Tag Archives: financial

Cannabis Receiverships: A Viable Alternative to Bankruptcy

By Oren Bitan
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Doing business in California’s legal cannabis industry remains a risky endeavor. The majority of the industry is still unlicensed, tax rates at the state and local levels are high (notwithstanding a recent reprieve from California’s cultivation tax) and there are not enough licenses to meet geographic demand throughout the state. Outside financing remains difficult to secure for equipment, tenant improvements, account receivables and working capital because, under the federal Controlled Substances Act (CSA), cannabis remains a Schedule I narcotic. Therefore, entrepreneurs, investors and lenders who have stakes in state-sanctioned cannabis enterprises expect to see returns that justify the higher level of risk, which places additional financial pressure on cannabis businesses. In addition to the industry specific challenges, the United States economy is on the verge of a recession that may further hamper the industry notwithstanding the industry’s resiliency during the pandemic when it was deemed to be an “essential” industry that benefited from consumer spending of stimulus monies.

These outside pressures increasingly lead to ownership disputes and creditor defaults that result in litigation and the need for restructuring. In some instances, business partners cannot agree about control and finances of the licensed businesses and in other instances unpaid creditors file suit to enforce their interest in a company’s assets. And sometimes a local municipality discovers wrongdoing by an operator and initiates a health and safety lawsuit to cease the illegal condition.

Bankruptcy reorganization is an option typically utilized by struggling businesses to shed or restructure debt. Cannabis businesses, however, cannot take advantage of bankruptcy remedies because bankruptcy is a product of federal law and federal law still prohibits the sale of cannabis.

As a result, stakeholders in legal California cannabis enterprises must consider alternatives to bankruptcy to collect what they can on their loans and investments in the event the enterprise becomes insolvent or requires restructuring. A well-established alternative to bankruptcy is a state court remedy – the appointment of a receiver over the assets of a business or over the entire business operations. Through the receivership process, stakeholders may obtain many of the same protections available to them through bankruptcy

A. Federal Illegality Bars Access to Bankruptcy Protection

Over the past ten years, bankruptcy courts have routinely prohibited licensed cannabis businesses from seeking bankruptcy protection because cannabis remains illegal at the federal level under the Controlled Substances Act (CSA). Bankruptcy trustees are typically charged with managing and operating property in the same manner that the owner would be bound to do if in possession thereof. Because cannabis remains illegal at the federal level, trustees are not able to manage and operate licensed cannabis businesses.

B. Receivership as an Alternative to Bankruptcy

Under California law, a receiver is a neutral agent of the court appointed to preserve, control, manage and ultimately dispose of property that is subject to the litigation before the court.1 The receiver, therefore, holds property for the court, not the parties to the litigation.

Appointment of a receiver is a statutory provisional remedy. Other than corporate dissolutions under Code of Civil Procedure section 565, the law does not have a specific cause of action to appoint a receiver. Thus, the proponent of a receiver must have a valid cause of action in an underlying lawsuit.

1. The Appointment of a Receiver

The appointment of a receiver rests within the trial court’s discretion. Code of Civil Procedure section 564 contains the broadest statutory authority to appoint a receiver. Subdivision (b), details twelve possible situations in which a receiver may be appointed, most of which are beyond the scope of this article. The most common of these is a lender’s request to appoint a receiver when a borrower defaults on a loan and the lender seeks the appointment of a receiver over its collateral. The statute, however, clarifies that the situations listed in the statute are not exclusive: a court may appoint a receiver “[i]n all other cases where necessary to preserve the property or rights of any party.”

The receiver’s powers are limited by the statute under which the court appointed the receiver and those conferred by the court. The appointment order should, therefore, detail the duties the receiver owes to the court, and actions that the court authorizes the receiver to take to perform those tasks. The order should also specify the property that will be part of the receivership estate.

2. The Receiver’s Powers

The receiver has general statutory powers.2 The statutory powers include (i) commencing or defending litigation; (ii) taking and possessing property of the receivership estate, (iii) receiving rent, collecting debts, and making transfers, and (iv) acting in accordance with the court’s instruction with respect to the property.3 But the court’s authorization is necessary to sue the receiver and for the receiver to commence litigation.4 In the foregoing scenarios, the receiver is immunized personally from tort liability, but not in his or her official capacity as receiver.5

In addition to taking possession of property, the receiver may dispose of receivership property with the court’s approval.6 If the receiver is an equity receiver, the receiver may take possession and satisfy creditors from all the debtor’s assets.7

The court may further authorize the receiver to issue “certificates of indebtedness” to raise money to administer the receivership estate.8 This device permits the receiver to provide liquidity to the estate and gives the certificate holder an interest-bearing priority claim against the receivership estate.

3. Liquidating Cannabis Assets Through a Court Appointed Receiver

After the court appoints the receiver, the receiver should have sufficient powers to, among other things: (i) take over the management of the company; (ii) open bank accounts; (iii) borrow money by issuing receivership certificates; (iv) manage all of the company’s property; (v) hire counsel and other professionals; and (vi) sell the receivership estate’s assets for the benefit of the creditors. To maximize repayment to the creditors, the receiver may hold an auction to sell the assets and assist in facilitating the cancellation of company’s state license while the buyer of the assets secures its state license after the local license is transferred.

State cannabis licenses may not be sold or transferred.9 Yet, to maximize recovery for the creditors, the receiver may need to participate in the regulatory process to maintain a license during the pendency of the receivership and to assist in the amendment of a license while a prospective buyer seeks to obtain its own license. To do so, the receiver will first need to qualify as a licensee under state law to join as a licensee on the license and further the licensee as a going concern. Next, the principals of the prospective buyer will themselves need to qualify as licensees under the license. Then, once the sale of the company’s assets (including any interest in the license) to the buyer closes, the receiver and the company’s original owners will terminate their capacities as licensees of the license, leaving only the new owners as licensees. Thus, the proposed order should be written with attention to ensure the receiver has powers to further the foregoing and not diminish the value of the receivership estate.

