Uncharted Roads: Businesses Navigate Amid COVID and Economic Uncertainty

Businesses everywhere, including the cannabis and hemp industries, are entering a new “normal “as the global coronavirus pandemic wreaks havoc on various sectors, fundamentally altering the way we work and likely unleashing repercussions for months and years to come.

From state-by-state policymaking impacts to extended tax deadlines, we’ve taken some time to explore the broader ramifications of the virus – and the uncertain economic conditions ahead – for cannabis, hemp and ancillary businesses, as well as provided an update on emergency (federal and state level) aid for businesses.

See our timeline of global, national and Vermont COVID-19 developments and important dates.

• Cannabis Dispensaries and Sales
• Consumer Behavior and Business Shifts
• Vermont Hemp Industry: Getting Real in 2020
• State and Federal Relief Efforts
• Legislative Efforts for Canna-Business Relief
• Vermont Tourism- and Why its Decline Matters
• Unemployment and Other Important Indicators
• Insurance and Other Ripple Effects

Unlike many industries, cannabis – specifically adult use markets – has seen a surge in sales amid the COVID-19 outbreak. It is recession-resistant, much like alcohol and tobacco, and numbers showed that Americans excessively ate, drank and smoked their way through quarantine. However, sustainable success through this disruptive time depends on a functioning global supply chain with access to cultivation products – many of which are manufactured in China.

The coronavirus crisis has revealed the fragility of, among other things, the modern global supply chain. It has arguably experienced the greatest impact from the pandemic, with closed factories, anemic production, outstanding invoices, closed ports and transportation routes. In fact, 94% of Fortune 1000 companies are experiencing shocks to their supply chain, according to Dunn & Bradstreet.

These disruptions led to an anticipated two- to three-month delay for cultivation materials such as grow lights, pots, and other agricultural commodities.

The cannabis industry has experienced cycles of supply shortages over the last two years, but this pandemic is a different beast. With challenges coming from both overseas as well as North America, it’s a double-edged sword. Pile this on along with Trump’s poking of the China Trade War Beast, and you have a year that’s been a headache for most business owners relying on imports.

In the early months of 2020, ports and factories in China were impacted when the coronavirus made its debut in Wuhan. These disruptions led to an anticipated two- to three-month delay for cultivation materials such as grow lights, pots, and other agricultural commodities.

The world has yet to see the full ramifications of such a global supply shut-down.

In the U.S., many companies are not functioning at full capacity with layoffs and staff in quarantine, or in otherwise uncertain status. The world has yet to see the full ramifications of such a global supply shut-down.

Cannabis was deemed essential in some states with existing medical and adult-use markets when the pandemic hit, a fortunate turn with what could be long-lasting ramifications for progressive policymaking.

Due to COVID-19, industry reports showed that hemp growers postponed seed purchases, and delayed or decreased their spring planting as a result of economic and regulatory uncertainty, along with the potential for decreased consumer spending.

Many companies in the US show a marked slowdown in first and second-quarter revenues as compared to 2019 due to COVID-19. Although many retailers, including CBD stores, have adapted with curbside pickups and online orders, brick-and-mortar storefront sales have been hit hard as a result of the pandemic.

Cannabis Dispensaries and Sales

While state-legal cannabis markets each have their own unique dynamics, cannabis sales generally have been strong for adult use and medical markets during the past few months.

Because of state regulations, there were already protocols for sale of cannabis that closely resemble social distancing measures, such as limiting the number of people in a store. In many ways adapting to the new standards has been an easy transition.

Unfortunately, smaller businesses, especially retailers, tend to suffer during downturns.

Unfortunately, smaller retailers, who must adapt and make necessary changes at a greater relative cost and with less working capital to weather the chaos, tend to suffer during downturns – and of course federal relief funds are unavailable for many cannabis businesses.

During a Marijuana Business Daily webinar, Nancy Whiteman, CEO of Boulder, Colorado-based edibles company Wana Brands, shared her company’s insights alongside broader data presented by Liz Connors, director of analytics at Seattle-based Headset.

Some markets have struggled. Specifically, adult-use cannabis sales in Colorado and Nevada declined in April. Connors suggested those drops resulted from the sudden elimination of travel and tourism in both states. With no spring-break trips to Colorado ski towns or the Las Vegas strip, retailers were limited to local customers.

However, Wana Brands posted record sales in May in Arizona, Illinois, Michigan and Ohio, Whiteman said. The brand also successfully launched in Oklahoma two weeks after that state’s safer-at-home orders began.

