By Abraham Finberg, Rachel Wright, Simon Menkes No Comments
In Part 1, we examined the current status of adult use cannabis in Minnesota, paying particular attention to the licensing framework, taxation and social equity considerations. In this article, we’ll cover some important need-to-know info if you’re considering opening an adult use business in the “Land of 10,000 Lakes.”
Starting a Cannabis Business in Minnesota: Important Considerations
As the state does not expect to begin issuing licenses before the first quarter of 2025, now is the time to plan a licensing campaign. With a population of 5,714,000, 64% of which live in the Twin Cities of Minneapolis-Saint Paul, Minnesota is close in population to Colorado, with 5,774,000 residents. Colorado currently has around $1.8 billion in yearly retail cannabis sales. This may suggest a similar possible level of sales for Minnesota once its retail cannabis market matures.
In a recent op-ed piece for Marijuana Moment, the New York cannabis consulting firm of Bridge West Consulting suggested three reasons, in addition to low cannabis excise taxes and reasonable license fees, why entrepreneurs should consider investing in a retail cannabis business in Minnesota:
Minnesota legislation prohibits localities from banning cannabis businesses. This avoids serious problems that have plagued cannabis businesses in other states including California and Montana in which access for cannabis companies has been denied and, in Montana’s case, even reversed. (Minnesota’s new legislation does allow local governments to limit the number of cannabis retailers to one for every 12,500 residents, however.)
Minnesota has allocated funds to assist social equity cannabis businesses, including $6 million to the CanStartup which will fund non-profits to make loans to budding cannabis businesses.
Bridge West makes the interesting observation that Minnesota is bordered by four states—Wisconsin, Iowa, South Dakota and North Dakota—none of which have legalized adult use cannabis. Moreover, an estimated 1.9 million people live outside of Minnesota within a 50-mile radius. That means that not only will Minnesotans not have to compete with out-of-state cannabis dispensaries but will benefit from the purchases of out-of-state residents that live within a comfortable distance.
How a License Application is Scored
HF100 gives some guidance as to how the Office of Cannabis Management (OCM) will score license applications, awarding points for the following 9 categories: social equity status, veteran status, security and record keeping, employee training plan, business plan and financial situation, diversity plan, labor and employment practices, knowledge and experience and environmental plan.
The OCM may award additional points if the applicant would expand service to an underrepresented market. Points may also be awarded to those applicants who can demonstrate a negative impact from cannabis prohibition such as arrest or imprisonment of the applicant or their immediate family. This is different from social equity status and the law says points may be awarded to the applicants “in the same manner as points are awarded to social equity applicants.”
Emphasis on Market Stability; Prohibition of Vertical Integration
Minnesota is taking measures to ensure “market stability,” which it doesn’t specifically define, but which it says involves:
Ensuring an adequate supply of cannabis, but not a glut.
Eliminating the illicit cannabis market.
Promoting a craft cannabis industry.
Prioritizing growth and recovery in communities that have experienced a disproportionate, negative impact from cannabis prohibition.
HF100 states, “The office shall issue the necessary number of licenses in order to ensure the sufficient supply of cannabis flower and cannabinoid products to meet demand, provide market stability, and limit the sale of unregulated cannabis flower and cannabinoid products.”
Continuing its emphasis on “smaller is better,” HF100 says, “Unless the office determines that the issuance of bulk cultivator licenses is necessary to ensure a sufficient supply of cannabis flower and cannabinoid products, the office shall not issue a bulk cultivator license before July 1, 2028.”
Vertical integration is also prohibited. “The office shall not issue licenses to a single applicant that would result in the applicant being vertically integrated.” HF100 goes on to state that microbusinesses are exempted, and that if the OCM determines that vertical integration is necessary to ensure a sufficient supply of cannabis and cannabis products during the first year of such products being sold to customers, it may authorize one or more applicants to be vertically integrated. However, such a group of licenses are very temporary and will expire at the end of that first year period.
An entity holding a cannabis retailer license may also hold a delivery license, a medical retailer license and an event organizer license. But no retailer may hold any other license. Also, no entity may own or operate more than one retail business in one city or county.
Interestingly, Minnesota is also allowing cities or counties to own and operate a municipal cannabis store, possibly similar to the way Utah has government liquor stores which compete with private bars, breweries, wineries and distilleries.
In Summary
Minnesota is just beginning to define and establish its adult use cannabis market. Like other states before it, it is attempting to promote social equity aims at the same time as it’s working to avoid the serious problems of a competitive illegal market and an over-or-under supply of cannabis to its citizens.
With low license fees and excise taxes and a good-sized population, 420CPA believes cannabis entrepreneurs should seriously consider Minnesota for possible investment. The first cannabis retail businesses are not expected to open for another 18 months, so now is the time for businesspeople to lay the groundwork for their applications and future locations.
Metrc combines a software platform with radio frequency identification technology to track plants and cannabis products from seed to sale. The track-and-trace model quickly became adopted by dozens of states to regulate their cannabis markets over the years, becoming an important standard in the industry.
