#074 - Understanding Receivership & Bankruptcy in Cannabis & Hemp w/ Ted Lanes - High Spirits: The Cannabis Business Podcast

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
AnnaRae Grabstein (00:05):
We want to give a quick shout out to our
friends and sponsor over atKitPrint, the cannabis operators
production design partner.
Is your team getting boggeddown with static and variable
packaging layouts and productrenders?
Are you looking to support yourretail and wholesale teams with
better and more frequentstate-specific sales and
marketing assets?
With KitPrint's productiondesign team, you get files

(00:28):
turned around in three businessdays or less at roughly 50% of
the cost of the averagefull-time employee.
New customers use code highspirits all one word when you
sign up at kitprintco and you'llget 10% off your first two
months.
To learn more, go to kitprintcoto book a call with their team.

Ben Larson (00:53):
Hey everybody, welcome to episode 74 of High
Spirits.
I'm Ben Larson and, as always,I'm joined today by Anna Rae
Grabstein.
We're recording Thursday,january 23rd 2025.
And we got a cool topic today.
Not always the most exciting,in fact, it could be
anti-exciting if you're on thereceiving end of it.

(01:14):
We're going to be talking aboutbankruptcies and receiverships
in cannabis and hemp and all thethings surrounding that.
I'm interested in it.
I've been on the receiving endof some of those letters of not
getting paid.
So fun times.
But before we get there, annaRae, how's your day going?
How's everything in NorthernCalifornia?

Yeah, I'm good.
It's been a great week and I,too, am very excited about this
conversation.
I think that it doesn't alwayssound, gives us all a better

(02:04):
chance of winning, andreceiverships don't seem to be
going anywhere in this industryright now, so I'm excited to
really learn more, and I knowthat there's a lot of people in
my circle that are too.
People are trying to wrap theirheads around what this all is,
so I'm pumped.

Ben Larson (02:20):
Yeah, no-transcript.

It's true, it's true.

Ben Larson (02:38):
And so where are you today?
You are not in California, thebest week of the year to come up
to Toronto, where there hasbeen a recorded negative 20 to
negative 40 degrees Celsius,which I think is somewhere
between zero and negative 40,and on Fahrenheit it's cold.
I don't know how else to say it, but I'm sitting in the offices

(02:58):
of Tyma Extracts, which is ourkey partner up here in Toronto.
They've been a great partnerfor a number of years and, yeah,
it's like our home north of theborder.

Nice.
So they do manufacturing, isthat right?

Ben Larson (03:14):
They do.
They do A lot of oil extracts,as the name would suggest.
It's also the home of ouremulsion production in Canada
and they also do a lot of whitelabeling.
So, like you know, vape cardsand pre-rolls and that kind of
stuff.
So a quiet, quiet, little largeoperation.

Sweet.
Well, I appreciate them hostingyou today.
For sure, I do too.

Ben Larson (03:39):
Yeah, it's nice and it's a lot warmer here than it
is right out there, and it's alot warmer here than it is right
out there.

And before we jump in, I also want to give a
shout out to the folks at DeltaEmerald Ventures who are going
to be hosting us at theCanadatacon I almost said
concert conference.

Ben Larson (03:57):
It is like a concert .
It's so much fun.

It having a great event in, I think, just
about two weeks from today, andyou're going to be making some
other stops before that tooright?

Ben Larson (04:12):
Yeah, it's going to be a week, but I'm going to be
dropping into Denver, hopefullygetting in some skiing in the
mountains the day before.
But WSWA, the Wine and SpiritsWholesalers of America, is
holding their Access Live showand so working with a lot of our
friends in the beverageindustry, both inside and out of

(04:33):
the hemp and cannabis industry.
So we'll be going there for, Ithink, three days and then
straight over to Miami.
So hopefully this polar vortexleaves Miami so that I can get
my adequate beach time at theend of the week.

Absolutely, Absolutely Good.
Well, let's let's talk aboutreceiverships and financial
crisis in this.

Ben Larson (04:57):
Yeah.

What?
What got us here?
You know, like that's, that'sreally the the, the big question
right.

Ben Larson (05:05):
Yeah, I mean, it's well.
We both work in the business ofcannabis and I think it's
fairly frequent that we hearabout people going under, and
we've generally known thatbankruptcies are not available
to cannabis businesses, and sowe get a lot of receivership
notices and I've always wonderedexactly what that means.

(05:27):
You know, I know banks areinvolved, I know there's lesser
of a chance of me getting mymoney and there's new people
that are entered into theequation.
But you know, we always haveour planning meetings where it's
like what are we going to talkabout on the show?
Who are we going to have on?
And I just thought it wasreally cool.
It was the first time where youand I were like, we want to
talk about this, but we don'tknow anyone, and so you just put

(05:49):
out a simple little ping to thenetwork and, man, the network
delivered.

The network delivered.
There was so much input of youhave to talk to this person.
You got to talk to this personand what came out of it actually
is I've been having a lot ofconversations with a number of
the different folks that wererecommended experts around this
topic, and it has spurred somemotivation to have other types

(06:18):
of conversations that are sortof ancillary and connected to
this receiver conversation, andsome of those topics include
things like creditworthiness ofcannabis companies and the work
that some groups are doing nowto actually create credit
ratings so that when a vendor isthinking about issuing terms to

(06:40):
a retailer, they have moreinformation.
Talking overall about theaccounts receivable crisis
across the industry, there'sjust so much that this topic
touches, and I think a lot of itcomes back to the prohibition
of cannabis companies fromparticipating in so many of the
traditional business structuresthat do exist, whether

(07:03):
traditional credit ratings oraffordable financing from SBA
and other more small businessloan providers that have
supported kind of the creationof American industry and pushed
out from a lot of that stuff andas a result, there has been
struggles that some businesseshave been able to persist

(07:25):
through.
Like absolutely there have beenwinners in this game, but there
have also been a lot of losersand there's a lot of folks that
have found themselves trying tonavigate how to get out of
financial stress without a paththat very many people know how
to navigate, because, like yousaid, bankruptcy isn't allowed.

