07 May Corona-Cannabis Update #10: Big New Investment, Licensing Delays

How the world has changed since March 18 when the first of these updates was published. New York was still open for business (though my firm’s office had closed), a scary 14,200 people had tested positive in the U.S. and at least 187 had died. And now, well, the sadness overwhelms. As of yesterday, just seven weeks since we started this series, we have 1.26 million cases and over 75,000 dead here in the US, and every indication that unfortunately we have much more to come.

As we have indicated, so far the cannabis industry seems, for the most part, both recession- and pandemic-resistant. The fundamental trends, positive and negative, that were developing before COVID-19 remain, in some cases exacerbated by challenges in the capital markets and a few supply chain issues caused by the virus. What will the industry look like post-pandemic? We will begin to explore that in future installments, remembering that it is not at all clear when exactly that will be. Here is this week’s update on how the coronavirus has impacted the marijuana and hemp industry:

• Big new investment. Many remember Warren Buffett bringing a little confidence during the 2008 financial crisis by investing $5 billion in Goldman Sachs when some were warning it could go down after Lehman’s fall. The terms were overwhelmingly favorable to him, but it saved the company and possibly our entire economic and financial system. While I normally don’t mention companies, the C$245 million (about $175M US) investment into Canopy Growth by Constellation Brands six days ago is a big deal. They exercised soon-to-expire warrants at a price that’s roughly 18% below the current market price, and bought another 5% of the company. This against Canopy’s recent decision to lay off 200 people. More below.
• Delays in issuing licenses. Due to COVID, Illinois is delaying the issuance of 75 new adult use licenses that were to be issued by May 1 until the state lifts its disaster declaration, currently extended until May 31. The state also has loosened rules to allow curbside sales to medical cannabis patients.
• Telemedicine moving in. States like Florida are now permitting cannabis patients to obtain medical cards and have follow-up visits by telemedicine without having to meet a prescriber in person. Other states like Oklahoma, New York, Maine, Missouri, and California have similar regulations permitting telemedicine to issue medical cannabis cards.
• Some deals but a big one busts. One company completed a $1.5 million bridge financing. Another sold some licenses in Maryland and Pennsylvania to raise about $22 million in cash. Another signed an LOI to buy a psychedelic company in Colorado for $850k in stock. A California cannabis e-commerce company is going public in a reverse merger with a CA-based cannabis manufacturer. But a large operator canceled a $282 million acquisition for a number of reasons including COVID-19.
• Easing employment regulations. Back to Illinois, where on Monday the Governor signed an executive order allowing dispensary workers to start work as soon as they apply for a card to do so, rather than having to wait for the card to be issued. The move is intended to address a staffing shortage at dispensaries based on workers calling in sick or being at risk of the virus.

I think the Constellation deal is important and symbolic. Even for such a big company, $175 million is a big check. They could have let the warrants expire, or renegotiated the terms or sought an extension of the expiration date, and presumably Canopy would have permitted this. But they went ahead and exercised these warrants, albeit “in the money” and instantly worth more than what they paid. It says to me, however, that this large multinational spirits company, in doubling down on their investment, believes in the future of the industry despite COVID and stocks dropping.

The Illinois license delay seems understandable since the state is technically under lockdown for now. This too shall pass, and allowing curbside sales will help, as will the advent of telemedicine- a change that is likely to alter the delivery of medical services and advice for good. We are still way below investment and M&A deal activity of a year ago, when I would not even have been able to list all the deals going on. And the busted acquisition adds to the list of transactions that have gone away at least in part due to COVID.  But the “essential” nature of the industry continues to yield support, such as the Illinois order allowing workers to start before their formal state approval. Spring is indeed here, I hope everyone gets a chance to enjoy it this weekend! Please stay safe and, more importantly, sane.