With government contracts in nineteen states and counting, Metrc has become an omnipresent fixture in the United States cannabis market. States work with Metrc to provide their market’s traceability software for the entire supply chain, which helps prevent diversion to the black market, offers security and safety, aids in recalls and regulatory compliance tools.
We sat down with Michael Johnson, CEO of Metrc, to discuss retail challenges, regulations, cybersecurity, compliance and more.
Aaron Green: What are the major compliance challenges retailers face?
Michael Johnson: Major compliance challenges that retailers face will vary from state to state, however, we do see common themes across state lines. Financial services, for instance, has been a historical industry hurdle, as most big banks and credit card companies deny access to their network, making it difficult for retailers across the board – from bank account setup to limited customer and patient payment options to security issues when managing a cash-only retail business. The tides are starting to change with more credit unions and state-chartered banks opening their doors to the industry, along with new payment technologies for consumers to use instead of cash.
Michael Johnson, CEO of Metrc
We also see common operational challenges, including inventory management issues due to human error, lack of consistent quality assurance, and product theft. Retailers regularly face strict packaging, labeling, and product safety laws along with requirements for public health, storage and sanitation procedures and additional layers of security and surveillance.
Finally, access to compliant and retail-friendly technology systems is important as it can have a major operational impact. If a retailer can choose, selecting the right platform will manage all their operational needs – from ID-scanning at check-in to inventory management to banking – while properly integrating with their state’s track-and-trace technology. That’s a major benefit and one that Flowhub brings to the industry, alongside Metrc.
Aaron: How does compliance for retailers differ from cultivators and manufacturers?
Michael: It is important to note that proactive compliance sits at the center of cannabis regulation. Not only does it ensure the maintenance of license(s) and overall businesses, it helps expand and enhance the industry as a whole. As a highly regulated sector, transparent and consistent compliance initiatives provide the necessary foundation for a safe and secure environment, strengthening all levels of the supply chain and the industry at large.
All industry players must adhere to specific licensing and documentation requirements – an expired or illegal license may lead to serious fines and carries the potential of losing the business. In a handful of states, employees may need a license as well. Real estate also comes into play for all license holders, with special cannabis zoning restrictions, such as requiring distance limits between select institutions.
Since retailers are customer- and/or patient-facing, they may experience unique operational requirements compared to cultivators and manufacturers, including ID-checking policies, customer or patient delivery laws, additional packaging and labeling rules, strict dispensation regulations, in-store and on-shelf product placement, retail signage, and product promotion rules, and more.
Just like retail, cultivation and manufacturing compliance will also vary across states, but with a host of additional compliance requirements to keep in mind – for example, biological, chemical, and physical hazards are something that play a larger role at facility operations, which are subject to Occupational Safety and Health Administration (OSHA) rules. Other compliance issues to highlight on the cultivation and manufacturing side include state requirements on inventory reporting, security patrols, waste removal, and meticulous logging.
Aaron: What is your process for evaluating vendor integrations?
Michael: At Metrc, we maintain an efficient and consistent process for evaluating vendor integrations – an example of our commitment to ensuring the safety and security of legal cannabis markets.
First, integrators petition access into specific instance(s) by filling out a form with their basic information (business name, software name, contact info, etc.), along with any state-required agreements that must be signed. The integrator is then given a set of steps to perform in each instance requested. The steps provided are then evaluated by our API Support team. When all steps are performed accurately, the integrator is added into production and an API key is generated for their use. Licensees must also issue the TPI a User API key to gain access to the API. Overall, the process is a combination of meeting state, Metrc, and licensee requirements.
Aaron: Can you address the cybersecurity landscape METRC faces? What is METRC’s process for dealing with cybersecurity threats?
Michael: Cybersecurity threats are shared across industries and although not unique to Metrc or the cannabis sector, cybersecurity threats and the value of data continues to change. Maintaining strict safeguards around data privacy and the security is a top priority at Metrc and we keep a constant pulse on changes in the cybersecurity landscape, to maintain this safeguard for our customers, industry users, and Metrc as a whole.
Aaron: What trends in cannabis regulation are you following?
Michael: Cannabis rules and regulations are ever evolving, which is why it is vitally important for anyone in the industry to stay up to date. Examples of some we are following closely at Metrc include the SAFE Banking Act, Marijuana Opportunity Reinvestment and Expungement (MORE) Act, and Cannabis Administration Opportunity Act (CAOA); and more generally federal legalization, public health protection, and environmental regulations.
Aaron: What’s next for METRC?
Michael: We continue to expand our customer and user feedback loop to ensure our roadmap meets the unique needs of markets and an overall evolving industry/regulatory landscape. Examples include continued performance improvements, more robust analytics capabilities, user-driven functionality updates, and exploring the design of a more sustainable RFID tag.
At its core, Flowhub is a point-of-sale and compliance software company, but they offer much more than that. After becoming the first company to integrate with Metrc in 2015, the platform quickly became a leading software company in the space.