After the conclusion of the sale of all assets, the receiver will need to obtain a discharge from the court of his or her duties as receiver. The receiver may do so by the parties’ stipulation or by motion. Together with the request for a discharge, the receiver should seek approval to pay: (i) any lenders to the receivership estate; (ii) professionals that the receiver hired; and (iii) him or herself for his or her services. Upon the court’s approval, the receivership will be terminated.

The conflict between federal and California law regarding cannabis continues to be an impediment for stakeholders in California’s cannabis market. Because of this conflict, stakeholders in California’s legal cannabis market lack access to vital traditional institutions, such as bankruptcy remedies. As a result, stakeholders must be prepared to consider alternatives such as a court appointed receiver, which can be a useful alternative to both secured creditors and unsecured creditors. Stakeholders who pursue a court appointed receiver will benefit from a long-established body of law and experienced professionals.

References

  1. Cal. Rules of Ct., r. 3.1179(a).
  2. Cal. Civ. Proc. Code §§ 568-570.
  3. Free Gold Mining Co. v. Spiers, 136 Cal. 484, 486 (1902); Steinberg v. Goldstein, 129 Cal. App. 2d 682, 685 (1954).
  4. Vitug v. Griffin, 214 Cal. App. 3d 488, 493 (1989).
  5. Chiesur v. Superior Court, 76 Cal. App. 2d 198, 201 (1946).
  6. Helvey v. U.S. Bldg. & Loan Ass’n, 81 Cal. App. 2d 647, 650 (1947).
  7. Turner v. Superior Court, 72 Cal. App. 3d 804, 812 (1977).
  8. Cal. Civ. Proc. Code § 568.
  9. See e.g., Cal. Code Regs. tit. 16, § 5023(c).

The CLIMB Act: How the Cannabis Industry Could Benefit

By Zachary Kobrin
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The cannabis industry could receive a significant boost if the recently introduced Capital Lending and Investment for Marijuana Businesses (CLIMB) Act passes Congress. The bipartisan bill was introduced by Rep. Troy A. Carter, Sr., a Democrat from Louisiana, and Rep. Guy Reschenthaler, a Republican from Pennsylvania. It is intended to boost the cannabis industry by creating greater access to capital, banking insurance and other business services. Unlike the SAFE Banking Act (which specifically addresses banking services for the cannabis industry), the CLIMB Act was introduced “to permit access to community development, small business, minority development and any other public or private financial capital sources for investment in and financing or cannabis-related legitimate businesses.”

Rep. Troy A. Carter, Sr.

Currently, the cannabis industry faces a serious dilemma with regard to accessing not only traditional banking services, but also essential capital and financing sources. The latest member of the cannabis bill alphabet soup attempts to remedy this by addressing two key issues.

First, the CLIMB Act would permit access to key “business assistance” programs from various financial institutions by prohibiting any federal agency from bringing any civil, criminal, regulatory or administrative actions against a business or a person simply because they provide “business assistance” to a cannabis state-legal company. The CLIMB Act defines “business assistance” broadly to include, among other things, management consulting work, accounting, real estate services, insurance or surety products, advertising, IT and other communication services, debt or equity capital services, banking or credit card services and other financial services.

This provision of the CLIMB Act would immediately create more access to traditional insurance, lending and credit. This broad protection would not only apply to private entities providing “business assistance,” but arguably means that the U.S. Small Business Administration (SBA) could not be penalized by Congress or another government agency for providing loans to state-legal cannabis companies. Moreover, currently the cannabis industry does not have access to use credit cards, as major credit card companies refuse to permit such transactions. The CLIMB Act could pave the way for major credit card providers to begin permitting cannabis transactions. Permitting the use of major credit cards like American Express, Mastercard and Visa could result in an increase in sales for cannabis retailers.

The second, and possibly the most important, aspect of the CLIMB Act is that it would amend the Securities and Exchange Act of 1934 to create a “safe harbor” for national securities exchanges like Nasdaq and the New York Stock Exchange (NYSE) to list cannabis companies and would permit the trading of these cannabis businesses stock. Currently, plant-touching cannabis companies with operations in the U.S. can only be listed on a Canadian-based exchange and can also only be traded in the U.S. via the over-the-counter (OTC) markets. Trading securities on the OTC markets does not provide the same level of security as securities traded on a national exchange like Nasdaq or NYSE. Specifically, the CLIMB Act delineates that the federal illegality of cannabis is not a bar to listing or trading of securities for legitimate cannabis-related businesses.

Rep. Guy Reschenthaler

This provision of the CLIMB Act has two immediate effects. First, the CLIMB Act would allow for U.S. cannabis companies currently listed in Canada to list on the Nasdaq or NYSE. Second, this provision would allow more traditional, “blue-chip” industry companies currently listed on Nasdaq or the NYSE who haven’t been able to operate within the cannabis industry as a plant-touching entity, to enter the cannabis industry as an active participant.

In announcing the CLIMB Act, Representative Reschenthaler stated that “American cannabis companies are currently restricted from receiving traditional lending and financing, making it difficult to compete with larger, global competitors. The CLIMB Act will eliminate these barriers to entry, and provide state-legal American cannabis companies, including small, minority, and veteran-owned businesses, with access to the financial tools necessary for success.”

It is important to note that the CLIMB Act, like the SAFE Banking Act, only represents one small, but important step toward cannabis reforms. Neither proposal would legalize, de-schedule or reschedule cannabis. Rather, the CLIMB Act addresses very real-world, operational issues facing the cannabis industry. With that in mind, the CLIMB Act would certainly provide much needed clarity for issues facing all cannabis companies.

Passage of the CLIMB Act is not a forgone conclusion, but rather is quite uncertain. Other pieces of cannabis-related legislation, like the SAFE Banking Act, have passed the House of Representatives multiple times without the U.S. Senate taking any action. Moreover, the CLIMB Act was introduced with only two legislative supporters.

