Tag Archives: Federal

Intimate Care Products with Cannabinoids Need More Safety Data

By Cindy Orser, PhD
No Comments

Cannabinoid products for intimate care use are now being sold in the unregulated cannabidiol (CBD) marketplace without proper evaluation of their impact on the vaginal microbiota or women’s health. Cannabinoids can exhibit complex and at times contra intuitive actions. The addition of CBD to these products is presumably for its anti-inflammatory pain-relieving qualities even though little is understood with regards to dosing and formulating. Moreover, in states where cannabis is legal, tetrahydrocannabinol (THC) along with other minor cannabinoids are also being added to intimate care products without purview of any federal agency. In general, the impact of vaginal products on vaginal microbiota is poorly understood. Ten years ago, Jespers et al. (2012) proposed to monitor lactobacilli indicator species of the vaginal microbiota in safety trials of intimate care products. Yet today, human safety data are not required prior to commercialization of intimate care products which are currently regulated like cosmetics except for lubricants which do require a 510K filing with the FDA.

The vaginal microbiota (VMB) of healthy women is dominated by Lactobacillus species, which exert important health-promoting effects to their host through the production of antimicrobial compounds, including hydrogen peroxide and lactic acid, to prevent invasive microbes from establishing in the vaginal epithelial mucosa (Pino et al. 2019). It was established almost 40 years ago by Speigel et al. (1983), that changes to the dominant Lactobacillus species, a process called dysbiosis, and overgrowth by diverse anaerobes can result in symptomatic conditions including bacterial vaginosis (BV), vaginal candidiasis, pelvic inflammation, and endometriosis (Taylor et al. 2013). The conditions resulting from dysbiosis are also linked to fertility problems, poor pregnancy outcomes, spontaneous miscarriages and preterm birth (Laniewski et al 2020).

An example of an infused intimate care product, the Foria Awaken Arousal Oil with CBD

Complications from dysbiosis of the reproductive tract can be serious in women wanting to become pregnant and in already pregnant women, including preterm premature rupture of membranes, spontaneous preterm labor and preterm birth (Ventolini et al. 2022). Reproductive tract microbiomes from idiopathic infertile women differ from fertile women’s VMB (Tomaiulol et al. 2020; Wee et al. 2018). Numerous studies have documented the vaginal community type microbiota associated with occurrence of BV around the world showing that HIV load is inversely proportional to lactobacilli species but positively correlated with BV (Sha et al 2005) as well as endometrial and ovarian cancer development (Walther- Antonio et al. 2016; Zhou et al. 2019).

Sexual lubricants often contain antimicrobial preservatives that have been shown to directly impact lactobacilli species in the cervicovaginal microbiome. The deterioration or absence of the lactobacilli-dominated vaginal mucosal biome through exposure to over-the-counter lubricants has been linked to increased incidence of BV (Brotman et al. 2010) and release of IL-8, a proinflammatory innate immunity mediator, produced by human epithelial cells to recruit leukocytes in response to infection, initiating an inflammatory response (Fashemietal.2013). The addition of under-researched cannabinoids to these products introduces the potential for further biological activity. Cannabinoids are widely reported to exhibit anti-microbial activity in vitro. The mechanism of CBD’s anti-microbial activity is thought to be due to its ability to intercalate into cytoplasmic membranes (Guard et al. 2022) and thereby modulate membrane vesicle (MV) release from bacterial cells which is associated with cell-to-cell communications (Kosgodage et al. 2019). Treatment of the gram-negative bacteria, E. coli, with CBD inhibited MV release and resulted in higher susceptibility to antibiotics but had minimal impact on gram- positive bacterial MV release. And CBD has recently been documented to inhibit the common human fungal pathogen, Candida albicans, from forming biofilms due to increased membrane permeability, reduced ATP levels, and modified cell walls (Feldman et al 2021).

In other reporting, the in vitro antimicrobial properties of CBD were demonstrated to have selective activity across a wide range of gram-positive bacteria, including several antibiotic resistant and anaerobic strains, with minimum inhibitory concentrations (MIC) in the low ppm range (Blaskovich et al. 2021). The conditions of a study impacted the observation of inhibition; for example, if human sera were present in the assay media, the antibacterial activity was drastically reduced. This has been attributed to CBD’s propensity to bind to non-specifically to proteins and thereby become unavailable (Tayo et al. 2018). Surprisingly, CBD does not exhibit broad antibacterial activity against Gram-negative species except against the human pathogens: Neisseria gonorrhoeae, N. meningitides, Moraxella catarrhalis, and Legionella pneumophila (Blaskovich et al. 2021). Bacteria do not develop resistance to CBD, but CBD is also non-systemic because of its high serum binding activity (Tayo et al. 2018).

The active ingredients in intimate care products can impact beneficial microorganisms but also deleterious ones. CBD has become a widespread, understudied active ingredient for women’s health. Today the molecular screening tools exist to conduct large scale epidemiological studies to further understanding of the consequences of dysbiosis and document the adverse effects on women’s reproductive health outcomes. Preventative treatments to reestablish dominant lactobacilli, in particular L. crispatus could have big impacts on not only women’s health but public health (Borgdorff et al. 2014).

As Ley R (2022) recently opined on the human microbiome, “there is much left to do.” Microbiomes are essential to the proper functioning of our bodies affecting social engagement, mental health, obesity, and disease states, and little is known about differences in microbiota across different groups of humans. More research is needed on the biological activity of cannabinoids as well as regulatory oversight to protect the health and safety of consumers.

