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What Cannabis Businesses Need to Do to Adapt to COVID-19

By Arthur Gulumian
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How COVID-19 Impacted Cannabis Businesses

Before jumping into what cannabis businesses can do amid this pandemic, it is crucial to explore the specifics behind how the virus impacted the industry as a whole. From a surface level, it seems obvious what happened: dispensaries had to implement social distancing protocols, require both customers and employees to wear masks and limited the number of customers that can be present on the point-of-sale floor room. But COVID-19 did not merely make shopping experiences a tab bit inconvenient.

Cannabis producers, and especially those involved in manufacturing cannabis goods, experienced an apparent disruption in their production schedules. If the metals and plastics were sourced from Wuhan, Shenzhen or any other dense industrial area in China, supplies suddenly stopped coming, and producers were left with limited production options. Businesses did not consider the value of having various vendors and instead put all their stock in one source. A disruption in production inherently impacts dispensaries.

COVID-19 impacted more than just supply chains, however. For instance, investors are now less likely than before the pandemic to invest in early-stage cannabis companies. Competition for capital now far outweighs the supply for cannabis companies, and we have seen (and will continue to see) a drop in company valuations. Indeed, COVID-19 is affecting more than just currently existing operators but those yet struggling to create cannabis businesses of their own.

Vendors & Supplies

A broad survey conducted by the Institute for Supply Management (ISM) between February 22, 2020 and March 5, 2020 found that 75% of U.S. companies had experienced supply chain disruption as a result of the COVID-19 outbreak. An estimated 90-95% of all components utilized in cannabis vaporizer pens were sourced from manufacturers in Shenzhen, China. In contrast, very few companies used domestic manufacturers. While this is just one example, it is equally important to note that cannabis-specific equipment and supply shortages were not the only factors that disrupted cannabis businesses. Shortages of personal protective equipment (PPE) presented challenges for cannabis dispensaries, producers and manufacturers that continued to operate during the “shelter in place” orders.

Operators must establish a resilient supply chain. Do not simply limit your options to one specific region, as this can be a costly mistake. Operators must cultivate an in-depth understanding of their supply chain beyond critical suppliers and their stress points; they need to develop and follow a systematic supply process that takes potential disruptions and stress points into account. When vetting potential vendors, always ask detailed questions that elicit evidence-backed responses. Ask vendors where they source their materials from, whether they have any history of experiencing disruptions in their supply chain and what kind of setbacks they have suffered as a result of COVID-19.

Investing in Your Core Business

In light of COVID-19, operators must invest in solutions that increase efficiency and improve the customer’s experience. This entails ensuring your customer safely enters and leaves your dispensary with a product they are satisfied with—the essence of any retail operation. Your operation should focus on enhancing customer flow as opposed to encouraging aimless roaming. Having an open-space, Apple store style dispensaries might have been a popular option before, but times have changed, and dispensaries must adapt.

Guided purchases offer not just more efficient transactions, but also serve to ensure that your waiting room isn’t backed up with an endless stream of unmanageable customers. Depending on your locally-mandated COVID-19 protocols, your dispensary will likely not be permitted to hold a high number of customers in the store, nor should it during this pandemic. Each customer service representative must be active as opposed to passive, directly asking customers what they are interested in, offering product or strain choices when customers seem unsure and answering questions as thoroughly as possible to avoid confusion and inherently delays. Be sure to emphasize the value of guided purchases to your employees and how they can promote the safety of both themselves and their customers.

Maintaining Urgency

The uncertainty of COVID-19 and its impact on the general economy has left many individuals “clocked out.” Simply put, many people feel that they should wait until things go back to normal before making any critical decisions. As essential businesses, cannabis operators cannot afford to make this same mistake. Now is not the time to sit back, reflect and wait for the vaccine. Instead, operators must work to precisely assess how COVID-19 impacted their business and execute a clear plan of action to address foreseeable problems.

Execution is far more important than perfection; you’ll need to make changes on a dime and avoid spending excessive hours obsessing over debating specific actions rather than taking them. It is far more essential to get tasks done versus ensuring they are perfect. If something is not working in your business, it must be readdressed or removed entirely from the protocol. It is far better to make necessary changes now amid the pandemic as opposed to reactively waiting and seeing what may come next following it.

Stay nimble by cutting out any factors that may be slowing down your company’s efficiency. Is your point-of-sale system causing issues? Can you use a better payment processing tool? Are any employees underperforming? Are there any internal policies that may be hindering your employees’ ability to work as optimally as possible? These are some of the many factors that must be considered to ensure your business stays agile and adaptable. Determine what is working against you and execute a plan of action to address. Do not wait and do not take shortcuts around regulations.

Understanding the Shift in Purchasing Behavior

Regardless of whether or not a vaccine for COVID-19 is completed anytime soon, operators must know that there is no “returning to normal.” People’s habits and behaviors have changed due to this virus, whereas slow browsing of items might have been preferable for some individuals before COVID-19; this is likely not the case today. Furthermore, research groups like Accenture have found that most customers expect their shopping habits to change permanently.

Source: Accenture COVID-19 Consumer Research, conducted April 2–6. Proportion of consumers that agree or significantly agree.