Cannabis M&A: Take Care of the Due Diligence Essentials

By Michael G. Lux
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As the regulated cannabis industry matures, M&A activity is expected to continue accelerating. Whether they are existing licensed businesses looking for acquisition opportunities or new investor groups seeking to enter or expand their positions in the industry, investors should recognize the special due diligence challenges associated with cannabis industry transactions.

Above all, investors should avoid the temptation to omit or short-circuit long-established due diligence practices, mistakenly believing that some of these steps might not be relevant to cannabis and hemp operations. Despite the unique nature of the industry, thorough and professional financial, tax and legal due diligence are essential to a successful acquisition.

Surging M&A activity

Over the past few years, as the cannabis industry matured and the regulatory environment evolved, M&A activity involving cannabis and hemp companies has undergone several cycles of expansion and contraction. Today, the expansion trend clearly has resumed. Although the exact numbers vary from one source to another, virtually all industry observers agree that 2021 saw a strong resurgence in cannabis-related M&A activity, with total transactions numbering in the hundreds and total deal values reaching into billions of dollars. Moreover, most analysts seem to agree that so far, the pace for 2022 is accelerating even more.

Today, many existing cannabis and hemp multistate operating companies are in an acquisitive mood as they look for opportunities to scale up their operations, enter new markets, and vertically integrate. At the same time, the projections for continued industry growth over the next decade have attracted a number of investment funds and private equity groups, which were formed specifically for the purpose of investing in cannabis and hemp businesses.

These two classes of investors often pursue distinctly different approaches to their transactions. Unlike the largely entrepreneurial cannabis industry pioneers now looking to expand, the more institutional investors are accustomed to working with professional advisers to perform financial, tax and legal due diligence as they would for a transaction in any other industry.

Among both groups, however, there is sometimes a tendency to misunderstand some of the transactional risk elements associated with cannabis M&A deals. In many instances, buyers who are generally sensitive to potential legal and regulatory risks will underestimate or overlook other risks they also should examine as part of a more conventional financial and tax due diligence effort.

For example, since much of the value of a licensed cannabis operation is the license itself, investors often rely largely on their own industry understanding and expertise to assess the merits of a proposed acquisition, based primarily on their estimation of the license’s value. This practice provides acquirers with a narrow and incomplete view of the deal’s overall value. More importantly, it also overlooks significant areas of risk.

Because cannabis acquisition targets typically are still quite new and have no consistent earning records, acquirers also sometimes eschew quality of earnings studies and other elements of conventional due diligence that are designed to assess the accuracy of historical earnings and the feasibility of future projections.

Such assumptions and oversights often can derail an otherwise promising transaction prior to closing, causing both the target and the acquirer to incur unnecessary costs and lost opportunities. What’s more, even if the deal is eventually consummated, short-circuiting the normal due diligence processes can expose buyers to significant unanticipated risk down the road.

Recurring issues in cannabis acquisitions

The most widely recognized risks in the industry stem from the conflict between federal law and the laws of various states that have legalized cannabis for medical or adult recreational use. The most prominent of these concerns relates to Section 280E of the Internal Revenue Code (IRC 280E).

Although its use is now legal in many states, cannabis is still classified as a Schedule I substance under the federal Controlled Substances Act. IRC 280E states that any trade or business trafficking in a controlled substance must pay income tax based on its gross income, rather than net income after deductions. As a result, cannabis businesses are not entitled to any of the common expense deductions or tax credits other businesses can claim.

The practical effect of this situation is that cannabis-related businesses – including growers, processors, shippers and retailers – often owe significant federal income tax even if they are not yet profitable. Everyone active in the industry is aware of the issue, of course, and any existing operating company or investment group will undoubtedly factor this risk into its assessment of a proposed acquisition target.

The challenge can be exacerbated, however, by other, less widely discussed factors that also affect many cannabis businesses. These issues further cloud the financial, tax and regulatory risk picture, making thorough and professional due diligence even more critical to a successful acquisition.

Several of these issues merit special attention:

  • Nonstandard accounting and financial reporting practices. As is often the case in relatively young, still-maturing businesses, acquisition targets in the cannabis industry might not have yet developed highly sophisticated accounting operations. It is not uncommon to encounter inadequate accounting department staffing along with financial reporting procedures that do not align with either generally accepted accounting principles or other standard practices. In many instances, company management is still preparing its own financial statements with minimal outside guidance or involvement by objective, third-party professionals. Significant turnover in the management team – and particularly in the chief financial officer position –is also common, as is a general view that accounting is a cost center rather than a value-enhancing part of the management structure.

Such conditions are not unusual in young businesses that are still largely entrepreneurial in spirit and practice. In the cannabis industry, however, this situation is also a reflection of many professional and business services firms’ longstanding reluctance to engage with cannabis operators – a hesitancy that still affects some organizations.

When customary business practices are not applied or are applied inconsistently, acquiring companies or investors should be prepared to devote more time and attention – not less – to conventional financial due diligence. The expertise of professional advisers with direct experience in the industry can be of immense benefit to all parties in this effort.

  • Restructuring events or nonrecurring items in financial statements. Restructuring events and nonrecurring items are relatively common in many new or fast-growing businesses, and they are especially prevalent among cannabis operations. In many instances, such companies have engaged in multiple restructuring events over a short period of time, often consolidating operations, taking on new debt, and incurring various one-time costs that are not directly related to the ongoing operations of the business.

The inclusion of various nonrecurring items within the historical financial statements can make it much more difficult for a buyer or investor to accurately identify and assess proforma operating results, especially in businesses that have not yet generated consistent profits. Here again, applying previous experience in clearing up the noise in the financial statements can help improve both the accuracy and timeliness of the due diligence effort.

  • Run-rate results inconsistent with historical earnings or losses. A company’s run rate – an extraction of current financial information as a predictor of future performance – is a widely used tool for creating performance estimates for companies that have been operating for short periods of time or that have only recently become profitable. In cannabis businesses, however, run-rate estimates sometimes can be unreliable or misleading.