References

  1. Blaskovich MAT, Kavanagh AM, Elliott AG, Zhang B, Ramu S, Amado M, Lowe GJ, Hinton AO, Thu Pham DM, Zuegg J, Beare N, Quach D, Sharp MD, Pogliano J, Rogers AP, Lyras D, Tan L, West NP, Crawford DW, Peterson ML, Callahan M, Thurn M (2021) The antimicrobial potential of cannabidiol. Commun Biol 4:7
  2. Borgdorff J, Tsivtsivadze E, Verhelst R, Marzorati M, Jurrrians S, Ndayisaba GF, Schuren FH, van de Wijgert J HHM (2014) Lactobacillus-dominateed cervicovaginal microbiota associated with reduced HIV/STI prevalence and genital HIV viral load in African women. The ISME J 8:1781-1793.
  3. Brotman RM, Ravel J, Cone RA, Zenilman JM. (2010) Rapid fluctuation of the vaginal microbiota measured by Gram stain analysis. Sex Transm Infect 86(4):297-302.
  4. Fashemi B, Delaney MA, Onderdonk AB, Fichorova RN (2013) Effects of feminine hygiene products on the vaginal mucosal biome. Microbial Eco in Health & Disease 24:19703-08.
  5. Feldman M, Sionov RV, Mechoulam R, Steinberg D (2021) Anti-biofilm activity of cannabidiol against Candida albicans. Microorganisms 9:441-457.
  6. Ilha EC, Scariot MC, Treml D, Pereira TP, Sant’Anna ES, Prudencio ES, Arisi ACM (2015) Comparison of real-time PCR assay and plate count for Lactobacillus paracasei enumeration in yoghurt. Ann Microbiol 66:597-606.
  7. Jespers V, Menten J, Smet H, Poradosu S, Abdellati S, Verhelst R, Hardy L, Buve A, Crucitti T (2012) Quantification of bacterial species of the vaginal microbiome in different groups of women, using nucleic acid amplification tests. BMC Microbiol 12:83.
  8. Kosgodage U et al. (2019) Cannabidiol is a novel modulato of bacterial membrane vesicles. http://doi.org/10.3389/fcimb.2019.00324.
  9. Laniewski P, Ilhan ZE, Herbst-Kralovetz MM (2020) The microbiome and gynaecological cancer development, prevention, and therapy. Nat Rev Urol 17(4):232-250.
  10. Laniewski P, Owen KA, Khnanisho M, Brotman RM, Herbst-Kralovetz MM (2021) Clinical and personal lubricants impact growth of vaginal Lactobacillus species and colonization of vaginal epithelial cells: an in vitro study. Sex Transm Dis 48(1):63-70.
  11. Ley R (2022) The human microbiome: there is much left to do. Nature p. 435
    Pino A, Bartolo E, Caggia C, Cianci A, Randazzo CL (2019) Detection of vaginal lactobacilli as probiotic
  12. candidates. Sci Rep 9:3355
  13. Sha BE, Zariffard MR, Wang QJ, Chen HY, Bremer J, Cohen MH, Spear GT (2005) Female genital-tract HIV load correlates inversely with Lactobacillus species but positively with bacterial vaginosis and Mycoplasma hominis. J Infect Dis 191:25-32.
  14. Spiegel CA, Davick P, Totten PA, Chen KC, Eschenbach DA, Amsel R, Holmes KK (1983) Gardnerella vaginalis and anaerobic bacteria in the etioloty of bacterial (nonspeecific) vaginosis. Scand J Infect Dis Suppl 40:41- 46.
  15. Taylor BDP, Darville T, Haggerty CL (2013) Does bacterial vaginosis cause pelvic inflammatory disease? Sex Transm Dis 40:117-122.
  16. Tayo B. (2018) Exploration of the potential for plasma protein binding displacement and drug-drug interactions of valproate in combination with cannabidiol [abstract] Amer Epilepsy Soc Ann Mtg. New Orleans LA.
  17. Ventolini G, Vieira-Baptista P, DeSeta F, Verstraelen H, Lonneee-Hoffmann R, Leeev-Sagie A (2022) The vaginal microbiome: IV. The role of vaginal microbiome in reproduction and in gynecologic cancers. J Lower Genital Tract Dis 26(1):93-98.
  18. Walther-Antonio MRS, Chen J, Multinu F et al. (2016) Potential contribution of the uterine microbiome in the development of endometrial cancer. Genome Med 8:1-15.
  19. Zhou B, Sun C, Huang J et al. (2019) The biodiversity composition of microbiome in ovarian carcinoma patients. Sci Rep 9:1691.

M&A in Cannabis: A Guide for Buyers and Sellers

By Abraham Finberg, Rachel Wright
No Comments

Mergers and acquisition activity in the cannabis space tripled from 2020 to 2021, and that pace is on track to continue in 2022. With big players entering the global cannabis market, we’re fielding more questions about mergers and acquisitions of cannabis businesses.

In this guide, we look at the evolution of the U.S. cannabis industry and some best practices and considerations for M&A deals in this environment.

The New Reality of Cannabis M&A Activity

The industry has evolved since adult use cannabis was first legalized in some U.S. states in 2012. More cannabis companies have a professional infrastructure—legal, financial and operational—with executive teams and board members ensuring the organization establishes proper governance procedures. Investors and private equity firms are showing more interest, and some cannabis companies have celebrated their first IPOs on the Canadian Securities Exchange (CSE).

At the same time, we are seeing a kind of “market grab” by multistate operators (MSOs) looking to acquire various licenses and expand their market share. MSOs tend to understand the current state of the market. For example, in California and some other states, there is a surplus of cannabis on the market for various reasons, partially due to so-called “burner distribution”—rogue distributors using licenses to buy vast amounts of legally grown cannabis at wholesale prices and selling the product on the black market, thereby undercutting retailers and other legal cannabis businesses. Another reason for the surplus is simply the entrance of many legal cultivators into the market over the past year.

Due to these trends, MSOs are interested in acquiring the outlets to be able to sell the surplus cannabis within California and other new markets.

Transferring Cannabis License Rights

One of the biggest challenges to M&A activity in the cannabis sector is the difficulty of transferring or selling a cannabis license.

Different types of cannabis licenses in California

Cannabis licenses are not expressly transferable or assignable under California law and many other states. However, the parties involved aren’t without options. For example, a business that is sold to a new owner may be able to retain its existing cannabis license while the new owner’s license application is pending, as long as at least one existing owner is staying on board. At the state license level, a change of up to 20% financial interest does not constitute a change in ownership, although the Bureau of Cannabis Control (BCC) must be notified and approve the change.

This process can take a while—often a year or more—since licensing involves overcoming hurdles at the local level as well as the state level with the BCC. It’s crucial to talk with legal counsel about the particulars of the license and location early in the process to best structure the terms of the agreement while complying with state and local requirements.

Seeking a Tax-Free Reorganization in the Cannabis Space

In many cannabis mergers and acquisitions, the goal is to accomplish a tax-free reorganization, where the parties involved acquire or dispose of the assets of a business without generating the income tax consequences that would result from a straight sale or purchase of those assets.

IRC Section 368(a) defines various types of tax-free reorganizations, including:

Stock-for-stock exchanges (IRC Section 368(a)(1)(B)

In a stock-for-stock reorganization, all of the target company’s stock is traded for a portion of the stock of the acquiring parent corporation, and target company shareholders become minority shareholders of the acquiring company.

Often, it’s tough to meet the requirements to qualify for this type of tax-free reorganization because at least 80% of the target stock must be paid for in voting stock of the acquirer.

Additionally, companies may be saddled with too much debt. If the acquirer assumes that debt, it may be classified as consideration paid to the seller and therefore disqualify the transaction as a tax-free reorganization.

In other M&A deals, the acquiring corporation may be unwilling to assume the debt of the target corporation—perhaps because showing these items on its balance sheet would impact its debt-to-equity and other financial ratios.

Stock-for-asset exchanges (IRC Section 368(a)(1)(C)

Rather than acquiring the target company’s stock, the acquirer may purchase its assets. In a stock-for assets exchange, the buyer must purchase “substantially all” of the target’s assets in exchange for voting stock of the acquiring corporation.

A stock-for-assets format offers the buyer the benefit of not having to assume the unknown or contingent liabilities of the target. However, it’s only feasible if the acquirer purchases at least 80% of the fair market value of the target’s assets AND all or virtually all of the deal consideration will be stock of the acquirer.

Tax Consequences Arising from Sale of Assets

If the sale price doesn’t consist primarily of the buyer’s stock, the transaction may be a standard asset sale. This leads to very different tax results.

If the seller is a C corporation, it will typically face double taxation—paying tax once on the sale of assets within the corporation and again when those profits are distributed to shareholders. If the target company has net operating losses (NOLs), it can use those NOLs to offset the tax hit.

If the seller is an S corporation, it won’t have to pay corporate tax on the transaction at the federal level. Instead, shareholders will pay tax on the gain on their individual returns.

For the buyer, the benefit of an asset sale is that the assets acquired get a “step-up basis” to their purchase price. This is beneficial from a tax perspective, as the buyer can depreciate the assets and may be able to claim accelerated or bonus depreciation to help offset acquisition costs.

Reverse Triangular Merger

Often, in practice, we come across what is termed as a reverse triangular reorganization. In this type of merger,

  1. The acquiring company creates a subsidiary,
  2. The subsidiary merges into the target company before liquidating,
  3. The target company then becomes a subsidiary of the acquirer, and
  4. The target company’s shareholders receive cash.