In the study mentioned above, shopping more consciously is one of the two top priorities for customers during this pandemic. According to Accenture, “[c]onsumers are more mindful of what they’re buying. They are striving to limit food waste, shop more cost consciously and buy more sustainable options. Brands will need to make this a key part of their offer (e.g., by exploring new business models).” Furthermore, customers are now more likely to shop locally; this is why community engagement would be especially important to ensure you develop transparency and trust between your brand and your customers. Understanding this shift in purchasing behavior will remain one of the more crucial tasks of any cannabis operator.

Expanding Sales Avenues

More and more customers are now relying on online and curbside purchases than ever before. Dispensaries must look to their current sales avenues and determine where key focuses should be made. Use your sales data to determine where customers are making their purchases the most, be it through third-party delivery services such as Eaze, standard home delivery, online ordering or curbside pickup. Focus on identifying friction and streamlining the user experience on all customer-facing platforms and services. Equally, consider which platform your customers are using the most to make purchases; are they making more online purchases, or do most still prefer direct shopping at the store? Remember that having more products doesn’t necessarily mean more revenue. You must also identify which products are performing well and which have low margins.

These considerations can help strengthen your highest performing platform while working to fix any more inferior performing platforms. As stated before, stay nimble; if something is not working out, cut it out from your business model, and move forward. Do not be afraid to cut poor-performing platforms to hone your focus on the successful ones. Since post-COVID-19 shopping behavior is likely to stay permanent, these changes may still be applicable following a slowdown or cessation of the virus.

Delighting Your Customers

Virus or not, customer satisfaction remains one of the most crucially defining points for the future of your business. Your customers must be safe and must be happy with their purchase. To ensure this outcome, you need to maintain adequate safety policies while equally promoting streamlined purchases. Although a limited number of individuals may be annoyed with over-the-top safety precautions, most customers will enjoy the heightened security that comes alongside these types of measures.

Contactless service, such as having customers scan their identification upon entry or encouraging more credit card versus cash transactions, can increase customer satisfaction, as they will feel a stronger sense of security when shopping at your dispensary. Focus on streamlining curbside pickup. Things such as requiring vehicle descriptions (e.g., license plate numbers, color, make) for curbside pickup purchases can go a long way in helping employees quickly identify customers.

Equally, be sure there is hand sanitizer available near the entrance of your dispensary. This adds a further sense of security for your shoppers. Delivery should be consistent; delays and setbacks must be minimal to win the confidence of your customers. Take the extra steps to ensure your dispensary is clean and products hygienic. All these factors work to increase customer satisfaction while maintaining their safety, and more importantly, impact the level of trust your customers have in association with your brand.

Scaling Operations Taking Advantage of Limited Competition in Emerging Markets

As stated before, several individuals—including existing and emerging cannabis businesses—are clocked out following COVID-19. This mindset is not only detrimental for operations but can also impact how you scale your business. New markets are coming online and will continue to do so as regulators are increasingly incentivized to replenish government coffers. Riverside County in California, for instance, is now allowing for capless licenses for all cannabis business types. However, what remains the key focus for regulators is expanding the number of delivery and distribution operators. In Massachusetts, delivery endorsements for dispensaries are available without a set deadline to social equity applicants and do not have a defined cap. In Illinois, the cap for transporters was equally removed, and each applicant who scores above 75% will receive a license.

These types of licenses are now more valuable than ever before for two reasons. The first reason is that regulators are keener to award delivery and transporter licenses than other types. Secondly, customers now prefer home delivery over shopping in stores due to COVID-19. With more people clocked out during these times, you have far more opportunities and far fewer competitors during application processes. Use this time to truly develop a strategy for expansion, as the chance might not come so quickly again.

Conclusion

As a final point, be sure to expand your online presence during this time. Although you may not have the capacity to reflect your company’s personality and value through quick in-store transactions, you can use social media to encourage product reviews, social interactions, and recommendations. Invest in marketing through social media platforms. Platforms such as TikTok have helped form communities of like-minded individuals. Use platforms such as that to highlight your company’s personality and values, avoid being “salesy” and focus more on being funny, entertaining and just alive. Character adds value to your business.

People want to laugh, to feel safe and they want to live. Create social interactions and immersion and always prioritize being honest and transparent with your customers. This final point stands as equally as important as the rest of the considerations highlighted throughout this article. Stay nimble, stay active and stay alert! Do not view the chaos behind this pandemic as a pit, and instead see it as a ladder. Track down opportunities, do not be afraid of change, and, more importantly, do not wait for an answer to COVID-19, be the answer.

The Hopes of Illinois Social Equity Applicants

By Taneeshia Thomas
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It is almost impossible to turn on the tv and not find a show or news conference or even live footage of an ongoing protest over “Black Lives Matter” or “Economic Equality.” The same situation exists with social media platforms, radio broadcast, etc. All sharing the common theme of social equity. While we all seek a solution, the state of Illinois is doing their part by awarding the coveted adult use cannabis business licenses for craft growing, infusion, transportation and dispensaries to social equity applicants by using a scoring system that favors the social equity applicant. We believe in this vision at TGC Group and our dream is to pay it forward.

