High Spirits: The Cannabis Business Podcast

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

โ€ข AnnaRae Grabstein, Ben Larson, and Ted Lanes โ€ข Episode 74

Tune in to our next episode of ๐—›๐—ถ๐—ด๐—ต ๐—ฆ๐—ฝ๐—ถ๐—ฟ๐—ถ๐˜๐˜€ as we unravel the complexities of receivership and the intricacies of bankruptcy within the cannabis and hemp industries. We're joined by Ted Lanes, the "๐™‚๐™ง๐™š๐™š๐™ฃ ๐™๐™š๐™–๐™ฅ๐™š๐™ง" of finance, to shed light on what these financial states mean for businesses and creditors alike.

๐Ÿš€ ๐—”๐—ฏ๐—ผ๐˜‚๐˜ ๐—ง๐—ต๐—ถ๐˜€ ๐—˜๐—ฝ๐—ถ๐˜€๐—ผ๐—ฑ๐—ฒ: We delve deep into the financial mechanisms that companies in the cannabis industry often have to navigate, particularly focusing on why traditional bankruptcy isn't an option and how receivership becomes a path many find themselves on. Ted Lanes, a seasoned receiver and financial expert, brings clarity to this often murky topic, discussing everything from the role of a receiver to strategic debt restructuring.

๐Ÿ’ก ๐—ช๐—ต๐—ฎ๐˜ ๐—ฌ๐—ผ๐˜‚'๐—น๐—น ๐—Ÿ๐—ฒ๐—ฎ๐—ฟ๐—ป:

โ€ข  Receivership vs. Bankruptcy: Understand the fundamental differences and why bankruptcy isn't available for cannabis companies.

โ€ข  Role of a Receiver: Explore how receivers are appointed and their responsibilities in managing a company's assets and operations during financial distress.

โ€ข  Legal and Ethical Considerations: Learn about the legal framework surrounding receiverships and the ethical obligations of receivers.

โ€ข  Actionable Advice for Vendors and Operators: Practical tips for businesses on both sides of a receivershipโ€”how to protect your interests and navigate the process.

๐ŸŒŸ ๐— ๐—ฒ๐—ฒ๐˜ ๐—ง๐—ฒ๐—ฑ ๐—Ÿ๐—ฎ๐—ป๐—ฒ๐˜€: With a wealth of experience spanning over 30 years across various industries, Ted Lanes of Lanes Management Services has become a pivotal figure in managing complex receiverships and financial restructurings. His background includes significant roles such as the interim CFO of MedMen and advisory positions in multimillion-dollar funds, making him a respected authority on financial crisis management.

#Bankruptcy #Receivership #HighSpirits #cannabisindustry #hempindustry

--
High Spirits is brought to you by Vertosa and Wolf Meyer.

Your hosts are Ben Larson and AnnaRae Grabstein.

Follow High Spirits on LinkedIn.

We'd love to hear your thoughts. Who would you like to see on the show? What topics would you like to have us cover?

Visit our website www.highspirits.media and listen to all of our past shows.

THANK YOU to our audience. Your engagement encourages us to keep bringing you these thought-provoking conversations.

Remember to always stay curious, stay informed, and most importantly, keep your spirits high.



AnnaRae Grabstein:

We want to give a quick shout out to our friends and sponsor over at KitPrint, the cannabis operators production design partner. Is your team getting bogged down with static and variable packaging layouts and product renders? Are you looking to support your retail and wholesale teams with better and more frequent state-specific sales and marketing assets? With KitPrint's production design team, you get files turned around in three business days or less at roughly 50% of the cost of the average full-time employee. New customers use code high spirits all one word when you sign up at kitprintco and you'll get 10% off your first two months. To learn more, go to kitprintco to book a call with their team.

Ben Larson:

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 the receiving end of it. We're going to be talking about bankruptcies and receiverships in cannabis and hemp and all the things surrounding that. I'm interested in it. I've been on the receiving end of some of those letters of not getting paid. So fun times. But before we get there, anna Rae, how's your day going? How's everything in Northern California?

AnnaRae Grabstein:

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 always sound, gives us all a better chance of winning, and receiverships don't seem to be going anywhere in this industry right now, so I'm excited to really learn more, and I know that there's a lot of people in my circle that are too. People are trying to wrap their heads around what this all is, so I'm pumped.

Ben Larson:

Yeah, no-transcript.

AnnaRae Grabstein:

It's true, it's true.

Ben Larson:

And so where are you today? You are not in California, the best week of the year to come up to Toronto, where there has been 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 of Tyma Extracts, which is our key partner up here in Toronto. They've been a great partner for a number of years and, yeah, it's like our home north of the border.

AnnaRae Grabstein:

Nice. So they do manufacturing, is that right?

Ben Larson:

They do. They do A lot of oil extracts, as the name would suggest. It's also the home of our emulsion production in Canada and they also do a lot of white labeling. So, like you know, vape cards and pre-rolls and that kind of stuff. So a quiet, quiet, little large operation.