The system helps dispensaries manage inventory, report sales data to regulators, manage payment processing, manage workflows and simplify compliance. Following a few stints at Dixie Elixirs, Weedmaps, and Neos Vape Pens where he saw the day-to-day inefficiencies of cannabis compliance, Kyle Sherman launched Flowhub about eight years ago.
As Founder & CEO, Sherman and his team have taken Flowhub to the next level, with over 1,000 dispensary partners processing $3 billion in annual sales. We caught up with Sherman to ask about compliance challenges facing the industry, 4/20 sales data, integration technology and more.
Aaron Green: What are the major inventory and point-of-sale challenges that retailers face?
Flowhub Founder & CEO Kyle Sherman
Kyle Sherman: Cannabis has yet to be federally legalized and the industry remains a highly regulated environment that’s subject to a patchwork of state and local regulations. Dispensaries face an influx of challenges compared to traditional retailers due to strict compliance requirements. Cannabis retailers are required to report all sales activities and inventory movements to their state regulators, sometimes in real time. If physical inventory does not match what has been reported to regulators, their license is at risk for suspension. Maintaining accurate inventory records across systems (including point of sale, Metrc, and ecommerce menus) is one of the biggest struggles we hear from retailers.
In addition to compliance, lack of financial services and support from large banks and credit card companies is a big challenge for the cannabis industry. This means most transactions in the industry are limited to cash. Managing such large quantities isn’t easy and it puts dispensaries at risk of theft, both internally and externally. While cash alternatives like ACH are becoming increasingly accessible, some retailers are choosing partners with predatory financial terms or those that don’t operate in compliance.
Flowhub’s point of sale software enables a dispensary to provide best-in-class customer experiences without worrying about compliance. The software is purposefully built for the cannabis industry, focused on making the jobs of dispensary owners and staff members as streamlined as possible. Flowhub also helps dispensaries hide the complexities of a cash-intensive industry by allowing customers to use alternative forms of payments at checkout, like ACH and Point of Banking. Cannabis businesses should be able to transact as easily as if they were selling coffee and doughnuts.
Aaron: We’re about a month past 4/20, how was 2022 different and how can retailers prepare for next year?
Kyle: 420 2022 was the highest cannabis sales day in history! Dispensaries brought in twice the revenue compared to an average Saturday which is typically the busiest day of the week.
While ecommerce has become a major trend for dispensaries since the pandemic, traditional retail shopping is still by far the preferred mode of purchasing for consumers. With loosening COVID restrictions, 420 2022 saw a return to in-store shopping and in-person events. We also saw that while flower still stands as the most popular product category, customer product preferences are beginning to shift toward alternative options like edibles, beverages, vapes and concentrates.
To prepare for next year, retailers should analyze their 420 data to understand customer preferences. Dig into customer demographics to find out who was shopping, at what times, and for which products. This information can be used to curate a strategic marketing and execution plan in 2023. With many dispensaries offering similar products, it’s more important than ever to have a distinct experience that differentiates from the competition. Consider forming unique partnerships, ways to give back to your local community and how you can facilitate a shopping experience others cannot replicate.
At Flowhub, you can track your dispensary analytics from your smartphone with our mobile View app. Retailers can see real time performance metrics including sales data (track your sales, before and after-tax, by product category, average basket size, and total number of transactions), employee data (see top selling budtenders for the most recent day, week, month or quarter), and inventory data (view total identified inventory discrepancies by room, or see your most popular vendor and products at a glance). With data at your fingertips, you can stay on the pulse of your business and more adequately prepare for key dates and specific times of year, like 420.
Aaron: Flowhub was the first to integrate Metrc. What synergies were unlocked with this integration?
Kyle: Flowhub has always been involved in federal legalization advocacy. In 2014, I lobbied the CO Department of Revenue to build an open API to Metrc. Integrating with Metrc opened the door for cannabis operators to accelerate workflows, increase accuracy and simplify compliance. Prior to the API, tracking and reporting cannabis sales was painful. We were all handcuffed to manual pen and paper processes. Flowhub paved the way for other software companies to integrate to the Metrc API which is now the standard for track and trace systems in most legal cannabis markets.
Aaron: What’s next for Flowhub?
Kyle: Flowhub is strategically growing alongside the cannabis industry. We’re looking forward to supporting newly legal markets like New Jersey, where AU is now legal. We also recently integrated with Aeropay to offer dispensaries compliant ACH payments. Later this year we’ll have some major product developments coming out that I can’t disclose just yet but they’re very exciting! Stay tuned.
As an experiential marketer that works with a lot of vice-oriented brands, I’ve always been fascinated by the story of the rise of spirits in the US – a history marked by ingenuity in the face of heavy restrictions, clashing social norms, crime and political ideals. Since then, those same qualities have emerged in the story of cannabis and how, against all odds, it has recently begun to push its way into the mainstream. But on the path to legalization, cannabis can also learn a lot from the spirits industry about what not to do.