Structuring the deal this way may work to overcome the hurdle of transferring the license but may not qualify as a tax-free reorganization.

Bottom Line

The circumstances and motivations for mergers and acquisitions in the cannabis industry are diverse. As a result, there is no one-size-fits-all approach to structuring the transaction. In any event, it’s crucial to start the process early and seek advice from legal counsel and tax advisors to minimize the tax burden and ensure that both parties to the transaction get the best deal possible. If you need assistance, contact your 420CPA strategic financial advisor.

ASTM Approves New Cannabis Standards

By Cannabis Industry Journal Staff
No Comments

According to a press release sent out today, ASTM International’s D37 cannabis committee has approved three new standards for environmental conditions during packaging, shipping and storing cannabis and hemp flower. The three new standards are:

  • Standard Specification for Environmental Conditions for Post Packaged Storage and Retail Merchandising of Cannabis/Hemp Flower (soon to be published as D8423);
  • Standard Specification for Environmental Conditions While In-Transit for Packaged Cannabis/Hemp Flower (soon to be published as D8432); and
  • Standard Specification for Environmental Conditions While Packaging Cannabis/Hemp Flower (D8450).

ASTM members will be presenting at the Cannabis Quality Conference & Expo, October 17-19 in New Jersey. Click here for more information. Jonathan DeVries, a member of ASTM, says these standards are designed for the entire cannabis supply chain, from cultivation, manufacturing and transportation all the way to the end consumers. “These standards are designed to support the safety and quality of packaged cannabis and hemp flower as it moves through the supply chain,” says DeVries. “This includes the activities following curing and drying, namely packaging, transit, and storage, until it reaches the final end user.”

The ASTM D37 committee is working on a number of other standards related to these and they invite anyone interested to share their feedback.

PlantTag

The B2B Marketplace Trend Comes to Cannabis (Finally)

By Adam Benko, Brian Mayfield
No Comments
PlantTag

Ancillary services are a hot topic in the cannabis industry, as they are in many niche industries turning to B2B marketplaces to connect with specialized expertise and products.

Platforms such as Amazon Business, Flexport, SupplyHog and others have emerged to connect mainstream business sectors with the vendors and services they need, but things look a lot different in the cannabis space. The many disparate aspects of launching, running and scaling a cannabis business—and vetting dozens of service providers clamoring for your business—can feel like playing whack-a-mole blindfolded.

While a business consultancy can do some of the heavy lifting, there are reasons why this traditional “one-size-fits-all” approach is problematic. However, the rise of legalization is creating new avenues for founders in both established and emerging markets to take charge of their destiny and secure the services that truly meet their needs.

Understanding what’s available can help founders avoid pitfalls, from inadequate insurance coverage and predatory lenders to inexperienced service providers seeking to cash in on the “green gold rush.”

The Importance of Regulatory Knowledge

One reason B2B services look so different in the cannabis industry is because the industry itself is still rapidly evolving, as new state markets for medical cannabis and recreational adult use come online and states constantly amend their regulations. There’s also the sprawling scope of compliance requirements facing a cannabis operator, from securing tightly zoned real estate to building a facility with adequate security, to integrating into the state’s seed-to-sale tracking system.

PlantTag
A plant tagged with a barcode and date for tracking

It’s critical to engage with experts who are knowledgeable on the regulatory variances of the state (or states) where the business will operate. Someone who has experience interpreting cannabis regulations will know, for example, if you should have a real estate lease locked in prior to applying or if a particular state would prefer you move through the pre-opening process in a different order.

Another reason ancillary services are so important is that cannabis regulations aren’t standardized on the federal level or even state to state, which requires an especially deep, granular level of understanding of market trends and compliance demands. That can make the difference not only between a successful business launch and a swift nose dive, but also between a business surviving a major disaster or setback and becoming past tense.

Insurance and Lending Issues

Every business owner knows they need insurance, for example, but not every insurance broker knows what specific coverages to lock in to ensure a payout if a dispensary is vandalized or if a wildfire burns a grow operation to the ground. While federal legislation like the Clarifying Law Around Insurance of Marijuana (CLAIM) Act could one day make it easier for national insurance companies to serve legal cannabis businesses, currently criminal conduct exclusions can be used to keep plant-touching business owners from getting their full payout.

Fires in Sonoma County devastated cannabis crops in Northern California back in 2017.

Not only does federal prohibition make it challenging for a cannabis business operator to find proper insurance coverage, access financial networks and establish employee benefits programs to keep industry jobs competitive, even seeking investment capital can leave cannabis companies exposed to unfavorable terms. Just look at the case of iAnthus, a multistate operator that claims to have been burned in a deal with Gotham Green Partners while looking for expansion funding.

So how can cannabis leadership locate and vet professional services, particularly in the critical startup stage when it feels like everything has to happen right away? That’s where the B2B marketplace trend comes in.

The Advent of Vendor-Agnostic B2B Marketplaces for Cannabis

While platforms such as Amazon Business have offerings for a variety of mainstream industries, they’re not tailored for cannabis. But there is a growing field of vendor-agnostic specialists helping cannabis founders make the right moves.

Vendor-agnostic consultancies are nimble and adaptable in a way that broad-scale platforms are not

Necessity absolutely produced this particular innovation, which upends the traditional single-funnel consultancy model to instead create a village that can raise a variety of cannabis businesses. Vendor-agnostic consultancies are nimble and adaptable in a way that broad-scale platforms are not. And rather than being tied to a particular suite of products and service providers the way traditional business consultancies often are, the vendor-agnostic approach gives both consultants and cannabis founders much-needed flexibility.

In a cannabis B2B marketplace, a pool of inventory-tracking software vendors, for example, can be sorted to allow for easy comparison shopping based on whether the operator is a single-state startup looking for basic integration with the state compliance system, or an MSO that needs a more robust platform. And the customization extends from there—vertically integrated businesses versus standalone wholesale producers, plant-touching businesses versus other professional service providers and beyond.

As more and more industries specialize, it’s no wonder ancillary services are having a renaissance and replacing the traditional one-size-fits-all model popularized decades ago. But it’s also no wonder that the cannabis industry needs an especially unique approach to professional support for niche fields. The more this industry expands, the more founders and their B2B partners need to roll with their own solutions.

An Interview with Bespoke Financial Co-Founder & CEO George Mancheril

By Aaron Green
No Comments

Founded in 2018, Bespoke Financial is the nation’s first fintech lender focused on the cannabis industry. Led by a premier team of experts in the credit, technology and cannabis industries, Bespoke Financial has financed more than $800M in GMV across the US cannabis industry and is on track to deploy $1B by end of year 2022 via their revolving lines of credit. Bespoke’s financing empowers cannabis companies to increase purchasing power, remove working capital limitations and accelerate growth in a rapidly growing industry. The company is backed by respected venture capital firms such as Casa Verde Capital, The General Partnership, Greenhouse Capital Partners and Ceres Group Holdings.

Bespoke recently entered into a milestone partnership with Blaze as the cannabis industry’s first tech-enabled B2B lending product available in CA & MA. Through this partnership, Bespoke and Blaze will be the first to bring “Buy Now Pay Later” to the industry. With just the click of a button, vendors can utilize this BNPL feature by paying directly within the Blaze platform via Bespoke’s financing with a 60-day repayment term on all vendor payments while minimizing dispensaries’ reliance on cash transactions. 

We caught up with George Mancheril, co-founder and CEO of Bespoke Financial to learn more about trends in cannabis lending and their unique partnership with Blaze. George was the company’s CFO prior to taking the CEO position in 2019. Prior to Bespoke, George was a VP at Guggenheim Partners in California. 

