California delivery software company Eaze has finally gotten fed up with DionyMed’s (CSE: DYME) (OTC:DYMEF) accusations and filed a countersuit on Tuesday against the company. For DionyMed, it comes at a pretty bad time. The company just accepted the resignation of its COO Pete Hilliard and is restructuring its debt. Plus, the stock was halted in trading. So, where to begin?
2019-09-18 Eaze Technologies, Inc.’s Cross-Complaint
Let’s start with the Eaze lawsuit. Back in April, DionyMed terminated its contract with Eaze and claimed that “Based on review by outside counsel, DYME could not confirm that the processing procedure meets California regulatory requirements.” The company said it was going to invest in its own delivery service called “Chill.” DionyMed through its dispensary store Hometown Hearts claimed that Eaze was using shell accounts to create fraudulent charges and payment processing, which was the excuse it needed to terminate a three-year contract.
The only problem was that Eaze doesn’t process payments. It merely provides the software that facilitates the transaction between the consumer and the dispensary. The third-party processing companies would have been accounts that Hometown Hearts through its parent company Herban set up, not Eaze. Eaze said it can suggest payment processors and works with them, but doesn’t actually process the payment. The relationship is between the dispensary and the payment company.
Eaze is accusing DionyMed of dirty tricks in an effort to destroy the company and take over its business. “The defendants’ unethical and unscrupulous conduct has not only injured Eaze, it has created a threat to cannabis consumers, retailers, and the industry at large,” said Eaze’s Chief Risk Officer Andrea Lobato, “We intend to show how DionyMed’s campaign of dirty tricks was designed to confuse cannabis consumers and drive them to DionyMed’s competing platform, undermining all of the licensed brands and retailers that utilize the Eaze platform.”
DionyMed poached key employees like Evan Tenenbaum who was one of the first Eaze employees. Tenenbaum joined DionyMed’s board while also creating a logistics company called Rise Brands which was subsequently acquired by DionyMed for $8 million. Maurissa McCarthy was also hired from Eaze to run marketing for the new competing Chill platform.
DionyMed, then acquired the dispensary Hometown Heart, also from Tenenbaum (according to the Eaze lawsuit) for $6 million with a potential amount rising to $12 million. Hometown Heart had been a big part of the Eaze volume business. It wasn’t until DionyMed was ready to move to the Chill platform that it expressed issues with Eaze. Up until that point, Hometown Hearts was using Eaze and raking in millions while doing so. Canaccord Genuity analyst Bobby Burleson accurately predicted that Hometown Hearts sales would decline with the loss of the Eaze contract as the Chill platform was put into place, except Chill only accepted cash. Sales did decline, but for now, we’ll stick to the lawsuit.
Eaze also notes in its countersuit that Hometown Heart knew that the payment processors it accused of fraud, were its own processors, not Eaze’s. Eaze also claims its business was hurt by DionyMed accusing the company of fraudulent charges. Plus, the timing of the accusations right before the April 20 holiday affected Eaze’s ability to fulfill orders at the biggest sales day in the cannabis industry. Eaze says that the intention from Hometown Hearts was that the move would crush Eaze at an important time.
Hometown Heart also had access to the Eaze’s customer list and began targeting them for business and suggesting a link between Chill and Eaze, which wasn’t true, while at the same time suggesting Eaze was engaging in fraudulent credit card processing.
Eaze had tried to get the DionyMed case dismissed, but on September 11, a judge ruled the case could move forward. However, the judge stated in the court transcript that he didn’t believe DionyMed could prove its accusations. DionyMed saw this as a win for its side.
“Eaze’s alleged decision to terminate online card payments and cease working with EU Processing shortly after our complaint was filed is a powerful admission of guilt, and an acknowledgment that the allegations in our complaint are true. Those changes don’t go far enough,” said DionyMed CEO Edward Fields. “We are pleased with the court’s decision to allow our lawsuit to proceed. We will continue until the direct-to-consumer cannabis delivery playing field is level for all market participants, and Eaze has compensated DionyMed for the massive damages its conduct has caused our company and shareholders.” EU Processing, however, was the company hired by DionyMed to process the payments, not Eaze.