For example, when laws governing the spirits industry were written in the post-Prohibition 1930s, the federal government wanted to create an equitable landscape. So, they created a 3-tier system – manufacturers or importers must sell to wholesalers, wholesalers must then sell to retailers and retailers sell to us. They figured that keeping manufacturing interests separate from wholesale and retail interests would keep any large company from owning an entire supply chain, muscling out smaller competitors.
In theory, it’s not a bad idea. Imagine the consequences of massive companies like Diageo or AB InBev using their money to pay bars and liquor stores to only stock their brands and not competitors. Add on the Tied House Laws, which basically says an entity in one of the three categories cannot have an ownership stake in any of the others, and you get a seemingly even-handed marketplace.
Tied House Laws theoretically limit one entity from monopolizing a supply chain
In truth, it makes it almost impossible to be disruptive or for new brands to break through. Other industries have innovated by cutting out the middleman and selling direct-to-consumer – something that simply cannot happen in alcohol (minus the wineries and distilleries that can sell direct out of their tasting rooms). Also, now distributors are so consolidated that there are only one or two big distribution companies in each state. So, as a company trying to bring a new product to market, you have to get into one of these highly selective and competitive distributors if you are going to be successful – a challenging ask for a small, independent brand.
Protection racket
Now, imagine that same challenge coming to the cannabis space. With legalization around the corner, the adult use (as opposed to medical use) cannabis industry could easily look like alcohol in the rules that will be set up.
The demand for high quality cannabis continues to increase, but the prices need to level out to stave off the black market.
Right now, adult use manufacturers can sell their products to dispensaries directly. Some use a distributor, but there is no nationwide mandate to – which is probably for the best. If a distributor isn’t a requirement, it forces brands to offer something new to differentiate themselves. It will spark innovation, rather than add an extra profit margin that will get rolled into the final price – a price that is already higher than it should be due to the murky federal legal status. Adding complexity and cost will only make it harder to compete with the illicit market. For the industry to grow, costs for illicit cannabis can’t be lower than its legal counterpart.
Of course, we are in the nascent stages of legalization here and we’ve come a long way culturally and technologically since the 30s. But remember, the rules governing alcohol were written nearly 100 years ago along with the passage of the 21st amendment repealing prohibition. Startlingly, those laws haven’t changed that much since they were written, so any mistakes made now in dealing with the cannabis industry could last for a long time.
A new way forward
What the cannabis industry needs is a new model for the adult use/recreational space, keeping some of what exists in the alcohol industry but without ever mandating use of a distributor – the middle tier. This would mean keeping Tied House Laws in place and applying them to cannabis so that a manufacturer could never hold an interest in a retailer, while still allowing them to sell directly to dispensaries and to consumers. Currently, some states allow for vertical integration, which would change under Tied House Laws.
This should be pretty simple, since most states are already separating licenses by type of activity (manufacturer, retailer, etc.) and it would promote competition while bringing the widest array of products possible to each consumer. Also, it would prevent any behemoths from squeezing out the up and comers.
Constant innovation is a hallmark of the cannabis market and a key factor in continuous growth.
Of course, some retail license allowances could be considered on a case-by-case basis. For example, I would carve out an exception that growers/manufacturers could sell direct to consumers through a single “tasting room” at their brand home. This is similar to the operations of microbreweries, distilleries and wineries. It would encourage education for consumers, and provide great opportunities for brands to show why their products are better or unique.
Given the technology and logistics solutions available to businesses in a 21st century economy, mandated distributors create a sometimes-unnecessary barrier to an already efficient supply chain. If mandated, prices will inflate to cover added margin, thus making it harder to bring consumers over from the legacy market to the legal one. I’m not against the idea of a distributor – they can add tremendous value, but the mandate would seriously curtail industry growth.
Direct-to-retail and direct-to-consumer sales are necessary for the economic health and growth of the industry. Without this, using alcohol as a cautionary tale, at some point the middle tier cannabis brands will inevitably begin to wield an outsized amount of power. We are living at a time where innovation is going to be the key to explosive growth in the cannabis industry, so it’s important to do everything possible to let the market find its way without falling into a century-old trap.
By Gregory S. Kaufman, Jessica R. Rodgers No Comments
With the signing of the Cannabis Control Act (the Act) on April 21, 2021, Virginia became the first southern state to legalize adult use cannabis and just the fourth state to do so through the legislature. Legalizing adult use cannabis through the legislature, as opposed to through the ballot box, is not the typical route states have followed up to now. Eleven of the sixteen states and the District of Columbia have legalized adult use cannabis through the use of ballot measures. Virginia joins Vermont, Illinois, New York and New Mexico (which legalized after Virginia) as one of the few states that have gone the legislative route. Under Governor Northam’s administration, the path to legalization was swift, taking less than four months from introduction to passage.