Aaron Green: What does it mean to be a fintech lender in cannabis?

George Mancheril: Bespoke Financial is a first mover in fintech lending for the cannabis industry, equipped with a robust network of investors, industry expertise and a multi-year track record solidifying our credibility in the space. We are focused on working with established cannabis companies who can use our financing to unlock growth, profitability, and success in the near- and long-term future.

Cannabis lenders must navigate a complex web of both cannabis and financing regulations, specific to each state, while trying to identify good borrowers in a nascent industry comprised of new companies. This has caused banks, traditional lenders, and institutional investors to avoid cannabis despite the unique growth opportunities and economic potential of the industry overall.

Green: What makes Bespoke different from other cannabis lenders in the business?

Mancheril: Unlike the few cannabis lenders active in the market, Bespoke Financial combines best-in-class technology and lending products designed to address the specific financing needs of the industry to better serve our clients. Our tech platform offers a simple interface for our clients to easily access financing, monitor loan balances, and manage payments. Bespoke’s technology allows us to service a broad array of clients in numerous markets across the US, offering our clients a reliable financing partner for their immediate and future needs.

Green: What markets do you serve in cannabis? Are you able to finance plant-touching operations?

George Mancheril, Co-Founder & CEO of Bespoke Financial

Mancheril: Bespoke works with cannabis companies across the entire supply chain within 15 U.S. cannabis markets, with the vast majority of our borrowers being plant-touching operations, Our portfolio comprises cultivators, manufacturers, distributors, dispensaries, non-plant touching cannabis brands, ancillary service providers and CBD companies. Our financing options have helped a wide variety of cannabis operations overcome working capital limitations and capitalize on new growth opportunities and increase profitability.

Green: You recently announced a “Buy Now Pay Later” partnership with Blaze. What problems do dispensaries have that you are solving for there?

Mancheril: As broader economic activity slows in the US with the threat of a recession impacting both businesses and consumers, dispensaries face supply, demand, and fundraising challenges:

  1. Consumer demand challenges:
    1. Cannabis consumers in 2022 are significantly more price sensitive than recent years for several reasons.
      1. High inflation over the past 1yr+ has reduced disposable income for consumers in the US.
      2. Post-COVID return to normalcy has allowed consumers to spend disposable income on many goods and services which were largely been unavailable since the beginning of 2020 (ie travel).
      3. Concern about a recession and slower wage growth has further reduced consumer spending.
      4. Illicit cannabis has always been the main competition for legal dispensaries with little enforcement or curtailing of black-market activity to note in the US.
    2. New cannabis consumers are gravitating towards smaller (but growing) product categories (edibles, concentrates, infused beverages, etc.) as opposed to just purchasing packaged flower. Dispensaries must carry a wide array of products and brands in order to better attract and service new and existing customers.
  2. Supply side challenges:
      1. Mature cannabis markets, such as California, have been saturated with over supply since Q2 2021 leading to inventory build ups and declining wholesale prices for cultivators, manufacturers, and brands (collectively referred to as suppliers). In this environment, suppliers are offering discounts to incentivize customers (i.e. dispensaries) who can:
        1. Purchase larger quantities more frequently to allow suppliers to move inventory before the product quality degrades.
        2. Pay COD for purchases as cashflow and capital are very important for suppliers during periods of economic stress.
      2. Dispensaries without the financial means to conform to suppliers’ preferences will be at a considerable disadvantage as they will continue to have trouble sourcing popular products at the lowest possible cost.
  1. Fundraising challenges:
    1. Cannabis’ federal illegality has resulted in a much smaller universe of potential capital providers. Once a potential lender or investor is identified, typically the application process requires time and resources to complete which puts dispensaries in an especially disadvantageous position. Large MSOs, who tend to attract most of the available capital, can rely on internal finance teams to source capital whereas dispensaries are much more constrained and require a simpler, faster, and easier application process.

Our partnership with Blaze to offer B2B BNPL to dispensaries addresses these challenges and more. With access to our financing, dispensaries are empowered with:

  1. Fast access to financing without a lengthy application process, entirely housed within the Blaze POS’ platform
    1. Dispensaries on the Blaze platform do not need to seek out lenders or weigh various financing options.
    2. No materials need to be gathered for the application.
    3. At the click of a button, dispensaries gain access to capital which they are free to use as they see fit with no obligation.
  1. Easy to understand financing
    1. No obligation: dispensaries have full discretion to use our financing only when they choose.
    2. No prepayment penalties or additional fees.
  1. Increased purchasing power, enabling dispensaries to
    1. Carry a wider array of cannabis products and brands to better service consumer needs.
    2. Purchase a higher quantity of inventory from suppliers to qualify for volume-based discounts.
    3. Pay COD for purchases to qualify for early payment discounts.
    4. Offer lower prices to cautious consumers as a result of these discounts, thereby increasing sales and gross profit while strengthening their relationships with suppliers.

Green: Can you explain your decision to launch in CA and MA first? 

Mancheril: While our ultimate goal is to offer B2B BNPL in all legal cannabis markets, we launched in CA and MA first because these states represent the largest and fastest growing markets in the US respectively. California was the first state that both Bespoke and Blaze launched in individually, so it was a natural starting point for our BNPL partnership. Massachusetts’ continued growth is compelling for any service provider and we believe our BNPL financing will be as successful addressing the needs and challenges in this newer market alongside those in more mature states.

Green: What trends are you seeing in US cannabis debt financing?

Mancheril: Since 2020, we’ve seen many MSOs increasingly rely on debt financing as opposed to equity capital. MSOs accounted for over ~80% of the debt raised over the past 2 years despite only representing a fraction of the broader cannabis market. Additionally, commercial real estate financing options for cannabis companies have increased over the same time period, driven by the growth of cannabis focused REITs. In general, by the end of 2021, we saw an increasing number of debt investors focused on higher yields participate in cannabis deals.

The recent macroeconomic volatility, increase in rates, and widening credit spreads in 2022 have slowed and slightly reversed the trends seen over the past 3 years. While banks and traditional lenders continue to wait for federal legalization, the vast majority of cannabis companies continue to have very limited access to debt financing options. Over the past quarter, we have seen debt investors leverage the recent illiquidity to negotiate higher interest rates and equity components in new debt deals, a trend we expect to continue until the broader economy strengthens or federal legalization gains traction.

At Bespoke, we empower entrepreneurs to grow their businesses without having to surrender control of their companies or visions. We are excited to continually be market leaders addressing this very vital need for cannabis companies of all sizes in all market environments.

Green: What trends are you following in US regulations and emerging markets?

Mancheril: The most recent headlines have been mixed for US cannabis regulations. Federal legalization is a huge point of focus with SAFE Banking failing (again) to survive the US Senate while the introduction of the revised CAOA offers a glimpse of hope. We believe federal regulatory changes will continue to be debated and discussed without any meaningful progress over the next 2 years but the current discussion of the CAOA revisions will provide the best insight on lawmakers’ priorities. On the local level, the list of states with adult-use sales continues to expand and we would expect to see a handful of new markets ushered in by voters in 2022.

Green: What would federal legalization mean for the cannabis lending industry? How do you stay ahead of the curve?

