Managing Distressed Assets – Lessons Learned From MedMen, Ignite, and Acreage Holdings

The global pandemic and resulting economic turmoil have caused many businesses in the cannabis industry to teeter on the edge of insolvency. Although Governor Newsom was quick to declare cannabis businesses as “essential,” many of these companies have suffered huge losses, defaulted on their loan obligations and leases, and lack the capital to pay for their local or annual licenses. Even high-profile cannabis companies such as Medmen, Ignite, and Acreage Holdings are having trouble managing their “distressed assets” and may become insolvent in a matter of months. While the massive spending by these particular companies was once a strategic advantage – giving them an early foothold in newly legal markets – this approach has proven to be a weakness in an unstable economic climate.

Medmen Enterprises

Just 3 years ago, Forbes named MedMen Enterprises as the top financial leader in the cannabis industry. As of February, Medmen has 6 months of available cash on hand before it runs out of money, according to Ello Capital’s liquidity analysis report. So what happened? MedMen embraced a shotgun approach and tried to expand into too many states too quickly. By the end of last year, MedMen accepted a $250 million dollar loan investment from Gotham Green Partners, and since then, has had trouble acquiring the capital to pay it back.¹ MedMen has begun selling its licenses, restructured its financing, and fired hundreds of workers to try to reduce its expenses. Storefront locations may not be far behind as the company continues to shed its distressed assets.

Ignite International Brands, Ltd.

The Medmen story is not an anomaly. Another cannabis company that has been under the spotlight lately has been Canadian based Ignite International Brands, Ltd. – founded by Dan Bilzerian – a millionaire, C-list celebrity, who is known for his extravagant and wild lifestyle. An independent audit report conducted on June 15, 2020, concluded that “a material uncertainty exists that may cast significant doubt on the Company’s ability to continue.” By the end of the year, Ignite had an accumulated deficit of over $80 million dollars, while only having a positive working capital of $10.7 million dollars. Bilzerian’s lavish lifestyle and personal spending may be a significant cause of the company’s current state of distress (e.g. an Ignite payment of  $793,000 for a yacht rental and $128,000 for a two-night stay in London).² While Ignite was awarded over a $1 million dollar PPP loan,³ the company will have to curb Bilzerian’s lavish spending and fix its massive deficit just to stay afloat.

Acreage Holdings

Like the other cannabis companies discussed above, Acreage Holdings has limited funding options available. The company had to choose between giving up equity or agreeing to accept a $15 million dollar loan with a 60%, ridiculously high-interest rate.⁴ In 2019, Acreage Holdings had upwards of approximately $150 million in losses, a five-fold increase from the previous year.⁵ Looking to write-down some of its distressed assets, Acreage has sold off its North Dakota medical marijuana business, its undeveloped real estate in Massachusetts, and pulled out of two proposed acquisitions in Rhode Island and Nevada.⁶ With major cannabis companies in financial straits, understanding the basics of distressed assets is relevant to high-profile, medium, and small businesses in the industry.

Because cannabis is still Federally illegal, filing for bankruptcy in court is not available for cannabis companies. That being said, for cannabis businesses facing insolvency, there are a few options that can help struggling businesses stay afloat.⁷

1. State Court – Receivership

In a receivership, a court appoints a neutral third party (the receiver) to exercise independent oversight on a company’s distressed assets.⁸ Receiverships can arise in commercial settings when a business has a number of distressed assets, in situations of corporate deadlock, and during litigation where the rights of the parties cannot otherwise be fully protected.⁹ In a Receivership Order, the court will grant authority to the receiver to manage the business’s capital, sell off assets (including actually selling cannabis) to pay off creditors, enter into new contracts or leases, and fire or hire employees.¹⁰

However, using a receiver can be risky because of the receiver’s broad power and control over the business, especially if the receiver is not an expert within the cannabis industry. Additionally, a receivership can be costly, especially for an already struggling company.¹¹ The court has the discretion to determine which party should bear the costs for the receiver, but it will most likely be the party who went to court to request the receivership in the first place (the distressed business).¹² While distressed businesses may be limited in their options during an economic downturn, making use of an ABC may be a better option.

2. Out of Court – ABCs

An Assignment for the Benefit of Creditors (ABC) does not require filing for bankruptcy or any court involvement.¹³ Compared to a receivership, where the court assigns a neutral third party receiver, in an ABC, the distressed business is the one who picks the third party assignee. Here, a business transfers all of its control, including all of its rights, title, or interest in its property to a third party assignee in trust.¹⁴ The assignee liquidates the company’s assets and distributes the capital to creditors.¹⁵ The advantage of an ABC is that it allows the third-party assignee to sell its distressed assets free of the business’ unsecured debt.¹⁶ An ABC is typically less expensive than a receivership and may be the most efficient way to liquidate a company.¹⁷

3. Distressed Acquisitions

The sale of distressed assets can also decrease the company’s overall debt, and improve its financial situation. Some businesses become insolvent because they vertically integrate too far up, by taking on too many license types without having the capital to expand operations. Companies may need to sell off certain assets, including licenses, that they do not have the capacity to financially hold on too, and instead focus on making a profit with one license type.

