The California cannabis market is truly struggling all the way around. Cannabis businesses and those who work with them closely face mounting financial pressure. Because of the credit crunch in California cannabis, the state and various impacted distributors and brands are taking steps to help shore up the issues created by cannabis companies that can’t (or sometimes won’t) pay their bills. Given the state of the overall industry right now in most locales, it wouldn’t shock me if other states and industry trade groups follow suit with California.
Cannabis regulators may step in
First, California is seriously flirting with the passage of AB 766. It would be something new for a state cannabis regulator to take action over B2B commercial dealings of this nature. Failing to pay bills when due (other than tax) usually isn’t going to amount to an actionable regulatory violation where you can approach regulators for help. AB 766 would change this in the Golden State. The bill summary provides:
Salvo que se especifique lo contrario, este proyecto de ley obligaría a los titulares de licencias a pagar los bienes y servicios vendidos o cedidos por otro titular de licencia, cuyo valor total sea de al menos 5 000 dólares, en un plazo máximo de 15 días a partir de la fecha límite indicada en la factura o facturas. El proyecto de ley exigiría que un titular de licencia que haya vendido o transferido bienes a otro titular de licencia y que no haya recibido el pago íntegro 15 días después de la fecha límite establecida en la factura comunique la factura impagada al departamento, según lo especificado. El proyecto de ley obligaría al departamento a notificar al titular de la licencia dicha notificación, a emitir un aviso de advertencia o, a su discreción, a emitir una citación o a iniciar una acción disciplinaria contra el titular de la licencia si este no paga la factura pendiente en su totalidad en un plazo de 30 días tras dicha notificación, según se especifica, y, en caso de incumplimientos reiterados de estas disposiciones, a iniciar una acción disciplinaria, según se especifica. El proyecto de ley prohibiría al titular de la licencia adquirir bienes y servicios a crédito de otro titular de la licencia hasta que haya abonado íntegramente la factura pendiente. El proyecto de ley prohibiría, a efectos de estas disposiciones, que la fecha límite establecida en una factura para el pago de la misma sea posterior a los 30 días naturales a partir de la fecha en que se vendan o transfieran los bienes o servicios. El proyecto de ley especificaría que estas disposiciones no se aplican a las facturas correspondientes a ventas o transferencias realizadas antes del 1 de enero de 2024.
We recently wrote a post about why AB 766 could lead to more harm than good, which you should check out.
The “no fly” list developing
L.A.-based Credit Management Association (CMA) is taking a look at the many accounts receivable now plaguing a good number of distributors and brands in California. Those distributors and brands apparently hired the CMA to do the analysis and compile a list of “no go” retailers who continually stiff other cannabis businesses on their bills. See here as reported by MJ Biz Daily. Per MJ Biz Daily, “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.”
It’s estimated that there’s about $1 million outstanding in unpaid invoices from California cannabis retailers. And what’s the point of compiling this kind of list? According to CMA’s website, ” . . . by submitting your accounts receivable data to Credit Management Association, you can positively (or negatively) affect your customer’s payment history, as the information is aggregated safely and securely.” This particular data is going to help the entire California industry (maybe even nationally depending the retailer) identify high risk accounts where net terms or any kind of credit shouldn’t be extended. It may also hasten the demise of these particular retailers as a result. Ultimately, this list will be a helpful tool to cannabis-related CMA members.
The main California cannabis problems remain
I’m glad to see the CMA accept cannabis clients (and hopefully it’ll adopt cannabis as one of its 250 industry groups). This helps to further legitimize the industry and helps licensees gauge risk across the supply chain. However, even with the Department of Cannabis Control and the CMA helping to identify and trying to redress the issue of lots of accounts receivable, it doesn’t solve the main California cannabis problems that contribute to those cannabis retailers being unable to pay their bills.
As we’ve said from the inception of this democratic experiment, the local control stranglehold of cities and counties is a problem. Because cities and counties can and do opt out of legalization altogether, California only has pockets of legalization and large swaths of cannabis desert where the illegal market rages on. We also have fairly high state taxes that probably will not diminish anytime soon. Same problem with certain local taxes, too (and retailers now bear the main brunt of those state taxes).
Additionally, the state has not done a good job consistent enforcement against both illegal market actors, or against licensees who openly commit a variety of crimes and regulatory violations that undermine law-abiding licensees. (See the issue of burner licenses.) Unless and until the foregoing issues are seriously addressed, I think that CMA list of non-credit worthy actors will only expand in California.
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