In a story first broken by MJBizDaily, California cannabis distributor Herbl recently collapsed and is now in receivership. We wanted to take a moment to examine the collapse of Herbl and the effects this will have across the industry.
Who is Herbl?
In 2022, Herbl handled over $700 million in product sales. They had investments from big names like Measure 8 Ventures, Salveo Capital, and Silverleaf Venture Partners. Herbl has more than 200 employees and does business with over 1,000 retailers in California.
What happened to Herbl?
Herbl defaulted on one of its major loans and now they are in receivership. Receivers are typically appointed by the court to help secured creditors get money out of a failing company with the goal of avoiding bankruptcy. Because cannabis is still federally illegal, bankruptcy is not an option for cannabis businesses. However, receivership happens at state courts, and receivership has been the go-to method for cannabis businesses all over the country, including Oregon-based dispensary giant Chalice Farms.
Prior to Herbl’s collapse, cannabis businesses that supplied Herbl with product noticed that Herbl was not paying its invoices in full, and in some instances Herbl was not paying its invoices at all. Now, Herbl has laid off most of its workforce and many invoices remain unpaid.
What effects does that have on others?
A big issue here is that, because Herbl has investment money and secured creditors, those companies are likely to get paid first. That may leave little to nothing for the cannabis brands that supplied Herbl with product. This could send a serious shockwave across the industry. Herbl is certainly not the only company struggling with cash flow, and now countless brands are going to miss out on money owed to them by Herbl. Those unpaid invoices will probably make it harder for other companies doing business with Herbl to keep up on their own debts.
What does this mean for the industry?
A lot of big players are going down all over the country. Chalice Farms in Oregon recently entered into receivership because it owed more than $35 million and it could not keep up on its debts. The truth is that the cannabis industry is filled with big money investors who thought they could pour money into the industry, take losses, and eventually come out on top. Unfortunately, very few investors started realizing investment, are getting impatient, and now they are pulling money out of the California cannabis industry altogether.
Recently, Herbl has moved to recover funds from retailers who failed to pay Herbl, claiming almost $10 million in unpaid debts from cannabis retailers across California. This move shows that Herbl is not the only giant cannabis company failing to keep up on its debts, and is likely the first of many dominoes to fall.
How can you protect yourself?
There are two types of creditors – secured and unsecured. In the simplest terms, a secured creditor requires the company it is offering money to (or in this case, cannabis goods) to put up collateral, such as a lien against property owned by the debtor. If you are going to give product on credit, this is a great opportunity to require that the company you offer product on credit put up some collateral, such as a lien against property they own. If you are going to take product on credit and you are required to put up collateral, it is always important to make sure you only take on obligations you are certain to pay.
How can you prevent this from happening to you?
The trend here is that large players are failing, and they are failing hard. It seems like a lot of that has to do with unhappy or impatient investors. Many of our clients are simply funding their own endeavors without big investment money. The flipside of this whole ordeal could be that, because big players are leaving California, smaller cannabis companies will have less competition from big names with historically large investment. Making it through a tough period is key to success in this industry and a lot of our clients are in a good position now to come out successful if they can outlast competition from big cannabis companies. While big cannabis companies are not the only ones struggling, this feels like a golden opportunity for smaller players to regain market share and build stability into the future of the cannabis industry.
Outlasting competition may require companies to offer products on credit with security attached. This will help ensure that, even if a company goes under, you can collect funds before all the money in a failing company pays out to others. Inversely, companies taking product on credit should only take product that they can actually pay for. Falling into debt with suppliers can be an easy way to fall behind on obligations and could be a fatal blow to companies.
Of course, we want all of our clients and their businesses to succeed and thrive. If you are unsure about how to navigate the collapsing cannabis industry, our attorneys are here to weather the storm with you and help you reach success in your business endeavors.