COVID-19 and the Cannabis Industry

March 24, 2020

Frank A. Segall chairs the firm’s Business Law and Finance groups and co-chairs its Cannabis Business & Law Advisory group. With a strong background in finance and business operations, Frank negotiates business deals that include mergers, acquisitions, sales, syndications, loans, restructuring, and equity investments. He also provides counsel to cannabis investors, lenders, and operators of cultivation and dispensary facilities. Frank was named an inaugural “Cannabis Trailblazer” by the National Law Journal in 2018. He can be reached at fsegall@burnslev.com or 617.345.3684. Scott Moskol co-chairs the firm’s Financial Restructuring & Distressed Transactions and Cannabis Business & Law Advisory groups. He is also a member of the Corporate and Finance practices. He is often retained for assisting with capital raises, structuring appropriate investment vehicles, drafting operative documents, and providing general business advice, given his involvement as an executive team member of one of his operating entity clients. He has provided corporate counsel to a nationwide base of clients in the cannabis space since 2013. Scott was named to the National Law Journal’s inaugural “Cannabis Trailblazer” list in 2018. He can be reached at smoskol@burnslev.com or 617.345.3522.

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The COVID-19 pandemic has created new challenges and – for a few – opportunities in the cannabis industry, which has been complicated recently by liquidity concerns. Further supporting the old adage that certain “sin” industries, like alcohol, prove resilient in recessionary times, Columbia Care announced that it had achieved record revenue the week ending March 14^th and had broken weekly revenue records in facilities in eight of the states in which it operates (however, there are questions about whether consumers and patients were making major purchases, wary of potential closings). Here are five initial key takeaways that industry participants should keep in mind as they make decisions over the next few weeks:

1.         The Show Must Go On. Even in this new time of social distancing, the cannabis industry marches on, adapting itself to new logistical concerns. In Massachusetts, the Cannabis Control Commission has indicated that, like many other state cannabis regulatory agencies, while it would not meet in person, it would work remotely and continue review of applications. In various states with “shelter in place” orders, both medical and adult-use retail operations have sought and achieved essential business designation status, although in Massachusetts only medical retail is deemed “essential”. Other state regulatory bodies are re-examining the availability of delivery, curbside pickup, and online ordering at least for medical operations. Patients in some states, including those in Massachusetts, may obtain renewal cards via telephonic visits as opposed to previously mandated in person doctor visits. While COVID-19 has grounded many segments of the U.S. economy, requiring adaptation at times, the cannabis industry should prove somewhat resilient, especially if all states allow at least all medical operations to be designated as essential businesses.  However, it is important to note, that when liquor and package stores have been designated as essential businesses, it would be logical for states to treat recreational operations in the same manner, as some patients eschew obtaining medical cards to stay out of the system. Certainly allowing for sales measures that are more compatible with social distancing, such as permitting sales solely to state residents, delivery, online ordering, and curbside pickup, can resolve many of the concerns with allowing recreational dispensaries to remain open. More than ever, the cannabis industry must band together to protect itself not only from the virus, but also from legislation that can and will impact the economic viability of certain industry players.

2.         Cannabis Operators Need to Address Systemic Business Concerns Now. Where liquidity has always been a challenge to the cannabis industry, recessionary forces will only exacerbate these challenges. Operators should get a clear understanding of their present cash reserves, accounts receivable (if any) and payables. Operators should create conservative 30, 90 and 180 day cash flow projections and make very difficult decisions as to how cash is deployed. What are the essential business expenses for at least the next 90 days? Are there sufficient cash reserves to pay employees (as unpaid wages can become personal obligations of the principals)?  Any expansion related and expensive buildouts that can be postponed?  Do operators have sufficient insurance coverage and limits going forward? Now is the time to examine business operations and make those hard and difficult decisions that have been postponed.

3.         Cash Remains King. All operators that have some form of revolving credit line or outstanding capital call investor obligations should immediately review the terms of their loan and investment documents and, if allowed, draw down on such credit facilities or capital call obligations to ensure that sufficient cash reserves are on hand.  Similarly capital providers, whether debt or equity, should examine their documents with operators to determine what remaining funding obligations they may have and re–examine the underlying credit to determine whether it both makes sense to continue to fund in light of new economic realities and whether legally they can restrict future disbursements of cash.

4.         Cannabis Meets the Workout/Restructuring World. While marijuana itself maybe more recession proof than other industries, that doesn’t mean that operators will be able to sustain themselves and remain open during these times. Although generally neither plant-touching operators nor non-plant touching ancillary companies are permitted to file for federal bankruptcy protection, this doesn’t preclude availing yourself of other insolvency related proceedings or remedies. State court cannabis receiverships are specifically provided for in states like Washington or Oregon. Certain states’ assignment for benefit of creditor (ABC) statute may also prove useful in certain circumstances. And certainly, old school compositions have true utility as a means to restructure and address debt obligations and other liabilities. Lenders and trade creditors may have access to state court remedies and solutions such as Article 9 secured party sales, enforcement of pledges and Deposit Account Control Agreements (DACAs) or real estate foreclosures, subject to each state’s regulatory framework. That said, companies involved with Industrial Hemp and related products (such as CBD) do have access to federal bankruptcy court protections.

5.         The Rise of Strategic Opportunities: In challenging economic times, there always exists a range of strategic opportunities that will be of interest to well-funded cannabis operators. We would expect more and more marijuana licenses and actual companies to be available for sale across the country at a discounted valuations. Multi-state operators may use this as an opportunity to sell-off some non-performing sites or to diversify their geographic holdings. We would expect that competitive applications for licenses may begin to dwindle, in light of capital constraints. State court receivers may be petitioned in place to oversee the sale of assets of both plant-touching and non-plant touching companies, including licenses, real estate, and intellectual property. We also expect to see the emergence of new debt funds and “Vulture Funds” that will enable the aggressive entrepreneur to capitalize on market opportunities.

While we expect the economic and financial turmoil resulting, in great part, from the COVID-19 pandemic to plague the cannabis industry for some time, it is clear that the industry has not shut down and, in light of medical facilities being granted essential designation by many states, will continue to generate revenues. While it is a time of great challenges, and there is a need for financial reflection and restructuring to survive, the industry itself presents certain strategic opportunities. Burns and Levinson’s Cannabis Business & Law Advisory group continues to keep abreast of and be at the forefront of all of these developments and will continue to represent all our present clients, as well as new potential clients, in successfully navigating these tumultuous times. Please do not hesitate to contact either Frank A. Segall or Scott H. Moskol, co-chairs of Burns & Levinson’s Cannabis Business & Law Advisory Group, for any questions or needs you may have.