Taneeshia Thomas and her husband, Christopher Lacy, who did 3.5 years in prison for growing cannabis in 2009.

We see the world, especially for minorities living in poverty, quite differently because of where we come from. “Black Lives Matter” is a movement to save the lives of all people and have human life viewed equally no matter the race of an individual. Economic equality is a totally different fight. Our communities that are impoverished need cash infusions. There needs to be financial infrastructure that recirculates the dollars from the poor communities and that comes from having business owners in the affected community to put their profits back into their community. There needs to be a system of lending that is not based on credit scores and criminal background checks because most people at the bottom will never qualify. An example would be my husband, Christopher Lacy: he went to prison for 3.5 years for growing cannabis back in 2009. He is not a violent man; he never even had a fight in prison. He spent much of his time in prison teaching inmates how to read, write and most importantly, he tried to teach them economics. He is educated about cannabis because he has been intimately involved with this plant and has been growing it for just about 20 years. Yet when he tried to apply for jobs in Illinois for growing cannabis, his invisible barrier starts with the resume. Just think about it, my husband, knows more about cannabis than most people in the industry today and could manage a facility with ease. No one could see his worth because of his background and work experience? This is the same situation with so many others in our poor communities. We know for a fact that there is hidden talent in the impoverished communities and prison system, and we intend to find it and empower these individuals to rebuild what was destroyed by the war on drugs. I speak for all the ghettos when I say this: give us access to the capital and we will get the rest done on our own. Conventional banks have their hands tied with this approach because they are regulated, but private funds have more flexibility. The excess capital needed to rebuild will not come from jobs, it only comes from ownership. Luckily, J.B. Pritzker and Toi Hutchinson are aware of this and hence created the social equity fund to help the social equity applicants fund their projects if and when they are awarded a license. We must find a way to give to the bottom so that the dollars can trickle up. Trickledown economics is kind of like that movie “Platform” on Netflix. There are never enough resources to get to the bottom because the people sending the resources down have no idea how to get them to the bottom floors of society. Trickle up economics can start at the very bottom rungs of society and still will reach to this highest level of the economic system because its built in such a way that it will inevitably get there.

State Sen. Toi Hutchinson (D-Park Forest), now The Illinois Cannabis Regulation Oversight Officer

These new licenses, literally pathways to financial freedom if operated correctly and efficiently, are revenue machines capable of changing our community. This change does not come from providing jobs (although jobs do help and will be available), but by providing capital to rebuild. These funds can provide scholarships, business loans, even small infrastructure projects can get accomplished via the tax revenue generated by the local governments. We have already made a written commitment to give a portion of net margins to the village. Capital in the right hands can make dreams come true. In theory, poverty can be solved. Poverty is not a prerequisite to the American way of life. That is why we were so proud to get zoning approval by our village. They see what we see. We can change neighborhoods like Beacon Hill. The dollars must recirculate in the community. Wherever you see high poverty rates you see high crime rates. This is not a coincidence. If you can lower the poverty rate you can lower the crime rates. This raises the quality of life for everyone. We see the state is on board, the county is on board, the Village of Park Forest is on board and the citizens of the community are on board. Now all we need is the license and capital to get the resurrection started.

Unlike other applicants, we were only capable of applying for one license for a craft grow facility. Some may see this as a disadvantage because only 40 licenses will be issued for this purpose. I wish we could have applied for more to increase our odds, but resources were scarce and applying was not cheap. We decided to stick with the efficient market theory and put all our eggs in the one basket that we know we can carry and be successful with. Without the help of Justice Grown, we would’ve never completed the application so shout out to them and anyone else that helped “true” social equity applicants apply.

The wheels are in motion so all we can do is wait to see who wins. I would hate to be on the team who must decide who wins these licenses. Everyone knows large corporations found ways to apply as social equity applicants because they only needed a certain number of “social equity” employees to qualify. But if you go ask the employees, not the owners, if they have been cured of their financial burdens and see if $15 has raised their quality of life to a middle-class level. The answer is emphatically NO. You cannot give out band-aids for heart attacks. If these large corporations are awarded the licenses, it will perpetuate the cycle of poverty. We do not personally have anything against the big companies. Like Toi Hutchinson said regarding the first round of dispensary and cultivation licenses: we needed the big company dollars to fund the next round of licenses. Well, the next round is here. Let’s do right by the communities that were truly affected by the war on drugs and on a more personal level and my reason for applying: let’s do right by my husband because he lost 3.5 years of his life and was excluded from participating with his family for doing what is now legal.

SAFE Banking Act Included in COVID-19 Legislation

By Aaron G. Biros
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UPDATE: Late in the evening on May 15, the House of Representatives passed the HEROES package, voting 208-199 (with 23 abstentions). The bill now now heads to the Senate where its fate is more uncertain. 


Earlier today, Speaker Nancy Pelosi debuted the latest piece of legislation to help Americans impacted by the coronavirus pandemic. The Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) is a large bill containing emergency supplemental appropriations more than 1,800 pages long.

On page 1,066, those in the cannabis industry will find a very exciting addition: the Secure and Fair Enforcement (SAFE) Banking Act. For the uninitiated, the SAFE Banking Act would ensure access to financial services for cannabis-related businesses and service providers.

