STATE OF THE MARKET: CANNABIS

Troubles continue for cannabis operations

While it once had a very promising outlook for entrepreneurs and business owners on the cutting edge of a new market, the cannabis market continues to present challenges for operators in California and across the states where it has been legalized for recreational sale. These challenges are leading to more and more troubled cannabis businesses,

DWC has been assigned to a number of receiverships of late involving cannabis operations spanning all parts of the business: retail, distribution, licensing, manufacturing and growing.

In the case of one cannabis partnership dispute, DWC is serving as receiver for a West Hollywood dispensary and is in the process of marketing several licenses for sale in the recovery process.

Operating challenges

Operating differences between cannabis companies and other retail and distribution operations are significant. DWC continues to encounter businesses encumbered by fundamental business elements that apply to cannabis only such as limited banking and finance availability, unique regulations, restricted payment sources, increased security needs, and and in turn, an increased need for receivers and other fiduciaries to play a role in recovery.

Options for cannabis companies in distress are very limited due to the fact that cannabis is not federally regulated, though a recent controversial ruling in the U.S. Bankruptcy Court for the Central District of California may signal a slight shift in the courts’ response to some cannabis cases seeking Chapter 11 bankruptcy protection. The vast majority, however, remain unable to receive this protection and must pursue other remedies — receivership included.

“Cannabis markets are in a state of disarray from a capital standpoint and from a regulatory standpoint,” says DWC Chairman and CEO Douglas Wilson. “Because of that there is compaction, confusion and consolidation in these markets, resulting in a massive amount of erosion of equity.”

In another, DWC served as a receiver where a property had been used for illegal growing operations, leading to problems with the site and ongoing issues for the owner.

In our most recent experience, today’s market is marked by several factors from falling sales to unsustainable taxation, all playing roles in the disarray many cannabis operators are facing.

Cannabis sales

Reported cannabis sales are falling in some markets. Sales fell in California in 2022 — the first annual decline since legal sales began in the state in 2018. California recorded $5.3 billion in cannabis sales taxed in 2022 down from $5.77 billion in 2021. Experts attribute the decline to a disproportionately burdensome tax structure and falling wholesale prices, among other factors. One cannabis farmer told Forbes in late February the market is “imploding.” disproportionate taxation compared with non-cannabis goods.

Unsustainable taxation and pricing problems

With a 15% excise tax on wholesale cannabis products in some states, plus other local and state taxes, many businesses are struggling to compete with the black market for marijuana. And while raw supply is abundant, consumers face a much higher price when purchasing cannabis products from legal vendors than what is available illegally. This counterbalance has recently led to turmoil for some operators. With the added pressure of very little capital available in today’s market, many individual operators are unable to survive.