Governor Northam added amendments to the already passed Senate Bill 1406 and the General Assembly voted to approve those amendments, with the Lieutenant Governor breaking the tie in the Senate’s vote. Upon signing, Governor Northam called the law a step towards “building a more equitable and just Virginia and reforming our criminal justice system to make it more fair.” This message and the opportunities to promote social equity through a legal cannabis industry have been consistent points of advocacy made by supporters as the bill advanced to becoming law.
Prior to the Governor’s amendments, the Act under consideration set July 1, 2024 as the date on which both legal possession and adult use sales would begin. The Governor decided to accelerate the date for legal possession to July 1 of this year, a decision believed to have been influenced by data showing that Black Virginians were more than three times as likely to be cited for possession, even after simple possession was decriminalized in the state a year prior. The regulated adult use market is still set to begin making sales on July 1, 2024; however, it remains possible that this date could be advanced through the legislature in the meantime. Nevertheless, Virginia is on track to becoming the first southern state with an operating regulated commercial cannabis market.
Creating an Administrative Structure for the Adult Use Program
Virginia became the first state in the South to legalize adult use cannabis
This sweeping fifty-page law creates the Cannabis Control Authority to regulate the cultivation, manufacture, wholesale and retail sale of cannabis and cannabis product. The Act further lays the groundwork for licensing market participants and regulating appropriate use of cannabis; defining local control; testing, labeling, packaging and advertising of cannabis and cannabis products; and taxation. The Act also contains changes to the criminal laws of the Commonwealth. Companion to the Act are new laws addressing the testing, labeling and packaging of smokable hemp products and manufacturing of edible cannabis products. Additionally, the Cannabis Equity Reinvestment Board was created to address the impact of economic divestment, violence and criminal justice responses to community and individual needs through scholarships and grants.
While persons 21 years or older may possess up to one ounce of cannabis and cultivate up to four plants for personal use per household beginning on July 1, 2021, there are a host of regulations to be written in order to regulate the adult use market. These regulations will be the devil in the details of how the regulated market will work. Regardless, the Cannabis Control Act does establish the framework for adult use cannabis that is unique to Virginia and designed to promote and encourage participation from people and communities disproportionately impacted by cannabis prohibition and enforcement.
The Cannabis Control Authority (CCA) will consist of a Board of Directors, the Cannabis Public Health Advisory Council, the Chief Executive Officer and employees. The Board will have five members appointed by the Governor and confirmed by the legislature, each with the possibility of serving two consecutive five-year terms. The Board is tasked with creating and enforcing regulations under which retail cannabis and cannabis products are possessed, sold, transported, distributed, and delivered. It is expected that the Board will begin discussing regulations next year and that applications for licenses for cannabis cultivation facilities, manufacturing facilities, cannabis testing facilities, wholesalers, and retail stores will begin to be accepted in 2023. Importantly, a Business Equity and Diversity Support Team, led by a Social Equity Liaison, and the Equity Reinvestment Board, led by the Director of Diversity, Equity and Inclusion, are to contribute to a plan to promote and encourage participation in the industry by people from disproportionately impacted communities.
Regulating Participation in the Market
The Act empowers the Board to establish a robust and diverse marketplace with many entry opportunities for market participants. Up to 450 cultivation licenses, 60 manufacturing licenses for the production of retail cannabis products, 25 wholesaler licenses and 400 licenses for retail stores can be granted. These numbers do not include the four permits granted to pharmaceutical processors (entities that cultivate and dispense medical cannabis) under the Commonwealth’s medical program.
Virginia Governor Ralph Northam Image: Craig, Flickr
In addition to the sheer number of licenses that can be granted, the Act devises a unique approach to addressing concerns of a concentration of licenses in too few hands and a market dominated by large multi-state operators. At the same time, it sets up a mechanism to capitalize two cannabis equity funds intended to benefit persons, families and communities historically and disproportionately targeted and affected by drug enforcement through grants, scholarships and loans. Over-concentration and market dominance concerns are addressed by limiting a person to holding an equity interest in no more than one cultivation, manufacturing, wholesaler, retail or testing facility license. This eliminates the ability of companies to be vertically integrated from cultivation through retail sales operations. However, there are two exceptions to the impediment to vertical integration. First, the Board is authorized to develop regulations that permit small businesses to be vertically integrated and ensure that all licensees have an equal and meaningful opportunity to participate in the market. These regulations will be closely scrutinized by those looking to enter Virginia’s regulated market once they are proposed. Qualifying small businesses could benefit substantially from the economic advantages commensurate with being vertically integrated, assuming they have the access to the capital needed to achieve integration and operate successfully. The second exception allows permitted pharmaceutical processors and registered industrial hemp processors to hold multiple licenses if they pay $1 million to the Board (to be allocated to job training, the equity loan fund or equity reinvestment fund) and submit a diversity, equity and inclusion plan for approval and implementation. Consequently, Virginia is attempting to fund, in part, its ambitious social equity programs by monetizing the opportunity for these processors to participate vertically in the adult use market.
