Corporate insolvency and restructuring statutes, like Chapter 11 in the United States and CCAA in Canada, provide companies with mechanisms to seek temporary protection from creditors while they prepare a restructuring plan for creditor and court approval. The steps and processes involved in these restructurings often involve nuance and complexity generally, however, for companies in the emerging (and often still, illegal) cannabis sector (including cannabinoid and hemp), there are several unique challenges that will have to be addressed which companies in more traditional sectors do not face.
In many ways, the unique challenges facing cannabis companies in restructuring mirror the unique challenges of operating such companies. These include complexities pertaining to banking, finance, insurance, regulatory compliance, inventory security, license transfer restrictions, lack of sector-specific experience/expertise among traditional service providers, lack of access to federal bankruptcy protections (in the U.S.), reliable asset valuation, and shallow depth of interested buyers/investors.
Banking
Companies operating peripherally to the cannabis industry often face difficulty when looking to procure banking services. Banking services can be the most difficult to obtain for those companies which "touch the plant" compared to companies which do no. This is true even in jurisdictions like Canada, where cannabis has been legalized For example, recent headlines suggested even the Business Development Bank of Canada - a 'bank' intended to assist emerging companies and is not beholden to public shareholders - is resisting offering banking services to companies involved in any cultivation, production, testing, processing, transformation, packaging, distribution, import/export, or selling of cannabis (wholesale or retail). In the U.S. it is even worse where many financial institutions are prohibited from working with non-cannabis companies, like construction companies, which do work in the cannabis sector but never "touch the plant". Despite quickly passing in the House, federal legislation tabled to make banking easier for state-legal companies is tied up in the Senate and may never be adopted (for a recent update, click here).
This obviously presents challenges for operating companies involved in the sector, but also presents significant challenges for companies putting together a restructuring plan that might otherwise include seeking credit from traditional sources. This leaves companies in the sector often dependent on non-traditional, uninsured, and more expensive, sources of credit.
Finance
In the U.S., Canada and Europe, many funds and institutions (especially larger ones) restricted themselves from investing in companies involved in the cannabis sector – particularly companies which "touch the plant". Again this remains true even for funds and institutions which operate and/or invest in jurisdictions where cannabis is legal.
Once again, as difficult as this is for operational companies, when it comes to finding restructuring financing, these limitations only accentuate the challenge of finding distress financing and make any offered that much more expensive.
Insurance
For companies in or providing products or services to the cannabis sector, insurance can be very difficult to procure at a reasonable price. Again, this is true in both Canada and the United States and truest for those that "touch the plant". It's the worst for companies seeking D&O insurance (see related article here), making it very difficult at times for them to recruit good people. Again, this challenge is doubled when the company is insolvent and/or under court-ordered protection for restructuring. Some vendors and staff simply refuse to be involved because of the heightened risk of liability over non- or under-insured companies.
Regulatory Compliance
Given the high level of regulatory oversight of the industry, any company operating in the cannabis sector can easily slip into non-compliance as it pertains to various aspects of its operation, product manufacturing, and distribution. This is particularly true for a company in a financial squeeze that starts to layoff and/or lose staff. Regulators will often be increasingly vigilant in monitoring companies it suspects may no longer have the staff or budget available to maintain compliance. If a company infringes its regulatory compliance obligations, this non-compliance can make its ability to recover from insolvency or court-supervised restructuring exponentially more difficult. It is imperative, in a court process, that experienced regulatory compliance/quality assurance people be listed as key personnel and their salaries and responsibilities be appropriately funded. To this end, a ‘key employee retention plan’ is a prudent planning and risk minimization strategy.
Restrictions on License Transfers
Given the tight controls that the government maintains over the granting and transfer of production, research, and retail licenses, selling assets or operating business or units is often complex and it may only be possible to properly value and complete transactions with the appropriate approvals from relevant authorities. Questions about the transfer-ability of licenses can slow down or completely impede transactions which are key to restructuring.
Inventory Security
One of the difficulties of having a product for which there is high demand in the illegal market, is the high security obligation this imposes on cannabis companies. Again, when money is tight, this can often be one area where it is easy to cut costs. A breach of security can lead to immediate shut-down, penalties, criminal charges, and retraction of licenses which, again, can slow down or impede a restructuring progress.
Asset valuation
Given the complexities of banking, insuring, licensing, and transferring/selling cannabis companies, the task of asset valuation in this sector is complex. This is further compounded by the fact that there are few, if any, fully mature cannabis companies for valuation experts to reference in establishing benchmark financial metrics and growth patterns that can be used in the valuation models for specific businessesThis if even further compounded by the fact that certain markets have experienced significant over-valuation of market capitalization (which are now experiencing severe corrections), other markets have more rational valuations, and even others would have significantly different valuation in their operating jurisdiction than is true of the valuation they receive where the stock is traded.
Lack of sector-specific experience among key product/service providers
Given the emerging nature of the industry, there is often a lack of experienced personnel or product/service providers with appropriate expertise in various areas of the cannabis industry. While certain talents, such as plant genetics and growing, translate well from the days of the illegal market, there are other areas of expertise which seem to be missing in these early days of the legal industry.
A great example of this is the recent debacle of companies looking to put THC-infused liquids into metal cans. Apparently very few people anticipated the challenges tin cans would present to the stability of THC in drinks. The same challenge, however, permeates even well-established areas of expertise such as insolvency, bankruptcy, and creditor protection processes. Given the unique challenges the sector presents to cannabis companies in operation - let alone when in court-supervised restructuring - those responsible for guiding these companies are almost assuredly not going to be able to do an adequate job if they do not have first-hand experience with cannabis operations, investors, bankers, insurers and, particularly, regulators.
Summary
Over the past few days we have tried to provide some insight into when management should consider court-supervised restructuring, a general description of what that the process (steps) looks like, and - now, above - how restructuring of a cannabis company likely involves several unique issues typically not confronted by teams restructuring companies in more traditional sectors.
The restructuring of cannabis companies is unique given the various factors described above There are very few people with experience in restructuring, insolvency, and the cannabis sectors who can provide good strategic advice, representation, and/or interim management. Find people with this kind of experience on both sides of the U.S./Canada border and you've really found something unique - like Restructur Advisors.