A majority of the wholesale B2B cannabis business in California is represented by a group of distributors and brands that have engaged a credit association to assess shops to reduce the hundreds of millions of dollars in arrears and deter repeat offenders.
The Credit Management Association (CMA), a nonprofit organization with headquarters in a suburban area of Los Angeles, is reviewing invoices and other paperwork from more than a dozen distributors and companies.
A "do not sell list" of 25 California shops that don't pay their bills on time will be emailed to each of the vendors and brands by the CMA, signaling a seismic issue in the country's and the world's largest cannabis market.
According to group members, the list of businesses includes dealers and delivery services that are frequently past due and owe at least $25,000 in product debt.
All retailers and delivery services in the state (including those not listed) likely owe more than $1 million in unpaid invoices since the companies classified as "do not sell" jointly owe at least $625,000.
This issue is more complicated than it first appears, similar to most issues in the cannabis business. For many years, it has been challenging for shops and delivery services to turn a profit due to high taxes, regulations, and competition from the black market.
Most shops don't intentionally set out to behave badly or poorly. According to insiders in the sector, many struggle to pay off their debt and fall behind on payments. The credit organization creates corporate credit reports by gathering data sets, onboarding new members, coordinating group meetings, and more.
According to Vince Ning, creator and co-CEO of California marijuana distributor Nabis, the San Francisco business leading the accountability initiative, "the group's goal is to create a little more consistency and financial framework in the supply chain of marijuana."
According to Ning, Nabis distributes goods worth $400 million annually, or more than 20% of the wholesale industry. It also manages brand customer collections, with Nabis keeping a portion of the money merchants owe as compensation for leading the campaign to collect the debt.
BRANDS IN A TOUGH SPOT
According to industry sources cited by MJBizDaily, unpaid invoices have become a widespread problem for numerous brands, distributors, and manufacturers in California. This predicament has been a lingering concern for years, but it escalated significantly in mid-2022 when the industry stocks started to plummet, and available capital became scarce.
Among the hardest hit are social equity licensees and brands, including businesses owned by Black and Latino entrepreneurs. These individuals and enterprises have been disproportionately affected due to their limited access to capital reserves and resources.
One of the top-selling joint and pre-roll brands in California, Presidential Cannabis, a member of the credit organization, had a client in the Inland Empire who stopped returning calls after accruing $180,000 in unpaid payments.
Numerous brands that depend on merchants and delivery services to sell their items are in a difficult situation. Due to the difficulties, the Black-owned Los Angeles company Presidential changed its policy and now requires payment in full before opening. Before closing its doors, another client ordered goods worth $120,000.
The hard stance had impacted the Presidential's sales, which before last year increased and tripled income yearly.
"Some of us brands have gone above and above to get our product into stores, doing anything they requested. The co-founder and CEO of Everett Smith said, "We had to stop selling to many of our bigger clients because they weren't paying." He continued that it also doesn't seem proper or fair to just drag this out. "There are no investors with us. Each dollar matters.
CREDIT STRUGGLES
Sunderstorm, the popular gummy brand Kanha manufacturer, has faced challenges in recovering unpaid debts and turned to collection agencies as a last resort. However, the effectiveness of this approach has varied, with the 20% fee charged by most agencies resulting in losses for the business.
Based in the San Francisco Bay Area, Sunderstorm successfully recovered $15,000 in unpaid wages by suing a delivery operator but had to deduct collection fees. Typically, cannabis businesses cannot file small claims due to the court's $5,000 maximum limit, which is often exceeded by outstanding bills. To account for uncollected receivables, Sunderstorm sets aside $30,000 per month as bad-debt reserves.
Keith Cich, the co-founder and president, highlighted the significant impact of unpaid invoices on the industry. Non-payment by retailers and distributors creates a ripple effect, affecting extractors, packaging companies, and cultivators who rely on timely payments. An industry consortium was formed to address these issues and ensure financial stability.
With regulatory changes, distributors like Nabis have reduced losses by shifting the responsibility of collecting the 15% excise tax from distributors to retailers. Thanks to implemented measures and stricter credit controls, the outstanding balance now stands at a manageable few hundred thousand dollars, according to Ning.
In the cannabis industry, credit assessment is gaining importance, paralleling practices in traditional sectors such as banking, lending, and government. Fitch Ratings, Moody's, and Standard & Poor's, the major global credit-rating agencies, have started evaluating cannabis companies like Canopy Growth Corp., a milestone recognized by the California cannabis group CMA. CMA sees the need to protect accounts receivable and manage credit risks, anticipating a mutually beneficial business relationship in this market where no other active business credit associations are currently operating.
DRAWING FROM HISTORICAL PRECEDENTS
The regulations governing credit in the alcohol sales industry have been established since the end of the Prohibition Era. Under federal law, suppliers can extend credit to retailers for 30 days. Similarly, California and most states have their own credit laws about alcohol sales, enforcing fines and potential license suspensions for suppliers and retailers who fail to comply with 30-day credit plans.
New York could become one of the first states to introduce similar credit laws in the cannabis industry. Proposed rules in the state's newly established adult-use market require operators to settle credit purchases within 90 days. Distributors must report any delinquencies to the Office of Cannabis Management in New York, which holds the authority to invalidate agreements.
In California and New York, licensed cannabis companies are mandated to procure products from authorized distributors. To alleviate the credit challenges faced by the cannabis industry in California, state assembly member Philip Ting, a Democrat from San Francisco, is leading the charge with Assembly Bill 766. This legislation imposes significant penalties on operators who bypass credit agreements, addressing the issue where businesses often do not receive payment for their services and have limited recourse. The bill stipulates that licensees who accept goods and services worth at least $5,000 must settle invoices no later than 15 days after the due date. Failure to comply would trigger a warning notice from state regulators, empowered to issue citations and take disciplinary actions.
BOTTOM LINE
The wholesale cannabis industry in California is grappling with unpaid debts, prompting distributors and brands to collaborate with a credit association. The Credit Management Association (CMA) assesses invoices and compiles a "do not sell list" of shops with outstanding bills. This situation highlights the need for credit assessment and regulatory changes to address the credit challenges faced by the industry. Finding solutions to ensure timely payments and financial stability is crucial for all parties involved.
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