Those devilish details of how this market will function, and how onerous compliance obligations will be, will emanate from those yet to be proposed regulations covering many areas and subject matters including:
Outdoor cultivation by cultivation facilities;
Security requirements;
Sanitary standards;
A testing program;
An application process;
Packaging and labeling requirements;
Maximum THC level for retail products (not to exceed 5 mg per serving or 50 mg per package for edible products);
Record retention requirements;
Criteria for evaluating social equity license applications based on certain ownership standards;
Licensing preferences for qualified social equity applicants;
Low interest loan program standards;
Personal cultivation guidelines; and
Outdoor advertising restrictions.
Needless to say, the CCA Board has a lot work ahead in order to issue reasonable regulations that will carry out the dictates in the Act and encourage the development of a well-functioning marketplace delivering meaningful social equity opportunities.
Much work needs to be done before July 1, 2024 to prepare for its debutThe application process for the five categories of licenses will be developed by the Board, along with application fee and annual license fee amounts. It is not clear how substantial these fees will be and what effect they will have on the ability of less-well-capitalized companies and individuals to compete in the market. The Act dictates that licenses are deemed nontransferable from person to person or location to location. However, it is not entirely clear that changes in ownership will be prohibited. The Act contemplates that changes in ownership will be permitted, at least as to retail store licensees, through a reapplication process. Perhaps the forthcoming regulations will add clarity to the transferability of licenses and address the use of management services agreements as a potential workaround to the limitations in license ownership.
Certain requirements particular to certain license-types are worthy of highlighting. For example, there are two classes of cultivation licenses. Class A cultivation licenses authorize cultivation of a certain number of plants within a certain number of square feet to be determined by the Board. Interestingly, Class B licenses are for cultivation of low total THC (no more than 1%) cannabis. Several requirements specific to retail stores are noteworthy. Stores cannot exceed 1,500 square feet, or make sales through drive-through windows, internet-based sales platforms or delivery services. Prohibitive local ordinances are not allowed; however, localities can petition for a referendum on the question of whether retail stores should be prohibited in their locality. Retail stores are allowed to sell immature plants and seek to support the home growers, an allowance that is fairly unique among the existing legal adult-use states.
Taxing Cannabis Sales
Given the perception that regulated cannabis markets add to state coffers, it is little surprise that Virginia’s retail market will be subject to significant taxes. The taxing system is straightforward and not complicated by a taxing regime related to product weight or THC content, for example. There is a 21% tax on retail sales by stores, in addition to the current sales tax rates. In addition, localities may, by ordinance, impose a 3% tax on retail sales. These taxes could result in a retail tax of approximately 30%.
Changes to Criminal Laws
Changes to the criminality of cannabis will have long lasting effects for many Virginians. These changes include:
Fines of no more than $25 and participation in substance abuse or education programs for illegal purchases by juveniles or persons 18 years or older;
Prohibition of warrantless searches based solely on the odor of cannabis;
Automatic expungement of records for certain former cannabis offenses;
Prohibition of “gifting” cannabis in exchange for nominal purchases of some other product;
Prohibition of consuming cannabis or cannabis products in public; and
Prohibition of consumption by drivers or passengers in a motor vehicle being driven, with consumption being presumed if cannabis in the passenger compartment is not in the original sealed manufacturer’s container.
These changes, and others, represent a balancing of public safety with lessons learned from the effects of the war on drugs.
Potpourri
The Act contains myriad other noteworthy provisions. For example, the Board must develop, implement and maintain a seed-to-sale tracking system for the industry. Plants being grown at home must be tagged with the grower’s name and driver’s license or state ID number. Licenses may be stripped from businesses that do not remain neutral while workers attempt to unionize. However, this provision will not become effective unless approved again by the legislature next year. Banks and credit unions are protected under state law for providing financial services to licensed businesses or for investing any income derived from the providing of such services. This provision is intended to address the lack of access to banking for cannabis businesses due to the federal illegality of cannabis by removing any perceived state law barriers for banks and credit unions to do business with licensed cannabis companies.
The adult use cannabis industry is coming to Virginia. Much work needs to be done before July 1, 2024 to prepare for its debut. However, the criminal justice reforms and commitment to repairing harms related to past prohibition of cannabis are soon to be a present-day reality. Virginia is the first Southern state to take the path towards legal adult use cannabis. It is unlikely to be the last.
Part One of this series took a look at how the regulated cannabis market can only be understood in relation to the previous medical market as well as the ongoing “traditional” market. Part Two of the series describes how regulation defines vertical integration in California cannabis, and conversely, how vertical integration can address some of the problems that the regulations create. But first:
A Grain of Salt
Take the conventional wisdom about vertical integration with a grain of salt. Expected benefits may not materialize under the current circumstances:
Overall, the business environment is highly challenging due to extensive regulation, over taxation, insufficient retail capacity and competition from the “traditional” market. As a result, integrating businesses upstream or downstream may mean capturing losses, not profits.
The three major types of cannabis activity span three major industrial sectors: raw materials (i.e., cultivation), manufacturing and service (distribution, testing and retail). As a result, a vertically integrated company needs to carry out very different types of activity, which require very different types of core competencies, equipment and facilities.
