Add “global pandemic” to the list of challenges faced by the sputtering cannabis industry.
The coronavirus COVID-19 is tearing across the U.S. economy. Businesses everywhere are making very difficult decisions. In many cases, those decisions are being made for them. As I write this post on the evening of Sunday, March 15, the Federal Reserve has slashed the federal funds rate to zero, the Center for Disease Control (CDC) has recommended cancellation of all events with 50 or more people, and a cascade of state and local governments have shuttered everything from schools to bars. All of that happened in the last few hours. By the time you are reading this, the crush of news will only have accelerated.
That’s the very big picture. But you run a small (or small-cap) cannabis business. What should you be doing? Here are some high-level thoughts for the “prepare and don’t panic” crowd.
If you haven’t yet issued guidance to your employees, you are behind the curve. This is a crucial step, whether you have 1 or 100 staff. So get a plan together and get an email out right away! If you have a payroll system, employee handbook or other policy that does not accommodate paid sick leave, consider axing that. Allow or require everyone to work remotely if possible. And depending on the type of business you have and evolving relevant guidelines, consider suspending operations.
Excellent guidance exists on what you should be doing today, including at the federal level (CDC; OSHA) and by states and counties (cf. California Labor & Workforce Development Agency). Note that under Section 13 of the OSHA Act, you cannot force an employee to work if they believe they are in imminent danger. Most situations don’t yet rise to this level, but it’s something to monitor. The National Labor Relations Act also extends broad protections to union and non-union employees to engage in “protected concerted activity for mutual aid of protection.”
Pull these out and dust them off, whether it’s a lease, loan agreement, or a purchase order subject to “terms and conditions” that may be published on a vendor website. Look carefully for words and terms related to default on payment or performance obligations, including: “act of God”, “force majeure”, “excuse of obligations”, “frustration”, “impossibility”, “interruption” etc. At some point very soon, someone is going to tell you they cannot pay you because of something COVID-19 related, or you will be saying the same.
A special note on “force majeure”: This is a contract provision that relieves parties from performing their obligations when unforeseen circumstances arise, making performance inadvisable, commercially impracticable, illegal, or impossible. Force majeure is considered contract “boilerplate”, often buried alongside standard terms toward the end of an agreement. Cannabis industry contracts tend to contain force majeure clauses, stemming from concerns of federal law enforcement.
Whether a pandemic like COVID-19 triggers the force majeure clause in a contract, and the effect of that clause on the provisions of the contract, will vary significantly with each situation. I can tell you that, owing to coronavirus, I’ve had more requests for review of “force majeure” contract provisions in the past week than in 10 years’ of lawyering combined. Take a close look at how this clause is written before telling your landlord you are terminating your lease, or accepting a supplier’s position that product deliveries are canceled. Call your lawyer, too.
Businesses tend to allocate the risk of disruptions through insurance policies, as well as standard contracts. And while most cannabis businesses have some form of general liability insurance, these policies generally do not insure against business disruption. Still, read your policy. You (or whomever bought that policy) may have signed up for coverage you didn’t know you had.
In the case of property insurance, most policies are built on an “all risks” basis. A typical agreement will cover “all risks of direct physical loss or damage… from any external cause.” This broad coverage will then be narrowed by specific exclusions.
Business interruption insurance is a specific form of property insurance, again with exclusions. It provides coverage for lost income and extra expenses during an interruption arising from a “direct physical loss” to the insured property. “Interruption” refers to a business’s inability to put insured property to its normal use, due to damage caused by a covered “peril”. If, for example, a cannabis processor were forced to cease operations as a result of COVID-19, policy coverage could attach.
Liquidity in the cannabis markets has been dissipating, even before the pandemic. It’s going to be harder now. Stocks are in free fall and we may be headed toward a recession. The fed is scrambling to encourage borrowing and investing, but options are limited. Cash is king in a fraught environment.
Sometimes, it seems like cannabis businesses are always trying to raise money. This includes small, U.S. businesses raising a few million for launch, to publicly traded companies limping along from quarter to quarter on the Canadian exchanges. These businesses generally cannot get bank loans; they look to private investors. And when venture capitalists and others see uncertainty, they tend to stay on the sidelines or drive even harder terms.
Businesses seeking bridge loans, credit lines and other debt instruments to cover operations while the coronavirus does its damage will be similarly affected. There simply won’t be much cash out there in the near term – for anything.
If you were preparing to close on a deal sometime in the coming weeks or months, be prepared to renegotiate (or worse). Cannabis businesses should also prepare for delays in the regulatory approvals that often are required in financing. State agencies will be slowed by coronavirus, too.
Start calling people. Call them to tell them what is going on with your business, whether it’s to prepare them for a rough patch or to reassure them. Check on others in your ecosystem to see how they are faring and how your business and supply chain may be affected. Brainstorm, iterate and forecast. Share information.
Most people who have been around business know that bad results can often be mitigated through constructive approaches and early conversations. Leave off the panic and see where you get by checking in. Everyone in the cannabis industry will be affected by COVID-19; in fact, everyone already is to some extent. Maintaining positive relationships in the tough times will see you through on the other side.