Check out the clip below, moderated by MJBizDaily’s research editor Eli McVey, featuring discussion about the impact of COVID-19 on cannabis sales:

Consumer Behavior and Business Shifts

Consumers’ purchasing habits are changing, including the method they use to buy cannabis products. Online ordering, delivery, curbside pickup and drive-thru lanes are likely here to stay as both retailers and customers recognize their ease of use. This shift in habits generally applies to other non-cannabis retail spaces as well.

Mike Werner, chief business officer for Oakland, California-based dispensary Nug, said a switch to curbside pickup and delivery will limit the interaction his employees have with customers.

“Social distancing has made people not really want to go into a store and mill about,” Werner said.

The COVID-19 outbreak has exacerbated pre-existing fault lines in what was already a rapidly evolving market. This has led to number of shifts, including:

• Retailers adapt to changing consumer behavior by offering delivery, curbside pickup, etc
• State-by-state legalization movements hitting major obstacles and slowdowns
• Businesses hoping for post-pandemic real estate deals
• An acceleration of acquisitions and business failures, specifically in California
• Firms reevaluating the viability of the international supply chain

Across the country, cultivators are finding new ways to manage labor to meet the challenges caused by the coronavirus pandemic.

This is yet another sector in the cannabis industry to adapt its operations in response to COVID-19, similar to retailers, for example, who have been using drive-thru and curbside pickup to keep customers and employees safe.

In some states, growers are experiencing increased demand for cannabis from retailers and developing staffing solutions to account for the uptick. Others have avoided furloughing the cultivation crew or reducing hours by shifting work schedules. Growers report they have altered protocol for employees to keep them safe and to maintain workflow.

A few of those adjustments include:

• Staggering shifts into the evenings and on weekends so workers have more space to themselves.
• Using digital solutions to prevent in-person contact.
• Retaining and paying well those employees who are the most versatile to help out with multiple facets of the operation.
• Communicating that employee health is a priority.

An area of concern for seasonal hemp growers is hiring for fall harvest, which is typically the busiest time of the year for outdoor hemp cultivation. Should a spike of COVID-19 emerge in Vermont this fall, it could create serious delays and ramifications for small growers in the state.

Vermont businesses are slowly reopening after closing in March to suppress the spread of Covid-19. But there’s fear a second wave of infections could hit in the fall, when it’s time to hire people to harvest and process the plant, said Tim Fair of Vermont Cannabis Solutions in a VTDigger article in May. Some of the work is outdoors, which is tremendously helpful – but it remains a wild card, like so many other aspects of this rollercoaster of a year.

Vermont Hemp Industry: Getting Real in 2020

It’s been clear since last fall that this year’s cannabis-growing season wasn’t going to be as active as last year’s.

After the federal government redefined hemp as a regular agricultural commodity in 2018, new growers surged into the market, eager to cash in on the interest in CBD, one of the many compounds in the hemp plant touted for its health-giving properties.

In 2019, nearly a thousand people paid $25 to register with the Agency of Agriculture to grow cannabis to process into CBD. The number of Vermont growers doubled from 2018 to 2019, and food and personal products manufacturers added CBD to hundreds of products for humans and pets.

A wet spring, along with lower-than-hoped-for demand and processing problems, put a damper on the 2019 season, and a number of Vermont growers ended up leaving plants standing in the field because it didn’t make financial sense to process them.

On top of this, nationwide the cost of CBD has been dropping since last year. Throw in the increase in state hemp licensing costs, and all this means that many fewer people are registering to grow hemp in Vermont than last year, as VTDigger reported this spring.

As we mentioned above, some hemp growers, in anticipation of decreased consumer spending, have scaled back their operations – and their expectations – for the 2020 season. This included postponing seed purchases, and delaying or reducing their spring planting as a result of economic and regulatory uncertainty.

State and Federal Relief Efforts

For small business, bridge-gapping can be enormously helpful —whether it’s funds in the form of PPP, or whether it’s forbearance in the form of public utilities, or other expenses that can be managed in such a way so that as much capacity is maintained and kept in existence even if it’s at lower utilization. For many, this is preferable to an outright shutdown, giving them the option to be flexible and scale up quickly where needed.

Several relief sources have been available to small businesses – here’s an update on what’s out there and where it currently stands.

Vermont’s statewide Emergency Economic Recovery Grants became available as expected and started processing applications on Monday, July 6. The grants are available to Vermont businesses who can demonstrate revenue loss in any one-month period from March 1, 2020 to August 31, 2020, when compared with the same month in 2019.