Ben Larson (07:46):
Right, right.
So who do we find?

We found Ted Lanes.
Let's bring him on and I'll cueup the intro.
Ted is a seasoned financialexpert and receiver with over 30
years of experience across lotsof different industries.
30 years of experience acrosslots of different industries,
but notably, he's played reallycritical roles in lots of
cannabis high profile cannabisrestructurings, including being

(08:13):
the interim CFO at MedMen, alongwith receiverships like
Pineapple Express, a number ofothers which we'll let him talk
about, and he is here to help usunderstand the nuances of
receivership, how it differsfrom bankruptcy and also what it
means to be a receiver.
So, ted, welcome to HighSpirits.

Ben Larson (08:36):
Thank you very much for having me.
Let's start with Ted.
Where are you sitting today?
Let's let the crowd know yourperspective.

Ted Lanes (08:43):
Yeah, I'm in Southern California.

Ben Larson (08:45):
I'm in Los Angeles.
All right, southern California,a great state for embattled
cannabis businesses, I dobelieve.

Ted Lanes (08:53):
It is fertile hunting ground.

Yes, when I was thinking about the most high
profile receiverships that areout there.
Most of them seem to come fromCalifornia Herbal, MedMen, High
Times, more recently, Statehouse.
There certainly are others, butthe ones that seem to have the
biggest headlines have come fromCalifornia.

Ted Lanes (09:16):
Yeah, they garner the national press.
Yeah, there's quite a few thatare right below below that
threshold.
Um, because I couldn't eventell you how many cannabis
companies operate or have beenoperating in in california.
It's a huge number it's a hugenumber.

Well, so let's just dive right in.
Uh, we said that bankruptcyisn't an option for cannabis
businesses, but I would love tohear your expert explanation of
why that is and why receivershipserves as an alternative.

Ted Lanes (09:50):
It's actually very simple Bankruptcy, as it's
defined, it's a federal actionperiod.
So if your company is illegalat the federal level that
cannabis companies are, despitebeing legal in many states, you
do not have a federal action ofprotection, which bankruptcy is
available to you.
That's it.
That's literally why bankruptcyis not an option.

(10:12):
Now there's there's all kindsof variations If you use a
Canadian holding company andthis and that and the other, but
fundamentally you don't haveaccess to the bankruptcy statute
in the United States.

Got it, and so what you do have access to is
.

Ted Lanes (10:28):
Receivership assignment for benefit of
creditors.
There's other legal remediesavailable and the important
thing to remember about areceivership is, because there's
a lot of misunderstanding,because it is a bit of a black
art, I'll give you that there'sno book on how to do it.
It's called an equitable remedyat law, which means the

(10:51):
receiver is actually a neutraland doesn't work for either
party the moving party or thedefendant, right, it's playing
for the defendant.
The receiver works solely forthe judge and that's kind of
lost on a lot of people.
We're not hired to be hit men.
We have to follow the rules asdefined by the court in the
appointment order.

Ben Larson (11:13):
So on one side you have the company and then on the
other side it's a majorcreditor, or is it a group of
creditors?
Is it all the creditors?
How does that actually work?

Ted Lanes (11:24):
Well, somebody withstanding in your example,
let's say you have a companythat has loans to three
different lenders and they'vedefaulted on two of the three.
Those two lenders are going tohave standing to bring a
receivership action to try tohave a receiver appointed to
protect what they deem are theirassets.
And then you get into the tugof war about who's collateral

(11:47):
we're talking about.
But all that should be definedin the loan agreements, right.
But the overarching goal of areceivership is to marshal and
protect the assets of the entity, whatever is put in the
receivership estate.
And then you can sort of workforward some sort of remediation
plan or adjudication plan.

(12:07):
But again, the people that movefor the receiver need to
understand the receiver does notwork for you.
The receiver works solely forthe court, and that hasn't been
clear in a lot of appointmentsI've been involved in.

Well, so let's dive into that and why
that isn't clear.
Because in the manifestation ofthe receiver coming into a
company, what that looks like isthe receiver is actually
actively involved in theoperations, right?

Ted Lanes (12:41):
That's a little.
Yes, the receiver is definitelyinvolved in the operations, but
it's a little.
Yes, the receiver is definitelyinvolved in the operation, but
it's a little different.
So, essentially, what a areceivership order is going to
do is the best way to thinkabout it is the receiver will
step into the shoes ofmanagement and operate the
business for the benefit of allinterested parties, if at all
possible, not just for theperson that filed the action

(13:05):
right.
So you and you're on your introyou talked about the receivables
and the payables all over theindustry.
That's.
That's no different than makingsure that the debt, any debt,
gets paid right.
That's just another debt of thebusiness.
So the receiver has to go inand sort of do a lay of the land
, if you will, to present to thecourt to say you know, it's

(13:27):
usually like 30 days after yougo back and you have what's
called a confirmation hearingwhere you have to go to the
court that appointed you and sayyour Honor, this is what we
found.
We think this is a validreceivership appointment because
the allegations are in factcorrect and we're starting to
work for a plan forward to tryto remedy these problems.
It isn't, these people movedfrom my appointment and I'm just

(13:51):
going to write them a check.
Right, that's not how it works.

