Outstanding Debt Between Cannabis Licensees Must be Paid, Colorado Regulators Warn

The days of lingering IOUs between cannabis buyers and suppliers were far and wide left in the rearview mirror when legalized markets came online in the U.S.

In the regulated space, a retailer orders product, a distributor delivers the product, the retailer pays for the product, and then the retailer sells the product and reorders. Or at least that’s the way some expect business to be done in a perfect world. And that’s how business was primarily done from the onset in nascent state markets.

But many legacy operators have learned the cannabis industry is far from perfect and that collecting on delivery is no longer a given. Now, outstanding debt is becoming more widespread in the industry.

In Colorado, state regulators from the Marijuana Enforcement Division (MED) issued a bulletin March 9 warning industry stakeholders that contracts between licensed cannabis businesses are enforceable. The industry bulletin came in response to a “series of reports” regarding licensees not paying invoices for cannabis ordered and received from other licensed businesses.

In the bulletin, MED officials stated that “Colorado recognizes the enforceability of contracts” between regulated cannabis businesses involving the purchase and sale of regulated cannabis under state law.

“Licensees should consider utilizing any available commercial contract provisions and civil court processes to enforce contracts or recover unpaid amounts,” the bulletin states. “These remedies are similar to those available to businesses that operate outside the regulated marijuana industry.”

The issue of unpaid debt isn’t just isolated to Colorado.

In California, Lex Corwin, who founded Stone Road Farms in 2016, told Cannabis Business Times last month nearly 100% of the company’s accounts were collected on delivery (COD) when the sun-grown flower brand first got its feet wet in the regulated space. That COD rate dropped to roughly 35% in 2021 and now hovers around 8%, meaning Stone Road is essentially acting as a credit card company for more than 90% of its customers.

It’s a system that Corwin described as “inherently broken” and one that is not sustainable in the industry, especially amidst the price compression headwinds that have correlated with hundreds of cultivation licensees exiting California’s market in the past year, according to the state’s Department of Cannabis Control licensing portal.

“It’s these retailers realizing that they basically just have an unlimited credit card to just rack up tons and tons of products from all the brands,” Corwin said. “Some of them are … not good businesspeople and they’re unethical people who take the profit from their shops and squirrel it away, … and they don’t pay their vendors.”

RELATED: How Stone Road Farms Maintains Steady Growth Amid Industry Challenges

In many cases, licensees will continue to deliver products to retailers out of fear of losing coveted shelf space in a competitive market. And while retailers appear to hold the upper hand in negotiations with nonvertical cannabis suppliers in the current market environment, their revenues are fading, too.

In Colorado, licensed retailers reported $129.4 million in total cannabis sales (adult-use plus medical) in January 2023—the lowest monthly figure recorded since February 2019, according to the state’s Department of Revenue.

And January is a continuation of a retail rut from 2022, when Colorado’s $1.77 billion in total cannabis sales for the year represented a nearly 21% decline from 2021—the first year cannabis sales shrank in Colorado since the state’s adult-use market commenced in 2014.

Nick Jack, chief operating officer of Denver-based Frost Exotic Cannabis, recently told CBT that the state is currently experiencing the aftermath of ramped up production during a COVID-related boom that has now created a “glut” in the market that’s driving down prices.

“We’re seeing tons of price compression in the market,” he said. “Wholesale pounds are selling for as cheap as $400. And this has resulted in dispensary operators buying and selling of course for cheaper than ever before. And that leaves cultivators with little to no room for margin opportunity, and dispensary operators are struggling to hit break-even revenues.”

RELATED: Colorado Operators See 'Bubble Deflating' as Cannabis Prices Continue to Fall

Despite market struggles in any given industry segment, contract obligations between licensed operators must be honored, MED regulators notified industry stakeholders.

While MED does not engage in contract disputes between licensees, the division will investigate matters of a transaction or a failure to make payment that lead to indications of noncompliance with state laws and enforceable MED rules. Those investigations could lead to administrative action, according to the bulletin.

“As part of an investigation, the MED may also consider whether a licensee’s failure to make payment is an aggravating factor in relation to a violation,” the bulletin states.