California Cannabis Conundrum Continues, Major Distributor Collapses

California Cannabis Conundrum Continues, Major Distributor Collapses

Customers shop for marijuana products at Catalyst Cannabis Dispensary in Santa Ana, Calif., on Feb. 18, 2021. (John Fredricks/The Epoch Times)

Travis Gillmore

Travis Gillmore

7/13/2023

Updated: 12/30/2023

California’s legal cannabis market has suffered a series of setbacks since June that have many questioning its future, with the largest distributor in the state forced to close and a global industry leader liquidating local facilities to free up much-needed cash reserves.
The closure of Herbl’s California operations—a distributor that served approximately 98 percent of retail clients in the state according to a 2022 company statement—created a shockwave of uncertainty across the industry, as reportedly about $10 million in unpaid invoices are involved in the foreclosure, with an untold number of brands left without compensation.
Herbl didn’t respond by press time to a request for comment.
The company managed more than $700 million worth of sales in 2022 to approximately 1,100 retailers across the state while employing more than 200 employees as of September 2022, according to MarketWatch—an online business and finance website.
A file photo of cannabis samples in Santa Ana, Calif., on Feb. 18, 2021. (John Fredricks/The Epoch Times)

A file photo of cannabis samples in Santa Ana, Calif., on Feb. 18, 2021. (John Fredricks/The Epoch Times)

The terms of the closure agreement are reported to prioritize investors’ claims before brands are paid, leaving some businesses sitting on effectively worthless invoices, according to experts.
“We are very glad we aren’t involved with them,” Nikki Lastreto of Swami Select—a boutique cannabis producer founded in 2015 and based in the hills of Mendocino County in Northern California—told The Epoch Times.
Problems with distributors are a recurring issue for producers, as terms have changed repeatedly over the years, and many have failed, according to Ms. Lastreto.
“We are on our sixth distributor now, luckily we get the sense of when it’s time to quit and move to the next,” she said.
The issues facing Herbl aren’t unique, as several large distributors in Northern California have floundered over recent years, leaving businesses that supplied them strapped for cash, with many closing their doors.
While Swami Select has successfully navigated the current distributor predicament, many licensed farmers in the state aren’t as fortunate, trusting that contracts would be honored and that invoices would be paid, something that, so far, hasn’t come to fruition in many instances.
“Many of our peers and friends have lost hundreds of thousands of dollars to bad distributors,” Ms. Lastreto said. “And I’m sure the distributors blame the retailers for not paying them—it’s a domino effect that is hurting everyone.”
In the case of Herbl, her assumptions are accurate, as the distributor has filed lawsuits against a number of retailers that have allegedly failed to pay for delivered products.
Court records filed in Los Angeles and Orange counties show that Herbl is currently suing more than 10 retailers, including a claim that Los Angeles-based delivery firm Urban Buds owes it $123,000.
Canopy Growth—a multibillion-dollar global firm based in Canada—sold its facilities located in Modesto, California, as part of ongoing efforts to divest from the industry in an effort to shore up cash, according to a June 29 statement.
“Today’s announcement reflects our continued focus on strengthening Canopy Growth’s balance sheet and demonstrates the rapid execution of our transformation to an asset-light, North American focused cannabis business on an accelerated path to profitability,” Canopy Growth CEO David Klein in the statement.
A cannabis growing operation in the Santa Ynez Valley northwest of Santa Barbara, Calif., on Aug. 6, 2019. (David McNew/AFP via Getty Images)

A cannabis growing operation in the Santa Ynez Valley northwest of Santa Barbara, Calif., on Aug. 6, 2019. (David McNew/AFP via Getty Images)

Industry Buckled by High Taxes

Critics say inordinately expensive and burdensome regulations and tax structures that prevent the legal market from competing with unlicensed producers are to blame.
“They created a system that is overtaxed and over-regulated, and it fails the farmer, the distributor, the retailer, and the consumer,” Swami Chaitanya, a partner in Swami Select, told The Epoch Times. “If the plant was treated like the agricultural product that it is, none of this would be an issue, but right now the state is the only one benefiting.”
Cannabis taxes have raised more than $4.9 billion since 2018, as of the first quarter of 2023, according to the California Department of Tax and Finance. However, revenues have declined for seven consecutive quarters since peaking in 2021, falling by 40 percent in two years.
Some point to a significant discrepancy in price that exists between licensed and unlicensed cannabis as a reason the legal market is failing, and several consumers told The Epoch Times that they can easily obtain cannabis at a fraction of the price offered at dispensaries without having to pay state taxes.
“I’d spend $200 to $300 in a club for what I can get from a friend for $75,” said a Northern California woman who requested anonymity. “The system put me in a position where I can’t afford to play by their rules.”
Catalyst Cannabis Co. cannabis samples in Santa Ana, Calif., on Feb. 18, 2021. (John Fredricks/The Epoch Times)