DionyMed’s shares were halted in trading on Tuesday when the company announced it was restructuring its debt facility and opened back up for trading on Thursday morning as the stock slid over 30%. According to the company statement, DionyMed “Announced additional investment from its senior secured investor of $3.2MM and a reorganization of the business to right-size the Company. This increases the credit facility with the senior lender to US$19.2 MM. The credit facility bears interest at LIBOR (at a floor of 2.5%) plus 12% plus an anniversary fee of 2.5%, maturing February 6, 2021. While the credit facility is currently in default, the senior lender has agreed to make additional advances to the Company.” DionyMed will cut its employees from 299 to 199 and focus on the delivery service Chill.
Gotham Green Partners had provided a $2 million secured convertible note in August at an eye-popping interest rate of 12.5%. The notes are convertible into warrants at C$1.45, but the stock was halted at $0.56 a share. The company also announced today that “Gotham Green has issued a request for repayment of its outstanding balance of $2.2 MM representing the credit advance made on July 30, 2019 plus accrued and unpaid interest.”
“With respect to these changes,” said DionyMed CEO Ed Fields, “we’re looking forward to improving market efficiencies and getting the business to breakeven at an accelerated pace. We’re excited about finalizing a deal with the right strategic partner and injecting the capital necessary to drive DionyMed forward as a leader in the cannabis industry.”
In addition to the debt restructuring, DYME said its COO Peter Hilliard resigned and the company hired Mark Zinselmeier to take his place. Zinselmeier was working as a consultant on the Chill platform and will now focus on growing that business.
DionyMed continues making the odd claim that Eaze is behind its payment processing, which isn’t the case because as Eaze will say repeatedly, “It doesn’t process claims.” Even more strange is that Hometown Heart had its delivery license revoked. According to CannaBiz Media, State License A9-18-0000032-TEMP for Hometown Heart was issued January 26, 2018, expired August 19, 2019 and on September 16, 2019 was updated as “Revoked.” This was confirmed on the California Bureau of Cannabis Control website. Yet, just two weeks ago, DionyMed was announcing it had been awarded the license, even though it had been expired on 8/19/2019.
“DionyMed today also announced the award of a non-storefront retail provisional license in San Francisco, issued to Hometown Heart, a licensed California delivery service managed by DionyMed. The license allows DionyMed to deliver within San Francisco and the surrounding cities, the company’s largest direct-to-consumer market with more than 20,000 deliveries since its Chill Concierge Cannabis Delivery began service in April 2019.”
Although DionyMed did note in its September 4, filing that “The Bureau of Cannabis Control has approved Hometown Heart’s application M9-18-0000278-APP for a provisional license pursuant to Business and Professions Code section 26050.2 “ That filing was the credit agreement for $2 million, that was later upped to $3.35 million.
Also, on September 4th Canaccord analyst Bobby Burleson wrote, “”While we are cutting our estimates due to capital constraints on growth and elevated costs, DYME’s announcement that the company has hired an adviser to assist in managing discussions with potential strategic partners is highly constructive, in our view, and warrants we maintain a SPEC BUY rating. We note that major MSOs have been accelerating their entry into the California market through investments in brands and distribution. DYME appears well-positioned in both regards, and with a growing home delivery platform its distribution capability spans wholesale and retail, marking the company as an attractive asset. Our price target remains C$6″
However, it should be noted that in an August 29 filing the company said that “On May 7, 2019, DionyMed closed a bought deal private placement financing with a syndicate of agents co-led by Canaccord Genuity Corp. and Cormark Securities Inc. for 3,822,055 units of the Company at a price of C$2.75 per Unit for aggregate gross proceeds to the Company of $7,148,824.” So Canaccord was clearly underwater when it continued praise the company.
DionyMed didn’t respond to a request for comment. Public Relations firm KCSA said the company was no longer a client