Cannabis businesses face unique challenges when confronted with economic difficulties and financial challenges in an industry suffering from a lack of institutionalized capital. While cannabis remains federally illegal, bankruptcy court protection is denied to plant-touching and, in some circumstances, ancillary companies. Scott Moskol, co-chair of Burns & Levinson’s Cannabis Business Advisory Group, moderated the first panel at the firm’s Fourth Annual State of the Cannabis Industry Conference, exploring both the judicial and non-judicial options for operators, secured creditors, investors, and other stakeholders in the context of distressed transactions as well as other financial issues affecting the industry.
The panel opened with a brief discussion on the apparent financial strength of the cannabis industry, even despite the economic repercussions of the pandemic. Vicente Sederberg’s Charles Alovisetti noted that at the start of the COVID-19 crises there was widespread concern over the financial health of the industry but, the anticipated volume of distress did not materialize. Nonetheless, Mr. Alovisetti cautioned that some cannabis companies will experience distress and, therefore, it is vital that we consider the important questions that will arise in those circumstances – namely, what will happen to a distressed business’ most valuable asset: its license?
Our panel then examined the current level of distress in the industry and whether any trends have been detected. “Like many businesses, cash becomes a challenge, and for cannabis companies, it is even more of a challenge because access to capital is not nearly as varied,” explained Cynthia Romano of CohnReznick. As we have previously noted, access to banking and other financial services has remained a consistent barrier to access to working capital in the legal marijuana industry. However, there has been an expansion in credit union participation.
Ms. Romano further explained that while non-cannabis businesses availed themselves of the federal government’s COVID stimulus funding, including the Paycheck Protection Program (PPP), cannabis companies were not eligible to participate in these programs due to marijuana’s federally illegality. Sharing similar concerns, John Brecker of Altitude Investment Management asserted that the proliferation of traditional institutional capital will launch the industry into its next phase of growth. In the absence of such capital, Mr. Brecker claimed the national cannabis market has been bifurcated into (i) large multistate operators who are continuing to raise money and (ii) smaller single-state operators who have seen their access to capital slow. Moreover, various panelists noted that the lack of capital had spurred a shift in operators’ focus from acquisition to actual operational stability. This development will undoubtedly shape the character of the industry.
Additionally, the panel discussed both the judicial and non-judicial remedies for distressed companies in the cannabis space. In the non-judicial context, Ms. Romano explained the relevant considerations if a distressed business appoints a chief restructuring officer or CRO. With respect to the judicial context, cannabis businesses are prevented from utilizing the federal bankruptcy law. However, state receivership statutes present one judicial option for operators, and the panel expounded on these possibilities in its discussion of the new proposed receivership process for cannabis operators, which will be implemented in Massachusetts.