Tag Archives: liquidity

2021 Trends: Nine Developments in California’s Cannabis Market

By Amy Steinfeld, Jack Ucciferri
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While we’re pleased to report that 2020 is almost over, 2021 will be a mixed bag. New jurisdictions will open their doors to cannabis and consumption will continue to rise, but competition from new operators and illicit supplies will increase. As California’s cannabis industry matures and turns the page on a bizarre year, market uncertainty will linger as the pandemic drags on and overtaxation and regulation strangle profits. But let’s remember, cannabis has been cultivated for over 6,000 years and has withstood far worse—this market isn’t going anywhere and will continue to grow and become more impactful.

Access to Traditional Finance Services

The U.S. Senate will likely pass legislation providing cannabis businesses access to traditional banking and financing services. This will be a game changer for the industry. Valuations will go up. Increased liquidity will smooth transactions. Companies will look to affordable debt to expand their footprints and capacity to compete on a new scale. Full federal legalization could be a game changer if 280E tax restrictions are lifted and interstate and international cannabis trade open up, but the timing of this is hard to predict.

Continued Quarantine-Induced Consumption

Cannabis consumption will continue to increase as Californians seek to ease pandemic-related stress, temper quarantine conditions, and sample an eye-popping array of new products. Sophisticated consumers will be open to spending more on unique and niche products. But hemp-derived cannabinoids may present a new source of competition, especially if CBD remains unregulated. By the end of 2021, cannabis beverages will begin to compete with mainstream alcohol categories. Pharmaceuticals will increasingly take notice of this industry and the increasing share of consumers turning to plant-based remedies.

Ever More Cultivation Opportunities 

In pursuit of revenue, agricultural counties will liberalize their policies on cannabis cultivation by permitting more acreage and streamlining permit processes. Neighborhood groups will push back, but policymaker concerns will be assuaged when they see cannabis farms operating innocuously (and sustainably) around the state. Advances in seed breeding, pest-and-disease control, outdoor growing techniques and odor abatement technology will help too.

New Retail

Cities and counties will revisit opening their borders to cannabis retail storefront and delivery as they attempt to fill budget gaps. Many cities will allow cannabis retail for the first time and/or expand the number of licenses available. These new dispensaries will provide a much-needed outlet for the influx of licensed flower and will continue to spur innovation and consumer education. But a “second wave” of retail speculators seems poised to let optimism override judgement, setting themselves up for failure or acquisition by incumbents.

Getting Social Equity Right

2021 will be a pivotal year for social equity, which will establish a foundation for a just cannabis economy. The industry will have to grapple with how to ensure that those most impacted by the criminalization of cannabis and most often excluded from traditional financing exposure are provided with equitable access to meaningful opportunities. As California’s regulated cannabis market grows, getting social equity right will be important if the industry is to firmly establish itself as an inclusive industry that addresses impacts on marginalized communities and responds to customer demands.

Formalizing Appellations  

California’s new CalCannabis Appellations Program will provide cultivators and brands a way to credibly market the value of their unique growing regions and cultivation methods. These distinctions only apply to cannabis planted in the ground, excluding greenhouse and warehouse grows. The expectation is that high-end consumers, trained to recognize place-based designations and quality certifications in other products, will reward products that boast these designations. How many consumers will be willing to pay the premium and how long full implementation of the program will take, remains to be seen.

Prices May Begin to Drop

2020 was a great year for the few fully licensed cultivators in California permitted to sell to the regulated market. 2021 may be different. Numerous licensed cultivation projects will complete the permitting processes and come online next year. While growing demand may outpace supply at first, by Q3 supplies could swamp the market. Premium flower is perhaps an exception. Adding to the pricing pain, as always, is California’s illicit market, which will continue to undercut prices, as legal growers toil to comply with a labyrinth of state and local regulations. Nonetheless, cannabis will remain the most profitable crop on a per acre basis for some time.

Business Turmoil

The drop in prices coupled with continued high taxes and regulatory burdens will result in turnover of assets and businesses. Less efficient and inexperienced cultivators will struggle, many unable to ultimately withstand pricing pressure. Others will be hit by enforcement actions for failing to comply with California’s myriad regulations. Retailers, already burdened by punitive tax structures, real estate finance commitments and onerous local regulations, will need to be disciplined and have a clear strategy to address new competition.

Consolidation

Driven by business failures and renewed investor interest, California’s regulated cannabis industry may consolidate rapidly in the second half of 2021. Institutional finance will enter the space with a much more disciplined approach than prior capital sources. Traditional agricultural interests will invest in cannabis cultivation projects. Well-run retail chains will begin to outcompete, and then acquire, mom-and-pop competitors. Big brands will continue to expand their shelf space, relegating smaller competitors to niche and novelty status.