Catalyst Cannabis Co. cannabis samples in Santa Ana, Calif., on Feb. 18, 2021. (John Fredricks/The Epoch Times)

Many others report similar sentiments, although one Sonoma County local—Lauren Smith, a retiree who said she uses cannabis for health conditions—said she doesn’t mind paying the higher price because the regulations and testing for contaminants put her at ease.
“With all the dangerous chemicals some growers use and the risk of fentanyl poisoning, I am more comfortable buying from licensed dispensaries,” she told The Epoch Times.
The difference in price between licensed and unlicensed cannabis lies in the excise taxes and distribution fees that are included in the retail pricing structure, according to experts, with several individuals reporting no difference in quality. However, illegal cannabis isn’t lab-tested.

Blurred Lines of Legal vs. Illegal Cannabis

The news of Herbl’s collapse comes as many cannabis businesses report struggling to cover expenses amid a steep decline in sales volume, affecting pricing.
Once selling for thousands of dollars per pound, some farmers told The Epoch Times that they sold their crops for a few hundred dollars earlier this year in fear of being stuck with perishable inventory.
Farmers report wholesale illegal prices rebounding from about $300 to $500 per pound earlier this year to between $600 and $800 currently.
“Some call it the black market, but we like to say it’s the traditional market,” a multi-generational cannabis farmer operating without a license in Northern California who also asked for anonymity told The Epoch Times. “And the worse the legal side does, the more opportunity there is for family farms that have been in these hills for decades.”
One of the not-so-well-kept secrets in the industry is that some—others suggest most if not all—licensed operators are dabbling on both sides of the law not with the intention of skirting the rules but as last-ditch efforts to keep businesses afloat.
“I don’t know if you can find any farm that has stayed completely clean the entire time,” Rachel Greene—former longtime licensed cannabis grower intimately familiar with the counties of Mendocino and Humboldt—told The Epoch Times. “These people wanted to do the right thing, but with very little happening in the legal market, farms are doing what they have to do to pay the bills.”
There are roughly 5,000 greenhouses illegally cultivating marijuana in Siskiyou County, Calif., according to the county's Sheriff's Department in March 2023. (Courtesy of the Siskiyou County Sheriff's Department)

There are roughly 5,000 greenhouses illegally cultivating marijuana in Siskiyou County, Calif., according to the county's Sheriff's Department in March 2023. (Courtesy of the Siskiyou County Sheriff's Department)

Proposed Regulations Would Increase Penalties

Recognizing the impact of unregulated activities, multiple bills are currently being considered by the Legislature to address the problem.
One such proposal, Assembly Bill 1448, authored by Assemblyman Greg Wallis, a Republican, would allow local governments to impose fines of up to $30,000 per day for illicit cannabis activity and $10,000 per day for landlords of properties where such activity is occurring.
Another would allow jurisdictions to declare illicit cannabis activity as a public nuisance and would permit fines of $10,000 per day for both renters and property owners.
Those measures and two others passed the Assembly and are now under consideration by the Senate. The latter two would allow licensed producers to seek legal recourse against unlicensed operators, effectively placing the initiation of enforcement proceedings in the hands of private businesses, according to industry analysts.

Strict Regulations and Oversupply Impacting Industry

As the first state in the nation to legalize medicinal cannabis, the regulatory structure has changed repeatedly since Proposition 215 was passed in 1996.
Proposition 64—known as the Adult Use of Marijuana Act and passed by voters in 2016—legalized recreational use of cannabis and provided a framework for licensing and taxation of retail sales.
As the legal market has grown in California, the volume of legal cannabis produced is nearly seven times what the market consumes, according to data from HdL—an analytics firm providing industry statistics.
Law enforcement estimates suggest that at least 60 percent of the state’s production comes from unlicensed grows, further adding to the significant oversupply.
As such, more than 70 percent of cannabis businesses in the state will experience losses this year, according to HdL data.
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Travis Gillmore

Travis Gillmore

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Travis Gillmore is an avid reader and journalism connoisseur based in California covering finance, politics, the State Capitol, and breaking news for The Epoch Times.

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