So let's think about how a company gets
there, what's happening that'sputting people in that situation
.
So we've talked about debt,we've talked about payables like
let's, let's, let's queue it uphere how someone ends up in
front of the judge okay, reallygood question.

Ted Lanes (14:15):
So in the early days of cannabis I'm talking about
just california, because this ispredominantly my experiences in
california the companies werestarted with equity investments.
People were writing checks tobuy equity, to own part of the
business.
And in a natural course of abusiness, sometimes you need
follow-on capital, for whateverreason You're growing the

(14:38):
company.
The later monies, for whateverreason, it shifted to be secured
debt right and the debt portionhad the collateral of whatever
your loan agreement is and itwould typically be the whole
company, the brands, themanufacturing facility,
everything.
They throw the whole kitchensink in there.

(14:59):
So if you fall out of favor withthat debt, if default on that
debt or if you break covenantsor what have you, and that the
debt's only real remedy is tosay either we're going to own
this whole thing through aforeclosure process or if they
think that they can restructureit properly.

(15:20):
But remember, you've still gotpayables.
You have trade payables, youhave W-2 issues, you have EDD,
you have all the other supplychain taxes that you have to
worry about CDTFA.
Putting a receiver, putting aneutral, in there to step in the
shoes of management, has becomea really good method to do it
to try to save the business, ascompared to just foreclose on it

(15:42):
and flush it the business, ascompared to just foreclose on it
and flush it From the debtorsthat you know, that you've
encountered through workingthrough processes like this.

when they put those covenants in place or put
the debt into a secure position, do you think that they thought
that they might one day begoing through this process?

Ben Larson (16:06):
Ooh loan to own yeah .

Ted Lanes (16:07):
Yeah, there it is.
You took it right out of mymouth, man.
Yeah, loan to own is.
They will call themselvessophisticated lenders because
they know how to protectthemselves, which you and I
would do, too, right.
You want to have protectionwhen you lend money, what you
and I would do, too, right.
You want to have protectionwhen you lend money.
Saying that it's specificallyset up as a loan to own scam is

(16:29):
that's a little rough right?
I might've seen that one or twotimes where they made the debt
covenant so ridiculous thatthere was no way.
It was like a booby trap.
There was no way the companywas going to survive.
But then you ask yourself ifthe assets in the business
weren't surviving before, whywould you want to own them
through a loan to own program?
So it's kind of illogical in away.

(16:51):
So, yeah, I see that thrownaround a lot.
I personally don't think muchof this money came in under loan
to own sort of.
You know as a strategy, but it,it, it is out there.
You know as a strategy, but it,it, it is out there.

Ben Larson (17:04):
I'm I'm curious kind of on the.
You know we've talked about theloaners being the first one
that sounded right but I'll justcall them that loaners.

Ted Lanes (17:16):
They have senior security.
Yeah, they're the priority.

Ben Larson (17:18):
Senior securities being kind of like you know, top
of the heap as far as like theones bringing in the receiver
potentially getting paid.
What about everyone else thatit's owed money, like what?
What's the kind of the thepriority list like I've heard
like as as soon as like you hearabout something going under,
it's like send them tocollection.
So at least you're like kind ofa little bit higher on the list

(17:40):
.
But I don't have a goodunderstanding of what is that
priority list.
It's like who has the highestchances of getting paid?

Ted Lanes (17:47):
So you have two classes, or sometimes three
classes of debt.
You have the secured lenderright, and that's usually the
big money that came in, insertwhatever number here, and that
collateral agreement is going toinclude any rece right that are
owed to the business, theonsite equipment, any inventory

(18:08):
that's as if yet unsold, whetherit's at a distributor or not
right, whether it's onsite orwhat have you, and these things
all seem to have company carsfor whatever reason.
So they will throw a blanket, acomplete blanket, over all of
the assets, and in many casesI'm seeing more and more where
those collateral agreementsinclude the stock of the company

(18:30):
, and in a second I'll tell youwhy they do that.
So to answer your questionthough, ben, the waterfall is
the senior.
Secured debt typically getspaid first, in whatever capacity
, which is why you see theunsecured debt in the form of I
hate to say it, but payables tovendors usually gets square root

(18:52):
of zero and it's sort of mixedin.
There is tax liabilities.
Where do they fit?
Are they above the debt?
Are they below the debt?
W-2 payroll is usually first.
I usually make sure that thatgets cleared.
I don't want to fight with theEDD.
I most certainly nobody shouldCDTFA, they can come in and make
your life miserable.

(19:12):
So you either horse trade withthose organizations and then
deal with your secure debt, orif the collateralized debt wants
to take that obligation, I'mhappy to hand it over to them.

Well, so you said you were going to get to
the stock.
I think that one of the thingswe haven't clearly highlighted
is that through this process,the ownership of a company is
going to change substantively.
It can, yes, and I'd like foryou to talk about that.
In cannabis, really, mostcompanies have been startups and

(19:44):
the founders have held a lot ofstock, and then there's been
different classes of stock thatsome of that maybe came in at
that you talked about, and thenthe debt came.
After that, at the end of thereceivership process, the
ownership most likely looks verydifferent than when it started.

Ted Lanes (20:02):
It certainly can.
But there's even a differentreason why some of the more
sophisticated lenders are askingfor majority ownership of the
company as collateral, just ascollateral.
You're not selling them thebusiness in exchange for this
debt.
It's collateral in aforeclosure action.
And the reason they do that isit's a in theory.

