The recent bankruptcy of Herbl, one of California’s largest cannabis distribution companies, sent shockwaves through the California cannabis industry.
Once a major player with product sales of $700 million in 2022, Herbl’s demise highlights deep-seated problems in California’s cannabis market, sparking concerns over unpaid bills, tax liabilities and the more general difficulties faced by companies in the sector.
Herbl’s Rapid Rise and Fall
Founded in 2016, Herbl has grown rapidly, becoming a key player in California’s legal cannabis market. The company’s success is based on numerous exclusive distribution contracts with major brands and substantial investment capacity. But a series of setbacks, including the loss of a major contract with Raw Garden in January 2022, marked the beginning of Herbl’s decline.
According to MJBizDaily, Herbl’s collapse has left tens of millions of dollars in unpaid bills to other cannabis businesses across the state, raising concerns about the stability of California’s cannabis industry. Tyler Kearns, founder and CEO of Seven Leaves, a Sacramento-based cannabis company, believes the impact will be widespread, saying Herbl’s bankruptcy was “sickening” and that his company has an $880,000 debt owed to Herbl.
Herbl’s downfall is not an isolated incident, but rather part of a broader trend in California’s cannabis industry. The state’s distribution model, which requires brands to sell through authorized distributors, has created a complex web of financial transactions. Brands are finding it difficult to collect payments, which has a cascading effect on suppliers, distributors and retailers.
Wesley Hein, president of the Cannabis Distribution Association, highlighted the broader implications of Herbl’s collapse, saying it should serve as a “wake-up call to policymakers.” Mr. Hein stressed the need to take immediate action to address regulatory, tax and illicit market issues, highlighting the fragility of the industry.
Domino effect
Various California cannabis companies began reporting payment issues with Herbl in the spring, with unpaid or partially paid invoices becoming more common in recent weeks. This financial pressure has had a domino effect, affecting the entire supply chain, from growers to retailers. Ciencia Labs CEO Ben Mitchell highlighted the difficulties faced by brands trying to get paid: “Unfortunately, we will not be paid by Herbl.”
Herbl’s bankruptcy also highlights the difficulties faced by cannabis businesses in California, which are subject to a more restrictive set of rules than those in other industries. Observers say the lack of government intervention in Herbl’s case raises questions about support for cannabis businesses, especially compared to other struggling sectors.
Various legal actions have been brought by dissatisfied brands seeking compensation. Ali Jamalian, owner of Sunset Connect, filed a lawsuit accusing Herbl executives of fraud and entering into contracts without the intention of payment. Herbl currently owes at least $2.2 million to various cannabis brands, and is expecting $1.9 million from retailers who haven’t paid the distributor.
Adam Cavanaugh, president of the Cannabiz Credit Association, has shined a spotlight on the difficulties faced by creditors in the cannabis industry, citing a lack of access to traditional bankruptcy protections. The lack of such protections poses a significant risk to companies doing business with cannabis-related entities, making it more difficult to collect outstanding debts.
A warning for the industry
Herbl’s collapse is a cautionary tale for California’s cannabis industry. Beyond the impacts of Herbl’s bankruptcy, the broader regulatory landscape, tax issues, and competition from the illicit market pose significant threats to the industry’s viability. HERBL’s fate should not only prompt reflection on its specific circumstances, but also serve as a catalyst for deeper change in the state’s cannabis regulation.
