StateHouse receiver says cannabis receiverships on the rise

There’s a reason why Scott Yahraus’s firm, Receivership Specialists, was requested by Pelorus Fund in its recent move to force StateHouse Holdings (CSE: STHZ) (OTCQB: STHZF) to be managed by a court-appointed receiver: the company’s been taking on such jobs for almost a decade in three states, and has managed 30 such marijuana receiverships in that time frame.

Yahraus, a senior project manager at Receivership Specialists, sat down with Green Market Report to discuss what he’s seen from a receiver’s vantage point regarding seriously distressed marijuana companies. He indicated there’s been a steady increase in demand for his company’s services, particularly in California.

Though Yahraus wasn’t at liberty to share details about how the StateHouse receivership is progressing, he said there have been developments in recent weeks. He also declined to identify any of the other cannabis companies he’s managed but said there have been some “very big names” and that a steadily increasing number of such businesses have fallen into receiverships, mostly due to loan defaults that have had to be settled.

This interview has been edited for length and clarity.

How many cannabis companies so far have receivership specialists been appointed to oversee as receivers? And has it just been in California or has it been in other states?

The number I’m up to is 30 cases. It’s been over time, it’s been California, Nevada, Arizona, predominantly California. There’s no bankruptcy protection in cannabis, so unlike a regular business, say it was a restaurant, you could file for bankruptcy, cannabis is not afforded that option. It’s federally illegal and bankruptcy is a federal court. So one remedy is a receivership. It’s typically born out of loan defaults, which is where I see most in cannabis, where the proprietor has taken on a loan and then that’s been defaulted on it. So you have what’s referred to as a lender default receivership.

When was the first cannabis receivership that your company was appointed or retained for?

It was an Arizona case in 2015.

So you’ve been doing this for almost 10 years just in cannabis. And also to be clear, receivership specialist is not cannabis-exclusive?

Oh yeah. Anytime there’s an issue of equity and there’s a lawsuit and one of the parties will move to appoint the receiver. Now having a receiver appointed is not an easy task. It’s not a rubber stamp. It’s a very draconian measure of the law, but it’s to protect something of equity. Again, these are courts of equity, and so the receiver steps into the shoes of the ownership and protects and preserves the asset until the issue can be adjudicated by the courts. Oftentimes we will be asked to sell the asset. And that divorces everyone. So in the cannabis case, let’s say you had an investor, who just wants his money back, just like a lender would if you owned a home and you defaulted. The lender would just want their money back. How do you do that? You sell the product to pay the lender back. We do those things in very similar cannabis receiverships when there’s a lender default receiver kit.

Most of the 30 cannabis that you’ve done, have most of them been liquidations where you’re just looking to settle debts and get whatever you can for the assets?

Yes, and we want to get the highest price, and a lot of times we want to add value. That’s a big part of what we do. It’s not a fire sale, it’s not a liquidation, it’s none of those things. It’s about protecting the asset and adding value where we can. A great case was, that we had an Arizona dispensary many years ago, it was doing $30,000 in top-line revenue a month. And by the time we exited that case, it was very successful. It was doing $900,000 a month in sales. So that’s an example of the receiver adding value, doing the things we do as business people, to add value and create a better situation.

If a cannabis company winds up in receivership, does that mean that it’s going to wind up on the auction block? Or does it mean that you could take a very different tactic and just do some reorganization and change around some management or business practices or SOPs? Something short of liquidation?

Yes. It’s not an auction block. It’s not, “Sell it for pennies on the dollar.” That’s never what we’re looking to do. We’re always looking to add value and to be a resource for the assets.

Have you noticed any sort of increase over time in just how many cannabis companies have been winding up financially distressed in receivership? Or has it stayed fairly steady since 2015?

It’s increased, but that increase has been in California cases from what we see, and again, we only do this in three states. Predominantly all our work is in those three states. So I’ve seen an uptick in California in the last five years. Just because the laws have been, laws got on the books, people started getting into business, it takes time. Then you had a lot of the COVID-19 stuff, which was just a crazy thing. It was just due to the timing of laws and legislation and then people getting into their business and actually working and operating and then trying to execute. We’ve seen more activity in California; I think it’s just because of more volume of people, more businesses, more licenses, just everything’s more, so there’s just more opportunity for something to go wrong in a business.

