The Ermont dispensary in Quincy, Mass. It is in receivership as part of ongoing litigation in Massachusetts Superior Court.

Inflation, a lack of available capital, and a flood of new licenses in the Massachusetts adult use cannabis market are setting off a wave of struggling businesses seeking debt restructuring deals, according to several prominent attorneys in the Bay State. 

“It’s not an aberration,” said Frank Segall, a partner at Burns Levinson who chairs the firm’s cannabis practice. “We’re at an inflection point right now in this industry where we are going through a distressed period of time. I think it’s a little sooner than anyone expected, but I attribute that to the rapid growth of the industry. The top line is still growing every year, but the bottom line has always been a problem.”

Retail flower prices in the state have been steadily dropping since early 2021, according to state data. In April 2021, the average price of flower was $14.23 per gram. Eighteen months later, in October, 2022, prices hit a record low of $7.76 per gram. The previous record for low price was $9.74 in April 2020 when cannabis shops were forced to close in order to quarantine amid the outbreak of COVID-19. Prices rebounded the following month to $13.91 per gram. 

“Two years ago you’d get in Massachusetts maybe $6,500 for a pound. Today, you can buy that as low as $1,000 a pound or maybe even lower. That’s a big, dramatic impact,” said Segall. “So, companies are finding themselves with debt issues. They borrowed money at very high rates, overleveraged themselves in some cases or they just ran out of capital or they’re on leases and the rent might be too high and you’re seeing what I would say is a distressed environment.” 

Total sales in Massachusetts continue to climb, but not at the same rate as the number of licensed cultivators and retailers. 

In the Massachusetts adult use market, there were 89 cultivators in operation and 243 retailers as of the Oct. 13 meeting of the Cannabis Control Commission. This is a big jump from 58 cultivators and 169 retailers were in operation in October, 2021. 

With rapidly dropping prices, fewer and fewer operators are finding success at turning a profit. 

“The price of flower is dropping and borrowers are trying to secure their debt, intersecting with tight liquidity,” said Max Riffin, partner at Prince Lobel who focuses on business transactions. “In the cannabis space we’re seeing the perfect storm,”

While the cannabis business woes in the Bay State may not quite rival those of Michigan, the two states are facing similar and persistent challenges with pricing. 

“Massachusetts, and this is not just specific to Massachusetts, is going through a very difficult time,” said Segall. “With respect to capital, a lot of states like Massachusetts are experiencing a lot of competition. I would even say that Massachusetts is oversaturated with over 250 stores and another couple hundred licenses in the queue.” 

“Obviously inflation affects everyone, and in particular in markets where there’s been a saturation of companies, so you have inflation increasing costs and you also have competition driving down prices and revenue,” said Alison Bauer, a partner and co-chair of Foley Hoag’s Bankruptcy and Restructuring Practice.

While some of the price problems in Massachusetts’ market are the result of a maturing cannabis industry with hundreds of licensed retailers, Bauer also noted that newer markets may not have to wait as long as the Bay State has for a price decline, especially since many of them, such as Connecticut or New Jersey are favoring smaller operators that may have limited access to capital, while inflation and supply chain delays continue to hamper the market.

“We would anticipate that they would have some problems earlier on in their life cycle,” she said.

Further complicating the matter for cannabis businesses is the lack of options for capital investment. Most of what is available does not come from traditional banks bound by state usury laws, which means the majority of operators have to resort to private sources of equity with steep interest. 

Segall explained that there are also a lot of smaller single-state operators who borrowed maybe $5 or $10 million from family or friends that are now feeling the squeeze of a tightened economy, while they struggle to survive among increased competition and depleted prices.

“There’s very little traditional debt,” he said. “It’s typically high yield, through either REITs [Real Estate Investment Trusts] or hedge funds.” 

Although there has been an increase in traditional banks and credit unions willing to do business with plant-touching companies, this is only a recent change. 

“A lot of those banks didn’t come into the space until the last couple of years, so there’s a lot of legacy debt out there, and the markets dramatically changed in the last couple of years,” said Segall. 

Another pitfall is that the federal prohibition of cannabis, means that cannabis operators are unable to go to federal bankruptcy court. This means distressed companies in Massachusetts must resort to receivership arrangements through the state’s Superior Court. In turn, this brings further delays, which also means more billable hours from attorneys.

Bauer said that her firm recently represented a purchaser in a deal to buy distressed assets from a cannabis company in Massachusetts that was in receivership. She expects to see more, similar cases in the near future. 

“Given the state of the market in general, we’re anticipating that there will be a number of workouts and receiverships in the cannabis industry,” she said.

Segall agreed with that assessment.

“I’m involved in a number of restructurings right now,” he said, noting that almost all of them involved vertically integrated companies. 

“I handled the first receivership in Massachusetts,” he said. “You’re gonna see a lot more of that.” 

Riffin said he is already seeing a lot more activity on that front. 

“I’m fielding calls on a weekly basis about receivership,” he said. “All across the board it’s this macro event.” 

Without explicitly committing to a time frame, Bauer said she expects a wave of restructurings next year.  

Riffin was more explicit with his prediction.

“Q4 of this year, or Q1 next year will be busy from a restructuring perspective,” he said, adding that he is waiting to see if there will be an influx of distressed assets funds interested in scooping up debt in the cannabis industry. “The cottage industry that builds up around it will be interesting to see. I think it’s going to be a fascinating time in the evolution of the cannabis industry.”

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Zack cut his journalistic teeth covering high school sports in the south before spending a decade covering local government, politics and the courts in the Boston, Massachusetts area. He's previously written...