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Break Up Vertical Integration

By Ryan Douglas
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Editor’s Note: This is an excerpt from chapter ten of From Seed to Success: How to Launch a Great Cannabis Cultivation Business in Record Time by Ryan Douglas. Douglas is founder of Ryan Douglas Cultivation, a cannabis cultivation consulting firm. He was Master Grower from 2013-2016 for Tweed, Inc., Canada’s largest licensed producer of medical cannabis and the flagship subsidiary of Canopy Growth Corporation.


Cultivation businesses should consider specializing in just one stage of the cannabis cultivation process. The industry has focused heavily on vertical integration, and some regulating bodies require licensees to control the entire cannabis value chain from cultivation and processing to retail. This requirement is not always in the best interest of the consumer or the business, and will likely change as the industry evolves. Not only will companies specialize in each step of the value chain, but we’ll see even further segmentation among growers that choose to focus on just one step of the cultivation process. Cannabis businesses that want to position themselves for future success should identify their strengths in the crop production process and consider specializing in just one part.

Ryan Douglas, former Master Grower for Tweed and author of From Seed to Success: How to Launch a Great Cannabis Cultivation Business in Record Time

Elsewhere in commercial horticulture, specialization is the norm. It is unlikely that the begonias you bought at your local garden shop spent their entire life inside that greenhouse. More likely, the plant spent time hopping between specialists in the production chain before landing on the retail shelf. One grower typically handles stock plant production and serves as a rooting station for vegetative cuttings. From there, rooted cuttings are shipped to a grower that cares for the plants during the vegetative stage. Once they’re an appropriate height for flowering, they’re shipped to the last grower to flower out and sell to retailers.

Cannabis businesses should consider imitating this model as a way to ensure competitiveness in the future. In the US, federal law does not yet allow for the interstate transport of plants containing THC, but the process can be segmented within states where vertical integration is not a requirement. As we look ahead to full federal legalization in the US, we should anticipate companies abandoning the vertical integration model in favor of specialization. In countries where cannabis cultivation is federally legal, entrepreneurs should consider specialization from the moment they begin planning their business.

Cultivators that specialize in breeding and genetics could sell seeds, rooted cuttings, and tissue culture services to commercial growers. Royalties could provide a recurring source of income after the initial sale of seeds or young plants. Contracting propagation activities to a specialist can result in consistently clean rooted cuttings that arrive certified disease-free at roughly ¼ the cost of producing them in-house. This not only frees up space at the recipient’s greenhouse and saves them money, but it eliminates the risks inherent in traditional mother plant and cloning processes. If a mother plant becomes infected, all future generations will exhibit that disease, and the time, money, energy, labor, and space required to maintain healthy stock plants is substantial. Growers that focus on large scale cultivation would do well to outsource this critical step.

From Seed to Success: How to Launch a Great Cannabis Cultivation Business in Record Time

Intermediary growers could specialize in growing out seeds and rooted cuttings into mature plants that are ready to flower. These growers would develop this starter material into healthy plants with a strong, vigorous root system. They would also treat the plants with beneficial insects and inoculate the crop with various biological agents to decrease the plant’s susceptibility to pest and disease infestations. Plants would stay with this grower until they are about six to 18 inches in height—the appropriate size to initiate flowering.

The final stage in the process would be the flower grower. Monetarily, this is the most valuable stage in the cultivation process, but it’s also the most expensive. This facility would have the proper lighting, plant support infrastructure, and environmental controls to ensure that critical grow parameters can be tightly maintained throughout the flowering cycle. The grower would be an expert in managing late-stage insect and disease outbreaks, and they would be cautious not to apply anything to the flower that would later show up on a certificate of analysis (COA), rendering the crop unsaleable. This last stage would also handle all harvest and post-harvest activities—since shipping a finished crop to another location is inefficient and could potentially damage the plants.

As the cannabis cultivation industry normalizes, so, too, will the process by which the product is produced. Entrepreneurs keen on carving out a future in the industry should focus on one stage of the cultivation process, and excel at it.