AnnaRae Grabstein:

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

Ben Larson:

Yeah, it's nice and it's a lot warmer here than it is right out there, and it's a lot warmer here than it is right out there.

AnnaRae Grabstein:

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

Ben Larson:

It is like a concert. It's so much fun.

AnnaRae Grabstein:

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

Ben Larson:

Yeah, it's going to be a week, but I'm going to be dropping into Denver, hopefully getting in some skiing in the mountains the day before. But WSWA, the Wine and Spirits Wholesalers of America, is holding their Access Live show and so working with a lot of our friends in the beverage industry, both inside and out of the hemp and cannabis industry. So we'll be going there for, I think, three days and then straight over to Miami. So hopefully this polar vortex leaves Miami so that I can get my adequate beach time at the end of the week.

AnnaRae Grabstein:

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

Ben Larson:

Yeah.

AnnaRae Grabstein:

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

Ben Larson:

Yeah, I mean, it's well. We both work in the business of cannabis and I think it's fairly frequent that we hear about people going under, and we've generally known that bankruptcies are not available to cannabis businesses, and so we get a lot of receivership notices and I've always wondered exactly what that means. You know, I know banks are involved, I know there's lesser of a chance of me getting my money and there's new people that are entered into the equation. But you know, we always have our planning meetings where it's like what are we going to talk about on the show? Who are we going to have on? And I just thought it was really cool. It was the first time where you and I were like, we want to talk about this, but we don't know anyone, and so you just put out a simple little ping to the network and, man, the network delivered.

AnnaRae Grabstein:

The network delivered.

AnnaRae Grabstein:

There was so much input of you have to talk to this person.

AnnaRae Grabstein:

You got to talk to this person and what came out of it actually is I've been having a lot of conversations with a number of the different folks that were recommended experts around this topic, and it has spurred some motivation to have other types of conversations that are sort of ancillary and connected to this receiver conversation, and some of those topics include things like creditworthiness of cannabis companies and the work that some groups are doing now to actually create credit ratings so that when a vendor is thinking about issuing terms to a retailer, they have more information.

AnnaRae Grabstein:

Talking overall about the accounts receivable crisis across the industry, there's just so much that this topic touches, and I think a lot of it comes back to the prohibition of cannabis companies from participating in so many of the traditional business structures that do exist, whether traditional credit ratings or affordable financing from SBA and other more small business loan providers that have supported kind of the creation of American industry and pushed out from a lot of that stuff and as a result, there has been struggles that some businesses have been able to persist through. Like absolutely there have been winners in this game, but there have also been a lot of losers and there's a lot of folks that have found themselves trying to navigate how to get out of financial stress without a path that very many people know how to navigate, because, like you said, bankruptcy isn't allowed.

Ben Larson:

Right, right. So who do we find?

AnnaRae Grabstein:

We found Ted Lanes. Let's bring him on and I'll cue up the intro. Ted is a seasoned financial expert and receiver with over 30 years of experience across lots of different industries. 30 years of experience across lots of different industries, but notably, he's played really critical roles in lots of cannabis high profile cannabis restructurings, including being the interim CFO at MedMen, along with receiverships like Pineapple Express, a number of others which we'll let him talk about, and he is here to help us understand the nuances of receivership, how it differs from bankruptcy and also what it means to be a receiver. So, ted, welcome to High Spirits.

Ben Larson:

Thank you very much for having me. Let's start with Ted. Where are you sitting today? Let's let the crowd know your perspective.

Ted Lanes:

Yeah, I'm in Southern California.

Ben Larson:

I'm in Los Angeles. All right, southern California, a great state for embattled cannabis businesses, I do believe.

Ted Lanes:

It is fertile hunting ground.

AnnaRae Grabstein:

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

Ted Lanes:

Yeah, they garner the national press. Yeah, there's quite a few that are right below below that threshold. Um, because I couldn't even tell you how many cannabis companies operate or have been operating in in california. It's a huge number it's a huge number.

AnnaRae Grabstein:

Well, so let's just dive right in. Uh, we said that bankruptcy isn't an option for cannabis businesses, but I would love to hear your expert explanation of why that is and why receivership serves as an alternative.

Ted Lanes:

It's actually very simple Bankruptcy, as it's defined, it's a federal action period. So if your company is illegal at the federal level that cannabis companies are, despite being legal in many states, you do not have a federal action of protection, which bankruptcy is available to you. That's it. That's literally why bankruptcy is not an option. Now there's there's all kinds of variations If you use a Canadian holding company and this and that and the other, but fundamentally you don't have access to the bankruptcy statute in the United States.

AnnaRae Grabstein:

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

Ted Lanes:

Receivership assignment for benefit of creditors. There's other legal remedies available and the important thing to remember about a receivership is, because there's a lot of misunderstanding, because it is a bit of a black art, I'll give you that there's no book on how to do it. It's called an equitable remedy at law, which means the receiver is actually a neutral and doesn't work for either party the moving party or the defendant, right, it's playing for the defendant. The receiver works solely for the 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 as defined by the court in the appointment order.