Currently, federally regulated financial institutions face penalties for dealing with cannabis companies due to the Controlled Substances Act. The bill, if passed, would eliminate the possibility of any repercussions for doing business with cannabis companies.

The impact of this bill becoming law would be widespread and immediate for both the cannabis market and banks looking to invest in the cannabis industry. With banks given the green light to conduct business with the cannabis industry, there is no doubt that many financial institutions will rush to the opportunity. Cannabis businesses will benefit greatly, no longer having to deal with massive quantities of cash and gain access to things like loans, bank accounts and credit lines. Furthermore, cannabis companies will benefit from the rush of banks getting in the game, leading to a competitive and affordable banking market.

It is no secret that cannabis businesses have had a cash problem for decades now. Given the coronavirus pandemic, CDC guidelines dictate minimizing the handling of cash and encourage payment options like credit cards. Cannabis businesses dealing with large quantities of cash puts them, their employees, their customers and even regulators at risk.

Aaron Smith, executive director of NCIA

According to Aaron Smith, executive director of the National Cannabis Industry Association (NCIA), the cash problem is a serious, unnecessary health risk. “On behalf of the legal cannabis industry, we commend the congressional leadership for prioritizing public health and safety by including sensible cannabis banking policy in this legislation,” says Smith. “Our industry employs hundreds of thousands of Americans and has been deemed ‘essential’ in most states. It’s critically important that essential cannabis workers are not exposed to unnecessary health risks due to outdated federal banking regulations.”

In fact, it was the NCIA and a handful of other industry organizations that lobbied Congress last week to include language from the SAFE Banking Act in the HEROES Act, citing the known fact that cash can harbor coronavirus and other pathogens, along with the “personal proximity required by cash transactions as reasons for urgency in addition to the other safety and transparency concerns addressed by the legislation.”

The SAFE Banking Act was already approved by the House of Representatives. In September of 2019, the bill made a lot of progress through Congress, but stalled once it made it to the Senate Banking Committee.

The HEROES Act will be debated by the House of Representatives prior to a floor vote. If it passes the House, it moves to the Senate, which is about as far as it made it the last go around. However, because the banking reform is included in coronavirus relief legislation, there is a newborn sense of hope that the bill could be signed into law.

Soapbox

Tips to Shrink your Shrinkage

By Carl Silverberg
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I had dinner last night with a friend who is a senior executive at one of the largest automobile companies in the world. When I explained the industry-accepted rate of 25-30% shrinkage in horticulture he said, “Are you kidding me? Can you imagine the story in the Wall Street Journal if I gave a press conference and said that we were quite content to throw away three out of every ten cars we manufactured?”

Yet, for all growers, operators and investors who complain about shrinkage, it’s an accepted part of the business. What if it wasn’t; what if you could shrink your shrinkage by 60% and get it down to 10% or less? How much more profitable would your business be and how much easier would your life be?

Let’s take the floriculture industry as our first example. You propagate chrysanthemums in February, they get repotted at the end of April and by the end of June, you might start to see some buds. In a very short time span your job changes from being a grower who manages 10,000 square feet of chrysanthemums to being an order taker. Over a period of eight weeks, you have to unload as many of those mums as possible. The sales team at Macy’s has more time to move their holiday merchandise than you do.

If you’re like most operations, your inventory tracking system consists of Excel spreadsheets and notebooks that tell you what happened in previous years so you can accurately predict what will happen this year. The notebooks give you a pretty accurate idea of where in the greenhouses your six cultivars are, how many you planted and which of the five stages they are in. You already have 30 different sets of data to manage before you add on how many you sell of each cultivar and what stage they were in.

The future of the industry is making data-driven decisions that free up a grower to focus on solving problems, not looking for problems.Then your first order comes in and out the window goes any firm control of where the mums are, what stage they’re in and how many of each cultivar you have left. A couple of hours after your first order, a second comes in and by the time you get back in touch, check your inventory, call back the buyer and she’s able to connect with you, those 2837 stage 3 orange mums are moving into stage 4. Only she doesn’t want stage 4 mums she only wants stage 3 so now you frantically call around to see who wants stage 4 orange mums very soon to be stage 5 mums.

And, the answer is often no one. What if you didn’t have your inventory count exact and now you have 242 yellow mums that you just found in a different location in your greenhouse and had you known they were there, you could have sold them along with 2463 other mums that you just located in various parts of your greenhouse.

It doesn’t have to be like that. We had a client in a similar situation, and they are on track to reduce their shrinkage to just a shade over 10%. The future of the industry is making data-driven decisions that free up a grower to focus on solving problems, not looking for problems.

And don’t think that shrinkage is an issue only in the purview of floriculture. It’s an even bigger problem for cannabis because of the high value of each crop. The numbers don’t sound as bad because unlike floriculture, you don’t have to throw out cannabis that’s not Grade A. You can always sell it for extract. But extract prices are significantly less per pound than flower in the bag.

