When Cannabis businesses face financial distress

Feb 3, 2022

When Bankruptcy isn’t an option

After another rollercoaster of a year, I’m reflecting back on some of the insights my partners and I at Opus Consulting (previously Nucleus One) shared with the Cannabis Industry throughout the COVID-19 pandemic.

One area that we’ve continued to monitor (and have recently become directly involved in) is Bankruptcy and Receivership within the Cannabis Industry. I thought I’d share an update on this topic, as well as highlight a related business opportunity.

Despite the prolonged financial uncertainty for many cannabis companies over the past few years, ‘failure’ as a business or investor group is still not really an option. Due to the federal marijuana prohibition, financially distressed cannabis companies face limited options when they need relief from creditors or to restructure their business. Most non-plant-touching businesses in the Cannabis space are ineligible to go through federal bankruptcy reorganization.

A strong business strategy requires focus on cost structure, product availability, quality, and investment in customer experience. However, the illicit market and lack of regulation enforcement can still pose a threat to legal operators with sound strategies. This risk, combined with inadequate financing or ineffective management, may lead operators and investors to accumulate more risk than they can ultimately handle. In non-cannabis industries, businesses at similar crossroads often turn to bankruptcy filing and reorganization. However, cannabis businesses are forced to turn to different options.

The good news is that there are other options available to cannabis businesses, and they don’t require federal bankruptcy involvement. One path operators can take is to seek assistance from professionals to initiate a process wherein a “receiver” or “reorganization specialist” is appointed by a state court to manage the operation on a temporary basis and handle the reorganization of the company until the business is back on track or the assets are sold or liquidated. This option is more widely known as “receivership”.

Receivership as an option for Cannabis Businesses

A receivership may offer secured lenders some of the same safeguards and protections available in a Federal Bankruptcy Chapter 11 filing, but with more flexibility in terms of cost, timing, and procedural requirements.

The goals of receivership are similar to bankruptcy in that it is intended to preserve and maximize the value of an operating business for the benefit of its stakeholders. While most think that receivership will lead to the liquidation of a business, it is not necessarily the case, as the process can be flexible enough to allow the business to continue to operate. And if viable, it can continue on its path to success, as long as goals and liabilities are met.

Opus Consulting named Receiver for Ermont, Inc.

In November 2021, Opus Consulting was appointed Receiver of Ermont, Inc. by the Superior Court in Massachusetts. In this capacity, Opus has taken control of the company’s assets and is operating the business while moving forward with a plan to market the Ermont assets for sale.

Ermont Inc. is a medical retail and cultivation operation located in Quincy, MA, licensed by the Cannabis Control Commission and operational since 2016. As with any business confronting bankruptcy or receivership, a number of operational and financial factors have contributed to the position the company is currently in.

However, Ermont is in a strong position to continue its medical marijuana operations, while focusing new efforts towards capitalizing on adult-use opportunities within its existing market. Located off of the I-93 exit, just south of Boston, Ermont’s operations are situated in a densely trafficked area, with a strong target customer base. An experienced player within the cannabis industry can recognize the opportunity at hand and with strong leadership, can steward growth for years to come.

In the coming weeks, we expect to issue a “call for offers” for the Ermont assets.

Questions, interest inquiries, and communication can be directed to Jacques Santucci of Opus Consulting, via email to jacques@opuscg.com, or phone, (207) 619-1899.

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