Are there any other sort of common threads that you’ve noticed among those cannabis companies that you’ve had to take over as a receiver or any other common threads or just really just simply loan defaults with companies getting out financially over their skis?

They’ve been in all the sectors, they’ve been dispensary, cultivation, delivery, and manufacturing. So we’ve seen all of it. It wasn’t just cultivation. But what I’ve seen is what causes this is the stress of being able to monetize. It’s highly taxed at the local level and the state level. So in California, you’re also getting taxed in the city that you’re operating in. Like in Los Angeles, there’s another 10% tax on top of the state taxes. Whereas in Arizona, you just have the state taxes, the cities don’t have any say, and that works over there. It’s a very lucrative endeavor over there in Arizona. And it’s because of the way the laws are set up. So I can’t really say. The commonality is just the inability to execute operationally – that’s a very common theme, just the operators are, I think the mentality in some ways is like, wow, this is just the wild west, the get-rich-quick scheme. But it’s not, it’s hard. It’s very difficult. You have to operate a business like a business person. But then this industry is unique in that it has a lot of regulations and a lot of temptation, which really can stress the business.

Do you have any sense of whether or not we’ve sort of reached the bottom as far as a lot of cannabis companies like StateHouse, MedMen, Herbl, other big names and whatnot, flaming out going into receivership because of debts and bad business decisions? Or do you think there are more financially distressed marijuana companies heading your way?

We get a lot of phone calls and inquiries about receivership. A lot of attorneys are asking, but that’s in all industries. It comes down to the individuals who are running and operating the businesses, and how strong they are. It could be in any industry, just having people who are not minding the store, if you will. This is going to happen one way or another.

Receivership Specialists was able to turn that one Arizona operation around so dramatically, from $30,000 to $900,000 in revenue monthly, that suggests that it’s a lot of times maybe a case of just poor business management in charge of various companies. Is that fair?

It is. In that case, it absolutely was. That case had a lot of investors and they had a lead investor and they got into infighting and it just spun out of control to the point where nobody’s really running things and people get apathetic. And before you know it, you’re running afoul with the regulators and your attention’s really drawn away to the infighting versus the business, the boots on the ground, what needs to be done.

Cumulatively, with these 30 different cannabis that you’ve done, what does all that, I guess, tell you about the cannabis industry in general and how either hard or easy it is to succeed in?

Well, I mean there are thousands of licenses out there. I would note in California, for example, between 2022 and 2023, there was a decrease in 3,000 licenses. That was people either not renewing or surrendering them. So it went from 8,500 licenses down to 5,500 licenses and dry flower dropped by 38% in the state. Those are numbers from the (California Department of Cannabis Control). So just on those statistics, I would say, well, gosh, something’s going on here. That’s a huge drop. Three thousand. So you’re talking about a 35% drop in licenses, year-over-year. So what’s happening, I don’t have those answers, but anecdotally, I just think that it’s hard to do business in California because it’s a very expensive place to do business. It’s a high-tax state to do business. I think that has hurt many operators in the state.

One of the more high-profile ones that we’ve been watching that has been slowly getting liquidated and shut down is MedMen, which has been run by a receiver named Richard Ormond. He’s been progressively selling off assets to settle debts. But from what you said, it sounds like Receivership Specialists does not really take that kind of approach.

I know Richard. Every case is very different because you have to recognize that there has to be a funding source as well. So let’s say the owners, the equity owners of MedMen or the plaintiff, whoever those plaintiffs are, he didn’t want to inject capital to keep the receivership alive, keep the businesses going. So what could Richard do? He’s going to try to sell assets to raise money or keep the operations going. And it also depends on what his court order says. So whatever’s happening with MedMen, I have no idea. The court order will dictate what that receiver is supposed to do. So I am not familiar with it. And also the receiver should use his business judgment as well, what’s best for the assets. So again, I don’t know if you’ve ever seen that. So all these things matter, and a receiver is like a chameleon. You’ve got to adapt. And each case is very different. And there are no two cases that are alike. I’m just saying in general, the objective of the receiver is not to just fire sale, liquidate, if you will. It’s just to add value. And perhaps in that MedMen case, he’s adding value by being able to sell the assets while he can.