Mancheril: Federal legalization can occur in a variety of ways, including rescheduling cannabis (currently Schedule 1), descheduling cannabis entirely from the CSA, deferring to state specific regulation, implementing a national cannabis regulatory framework, or some combination of all of the above. The complexity of future regulatory changes makes the timeline for legalization difficult to forecast but we believe that the path forward will be comprised of multiple legislative changes over a number of years as opposed to a comprehensive reform addressing all the relevant points at once.

Based on the interests and goals of all stakeholders in this conversation, we believe that:

  1. Cannabis de-scheduling or rescheduling is unlikely to occur before 2025
  2. Any federal legislation which is approved will require long transition periods for new rules to be finalized, implemented, and adopted by relevant stakeholders (state regulators, courts, cannabis operators, financial institutions, etc.)
  3. Federal lawmakers may allow for financial institutions to service the cannabis industry prior to de-scheduling through limited scope legislation like SAFE banking
  4. Federal legislation will have a difficult time balancing deference to state specific cannabis regulation while enabling federal agencies such as the FDA and Treasury department to issue guidelines and rules for the broader industry. Too much federal agency interference will jeopardize existing & functioning cannabis markets while too much deference will impede vital oversight and consumer protection.
  5. We believe interstate commerce will not be allowed immediately following federal legalization. Interstate commerce will benefit larger MSOs and states with mature cannabis markets (which are hampered by oversupply) at the expense of smaller single state operators and new markets. State governments are motivated to legalize cannabis in the pursuit of tax revenue and economic opportunity for their constituents, both of which would be significantly reduced for newer markets competing with out of state operators.

Regardless of which path federal legalization takes in the coming years, the net benefit for the industry overall will be clear. Setting aside the societal benefit from expunging criminal records for non-violent offenders and freeing enforcement agencies to focus on more serious issues, any progress towards legalization would significantly reduce the challenges that cannabis operators face today. Cannabis companies will see a reduction in operating expenses, a wider array of options for basic business services like insurance and marketing, and an increase in consumer demand as the stigma of illegality fades into memory. Allowing banks to service the industry would remove cash as the primary form of payment, entice larger pools of capital to enter the cannabis market, and in general de-risk the industry tremendously. Bespoke will continue in our role as market leader and cannabis industry advocate in this new paradigm by empowering our clients with even greater access to the capital and services vital to their continued success.

Transportation & Supply Issues in Cannabis Staffing: How to Get Unstuck

By Melita Balestieri
No Comments

Anyone in cannabis will tell you that complex transportation and supply issues are stalling industry growth and impacting employers’ ability to hire teams for the critical roles that keep product moving on schedule.

Since the onset of COVID-19 in March 2020, global and domestic supply chains have suffered bottlenecks caused by ever-changing public health policies and ongoing materials and labor shortages. While the status of transportation as an essential business kept other essential sectors, such as cannabis and grocery, chugging along, the current situation is still challenging.

Transportation remains the biggest supply-side problem, with the American Trucking Association reporting a shortage of an estimated 80,000 truckers in October 2021. The Bureau of Labor Statistics also continues to report high numbers of job openings across supply-chain jobs such as warehousing and transportation.

Cannabis businesses, from multistate operators to distributors to delivery service startups, are hardly immune to these issues. In fact, they face the additional hurdle of restrictive federal regulations, including the illegality of transporting cannabis across state borders. For example, this stipulation means that the over-saturation of flower in California cannot be addressed in a naturally symbiotic manner by shipping to states whose markets demand more flower, such as Arizona and New Mexico.

In the aggregate, these challenges impact employers’ operational and logistics goals and diminish candidates’ interest to work in a highly scrutinized industry. Many trucking companies have found it a challenge to attract drivers. Low pay, grueling schedules, and zero-tolerance cannabis testing for drivers despite legalization have led to an exodus of truckers in the U.S. and Canada.

Despite these obstacles, cannabis employers can still embrace smart strategies to attract quality employees and create much-needed stability to thrive in the rapidly changing marketplace.

Cannabis, COVID & the Great Resignation

In recent months, when it seemed America was finally emerging from COVID’s long shadow, the Great Resignation dampened business optimism. Employee turnover hit cannabis hard—especially in California, where other challenges like a thriving illicit market, high taxes and wholesale price compression have impacted companies’ ability to operate smoothly. Transportation and supply issues compound the problems.

For example, even transporting federally legal hemp in California and elsewhere has its headaches. Our company’s trimmer certification course uses hemp for training purposes. We ship the hemp directly to students’ homes so they can participate in virtual training sessions. Although our company has certified that the course packet contains only hemp, the U.S. Postal Service (USPS) will not ship it, regardless of whether the delivery location is in or out of state. We therefore must rely on a private carrier to transport the course packets to class participants, which is more time consuming and costly

Staffing Strategies for Transportation & Supply Jobs

Cannabis employers have several traditional and non-traditional tools at their disposal to address transportation and supply-related staffing.

While standard ecommerce jobs are synonymous with turnover, here lies an opportunity for cannabis operators to differentiate themselves. This is the cannabis industry, after all, and plenty of individuals who might not normally be interested in the transportation or supply aspect of ecommerce, might be far more open to those types of roles if they know the jobs involve cannabis.

What can employers do to attract these more receptive candidates to their organizations? Hone in on workers who have a passion for the plant. In job descriptions, position cannabis messaging front and center and conduct outreach through LinkedIn groups and other social media platforms to groups and individuals that have a cannabis focus.

Salary and Benefits

These days, a competitive salary simply is not enough to entice the right employees. A solid benefits package goes a long way to establishing trust between employers and employees and provides employees with a level of comfort and reassurance that they are supported during these tumultuous times. For example, companies must prioritize healthcare benefits and consider including coverage for part-time workers on the supply side of the cannabis industry.

Bonuses

Bonuses are another great way to catch the eye of potential employees, but bonuses must be developed within a framework designed for retention. Cannabis employers who establish performance bonuses and loyalty bonuses also increase that ever-important aspect of trust within their companies.

Safety

A transparent and robust HR plan that addresses safety concerns—COVID and beyond—can affect employees’ comfort for certain supply or transport positions that may involve increased public exposure or enhanced personal safety risks. Be clear with employees about the system that’s in place to support them in the event of unforeseen emergencies or injuries.

Procedures

Cannabis employers should also be aware of the importance of having compliance-focused internal transportation standard operating procedures and protections for employees. These policies can be a key factor in attracting both drivers and additional transport and supply experts from other regulated transport industries such as food, agriculture and pharmaceuticals. Candidates without a cannabis background will be more drawn to companies that provide a well-developed and safe infrastructure.

Smart Cannabis Staffing Solutions: The Time is Now

Federal cannabis legalization is coming, and with that nationwide sea change other issues in cannabis supply and transport will emerge. How will cannabis transport consolidate? Will the nation’s top carriers simply take over?

Regardless of what those answers might be, the need to embrace smart staffing solutions now is imperative. Providing a solid base wage with health benefits, and making it clear to current employees and job candidates that there’s an internal infrastructure of support—from HR to loyalty bonuses—is the best way to tackle the transportation and supply issues to position your company for future success.

An Interview with Würk CEO & Chairman, Scott Kenyon

By Aaron Green
No Comments

The cannabis industry operates in a legal gray area between federal restrictions and state legalization in a constantly changing regulatory environment. Maintaining payroll and HR compliance is a burden cannabis companies face that grows exponentially with geographic expansion of the workforce.

Würk allows cannabis companies to manage payroll, human resources, timekeeping, scheduling and tax compliance, minimizing compliance risks in the ever-changing cannabis regulatory environment. The company uses its expertise and trusted partnerships to provide guidance on 280E tax law, accounting and banking. Its platform is designed to scale nationally with the growth of the industry while incorporating the local laws and regulations unique to individual states. Their clients include Cresco Labs, Canndescent and NUG.

