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This spring, rumors were swirling that HERBL, one of California’s largest cannabis distribution companies, was on the verge of collapse. So Mike Beaudry, the company’s CEO, sent out an email on May 18 declaring that “these rumors are categorically not true. HERBL continues to be fully operational.”
Less than a month later, HERBL had completely collapsed. HERBL’s failure left a trail of damage that hurt small pot brands and shorted the state some $17 million in unpaid taxes. HERBL is only the latest high-flying California pot startup to crumble, following companies like Flow Kana, which raised $175 million in capital only to collapse, and MedMen, the California startup that earned a billion-dollar valuation calling itself the Apple Store of Weed only to find itself this year on the brink of financial ruin.
California state law requires distributor companies to work as middlemen between pot producers and retailers. HERBL’s demise has become a giant flashing red warning sign because of the vital role distributors play in California’s market; if a company as large and entrenched as HERBL can go under, experts say, then there are deep problems in the industry that will only lead to more company failures.
“I do feel like we’re going to see a significant and material number of closures, up and down the supply chain,” Wesley Hein, the president of the Cannabis Distribution Association, told SFGATE.
Observers in the industry say that HERBL’s demise shows how cannabis companies in California are forced to abide by a more difficult set of rules than other industries. They also argue that if HERBL were a different type of company, the state government would have stepped in to save it.
“Sickening”
Tyler Kearns, the founder and CEO of Seven Leaves, a Sacramento-based cannabis company, said it felt “sickening” in the moment in June when he learned that HERBL had finally bit the dust. Kearns said HERBL owed Seven Leaves $880,000, so when he found out in June that the company had started laying off delivery drivers he realized it was going to be almost impossible to get that money back.
“I knew this was going to be the biggest failure in U.S. cannabis history,” Kearns told SFGATE.
HERBL wasn’t always arousing such fear. Founded in 2016 by veteran executives from the food distribution industry, it quickly grew to be a major player in California’s newly legal pot market. By 2022, the company was delivering to over 1,000 stores and reportedly sold $700 million’s worth of cannabis in 2022 alone, making it a massive pillar of California’s $5 billion legal pot market. From 2018 to 2022, it was the largest distributor in the state.
HERBL’s rapid rise was driven largely by two factors: its exclusive distribution contracts with some of the biggest brands in the state, which made HERBL attractive for retailers and even smaller pot brands; and its tranche of investment cash, which allowed HERBL to keep paying its bills even as the rest of the state’s industry sunk into a debt crisis.
Both of those factors started to unravel in the past two years. In January 2022, HERBL lost its contract with Raw Garden, one of the biggest producers of cannabis in California. The distributor quickly filed a lawsuit, alleging that Raw Garden had breached its contract, but the lawsuit has yet to be resolved, leaving the distributor without one of its top-selling products.
Without a big name like Raw Garden, California’s debt problems started to drag down the company. HERBL had become known as the “bank of cannabis” in California because it kept buying more cannabis from suppliers, even after retailers stopped paying for goods they had purchased from HERBL. That meant HERBL was effectively holding debt for the entire industry. As unpaid bills piled up across California’s weed market — a 2022 report estimated that the industry was sitting on over $600 million in debt — it eventually became too much for HERBL to handle. Rumors started spreading that the distribution company, which had a reputation for paying producers no matter what, was no longer doing so. The panic led even more brands to leave the platform.
Beaudry, HERBL’s CEO, tried to stem the tide that was crashing against his company by writing his May 18 letter. He admitted that HERBL had missed payments to some of its suppliers, but assured customers that “we fully expect the current situation to be temporary.”
The letter did little to assuage concerns. Yet more brands left the company, and some called on retailers to stop paying HERBL and instead pay the cannabis brands directly. The final blow came on June 20, when MJBiz Daily reported that the company’s “main lender” East West Bank had canceled HERBL’s line of credit, effectively turning off the company’s flow of cash and plunging California’s biggest pot distributor into receivership.
That’s left cannabis brands looking for money they may never receive.
Ali Jamalian, owner of San Francisco cannabis company Sunset Connect, said he is owed $180,000 by HERBL. Like Kearns, he said he has little hope of getting it back. Jamalian said he “felt used” by HERBL because he launched with the company in January of this year — just as, in hindsight, it appears the company was crumbling — but said the distributor obscured its poor financial position by repeatedly assuring Jamalian that the company was on firm financial footing.
“Mike [Beaudry, HERBL’s CEO] and his team did a really good job of hiding that fact from their own brands… that’s how they kept getting our products,” Jamalian told SFGATE.
Jamalian sued Beaudry and other executives at HERBL in June, accusing them of fraud and of entering into contracts with Sunset Connect even though the distributor had “no intention of ever paying.”
Beaudry and HERBL did not respond to multiple SFGATE requests for comment.
A ‘remarkable’ debt crisis
HERBL currently owes at least $2.2 million to various pot brands and is owed $1.9 million by various retailers who failed to pay the distributor, according to an overview of the company’s assets that was posted online by its receiver and viewed by SFGATE but later taken down. The company’s assets were auctioned off to the highest bidder in September. In a move that reflects the bleak legal cannabis economy in California, HERBL’s most valuable single asset was the rights to its lawsuit against Raw Garden, which its receiver estimated is worth between $20 million and $40 million.
Adam Cavanaugh, the president of Cannabiz Credit Association, a group that tracks debt and provides credit ratings for cannabis companies, agreed that the lack of bankruptcy protections make it harder for pot companies to get paid after another company fails.
“This lack of access to traditional bankruptcy protections indeed presents more risk for companies doing business with cannabis-related entities, as they may find it more challenging to recover their outstanding debts,” Cavanaugh wrote to SFGATE in an email.
Cavanaugh said his group has already tracked $20 million in debt in California’s weed industry this year, a “remarkable” 27% increase from 2022.
Hein, of the Cannabis Distribution Association, said that HERBL’s failure was partially caused by poor business decisions, particularly its continued reliance on the traditional distribution model despite the clear pattern of California retailers being unable to pay their bills. But, he said, the collapse also exposes systemic issues in California’s pot industry that will doom other businesses. He pointed to overtaxation, competition from unlicensed pot businesses that undercut legal operators and “very excessive and overly burdensome regulations,” and compared the collapse of HERBL to the 2008 failure of the Lehman Brothers Bank.
“Lehman Brothers was a century-old firm with 99 profitable years, you would think somebody in all of that would go, ‘Let’s bail them out, let’s put money in.’ But when they looked like they were too risky to invest in, that really signaled something,” Hein said.
Hein said he hopes lawmakers in California are paying attention to HERBL and learning the right lessons.
“This is a story about HERBL, but it’s also a story about every distributor, so there’s still time to fix the system,” Hein said. “There’s always time to start trying to improve and correct things.”
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