Marijuana Industry Debt Crisis Intensifies as Lenders Circle Overleveraged Operators

As spurned lenders begin to encircle marijuana companies owing an estimated $3 billion in collective debt coming due soon, one overleveraged operator is resorting to what observers say are increasingly creative and desperate methods to protect assets from liquidation.

That includes shutting down licensed locations and even moving a pre-roll machine from one location to another in an attempt to elude creditors, according to a lawsuit filed earlier this month.

Those are some of the allegations made against Colorado-based Medicine Man Technologies, which does business as Schwazze, by one of its lenders, Virginia-based cannabis-centric investment fund Altmore Capital, in a lawsuit filed May 3 in Denver District Court.

The techniques Schwazze is allegedly using to delay repaying Altmore are familiar to high-yield markets but “seem like a new development in cannabis restructuring,” said Frank Colombo, a managing director at New York-headquartered investment banking and data firm Viridian Capital Advisors.

But the situation might also portend a halt to the stalling tactics that have so far avoided any major reckoning, such as an adjustment of cannabis companies’ valuations or of the loans offered them. “In terms of a harbinger of things to come, we’ve seen multiple rounds of ‘extend and pretend’ stuff done,” Colombo added. “I’ve been arguing we’re coming to a time where you need to try to fix these companies.”


Lender claims company is ‘insolvent’
In its lawsuit, Altmore claims Schwazze – which has reported nearly $200 million in debt and liabilities far outstripping assets – is “insolvent.” Altmore is requesting, in part, that a judge appoint a receiver to divvy up the company. The cannabis-specific lender declined to comment to MJBizDaily. MJBizDaily efforts to contact Schwazze were unsuccessful.

But Schwazze spokesperson Sean Mansouri told BusinessDen that the company “vehemently den(ies)” devaluing assets and “intend(s) to vigorously defend ourselves through the appropriate legal channels.”

The company “had to make strategic decisions about how and when to allocate resources, including the timing of certain payments,” Mansouri told BusinessDen.

But the situation also could portend significant revaluations of cannabis companies that racked up debt in a bygone boom market as lenders fight over what’s left, said Hirsh Jain, a California-based consultant and University of Nevada, Las Vegas law school lecturer.


‘Zombie companies’ using ‘questionable tactics’
Schwazze is likely to be among the first of a wave of companies that “do not have the money to repay their debt obligations and may resort to questionable tactics to avoid repaying these debts,” Jain added.

“Like Schwazze, these MSOs may continue to operate for some time – retaining employees and serving customers – but they will in some respect be ‘zombie companies’ whose financial health is long past salvageable and whose lenders may get stuck incurring significant losses.”

Schwazze, which once listed its shares on the over-the-counter markets and the NEO Exchange (now known as Cboe Canada), transitioned last July to the OTC Expert Market, which is closed to retail investors. Then, in December, the company announced that its financial reports from 2023 and 2022 “should no longer be relied upon” because of “certain accounting errors that require corrections.”

Not long after that, the U.S. Securities and Exchange Commission suspended the accountant whom Schwazze had hired as its independent auditor, according to an April 1 filing that said reports from 2024 also would be late. More recently, Schwazze announced the April 30 exit of Daniel Pabon, the company’s chief policy and regulatory affairs officer.

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Courtesy of Chris Roberts, MJ Bix Daily