Distribution Mayhem In California: Who’s Left Holding the “Bag”?

• Herbl, one of California’s largest licensed cannabis distributors is in receivership. Last year it served ~1K retailers and accounted for ~18% (~$700M) of the state’s $3.8B retail sales amount. Other licensees could be at or near a similar breaking point.
• California is the largest cannabis market in the U.S. which at maturity, we estimate at ~$7B.
• The state’s accounting of delinquent excise and cultivation taxes that are due from distributors totals ~$200M (~$400M with interest and penalties). This translates into a wholesale value of ~$539M which likely represents the amounts owed to product manufacturers (brands). According to the California Department of Tax and Fee Administration (CDTFA), there are 327 distributors with delinquent tax accounts (~30% of the total).
• With nearly $1B owed ($400M taxes/penalties, $539M inventory), many brands (as well as retailers) could be forced out of business or will need to consolidate. Our estimates do not include amounts owed to vendors or service providers.
• The impact to Single State Operators (SSO) and the larger MSOs with exposure to the California market appears negligible, and many have implemented tighter credit policies to mitigate potential losses. This is evidenced to some extent by sequential declines in wholesale (CPG) revenues. Also, many have either exited the state or have downsized operations.
• As the California market continues to evolve by trial and error, ineffective and non-sensical policies have been called to question. Regulators seemingly are moving towards a more balanced, practical approach to sync effective regulatory oversight with sound business acumen. We believe this re-set will, in time, attract new capital into the California cannabis market.

Full Article