29 Apr Corona-Cannabis Update #9: Some Acquisitions, NY Still Hopeful

The weeks fly by and here we are again! Welcome to the ninth edition of our update focused exclusively on the impact that COVID-19 has had on the marijuana and hemp industry. We generally remain positive about the essential business designation for medical cannabis, but frustrated with some states restricting or prohibiting the opening of adult use dispensaries. There also remain concerns about the supply chain, and the oversupply of hemp as more states’ plans are approved by the USDA under the 2018 Farm Bill. Here are this week’s interesting array of developments to ponder:

• Smaller acquisitions closing. A Colorado operator has completed the acquisition of a Denver based edibles brand. Another Colorado-based company has acquired a dispensary and manufacturing operation. A well-known consulting firm turned vertically integrated operator has acquired a dispensary operator. These are small (several million dollar) deals and seem focused on the new Colorado law allowing public companies to own Colorado-licensed companies for the first time.
• NY remains hopeful of legalization. The New York Assembly Majority Leader said this week that she believes there is still time to complete adult use legalization before the legislature’s session ends in June, acknowledging that dealing with the pandemic took priority over the attempt to include legalization in the budget process last month. The Leader suggested that there were few differences remaining to take the bill across the finish line.
• Class actions rising quietly. For now the three 2020 cases we are aware of are against Canadian companies. That said, the rate of new cases by shareholders against public cannabis companies more than doubled last year, given that six new cases were brought in 2018 and 13 in 2019. The newer cases focus on issues of revenue recognition and related party transactions. This makes sense given the dramatic drops in stock prices that started in the second half of 2019.
• Democrats seek to allow access to relief funds. Late last week several Democrat congressmen introduced a bill requiring the government to allow cannabis companies to obtain loans and other relief under the various coronavirus relief bills. Not many are optimistic of passage.
• Large at-the-market offering. A Canadian operator announced a $49 million “at-the-market” stock offering. Investor reaction has not been positive since the dilutive effect of the offering is potentially significant given the significant decline in the company’s trading price over the last year.

Public cannabis companies are looking at snapping up Colorado operators now that they are allowed, that will likely continue this year. It does not seem like a great bet that NY will pass adult use this year, especially since Cuomo declared the legislative session “effectively over.” Securities class actions could become a bigger problem than they have thus far, keep an eye on this. As noted, it does not appear that the Democrat bill to allow cannabis companies to access relief funds will make its way through the Senate (or even the House for that matter), let’s hope I’m wrong on that. The need to fundraise is going to become more critical for a number of key companies in the industry. Those deals will be painful and dilutive, but critical to survival for a number of operators. Stay safe everyone and be patient we will see each other soon!