companies, the product, marijuana, is still illegal to the federal government’s eyes.
The disadvantage is that it makes it difficult for Schwaze and other cannabis companies to win concessions from lenders as a wave of debt borrowed by industry in recent years to expand in states where weeds are legal. According to Bo Whitney, chief economist in cannabis economics, the largest companies will mature as much as $6 billion next year.
This calculation is because the industry has not been able to turn legal weeds into reliable profits. According to a Whitney survey, more than 42% of dealers reported profits in 2022. By last year, that number had fallen to about 27%. Those who can’t integrate will fail and go out of business. Many people are forced to refinance their obligations with higher interest rates and troubling contractual contract agreements.
“If not addressed, there is a big debt bubble that could have a major negative impact on the cannabis industry,” Whitney said. “Refinancing this cycle is a much higher interest rate and companies don’t have the cash flow to manage it.”
Colorado-based Schwaze has hired an advisor to understand how to restructure debt while opening a chain of pharmacies in two states, according to people familiar with the situation. Ta. Although some loans were able to push back due dates, they would need more cash, said those who asked not to identify discussions about private issues. However, due to federal bans, training must be off-court.
Almost half of US states legalize marijuana, while many other states either decriminalize or allow it for medicinal purposes. It remains completely illegal in just four states. According to the Pew Research Center, approximately 79% of the US population lives in counties with at least one clinic. The legal cannabis company employs more than 450,000 people and sold more than $30 billion in product last year, Whitney said.
Federal law prohibits people from moving marijuana across state boundaries and treats it as a dangerous Schedule I drug. While prosecutors generally do not take action against individual consumers, the law still limits banking services in the cannabis industry. Additionally, the US fiduciary, the federal watchdog of the US Bankruptcy System, has blocked the company from filing for Chapter 11 protection.
Schwaze, Medicine Man Technologies, is involved with Oppenheimer & Company and Goodwin Proctor as lawyers for its consultations, people said. The company’s group of creditors is working with Paul Hastings, they added.
Negotiations will take place as Schwazze received the default notice in December due to delays in the audited financial report. The company had to switch independent auditors and re-run the 2022 and 2023 annual results after accounting errors were discovered. In July, Schwaze was able to push back maturity with a $15 million loan with Reynold Greenleaf and Associates, which are due this month, and a $17 million promissory note, according to public disclosures.
Among those options, Schwaze is about to acquire progressive capital and may be seeking substandard exchanges, which could lead to dilution of fairness, people said. .
“This has been like this for years,” said Hilary Bricken, an industry lawyer at the Husch Blackwell law firm. “These lenders are dominant. The term given to cannabis companies is both tedious and strict. It’s not a friendly environment.”
Last year, the US Department of Justice began the process of classifying marijuana as Schedule III. This means that cannabis companies deduct regular business expenses and “if not thousands, if not hundreds, or even hundreds, then at one of the industry’s main goals.” No. Aaron Smith, co-founder of the National Cannabis Industry Association, said:
President Donald Trump’s incoming Attorney General, Pam Bondy, refused to say at a confirmation hearing last month whether she would cancel the process. The industry has worked for years to remove as many federal hurdles as possible, despite the majority of Americans who support legalization.
Colorado and Washington became the first states to legalize recreational marijuana around 12 years ago, launching a wave of small startups run by enthusiastic but inexperienced entrepreneurs. As more states were legalized as recreational use or medicine, investors were stacked up and the number of licensed dealers and clinics exploded. Overall sales increased steadily, with revenue rising after the pandemic ended. That’s when companies load their debts scheduled for next year.
Today, the market has matured with more specialized operators at Savvier, pushing mom and pop startups, says Bricken, a marijuana lawyer who has advised clients since the beginning of legalization. According to Bricken, only a handful of lenders are willing to invest in the industry, citing two things: Chicago Atlantic Group and Altmore Capital Investment Management.
“All of the stupid money left the space,” she said.
Representatives from the Chicago Atlantic did not reply to requests for comment. Altmore Capital declined to comment. Messages left to Schwazze, and Oppenheimer, Goodwin Procter, and Paul Hastings were not returned.
Cannabis businesses have difficulty competing with unlicensed dealers because they don’t have licenses, paying their licenses, complying with regulations, or facing taxes. According to the Cannabis Market Tracker BDSA, the US saw about $44 billion in illegal sales last year.
“Unless there is federal intervention, through reform, the industry is on the cliff of collapse and large companies outside the cannabis industry can take over for the dollar penny,” Whitney said.
– Support from Fiona Rutherford.
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