(20:24):
The way it's written is you'renot really supposed to be able
to use your license ascollateral for a debt because
the license is owned by thestate.
But yet you see these licensesgetting sold as if you're a
recovery for collateralized debt.
And the way they do that isthey say well, we own the stock
of the business, so in essencewe're selling the shares of the

(20:47):
business for which the licensegoes with.
There's some machinations tothat.
But to answer your question, atthe end of the day, if the
equity was part of thecollateral of the debt, it is up
to the lender whether or notthey want to continue to own
that entity or if they just wanttheir money.
Right, you can decide and I'vehad one particular case where

(21:13):
the equity was part of thecollateral for the debt and the
deal was cut that you're goingto get 60 cents on the dollar
but you're going to return theequity to the previous owners.
You're going to forgive thatpart of your collateral because
you guys are not operators andyou don't want to run the
business and this way they cango out and recapitalize the
business and start again.
So they we sort of had adivorce right, so it's used kind

(21:34):
of as leverage, but it is aimportant part of a lot of the
collateral stacks.

Ben Larson (21:38):
So it makes sense that if I'm a lender and things
are getting into a situationwhere I'm afraid I'm not going
to get what I'm deserved and andI engage, um, the court in the
court, uh, assigns a receiver.
Does it ever happen in theopposite direction, where the
company is like finding itselfin a bad position and is seeking

(22:01):
, like a receiver, to getengaged?

Ted Lanes (22:04):
Yes, yeah, I've had companies reach out to me where
I've been appointed and it waslike a receiver to get engaged.
Yes, yeah, I've had companiesreach out to me where I've been
appointed and it was purelybecause they had completely lost
control of the business andthey were just looking.
They were just saying listen,your honor, we don't want to, we
don't want to screw over allthese people that have been good
to us.
We have payroll debts, we havethis, we have that.
If you can appoint a receiver,a receiver would like to turn
the operations over and havethem try to normalize it because

(22:25):
, a we don't have the skill setand, b we need court protection.

Ben Larson (22:31):
That seems oddly responsible.

Ted Lanes (22:32):
I didn't say it happens a lot.

Ben Larson (22:34):
It does happen a lot , okay, I didn't say it happens
a lot.
Oh, you didn't say it happens alot, yeah.
How often would you say ithappens when maybe it should be
happening?
Oh God.

Ted Lanes (22:51):
I'm doing the way back machine here.
I probably had three of thosethat that we got appointments on
.
Okay, it should happen more.
I mean one of the things thatthat we see a lot and I'm
speaking for a lot of my friendsin the receivership industry,
because we discussed this ispeople wait till the 12th hour
and then there's almost nothingyou can do right, there's
nothing to work with, there's nomaterials to work with.

(23:12):
So if you want to be proactiveabout it, the court might
actually be more receptive ifyou stipulate to it and say,
listen, we're stipulating tothis appointment because we need
this to stop and catch a breathand try to figure all this out.
And we're going to.
You know, we're going to try todo the right thing.
That depends on the judge, butsome judges have done it and
they said, yeah, we'reprotecting this receivership

(23:33):
estate, which is the payables tothe vendors, the W-2
liabilities you know all and thejobs however many jobs there
are, all that stuff.
So you can use it proactively.
I wish it happened more,because usually we get brought
in or somebody makes for anappointment when it's an empty
bucket.

Ben Larson (23:50):
Yeah, yeah, right.
And so what?
What does from the mechanicside?
What would that look like?
It's, um, it's like we, youfile for that intervention.
I mean the companytheoretically needs to keep
running to like so it doesn'tcompletely fall apart.
Would you then bring in like amanagement team to start kind of

(24:11):
grabbing the reins?

Ted Lanes (24:13):
So I do mine a little differently.
I don't necessarily default tothat, because I was an operator
and I've run a couple ofcompanies, including two public
ones, so I like to do thatmyself.
I keep a smaller shop.
I don't have 50 people, I havefour.
So I usually go meet withincumbent management and try to
explain to them.
I would love to have all of youstay here, but this is going to

(24:34):
be the rules and this is whatwe're going to do, and if I get
the sense that they want to workwith me and we want to sort of
move this forward, I'm happy tohave them stay, because if you
think about the institutionalknowledge that is with all of
those employees, that's reallydifficult to replace and the
relationships that they havewith their vendors and their

(24:55):
suppliers and all that kind ofstuff.
So my preference is to keep asmany of the incumbent management
as possible.
That's not always possible.

Ben Larson (25:04):
So you kind of see yourself as like an interim CEO,
CFO.

Ted Lanes (25:08):
Yep.

Yeah, I was going to say within this context
of kind of all the people thatare a part of fixing the company
and turning it around.
Just over the past few weeks,if if you're on any sort of
cannabis business mailing list,email list, you've been getting
the broker notices about thestate house assets being up for
sale.
It was like every day everyonewas getting here's the list of

(25:32):
assets, here's what's up forsale, and I actually have been
working with someone looking ata few of those assets and so I
was wrapping my head around itall.
But the reality is is that, aswe've seen, a lot of companies
go through different levels offinancial intervention.
The outcome in some cases isthat the company ends up with a

(25:55):
broker like the state houseassets are and there's this
auction date and you're supposedto submit bids and a lot of the
time what ends up happening atthe end of that is that nobody
in the auction actually comesout an owner and that the debt
holders are the new owners andoperators.
We don't know what will happenwith Statehouse yet.

(26:16):
That is absolutely still anopen story, but with many other
instances, the debtors are allof a sudden now the operators
instances, the debtors are allof a sudden now the operators
and and the cap tables have beencompletely wiped out and and
it's sort of the same companybut sort of different.
What.

(26:38):
What's?
What's the deal with theseauctions and the asset sales?
Is it ingest?
Is it?
Is it just because it'srequired to go through that
process to try and sell them?
What's really going on here?