We caught up with Scott Kenyon to ask about Würk’s approach to human capital management, challenges facing cannabis businesses and industry trends. Scott sat on the Board of Würk before becoming its CEO and chairman. Prior to Würk, Scott held leadership roles at Dell and Phunware.

Aaron Green: How did you get involved in the cannabis industry?

Scott Kenyon, CEO and Chairman of Würk

Scott Kenyon: My wife and I were early investors in a few companies in Colorado and Nevada. From early on (this was back in 2015) we learned the hard way of cannabis and how difficult it is to run these businesses, especially in those early days. We’ve progressed a ton over the years, but it’s still very difficult to run cannabis businesses.

I joined Würk about five years ago as a board member. I came on as CEO at the beginning of 2021 after our founder and previous CEO Keegan Peterson, who was an early trailblazer in the industry, passed away. So, I’ve been CEO at Würk for about 18 months.

Green: Tell me about Würk and the main problems you’re trying to solve.

Kenyon: Early on we were focused on establishing getting out of the cash business for these cannabis companies. Allowing them to pay payroll, taxes and be tax compliant electronically was a huge early advantage for us as a company. Now, fast forward seven years later and a lot of different banks (credit unions) are in the industry and that is allowing people to move money. So, that’s not as big of an advantage for us anymore, but early on that was huge.

Our advantage now is the scars on our back, for lack of a better phrase, from what we’ve gone through over the last seven years. We anticipate. We prevent. And most importantly we’ve seen all those problems for our customers. Last year, a big thing of mine was being “Smokey the Bear.” We want everybody to be Smokey the Bear: prevent fires and prevent issues for our customers. When I came in, we were the world’s best firefighters. I didn’t want that title. I wanted to prevent issues for our customers. That takes you from being a vendor to a partner.

If you look at it, on our platform we have 80% of the enterprise cannabis market, about 60% of the mid-market and then low single digits in the small business space. We have that market share because we provide invaluable experience and guidance to our customers. The biggest MSOs have different challenges from a “Joseph and Scott” dispensary, or a “Mary and Jane” grow facility. We’re able to adapt to all those different segments.

At the core of our product, we offer payroll services and what we call HCM – human capital management. That’s everything from scheduling, applicant tracking systems processing and paying your payroll taxes. So, we have the full gamut of product offerings that any type of HCM or HRIS software system does, whether you’re outside of cannabis or inside of cannabis, we’re offering the same thing.

Green: How does Würk differ from say a Professional Employer Organization (PEO)?

Kenyon: We aren’t a PEO. We don’t manage employees. At a high-level, a PEO is basically managing HR for these companies. Our platform enables HR professionals to go out there and do that. PEOs are more popular down in the small business space, because people are not at the scale to hire an HR team. We’re similar in that we’re processing payroll and have all the software that these companies need, but we’re different in that we’re not running their HR for them.

Green: How do you work benefits into the mix?

Kenyon: We leave it to the client, and we integrate their benefits provider into our platform so it’s an easy one-stop shop. We have single sign-on for a lot of our integrations. For the HR organizations, we want them to log into our platform and everything they need will be there.

Green: How is SAFE banking going to affect the HR industry in cannabis?

Kenyon: It’s going to be great for the industry, obviously. For HR specifically, it’s going to bring in more providers of payroll and more competitors for us for sure. But also it’s going to bring in more providers of services that can come in and offer that right now because of the federal illegalization.

Green: How does 280E affect your business and your customers?

Kenyon: We don’t guide people around 280E because that’s a tax specific matter. We refer them to their tax experts. We process payroll tax, which is different than what 280E affects. I think 280E was a big challenge, it’s still a big challenge, but that’s mostly because people didn’t really understand it. I think 280E was a problem five to seven years ago. In the last two years most companies are very familiar with it. That doesn’t mean 280E is the right thing. I think 280E is an awful thing. And while I think I hope SAFE banking is the first thing to fall legislatively, I think 280E has a good chance of getting across first.

On any given day my opinion on which will go first changes. I just want something to get across the line.

Green: What are some unemployment and payroll challenges your customers face?

Kenyon: We really watch unemployment changes and changes in job descriptions or job codes. For example, if an unemployment rate changed, and that unemployed person moved to a different place, which happened a lot during COVID, that company needed to report that and they needed to collect the appropriate charges or taxes there.

Green: What geographies are you in right now?

Kenyon: As of January 1, we had people on our platform in 46 states and just under 600 different jurisdictions. So, even though cannabis isn’t legal in all those states, big companies have employees across the United States.

Green: How do you help your users manage compliance across multiple jurisdictions? That must be a complex undertaking.

Kenyon: Our platform automatically plugs into the states that have electronic notifications around laws, which most states do. In our tax department, we have certain group members that are experts, let’s say, in the west coast. So, we assign people to certain regions to ensure that they have the best knowledge.

From our support piece, where a lot of our customers come in, somebody might say, “Hey, I have a unique question for Utah” and we’ll say we have a person that is specialized in Utah, but we don’t force them there, we just give them the option. But in our tax queue, we actually direct the customer like, “Hey, here’s a Massachusetts Question, so that goes to a particular person because they are our Massachusetts expert.”

Green: How do you deal with timekeeping issues like overtime?

Kenyon: Well, our system does that automatically. Let’s say they’re working overtime in a state that’s difficult to keep time for like California. In the state of California, if they’re working overtime on a Saturday or Sunday or a holiday, that’s a whole different calculation than working longer on a Thursday night. So, our platform is made to automatically calculate that for our customers. There’s no manual adjustments or coaching happening there. We just follow the state law based on where the employees are.

Green: Are you seeing any unionization of employees within the cannabis industry?

Kenyon: There’s unionization in many of our states, I don’t know the exact number, but California being the biggest, there’s a lot of union representation. Illinois is probably the second biggest union state on our platform. I’m assuming New York will be once it becomes adult use.

Green: How does Würk approach cybersecurity?

“Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen.”Kenyon: Well, we approach it very seriously and I recommend everybody take cybersecurity seriously. We test our internal systems regularly. We test our employees through phishing scams. And we’re always just trying to educate our team on the risk that we have.

I can’t share specifically the prevention steps that we’re taking, but I can tell you we partner with some of the biggest experts and make sure that we’re following everything that they’re recommending. More importantly, we’re testing for human failures, because where most failures happen is with people.

Green: What trends are you following in the industry right now? 

Kenyon: Any type of activity in Congress is going to be huge for this industry. So that’s something I always keep abreast of. The next thing that comes down the line which is tied to that is interstate commerce: How is interstate commerce going to really come into play? And how does that change this industry?

Within the industry, the big question is how do we combat the illicit market? Over the last five years, I’ve heard all kinds of different ideas. But in the end, I think we have to out-innovate the illicit market, and that’s what I’m most excited about.

There are new product categories, beverage being one that is starting to gain traction. How are these new products and new variations of the cannabis plant able to treat and help people in ways that we’ve never thought of? That’s part of out-innovation. I was reading an article today about new terpenes that were discovered and how 100 products could come from each one of those new terpenes. I think we’re just still at the tip of the iceberg of product innovation.

How do we fight the illicit market? I think that is just through coming up with new products that treat different illnesses and ailments, that allow customers to get away from pharmaceuticals. Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen. They’re not going to do it when there’s a huge price difference, but they will do it when there’s a huge product difference. And right now, our products are very similar to what you can find on the illicit market. You can find vapes, you can find gummies, you can find all that in the illicit market. We’ve got to out-innovate the illicit market.

