Big Colorado cannabis companies are expanding their footprints under a new law that opens up the industry to out-of-state investors. As a result of the law, the state’s two biggest companies, Schwazze and LivWell, have been expanding rapidly. Combined, as of this month, they own nearly one in twelve adult use dispensaries in Colorado.
House Bill 19-1090, which went into effect in November 2019, repeals the restriction on publicly traded companies holding a marijuana license and also lets qualified privately held investment companies hold a license. The result has been consolidation and an injection of capital into the cannabis industry. Before this law passed, Colorado businesses felt they couldn’t attract opportunities with national investors because of the state’s strict ownership requirements.
Cannabis companies in Colorado lobbied aggressively for HB 1090. Both Schwazze and LivWell hired lobbyists to push for the bill as it made its way through the legislature. Dispensaries such as Buddy Boy, Lightshade, and The Green Solution also pressed hard for the bill’s passage. Only Colorado Christian University and the City of Commerce City lobbied against the bill.
Schwazze—known until this April as Medicine Man Technologies—was the first Colorado cannabis company to become publicly traded. The Department of Revenue’s Marijuana Enforcement Division approved its application this March.
“Schwazze,” Dan Pabon, the company’s general counsel and chief government affairs officer told Cannabis Wire, “was designed from its inception to be a publicly traded vehicle should the law ever change.” Pabon is a former state representative and sponsored the first attempt at opening up the cannabis market, HB 1011. Former Governor John Hickenlooper, who is running for Senate in the Colorado Democratic primary, vetoed that bill in 2018.
Schwazze is vertically integrated. In addition to its retail shops and cultivation and processing sites, it owns a nutrient line, a consulting firm, and intellectual property for a growing method. (The term “schwazze” comes from the company’s trademarked “Three A Light” technique for increasing the yield of indoor cannabis grows.)
Medicine Man’s founder, Andy Williams, stepped down as CEO in December 2019 and became vice chairman and president before fully departing the company this March. The move made way for Justin Dye, of the Florida-based private equity firm Dye Capital. The firm committed $20 million to Williams’ company in 2019.
But even before Dye moved in as CEO, Williams was scooping up companies with Dye’s investment. Within a week of HB 1090’s passage in May 2019, the company was in contract with MesaPur, the parent company to four shops known as Mesa Organics and the processor Purplebee’s. This June, Schwazze acquired Star Buds, its biggest adult-use retail chain yet, in a cash and stock deal valued at $118 million. Star Buds operates thirteen shops, four in Denver and the rest spread across the Front Range. It also has one cultivation site. The acquisition brings twenty-seven shops under Schwazze. They’re geographically diverse, including Root Rx’s six shops in the state’s ski towns and four Medicine Man-branded shops in the Denver and Boulder metro areas. Both of those companies came with cultivation licenses as well. In total, Schwazze owns six cultivation sites and four processors.
Schwazze owns other odds and ends, too, including two cannabis-infused product brands, Quiq and Nove; and MedPharm Holdings, a cannabis research firm, which was just awarded the first medical cannabis research and development license in Denver.
But not every deal has been a success. This July, Los Sueños Farms terminated a deal with Schwazze. It’s a big loss to the company’s cultivation assets. With thirty-six acres of outside growing operations and 36,000 square feet of greenhouse cultivation, Los Sueños says it’s the largest legal outdoor cannabis farm in the country. Los Sueños founder Bob DeGabrielle resigned from Schwazze’s board last month; he had been serving as the company’s COO since the deal was announced in June 2019.
The southern Colorado dispensary chain Strawberry Fields terminated its acquisition deal this May. Concentrate company Dabble Extracts terminated its deal this July. Colorado Harvest Company, which operates three shops in the Denver area, walked away from a deal with Schwazze this June. In an email to Cannabis Wire, Colorado Harvest Company CEO Tim Cullen said, “As our contract expired, it made sense to step back to reevaluate our goals and direction as a company.” He added that it’s “inevitable” the two companies will cross paths again.
Other Colorado companies are expanding rapidly as well in light of the new law. LivWell Enlightened Health was one of the state’s biggest cannabis retail chains even before HB 1090 passed. It is vertically integrated, like Schwazze, but hasn’t become publicly traded yet. Chief legal officer Dean Heizer said the company is waiting for the appropriate time. “In the interim, we’re using the freedoms that [HB] 1090 granted to us on the private equity side to do some financing.” Among other things, the law lifts background check requirements for “passive” owners (with less than 10% stake) who aren’t otherwise involved with a business.
LivWell’s dispensary total is up to twenty-two after its acquisition of Mindful’s five stores this May. Unlike Schwazze, LivWell’s retail acquisitions transform in name as well. The Mindful shops are expected to take on the LivWell brand name in the next few months.
LivWell has five cultivation licenses registered with the Marijuana Enforcement Division. This April, it bought the edibles maker, Sweet Grass Kitchen. The company has about 700 employees, according to Heizer.
Both companies see HB 1090 as a lifeline for Colorado’s cannabis industry. (Other businesses have also echoed this sentiment, as Cannabis Wire has previously reported.) Industry groups chastised Hickenlooper after he vetoed HB 1011 two years ago. Andy Williams, CEO of Medicine Man Technologies at the time, threatened to move the company out of state.
Hickenlooper’s successor, Governor Jared Polis has been friendlier to the cannabis industry. In response to Hickenlooper’s veto, Polis, then running for governor, tweeted his support of HB 1011. LivWell took note. Within a week, the company (via Beyond Broadway, which does business as LivWell) contributed $25,000 to Bold Colorado, a Political Action Committee supporting Polis. LivWell CEO John Lord later contributed another $25,000 to the PAC. In 2018, Lord also donated $400 dollars to Representative Kevin Van Winkle and $200 to Representative Matt Gray, prime sponsors of HB 1090.
Pabon, of Schwazze, says cannabis enforcement is different now than it was under Hickenlooper. The Marijuana Enforcement Division, under the new Gov. Polis’s administration “has taken the approach where they are actually trying to advocate for and support marijuana businesses,” Pabon said. He described the Division under Hickenlooper as searching for “gotcha” moments.
Travis Haley, a financial analyst at the Marijuana Enforcement Division, said the aim is to work with businesses on enforcing the new law, especially as the agency figures out how to do that. “We want to be collaborative together with the industry. We want to try to find that path forward, that path of least resistance,” Haley said.
Haley added that companies have been diligent with the application process for going public so far. But the Division is girding itself for a flood of money into the industry and the added complexity of transactions under the new law. “We don’t want to be caught flat-footed. We want to be able to be a partner with the industry and with our constituents,” Haley said.
The cannabis conglomerates eating up other businesses around Colorado raise questions about the state’s future. Will small, independent businesses survive all the money pouring into the Centennial State?
Pabon said the market was designed to be accessible for mom-and-pop businesses but that the in-state money that got the state’s cannabis industry running is drying up. Without HB 1090, he said, outside money would have gone to other markets, like California.
“I don’t think it’s necessarily a concern that mom and pops will continue to operate,” Pabon said. “I think it will just be like craft breweries—you know, just very unique offerings. And at the same time, consolidation is the natural economic progression of any industry.”
Clarification: Schwazze’s deals with Medicine Man, Roots Rx, and Star Buds have been announced, but not yet finalized.