Ted Lanes (26:54):
Okay.
So first of all, it istypically required because you
have to serve public notice toget the highest recovery for the
assets right.
Otherwise we're going to beselling them to our
brother-in-law for a dollar, andthen you know all that.

It seems like it's happening anyway Sometimes
.

Ted Lanes (27:13):
Very well might be right.
Very well might be, but the ideais and I'm going to make up
numbers let's say there's ahundred million of secured debt
on a balance sheet, right, whichis, you know, not outrageous in
some instances.
The opportunity that there's$100 million of marketable
assets at a company that's indistress is very, very small.
So you can either spend a tonof money selling things one at a

(27:36):
time, in which case you don'treally have any pricing pressure
, right, you're not going to beable to maximize value because
somebody can say, oh, you wantto sell that machine, I'll give
you X, because it's only worth Xto that one individual, as
compared to try to sellsomething that's close to a
bundleable company that you canthen resuscitate.

(27:57):
So the idea is, if you can sellit all at once, the odds are
that you'll get a betterrecovery and you're only paying
for one transaction and you gotwhat the market will bear.
The unfortunate side is, you'reright, you scrape the earth
with the remnants of the oldcompany.

(28:18):
But I've done a deal where partof it was that they hired back
the majority of the previousemployees Because, again, they
had institutional knowledge.
They wanted to resuscitate thebrands.
That's not common but it doeshappen.
For a smart buyer.
A smart buyer is going to sayall those people knew, they know
my products, they know thesemachines, they know the
customers, there's a lot ofvalue there and they hire them

(28:41):
into Nuko.
So it is a real process thatthe receiver is following where
he's been ordered.
He or she's been ordered toliquidate the inventory for the
benefit of that creditor orwhoever those creditors are, and
the most cost-effective way todo it, an expeditious way to do
it, is a bucket auction and thereceiver is not the broker.

The broker is a separate business.
Yeah, can't be.
And so there's a broker at thetable, there's a receiver at the
table, there's a judge.
There are also lawyers, who arethe other key players?

Ted Lanes (29:20):
in all of this.
Isn't that enough?
That seems like plenty.
I think that's plenty.
Look, the process is notinexpensive.

Who's paying?
The receiver and all of these.

Ted Lanes (29:30):
Glad you asked.
So the rule of thumb is thatthe people who move for the
receiver's appointment have tocommit some.
They have to commit to somedegree of covering the
receivership expenses.
The hope is that the estateitself has sufficient funds to
pay the receiver's fees.
If it doesn't, then there's athing called receivership
certificates, where a party willlend in the money to cover the

(29:52):
receivership fees in the hopethat they get more than that
back at the liquidation right.
So the the onus typically restswith the party who's making the
motion to have the receiverappointed interesting okay right
, and then it can switch to like.

Ben Larson (30:05):
I have a case right now it's not in it's, it's
making the motion to have thereceiver appointed.
Interesting Okay.

Ted Lanes (30:07):
Right, and then it can switch to like.
I have a case right now.
It's not in, it's, it's a farchain of pharmacies, right?
It's no secret.
Receiverships are public, bythe way, and the the operations
of the chain of pharmacies isliable for my bills, and that's
who's been paying us.

Ben Larson (30:24):
And then you know luckily, and that's who's been
paying us.

Ted Lanes (30:26):
Luckily, there's enough there, but that's not
always the case.

Ben Larson (30:29):
So you were telling us a story before we hopped on
about someone in a case that youwere involved in, adoringly
labeling you the Green Reaper.
Here we go.
Might be a little bit of amisnomer, because you're just,
you're court appointed, soyou're there doing the job and

(30:51):
so you're not necessarily thebad guy, but like is that?

Ted Lanes (30:56):
a common like juxtaposition.

Ben Larson (30:59):
Is that a common like positioning of like you
just because you're the personthat they're interacting with,
or do some people come to termswith it and understand that you
are just there because the courtneeds you to be?

Ted Lanes (31:11):
Both that particular moniker came from.
There was just this one weekwhere there was three
nominations and that attorneywas on the other side for all
three and I kept walking in theroom.
He's like dude, you're justlike the green Reaper.
Oh my God Right.
And so it's kind of stuck Right.
Um, but it is, you know, the.

(31:33):
The brass ring is to find a wayto keep these businesses, to
restructure it, get the debt tomaybe lower, you know, adjust
interest or defer, go to pickwhatever.
There's a few levers we canpull.
The brass ring is to find a wayto have the entity come out the
other side.
Sometimes that's just notpossible.
There's just not enough left,and I've been doing some work

(31:55):
for a very large secure debtfund in the space and I think
that we had 75 investments andI've been having to do the
workout on all of them.
10 or 15 of them we found happylandings for.

Ben Larson (32:07):
Oh.

Ted Lanes (32:08):
Right, and they're good.

Ben Larson (32:09):
Yeah, and that's it usually looks like a new
management team put in place, oris it sometimes the same
management team surviving.

Ted Lanes (32:17):
In most of them it's the same management team,
because new money would come inand buy out the existing debt
and you know maybe at a lowerrate or under different terms,
and maybe at a lower rate orunder different terms and again
that institutional knowledge ofknowing the brand being
associated with it, knowing yoursuppliers and things that you
can fix that maybe you didn'thave the money to fix before to
economize there's value in that.
To a lot of smarter operators,there's value in that.

So a lot of what has gotten the cannabis
industry into this situation isthat senior secure debt
structure Right.
Do you have advice orstrategies that you think
operators should consider asthey are looking at different
financing strategies?
If a company was thinking aboutbringing in senior secure debt

(33:04):
tomorrow, would you tell themnot to?
Would you say that under thesetypes of circumstances, what's
the way to navigate this?
To not end up in receivershipand be dealing with the green
reaper?

