When Cannabis Businesses face financial distress

After another rollercoaster of a year, I’m reflecting back on some of the insights my partners and I shared with the Cannabis Industry throughout the COVID-19 pandemic.

One area that we’ve continued to monitor (and have recently become directly involved in) is Bankruptcy and Receivership within the Cannabis Industry. I thought I’d share an update on this topic, as well as highlight a few recent examples.

Despite the prolonged financial uncertainty for many cannabis companies over the past few years, ‘failure’ as a business or investor group is still not really an option. Due to the federal marijuana prohibition, financially distressed cannabis companies face limited options when they need relief from creditors or to restructure their business. Most non-plant-touching businesses in the Cannabis space are ineligible to go through federal bankruptcy reorganization. Any advance in legalizing marijuana at the federal level would impact this.

A strong business strategy requires focus on cost structure, product availability, quality, and investment in customer experience. However, the illicit market and lack of regulation enforcement can still pose a threat to legal operators with sound strategies. This risk, combined with inadequate financing or ineffective management, may lead operators and investors to accumulate more risk than they can ultimately handle. In non-cannabis industries, businesses at similar crossroads often turn to bankruptcy filing and reorganization. However, this is not a viable option for most cannabis businesses due to the federal limitations.

The good news is that there are other options available to cannabis businesses, and they don’t require federal bankruptcy involvement. One path operators can take is to seek assistance from professionals to initiate a process wherein a “receiver” or “reorganization specialist” is appointed by a state court to manage the operation on a temporary basis and handle the reorganization of the company until the business is back on track or the assets are sold or liquidated. This option is more widely known as “receivership”.

Receivership as an Opportunity for Cannabis Businesses

A receivership may offer secured lenders some of the same safeguards and protections available in a Federal Bankruptcy Chapter 11 filing, but with more flexibility in terms of cost, timing, and procedural requirements.

The goals of receivership are similar to bankruptcy in that it is intended to preserve and maximize the value of an operating business for the benefit of its stakeholders. While most think that receivership will lead to the liquidation of a business, it is not necessarily the case, as the process can be flexible enough to allow the business to continue to operate. And if viable, it can continue on its path to success, as long as goals and liabilities are met. More info in a previous article.

Already a few receiverships

In April 2019, CWNevada filed a voluntary petition for Chapter 11 bankruptcy protection amid a flurry of lawsuits from investors and others. A court-appointed receiver took over in June 2019 to keep the company operational until its assets could be redistributed to creditors. The company was facing over $200 million in claims. The assets were liquidated for just about $13 million.

With regulations adopted by the Cannabis Control Commission (CCC) of Massachusetts, a Receiver was appointed in November 2021 for Ermont Inc, a medical retail and cultivation entity operational since 2016 in the state, taking control of the company’s assets and operating the business and marketing the assets for sale. Ermont may be in a position to continue its medical marijuana operations, while focusing new efforts towards capitalizing on adult-use opportunities within its existing market. Time will tell.

Don’t be surprised to see more receivership for cannabis companies this year.