Green: What in your personal life are you most interested in learning about?

Kenyon: I am the father of two teenagers right now and I really like to learn how to be a better parent to them because it’s really frickin’ tough!

Green: Great, that concludes the interview!

Kenyon: Thanks, Aaron.

Senators Introduce Cannabis Administration and Opportunity Act

By Cannabis Industry Journal Staff
No Comments

Senate Majority Leader Chuck Shumer (D-NY), Sen. Cory Booker (D-NJ) and Sen. Ron Wyden (D-OR) introduced the Cannabis Administration and Opportunity Act (CAOA), a bill that seeks to decriminalize cannabis and end prohibition as we know it. About a year ago, the same lawmakers held a press conference where they unveiled their first draft of the CAOA, calling on the public for comments and input.

In that press conference last year, Sen. Booker emphasized the need to address social equity and restorative justice, laying out the foundation for what would soon be called the most comprehensive piece of cannabis legislation so far.

Sen. Schumer unveiling the Cannabis Administration and Opportunity Act last year.

According to the Minority Cannabis Business Association (MCBA), the bill succeeds in doing that, offering a number of provisions that would help those most impacted by cannabis prohibition, offer funding for equity programs, support for minorities in the cannabis market and more. “The CAO Act represents a giant leap forward in federal cannabis policy by outlining the most meaningful solutions to address issues facing minority cannabis businesses we’ve seen in a federal legalization bill to-date,” says Kaliko Castille, president of MCBA.

Notable provisions in the bill also include:

  • Removes cannabis from the Controlled Substances Act scheduling entirely.
  • Allows states to implement their own policies without the federal government interfering.
  • Allows cannabis businesses access to financial services, removes the threat of 280E tax code impacting normal business deductions.
  • Regulatory responsibility would fall under the authority of the Alcohol and Tobacco Tax and Trade Bureau (TTB), the Food and Drug Administration (FDA).
  • Immediate expungement for prior cannabis convictions and cancellation of any sentencing for those incarcerated for cannabis.
  • Raise allowable THC content in hemp from 0.3% to 0.7%.
  • Sets up a pilot program with the Small Business Administration (SBA) for minority-owned and economically disadvantaged cannabis businesses.
  • High taxes: Up to a 25% federal excise tax on top of state cannabis taxes.

Cannabis Receiverships: A Viable Alternative to Bankruptcy

By Oren Bitan
No Comments

Doing business in California’s legal cannabis industry remains a risky endeavor. The majority of the industry is still unlicensed, tax rates at the state and local levels are high (notwithstanding a recent reprieve from California’s cultivation tax) and there are not enough licenses to meet geographic demand throughout the state. Outside financing remains difficult to secure for equipment, tenant improvements, account receivables and working capital because, under the federal Controlled Substances Act (CSA), cannabis remains a Schedule I narcotic. Therefore, entrepreneurs, investors and lenders who have stakes in state-sanctioned cannabis enterprises expect to see returns that justify the higher level of risk, which places additional financial pressure on cannabis businesses. In addition to the industry specific challenges, the United States economy is on the verge of a recession that may further hamper the industry notwithstanding the industry’s resiliency during the pandemic when it was deemed to be an “essential” industry that benefited from consumer spending of stimulus monies.

These outside pressures increasingly lead to ownership disputes and creditor defaults that result in litigation and the need for restructuring. In some instances, business partners cannot agree about control and finances of the licensed businesses and in other instances unpaid creditors file suit to enforce their interest in a company’s assets. And sometimes a local municipality discovers wrongdoing by an operator and initiates a health and safety lawsuit to cease the illegal condition.

Bankruptcy reorganization is an option typically utilized by struggling businesses to shed or restructure debt. Cannabis businesses, however, cannot take advantage of bankruptcy remedies because bankruptcy is a product of federal law and federal law still prohibits the sale of cannabis.

As a result, stakeholders in legal California cannabis enterprises must consider alternatives to bankruptcy to collect what they can on their loans and investments in the event the enterprise becomes insolvent or requires restructuring. A well-established alternative to bankruptcy is a state court remedy – the appointment of a receiver over the assets of a business or over the entire business operations. Through the receivership process, stakeholders may obtain many of the same protections available to them through bankruptcy

A. Federal Illegality Bars Access to Bankruptcy Protection

Over the past ten years, bankruptcy courts have routinely prohibited licensed cannabis businesses from seeking bankruptcy protection because cannabis remains illegal at the federal level under the Controlled Substances Act (CSA). Bankruptcy trustees are typically charged with managing and operating property in the same manner that the owner would be bound to do if in possession thereof. Because cannabis remains illegal at the federal level, trustees are not able to manage and operate licensed cannabis businesses.

B. Receivership as an Alternative to Bankruptcy

Under California law, a receiver is a neutral agent of the court appointed to preserve, control, manage and ultimately dispose of property that is subject to the litigation before the court.1 The receiver, therefore, holds property for the court, not the parties to the litigation.

Appointment of a receiver is a statutory provisional remedy. Other than corporate dissolutions under Code of Civil Procedure section 565, the law does not have a specific cause of action to appoint a receiver. Thus, the proponent of a receiver must have a valid cause of action in an underlying lawsuit.

1. The Appointment of a Receiver

The appointment of a receiver rests within the trial court’s discretion. Code of Civil Procedure section 564 contains the broadest statutory authority to appoint a receiver. Subdivision (b), details twelve possible situations in which a receiver may be appointed, most of which are beyond the scope of this article. The most common of these is a lender’s request to appoint a receiver when a borrower defaults on a loan and the lender seeks the appointment of a receiver over its collateral. The statute, however, clarifies that the situations listed in the statute are not exclusive: a court may appoint a receiver “[i]n all other cases where necessary to preserve the property or rights of any party.”

The receiver’s powers are limited by the statute under which the court appointed the receiver and those conferred by the court. The appointment order should, therefore, detail the duties the receiver owes to the court, and actions that the court authorizes the receiver to take to perform those tasks. The order should also specify the property that will be part of the receivership estate.

2. The Receiver’s Powers

The receiver has general statutory powers.2 The statutory powers include (i) commencing or defending litigation; (ii) taking and possessing property of the receivership estate, (iii) receiving rent, collecting debts, and making transfers, and (iv) acting in accordance with the court’s instruction with respect to the property.3 But the court’s authorization is necessary to sue the receiver and for the receiver to commence litigation.4 In the foregoing scenarios, the receiver is immunized personally from tort liability, but not in his or her official capacity as receiver.5

In addition to taking possession of property, the receiver may dispose of receivership property with the court’s approval.6 If the receiver is an equity receiver, the receiver may take possession and satisfy creditors from all the debtor’s assets.7

The court may further authorize the receiver to issue “certificates of indebtedness” to raise money to administer the receivership estate.8 This device permits the receiver to provide liquidity to the estate and gives the certificate holder an interest-bearing priority claim against the receivership estate.

3. Liquidating Cannabis Assets Through a Court Appointed Receiver

After the court appoints the receiver, the receiver should have sufficient powers to, among other things: (i) take over the management of the company; (ii) open bank accounts; (iii) borrow money by issuing receivership certificates; (iv) manage all of the company’s property; (v) hire counsel and other professionals; and (vi) sell the receivership estate’s assets for the benefit of the creditors. To maximize repayment to the creditors, the receiver may hold an auction to sell the assets and assist in facilitating the cancellation of company’s state license while the buyer of the assets secures its state license after the local license is transferred.