Ted Lanes (33:15):
Yeah, Never going to get enough money of that.
So one of the things I did witha consulting client is they
were out there looking for money.
We found them some capital.
We did a tiered investment.
What was typically happeningbefore was people are going for
these massive rounds right,thinking I need 50 million or 20
million because I've got allthese growth plans right.

(33:38):
So you are instantly saddledwith servicing a giant part of
that.
I mean a giant number,servicing a giant part of that.
I mean a giant number, okay,and your company may never grow
into that number.
So what we did is a tieredthing.
You know 2 million, 3 millionand when they'd hit certain
benchmarks.
So we didn't over-lever thecompany.
In the early days they had acommitment from this lender, but

(34:01):
it was a tiered, you know, onan as-needed basis, I think it
was $5 million chunks and thatway we let the business grow in
to being able to afford thatnext tranche and the next
tranche and the next tranche.
Because if you think about it,if you simply go borrow an
enormous amount of money at 15%,18%, 20%, 22%, whatever

(34:22):
cannabis money is now, you'repaying a lot of interest from
the get right, from the jump,and if you don't hit your your
growth goals or you have inputcosts that don't go down like
you think they are, you don't?
You know there's a millionthings.
You're running a business.
You're stuck paying thatinterest rate on that huge
amount of money, right, so thatthat has worked for us.

(34:43):
Um, other strategies like youcall me sooner, right and
they're all so different, likeevery scenario is so different.
I just I think smarteroperators that I've talked to
the people that are, you know,sort of got to be a little
devoid of ego that you may nothit those growth things that you

(35:04):
really want to hit, to be alittle devoid of ego that you
may not hit those growth thingsthat you really want to hit.
So don't over leverage yourbusiness, because if you start
to grow really fast, the nextround will be cheaper because
it'll be perceived as less risk.

So the follow-up question is for
companies that are receivingthose notices that one of their
customers is enteringreceivership, what do you do?

Ted Lanes (35:31):
You reach out to the receiver right away and you
explain this is how much I'mowed.
Right, we've been owed this.
For what have you?
You know, for whatever.
And then you need to find outand it should be in the public
filings how much debt is infront of you.
Find out and it should be inthe public filings how much debt
is in front of you.
Right, you do, because if youjust say, well, we're an

(35:54):
unsecured credit, we're a vendor, we are owed $750,000 in AP,
whatever the number is right youmight find out that the company
borrowed $100 million and theodds on the unsecureds getting
paid is very slim.
It's really slim.
Unfortunately, there isn't alot of great moves there.
The other alternative is, ifyou were a supplier and they

(36:14):
still have your product, youmight be able to claw it Right,
maybe.

But then you're, I know.

Ted Lanes (36:24):
And it expires and then you've got all the metric
stuff and all that mishegoss.
So you just need to make yourpresence known.
But there really isn't I hateto say there really isn't a lot
of chess moves if you're anunsecured creditor.

Can you say well, I would like to take the
van and I'll take some of theiPads and start getting to horse
trade.

Ted Lanes (36:52):
Sure, I listen to all horse trading.
It's just a question of howwell defined the collateral is
on the debt.
Presumably you're talking aboutcollateral as debt, that's
putting it into receivership.
If there's collateral that'soutside their collateral stack,
if they didn't do a good.
You know, it's a little MontyHall.

(37:12):
Right, let's make a deal.

But if the debtors own all the collateral,
then you can't really horsetrade either.

Ted Lanes (37:18):
There's not.
There's not a lot.
You don't have any leverage.
There's not a lot.

You can do.
Basically, you're screwed, iswhat I'm hearing, to be eloquent
about it?

Ted Lanes (37:25):
yes, yeah most likely .
You're pretty much hosed yeah.

Ben Larson (37:43):
Well, there, there's some comfort I take in that
being that I have been on thereceiving end of some of those
letters and just knowing that Iwasn't an external or uh, that I
wasn't, I was just yeah, it wasjust, uh, to be expected, um,
okay, so I'm uh, you know I'm,I'm the type of entrepreneur
that had a crazy idea at onepoint and just kind of dove into
it and and the the, those typesof entrepreneurs generally
always think optimistically andpositively and it's like you
know, we're going to grow thisbusiness, we're never going to
fail, all this kind of stuff.

(38:03):
But, um, you've also taught in,in, in, in use, in a classroom
with people that maybe areaspirational business leaders or
entrepreneurs, business leadersor entrepreneurs, and this
probably isn't a class that youknow they get excited about
taking but not to take away fromfrom your class but I'm used to
being, I'm used to it yeah yeah, how do you, how do you like

(38:25):
ease people into thisconversation or like, how do you
really capture their attentionand and what's your hope of them
coming out the backend of theclass, as they kind of then take
that into the business world?

Ted Lanes (38:37):
Right.
So, being a you knowentrepreneur myself, having
started a couple of companies,written a lot of checks some of
them I haven't gotten back everright Is one of the things that
I stress is, you know, settingup the entity properly, upfront,
right, like you know who yourother investors are.
The worst thing you can dopeople get mad at me for this,

(39:00):
but this is my belief is a 50,50 partnership because, then you
don't have a tiebreaker right,have a 1% owner, something to
have some, because otherwisethen you definitely wind up in
litigation.
So so what I tell them is you,you know, the tiered financing
thing is very powerful, butfinding, you know, the right

(39:20):
board members that are that arenot, you know, I like to find
board members that are out ofindustry, because then you get a
completely unvarnished view ofwhat, what the strategy is,
because if you can convincesomebody who's out of industry
that you have a good idea,you're positioning it right.
Like you might be ontosomething, but typically if I'm

(39:41):
lecturing, I explain to themthis is what can happen.
And here's this example, andhere's this example and this is
how it wound up there.
So let's not do that.
Right, and one of the big onesis acid testing.
Know, acid testing.
These presumptions about howquickly this business is going
to grow Right, and we all do it.