Ben Larson:

So on one side you have the company and then on the other side it's a major creditor, or is it a group of creditors? Is it all the creditors? How does that actually work?

Ted Lanes:

Well, somebody withstanding in your example, let's say you have a company that has loans to three different lenders and they've defaulted on two of the three. Those two lenders are going to have standing to bring a receivership action to try to have a receiver appointed to protect what they deem are their assets. And then you get into the tug of war about who's collateral we're talking about. But all that should be defined in the loan agreements, right. But the overarching goal of a receivership is to marshal and protect the assets of the entity, whatever is put in the receivership estate. And then you can sort of work forward some sort of remediation plan or adjudication plan. But again, the people that move for the receiver need to understand the receiver does not work for you. The receiver works solely for the court, and that hasn't been clear in a lot of appointments I've been involved in.

AnnaRae Grabstein:

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

Ted Lanes:

That's a little. Yes, the receiver is definitely involved in the operations, but it's a little. Yes, the receiver is definitely involved in the operation, but it's a little different. So, essentially, what a a receivership order is going to do is the best way to think about it is the receiver will step into the shoes of management and operate the business for the benefit of all interested parties, if at all possible, not just for the person that filed the action right.

Ted Lanes:

So you and you're on your intro you talked about the receivables and the payables all over the industry. That's. That's no different than making sure that the debt, any debt, gets paid right. That's just another debt of the business. So the receiver has to go in and sort of do a lay of the land, if you will, to present to the court to say you know, it's usually like 30 days after you go back and you have what's called a confirmation hearing where you have to go to the court that appointed you and say your Honor, this is what we found. We think this is a valid receivership appointment because the allegations are in fact correct and we're starting to work for a plan forward to try to remedy these problems. It isn't, these people moved from my appointment and I'm just going to write them a check. Right, that's not how it works.

AnnaRae Grabstein:

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

Ted Lanes:

So in the early days of cannabis I'm talking about just california, because this is predominantly my experiences in california the companies were started with equity investments. People were writing checks to buy equity, to own part of the business. And in a natural course of a business, sometimes you need follow-on capital, for whatever reason You're growing the company. The later monies, for whatever reason, it shifted to be secured debt right and the debt portion had the collateral of whatever your loan agreement is and it would typically be the whole company, the brands, the manufacturing facility, everything. They throw the whole kitchen sink in there.

Ted Lanes:

So if you fall out of favor with that debt, if default on that debt or if you break covenants or what have you, and that the debt's only real remedy is to say either we're going to own this whole thing through a foreclosure process or if they think that they can restructure it properly. But remember, you've still got payables. You have trade payables, you have W-2 issues, you have EDD, you have all the other supply chain taxes that you have to worry about CDTFA. Putting a receiver, putting a neutral, in there to step in the shoes of management, has become a really good method to do it to try to save the business, as compared to just foreclose on it and flush it the business, as compared to just foreclose on it and flush it From the debtors that you know, that you've encountered through working through processes like this.

AnnaRae Grabstein:

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 be going through this process?

Ben Larson:

Ooh loan to own yeah.

Ted Lanes:

Yeah, there it is. You took it right out of my mouth, man. Yeah, loan to own is. They will call themselves sophisticated lenders because they know how to protect themselves, which you and I would do, too, right. You want to have protection when you lend money, what you and I would do, too, right. You want to have protection when you lend money.

Ted Lanes:

Saying that it's specifically set up as a loan to own scam is that's a little rough right? I might've seen that one or two times where they made the debt covenant so ridiculous that there was no way. It was like a booby trap. There was no way the company was going to survive. But then you ask yourself if the assets in the business weren't surviving before, why would you want to own them through a loan to own program? So it's kind of illogical in a way. So, yeah, I see that thrown around a lot. I personally don't think much of 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:

I'm I'm curious kind of on the. You know we've talked about the loaners being the first one that sounded right but I'll just call them that loaners.

Ted Lanes:

They have senior security. Yeah, they're the priority.

Ben Larson:

Senior securities being kind of like you know, top of the heap as far as like the ones bringing in the receiver potentially getting paid. What about everyone else that it's owed money, like what? What's the kind of the the priority list like I've heard like as as soon as like you hear about something going under, it's like send them to collection. So at least you're like kind of a little bit higher on the list. But I don't have a good understanding of what is that priority list. It's like who has the highest chances of getting paid?

Ted Lanes:

So you have two classes, or sometimes three classes of debt. You have the secured lender right, and that's usually the big money that came in, insert whatever number here, and that collateral agreement is going to include any rece right that are owed to the business, the onsite equipment, any inventory that's as if yet unsold, whether it's at a distributor or not right, whether it's onsite or what have you, and these things all seem to have company cars for whatever reason. So they will throw a blanket, a complete blanket, over all of the assets, and in many cases I'm seeing more and more where those collateral agreements include the stock of the company, and in a second I'll tell you why they do that. So to answer your question though, ben, the waterfall is the senior. Secured debt typically gets paid first, in whatever capacity, which is why you see the unsecured debt in the form of I hate to say it, but payables to vendors usually gets square root of zero and it's sort of mixed in.