Because it is based only on the most current data, the run rate often does not reflect significant past events that could skew projections or recent changes in the company’s fundamental business operations. Because such occurrences are relatively common in the industry, the results of run-rate calculations can be inconsistent with the target company’s historical record of earnings or losses.

  • Historical tax and structuring risks new owners must assume. Like many other new businesses, cannabis operations often face cash flow and financing challenges, which owners can address through alternative strategies such as debt financing, stock warrants, or preferred equity conversions. Such approaches can give rise to complex tax and financial reporting issues as tax authorities exercise their judgment in interpreting whether these items should be reported as liabilities or equity derivatives. The situation is often complicated further by various nonstandard business practices and the absence of sophisticated accounting capabilities, as noted earlier.

As a consequence, financial statements for many cannabis companies – including a number of publicly listed companies – often contain complex capital structures with numerous types of debt warrants, conversion factors and share ownership options. Although an acquisition would, in theory, clean up these complications, buyers nevertheless must factor in the risk of previous noncompliance that might still be hidden within the organization – a risk that can be identified and quantified only through competent and thorough due diligence.

Not as simple as it seems

On the surface, the fundamentals of the cannabis industry are relatively straightforward, which is one reason it appeals to both operators and investors. For example, participants at every stage of the cannabis business cycle – growing and harvesting, processing and packaging, shipping and distribution, and ultimately marketing and retailing – can readily apply well-established practices from their counterparts in more conventional product lines.

The major exception to this rule, of course, is the area of regulatory compliance, which is still shifting and likely will continue to do so for the foreseeable future. Outside of this obvious and significant exception, however, most other aspects of the industry are relatively predictable and manageable.

When viewed in this light and in light of the continued growth of the industry, it is easy to see why cannabis-related acquisitions are so appealing to existing business operators and outside investors alike. It is also easy to understand why buyers might feel pressure to move quickly to take advantage of promising opportunities in a fast-changing industry.

As attractive as such opportunities might be, however, buyers should take care to avoid shortcuts and resist the urge to sidestep established due diligence procedures that can reveal potential accounting and financial statement complications and the related compliance risks they create. The unique nature of the cannabis industry does not make these practices irrelevant or unnecessary. If anything, it makes professional financial, tax, and legal due diligence more important than ever.

Crowe Disclaimer: Qualified organizations only. Independence and regulatory restrictions may apply. Some firm services may not be available to all clients. Given the continued evolution and inconsistency of various state and federal cannabis-related laws, any company should seek competent legal advice relating to its involvement in the cannabis industry, including when considering a potential public offering as a cannabis-related company.

Cannabis Banking: The Ins, the Outs & the Unknowns

By Tamara L. Kolb, Amy Bean, Caitlin Strelioff
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As the legal cannabis market expands, banks and nonbank financial institutions (NBFIs) across the United States continue to explore how to safely provide banking and other financial services to cannabis-related businesses (CRBs) and other CRB ecosystem players. At the same time, these organizations are taking into account changes they might need to consider relative to their Bank Secrecy Act ( BSA), anti-money laundering (AML) and related compliance programs. 

Regulatory conundrum

The Controlled Substances Act (CSA) identifies the cannabis plant and all its derivatives as a Schedule 1 controlled substance. Schedule 1 controlled substances have a “high abuse potential with no accepted medical use,” and they cannot be “prescribed, dispensed, or administered.” Because cannabis remains classified as a Schedule 1 controlled substance, the CSA “imposes strict controls on possession, manufacturing, distribution, and dispensing” of cannabis.

Under the Money Laundering Control Act of 1986 (MLCA) and the BSA as amended, covered banks and NBFIs are prohibited from providing financial services to businesses that are engaged in illicit activities. Because federal law prohibits the distribution and sale of cannabis, financial transactions involving CRBs are therefore deemed to be transactions that involve funds derived from illegal activities.

As of Feb. 3, 2022, 18 states, two territories, and the District of Columbia have enacted legislation to regulate cannabis for adult use. Thirty-seven states, the District of Columbia and four territories have approved comprehensive, publicly available medical and cannabis programs. Eleven states allow for the use of low-THC, high-CBD substances for medical reasons in limited situations or as a legal defense.

The growing divide between federal prohibition and state legalization of the cannabis industry creates a precarious position for federally regulated banks and NBFIs with the main concern involving exposure to legal, operational and regulatory risk. The situation begs the question: How might the federal government and regulators pursue and prosecute players in the legal cannabis industry?

The current economic trajectory predicts that retail sales of legal cannabis products in the U.S. will surpass an estimated $41.5 billion annually by 2025, and many banks and NBFIs are eagerly awaiting the federal green light to do business with CRBs without fear of prosecution or legal ramifications.

From 2018 forward, Congress has made several attempts to pass legislation that would protect CRBs when cultivating, distributing, marketing, and selling cannabis products in their state-legalized form. These efforts to declassify cannabis-related activity as a specified unlawful activity have thus far been unsuccessful.

The House passing the MORE Act back in 2020

Passage of the Secure and Fair Enforcement Banking Act of 2021 (SAFE Banking Act) and the Marijuana Opportunity Reinvestment and Expungement Act of 2021 (MORE Act) would enable banks and NBFIs to provide financial services to CRBs. The SAFE Banking Act would provide a safe harbor for banks and NBFIs that provide financial services to CRBs. The MORE Act would deschedule cannabis from the CSA entirely.

Questions to ask

Banks and NBFIs interested in providing financial services to CRBs should ask these questions:

  • Do we adequately understand our risk, and what are the implications for our organization? How should we augment our risk assessment process and our controls?
  • To what extent are we willing to accept the risk of banking CRBs? Do we have the ability to identify CRB customers, and if so, do we have any?
  • How should we advise the board of directors about setting risk appetite?
  • What customer due diligence (CDD) and enhanced due diligence (EDD) will we need to safely continue with existing customers and onboard new ones?
  • How will we monitor for unusual and suspicious activity? What will be the alerting and judgmental criteria?
  • How will our resource needs change so that we stay abreast of new processes and controls?

