Even before the coronavirus pandemic, capital markets in the cannabis industry had been drying up, due to a variety of issues related to oversupply, unsubstantiated valuations and the ever-changing regulatory environment. The pandemic has lit a fire under this downturn.
Now, businesses are unable to promote offerings at trade shows and, notwithstanding the widespread sentiment that cannabis is “essential,” many non-medical and/or non-retail facilities have been shuttered amid social distancing requirements.
In early April, at least two cannabis companies filed for bankruptcy (CannTrust Holdings and James E. Wagner Cultivation) and various publicly traded companies, including Cronos Group and Hexo either missed or delayed posting their fourth quarter earnings reports. The Viridian Deal Tracker, which monitors M&A activity, capital raises, joint ventures and licensing opportunities, posted merely two capital raises totaling less than $6 million, compared to 17 deals comprising close to $17 million over the same time period last year.
While we await a COVID-19 vaccine, it is expected that many cannabis companies will fail. As with most business issues giving rise to legal exposure, an ounce of prevention is worth a pound of cure. Those most likely to survive are those without debt, that consistently implement sound cash management strategies and include provisions to simplify and streamline collection efforts in their contractual agreements.
But businesses finding themselves at the end of their cash runway with little to no hope of raising investment capital should consider the following practices:
– Get organized: Dedicate personnel to financial bookkeeping, compile and analyze past and anticipated expenditures and rank those expenditures in terms of priority. Be sure to identify and collect on outstanding amounts due and issue outstanding invoices. Review material contracts for payment provisions and follow through on collection procedures.
– Cut: Identify areas to stop spending in favor of lower cost alternatives, such as lowering sales commissions and marketing/advertising opportunities; cutting out middle-men distributors or shipping direct-to-consumer; implementing across-the-board salary reductions; outsourcing to contractors; moving information storage to the cloud; and reducing inefficiencies and redundancies.
– Renegotiate: Evaluate interest rates and amounts due on all lines of credit, leases and other debts, and contact those vendors and ask for a reduction. Few creditors will offer a reduction outright, but most creditors will take a lower interest rate or new terms to avoid non-payment. Former bankruptcy litigator and cannabis attorney Rod Kight, who has written on COVID-19-related cash-saving opportunities, reminds operators that vendors and creditors, too, may be struggling during the pandemic: “To the extent possible, propose win-win situations. A vendor may agree to accept prompt payments of a lesser amount, rather than dragged-out payments of a lessor amount, in order to consolidate its cash position.”
– Liquidate: Identify those assets that are absolutely necessary for operations versus those that are not. For instance, if some or all employees can telecommute on an ongoing basis, consider downsizing space. If equipment isn’t revenue-generating or profitable, there is, and always will be, a market for distressed assets and investment funds organized to consolidate them.
– Barter: In trying economic times, many operators may be able to trade products or services in-kind. Design, legal, accounting, marketing, public relations, janitorial, technology and other services are all ripe for swapping and bartering, and there are a host of websites and “time banks” with established platforms to facilitate it.
– Borrow: While “direct cannabis businesses” and “indirect [ancillary] cannabis businesses” appear to be locked out of access to Small Business Administration financing and relief from the COVID-19 federal stimulus package, hemp businesses are not. With interest rates under 4% and forgivable attributes, it is worth taking the time to ascertain eligibility criteria for these loans. For those without access to such financing, consider hard money loans, secured by inventory, accounts receivable and other collateral. Liens on collateral may be prioritized, particularly if anticipated future revenue and collection efforts exceed debt obligations. While we are loath to advise clients to agree on personal guarantees, desperate times may call for desperate measures. Suggest a corporate guarantee over an individual, if possible.
– Go Green: Now is better than ever to adopt a cost-saving environmental policy. Utilize power strips, print on two sides and turn off all lights and other equipment when not in use. The switch will pay off financially and may provide a PR opportunity with current and prospective customers.
– Partner: Cannabis businesses are not alone in their cash plight. Communicate with neighboring small businesses to understand their cash-flow issues and consider partnering to share bulk expenses and marketing costs.
– Engage: Now is the time to capitalize on customer loyalty. Age-old practices, such as hand-written thank you notes have been known to increase sales 10-20%. Consider loyalty programs (subject to regulatory restrictions) and maintaining frequent communications with your customers and investors, many of whom may feel isolated.
Only those businesses who aggressively manage cash flow will survive for the ultimate return to “normalcy,” whenever that may be — and whatever that may look like.
Lauren Rudick represents investors and startup organizations in all aspects of business and intellectual property law, specializing in cannabis, media and technology. Her law firm, Hiller, PC (www.hillerpc.com), is a boutique, full-service firm with a track record for success in various practice areas including cannabis law, land use and zoning, disability insurance law and business and corporate law.