Ted Lanes:

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 that gets cleared. I don't want to fight with the EDD. I most certainly nobody should CDTFA, they can come in and make your life miserable. So you either horse trade with those organizations and then deal with your secure debt, or if the collateralized debt wants to take that obligation, I'm happy to hand it over to them.

AnnaRae Grabstein:

Well, so you said you were going to get to the stock. I think that one of the things we 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 for you to talk about that. In cannabis, really, most companies have been startups and the founders have held a lot of stock, and then there's been different classes of stock that some of that maybe came in at that you talked about, and then the debt came. After that, at the end of the receivership process, the ownership most likely looks very different than when it started.

Ted Lanes:

It certainly can. But there's even a different reason why some of the more sophisticated lenders are asking for majority ownership of the company as collateral, just as collateral. You're not selling them the business in exchange for this debt. It's collateral in a foreclosure action. And the reason they do that is it's a in theory. The way it's written is you're not really supposed to be able to use your license as collateral for a debt because the license is owned by the state. But yet you see these licenses getting sold as if you're a recovery for collateralized debt. And the way they do that is they say well, we own the stock of the business, so in essence we're selling the shares of the business for which the license goes with.

Ted Lanes:

There's some machinations to that. But to answer your question, at the end of the day, if the equity was part of the collateral of the debt, it is up to the lender whether or not they want to continue to own that entity or if they just want their money. Right, you can decide and I've had one particular case where the equity was part of the collateral for the debt and the deal was cut that you're going to get 60 cents on the dollar but you're going to return the equity to the previous owners. You're going to forgive that part of your collateral because you guys are not operators and you don't want to run the business and this way they can go out and recapitalize the business and start again. So they we sort of had a divorce right, so it's used kind of as leverage, but it is a important part of a lot of the collateral stacks.

Ben Larson:

So it makes sense that if I'm a lender and things are getting into a situation where I'm afraid I'm not going to get what I'm deserved and and I engage, um, the court in the court, uh, assigns a receiver. Does it ever happen in the opposite direction, where the company is like finding itself in a bad position and is seeking, like a receiver, to get engaged?

Ted Lanes:

Yes, yeah, I've had companies reach out to me where I've been appointed and it was like a receiver to get engaged. Yes, yeah, I've had companies reach out to me where I've been appointed and it was purely because they had completely lost control of the business and they were just looking. They were just saying listen, your honor, we don't want to, we don't want to screw over all these people that have been good to us. We have payroll debts, we have this, we have that. If you can appoint a receiver, a receiver would like to turn the operations over and have them try to normalize it because, a we don't have the skill set and, b we need court protection.

Ben Larson:

That seems oddly responsible.

Ted Lanes:

I didn't say it happens a lot.

Ben Larson:

It does happen a lot, okay, I didn't say it happens a lot. Oh, you didn't say it happens a lot, yeah. How often would you say it happens when maybe it should be happening? Oh God.

Ted Lanes:

I'm doing the way back machine here. I probably had three of those that that we got appointments on. Okay, it should happen more. I mean one of the things that that we see a lot and I'm speaking for a lot of my friends in the receivership industry, because we discussed this is people wait till the 12th hour and then there's almost nothing you can do right, there's nothing to work with, there's no materials to work with.

Ted Lanes:

So if you want to be proactive about it, the court might actually be more receptive if you stipulate to it and say, listen, we're stipulating to this appointment because we need this to stop and catch a breath and try to figure all this out. And we're going to. You know, we're going to try to do the right thing. That depends on the judge, but some judges have done it and they said, yeah, we're protecting this receivership estate, which is the payables to the vendors, the W-2 liabilities you know all and the jobs 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 an appointment when it's an empty bucket.

Ben Larson:

Yeah, yeah, right. And so what? What does from the mechanic side? What would that look like? It's, um, it's like we, you file for that intervention. I mean the company theoretically needs to keep running to like so it doesn't completely fall apart. Would you then bring in like a management team to start kind of grabbing the reins?

Ted Lanes:

So I do mine a little differently. I don't necessarily default to that, because I was an operator and I've run a couple of companies, including two public ones, so I like to do that myself. I keep a smaller shop. I don't have 50 people, I have four. So I usually go meet with incumbent management and try to explain to them. I would love to have all of you stay here, but this is going to be the rules and this is what we're going to do, and if I get the sense that they want to work with me and we want to sort of move this forward, I'm happy to have them stay, because if you think about the institutional knowledge that is with all of those employees, that's really difficult to replace and the relationships that they have with their vendors and their suppliers and all that kind of stuff. So my preference is to keep as many of the incumbent management as possible. That's not always possible.