Here’s how one grower explained it. “Because of the high value of the crop, and the only other crop I’ve worked with that high is truffles, you’re playing a much higher stakes game with shrinkage. Even if you try and salvage a bad crop by using all of the parts of the cannabis plant. Listen, the difference between Grade A and Grade C could be $1,000 for A while a pound of B/C is less than $400. If you produce a standard 180 to 200 pounds in your grow rooms, you’ve really screwed up. No operator is going to keep you if you just cost them $120,000.”

When You Don’t Know What You Don’t Know: Debunking Cannabis Insurance Myths

By , T.J. Frost
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For all of today’s growing acceptance and legitimacy with cannabis, the reality is that today’s operators – whether growers/producers or dispensary operators – still face risks in running their businesses. If, in the old days, a customer got deathly ill from cannabis contaminated with something from somewhere during the distribution chain, oh, well. But now that there’s a legal system of checks and balances; there’s recourse when issues arise.

The problem is that the business is so new that most people don’t know what they don’t know about mitigating those risks. And that, unfortunately, extends to many in the insurance business who need to be doing a better job helping put the right protections in place.

One grower bemoaned to me at a cannabis trade show, “I sure wish I could insure my crops.” What? “You can,” I told him. His old-school ag broker didn’t know any better and didn’t do him any favors with his ignorance. But it brought home the point: We have to start treating cannabis like the real business it is.

Reviewing the existing insurance policies of today’s cannabis businesses uncovers some serious gaps in coverage that could be financially crippling if not downright dangerous should a claim be triggered. Retail dispensaries, for example, are high-cash businesses, making banking and trusted employees a must-have.Today’s cannabis businesses need to understand there will be risks but they are a lot more manageable than in the old days. 

And a close eye must be cast to lease agreements for hidden exposures, too. We know a Washington state grower that had no property insurance on its large, leased indoor growing facility. The company’s lease made its owners, not their landlord, responsible for any required building improvements. It was one of a variety of serious exposures that had to be fixed.

Today’s cannabis businesses need to understand there will be risks but they are a lot more manageable than in the old days. Rather than find themselves under-insured, they can start by learning what they probably have wrong about insurance. Dispelling three of the most common myths is a good place to start.

Myth #1: Nobody will insure a cannabis business.

Not remotely true. You can and should get coverage. Think property and casualty, product liability, EPLI and directors and officers, employee benefits and workers comp. Additionally, you should be educated on what crop coverage does and doesn’t cover. Depending on your business’ role in production and distribution, you might also consider cargo, stock throughput, auto, as noted, crime and cyber coverage. It pays to protect yourself.

Myth #2: If my business isn’t doing edibles, I don’t have to worry about product liability insurance.

The reality is that product liability may be the biggest risk the cannabis industry faces, at every level on the supply chain. There’s a liability “trickle down” effect that starts with production and distribution and sales and goes down to labeling and even how the product is branded. Especially when a product is an edible, inhalable or ingestible with many people behind it, the contractual risk transfer of product liability is an important consideration. That means the liability is pushed to all those who play any role in the supply chain, whether as a producer or a retailer or an extractor. And all your vendors must show their certificates of insurance and adequate coverage amounts. Don’t make the mistake of being so excited about this new product that you don’t check out the vendors you partner with for this protection.

Myth #3: Any loss at my operation will be covered by my landlord’s policy.

As the example I cited early illustrated, that’s unlikely. Moreover, your loss might even cause your landlord’s insurance to be nullified for having rented to a cannabis business. It’s another reason to examine your lease agreement very carefully. You want to comply with your landlord’s requirements. But you also need to be aware of any potential liabilities that may or may not be covered. Incidentally, even if your landlord’s policy offers you some protection, your interests are going to be best served through a separate, stand-alone policy for overall coverage.

These are interesting times for the burgeoning legal cannabis business. Getting smart – fast – about the risks and how to manage them will be important as the industry grows into its potential.

Matt Engle
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Insurers Must Play Catch-Up to Meet Cannabis Industry Needs

By Matt Engle
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Matt Engle

As the cannabis industry continues to grow, demand for insurance products is also increasing. While insurers have been cautious about entering a market that carries the stigma of a Schedule I drug, the cannabis industry is clamoring for insurance coverage options tailored to meet the needs of key players— distributors, growers, processors and retail dispensaries.

The escalating need for insurance products tailored to these cannabis business sectors has not expedited an increase in coverage offerings. The slow entry of insurance carriers into the cannabis sector can be tied to a reluctance to insure an industry with emerging and often unknown risks. This will begin to change as more information becomes available on what loss ratio trends look like in the cannabis industry.

For now, there is a wait-and-see stance held by insurance carriers. This presents a major concern for cannabis-related businesses that are subject to risk at every stage of the supply chain, with particular exposure for theft, general liability, crop loss, and product liability.some degree of crime and theft coverage is needed for these enterprises to help manage the risks associated with a cash-based business

Theft

For cannabis companies, the use of paper currency is a huge part of their risk exposure. Federal banking regulations have limited these businesses to dealing mostly in cash, which makes them a prime target for crime and fraud. Currently, only one carrier will insure coverage for cash and theft risk, and the policy is limited to $1 million for most risks. This is inadequate coverage since many operators have more than that amount on-site.