Risk appetite considerations

In order to determine whether to accept or prohibit CRBs, banks and NBFIs should identify the level of acceptable risk they are willing to take on. Several key components need to be considered, such as:

  • The board of directors’ stance on legal cannabis, given that good governance recommends and regulators expect that the board sets risk appetite
  • Cannabis laws in states within the customer footprint and the impact on customers’ communities
  • Risk profile, customer base, geographic location, products, and services
  • Relationship with regulators and any recent deficiencies or weaknesses in the BSA and associated compliance programs
  • Ability to implement appropriate controls and staffing

 Developing a strategic road map

If the decision is made to bank CRBs, banks and NBFIs should perform an assessment of compliance maturity for existing BSA/AML program processes and controls to identify potential gaps and develop a strategic road map that helps the organization achieve its vision for future state compliance and sustainable operations. 

A well-developed and well-articulated strategic road map visualizes what actions or key outcomes are needed to help organizations achieve their long-term goals. When creating the road map, banks and NBFIs need to demonstrate a keen understanding of their desired strategy, outcomes, markets, and products for onboarding and banking CRB customers. Specifically, banks and NBFIs need to define and explain how desired outcomes and business strategies create risk and exposure.

In addition to a road map, banks and NBFIs should develop and document a detailed risk-based approach that is aligned to the organization’s risk tolerance to determine necessary compliance steps when banking CRB customers.

Specifically, the following activities should be considered when developing a CRB banking program that meets regulatory expectations:

  • Identifying BSA/AML control gaps related to CRB risk identification and mitigation and formulating a plan to address them
  • Updating a board-approved policy framework
  • Updating detailed operating policies and procedures
  • Planning for capacity, developing job descriptions, and onboarding new personnel
  • Training for all three lines of defense, senior management, and the board
  • Developing and documenting a phased or full approach to acceptance of CRB customers
  • Developing and documenting a CRB program oversight policy

CRB risk framework

A three-tiered CRB risk framework first proposed in 2016 has quickly become the cannabis industry standard. The framework has evolved and expanded comprehensively to consider many types of CRBs, and evolving legal systems continue to refine the framework.

This framework is intended to help banks and NBFIs differentiate types of CRBs and their corresponding risks, and it separates CRBs into three tiers and details risks for each tier. The following exhibit summarizes the approach:

Risk framework by tier

Level Risk
Tier 1 Direct
Tier 2 Indirect with substantial revenue from Tier 1
Tier 3 Indirect with incidental revenue from Tier 1

Source: CRB Monitor

Even the most conservative of risk appetites equivalent to outright prohibition is not devoid of significant risk considerations. Residual risk frequently encompasses a large number of indirect connections in the total CRB ecosystem. Common examples are printers, lawyers, accountants, landlords, and even utilities and taxing authorities, and all of these are subject to regulatory scrutiny and, importantly, visibility to law enforcement. Also, policies to prohibit or restrict will be audited and examined for compliance, and exceptions will require explanations.

This panorama necessitates expertise and prudence in identifying and evaluating risks within the many layers of CRBs. For example, consider a bank or NBFI that banks a CRB’s employee or vendor. If a bank fails to properly implement controls that would allow it to identify and mitigate risk associated with banking CRBs, it will be susceptible to severe violations of the BSA, including civil money penalties, criminal penalties, and regulatory enforcement actions. 

Implementing necessary precautions

A well-developed road map should consider and implement the following activities:

  • Understanding the most current state and federal cannabis laws and regulations to ensure the bank or NBFI’s compliance
  • Understanding the local, state, or tribal program to ensure CRB customers are compliant with the program
  • Implementing a CRB risk assessment
  • Implementing executive approval practices for direct CRBs
  • Developing adequate risk ratings (possibly through a risk-based, tiered approach) and corresponding monitoring for CRB customers that includes:
    • Integrating various customer onboarding and AML solutions at both onboarding and periodic levels
    • Scheduling regular reviews to include recurring enhanced due diligence, site visits, and transaction monitoring
    • Monitoring for suspicious activity, including red flags, via open sources for adverse information about the CRB customers and related parties such as beneficial owners
  • Performing adequate CDD and EDD that will validate that the CRB-offered products, services, and programs are compliant with most current state laws and regulations by:
    • Collecting appropriate documentation as evidence of compliance, perhaps including a comprehensive onboarding questionnaire, beneficial ownership information, and contracts for the growing, harvesting, transporting and processing of the product
    • Reviewing applications and supporting documentation used to obtain a legal cannabis state license
    • Understanding the normal and expected activity of the organization’s CRB customers and their product usage
  • Developing adequate training programs and governance and oversight programs to address this customer type by:
    • Updating existing policies and procedures to review inherent risk presented by banking CRB customers
    • Updating annual training for employees
  • Auditing initial program design and periodic operational effectiveness

Moving forward cautiously

The ins, outs, and unknowns of cannabis banking are complex, and they require banks and NBFIs to be extremely vigilant with current policy and aware of new developments. Overall, the idea of creating a cannabis program might seem like a daunting task, but with appropriate guidance and care, organizations can provide services in compliance with laws and regulations.

Crowe disclaimer: Qualified organizations only. Independence and regulatory restrictions may apply. Some firm services may not be available to all clients. Given the continued evolution and inconsistency of various state and federal cannabis-related laws, any company should seek competent legal advice relating to its involvement in the cannabis industry, including when considering a potential public offering as a cannabis-related company.

State of the US Cannabis Payment Processing Market: An Interview with Executives at KindTap and Aeropay

By Aaron Green
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Federal regulations have made compliant credit processing in the cannabis industry difficult to achieve. As a result, most cannabis retailers operate a cash-only model, limiting their ability to upsell customers and placing a burden on customers who might rather use credit. While some dispensaries offer debit, credit or cashless ATM transactions, regulators and traditional payment processors have been cracking down on these offerings as they are often non-compliant with regulations and policies.