Ben Larson:

So you kind of see yourself as like an interim CEO, CFO.

Ted Lanes:

Yep.

AnnaRae Grabstein:

Yeah, I was going to say within this context of kind of all the people that are 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 the state house assets being up for sale. It was like every day everyone was getting here's the list of assets, here's what's up for sale, and I actually have been working with someone looking at a few of those assets and so I was wrapping my head around it all. But the reality is is that, as we've seen, a lot of companies go through different levels of financial intervention. The outcome in some cases is that the company ends up with a broker like the state house assets are and there's this auction date and you're supposed to submit bids and a lot of the time what ends up happening at the end of that is that nobody in the auction actually comes out an owner and that the debt holders are the new owners and operators.

AnnaRae Grabstein:

We don't know what will happen with Statehouse yet. That is absolutely still an open story, but with many other instances, the debtors are all of a sudden now the operators instances, the debtors are all of a sudden now the operators and and the cap tables have been completely wiped out and and it's sort of the same company but sort of different. What. What's? What's the deal with these auctions and the asset sales? Is it ingest? Is it? Is it just because it's required to go through that process to try and sell them? What's really going on here?

Ted Lanes:

Okay. So first of all, it is typically required because you have to serve public notice to get the highest recovery for the assets right. Otherwise we're going to be selling them to our brother-in-law for a dollar, and then you know all that.

AnnaRae Grabstein:

It seems like it's happening anyway Sometimes.

Ted Lanes:

Very well might be right.

Ted Lanes:

Very well might be, but the idea is and I'm going to make up numbers let's say there's a hundred million of secured debt on a balance sheet, right, which is, you know, not outrageous in some instances. The opportunity that there's $100 million of marketable assets at a company that's in distress is very, very small. So you can either spend a ton of money selling things one at a time, in which case you don't really have any pricing pressure, right, you're not going to be able to maximize value because somebody can say, oh, you want to sell that machine, I'll give you X, because it's only worth X to that one individual, as compared to try to sell something that's close to a bundleable company that you can then resuscitate. So the idea is, if you can sell it all at once, the odds are that you'll get a better recovery and you're only paying for one transaction and you got what the market will bear. The unfortunate side is, you're right, you scrape the earth with the remnants of the old company.

Ted Lanes:

But I've done a deal where part of it was that they hired back the majority of the previous employees Because, again, they had institutional knowledge. They wanted to resuscitate the brands. That's not common but it does happen. For a smart buyer. A smart buyer is going to say all those people knew, they know my products, they know these machines, they know the customers, there's a lot of value there and they hire them into Nuko. So it is a real process that the receiver is following where he's been ordered. He or she's been ordered to liquidate the inventory for the benefit of that creditor or whoever those creditors are, and the most cost-effective way to do it, an expeditious way to do it, is a bucket auction and the receiver is not the broker.

AnnaRae Grabstein:

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

Ted Lanes:

in all of this. Isn't that enough? That seems like plenty. I think that's plenty. Look, the process is not inexpensive.

AnnaRae Grabstein:

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

Ted Lanes:

Glad you asked. So the rule of thumb is that the people who move for the receiver's appointment have to commit some. They have to commit to some degree of covering the receivership expenses. The hope is that the estate itself has sufficient funds to pay the receiver's fees. If it doesn't, then there's a thing called receivership certificates, where a party will lend in the money to cover the receivership fees in the hope that they get more than that back at the liquidation right. So the the onus typically rests with the party who's making the motion to have the receiver appointed interesting okay right, and then it can switch to like.

Ben Larson:

I have a case right now it's not in it's, it's making the motion to have the receiver appointed. Interesting Okay.

Ted Lanes:

Right, and then it can switch to like. I have a case right now. It's not in, it's, it's a far chain of pharmacies, right? It's no secret. Receiverships are public, by the way, and the the operations of the chain of pharmacies is liable for my bills, and that's who's been paying us.

Ben Larson:

And then you know luckily, and that's who's been paying us.

Ted Lanes:

Luckily, there's enough there, but that's not always the case.

Ben Larson:

So you were telling us a story before we hopped on about someone in a case that you were involved in, adoringly labeling you the Green Reaper. Here we go. Might be a little bit of a misnomer, because you're just, you're court appointed, so you're there doing the job and so you're not necessarily the bad guy, but like is that?

Ted Lanes:

a common like juxtaposition.

Ben Larson:

Is that a common like positioning of like you just because you're the person that they're interacting with, or do some people come to terms with it and understand that you are just there because the court needs you to be?

Ted Lanes:

Both that particular moniker came from. There was just this one week where there was three nominations and that attorney was on the other side for all three and I kept walking in the room. He's like dude, you're just like the green Reaper. Oh my God Right. And so it's kind of stuck Right. Um, but it is, you know, the. The brass ring is to find a way to keep these businesses, to restructure it, get the debt to maybe lower, you know, adjust interest or defer, go to pick whatever. There's a few levers we can pull. The brass ring is to find a way to have the entity come out the other side. Sometimes that's just not possible. There's just not enough left, and I've been doing some work for a very large secure debt fund in the space and I think that we had 75 investments and I've been having to do the workout on all of them. 10 or 15 of them we found happy landings for.

