By Bob Finley
The cannabis industry presents unique challenges to management teams charged with high growth objectives paired with industry-specific banking restrictions. One of the most pressing issues for many is how to fund cash requirements. Cash management becomes even more important when you cannot rely on traditional financing via federal banks and liquidation mechanisms such as through bankruptcy law.
An interesting story of how CFOs can add value in situations like these is the case of a cannabis company I’ll call “Moonflower Edibles”, a manufacturer of infused edibles, topicals, and concentrates derived from the highest quality distillate cannabis oil.
In December 2020, the management team was faced with the annual year-end close at the company and retained FLG Partners to assist. Moonflower Edibles operated three subsidiaries: a manufacturing plant in California, a second plant in Colorado, and an administrative subsidiary housing the company’s overhead functions. Reviewing the P&Ls showed the Denver subsidiary was a cash cow while California was burning cash.
In fact, a poorly negotiated lease for the manufacturing facility in California was draining the company’s cash, which was needed to fund the company’s rapid growth. Moonflower had launched a new product line in November and growing the top line was a top priority at the company.
Initially, I proposed renegotiating Moonflower’s expensive California lease, but the landlord refused to negotiate. Normally, another way out of the lease might have been to declare a Chapter 7 or 11 Bankruptcy, but unfortunately cannabis businesses cannot legally qualify for bankruptcy protection under current federal law. Fortunately, I knew of a third option.
A common law tool known as an Assignment for the Benefit of Creditors (“ABC”) is available to cannabis companies and provides a less costly and faster method for liquidation of assets versus using bankruptcy proceedings. An ABC is a contract by which an economically troubled entity (the “Assignor”) transfers legal and equitable title, as well as custody and control, of its assets and property to an independent third party (the “Assignee”) in trust, who is required to apply the proceeds of sale of the property to the Assignor’s creditors in accord with priorities established by law. While creditors can continue to pursue the Assignor, ABCs often block judgment creditors from attaching the Assignor’s assets because the Assignor no longer has title to or interest in the assigned assets. An ABC also provides grounds for filing an involuntary bankruptcy petition within 120 days of assignment.
In June 2021, after selling off its California assets and issuing a note payable to the parent company, Moonflower Edibles sent the landlord (technically, a creditor) notification of the ABC filing with the State of California. Surprisingly, the landlord failed to respond to the notice withing the mandatory 120-day period, thereby effectively surrendering its claim. Moonflower Edibles thus successfully ended its costly California facility lease, saving millions of dollars, and significantly improved its availability of cash to fund its ongoing need for working capital.
Since joining FLG Partners, I continue to be incredibly impressed with the deep reservoirs of experience at the firm and look forward to helping other FLG clients, particularly high-growth businesses such as Moonflower Edibles, prosper as we head into 2022.