A group of California distributors and brands representing more than half the state’s wholesale B2B cannabis market has hired a credit association to rate retailers in the hopes of reducing the hundreds of thousands of dollars in unpaid invoices – and reining in repeat offenders.
The Credit Management Association (CMA), a nonprofit based in suburban Los Angeles, is analyzing accounts receivables and other documents from more than a dozen distributors and brands.
The CMA plans to email each of the distributors and brands a “do not sell list” of 25 California retailers that don’t pay their bills on time – a seismic problem in the world’s largest cannabis market and across the United States.
The “red” list, according to group members, highlights retailers and delivery providers that owe at least $25,000 for products and are 90 days late or more on payments, often categorized as delinquent.
(In California, consumers pay delivery providers directly for products delivered, and in turn, delivery providers pay suppliers.)
Together, the companies on the “do not sell” list owe at least an estimated $625,000 – likely indicating that retailers and delivery providers statewide (including those not on the list) collectively owe more than $1 million in unpaid invoices.
The issue, like most in the cannabis industry, isn’t as clear cut as it seems.
Retailers and delivery operators have been struggling for years to turn a profit, burdened by high taxes, regulation and competition from the illicit market.
Most retailers don’t set out to become bad actors. They fall behind on payments and struggle to claw out of debt, according to industry sources.
The credit association is onboarding new members, facilitating group meetings and aggregating data sets to create business credit reports.
The first report is expected to be released to members in a few weeks, according to members who spoke with MJBizDaily.
“The goal of this group is to create a bit more stability and financial structure in the supply chain of cannabis,” said Vince Ning, founder and co-CEO of California cannabis distributor Nabis, the San Francisco company spearheading the accountability effort.
Nabis distributes about $400 million worth of products annually, more than 20% of the entire wholesale market, according to Ning.
It also handles collections for brand customers, with Nabis pocketing some of the money owed by retailers to cover its own costs for spearheading the collection effort.
“So when a retailer doesn’t pay, we bite the bullet, too,” Ning said.
Brands in a bind
Nearly every brand, distributor and manufacturer in California is dealing with unpaid invoices, a problem that has rippled through the market for years but really ramped in mid-2022 as industry stocks began reeling and capital dried up, industry sources told MJBizDaily.
Social equity licensees and brands, including Black- and Latino-owned businesses, have been particularly hit hard since most lack capital reserves and resources.
Presidential Cannabis, a member of the credit association and one of the top-selling blunt and pre-roll brands in California, has a client in the Inland Empire that stopped answering calls after racking up $180,000 in unpaid invoices.
Another client ordered $120,000 worth of product right before going out of business.
The setbacks caused Presidential – a Black-owned Los Angeles brand – to change policy to demand payment or close its doors.
It’s a predicament facing countless brands that rely on retailers and delivery providers to sell their products.
The hard line has hurt sales at Presidential, which had doubled and tripled revenue annually before last year.
“A lot of our bigger clients we had to stop selling to because they weren’t paying,” said Everett Smith, co-founder and CEO.
“Some of us brands have bent over backwards to have our product in the stores, do whatever the stores asked us to do. And then to just string us along just doesn’t seem right or fair,” he added.
“We don’t have any investors. Every dollar counts.”
Sunderstorm, which manufactures the gummy brand Kanha and self-distributes its products, has utilized collection agencies as a last resort, with varying success.
Since most firms take a 20% cut, any debt resolution typically translates into a business loss.
The San Francisco Bay Area company did have success suing one delivery operator, recouping $15,000 of back pay, minus collection fees.
A small claims filing is typically not an option for cannabis businesses because outstanding bills often exceed the $5,000 court maximum.
Sunderstorm allocates $30,000 a month toward bad-debt reserves to cover the cost of uncollected receivables.
“That’s a meaningful number for my business,” said co-founder and president Keith Cich, who highlights this trickle-down effect on the industry when invoices are unpaid.
If retailers and distributors can’t pay brands, brands can’t pay extractors or packaging companies, extraction operators can’t pay cultivators – and the cycle continues.
“It becomes this self-fulfilling negative shockwave through the entire ecosystem,” Cich said.
“One of the main reasons we got together as an industry consortium was that the entire supply chain gets threatened when one part of the supply chain can’t pay their bills.”
Before California regulators shifted the 15% excise tax collection last year from distributors to retailers, distributors such as Nabis were losing significant amounts of money prepaying the state on excise taxes without collecting on it from customers.
The balance is now a manageable few hundred thousand dollars, according to Ning.
“At one point, it was several million. Through these measures and tightening our credit controls, we’ve whittled down the balance significantly.”
Another industry evolution
While credit reports have been common for decades in mainstream industries such as banking, lending and government, they represent an emerging practice in the cannabis space.
Fitch Ratings, one of three New York-based global credit-rating agencies, started covering Canopy Growth Corp. only in the past few years.
Along with Moody’s and Standard & Poor’s, the other two dominant players in the global credit scene, the agencies assign letter grades to conglomerates, securities, government agencies and even entire countries based on their ability to meet financial obligations.
The California cannabis group represents CMA’s first foray into the marijuana sector.
“We commend leaders in that industry who see the necessity of protecting their accounts receivable and managing credit risk,” CMA Chief Executive Richard Adams told MJBizDaily via email.
“CMA has welcomed many emerging industries in our 140-year history, and we look forward to a mutually beneficial business relationship here as well.
“I’m not aware of any other business credit associations that are active in this market sector.”
Precedent for action
Federal and state credit laws regarding alcohol sales have been on the books since the end of the Prohibition Era.
Under federal law, suppliers can grant credit to retailers only for a maximum of 30 days.
California, like most states, also has credit laws regarding alcohol sales, with fines levied against suppliers or retailers – and potential license suspension – for failing to comply with 30-day credit plans.
New York might be among the first states to authorize these types of laws in the cannabis industry.
The proposed rules in the state’s recently established adult-use market require operators to pay for purchases on credit within 90 days.
Distributors are required to report delinquencies to New York’s Office of Cannabis Management, which has the authority to invalidate agreements.
In New York, like California, licensed cannabis companies are required to buy products from distributors.
California state assembly member Philip Ting hopes to ease the state’s cannabis credit crises with one of the nation’s first credit laws for marijuana sales.
The San Francisco Democrat is the lead sponsor of Assembly Bill 766, which levies stiff penalties against operators skirting credit agreements.
“Quite often, businesses don’t get paid after they supply services, so there’s no real recourse,” Ting said.
His bill requires licensees accepting goods and services worth at least $5,000 to pay invoices no later than 15 days after the due date.
If the invoice is not paid by that time, it would trigger a warning notice from state regulators, who can also issue citations and other disciplinary actions.
The bill also prohibits:
- Licensees from purchasing goods and services from other operators on credit until the invoice is paid in full.
- The invoice due date being no later than 30 days from the time goods or services are sold.
“What we want to do with AB 766 is provide credit protection to all cannabis licensees to ensure they receive payments,” Ting said.
“This will ensure a stable flow of goods and payments across the supply chain.” (Full Story)