Ben Larson:

Oh.

Ted Lanes:

Right, and they're good.

Ben Larson:

Yeah, and that's it usually looks like a new management team put in place, or is it sometimes the same management team surviving.

Ted Lanes:

In most of them it's the same management team, because new money would come in and buy out the existing debt and you know maybe at a lower rate or under different terms, and maybe at a lower rate or under different terms and again that institutional knowledge of knowing the brand being associated with it, knowing your suppliers and things that you can fix that maybe you didn't have the money to fix before to economize there's value in that. To a lot of smarter operators, there's value in that.

AnnaRae Grabstein:

So a lot of what has gotten the cannabis industry into this situation is that senior secure debt structure Right. Do you have advice or strategies that you think operators should consider as they are looking at different financing strategies? If a company was thinking about bringing in senior secure debt tomorrow, would you tell them not to? Would you say that under these types of circumstances, what's the way to navigate this? To not end up in receivership and be dealing with the green reaper?

Ted Lanes:

Yeah, Never going to get enough money of that. So one of the things I did with a consulting client is they were out there looking for money. We found them some capital. We did a tiered investment. What was typically happening before was people are going for these massive rounds right, thinking I need 50 million or 20 million because I've got all these growth plans right. So you are instantly saddled with 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 tiered thing. You know 2 million, 3 million and when they'd hit certain benchmarks. So we didn't over-lever the company. In the early days they had a commitment from this lender, but it was a tiered, you know, on an as-needed basis, I think it was $5 million chunks and that way we let the business grow in to being able to afford that next tranche and the next tranche and the next tranche.

Ted Lanes:

Because if you think about it, if you simply go borrow an enormous amount of money at 15%, 18%, 20%, 22%, whatever cannabis money is now, you're paying a lot of interest from the get right, from the jump, and if you don't hit your your growth goals or you have input costs that don't go down like you think they are, you don't? You know there's a million things. You're running a business. You're stuck paying that interest rate on that huge amount of money, right, so that that has worked for us.

Ted Lanes:

Um, other strategies like you call me sooner, right and they're all so different, like every scenario is so different. I just I think smarter operators that I've talked to the people that are, you know, sort of got to be a little devoid of ego that you may not hit those growth things that you really want to hit, to be a little devoid of ego that you may not hit those growth things that you really want to hit. So don't over leverage your business, because if you start to grow really fast, the next round will be cheaper because it'll be perceived as less risk.

AnnaRae Grabstein:

So the follow-up question is for companies that are receiving those notices that one of their customers is entering receivership, what do you do?

Ted Lanes:

You reach out to the receiver right away and you explain this is how much I'm owed. Right, we've been owed this. For what have you? You know, for whatever. And then you need to find out and it should be in the public filings how much debt is in front of you. Find out and it should be in the public filings how much debt is in front of you. Right, you do, because if you just say, well, we're an unsecured credit, we're a vendor, we are owed $750,000 in AP, whatever the number is right you might find out that the company borrowed $100 million and the odds on the unsecureds getting paid is very slim. It's really slim. Unfortunately, there isn't a lot of great moves there. The other alternative is, if you were a supplier and they still have your product, you might be able to claw it Right, maybe.

AnnaRae Grabstein:

But then you're, I know.

Ted Lanes:

And it expires and then you've got all the metric stuff and all that mishegoss. So you just need to make your presence known. But there really isn't I hate to say there really isn't a lot of chess moves if you're an unsecured creditor.

AnnaRae Grabstein:

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

Ted Lanes:

Sure, I listen to all horse trading. It's just a question of how well defined the collateral is on the debt. Presumably you're talking about collateral as debt, that's putting it into receivership. If there's collateral that's outside their collateral stack, if they didn't do a good. You know, it's a little Monty Hall. Right, let's make a deal.

AnnaRae Grabstein:

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

Ted Lanes:

There's not. There's not a lot. You don't have any leverage. There's not a lot.

AnnaRae Grabstein:

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

Ted Lanes:

yes, yeah most likely. You're pretty much hosed yeah.

Ben Larson:

Well, there, there's some comfort I take in that being that I have been on the receiving end of some of those letters and just knowing that I wasn't an external or uh, that I wasn't, I was just yeah, it was just, 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 one point and just kind of dove into it and and the the, those types of entrepreneurs generally always think optimistically and positively and it's like you know, we're going to grow this business, we're never going to fail, all this kind of stuff.

Ben Larson:

But, um, you've also taught in, in, in, in use, in a classroom with people that maybe are aspirational business leaders or entrepreneurs, business leaders or entrepreneurs, and this probably isn't a class that you know they get excited about taking but not to take away from from your class but I'm used to being, I'm used to it yeah yeah, how do you, how do you like ease people into this conversation or like, how do you really capture their attention and and what's your hope of them coming out the backend of the class, as they kind of then take that into the business world?

