Tag Archives: cash

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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
Soapbox

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.