Four Payroll Best Practices for Cannabis Companies

By Michelle Lanter Smith
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Among the myriad business challenges facing cannabis companies, processing payroll ranks right up there. On top of the industry’s overarching banking and regulatory hurdles—not to mention prohibitive tax liability—its varied, sometimes unconventional pay models can fall outside the scope of traditional payroll processing.

Obviously, despite the many business issues clamoring for attention, the cannabis industry is powered by people—and for a business to succeed, employees must be paid accurately, legally, and on time.

While the industry is still evolving in many respects, there are steps cannabis businesses can take right now to ensure payroll is processed correctly and compliantly—including these four best practices.

1. Implement Foolproof Tracking Processes for Each Pay Model

In addition to salaried and hourly employees—who can be difficult to time-track, depending how they’re distributed—some growers pay bud trimmers by the ounce or pound of trimmed, manicured product. While such productivity-based compensation may make absolute sense for your business, most conventional time and attendance and payroll software isn’t equipped to administer this pay model.

As a result, some companies may resort to manual tracking—but that can create regulatory recordkeeping challenges of their own. The answer: flexible time and attendance software that allows companies to track employees’ time and/or productivity using a variety of data collection methods for different elements of the workforce. It may mean using conventional biometric time clocks at processing facilities and retail dispensaries…mobile time-tracking apps for gardeners and growers in the field…and versatile apps that track employee output by work order or piece rate, however your business chooses to define it.

Furthermore, regardless of how it’s collected, all that data needs to flow seamlessly into your payroll processing system, ensuring pay is calculated correctly for every pay model. The HR payroll software is out there, but you may need to look for it.

2. Verify that Your Payroll Provider Is Cannabis-Friendly

Perhaps you’ve heard horror stories of cannabis companies getting abruptly dropped by their software providers with a mere 30-days’ notice. Some leading HR payroll software companies have made seemingly overnight decisions to withdraw from servicing the cannabis industry, leaving employers struggling to pay their people. Who can implement new HR payroll software in 30 days?

Make sure your payroll provider is committed to serving the cannabis industry for the long haul. If the commitment isn’t there, start looking elsewhere. Beyond avoiding potentially damaging business disruptions, partnering with a software provider that actively services the cannabis industry will offer unique capabilities you may not find elsewhere.

3. Become an Expert on IRS Code 280e (COGS)

Thanks to section 280e of Internal Revenue code, state-compliant cannabis business cannot deduct business expenses except for the cost of goods sold (COGS).

The saving grace here for growers and processors: labor costs that are inventorial in nature are considered cost of goods sold. That includes the cleaning, trimming and curing of product, as well as packaging and inventory labor.

Therefore, for tax purposes, it’s critical to assign each employee a specific title and role within your operation. This is particularly important for vertically-integrated companies whose employees wear more than one hat.

Say, an employee works part time in cultivation and part time in your retail dispensary. You need to be able to track their work time and compensation separately—i.e., you need a time and attendance system that can track split shifts—and keep detailed records of what labor costs are and aren’t deductible.

 4. Consider Integrated HR Payroll Software

Because of payroll challenges, many cannabis businesses are still piecing together disparate HR systems, such as applicant tracking, time and attendance, payroll and benefits. But when their integration isn’t flawless it can create the need for duplicate inputting and elaborate manual workarounds.

Furthermore, a patchwork software can stop businesses from accessing reports and analytics that inform decision-making and better position the company for growth—while also ensuring the company is in a position to provide whatever regulatory information may be required.

The answer: choose a payroll provider that offers complete, integrated HR payroll software—one that that can demonstrate its long-term commitment to serving the state-licensed cannabis industry.

Cannabis and the Connected Indoor Farm

By Cannabis Industry Journal Staff
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Cannabis Cultivation Virtual Conference Part 3

Cannabis and the Connected Indoor Farm- Technology Spotlight Sponsored by VividGro

By David Friedman, President of VividGro

This presentation discusses:

  • SMAA- Sensing, monitoring, alerting & automating
  • Hardware & software integration
  • Protecting & using your data