Ted Lanes:

Right. So, being a you know entrepreneur myself, having started a couple of companies, written a lot of checks some of them I haven't gotten back ever right Is one of the things that I stress is, you know, setting up the entity properly, upfront, right, like you know who your other investors are. The worst thing you can do people get mad at me for this, 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 otherwise then you definitely wind up in litigation.

Ted Lanes:

So so what I tell them is you, you know, the tiered financing thing is very powerful, but finding, you know, the right board members that are that are not, you know, I like to find board members that are out of industry, because then you get a completely unvarnished view of what, what the strategy is, because if you can convince somebody who's out of industry that you have a good idea, you're positioning it right. Like you might be onto something, but typically if I'm lecturing, I explain to them this is what can happen. And here's this example, and here's this example and this is how it wound up there. So let's not do that. Right, and one of the big ones is acid testing. Know, acid testing.

Ted Lanes:

These presumptions about how quickly this business is going to grow Right, and we all do it. We all think we're building the next Google tomorrow, Right, but there's, but there's so many years of work that those guys did in their room. You know their, their rooms in Stanford, right, that most people don't know about their room. You know their, their rooms in Stanford, right, that most people don't know about Um and I and I constantly explained to them not to you know sort of over commit. You know baby steps work. You don't have to come out of the gate hitting a grand slam but you build momentum. Because a lot of them were like oh, I'm going to go raise $50 million Cause I have this great idea. I'm like you're not going to own any of the business. If you try to leverage something, like you know start there you're going to own a paperclip and some letterhead, right.

Ted Lanes:

And so I'm a big believer in a seed round, you know for an A round, and sort of gradually get it going, because you learn a lot the first time you sell to a customer, right.

AnnaRae Grabstein:

What you're saying reminds me of a professor that I had in business school who talked about financial pornography a lot and said that a lot of the pro formas are financial pornography and they're fantasies, and fantasies aren't bad they're for some people.

AnnaRae Grabstein:

It's important You've got to have fantasies, but you also got to get grounded back on the ground and understand the reality and understand the steps to get there. And I believe that a lot of what put cannabis in the position that it's in today is financial pornography that was generated back at the beginning of the adult use space. You know that between 2017 and 2019, um, especially coming out of California, and I think a lot of the entrepreneurs cause I was at those tables like people didn't actually think that it was a fantasy. They, they believed it to be true, um, but unfortunately, in the end, it proved itself to to be a bit of a fantasy.

Ted Lanes:

Right? Well, you get the true believers who aren't going to. You know, the math doesn't matter. I remember seeing one business plan that required 10% of the population of the state of California to be a monthly customer.

AnnaRae Grabstein:

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

Ted Lanes:

Yes, they did. As a matter of fact, they most certainly did yes certainly did.

AnnaRae Grabstein:

Yes, it's incredible the amount of self-confidence that entrepreneurs are required to bring to the table to truly, you know, believe themselves sometimes.

Ted Lanes:

Yeah, yeah, hubris is free, sure, well so I want to.

AnnaRae Grabstein:

I want to dive into something slightly, uh, different. That sure we so. At the top of the hour, we talked about the reason that cannabis ends up in receivership because of federal illegality, and on this podcast we talk a difference for hemp companies, who are facing similar types of issues as it relates to defaulting on debt or on covenants in debt that might put them in the same situation that a cannabis company is forced into receivership.

Ted Lanes:

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 this right because I've had a lot of these discussions, and so I'm going to keep this very simple. At the federal level, hemp is legal period. The arm wrestling that started is that people have taken hemp and they've figured out how to derive certain cannabinoids and other elements from it that give you a THC style effect, or THC period or THC period. But my understanding is it's really inefficient, right, you need a huge input to get the same amount, right, but hemp is also cheaper and easier to grow and you can grow it anywhere to get the same amount. Right. So, but hemp is also cheaper and easier to grow and you can grow it anywhere.

Ted Lanes:

So the tug of war that started is just because hemp is legal. Is the product that comes out of hemp, if it's THC, legal, right? So right now and I had this discussion literally yesterday right now a hemp company can file for bankruptcy. Right, you might hit a speed bump 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. It happened to own shares in an adult use recreational legal cannabis company right. The DOJ challenged the bankruptcy filing and lost because the judge said they can own shares in the company. Their product is not THC right. So the message is that if you're taking hemp and turning it into a THC-based product, you might have some turbulence ahead. But as it stands right now, my understanding is they can file for bankruptcy.

Ben Larson:

Yeah, interesting, there's been a lot of, as you said, arm wrestling about what is legal. As you said, arm wrestling about what is legal and I know there's it's been adjudicated about, kind of as long as the origination is hemp and those products you know fit the mold that they've been upheld as federally legal. But it is really interesting to think that you might have companies that look very similar. It's just what supply chains are they using? And I mean this is very consequential, right, they can cross state lines with the hemp product too, right?