Two companies, KindTap Technologies and Aeropay, are addressing the cannabis industry’s payment processing challenges with innovative digital solutions geared towards retailers and consumers.

We interviewed both Cathy Corby Iannuzzelli, president at KindTap Technologies and Daniel Muller, CEO at Aeropay. Cathy co-founded KindTap in 2019 after a career in the banking and payments industries where she launched multiple financial and credit products. Daniel founded AeroPay in 2017 after a career in digital product innovation, most recently at GPShopper (acquired by Financial), where he oversaw the design and development of over 300 web and mobile applications for large scale Fortune 500 companies.

Green: What is the biggest challenge your customers are facing?

Cathy Corby Iannuzzelli, co-founder and president at KindTap Technologies

Iannuzzelli: Our customers include both cannabis retailers and their end consumers. As long as cannabis is illegal at the federal level, normal payment solutions such as debit and credit cards cannot be accepted for cannabis purchases. This has resulted in heavy cash-based sales and unstable, transient work-around ATM payment solutions that can be ripped out with little notice, disrupting the entire business. The lack of a mature payment network to support retail payments for cannabis purchases is a huge challenge for all stakeholders. Cannabis retailers bear the high cost and safety issues of operating a heavily cash-based retail business. Consumers encounter several friction points that require them to change their behavior when purchasing cannabis relative to how they purchase everything else.

Muller: Our cannabis business customers have faced a constantly changing and, frankly, exhausting financial services environment. From the need to move and manage large amounts of cash, to card workarounds, added to the disappointment from legislation around the SAFE Banking Act, these inconsistencies have acted as a roadblock to their potential growth and profitability. Aeropay is in the position to be a stable, long-term, reliable payments partner ready to help them scale their businesses. We believe these opportunities are limitless.

Green: What geographies have got your attention and why?

Daniel Muller, CEO and founder of Aeropay

Iannuzzelli: KindTap’s focus is on the U.S. market where federal policy has created the need for alternatives to traditional payment networks. KindTap is available in every U.S. state where cannabis is legally sold. In terms of our distribution channels, KindTap’s digital payment solution was brought to market during the COVID-19 pandemic when curbside pick-up and delivery became critically important. These channels are where the exchange of cash at pick-up posed the greatest security risk to employees and customers. Our early integrations were with e-commerce platforms focused on delivery and pick-up orders, and our integration partners have strong customer bases in California and the northeast. So, while KindTap can provide its “Pay Later” lines of credit and “Pay Now” bank account solutions anywhere, we have heavier penetration in those regions.

Muller: California, for its established tech culture and how it plays into the cannabis industry – your product simply has to live up to their tech standards to be heard. Also, Chicago, our headquarters, with its newly emerged commitment to financing the cannabis industry and bringing with it a more traditional business approach. In Chicago, you have to have elevated standards of professional practices in any industry you enter. And of course, we love to watch emerging markets like New York and Florida as they head towards adult-use and what shape cannabis and payments will take.

Green: What are the broader industry trends you are following?

Iannuzzelli: We continue to see a strong transition from cash and ATM transactions over to digital payments. Since KindTap has a fully-integrated payment “button” on e-commerce checkout screens, the adoption rate of end consumers to that one-click experience is quite strong. We are also seeing trends of more “express lines” in the retail environment – for those KindTap users who paid online/ahead – and faster/safer delivery experiences to people’s homes since there is no longer the need to collect any payment upon delivery. We are firm believers in the delivery/digital payments combination and a strong increase of that trend as more states allow for delivery.

Muller: The cannabis industry is starting to normalize payments and mirror traditional online and brick-and-mortar. With bank-to-bank (ACH) payments, cannabis businesses can now offer modern customer shopping experiences including pre-payment for delivery orders without the need for a cash exchange at the door, offering the option to buy online pickup in-store and contactless in-store QR scan-to-pay customer experiences. With these familiar and customer-driven options now available, we are seeing widespread adoption, as well as meaningful increases in spend and returning customers.

Green: Thank you both. That concludes the interview!

About KindTap: KindTap Technologies, LLC operates a financial technology platform that offers credit and loyalty-enabled payment solutions for highly-regulated industries typically driven by cash and ATM-based transactions. KindTap offers payment processing and related consumer applications for e-commerce and brick-and-mortar retailers. Founded in 2019, the company is backed by KreditForce LLC plus several strategic investors, with debt capital provided by U.S.-based institutions. Learn more at kindtaptech.com.

About AeroPay: AeroPay is a financial technology company reimagining the way money is moved in exchange for goods and services. Frustrated with the current, antiquated payments landscape, we believe there is a better way to pay and a better way to get paid. AeroPay set out to build a payments platform that works for all- businesses, consumers, and their communities. Learn more at aeropay.com.

Cannin Commentary

Is Tilray Stock a Buy Post Fiscal Q2 Results?

By Cannabis Industry Journal Staff
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Canadian cannabis giant Tilray (NASDAQ:TLRY) announced its fiscal second quarter of 2022 results last week. The company reported net revenue of $155 million in Q2 which was an increase of 20% year over year. Tilray attributed these gains to its expansion in verticals that include alcohol as well as hemp-based wellness.

Despite an uptick in sales, Tilray’s gross margin reduced by 7% to $32.8 million as the Canadian cannabis market continues to wrestle with oversupply issues resulting in lower-priced products. Alternatively, Tilray claimed its cost-reduction program is running ahead of schedule and it expects to save $100 million by 2023, up from its earlier forecast of savings of $80 million.

Tilray reported a net income of $6 million in Q2, compared to a year-ago loss of $89 million. The fiscal second quarter was also the 11th consecutive quarter where Tilray reported an adjusted EBITDA. This figure stood at $13.8 million in Q2.

Tilray stock rose by 15% in the two trading days following its Q2 results.

What impacted Tilray in Q2 of fiscal 2022?

