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Processing the pain: Financial disputes in a tight cannabis market

Media Partners, Stratcann

This post is presented by our media partner Stratcann
View the original article here.

The journey of a cannabis product from soil to consumption can be a tortuous one. Given that many cultivators and processors are feeling squeezed financially, it is no surprise that conflicts arise.

One of the most common areas of dispute is between a cultivator and a processor or a large LP with distribution. It usually takes a cultivator of any size over two months from germination to harvest, and upon harvest, most companies can’t afford to sit around: they want their biomass put to good use.

Here is where partnering with a well-connected processor – or perhaps a big LP – can save the day, as these companies often have the capabilities, the branding, and the market access. Unfortunately, once that biomass is out the door, getting payment can be a roll of the dice.

“We started out as an indoor cultivator with a 20-year contract in place to grow for a large Albertan LP,” says Carleen Roth, who, with her husband Marlin, operates CannGroup Dev. Corp. in Vernon, BC. “Before we even sold them our first crop, they were having financial troubles, and within the year they cancelled the contract.”

CannGroup then pivoted to extraction and CBD isolate production, and brought a legacy brand into their facility.

“Last year, we were selling that product through another LP to the provinces, as we couldn’t get our product accepted by those provincial boards,” says Roth. “That LP got our products accepted, and sold our products through to the provinces. They got paid for those products from the provinces and then stopped making their payments to us for the product sales, kept our funds, and went into CCAA protection in the fall of 2022.”

Roth estimates that CannGroup has lost about $1.2 million for the cost of producing those goods. Incredibly, they are also on the hook for $400,000 in excise tax.“The CRA holds us solely responsible as the excise stamps came from our licence; however, they’re working with us and have allowed us a payment plan,” says Roth. “Our guess is that they realize that there are so many companies in the same trouble, that if they bankrupt us all, they will get nothing unless they work with LPs.”

The limits of due diligence

StratCann spoke with numerous micros, LPs, and processors for this article – most of whom were unwilling to go on the record, either because of possible legal repercussions or the negative effect on their brand.

Two messages, however, come through loud and clear: many companies are hurting financially, which is leading to some questionable behaviour, and due diligence is a must, though there is no guarantee that this will ensure ethical behaviour.

“Contract agreements with processors are necessary,” says Vincent Bédard, director of Green Culture Verte, a micro in Fournier, Ontario. “However, our contract often says payment within 30 days, and we’ll get it in one and a half or two months. At that point, the contract’s been broken, but we have to accept it.”

Minor anomalies in such arrangements can be absorbed. Sadly, in more serious breaches, there’s little recourse.

“I am aware of micros sending many kilos of flower to a processor, and the processor paying for half of what was sent over, with the micro then left waiting for payment on the other half,” says Bédard. “The entire lot is sold, but that remaining half isn’t remitted. At that point, a large processor can say, ‘Take us to court!’ and just drag it out.”

Often, disputes arise among two parties that have had a good working relationship, with the trust resulting in more flexibility. This is understandable – but as terms become increasingly generous, they can also lead to dire consequences.

“We were told the company had good earnings, a great sales team and a strong parent company,” says Roth from CannGroup. “We signed the contract. They started out okay, but after two months, they started paying only partially and told us that they were raising money from their parent company to get us caught up.”

Roth says that the company dragged this out for another two and a half months, telling CannGroup that they would pay the next week, and giving partial payments.

“We had to make the decision to stop sending product,” she says. “They continued to collect the funds from our product being sold for the following two months and then went into CCAA.”

Quality pays

For smaller cultivators, one solution might be the approach followed by Ontario Micro Growers (OMG), which doesn’t charge its micro partners any fees, and pays them for their product upfront rather than on consignment.

“OMG’s approach isn’t typical,” says Craig Penstone, a co-founder of OMG. “It benefits growers by sharing their risk and increasing trust. Small growers face challenges like competition, regulation, distribution, and branding, but financing it all is probably the heaviest.”

What is understood in this arrangement is that the biomass will be of a marketable quality. While some disputes are due to financial constraints, others can come from a disagreement over the value of the cannabis itself, as can be seen in the recent dispute between Okanna Craft and Joint Venture Craft Cannabis (JVCC).

It is also important to note that once a processor takes possession of any biomass, it automatically assumes chain of custody – no matter the financial arrangement or the status of COAs. If the processor is dishonest or simply negligent, then all bets are off.

“I know of horror stories where micros pay processor fees, and then the processors just leave them in the dark,” says Bedárd from Green Culture Verte.

In one example shared on background with StratCann, a cultivator sent a processor a large amount of biomass with no agreement in place. The processor deemed the product unusable and destroyed it with no notice or remuneration. There is now an active dispute about how much money is owed – if any.

“If you’re a farmer, you know that your product is based on quality, but many people in this industry aren’t willing to accept lower prices that come with lower quality,” says Bedárd from Green Culture Verte. “I am currently dealing with another processor, as I am working on bringing a quality product to market. It is going very well – I’m hoping the processor can place the product with larger brands.”

Lessons learned

From the examples researched for this article – as well as some that were left out due to an unwillingness of some companies to go on the record – the lessons learned are clear:

Get a written agreement. A typical grower relationship with a traditional processor/marketer involves fees, consignment, IP rights, and exclusivity deals. None of this is worth much unless it is supported by a written contract. No product should be sent or received without a contract. Be sure to loop in your Quality Assurance Person (QAP).

Follow the COA regulations. Health Canada regulations are clear: a processor cannot accept any cannabis material without contaminant testing. Some companies are conducting business (sending, receiving and washing cannabis, etc.) without a Certificate of Analysis (COA). This is a major warning sign that puts all parties at risk.

Start small. There may be a temptation for cultivators to unload large amounts of biomass on processors, but StratCann has heard of many accounts where profit-sharing agreements are not honoured, or micros are simply ghosted.

Look for the signs. Small payment delays or anomalies can be excused, but repeated lack of payment is a huge warning flag, no matter the size and reputation of the company.

Trust yourself. If something sounds too good to be true, it probably is. Overly-generous revenue sharing agreements, and sweet delivery or payment terms, may be a red flag.

Prepare for hardball. Many smaller companies are getting burned because they are simply unwilling to go to court. Though it is certainly a last resort, court action must be accepted as a possibility.

This post was originally published by our media partner here.

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