Ted Lanes:

So again, if the way the law was originally written, I don't think they anticipated how clever some of the people in the industry are and that they were able to go. You know what we can do. We can grow a bunch of hemp and turn it into, you know, thc and cannabinoids and all that stuff, right? So the fear is that the enforcement side is going to say that wasn't the spirit of that law, it was for hemp, pure hemp products, and CBD, I think is fine, just CBD is fine. So that's the risk. So for right now, my understanding is that you can utilize the bankruptcy statute if you're a hemp product, but that might change based on what products you're selling.

Ben Larson:

Gotcha yeah.

Ted Lanes:

Does that make sense?

AnnaRae Grabstein:

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

Ted Lanes:

So the answer to the first answer, first question, is no, there's not. The ethical part is sort of it's anticipated that you're going to do the ethical thing. Plus, you have to answer to a judge right, and the judge controls your fate in that your appointment order says that if somebody thinks you did something you know out of bounds or left-handed, you're going to have to answer to that judge and they will waive your judicial immunity and all that kind of stuff and they will allow you to be sued for it. Luckily I've done over 100 cases. I've never been dragged in front of a judge right in front of a judge, right. The sort of rule of thumb is somebody nominates you and the judge looks at your background and the requirements of the case and decides you would be a good fit to handle that particular challenge.

AnnaRae Grabstein:

Who nominates you in that scenario?

Ted Lanes:

Well, a party withstanding, right. So in the cases we were talking about the secured creditor, for example, that's who's typically nominated me, right? They're like look, we have X amount of dollars linked into this cannabis company it's not doing. Well. We want to point you to take it over and figure out who did what to whom, and do my thing. The judge decides if I have the qualifications to do that. Got it Right?

AnnaRae Grabstein:

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

Ted Lanes:

LinkedIn is far and away the best way. I do have a website it's, you know, lanes managementcom, but 99% of the stuff I do is on LinkedIn. Um, I don't have any social media. I'm just not that exciting. Um, nobody cares. Um. But yeah, if you just find me on LinkedIn and I'm, I'm happy to answer questions because, like I said, people wait too long and if you're proactive, there's remedies, right, that we can try. Um, as compared to just having this thing thrown into receivership and everybody getting beat up.

AnnaRae Grabstein:

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

Ted Lanes:

Ooh, um, so many. Um. I mean, look, I completely understand that you know receivership and stuff that we get appointed and it's the boogeyman because it is a bit of a black art. It's not well understood. But the goal is to try and create an environment where everybody can get something, if at all possible, as compared to it just being a pissing contest where everybody's suing one another and then nothing good happens right. So if it's done correctly, there can be a positive outcome. It's not common and the media doesn't like those. So you hear about state house and all those other kind of things and to your point, anna Rae, about getting that letter, that you're going to get zero. That's a real unfortunate outcome. But you know, having seen so many companies that are headed towards receivership, sometimes there's ways to be proactive and remedy it and it's worth a phone call or an email. It really is.

Ben Larson:

Well, thank you so much, Ted. This has been really insightful. It kind of takes this big mysterious beast in my head and provides some clarity and makes it a little less scary, although maybe not any better of an outcome. Yeah, just really appreciate the time and thank you for schooling us all on receiverships and bankruptcy.

Ted Lanes:

Entirely my pleasure, happy to do it.

Ben Larson:

All right, we'll talk to you soon. And Ray, what was that term you used? Financial pornography.

AnnaRae Grabstein:

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

Ben Larson:

I'll probably refrain, but I found one of my old pitch decks and I just wanted to show you. Um. Something I'm quite proud of is this was what you know. Our company used to be called nanogen. This was my financial projections slide for our first pitch deck that we'd raised our seed round on and um financial pornography yeah, I'm like you know it's all bullshit. So that is my supposed claim to fame.

AnnaRae Grabstein:

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

Ben Larson:

It's the classic hockey stick. I had a little bit of a leg up because I was coming from the venture capital side and I'd probably seen 500 decks that had some form of a hockey stick on it, so I just did the real thing. All right, folks, what do you think? Was it educational? Did you learn something? Are you going through receiverships or bankruptcy? Let us know If you want more topics like this.

Ben Larson:

Our things are eating at you. We'll get it on the show. We'll find the best person our network has to offer and, just like we did with Ted, thank you. Thank you. Thank you for tuning in or liking, subscribing and sharing and doing all the things. Thank you to our teams at Virtosa and Wolfmeyer. Without you guys, we couldn't be doing this. Thank you, and to KitPrint for supporting the show. You guys have been a great partner, do great work. Keep it up, thank you. All right, and I think in two weeks we'll have the opportunity to see all in person, whether it's at WSWA or Canada DataCon in Miami. So find us, come be on the show. I think we might be doing some live recordings, a little birdie told me. Until then, stay curious, stay informed and keep your spirits high. That's the show.

People on this episode