Tilray explained its Q2 results were solid as it has successfully built a cannabis and lifestyle brand. Further, the company continues to benefit from its scale, global distribution capabilities as well as operational excellence allowing it to increase sales and maintain profitability despite macro-economic headwinds.

Last year, Tilray completed its merger with Aphria making the combined entity the largest cannabis producer in Canada in terms of market share and sales. Tilray maintained its leadership position in the country despite market saturation and rising competitive challenges.

The company enjoys strong brand recognition and is focused on ensuring an adept pricing environment. It also believes marketing adjustments will allow Tilray to aggressively capture market share going forward.

Germany is the largest medical cannabis market in Europe where Tilray has a 20% share. It’s well-positioned to capture the adult use cannabis market as well in Europe, if and when cannabis is legalized in this region.

Tilray, similar to most other producers aggressively acquired companies in the past. Its acquisition of the U.S.-based SweetWater Brewing and Manitoba Harvest provides it a foothold in the world’s largest cannabis market. These two companies have invested in product innovation to enhance awareness and distribution.

Further, SweetWater and Manitoba Harvest are profitable and provide Tilray an opportunity to launch THC-based products in the U.S. when pot is legalized at the federal level.

What next for TLRY stock?

During its earnings call, Tilray disclosed its new parent name called Tilray Brands. It reflects the company’s evolutions from a Canadian licensed producer to a global consumer packaged goods company with a leading portfolio of cannabis and lifestyle CPG brands.

german flag

Tilray aims to post annual sales of $4 billion by 2024 which is quite optimistic given analysts expect revenue to grow to $980 million in fiscal 2022 and $1.2 billion in fiscal 2023. In order for Tilray to reach its lofty goals, it will have to acquire other licensed producers resulting in shareholder dilution.

Germany is expected to legalize marijuana at the federal level, making it the largest country to do so in terms of population. Tilray already has an EU GMP-certified facility operating in Germany which can increase production capacity to accommodate demand from the adult use segment.

Bottom Line: Is Tilray Stock a Buy Post Fiscal Q2 Results?

While Tilray’s stock gained pace, following its Q2 results, investors should understand that it was estimated to report revenue of $171 million in the quarter. Despite the cost synergies enjoyed by Tilray, the adult-use market in Canada is crowded as well as highly fragmented and should consolidate in the upcoming years which will allow companies to improve the bottom line.

Tilray stock is valued at a market cap of $3.2 billion which suggests its forward price to sales multiple is over 3x. Unlike most cannabis producers in the U.S. Tilray continues to post an adjusted loss making it a high-risk bet at current multiples.

Emerald Holding Acquires MJBiz for $120 Million

By Cannabis Industry Journal Staff
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In a press release sent out today, Emerald Holding, Inc. announced they have completed their acquisition of MJBiz for $120 million.

Emerald Holding, Inc. is a large, publicly traded business-to-business events producer and content conglomerate with a number of publications and events in industries like design, equipment, retail, safety & security and technology. Founded in 2013, the company has become a leading operator of B2B trade shows in the US, with their largest shareholder being the Toronto-based investment group called Onex Corporation.

MJBiz, founded in 2011, is known in the cannabis industry for their content platform, MJBizDaily, as well as the world’s largest cannabis trade show, MJBizCon.

As part of the agreement to acquire MJBiz, Emerald Holding will retain senior management in the company for day-to-day operations. The agreement also includes the potential for future payments, depending on the company’s performance through the end of this year.

Hervé Sedky, President and CEO of Emerald Holding, says they have been big fans of the MJBiz brand for a long time. “We have long admired MJBiz’s sterling reputation for being the most trusted event and content producer serving the business side of the cannabis and hemp industries and their respective participants,” says Sedky. “This is a transformational acquisition for Emerald as it represents an important next step in the implementation of our strategic initiatives and underscores our commitment to evolve and grow our customers’ businesses 365 days a year.”

The two founders of MJBiz, Cassandra Farrington and Anne Holland, will stay on with the company in a consulting capacity. According to Farrington, who is also chair of the MJBiz Board, says they went with Emerald because they value the company’s uniqueness. “Our organization has experienced massive growth since its inception, initially as a how-to resource to help dispensary owners run their businesses better, into our position today as the leading commercial resource for the cannabis sector,” says Farrington. “Integrating with a larger organization provides the additional resources and channels to unlock the next phase of MJBiz’s growth and is the right next step in our evolution as a business.”

Cannin Commentary

Why Should You Add Columbia Care to Your Cannabis Portfolio?

By Cannabis Industry Journal Staff
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Investors looking to gain exposure to the cannabis space have several options given the increase in the number of cannabis producers in the past decade, the recent wave of legalization in the U.S. and a rapidly expanding addressable market. However, one undervalued cannabis stock with enticing growth prospects that remains a top buy today is Columbia Care (OTC: CCHWF). Let’s see why we are bullish on the large-cap multi-state operator right now.

What is Columbia Care?

Columbia Care is one of the largest cannabis producers in the world with 31 manufacturing and cultivation facilities. It has 99 dispensary locations in the U.S. with more than two million square feet of cultivation capacity and over 300 acres of outdoor cultivation capacity.

The company’s rapid expansion over the last few years has allowed Columbia Care to increase sales from $77.45 million in 2019 to $179 million in 2020. Wall Street expects sales to more than triple to $626 million this year and grow by another 55% to $970 million in 2022. In case Columbia Care manages to meet analyst estimates, the company would have grown its revenue at an annual rate of 132% between 2019 and 2022.

While several of Columbia Care’s peers, especially in Canada, are grappling with negative margins, this cannabis company is racing towards profitability. It has already narrowed its operating losses from $81 million in 2019 to $31.5 million in the last 12-months. Analysts expect its bottom-line to improve from a loss per share of $0.48 in 2020 to earnings of $0.27 per share in 2022.

We can see that Columbia Care is valued at a forward price to 2022 sales multiple of less than 2x given its market cap of $1.15 billion. Its price to earnings multiple is also quite attractive at 11.8x. 