Our Recommendations

Negotiate with Creditors before court involvement. 

Prior to court involvement or ABCs, distressed businesses may want to sit down and negotiate with their creditors. It is advisable to form a committee or bring in someone to speak to creditors during negotiations to discuss the viability of the business, the value of the company’s assets, funding alternatives, and how the company plans to turn the distressed assets into profitable assets.¹⁸

ABCs and Receivers – make sure they’re experts in the cannabis industry.

The problem with ABCs or Receiverships, in particular, is that relinquishing control to a third-party assignee is risky because they might not know all the ins and outs of the cannabis industry. It is crucial for the third-party assignee to accurately inquire and represent the true value of the company’s licenses before selling them off. Therefore, it is our recommendation that a distressed business select an assignee with appropriate experience and expertise to conduct the liquidation of its assets.

Seek investors.

During this period of economic recession, we have seen a rise in investors jumping on the opportunity to make a profit off of a company’s distressed assets.¹⁹ If you’re looking to make an investment in a cannabis business, it may be a good time to buy a company’s debt, rather than invest for equity. This is because investors owning debt have priority on payouts if the company ends up dissolving.²⁰

In sum, businesses of any size may get to a point of having to manage distressed assets. However, making a receivership, entering into an ABC, negotiating with creditors, or selling distressed assets are solutions if a business is to get to a point of insolvency. Manzuri Law is a team of experienced attorneys that can help cannabis businesses navigate their way out of insolvency.

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.

1. Anthony Varrell, 3 Cannabis Firms On A Collision Course With Bankruptcy, MedMen Enterprises: A Fall Far From Grace, March 13, 2020.
2. Christopher Palmeri, Ex-Ignite Chief Says He Got Fired For Curbing Bilzerian’s Bills,https://www.bloomberg.com/news/articles/2020-07-08/ex-ignite-chief-says-he-got-fired-for-curbing-bilzerian-s-bills, July 7, 2020.
3. Jay Lutz, Dan Bilzerian’s Ignite Brands One of First Cannabis Firms to Obtain PPP Loan,https://thedeepdive.ca/dan-bilzerians-ignite-brands-one-of-first-cannabis-firms-to-obtain-ppp-loan/, June 22, 2020.
4. Press Release, Acreage Enters Into Definitive Funding Agreement for $15 Million, https://investors.acreageholdings.com/file/Index?KeyFile=404355068, June 17, 2020.
5. Press Release, Acreage Holdings Reports Fourth Quarter and Full Year 2019 Results, https://investors.acreageholdings.com/file/Index?KeyFile=402974772, February 26, 2020.
6. Law360, Pot Co. Acreage Raises $60M in Pair of Funding Deals, https://www.law360.com/articles/1278772/pot-co-acreage-raises-60m-in-pair-of-funding-deals, June 1, 2020.
7. See generally Global Go Connect, Distressed Assets: Opportunities & Restructuring Challenges in the Cannabis Industry, https://www.youtube.com/watch?v=pcjRX5XcxNc&feature=youtu.be&t=200, June 3, 2020.
8. Aaron Walden, Sheryl Toby, Matt Ochs, Effectiveness of Contractual Receivership Clauses for Operating Companies, https://www.americanbar.org/groups/business_law/publications/blt/2019/09/contractual-receivership/, August 26, 2019.
9. Id. 
10. Julie Hamill, Receivership and Distressed Cannabis Assets in California, https://harrisbricken.com/cannalawblog/receivership-and-distressed-cannabis-assets-in-california/, January 10, 2020.
11. Id.
    
12. Id.
    
13. https://haysconsulting.net//Alternative_to_Bankrupcy_Exhibits.pdf.
14. David S. Kupetz, Assignment for the Benefit of Creditors: Effective Tool for Acquiring and Winding Up Distressed Businesses,https://www.americanbar.org/groups/business_law/publications/blt/2015/11/05_kupetz/, November 15, 2015.
15. David S. Kupetz, Assignment for the Benefit of Creditors: Effective Tool for Acquiring and Winding Up Distressed Businesses,https://www.americanbar.org/groups/business_law/publications/blt/2015/11/05_kupetz/, November 15, 2015.
16. Id.
    
17. See supra, note 10.
18. See supra, note 7.
19. See generally Burns & Levinson Cannabis Business and Law Advisory, Webinar 1: Coronavirus + Cannabis Regulatory Update, Apr 6, 2020.
20. Hilary Bricken, Distressed Asset Investors (Finally) Descend on California Cannabis,https://harrisbricken.com/cannalawblog/distressed-asset-investors-finally-descend-on-california-cannabis, April 8, 2020.