In states with legislation legalizing cannabis, the cannabis sector will be able to move away from operating in cash if Congress passes the Secure and Fair Enforcement (SAFE) Banking Act, which would protect financial institutions from liability for federal prosecution that could arise from servicing cannabis-related businesses authorized under state law. Until banking regulations give the cannabis industry the ability to operate as legitimate businesses with the stability and safety that would deter criminal activity, some degree of crime and theft coverage is needed for these enterprises to help manage the risks associated with a cash-based business.

General Liability

Cannabis-related businesses need the same general liability coverage as other businesses to protect their premises and operations from lawsuits involving public contact. However, standard general liability policies—which exclude Schedule I substances from coverage—were not created with cannabis businesses in mind. It is still difficult for these businesses to obtain adequate general liability as a result of the legal uncertainty associated with the industry.

Product Liability

Product liability exposures for cannabis businesses encompass a wide range of areas, including edibles, vaporizers, pesticides, mold/fungus, misrepresentation, label claims, breach of warranty, deceptive practices, and failure to warn.

A major area of exposure concerns accidents resulting from impairment. A cannabis cultivator, processor, distributor, or retailer potentially may be considered liable in the event a product defect results in injury after reasonable use or when label defects fail to warn users that a product may have psychoactive effects.

Another area of risk exposure involves products that contain THC, the psychoactive compound that gives cannabis users a high. As the number of THC-containing products such as edibles and tinctures increases, so does the potential exposure to product liability claims for manufacturers and retailers.

The California Cannabis Track-and-Trace (CCTT) system also has implications for product liability. The CCTT is a statewide system used to record the inventory and movement of cannabis and related products through the commercial supply chain. All state cannabis licensees, including those with licenses for cultivation, manufacturing, retail, distribution, testing labs and microbusinesses, are required to use this system. The product liability impact lies in its capacity to determine responsibility along the supply chain from seed to sale.

For example, if a plastic vape pen explodes, a product liability lawsuit could have repercussions for many touch points across the supply chain beyond the manufacturer of the pen–all of which can be identified through CCTT. Entities that touch cannabis products such as soil suppliers or delivery persons also have product liability risk exposure. Personal injury attorneys can find incident-related parties easily and determine liability. This makes it particularly important to add these parties to the policy as additional insureds to help reduce claims exposure.

Crop Loss

Another area of concern for risk exposure is crop loss. Crop insurance is generally hard to obtain due to the significantly different nature of cannabis crops compared to traditional crops like corn or soybeans.

Fires in Sonoma County devastated cannabis crops in Northern California back in 2017.

An indoor crop insurance policy covers cultivators when there is loss resulting from threats such as fire, theft, and sprinkler leakage. However, crop insurance policies generally do not cover losses resulting from mold, rot, disease, changes in climate, or fertilization issues. Many growers forgo this coverage and instead elect to absorb losses and regrow their crops.

Outdoor crop coverage is generally unavailable, or the cost is prohibitive. Any potential for writing outdoor crop insurance for the cannabis industry essentially disappeared as a result of the recent wildfires in California. These devastating fires highlighted the pressing need for property damage and business interruption coverage for growers and dispensaries and other downstream businesses whose supply was disrupted. This lack of available outdoor crop insurance is one of the more notable gaps in available cannabis business insurance coverage.

While cannabis businesses operating in states that have legalized medical and/or recreational cannabis use have challenges getting adequate insurance coverage, there is some good news on the insurance front for those in California. Last year, California’s insurance commissioner announced approval for carriers to offer insurance coverage specifically to cannabis businesses. The state also approved a cannabis business-owners policy (CannaBOP) program that provides a package policy containing both property and liability coverage for qualifying dispensaries, distributors, manufacturers, processors and storage facilities. Colorado is on the verge of being the second state to approve its version of a CannaBOP program.

While more insurance carriers are beginning to write cannabis coverage, the limited insurance options and policies with restrictive plans currently offered todaydo not meet the needs of the cannabis industry. Insurers must catch up to the coverage requirements of this sector by offering more options tailored to growers, retail dispensaries, processors and distributors with better terms and better pricing.

Harborside, CanPay Announce Partnership, Launching Debit Payment System

By Aaron G. Biros
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CanPay, a debit payment solution for the cannabis space, announced today their partnership with Harborside, the largest medical dispensary brand in the United States. The partnership will allow Harborside’s more than 200,000 patients to use a mobile debit app when purchasing cannabis through their delivery service, instead of bringing cash.

For deliveries, patients would use the CanPay app on their device “to generate a secure, single-use payment token that includes no personal identifiable information,” according to the press release. A Harborside delivery employee scans the token and the money is transferred from the patient’s checking account to Harborside. This allows for delivery employees to make less cash transactions and affords patients the luxury of not having to take out cash to get their medicine.

Harborside, founded in 2006, is recognized as the largest nonprofit cannabis dispensary in California, and the United States. They were reportedly the first dispensary to lab test their products. Being an advocate for patients and their safety, they offer a variety of free health and wellness services. “It’s important to us that we stay on the forefront of patient care and access to the products our community needs to improve their quality of life,” says dress wedding, co-founder of Harborside. “CanPay enables us to continue delivering on those goals by normalizing the payment process for our patients and staff.”