Here are the two major pieces of legislation intended to deliver financial resources to Vermont businesses hardest hit by the COVID-19 pandemic.

This initial grant money that was passed by the Legislature is less than half of what the Governor asked for in his $400 million economic recovery and relief package.

Act 115: Created a $70 million grant program for employers that experienced a 75% loss in revenue or more for any one month between March 1 and August 31, 2020, as compared to sales in the same month last year. Businesses that collect rooms and meals taxes, such as restaurants, bars, and lodging establishments, are set to receive $50 million in grants while other businesses will receive the remaining $20 million.

H. 966: This bill includes an additional $96 million in economic recovery grants including programs for Women- and Minority-Owned Businesses, Non-Profit Arts and Cultural Organizations, Outdoor Recreation Businesses as well as restaurants, bars, lodging establishments, and retailers that experienced a 50% drop in revenue in any one-month period from March 1, 2020 to August 31, 2020, when compared with the same month in 2019.

This initial grant money that was passed by the Legislature is less than half of what the Governor asked for in his $400 million economic recovery and relief package. On Friday, the governor and members of his administration pressed the Legislature to move faster to approve the full $400 million economic relief proposal he pitched last month.

The Economic Recovery Grants landing page has full details, including eligibility requirements, document preparation instructions, and a link to a series of FAQs to assist businesses in completing the application. Webinars hosted by ACCD can be found here. Given the limited funding available and high anticipated demand, businesses have been encouraged to apply as soon as possible.

Paycheck Protection Program: The Small Business Administration has approved nearly 4.8 million forgivable loans to small businesses through the Paycheck Protection Program since it opened in early April. The PPP program ended last Tuesday, on June 30.

The loans, created by the federal CARES Act, may be converted into grants if used according to certain parameters set by the federal government, including spending 60% or more of the funds on payroll costs. Forgiveness applications are open now and available here. Check out our Guide on how to fill out your PPP Forgiveness Application Form here.

Provided the loan proceeds are used for allowable expenses over the 8-week period after the loan is made and employee and compensation levels are maintained, borrowers will have their loans forgiven. It is anticipated that no more than 40% of the forgiven amount may be for non-payroll costs. Any principal balance that does not qualify for forgiveness must be repaid over a five-year period at the fixed interest rate of 1%.  All payments are deferred for six months.

In order to seek forgiveness, a borrower must submit an application that includes documentation verifying the number of employees and pay rates and canceled checks showing mortgage, rent, or utility payments.

The amount of debt forgiveness may be reduced if the employer reduces its workforce during the Covered Period when compared to other periods in 2018 or 2019, or reduces the salary or wages of an employee who had earned less than $100,000 in annualized salary by more than 25 percent during the Covered Period. This reduction may be avoided if the employer rehires or increases the employee’s pay within an allotted time period.

SBA Economic Injury Disaster Loans: The US Small Businesses Administration has reopened the Economic Injury Disaster Loan (EIDL) and EIDL Advance program portal to all eligible applicants experiencing economic impacts due to COVID-19.

“Businesses engaged in any illegal activity” are ineligible for SBA loans in normal times. Last year, the SBA reiterated that direct marijuana businesses, those that “touch the plant” are ineligible. It also said indirect marijuana businesses “which derive any of its gross revenue for the previous year from sales to Direct Marijuana Businesses” are ineligible, examples include testing services, sellers of lights and hydroponic equipment, businesses that sell smoking devices, and providers of services, such as law firms, accountants or policy consultants.

“There’s a misconception that cannabis businesses are well suited for this [lockdown], but a lot of these businesses won’t survive,” said Shawn Hauser, Partner and Chair of the Hemp & Cannabinoid Practice Group at Denver law firm Vicente Sederberg. “They’ve made progress to now be considered essential businesses, but they’re not treated the same as other essential businesses.”

“These companies have been battered from not getting financial services. They can’t get the relief loans that other businesses rely on,” said Hauser. “They don’t have the basic life jackets that everyone else has.”

The SBA also clarified that businesses that produce or sell hemp and hemp-derived products that are legal under the 297A of the Agricultural Marketing Act of 1946 (the 2018 Farm Bill) may be eligible for SBA loans.

Express Bridge Loan Pilot Program: The SBA’s website describes this program in the following way: The SBA has also established a pilot program that allows SBA Express Lenders authority to deliver expedited SBA-guaranteed financing on an emergency basis for disaster-related purposes to eligible small businesses, while the small businesses apply for and await long-term financing.

