😦 Could coronavirus be... good for cannabis?
This article was published 3/25/2020 on Cannablurbs, a weekly newsletter covering the business, strategy and policy of legal cannabis. If you like it, sign up here for the far more attractively formatted and convenient email!
Cannablurbs
Is COVID-19... potentially a positive for cannabis? In comparison to the devastation the virus is wreaking on other industries, cannabis does have a few things going for it. Shifting our format a little, we’re running through what the latest news says about the unique bullish and bearish factors cannabis faces with coronavirus.
Riding the Bull: Cannabis may not face the full shutdown risk that other businesses do. While many businesses face shutdowns through shelter-in-place or less severe orders, many marijuana businesses (especially medical) remain open for business as essential. Moreover, there’s a case to be made that cannabis, as a vice, may be a more recession-resistant product.
The Next Level: While those are relatively positive vs. other industries, those factors make cannabis “the nicest house on a bad block” than true tailwinds. The real bull case - the forced time at home may lead more people to cannabis consumption. We’ve seen a bump in cannabis sales as the virus has hit and it’s manifested in different consumption patterns. We’re also seeing an expansion of distribution channels (curbside, delivery/drive-through, online). Heck, you even have the Texas Young Republicans pushing for direct cannabis sales. These are temporary measures, but their success in a crisis could lead to longer-term change. If these represent meaningful shifts in new consumers or new means of reaching them, it’s a potentially big win for cannabis.
Bearing It Out: But… that’s a big if. There’s real evidence that the sales bump might be panic buying/hoarding, especially given that sales have dropped after the initial surge. Moreover, the “essential” designation is far from uniform, and is ultimately subject to rules that could (and are) changing day-to-day. Should stores be forced to close and sales drop, cannabis businesses really don’t have a backstop, as they’re ineligible for relief funds. Meanwhile, with way more pressing matters, it’s probably less likely that new states are going to legalize this year (forget hitting our forecast, probably).
The Next Level: Yes, there’s some positives, but it’s more likely than not that this is just adding more fuel to the fire of an already tough cannabis market. Capital markets aren’t going to loosen any further in any economic decline, making tough financials now potentially impossible to climb out of. For those companies that have the cash and position to weather the storm, they may emerge benefiting, while investors with capital on hand might find attractive opportunities.
¿Qué más?: Colombia is launching its domestic medical sales market, as Canadian-based but Colombia-focused Khiron Life Sciences was authorized to sell medical cannabis last week. The development is a significant one for Colombian businesses, which have received substantial investment since legalization in 2016 but have faced significant regulatory and commercial roadblocks. Investment flocked to Colombia on the promise of tremendous cost advantages (e.g. a gram of flower for 80 cents vs. $2 in Canada) that could make it a major export comparable to coffee, but has waned in recent times.
Why It Matters: If you think U.S. regulations are challenging, try Colombia. Numerous license requirements, delays in approvals, and international regulatory clashes (most countries only allow flower imports, but Colombia doesn’t allow flower export) have generated delay after delay for businesses there. A domestic market might be a lifeline to keep those companies going until exports are figured out. Otherwise, an early lead in legalizing among South American countries might not matter when everyone’s running through red tape.
Take Under: Indus Holdings, a small vertically integrated California marijuana business, raised $14.5 million from Geronimo Capital and Merida Capital. While the loan is ostensibly to finance greenhouse construction and working capital needs, the loan is more notable for its structure, with interest on the initial $2.3 million ratcheting from 10% to 20% next year, and ability to convert into equity at $0.20/share (below current trading price).
Why It Matters: Remember when we said it’s going to get weird? And how CEOs are leaving established canna-businesses to invest in distress? This is a great example, as former Acreage CEO George Allen’s Geronimo Capital is leading a deal that, for all purposes, will likely result in a change of control, should they so desire. If you’re giving up most of the company for 16% of tangible book value and 16% of last twelve month sales, you’re definitely in a tough spot. But that beats going out of business, probably...
Follow the Customer: Cannabis tech companies can sometimes be hard to understand and evaluate. Leaf Trade’s trying to chart a different course than some competitors, staying focused in its roadmap and following its customers methodically to new geographies and markets. Check out our newest article for more.
Product of the Week: W*nder
Works Like a W*nder: CBD is getting functional, and couldn’t taste better. W*nder offers four different mood-focused options that boast unique flavors backed by different vitamins, herbs, and adaptogens. Whether you’re seeking to focus, calm, energize, or relax, W*nder fits into any routine, and tastes great.
Quick Hits
- Markets Show Increasing Brand Concentration: The real question: Why? Broader distribution, superior marketing, better product? More importantly - is it defensible?
- Cronos Receives SEC Inquiry: Apparently this relates to revenue recognition on wholesale purchases, and is definitely tied to the recent delay and restatement of financials. Uh oh...
- Elixinol Focusing On Just Supplements: So I guess the “holy trinity” of CBD supplements, hemp food products and Australian medical marijuana was... not so divine?
- Green Bits Terminates 40 Employees: Lost in the COVID noise: some canntech layoffs. Green Bits and Leafly both made major cuts this past week, no doubt influenced by the tough macro environment.
- DEA Unveils New Rule For Research Growers: Real progress! Interestingly, the DEA would actually take possession and sell weed. These days, everyone wants to be dealing...
- NIDA Proposes 5mg Standard Dose: Federal agencies active this week, eh? The rationale here makes sense, even with complexities - a standard dose makes research more compatible and comparable.
- How The English Found Cannabis: Great read. “Wholesome, though for a time it takes away the memory and understanding” is a hilariously 1600’s way to describe a high.
Celebrity Canna-Pivot Of The Week:
Xzibit Launches Cannabis Brand
Hopefully he presents the products like it’s a Pimp My Ride episode? “I took your pre-roll, added 7 grams of premium flower and 1 gram of live resin infused rolling paper, and finished with a glass smoking tip. PLUS, I know how much you love grenades, so it’s all packaged inside of a collectable glass hand grenade.”
Research Rips
👍 Cannabinoids and Opioids Together May Produce Analgesic Effects Without Tolerance
👍 CBD May Exert Preventive And Protective Actions In Parkinson’s
👍 Washington Cannabis Advertising Tends To Focus on Nature, Not Partying
🍄 Psychedelics Can Have Enduring Changes With Limited Adverse Side Effects
State-by-State
ICYMI
Recapping some of our best and most recent long reads
- Keeping It All In the Family: Rejuvia’s founders are betting that a cross-generational family team and deep medical roots will be a winning combo in CBD.
- Why 2020 Will Be A Banner Year For Investing In Cannabis: (pdf link) Karan Wadhera (Partner @ Casa Verde Capital) on the opportunities in cannabis investing this year
- Why Just Build A Cannabis Brand When You Can Find Its Soul?: Shawn Gold (CEO @ Pilgrim Soul) on what to expect in the oncoming wave of cannabis brands
- Reimagining How We Drink: Can Cann reshape social drinking and cannabis consumption all at once? Co-founder Luke Anderson thinks so.
- 🔮 What’s Coming For Cannabis In 2020?: In January, we pulled out our crystal ball and made our biggest predictions for the year. Stay tuned!
This article was published 3/25/2020 on Cannablurbs, a weekly newsletter covering the business, strategy and policy of legal cannabis. If you like it, you should sign up here for the far more attractively formatted and convenient email!