CanPay launched last year in November and has since expanded to over 50 dispensaries and six different states. The premise of their system is a secure and safe transaction for customers or patients of dispensaries. “To ensure privacy and security, all purchases are made using non-identifiable, single-use, and random payment tokens generated in the CanPay App,” reads the press release. CanPay is currently serving businesses in Washington, California, Colorado, Maine, Florida, and Oregon.

Dustin Eide, CEO of CanPay

“Patients who rely on cannabis for preexisting medical conditions should not have to be inconvenienced or have their safety put at risk by a cash-only model,” says Dustin Eide, chief executive officer of CanPay. “Delivery is a mainstream solution and payments should be able to keep up with the industry. By partnering with Harborside, we are providing their patients the benefits of more secure, transparent transactions.” According to Eide, their service is compliant with federal medical cannabis policy and guidance. “CanPay’s service operates under compliance programs built around the Cole Memo and FinCEN Guidance issued by the Department of Justice and the Treasury, respectively, and updated on Feb. 14, 2014 which provided guidance to financial institutions on the conditions with which they can provide banking services to the state regulated cannabis industry without incurring federal action,” says Eide. “Also, CanPay utilizes the Automated Clearing House (ACH) network to affect our services in full transparency. While Visa and MasterCard have established clear rules prohibiting cannabis transactions on their networks, the ACH network relies on the individual financial institutions to determine what type of transactions may occur.” Because of that, Eide says, there’s no need to hide transactions, unlike services that use Visa or MasterCard that require using an obscure legal entity name or a financial intermediary’s name.

According to Dustin Eide, CanPay is designed to be a long-term solution for the cannabis industry’s cash transaction woes. “At approximately 2% fees to the dispensary (and no cost to the consumer), CanPay will be a low cost payment service compared to Visa and MasterCard when they do enter the market, which we’ve been told by our contacts at the companies that this won’t be until federal law changes,” says Eide. He thinks that when MasterCard and Visa begin working with cannabis businesses, they will charge higher transaction fees in the 3-4% range, given the high-risk nature of the market. “CanPay’s challenge is to gain sufficient breadth of coverage with dispensaries and adoption among cannabis consumers to be able to offer that value on a wide scale prior to Visa and MasterCard’s entry into the market.”

Looking to the future, Eide hopes the partnership with Harborside will lead to more business. “CanPay couldn’t ask for a better partner to enter into the California cannabis market, which is expected to top $20 billion by 2020, than Harborside, one of the world’s most respected and well-known cannabis organizations,” says Eide. “It is an honor to be chosen by Harborside, who has their pick of services for the cannabis industry, to facilitate their cashless delivery payments and enhance the safety and convenience of purchasing medicine from Harborside for both their patients and their employees.”

PA Cannabis Banking Committee Announces Formation

By Aaron G. Biros
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The Hoban Law Group announced today the formation of a committee to address banking access issues for the Pennsylvania cannabis market. Steve Schain, Esq., nationally recognized consumer finance litigation, banking law and cannabis law expert practicing with national cannabis law firm Hoban Law Group, is the committee’s spokesman and chair.

Steve Schain, Esq. practicing at Hoban law Group and chairperson of the committee.
Steve Schain, Esq. chair and spokesperson of the committee.

Limited access to banking is an ongoing issue plaguing cannabis businesses due to its federally illegal status. According to Steve Schain, cannabis businesses across the country are forced to pay their vendors, utility bills, payroll, taxes and insurance in cash. “At any time, a dispensary or cultivation operation could have up to $200,000 in cash on site- not having a place to bank opens opportunities for criminal activity,” says Schain. It also presents operational issues for business owners like record keeping or even personal bank accounts getting shut down.

“All of those issues could mean less jobs, less economic activity and less tax revenue for the state,” says Schain. “Fully compliant operations should not have to deal with this.”

Schain formed the committee for a number of reasons, including “Setting the table and starting a dialogue. We want this to be scalable. In the past, the great flaws in banking efforts for cannabis were a lack of cohesion and operating credibility- we hope to approach it from a multi-disciplinary angle and change that,” says Schain.

State Senator Daylin Leach introduced the bill
State Senator Daylin Leach

The committee’s members include three PA politicians: Daylin Leach, State Senator of the 17th District, who introduced the bill that legalized medical cannabis in Pennsylvania, Derek Green, Philadelphia City Councilman and Mary Jo Daley, Representative of the 148th District. Tom Fleming, former assistant director of the Office of Compliance at the Treasury Department’s Financial Crimes Enforcement Network, is also a member of the committee.

A number of committee members are actively involved in the legal cannabis industry and cannabis banking initiatives. Sundie Seefried, a member of the committee, is the chief executive officer of Partner Colorado Credit Union, which is

Lindy Snider, advisor at Greenhouse Ventures and KIND Financial
Lindy Snider, advisor at Greenhouse Ventures and KIND Financial

currently handling over half of Colorado’s estimated billion-dollar cannabis banking market, according to Schain. Lindy Snider, founder and chief executive officer of LindiSkin, advisory board member of KIND Financial and Greenhouse Ventures, is also listed as a member of the committee.