Developing core competencies is especially challenging because each of the major cannabis sectors is still evolving.
Realizing the benefits of vertical integration requires an additional core competency in cross-sector operations.
Regulations Define the Supply Chain
California’s regulations define the cannabis supply chain by defining both the individual links (licensees) and the relationships between those links. Therefore, an understanding of vertical integration must be grounded in an understanding of the underlying regulatory definitions.
The regulatory definition of each link is extensive. For example, each licensee is tied to a specific facility, and must have its own procedures for production, inventory control, security, etc. When the links are strung together, this definition tends to preserve operational redundancies, and impede operational integration.
Overall, the relationships between the links are primarily defined in terms of preserving the chain of cannabis custody. On top of that, regulations define very specific (and very consequential) links between certain licenses, as discussed below.
A Taxonomy of Links
There are currently 26 types of cannabis license in California, 25 of which can be vertically integrated:
Cultivation – 14 licenses, including 4 sizes each for Indoor (up to 22,0000 sf), Mixed Light (up to 22,000 sf) and Outdoor (up to 1 acre), as well as Nursery and Processor (drying, trimming and packaging/labeling). Note that cultivation licenses are the only licenses that restrict the scale of activities.
Manufacturing – 5 licenses, including volatile extraction, non-volatile extraction, everything but extraction (i.e., infusion) and packaging/labeling.
Testing (Type 8), for testing cannabis according to state standards prior to sale. The owner of a testing license cannot own any other type of license.
Distribution (Type 11), acts as the gateway between cultivation and manufacturing on the one hand, and retail on the other. The distributor’s gateway status is entirely an artifact of regulation – cannabis must be officially tested before it is sold to a consumer, and only a distributor can order the official test. All products must stay in a “quarantine” area at the distributor until they pass testing. Products that fail testing must be destroyed if they cannot be remediated.
Transport (Type 13), which can move cannabis between licensees (with a narrow exception). This license does not allow for official testing.
Delivery Retail (Type 10), for delivery services that are subject to the vagaries of software platforms and the intransigence of local authorities.
Microbusiness (Type 12), which allows the licensee to carry out cultivation (up to 10,000 square feet), non-volatile manufacturing, distribution and retail.
Event Organizer
Self-Distribution – A Case of Useful Integration
You may gather from the previous section that shoving a gratuitous and mandatory distributor into the middle of the supply chain creates problems for cultivators and manufacturers. Savvy operators solve this problem by getting a distribution license. This allows the cultivator or manufacturer to:
Pick the time and place for the testing of its cannabis products.
Avoid paying someone else for the storage of cannabis products as they await test results or purchase.
Reduce transport costs (particularly if the distributor is near the other operations).
Sell directly to retailers.
The bottom line is that vertical integration in California cannabis is useful as a means to an end, as opposed to an end in itself. Therefore, cannabis operators should carefully consider how vertical integration will benefit their core business before incurring the risks and expenses associated with an additional license.
This article is an opinion only and is not intended to be legal advice.
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.
From seed-to-sale, overseeing processing and extraction as well as navigating a dense web of complicated regulations, cannabis businesses have unique inventory management needs.
Unfortunately, there is no magical, one-size-fits-all inventory solution that is perfect for all cannabis companies. That is why cannabis businesses must take time to properly evaluate and identify an inventory system that is effective for their specific needs and requirements.
Inventory management plays a crucial role in maintaining productive and compliant day-to-day operations — and when seeking investment — as it has a direct impact on a business’s bottom line. Because of the regulatory and legal complexities in the industry, using an incomplete, rudimentary or outdated inventory system can lead to serious financial discrepancies guaranteed to cause headaches for accounting professionals and business leaders.
The right system also can give businesses actionable data to respond to changing market conditions, business needs and growth opportunities as they arise quickly. This visibility is a necessary aspect of ensuring your cannabis businesses can achieve long-term, sustainable growth.
Here are some guidelines to keep in mind when shopping for an inventory management system:
Use the Cloud
First, be sure your company is using cloud-based accounting software. This will instantly simplify both your accounting and inventory processes. Cloud-based solutions ensure company financial and inventory records are up to date and accurate.
Do Not Rely on Your Accounting Software
A plant tagged with a barcode and date for tracking
Your accounting software may provide native functionality for inventory tracking — but do not use it. Such native inventory functions are not robust or complex enough to properly maintain the complicated inventories of cannabis businesses. For instance, your business might be cultivating numerous plants across several sites, tracking plant movement and processing, or packaging it internally. You may be selling your products at other dispensaries or supplying other dispensaries’ products at your counter. Simply put: Cannabis businesses need more sophisticated solutions to track sales, monitor supplies, oversee shipments and remain informed on where products originate from and how frequently to re-order. Native functionalities too often do not provide such robust features.