State cannabis licenses may not be sold or transferred.9 Yet, to maximize recovery for the creditors, the receiver may need to participate in the regulatory process to maintain a license during the pendency of the receivership and to assist in the amendment of a license while a prospective buyer seeks to obtain its own license. To do so, the receiver will first need to qualify as a licensee under state law to join as a licensee on the license and further the licensee as a going concern. Next, the principals of the prospective buyer will themselves need to qualify as licensees under the license. Then, once the sale of the company’s assets (including any interest in the license) to the buyer closes, the receiver and the company’s original owners will terminate their capacities as licensees of the license, leaving only the new owners as licensees. Thus, the proposed order should be written with attention to ensure the receiver has powers to further the foregoing and not diminish the value of the receivership estate.

After the conclusion of the sale of all assets, the receiver will need to obtain a discharge from the court of his or her duties as receiver. The receiver may do so by the parties’ stipulation or by motion. Together with the request for a discharge, the receiver should seek approval to pay: (i) any lenders to the receivership estate; (ii) professionals that the receiver hired; and (iii) him or herself for his or her services. Upon the court’s approval, the receivership will be terminated.

The conflict between federal and California law regarding cannabis continues to be an impediment for stakeholders in California’s cannabis market. Because of this conflict, stakeholders in California’s legal cannabis market lack access to vital traditional institutions, such as bankruptcy remedies. As a result, stakeholders must be prepared to consider alternatives such as a court appointed receiver, which can be a useful alternative to both secured creditors and unsecured creditors. Stakeholders who pursue a court appointed receiver will benefit from a long-established body of law and experienced professionals.

References

  1. Cal. Rules of Ct., r. 3.1179(a).
  2. Cal. Civ. Proc. Code §§ 568-570.
  3. Free Gold Mining Co. v. Spiers, 136 Cal. 484, 486 (1902); Steinberg v. Goldstein, 129 Cal. App. 2d 682, 685 (1954).
  4. Vitug v. Griffin, 214 Cal. App. 3d 488, 493 (1989).
  5. Chiesur v. Superior Court, 76 Cal. App. 2d 198, 201 (1946).
  6. Helvey v. U.S. Bldg. & Loan Ass’n, 81 Cal. App. 2d 647, 650 (1947).
  7. Turner v. Superior Court, 72 Cal. App. 3d 804, 812 (1977).
  8. Cal. Civ. Proc. Code § 568.
  9. See e.g., Cal. Code Regs. tit. 16, § 5023(c).

Risk Management Considerations for Cannabis Retailers in New Jersey

By Eric Schneider
No Comments

Despite the US making cannabis regulations challenging to navigate, the industry is snowballing toward profitability. New Jersey legalized adult use cannabis on April 21 this year. One month earlier, The Garden State began accepting applications for Class 5: Retailers, Dispensing and Delivery.

Although New Jersey isn’t shy about its licensing requirements and standards, many people want to know how retailers can stay in the game for the long run. So, let’s talk about risk management considerations New Jersey retailers need to know.

Top Risks Cannabis Retailers Face in New Jersey

Regardless of what kind of retailer you operate —medical or adult use — it’s critical to know what you’re up against. The following are the most common risks we’ve watched cannabis retailers face daily in New Jersey, making a customized risk management strategy necessary.

Theft

Like other retailers, New Jersey cannabis retailers are vulnerable to theft. Unfortunately, theft can come from various angles, such as in-store, in-transit and insider crime. Besides cannabis retailers typically having a well-stocked inventory, it’s not uncommon for them to have more cash on hand than most other businesses.

Although the SAFE Banking Act could positively impact the cannabis industry, it’s in a notorious stall yet again. Briefly, the SAFE Banking Act would no longer allow financial institutions, such as banks and credit card companies, to refuse to do business with cannabis companies. However, cannabis retailers must operate in a cash-only environment, for now, forcing them to make bank runs multiple times a day. We probably don’t have to explain how enticing a significant inventory and fat bank bags look to criminals.

Cybersecurity

Since the onset of the global health crisis, the cyber liability landscape has nearly spun into a death spiral. In other words, cybercriminals sat on the edge of their seats during the pandemic, waiting to pounce on anything that looked slightly vulnerable. Remote workers, small businesses, and emerging industries were hard-hit.

It’s no surprise that New Jersey cannabis retailers face many cybersecurity risks through their point of sale (POS) systems. Additionally, retailers often gather and store personal information, such as email addresses, credit card numbers, shipping addresses, etc. Hackers and cybercriminals gravitate to this vital data rapidly.

Property Damage

In addition to the risk of theft, as mentioned above, cannabis retailers must protect their property from losses. Without adequate protection, damage to equipment or buildings could add up to high out-of-pocket costs. Consider the damage a weekend office fire or late-night vandalism would cause. If property damage occurs, retailers must figure out how to sustain business operations while recovering from the loss simultaneously. As a result, New Jersey retailers must protect their property and maintain business continuity.

How to Customize a Risk Management Strategy

Watch or listen to any news reports and there’s a decent chance that you’ll feel some slight sense of doom and gloom. And sure, a lot is going wrong in our world; however, that doesn’t need to impact how you perceive your businesses. Instead of casting a massive net over every possible risk that you can imagine, we recommend trying the following 5-step approach. Here’s the gist:

  1. Identify: Pinpoint high-level risks that are specific to the cannabis industry. Then, let the process trickle down to focus on company-specific exposures.
  2. Analyze: Determine how badly a particular risk could harm your retail company. How much will this hurt should the “what-ifs” play out?
  3. Evaluate: Categorize risks according to how risk tolerant your company is. Will you avoid, transfer, mitigate or accept the risk?
  4. Track: Use your history or the stats from a similar retailer to map out how you’ve handled the risk over time. Older retailers have an advantage over younger retailers, of course, but you can still get a feel for your risk management style.
  5. Treat: Make good on your evaluation promises by avoiding, transferring, mitigating, or accepting the various risks you identified.

Recommended Insurance for New Jersey Retailers

Sales totals in the first month of New Jersey’s adult use market

The New Jersey Cannabis Regulatory Commission issued detailed requirements for new cannabis businesses. That said, part of the application requirements considered is the plan for companies to obtain liability insurance. Many new retailers opted for a “letter of commitment” as opposed to a certificate of insurance (COI), stating their plans for obtaining the following coverages:

  • Commercial general liability: Protects cannabis companies against basic business risks.
  • Product liability: Protects against claims alleging your product or service caused injury or damage.
  • Property: Reimburses cannabis companies for direct property losses.
  • Workers’ compensation: Covers employees if they are injured on the job and can no longer work.

In addition to the required insurance coverages, we recommend New Jersey retailers customize their risk management package with these policies:

  • Crime: Protects your cannabis company against specific money theft crimes.
  • Cyber: Protects your cannabis company against damages from specific electronic activities.
  • Directors & officers: Protects corporate directors’ and officers’ personal assets if they are sued.
  • Employment practices liability: Protects cannabis companies against employment-related lawsuits.
  • Professional liability: Protects cannabis companies against lawsuits of inferior work or service.

With more states in the US entering the marketplace soon, New Jersey is doing its fair share of the heavy lifting by spearheading the onboarding process. Remember, doing your due diligence at the start pays off in the long run — New Jersey retailers are proving that. Consider teaming with a commercial insurance broker calibrated to the cannabis industry, so you get the most out of your broker, marketplace and the cannabis industry as a whole.