Colorado Gov. Jared Polis signed H.B. 19-1090 into law this past summer, opening the door for outside investment and ownership opportunities in the state’s cannabis market, and Diego Pellicer is in turn launching an M&A strategy to take its business to the next level.
The company, which primarily functions as a cannabis brand and development company, has announced letters of intent to purchase a series of yet-to-be-named assets in Denver: a 3,300-square-foot retail store, a 2,287-square-foot cannabis-infused product manufacturing facility and two cultivation facilities with a total of just under 30,000 square feet of grow space.
“We have a series of assets that we are pursuing currently, both the ones we’ve announced and ones that are still in the pipeline,” Diego Pellicer CEO Ron Throgmartin told Cannabis Business Times. “We’ve been patiently waiting for the Colorado market to open up business to publicly traded companies, which we are on the OTCQB. We’ve had very close ties in the marijuana industry … in Colorado but we’ve never, until the recent passage of H.B. 1090, had the opportunity to directly profit from the sale of marijuana, and this is a major shift for Diego Pellicer.”
Until now, Diego Pellicer has operated as a retail development and branding company.
“We’ve wanted to make sure to protect our shareholders, that we allow the market to properly mature, and we did not want to be the first public company that tried to cross those boundaries due to the uncertainty,” Throgmartin said. “We have waited, and we have seen other public companies cross that line, so to speak, and directly profit from the sale of marijuana in states where it was permitted. … We were very excited when Colorado announced its initiative to pass laws to allow public company ownership and it was well-accepted by us because we’d been anxiously awaiting to evolve our business model to include direct profiting from the sale of marijuana.”
The provisions in H.B. 19-1090 allow publicly traded corporations to hold Colorado cannabis business licenses, and qualified private funds based elsewhere in the U.S. may now invest in Colorado cannabis businesses and hold more than 10-percent equity. The law goes into effect Nov. 1.
Although Diego Pellicer must withhold the names of its acquisition targets and wait to formally submit its applications with Colorado’s Marijuana Enforcement Division (MED) until Nov. 1, it has been very involved in the rulemaking process as regulators have drafted regulations to implement the law, and the company moved quickly in entering into its letters of intent.
“Now, from this point forward, we will evolve into contracts as we approach Nov. 1,” Throgmartin said. “The MED set the date of Nov. 1 as the official date that they will accept change of ownership … packages, and those packages will include extensive applications on the company and its primary shareholders and officers for vetting by the Marijuana Enforcement Division, as well as the entity that’s being acquired and the terms of that acquisition, along with the contracts.”
Throgmartin has been immersed in Colorado’s cannabis industry since 2009 and has formed strong business relationships over the past 10 years, which have been the foundation for Diego Pellicer’s acquisition spree.
“I’ve acquired a significant amount of relationships and contacts with peers and industry leaders, as far as I’m concerned, and through those relationships and business dealings is how we selected our acquisitions,” Throgmartin said. “And it was important to us that the acquisitions that we targeted were of like mind as Diego Pellicer, and what I mean by that is that they carry the same kinds of standards that Diego Pellicer represents—the customer service, customer pricing, steadfast respect of regulations and compliance, and a laundry list of [other] priorities needed to be met for us to agree on what we thought was a suitable acquisition, and we’ve accomplished that.”
The company has approximately five other assets it hopes to acquire, in addition to the letters of intent that have already been announced. Each deal takes time, Throgmartin said, as the company works through the regulatory details.
“People outside of Colorado or outside our industry don’t fully understand the nuances that exist and the steps that we have to take,” he said. “It’s outside the norm of a normal business. Obviously, if we were acquiring coffee shops, we wouldn’t have to jump through the hoops that have to be jumped through, but it’s expected in an industry … that’s still federally illegal. It’s our primary focus to make sure we adhere to state laws in the states [in which] we operate, with an eye on federal guidelines to make sure that we put the company in the best possible position we can to prosper.”
Diego Pellicer’s original goal, Throgmartin added, was to one day become a national—and perhaps even international—fully integrated cannabis company.
“Obviously, that is a lofty set of goals that, in our current environment and political structure, are difficult to achieve,” he said. “You have to be patient and you have to achieve them as these opportunities arrive. … Our intent is, when the smoke settles, that Diego Pellicer is a fully integrated, national cannabis company. … We want to make sure that we can control the product and the customer from seed to sale.”
Even with its newly acquired cultivation space, Diego Pellicer will not be able to produce enough cannabis to completely self-sustain its sales, Throgmartin added—but that is part of the plan.
“We don’t want to say to our customers when you come to Diego Pellicer, we’re going to offer you the best product that we produce,” he said. “We’re going to go out and seek the best product that’s available, and at that particular harvest, it may not be what we harvested. So, we will go out and we will find the best available product in the market, whether we’ve grown it or not, and make sure it’s available on the shelves and available to our customers.”
The added cultivation space will, however, give the company more control over product quality and pricing, Throgmartin said.
“Our goal is not to produce cannabis in a surplus,” he said. “Our goal is to supply enough of our own production of cannabis to guarantee and have some control over quality and pricing because … the wholesale market fluctuates a lot. As you look at the landscape of the cannabis industry in Colorado with the laws that exist currently, you can be just a retailer with no production at all. Those retailers are, in my opinion, at a disadvantage because they’re susceptible to market changes and wholesale pricing. They’re susceptible to quality that’s available in the market to be purchased by wholesale. We at Diego believe that it’s important to have enough of our own production in the vertical integration to weather the sharp movements in the market, and that way it guarantees the customer consistent product, consistent pricing, no matter what exists in the market.”
The same concept applies to the company’s newly purchased manufacturing facility, Throgmartin added: “We want to make sure that we have a base and controls over the quality of our concentrates and edibles that are produced, that we have some sort of control of our destiny in the market, no matter which way the market may swing, [but] not to the extent that we’re forcing our products on the shelf and making that the only product that’s available to the customers. We will continue to seek out and purchase and procure the best concentrates and edibles in the market."