(This story has been corrected and clarified to reflect the status of three CWNevada retail licenses, two of which were jointly owned with another company. These two dispensaries have reopened under a different brand name).
A former major player in Nevada’s cannabis industry is in the final stages of being liquidated of more than $12 million in assets by a state court, providing a potential roadmap for marijuana businesses unable to file for federal bankruptcy protection.
This legal process, known as receivership, is an important option for struggling cannabis businesses in Nevada and perhaps other states that cannot go to federal bankruptcy court because marijuana remains illegal under U.S. law.
The December auction of the operating license of vertically integrated operator CWNevada will end with what participants say will be one of the biggest financial collapses of any marijuana company in the United States.
The sale resulted in proceeds of $12.4 million, whereas the trustee had hoped to receive double that amount.
The end result can be affected by a number of factors – such as. B. the need to purchase licenses on a cash basis and the uncertainty of the market in the event of a coronavirus pandemic.
Finally, a retail license that Wallflower currently operates in Clark Canopy County has been sold, along with five cultivation and production licenses awaiting final approval from state regulators. Earlier, regulators permanently revoked six other permits.
Beneficiary designated in 2019
In April 2019, KVNevada voluntarily filed for Chapter 11 bankruptcy protection amid a flurry of lawsuits from investors, building materials manufacturers and others.
According to the Las Vegas Review-Journal, creditors had to ask a Nevada judge to appoint a receiver for the company.
A trustee took control of CWNevada in June 2019 to help manage the company until assets can be redistributed to creditors after several Canopi-branded stores closed due to unpaid taxes.
Dotan Y. Melek, the court-appointed trustee who oversaw the auction, said few marijuana businesses have had financial problems on the scale of CWNevada.
Including the company’s problems in Las Vegas:
- Poor stock management resulting in fines.
- Non-payment of state taxes.
- Inability to pay creditors, including employees.
Enforcement of the rules governing the operation of marijuana facilities was new to the courts, regulators and the industry.
I probably should have been the first, said Melack, who noted that the process was expensive and complicated.
Several organizations have filed more than $200 million in claims against CWNevada, and Melech estimates that about $32 million of that is attributable.
CWNevada must pay a fine of $1.25 million. The court fined the defendant $500,000 for numerous violations of the rules governing the handling, testing and documentation of cannabis plants and products, including the sale of substandard marijuana and the destruction of evidence.
Fines and an additional $1.5 million in state and local taxes forced the company to close its stores, including three dispensaries, in April 2019. Two of these dispensaries were jointly owned by NuVeda and have reopened under a different brand, Sanctuary.
The Nevada Cannabis Compliance Board (NCB) approved the proposed final rule on 22. July 2020, just over two years after the process began.
The predecessor of the CCB, the city’s tax department. Nevada – launched an investigation into CWNevada in 2018 after the company failed to meet its tax obligations, according to a settlement agreement.
In the meantime, successful bidders go through a government review process that typically takes at least three months.
Two companies, Desert Evolution and Fortress Equities, submitted the majority of approved permit and inventory requests, including FF&E – furniture, fixtures and equipment.
According to court documents, the motions were approved:
- Desert Evolution has applied for $11.9 million in permits in Clark County.
- Forcress Equities has agreed to pay $385,000 for a recreational cultivation permit in Nye County.
- The third bidder, Consensus NV, agreed to pay $11,000 for additional inventory at a retail location in Clark County.
- Desert Evolution offered $80,000 for FF&E at three locations.
- Fortress Equities is offering $15,000 for FF&E at one location.
A KKB spokesman declined comment, saying final regulatory approvals for the case are pending.
Las Vegas attorney Brian Padgett, former majority shareholder and CEO of CWNevada, did not respond to an email from Marijuana Business Daily for comment.
Thirty-one companies have expressed interest in participating in the auction in December.
In the end, only seven companies made an initial bid for the assets in liquidation, and four of them participated in the auction.
Factors that influence sales
According to Mr. Melah, there were several factors that affected the sale price of the licenses and the amount of the auction proceeds.
Recipients who might follow the same path will face similar problems. One of these risks is the significant risk of acquiring privilege licenses in their current state, where they are, without any conditionality.
In other words: The issuance of operating licenses requires the approval of the CCM.
In addition, market conditions remain uncertain in the context of the pandemic, and some bidders have been rejected due to cash flow requirements for cannabis licenses in Nevada.
Melach said the proceeds of the sale would be enough to pay for everything:
- What CWNevada owes Nevada for unpaid taxes, fines and penalties.
- Overdue payments to the Nevada State Labor Commissioner on behalf of 79 former KVNevada employees for unpaid wages, penalties and interest.
It was unlikely that investors and others with unsecured claims against CWNevada would be able to fully collect their claims.
But Melech added that a lawsuit against a former CWNevada partner could generate more money to pay for other lawsuits.
Nevada Assemblyman Steve Yeager, who represents an area in the southwest Las Vegas Valley, said CWNevada’s resolution of the situation provides potential guidance for other financially troubled cannabis businesses in the state.
What happened there is obviously very unfortunate, Yeager said.
I think that gives us an indication of what could possibly be included in state legislation as a guide to what should be done in these situations.
I think the Cannabis Enforcement Board has handled this issue pretty well, but we can make recommendations in the future there will be legislation on this issue.
While Nevada considers changing state laws, Democrats in Congress are working hard to reform marijuana laws at the federal level.
Chuck Schumer, Senate Majority Leader and New York Democrat, said he wants to end the federal government’s ban on marijuana and repair the damage the war on drugs has done to communities.
Melach said that until federal legalization and bankruptcy protection are extended to marijuana, receivership remains the last and best option for cannabis businesses that are in financial trouble.