No industry is immune from COVID-19’s impact, not even state-compliant cannabis. When the pandemic began, most states with legal cannabis programs designated cultivation, manufacturing and dispensary businesses and workers “essential.” However, these essential businesses are still illegal in the eyes of the federal government. As a result, CARES Act funding and other coronavirus-specific federal debt relief measures have not been available to state-compliant but federally illegal cannabis companies.
Compounding liquidity issues, the tight capital-raising environment for cannabis companies before COVID-19 is now ever tighter, while operating expenses have increased. For cannabis operators with existing debt, the terms were already onerous by necessity, as traditional commercial lending terms have long eluded most cannabis businesses. The pandemic has undoubtedly forced upon certain operators difficult decisions regarding the short-term viability and long-term prospects of their operations.
Despite many states’ efforts to maintain access to medical cannabis—and in most cases, adult-use dispensaries—stay-at-home orders and consumer caution have meant that in some cases, patients and customers haven’t been frequenting retailers, dispensaries and provisioning centers as often as previously. Additionally, limited onsite capacities due to social distancing requirements have reduced the number of customers that some businesses are able to serve each day.
In this challenging business environment, cannabis operators and pre-operators could find themselves in need of contractual relief from existing debt. One option is a receivership, where a court-appointed receiver or trustee steps in to temporarily manage a company and its assets. Many people only think of receiverships as something initiated at the request of creditors to help them recover money owed. However, receiverships might also be initiated by a business owner in financial distress as part of a restructuring process, or to help avoid bankruptcy. In that situation, you might think of receivership as a sort of “time out” for the troubled business.