These bridge loans can be provided on an emergency basis in amounts up to $25,000 for disaster-related purposes.  There are underwriting requirements for these loans and they must be repaid over time.  This may serve as a short term financial solution while your hemp-related business waits for underwriting and loan approval on an Economic Injury Disaster Loan or other long term financing options. The Express Bridge Loan program ends in September of this year. More information can be accessed here.

FSA Loans: Licensed hemp growers may qualify for FSA loans just like other row crops and traditional farmers. Starting with the 2020 crop year, FSA is able to consider applications from hemp growers.  There are prerequisites for hemp-related applicants, including submission of a copy of the grower’s license and a requirement that the grower has a valid contract for the sale of his/her crop. The latter requirement is, of course, becoming more and more difficult for growers to meet and satisfy.  More information on available loan and crop insurance programs for 2020 can be accessed here.

Legislative Efforts for Canna-Business Relief

Cannabis Workers, Unemployment Insurance, and the Small Business Administration: What You Need to Know https://t.co/Tt2y2ovVHg

— NORML (@NORML) March 20, 2020

Several industry trade groups, including the National Cannabis Industry Association, National Cannabis Roundtable, Minority Cannabis Business Association, and the Cannabis Trade Federation, issued a letter to congressional leaders back in March seeking to limit restrictions and allow cannabis businesses to obtain the same relief available to other legitimate industries.

The letter called out the inequity to the cannabis industry given its obligations to comply with other Federal Stimulus relating to paid sick leave under the Families First Act. While the desired language did not appear in the bill signed into law on March 27, 2020, numerous U.S. senators expressed public support for making cannabis companies eligible.

On April 8, 2020, industry trade groups sent a separate letter to governors and state treasurers requesting state officials to: (1) encourage congressional delegations to insert language into future COVID-19 legislation that would enable marijuana companies to access SBA relief loans and disaster assistance, and (2) consider creating state-level lending programs for cannabis businesses to help fill the gap created by cannabis business ineligibility for the SBA’s Paycheck Protection Program and Economic Injury Disaster loans.

There is currently a bill pending in the U.S. House, H.R. 3540, the Ensuring Safe Capital Access for all Small Business Act of 2019, which seeks to remove cannabis from the schedule of controlled substances and prohibit the SBA from declining to provide certain small business loans to an eligible entity solely because it is a “cannabis-related legitimate business” or “service provider.”

Further, House Majority Leader Steny Hoyer recently indicated that he expects Congress to enact at least two more rounds of coronavirus legislative stimulus, indicating that additional financial relief may be available to the small business sector in the future.

In the interim, cannabis advocates have continued to promote the specific inclusion of the cannabis industry in economic relief legislation at the federal and state level. Among others, Vicente Sederberg is working in coordination with industry stakeholders to include protections for the cannabis industry at both the federal and state level.

Vermont Tourism- and Why its Decline Matters

Tourism is one of Vermont’s largest industries, bringing in nearly 13 million visitors and nearly $2.8 billion each year before Covid-19. It’s the largest sector of Vermont’s GDP after manufacturing, according to the state’s 2017 tourism study, and it supports 32,000 jobs, which is about 10% of the state’s workforce. Vermont hoteliers say the state’s lodging industry is expected to lose about $530 million in revenues this year, resulting in a loss of $48 million in occupancy taxes.

With declining travel wiping out millions of jobs across the U.S., and the tourism industry greatly impacted by social distancing, in a report released on the States Hit Hardest by COVID-19’s Impact on Tourism back in April, Vermont ranked fourth overall. Among the data points, Vermont has the fifth highest percent of workers associated with the tourism industry in the nation. The top three most impacted states are Hawaii, Montana and Nevada.

That means Vermont will likely be hit harder than other New England states by the economic impact of the Covid-19 shutdowns. In fact, this is already happening, said Jeff Thompson, who runs the New England Public Policy Center of the Federal Reserve Bank of Boston.

Thompson, using the unemployment rate as a measure of economic damage, said Vermont and Maine both exemplify rural states that have relatively low rates of Covid-19 but are suffering economic damage that’s just as severe as harder-hit states nearby.

Tourism makes up about 6% of Vermont’s GDP, said Thompson, putting it at No. 3 in the nation for its dependence on the industry, after Nevada and Hawaii. Maine is No. 6.

“One of the frustrating things is we can’t require guests practically, when the state doesn’t require it, or the county doesn’t require it, that they wear masks,” Sorenson said. Confidence, and along with it the economy, would improve faster with such a requirement, he said.