What’s Next for Columbia Care Investors?

Columbia Care has a strong presence in markets such as Virginia, Ohio and Pennsylvania that provide limited licenses to cannabis producers. This allows Columbia Care to improve customer engagement and ensure repeat purchases of its products.

In the second quarter of 2021, it increased revenue by 232% year over year to $110 million. Its adjusted EBITDA also rose to $16 million, compared to a loss of $4.7 million in the prior-year period.

Columbia Care acquired Medicine Man for $42 million.

Now, Columbia Care has shifted focus to larger cannabis markets including New York, Arizona, Columbia and New Jersey. In Q2, its sales in Arizona and Illinois rose by 23% and 15% respectively, on a sequential basis.

The cannabis heavyweight recently completed the acquisition of Medicine Man, a Colorado-based cannabis producer, for $42 million. Columbia Care explained the acquisition will be accretive to its bottom-line and is valued at 4.5x projected EBITDA for 2021.

Columbia Care has improved its gross margins to 42% in Q2, from 36% in the prior-year period. Its operating costs have also fallen from $61 million to $51 million in the last year, making it one of the best cannabis stocks on the market today.

Bottom Line: Why Should You Add Columbia Care to Your Cannabis Portfolio?

Columbia Care expects its total addressable market in licensed U.S. states to reach approximately $31 billion by 2026. In the event that cannabis is legalized at the federal level, this figure will surge significantly higher. Additionally, Columbia Care is well poised to gain traction in the future and leverage existing expertise, as it already has wholesale distribution agreements in 13 operational markets.

Its capital expenditure investments continue to generate returns as the company continues to benefit from economies of scale and higher margins.

Columbia Care stock is currently down about 60% from its 52-week high, providing cannabis investors the opportunity to purchase a quality growth stock at an attractive multiple.

For these reasons, we believe investors should consider adding Columbia Care to their cannabis stock portfolios while it’s still trading at a discount.

Cannin Commentary

3 Cannabis Stocks That Can Gain Over 50% According to Analyst Estimates

By Cannabis Industry Journal Staff
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Welcome to the Cannin Commentary Column. We’re happy to announce our partnership with Cannin Investment Group, a cannabis investment analysis firm. In this new column, we will provide readers with a taste of Cannin’s insights and analysis that they offer to their members. Throughout the new installments of this column, you’ll find articles that will touch on investment tips, trends, predictions, market updates and more.

Companies in the cannabis sector have the potential to increase your wealth at an enviable rate over the upcoming decade. But what are the 3 cannabis stocks that can gain over 50% according to analyst estimates?

The wave of cannabis legalization sweeping through the U.S. right now as well as the prospect of decriminalizing or even legalizing adult-use will be key drivers for licensed producers.

Here, we take a look at three cannabis stocks in Columbia Care, Green Thumb Industries and Cresco Labs that should be on your buying radar right now. Each of these stocks is also trading at a deep discount according to Wall Street estimates, allowing investors to derive market-beating gains in the next year.

Columbia Care

U.S.-based multi-state operator, Columbia Care (OTC: CCHWF) is valued at a market cap of $1.12 billion. The company has already increased revenue from $77.4 million in 2019 to $179 million last year.

Now, Wall Street expects sales to more than triple year over year to $625 million in 2021 and surpass $970 million next year. These stellar growth rates in revenue should allow Columbia Care to improve its bottom-line from a loss per share of $0.48 in 2020 to earnings per share of $0.3.

Columbia Care has a presence in 18 jurisdictions across the U.S. and Europe where it operates 31 cultivation and manufacturing facilities.

The company generated $110 million in revenue in Q2 which was 232% higher than the prior-year period. Columbia Care has 73 active dispensaries and another 26 under development, enabling it to target a rapidly expanding addressable market that is forecast to touch $31.6 billion by 2026.

So, is Columbia Care a cannabis stock that can gain over 50%? Well, analysts tracking Columbia Care stock have a 12-month average price target of $9.38 for the stock which is more than 200% higher than its current trading price.

Green Thumb Industries

A cannabis giant trading 46% below its all-time high, Green Thumb Industries (OTC: GTBIF) is valued at a market cap of $4.4 billion. Headquartered in Illinois, Green Thumb Industries has 13 manufacturing facilities, licenses for 111 retail locations and currently operates in 14 domestic markets.

In the second quarter of 2021, the company’s revenue rose by 85% year over year to $222 million – driven by strong demand in Pennsylvania and Illinois. The Q2 of 2021 was also the fourth consecutive quarter where Green Thumb reported a profit, with a net income of $22 million compared to a loss of $13 million in the prior-year period.

Green Thumb currently has 65 retail stores and just opened a third store in the state of New Jersey which is a market that recently legalized cannabis for adult use. While retail sales in New Jersey are expected to begin next year, Green Thumb’s presence in the medical space will enable the company to gain traction in the highly competitive adult-use cannabis vertical as well.

So, is Green Thumb Industries a cannabis stock that can gain over 50%? Well, analysts expect Green Thumb stock to rise by 95% in the next 12-months given its average price target of $37.54.

Cresco Labs

The final stock on our list is Cresco Labs (OTC: CRLBF), another cannabis heavyweight valued at a market cap of $2.16 billion. A vertically integrated cannabis operator, Cresco Labs currently has 40 dispensaries in 10 states and has grown its sales from $43 million in 2018 to $476 million in 2020.

Most states have a limit on the licenses they are allowed to issue and this barrier to entry allows Cresco and peers to enjoy a competitive advantage in the markets they operate in. Cresco Labs reported revenue of $210 million in Q2, a rise of 123% year over year.

It reported a net profit of $2.7 million in Q2 compared to a loss of $41 million in the prior-year quarter. Cresco expects to generate $1 billion in sales by the end of 2021, making it among the first cannabis companies to reach the milestone.

We believe Cresco is certainly a cannabis stock that can gain 50%. Wall Street expects Cresco Labs stock to gain over 60% compared to its current trading price.