In short, the cannabis industry will continue to be highly dynamic, exciting, enticing and risky.

Solutions & Alternatives to Bankruptcy for Cannabis Businesses

By Richard Ormond
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A Cannabis Related Business (or CRB), whether a plant-touching operation or a provider of goods and services to plant-touching operations cannot seek protection from the bankruptcy court as it is a federal court and cannabis remains illegal at the federal level. As such, a CRB does not have the benefit of a court approved restructuring as provided by Chapter 11 of the Bankruptcy Code and does not receive the benefit of an orderly liquidation as provided by Chapter 7 of the Bankruptcy Code. However, alternatives to bankruptcy do exist and are available to a CRB.

Historical Considerations

Before the emergence of the Bankruptcy Code, businesses and their creditors had very few options available to undertake a court-supervised restructuring or liquidation other than seeking the appointment of a court neutral, typically called a receiver or special master. That “neutral” would take the business or its assets into “legal custody” or custodia legis and begin the process of dissolving the entities, selling the assets or otherwise sell the business as a going-concern. In the 1880s and 1890s with the Gilded Age coming to an abrupt halt, this process was successfully used to restructure and recapitalize the failing network of over-extended railways and rail lines, leading to the consolidation in the market that remains to this day.

Cannabis businesses can be legal and now an “essential” business but, still cannot receive the benefits of bankruptcy court.During the Great Depression, the federal judiciary established “reference” courts to deal specifically with bankrupt businesses and individuals laying the foundations for the modern bankruptcy code which is still in effect today. Many of those first precedents used to establish the bankruptcy code and rules were drawn directly from the receivership case law and receivership statutes ever-present in the historical record of common law cases and common law countries, reaching all the way back to the Courts of Chancery in Britain established soon after the Norman invasion of the British Isles in 1066.

In the United States, the equitable power of courts to initiate receiverships or other insolvency proceedings and crafting orders and decrees based on equity, as opposed as based on law or statute, is codified clearly in Article III of the United States Constitution. Today, receiverships and special masters are still utilized by state and federal courts to remedy unique circumstances where a simple bankruptcy cannot address the inequities presented in that case.

State Court Powers & Financing of Receivership Estates

State courts in particular, and California especially, have a wide body of case law supporting the equitable powers of the court, the quasi-judicial immunity of the receiver and the many equitable tools available to receivers. These powers include the negotiation and transfer of liens, with liens attaching to proceeds of sales of assets, the dissolution of a business and the establishment of a claims process akin to a bankruptcy or assignment for benefit of creditors.

One of the many overlooked powers of a receiver is their ability to bring in outside financing or capital to fund the receivership estate to maintain a business as an ongoing concern or to provide short term leverage so that assets can be properly maintained, “dusted off” and sold.

This process of bringing in new capital is typically done by the issuance of receivership certificates. These certificates are approved, ahead of time, by the court and courts can authorize that such certificates prime all other claims (including sometimes administrative claims) and that these certificates can be reduced to a security interest recorded against real or personal property.

The Mechanics of a Receivership

However, because cannabis is approved at the state level, state courts retain their equitable powers and the power to appoint a receiver over a business in need of restructuring or liquidation. There are many avenues to get to court for this benefit, but the primary path to a receivership is either through a creditor (or group of creditors) filing a lawsuit and seeking the appointment of a receiver. This scenario can be done through cooperation and stipulation but can be hostile as well. The receiver option is available and open to address the needs of insolvency for this rapidly expanding industry.Or, a legal entity, can seek dissolution protection from the state court and seek a neutral dissolution officer (a receiver) to manage that process which may include the infusion of new capital through receivership certificates, the sale of assets to third parties, the negotiation and payment of liens and claims through a claims process and the final restructure of dissolution of the legal entity in a manner similar to a bankruptcy or assignment for benefit of creditors. This voluntary petition is permitted by statute and case law and is a mechanism available to a business that is unable to file for bankruptcy protection but is in dire need of court supervision and authority to work through its insolvency problems. Further, by court order, a receiver is able to establish banking relations where a CRB may be unable.

Typically, it is recommended that any receivership filing whether by creditors, claimants or the business itself, be guided by a well-written, explicit order that outlines the parameters of the receivership, the funding requirements and limits, the rights of claimants and some sort of stay of claims against the receivership estate to give the receiver the time needed to work through all of the issues in that receivership estate. Further, outside funding can be pre-approved by the court and the priority of that funding can be established through the open process that the court provides, much akin to a debtor in possession (DIP) financing motion in bankruptcy court.

Because of the unique circumstance that CRBs find themselves in here in California, where they are a legal and now an “essential” business but still cannot receive the benefits of bankruptcy court, the receiver option is available and open to address the needs of insolvency for this rapidly expanding industry.