“According to the treasury department, only 301 financial institutions have reported banking cannabis cash,” says Schain. “Few federally chartered banks or credit unions will work with cannabis businesses, but two states-Washington and Maine- have banking regulators sensitive to cannabis banking and we have found 36 banks and credit unions providing financial services to cannabis enterprises.”

The goal with forming this committee is to change that and create an environment where banking for cannabis businesses is much easier. “We plan on drafting a white paper with best practices on compliant and profitable banking on behalf of cannabis-related businesses and financial institutions,” says Schain.

Working from a banker’s perspective is the key here, says Schain. They want to create a working, compliant and profitable system for banks to do business with cannabis cash. One of the problems in the meantime is the high-risk nature of dealing with cannabis companies, leading to an inability to get insurance on those accounts. In the eyes of the federal government currently, conducting cannabis-related transactions may be deemed money laundering and highly illegal. “The real issue is with the federal government and I strongly suspect this is not an issue at the top of the Trump White House agenda.”

Ask the Expert: Straight Talk on Safety, Defense and Security, Part II

By Aaron G. Biros, Bruce E. Lesniak, Lezli Engelking
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In this week’s Straight Talk on Safety, Defense and Security, we answer a reader’s question about traceability in quality processes and offer some practical advice for building a safety and security strategy. Travis Lodolinsky from Gleason Technology submitted this week’s question. For a response, we sit down with Lezli Engelking, founder of the Foundation of Cannabis Unified Standards (FOCUS), to help answer your questions. If you have questions about safety, defense and security in cannabis, please ask them in the comments section below and we will address them in the next edition of Straight Talk on Safety, Defense and Security.

T. Lodolinsky: How are safety processes being tracked in the industry to ensure regulations and quality assurance are being uniformly enforced throughout?

Lezli Engelking: In related industries, such as herbal products or pharmaceuticals, the FDA has created guidelines, or current good manufacturing processes (CGMP) that control for the quality, consistency and safety of the products being produced. Businesses must be certified by independent third parties to demonstrate they are following CGMP to protect public health and consumer safety. CGMP is a proactive approach to quality assurance. A basic tenant of CGMP is that quality cannot be tested into a product after it is made; quality must be built into the product during all stages of the manufacturing process. One common misconception is that CGMP only covers the process of manufacturing itself. CGMP actually covers all aspects of the production process including materials, premises, equipment, storage, staff training and hygiene, how complaints are handled and record keeping.

Because cannabis is federally illegal in the US, the FDA has not developed cannabis-specific CGMP guidelines, so lawmakers do not have the benefit of having those guidelines available to base regulations on. So to answer your question, state cannabis regulations do not track processes and procedures used by cannabis businesses to control for safety or quality because they do not have the federal guidelines. Instead, most state cannabis regulations currently take a reactive approach to safety, mandating only for testing of the final product. While testing is an extremely important and valuable part of any quality management program, just analytics is not enough.

This is precisely why FOCUS was created and how they assist business owners and regulators, while fulfilling the mission of protecting public health, consumer safety and safeguarding the environment. The FOCUS standards are a cannabis-specific system of guidelines (cannabis-specific current good manufacturing practices) to ensure products are consistently produced according to quality standards. FOCUS provides detailed guidance and independent, third party auditing services for all key aspects of the cannabis industry including cultivation, extraction, infusion, retail, laboratory, security, packaging, labeling and sustainability.

CannabisIndustryJournal: What advice can you offer to cannabis businesses for product safety, defense and security prior to standardization?

Bruce E. Lesniak: Businesses that make products infused with cannabis (I call these businesses “plus one” companies because they produce products that include one more ingredient than traditional food products), require a carefully written master plan that specifically addresses the unique qualities, sensitivities and critical areas of the business. When building a comprehensive plan I address three questions:

  • Why (identify the why, this is your preventative, overarching strategy)?
  • How (addresses the “why question” with products, services and training)?
  • What (what is your reactive strategy that addresses actions and activities to be performed in the event of a breech)?

First and foremost, consumer-facing businesses must safeguard their products to the public. One product recall or illness related incident could spell disaster. Build your plan correctly the first time. Contact an industry expert to review your facility and help build and implement your plan. This will save you money by quickly exposing vulnerabilities and providing corrective measures specific to your business needs and requirements. Even though product safety and defense are closely related to security and should share a complementary strategy, product safety and defense are unique (due to standards and regulations), and should be treated as such.

Banks not accepting industry money complicates normal business operations and security planning, causing retail operations to handle and store large sums of cash. I asked industry expert and security professional, Tony Gallo of Sapphire Protection LLC, what is the single most important piece of security equipment you are currently providing for the retail and dispensary owner? “Design an air tight policy of handling money,” says Gallo. “Remove money often from cash registers and place it into the best safe for your application!”

Spend time familiarizing yourself with all things product safety and defense (there are volumes written on food safety and food defense, thus the “plus one” reference). This a great starting point and protecting the consumer protects your business. When it comes to designing your security application, consult an expert! Take into account that the cannabis industry is unique due to its “plus one” ingredient. Therefore you need to build your security systems, applications and policies to systematically protect your employees, facility, suppliers, transportation, manufacturing, distribution, warehousing, supply chain and brand.