Herbl’s high hopes run out of green
For the majority of the past five years, Goleta-based Herbl was shipping a lot of cannabis and making a lot of green in the process, reporting that sales exceeded $200 million in 2022.
But as of August 2023, the company has largely ceased operations and filed for receivership. Once the largest cannabis distributor in the state, the company has laid off nearly all of its staff.
An auction of the company’s assets is scheduled for Aug. 28.
The company’s filing for receivership was first reported by MJBizDaily, a cannabis-focused business journal.
Receivership can sound similar to a bankruptcy, but they are not the same process.
Receivership involves a neutral third party that takes over the debtor’s assets until the creditor is made whole again.
Because cannabis is not federally legal, businesses operating within the industry cannot use typical federal means, such as bankruptcy, when things go south.
“Cannabis is great. I think it’s gonna be worthwhile. I think it’s awesome in many ways, and I think we’re making the world a better place but the way it’s set up, nothing is really easy so far in this business,” Graham Farrar, president and cofounder of Glass House Brands, told the Business Times.
Herbl went into receivership because it fell behind in its payments to creditors.
After months of default, one of its creditors, East West Bank, filed a lawsuit for breach of contract and appointment of a receiver.
It is unclear exactly how much money Herbl owes to creditors, but based on court documents the number is well north of $15 million.
The state of California filed a state tax lien for $17 million and East West Bank claims to be owed at least $2.5 million as well, according to the filing.
Herbl is yet to make a public statement and the Pacific Coast Business Times reached out to numerous Herbl contacts for comment but did not get a response.
The company has no counsel in the receivership, according to a July 31 court filing.
The circumstances surrounding Herbl’s fall are also unclear.
As a distributor, Herbl does not grow its own product and instead purchases from the brands directly.
The distributor then sells to retailers and collects payment from them once the products are sold.
They then pay the brand back, minus a fee. While in some cases, companies fail to pay back creditors due to a lack of sales, in Herbl’s case, retailers apparently decided to not pay them for the sales they did make.
Farrar, whose company worked directly with Herbl, said that the company ran into a bad situation where retailers simply did not pay them for the products they were sold.
“Stores are paying really slowly, if at all, right now and Herbl basically got in a tight spot where they owed the brands money, but retailers were not paying them,” Farrar said.
Farrar said that with alcohol sales if a retailer fails to pay a distributor, the distributor can report them and get the store’s license suspended.
There are no credit laws in cannabis, meaning that if a store does not pay a distributor, there is nothing stopping them from going to another distributor right after and repeating that process.
“As people get desperate they’re more willing to ship on the hopes that they’re gonna get paid and the stores continue operating, but eventually, the things get more and more stretched out and, for Herbl, being the biggest, I think worked against them and that’s why they went down first,” Farrar said.
As a result, brands were upset with the lack of payment as well.
Darren Story, CFO of Coastal Sun Farm, took to LinkedIn two months ago and claimed Herbl had not paid many of its brands for their products. Story demanded brands too, in turn, stop paying Herbl.
Herbl’s failure is a depressing sign of how the cannabis industry has struggled in California since being legalized.
For years, cannabis growers, sellers, etc. have criticized the high tax rates that don’t exist for other industries — like alcohol — but one of the major problems continues to be the lack of retail.
For context, there are about 11,000 stores in California that sell alcohol but less than 1,000 that can sell cannabis.
As a result, this has opened the door for the black market to continue thriving, but it also leads to situations like Herbl, where there aren’t enough retailers that they can ship their product to and there especially aren’t enough thriving retailers that can deliver payment back to the distributor.
“Our thought process internally was always Herbl can’t fail unless the whole supply chain fails and we’re kind of seeing that,” a former Herbl employee told the Business Times.
In an effort to create more retail, the Department of Cannabis Control announced in June the recipients of the Local Jurisdictional Retail Access Grant, a first-of-its-kind program in the United States, that awarded 18 jurisdictions funding for establishing retail licensing programs in areas that do not currently offer retail cannabis licenses.
This program seeks to improve access to licensed cannabis as currently only 39% of the state has licensed retail dispensaries.
Cracks in Herbl’s foundation started much further back than this summer.
The cannabis distributor was given notice of its first default to East West Bank in November 2022, according to a lawsuit filed by East West Bank in the Superior Court of Santa Barbara on June 20.
The two parties restructured the deal to give Herbl an extension to Dec. 31, but Herbl failed to repay East West Bank with the extension, according to the filings.
The distributor was given notice of defaults three additional times in December, January and June prior to entering receivership, according to the filings.
As a result of Herbl’s inability to make their payments, East West Bank filed the suit for a breach of contract, appointment of a receiver and injunction in aid of a receiver, the filings read.
In Herbl’s case, the receiver is Kevin Singer, president of Receivership Specialists.
Singer was chosen because of his expertise in the cannabis industry, according to the filing. He has acted as Court Receiver for 19 cannabis companies, according to the filing.
“My team and I are well versed in the requirements for operating a cannabis business in California, as well as the necessary steps for winding down the affairs of such a business, liquidating its assets, and paying all net assets to creditors,” Singer wrote in a June 26 court filing.
Singer’s proposed plan is to auction off Herbl and its assets Aug. 28 for $9 million.
Herbl’s listed California assets in the court filing are five cannabis licenses, seven leases and various pieces of equipment.
The company also holds Nevada assets, including one license and three building leases.
In regards to its Santa Barbara presence, according to the Hayes Commercial Group Real Estate report, Herbl has ceased all operations and vacated its Goleta warehouse with 25,800 square feet of space and its 17,200 square foot office space, both located at Ward Dr.