Cannabis Business And Failure: What Do We Do When Bankruptcy Is Not An Option?

By The Fresh Toast's Brendan Bures, provided exclusively to Benzinga Cannabis.

Cannabis companies don’t have the same financial advantages of other companies, meaning success is the only option.

As high as waves rise, they all eventually crash. The cannabis industry has learned that lesson the hard way, as many of marijuana’s biggest players have experienced significant downturns over the past several months.

MedMen, one of the most recognizable marijuana brands, has shed over 40% of its corporate headcount, including co-founder and CEO Adam Bierman. Tilray laid off 10% of its staff this week and cannabis publication Leafly slashed 18% of its workforce “to more closely align our business operations with the market realities,” CEO Tim Leslie said.

For Tilray, the layoff announcement was a “logical response given the current state of the industry,” Cowen & Co. analyst Vivien Azer said in a report sent to clients Tuesday.

“Both Canadian and international LPs have built up infrastructure levels that exceed current market demand,” Azer added.

These examples, sadly, could go on. However far any cannabis company falls, though, you won’t see any of them declaring bankruptcy. That’s because they can’t.

“The simple answer on bankruptcy is in general a company that is growing or processing or selling cannabis cannot access federal bankruptcy,” David Feldman, a partner at Hiller P.C., a global law firm, told The Fresh Toast.

Due to marijuana’s federally illegal status, marijuana companies don’t have access to the same financial advantages as other business sectors do, including bankruptcy. If a marijuana company experiences turbulent times, it has few options to bounce back. Considering only 90% of marijuana companies are profitable, the downward turn in the market has presented difficult choices for executives. Some businesses have simply folded or sold themselves to other publicly traded companies. Otherwise, the solutions are few and far between.

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“Many states have insolvency proceedings you can go through. A number of states allow that, if you’re in a legal state,” Feldman says. “You can also try to restructure your debt and equity table in the way that people do and work out situations.”

Hence the layoffs, as well as businesses shedding assets, selling real estate to raise cash, or pulling out of operations in other states. The reality is that many marijuana businesses have a significant cash crunch at the moment. Initially, the belief was that multi-state operators, like MedMen, had to grow as quickly as possible so that when legalization came, the biggest players would be bought out. That hasn’t happened and doesn’t appear like it will anytime soon.

Because those companies overpromised and underdelivered for investors, it caused a major market correction with declining stock values in the cannabis space. As a result, capital has temporarily dried up and now cannabis companies have to realize new ways to keep the lights on.

What you’re seeing, in other words, is cannabis companies going through some very real growing pains. While Feldman believes this will be better for the marijuana industry in the long run, it doesn’t mean things will get easier for these companies anytime soon

“A number of these operators are no longer sitting around waiting for legalization and instead trying to chart a path towards their own success as an independent company,” Feldman says. “That includes actually focusing on achieving profitability and not being dependent on capital raising for funding their operations.”

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