Look for Direct Integration
That said, business owners want to ensure their inventory system directly and seamlessly integrates with their cloud accounting software. You should not have to input or upload information when setting up inventory software manually. In today’s world, the two systems should automatically and easily share information with each other. Each system’s website will often say whether it can integrate with various accounting platforms, but it never hurts to do some additional research. For example, both Fishbowl and Trade Gecko can be directly integrated with Xero. Some systems even offer a demo environment to let business owners experience what the integration will look like.
Explore Invoicing Capabilities
Some inventory management systems include invoicing capabilities, which can simplify the invoicing process – or even automate it. Such functionality reduces the risk of error when transferring data between programs. A consolidated system that automatically links inventory and invoicing allows business leaders to update invoices easily, mark orders as paid or unpaid, filled or unfilled, all while keeping a close eye on inventory. Some inventory solutions even offer dynamic reporting that displays real-time sales reports and fulfillment processes – making it easier than ever to work with vendors, identify and eliminate unnecessary costs and control cash flow.
Do Not Just Sign Up with the First System You Find
Choosing an inventory management system requires plenty of thought, and no two solutions look exactly alike. So, do not rush into a commitment just to get it over with and move on. Instead, spend enough time learning about various systems and their options to guide a confident purchasing decision. Going with the wrong system and having to switch later not only wastes time and money, but it can undo many of the efficiencies you worked to implement.
Consult an Accounting or Business System Expert
Working with accounting and business systems experts will provide insights related to your short- and long-term business goals. Such experts can help business owners understand exactly how their specific inventory ought to be tracked to avoid serious discrepancies or non-compliance. In addition, a strong accounting professional can act as an invaluable resource and partner when it comes to selecting and personalizing an inventory management system and identifying inaccuracies or inefficiencies. A good tax pro also can serve as a point person between the cannabis business and the software developer to address initial customization and setup or any issues that may arise.
Running a cannabis business requires an investment of time and money from the very start. The good news: You do not have to spend an arm and a leg on your inventory management system to find something that works. Some solutions marry affordability with efficiencies — but be sure to explore several options to find the right fit, keeping in mind the guidelines laid out above. Remember: Cost does play an important role, but the system’s capabilities are more vital to positioning your cannabusiness for sustainable, long-term growth and compliance.
LabVantage Solutions, known in other testing industries as a leader in laboratory information management systems (LIMS), has launched their own cannabis-specific LIMS. Unveiled at the Cannabis Science Conference in Portland, OR, the purpose-built software is designed specifically for cannabis testing and certification.
Here are a few key highlights of their system, taken from the press release:
Available through perpetual licensing or SaaS
One platform for all tests, instruments, sample information, and results data, with option to embed ELN, LES, and other modules
Registers sample requests, including a portal for remote requests from growers and distributors
Fully audited sample lifecycle and audit trail
Certificates of Analysis customized for local regulatory requirements
Includes American Herbal Pharmacopoeia® tests for Cannabis Inforescense.
Bob Voelkner, vice president of sales and marketing
LabVantage says their system can support ISO/IEC 17025 compliance, ISO 9001:2015, 21 CFR Part 11 and Annex 11 and GLPs as well. According to Bob Voelkner, vice president of sales and marketing, it has a very open architecture as well as web services technology, which allows for integration with METRC and other traceability software platforms. “We know the testing methodologies these labs use, so the customer doesn’t have to create that from scratch,” says Voelkner. “This is meant to be out of the box and ready-to-use, so the customer can get up and running with minimal lag time.” LabVantage has actually been a provider of LIMS solutions for over 30 years and they serve a broad range of lab types.
A screenshot showing the details collected in a harvest lot
Voelkner says they’ve been working with clients at cannabis labs over the past few years to configure their LIMS for this space specifically. “The lab managers can modify workflows on their own without having to write code,” says Voelkner. “We have a well-established solution with a good track record, that’s been around for a while and is proven. Some other players that are brand new to the space may be new to LIMS and that may not be a good thing. We are a market leader in the global LIMS space with a proven product that is very well established and very powerful.” Voelkner adds that lab managers get to own their data, not LabVantage. “You own the data. It is your database and it is proprietary to you. It is yours to use as you see fit.”
Lab managers have the option to configure the system to adapt to new compliance issues themselves, or work with the LabVantage professional services team to build it out further. “This particular space is new and emerging, it is pretty dynamic — we see a lot of change happening,” says Voelkner. “We believe this space needs a highly flexible platform and this is a proven technology solution with a lot of configurability built into it.”
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In a recent op-ed piece for Marijuana Moment, the New York cannabis consulting firm of Bridge West Consulting suggested three reasons, in addition to low cannabis excise taxes and reasonable license fees, why entrepreneurs should consider investing in a retail cannabis business in Minnesota:
Continuing its emphasis on “smaller is better,” HF100 says, “Unless the office determines that the issuance of bulk cultivator licenses is necessary to ensure a sufficient supply of cannabis flower and cannabinoid products, the office shall not issue a bulk cultivator license before July 1, 2028.”
