The US cannabis industry is reaching an inflection point and is one of the fastest growing markets in the world. There are several leading US cannabis operators that are generating more than $100 million of revenue per quarter and have been guiding higher for future quarters.
One of the main growth drivers for US cannabis companies has been the opening of new markets (recreational and medical). Over the next year, we expect to see additional states legalize recreational cannabis and see new states legalize medical cannabis. The November general election is expected to be a catalyst for the US cannabis industry and we are favorable on the tailwinds that could be supporting this market in the last quarter of the year.
The growth of the US cannabis industry has not been great for all companies. Several operators tried to expand too far, too fast and they are paying the price for it. Today, we want to highlight two US retailers that Tried to deploy an aggressive M&A strategy without having the capital in place to do so.
Schwazze: Failing to Execute on an Acquisition Strategy
Medicine Man Technologies (SHWZ) which recently changed its name to Schwazze has been highly focused on the Colorado cannabis market and has announced several substantial acquisitions over the last year.
Although the assets that Schwazze targeted were strategic in nature, the company does not have the capital to complete the transactions. Schwazze has tried to raise capital and we have seen the management team present at several banking conferences in 2019. COVID has only made the capital raising process more difficult for Schwazze and we do not expect to see the previously announced transactions completed.
In early June, Colorado Harvest Company, a leading dispensary chain in Colorado, reported to have terminated its agreement with Schwazze and this is a development that caught our attention.
Numbers do not lie and the number behind the Schwazze’s planned acquisitions are eye popping. Between January 2019 and September 2019, the company announced ten investments and acquisitions as part of a strategy to consolidate its Colorado supply chain and build the largest vertically integrated operator in the state.
If we had to estimate the cost of the ten acquisitions, it would be north of $300 million in aggregate. For a company with less than $10 million of cash on hand, the plan seemed unreasonable from the start. Earlier this year, Justin Dye was appointed as the new CEO of Schwazze and he recently reiterated plans to pursue a vertical-integration strategy.
Going forward, it will be interesting to see which acquisitions are completed and which are terminated. Colorado Harvest Company is a high-profile name and we expect to see other significant transactions cancelled in the near future. The recent trend for Schwazze has been to the downside and is an opportunity that we will continue to closely monitor.
MedMen: Will Gotham Green Take it Private?
Another US cannabis retailer that has failed to execute on a grandiose growth strategy is MedMen Enterprises Inc. (MMEN.CN) (MMNNF). When compared to Schwazze, MedMen is a better known operator that has a more checkered past.
From terminating previously announced acquisitions to taking on a lot of debt, 2020 has been a challenging year for the US cannabis retailer and we expect things to get worse before they get better.
In 2019, MedMen went on an acquisition spree and we believe that it bit off more than it could chew. The company’s growth strategy put significant strain on the balance sheet and forced them to offer suppliers stock instead of cash as a form of payment.
Gotham Green Partners is a leading cannabis private equity firm that is heavily invested in MedMen. The private equity firm provided the US cannabis retailer with a $250 million loan and we expect MedMen to face challenges when it is forced to make interest payments.
We continue to monitor MedMen from the sidelines and expect to see the operator default on debt in the near future. Going forward, we would not be surprised if Gotham Green took complete control of MedMen and this is a story that we will continue to closely follow.