(40:02):
We all think we're building thenext Google tomorrow, Right,
but there's, but there's so manyyears of work that those guys
did in their room.
You know their, their rooms inStanford, right, that most
people don't know about theirroom.
You know their, their rooms inStanford, right, that most
people don't know about Um and Iand I constantly explained to
them not to you know sort ofover commit.
You know baby steps work.

(40:23):
You don't have to come out ofthe gate hitting a grand slam
but you build momentum.
Because a lot of them were likeoh, I'm going to go raise $50
million Cause I have this greatidea.
I'm like you're not going toown any of the business.
If you try to leveragesomething, like you know start
there you're going to own apaperclip and some letterhead,
right.
And so I'm a big believer in aseed round, you know for an A

(40:44):
round, and sort of gradually getit going, because you learn a
lot the first time you sell to acustomer, right.

What you're saying reminds me of a professor
that I had in business schoolwho talked about financial
pornography a lot and said thata lot of the pro formas are
financial pornography andthey're fantasies, and fantasies
aren't bad they're for somepeople.
It's important You've got tohave fantasies, but you also got
to get grounded back on theground and understand the

(41:14):
reality and understand the stepsto get there.
And I believe that a lot ofwhat put cannabis in the
position that it's in today isfinancial pornography that was
generated back at the beginningof the adult use space.
You know that between 2017 and2019, um, especially coming out

(41:36):
of California, and I think a lotof the entrepreneurs cause I
was at those tables like peopledidn't actually think that it
was a fantasy.
They, they believed it to betrue, um, but unfortunately, in
the end, it proved itself to tobe a bit of a fantasy.

Ted Lanes (41:54):
Right?
Well, you get the truebelievers who aren't going to.
You know, the math doesn'tmatter.
I remember seeing one businessplan that required 10% of the
population of the state ofCalifornia to be a monthly
customer.

Yeah, but somebody believed that that was
going to happen.

Ted Lanes (42:08):
Yes, they did.
As a matter of fact, they mostcertainly did yes certainly did.

Yes, it's incredible the amount of
self-confidence thatentrepreneurs are required to
bring to the table to truly, youknow, believe themselves
sometimes.

Ted Lanes (42:22):
Yeah, yeah, hubris is free, sure, well so I want to.

I want to dive into something slightly, uh
, different.
That sure we so.
At the top of the hour, wetalked about the reason that
cannabis ends up in receivershipbecause of federal illegality,

(42:51):
and on this podcast we talk adifference for hemp companies,
who are facing similar types ofissues as it relates to
defaulting on debt or oncovenants in debt that might put
them in the same situation thata cannabis company is forced
into receivership.

Ted Lanes (43:08):
If it's different for hemp, it is, and so full
disclaimer I'm not an attorney,so I'm going to do this.
I'm pretty sure I have thisright because I've had a lot of
these discussions, and so I'mgoing to keep this very simple.
At the federal level, hemp islegal period.

(43:28):
The arm wrestling that startedis that people have taken hemp
and they've figured out how toderive certain cannabinoids and
other elements from it that giveyou a THC style effect, or THC
period or THC period.
But my understanding is it'sreally inefficient, right, you

(43:49):
need a huge input to get thesame amount, right, but hemp is
also cheaper and easier to growand you can grow it anywhere to
get the same amount.
Right.
So, but hemp is also cheaperand easier to grow and you can
grow it anywhere.
So the tug of war that startedis just because hemp is legal.
Is the product that comes outof hemp, if it's THC, legal,
right?
So right now and I had thisdiscussion literally yesterday

(44:11):
right now a hemp company canfile for bankruptcy.
Right, you might hit a speedbump if it turns out that their
main product is selling THC,essentially a hemp-derived THC.
I don't know where that lands,but there is a case where a hemp
company filed bankruptcy.

(44:32):
It happened to own shares in anadult use recreational legal
cannabis company right.
The DOJ challenged thebankruptcy filing and lost
because the judge said they canown shares in the company.
Their product is not THC right.

(44:53):
So the message is that ifyou're taking hemp and turning
it into a THC-based product, youmight have some turbulence
ahead.
But as it stands right now, myunderstanding is they can file
for bankruptcy.

Ben Larson (45:08):
Yeah, interesting, there's been a lot of, as you
said, arm wrestling about whatis legal.
As you said, arm wrestlingabout what is legal and I know
there's it's been adjudicatedabout, kind of as long as the
origination is hemp and thoseproducts you know fit the mold
that they've been upheld asfederally legal.
But it is really interesting tothink that you might have

(45:29):
companies that look very similar.
It's just what supply chainsare they using?
And I mean this is veryconsequential, right, they can
cross state lines with the hempproduct too, right?

Ted Lanes (45:40):
So again, if the way the law was originally written,
I don't think they anticipatedhow clever some of the people in
the industry are and that theywere able to go.
You know what we can do.
We can grow a bunch of hemp andturn it into, you know, thc and
cannabinoids and all that stuff, right?
So the fear is that theenforcement side is going to say

(46:03):
that wasn't the spirit of thatlaw, it was for hemp, pure hemp
products, and CBD, I think isfine, just CBD is fine.
So that's the risk.
So for right now, myunderstanding is that you can
utilize the bankruptcy statuteif you're a hemp product, but
that might change based on whatproducts you're selling.

Ben Larson (46:24):
Gotcha yeah.