Some areas, such as downtown Burlington are launching initiatives to encourage foot traffic and shopping, like Open Street on Saturdays. Stores on College and Bank Streets have invested in outdoor tents, extra clothing racks, and portable credit card scanners. After months of low turnover, store owners like Kari Feingold, owner of Tailfeather on College Street, say they’re ready for a larger volume of customers.

Customers do seem to feel much more comfortable shopping, eating, and mingling outside rather than in a confined space, and this is where Vermont summers have a delightful advantage.

“You see a little bit, but I think people are afraid to go in places,” Feingold said. “And I don’t blame them. You know we try to make things as clean and safe as possible, but I’m excited to kind of bring it out, set it up, and make it look nice.”

Customers do seem to feel much more comfortable shopping, eating, and mingling outside rather than in a confined space, and this is where Vermont summers have a delightful advantage – however few weeks we get, anyway.

Given the extent to which the Vermont economy relies on revenue from tourism, a drop in out-of-state tourism cash – both state tax dollars and much-needed cash for small businesses relying on seasonal income – could have potentially devastating effects on its small-town economies.

Unemployment and Other Important Indicators

The bonus $600 federal unemployment benefit is due to expire at the end of July, which, if this is allowed to happen, could reduce consumer spending significantly. The full extent of what that looks like is subject to a multitude of factors, from local Coronavirus cases to regional economies of scale.

Eviction grace periods are also due to expire soon. Tenants of apartment buildings financed by a federally backed mortgage, such as Fannie Mae or Freddie Mac, could not be evicted for failing to pay rent for 120 days, a grace period that ends July 25, under the CARES Act. After that, landlords can issue a notice to evict but can’t remove tenants for another 30 days. The grace period for renters of single-family homes ends Aug. 31. About half of all multifamily buildings and 40% of single-family homes are federally financed, according to the National Housing Law Project.

In the the latest projections from Vermont’s fiscal analysts, state revenues in fiscal 2021 could fall by $374 million across all state funds because of the Covid-19 crisis — a drop of about 15%. Nationally, it could take three years for the economy to recover from the impact of the crisis, according to a report from consultancy McKinsey & Company.

Quarantine free travel to Vermont is now an option for 6.8 million people from 75 counties.

Vermont continues its slow rollout of loosening restrictions, with the governor’s State of Emergency extended until July 15. Maximum gathering sizes are now 75 people for indoor events and 150 people for outdoor events, and a cross state travel map details counties New England and New York that can be traveled to or from without quarantine. Quarantine free travel to Vermont is now an option for 6.8 million people from 75 counties, doubling the number since the launch of the metric and map two weeks ago.

In Vermont, weekly unemployment claims fell last week after a spike the week before. After a steep decline as the economy began to reopen in April, initial unemployment claims for the last several weeks have flattened and are just under 2,000 claims.

They hit their peak in early April. At that point, Governor Scott’s “Stay Home” order resulted in the closing of schools, restaurants, construction and more, while many other industries cut back operations. As the governor has continued to open up the economy, the weekly unemployment insurance claims fell rapidly until early June.

According to a Chamber of Commerce / Metlife nationwide poll from June, most small businesses report being at least partially open. 79% of small businesses are either: fully (41%) or partially (38%) open. One in five are closed, either temporarily (19%) or permanently (1%).

Most businesses, in the poll, believe it will take longer for the small business economic climate to return to normal: 55% of small businesses believe it will take six months to a year before the U.S. business climate returns to normal, up from 50% last month and 46% two months ago.

Economists forecast record third-quarter U.S. GDP growth of 20% or more. The first estimate of second-quarter growth is due out on July 30; the initial third- quarter report is due out on Oct. 29, just days before the election.

Even so the economy will likely end 2020 smaller than it began, perhaps by about 6.5%, according to Federal Reserve policymaker estimates.

Insurance and Other Ripple Effects

The Lake Champlain Regional Chamber of Commerce says that their team has heard reports that as many umbrella and general liability insurance policies are being renewed, companies are including a Communicable Disease Exclusion endorsement. The endorsement excludes liability arising out of the actual or alleged transmission of a communicable disease from being covered.

The federal government extended the traditional April 15 deadline for tax returns and payments to July 15 due to the COVID-19 pandemic. The extension provided economic relief to many taxpayers impacted by business shutdowns, store closings and nationwide lockdowns. The People First Initiative, as it was named, offered taxpayers relief that included delaying installment payments, stopping field enforcement actions and suspending automatic liens or levies. Businesses who filed for an extension now have a deadline of October 15.