This post was originally published on this site.
This guest column is from Colin Decker, owner and founder of 7 SEAZ, New York’s first legacy-to-legal adult-use cannabis brand, and owner of Hudson Valley-based Sensei Growth Consulting. He is also in the December license queue for a distributor license. The views and opinions expressed in this article are those of the author, and do not necessarily reflect the views or positions of NY Cannabis Insider.
The long-awaited Office of Cannabis Management “delinquent list” – which names retailers who are delinquent in paying for cannabis products purchased on credit from licensed suppliers – is supposed to be coming to us on April 3.
Prior to the list being published (which will only be available to licensees and supplying stores within the compliant adult-use cannabis market), operators will be able to start reporting retailers who have failed to make payment on an invoice as required per state regulations.
The OCM rules state that suppliers are prohibited from extending credit to any retailer who appears on the Cash On Delivery (C.O.D.) list, and those reported retailers – once deemed in violation by OCM – may only purchase product if they can afford to do so on a C.O.D basis.
As an industry operator, I can tell you that since the OCM announced this list, many retailers have suddenly begun to pay off past due invoices that once appeared to have been lost, misfiled or not received.
This is certainly a step in the right direction for many growers and processors who have had to play the telephone game, knock on doors, send messages to non-responsive social media accounts, call from a random number, or put ego aside to basically beg for payment on products – while having their messages to the OCM go unanswered and compliance going unenforced.
For a long time, I have heard from retailers when discussing payment terms that my brand’s standard for net-30 payment strayed greatly from the path and that they would prefer what some processors and growers were perpetuating as the norm, the good old rolling 30, or net-90.
Due to my brand following the rules and sticking firmly to a net-30 payment term since the very first sale, our retailers never grew comfortable with the idea of extended terms and now they are not going to suddenly have cash flow issues because of how we personally conduct business.
Operating a brand here in New York that works with an Adult-Use Conditional Processor (AUCP) has its own quirks that differ from the active AUCP and Adult-Use Conditional Cultivator license holders.
The brand is unable to directly collect payment for orders distributed to retailers across the state due to not holding a license, but can make an effort with the initiation of payments for invoices owed to its AUCP from the retailer, similar to how a billing department operates in any business minus the actual payment collection itself.
This creates an additional step for brands to close out their accounts receivable as they must wait for payment to be made to another party before they can be paid. As happy as I am to see retailers paying the cultivators and processors along with an accountability system now in place for this arrangement, this creates another layer to the proverbial onion for many already operating and looking to continue to scale their operations and sell to stores across the state.
The distribution licenses that have been awarded, along with those that sit in the December queue, will become the middlemen who will have majority control over this industry.
The model that exists now and has for some time allows for the cultivators to distribute directly to the store and get paid. The same goes for the processors. Now that these licenses are being transitioned from provisional to adult-use, those holding a license have to decide if they would take on distribution themselves or work with one of the non-provisional licensees soon to set up shop once their provisional licenses expire later this year.
For many, taking on further distribution creates a whole new mess of problems and compliance requirements compared to what has been allowed up to this point. Distributors will be required to sell products to retailers who pay C.O.D but do not have to extend payment terms to retailers if they choose not to. This of course means those who are used to being paid directly by retailers and now use a third-party distributor have to wait for someone else to get paid in order to pay them, ultimately further delaying receivership of payment.
As of the time of writing this, the California Department of Cannabis Control states that 1,131 active licensed cannabis distributors are operating across their state delivering products to retailers as a middleman service. And from what we have seen here in New York, many of these California license holders are operating here in New York too, using what is known as a “burner distro” backdooring either excess or rejected products from California and sending them to New York sticker shops who are selling tax-free, potentially failed-testing products to consumers without a license.
However, not all in the Golden State are operating in nefarious ways, and many proudly conduct lawful business, working with growers and manufacturers to sell products to retailers and delivery services statewide.
The California market provides us with a reference point: that state has 1,131 active distributors per state records and 1,241 active licensed retail storefronts currently operating, while New York is intending to only license 30 adult-use distributors initially to satisfy the demand across the state, outside of those currently distributing (AUCCs & AUCPs).
With there being around 80 licensed outlets to purchase product from (retail and delivery) across the state currently, and more stores and delivery services opening statewide each week, that is roughly a 37% distribution-to-retail ratio while California sits at roughly a 91% ratio.
California is roughly 3.3 times larger than the state of New York, but the Office of Cannabis Management and Cannabis Control Board intends to issue around at least 1,500 retail licenses on top of the 463 Conditional Adult-Use Retail Dispensary licenses already issued.
The California market has shown us that the distributors are the kings of the industry – as the old saying goes, “the middle man makes the most money.” But what the saying doesn’t convey is that the middle man makes the most money because they typically don’t pay the growers and manufacturers on time – if they pay at all – along with the taxes they owe to the state.
This leads to an incredible volume of outstanding accounts receivable, forcing many mom and pop family-owned companies and small-to-midsize growers and manufacturers to default or go out of business. Trusting your company’s life, your brand’s growth and the vitality of your business’ bank account in the hands of someone else and relinquishing control can be incredibly daunting and risky. Make sure you know that the person distributing your products will be able to do more than just deliver to a store and that you will actually get paid for those products.
In looking at recent events out west, one of California’s largest distributors, HERBL, went out of business seemingly in the middle of the night, leaving many smaller brands and companies with the challenge to collect the hundreds of thousands owed to them by the distributor. Also, due to the limited bankruptcy protections to help a cannabis company get paid when another fails, this is not likely to occur, compared to other industries when such an event happens.
The future of the New York market is ever evolving, and I have valid concerns for our future regarding distributors and protecting our growers and manufacturers.
Distributors will take on the burden of the current potency tax at the time of sale to retailers that is due quarterly (if not altered by the New York State Senate), along with promises to suppliers to secure product volume and sell products to retailers in a bid to corner the market across New York State.
Distribution only works if the retailers pay the middleman and the middleman pays the grower or processor. Stores opening across the state are not all well-funded. Stores will ultimately purchase less products from certain brands if they know they must pay within 30 days due to the OCM’s rules, and not many stores will happily pay for unsold goods.
Retailers have to sell cannabis and a lot of it for distributors to even be needed. This market has survived thus far without standalone distribution, but if good products are sold, a vast amount of retailers one day exist, products get delivered and paid for by the stores, distributors pay their suppliers and bills and outstanding debt, and accounts receivable don’t pile up, this could be as simple as any other industry where supplier, middleman and retailer exist happily together.
But only time will tell.