Ted Lanes (46:25):
Does that make sense?

It does, Ted.
In order to be a receiver, isthere a special license and any
ethical requirements?

Ted Lanes (46:37):
So the answer to the first answer, first question, is
no, there's not.
The ethical part is sort ofit's anticipated that you're
going to do the ethical thing.
Plus, you have to answer to ajudge right, and the judge
controls your fate in that yourappointment order says that if
somebody thinks you didsomething you know out of bounds

(46:57):
or left-handed, you're going tohave to answer to that judge
and they will waive yourjudicial immunity and all that
kind of stuff and they willallow you to be sued for it.
Luckily I've done over 100cases.
I've never been dragged infront of a judge right in front
of a judge, right.
The sort of rule of thumb issomebody nominates you and the

(47:25):
judge looks at your backgroundand the requirements of the case
and decides you would be a goodfit to handle that particular
challenge.

Who nominates you in that scenario?

Ted Lanes (47:31):
Well, a party withstanding, right.
So in the cases we were talkingabout the secured creditor, for
example, that's who's typicallynominated me, right?
They're like look, we have Xamount of dollars linked into
this cannabis company it's notdoing.
Well.
We want to point you to take itover and figure out who did
what to whom, and do my thing.
The judge decides if I have thequalifications to do that.

(47:55):
Got it Right?

Got it.
Well, we're getting close tothe end and so, ted, how can our
listeners stay in touch withyou?
Is there a website or a socialmedia site that people should
follow to keep up with you?

Ted Lanes (48:13):
LinkedIn is far and away the best way.
I do have a website it's, youknow, lanes managementcom, but
99% of the stuff I do is onLinkedIn.
Um, I don't have any socialmedia.
I'm just not that exciting.
Um, nobody cares.
Um.
But yeah, if you just find meon LinkedIn and I'm, I'm happy
to answer questions because,like I said, people wait too

(48:33):
long and if you're proactive,there's remedies, right, that we
can try.
Um, as compared to just havingthis thing thrown into
receivership and everybodygetting beat up.

Perfect, and so do you have a last call for
our listeners.
Any advice or closing thoughts?

Ted Lanes (48:53):
Ooh, um, so many.
Um.
I mean, look, I completelyunderstand that you know
receivership and stuff that weget appointed and it's the
boogeyman because it is a bit ofa black art.
It's not well understood.
But the goal is to try andcreate an environment where

(49:14):
everybody can get something, ifat all possible, as compared to
it just being a pissing contestwhere everybody's suing one
another and then nothing goodhappens right.
So if it's done correctly,there can be a positive outcome.
It's not common and the mediadoesn't like those.
So you hear about state houseand all those other kind of
things and to your point, annaRae, about getting that letter,

(49:35):
that you're going to get zero.
That's a real unfortunateoutcome.
But you know, having seen somany companies that are headed
towards receivership, sometimesthere's ways to be proactive and
remedy it and it's worth aphone call or an email.
It really is.

Ben Larson (49:53):
Well, thank you so much, Ted.
This has been really insightful.
It kind of takes this bigmysterious beast in my head and
provides some clarity and makesit a little less scary, although
maybe not any better of anoutcome.
Yeah, just really appreciatethe time and thank you for
schooling us all onreceiverships and bankruptcy.

Ted Lanes (50:16):
Entirely my pleasure, happy to do it.

Ben Larson (50:18):
All right, we'll talk to you soon.
And Ray, what was that term youused?
Financial pornography.

That's right.
You can use it if you want.

Ben Larson (50:30):
I'll probably refrain, but I found one of my
old pitch decks and I justwanted to show you.
Um.
Something I'm quite proud of isthis was what you know.
Our company used to be callednanogen.
This was my financialprojections slide for our first
pitch deck that we'd raised ourseed round on and um financial

(50:50):
pornography yeah, I'm like youknow it's all bullshit.
So that is my supposed claim tofame.

And for those that are listening, what Ben
just put up on the screen was aliteral hockey stick with no
numbers associated with it atall.
Yeah, the revenue projections.

Ben Larson (51:12):
It's the classic hockey stick.
I had a little bit of a leg upbecause I was coming from the
venture capital side and I'dprobably seen 500 decks that had
some form of a hockey stick onit, so I just did the real thing
.
All right, folks, what do youthink?
Was it educational?
Did you learn something?
Are you going throughreceiverships or bankruptcy?
Let us know If you want moretopics like this.

(51:34):
Our things are eating at you.
We'll get it on the show.
We'll find the best person ournetwork has to offer and, just
like we did with Ted, thank you.
Thank you.
Thank you for tuning in orliking, subscribing and sharing
and doing all the things.
Thank you to our teams atVirtosa and Wolfmeyer.
Without you guys, we couldn'tbe doing this.

(51:56):
Thank you, and to KitPrint forsupporting the show.
You guys have been a greatpartner, do great work.
Keep it up, thank you.
All right, and I think in twoweeks we'll have the opportunity
to see all in person, whetherit's at WSWA or Canada DataCon
in Miami.
So find us, come be on the show.
I think we might be doing somelive recordings, a little birdie

(52:17):
told me.
Until then, stay curious, stayinformed and keep your spirits
high.
That's the show.

All Episodes

#074 - Understanding Receivership & Bankruptcy in Cannabis & Hemp w/ Ted Lanes

Episode Transcript

Popular Podcasts

Stuff You Should Know

Dateline NBC

On Purpose with Jay Shetty

.css-15opob5{left:0;position:absolute;top:0.8rem;} All Episodes

.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}#074 - Understanding Receivership & Bankruptcy in Cannabis & Hemp w/ Ted Lanes