Update: Governor McKee has signed the Rhode Island Cannabis Act into law, making it the 19th state to legalize adult use cannabis.
In Rhode Island this week, lawmakers voted to approve a bill that would legalize and regulate adult use cannabis. The state’s legislature passed the bill with overwhelming majorities in both the House of Representatives and the Senate.
The House voted 55-16 and the Senate voted 32-6 to approve the Rhode Island Cannabis Act, a bill that allows adults over 21 to possess, purchase and grow cannabis. The legislation contains a provision for automatic review and expungement of past cannabis convictions. Similar to other neighboring states, the bill also allows for allocating tax revenue from cannabis sales to communities most harmed by cannabis prohibition, such as low income neighborhoods.
Rhode Island Gov. McKee
Governor Daniel McKee has expressed support for the bill previously and is expected to sign it into law. According to Jared Moffat, state campaigns manager for the Marijuana Policy Project, Rep. Scott Slater, Sen. Josh Miller and Rep. Leonela Felix are to thank for their leadership in bringing the bill to a vote. “We are grateful to Rep. Scott Slater and Sen.Josh Miller for their years of leadership on this issue. Rhode Islanders should be proud of their lawmakers for passing a legalization bill that features strong provisions to promote equity and social justice,” says Moffat. “We’re also thankful to Rep. Leonela Felix who advocated tirelessly for the inclusion of an automatic expungement provision that will clear tens of thousands of past cannabis possession convictions.”
Among other provisions, the bill establishes a 10% sales tax in addition to the state’s normal 7% sales tax and 3% local sales tax. A quarter of all retail licenses will go to social equity applicants and another quarter of all licenses will be reserved for worker-owned cooperatives. The legislation also includes a “social equity assistance fund” that will offer grant money, job training and social services to communities most impacted by cannabis prohibition.
As the regulated cannabis industry matures, M&A activity is expected to continue accelerating. Whether they are existing licensed businesses looking for acquisition opportunities or new investor groups seeking to enter or expand their positions in the industry, investors should recognize the special due diligence challenges associated with cannabis industry transactions.
Above all, investors should avoid the temptation to omit or short-circuit long-established due diligence practices, mistakenly believing that some of these steps might not be relevant to cannabis and hemp operations. Despite the unique nature of the industry, thorough and professional financial, tax and legal due diligence are essential to a successful acquisition.
Surging M&A activity
Over the past few years, as the cannabis industry matured and the regulatory environment evolved, M&A activity involving cannabis and hemp companies has undergone several cycles of expansion and contraction. Today, the expansion trend clearly has resumed. Although the exact numbers vary from one source to another, virtually all industry observers agree that 2021 saw a strong resurgence in cannabis-related M&A activity, with total transactions numbering in the hundreds and total deal values reaching into billions of dollars. Moreover, most analysts seem to agree that so far, the pace for 2022 is accelerating even more.
Today, many existing cannabis and hemp multistate operating companies are in an acquisitive mood as they look for opportunities to scale up their operations, enter new markets, and vertically integrate. At the same time, the projections for continued industry growth over the next decade have attracted a number of investment funds and private equity groups, which were formed specifically for the purpose of investing in cannabis and hemp businesses.
These two classes of investors often pursue distinctly different approaches to their transactions. Unlike the largely entrepreneurial cannabis industry pioneers now looking to expand, the more institutional investors are accustomed to working with professional advisers to perform financial, tax and legal due diligence as they would for a transaction in any other industry.
Among both groups, however, there is sometimes a tendency to misunderstand some of the transactional risk elements associated with cannabis M&A deals. In many instances, buyers who are generally sensitive to potential legal and regulatory risks will underestimate or overlook other risks they also should examine as part of a more conventional financial and tax due diligence effort.
For example, since much of the value of a licensed cannabis operation is the license itself, investors often rely largely on their own industry understanding and expertise to assess the merits of a proposed acquisition, based primarily on their estimation of the license’s value. This practice provides acquirers with a narrow and incomplete view of the deal’s overall value. More importantly, it also overlooks significant areas of risk.
Because cannabis acquisition targets typically are still quite new and have no consistent earning records, acquirers also sometimes eschew quality of earnings studies and other elements of conventional due diligence that are designed to assess the accuracy of historical earnings and the feasibility of future projections.
Such assumptions and oversights often can derail an otherwise promising transaction prior to closing, causing both the target and the acquirer to incur unnecessary costs and lost opportunities. What’s more, even if the deal is eventually consummated, short-circuiting the normal due diligence processes can expose buyers to significant unanticipated risk down the road.
Recurring issues in cannabis acquisitions
The most widely recognized risks in the industry stem from the conflict between federal law and the laws of various states that have legalized cannabis for medical or adult recreational use. The most prominent of these concerns relates to Section 280E of the Internal Revenue Code (IRC 280E).
Although its use is now legal in many states, cannabis is still classified as a Schedule I substance under the federal Controlled Substances Act. IRC 280E states that any trade or business trafficking in a controlled substance must pay income tax based on its gross income, rather than net income after deductions. As a result, cannabis businesses are not entitled to any of the common expense deductions or tax credits other businesses can claim.
The practical effect of this situation is that cannabis-related businesses – including growers, processors, shippers and retailers – often owe significant federal income tax even if they are not yet profitable. Everyone active in the industry is aware of the issue, of course, and any existing operating company or investment group will undoubtedly factor this risk into its assessment of a proposed acquisition target.
The challenge can be exacerbated, however, by other, less widely discussed factors that also affect many cannabis businesses. These issues further cloud the financial, tax and regulatory risk picture, making thorough and professional due diligence even more critical to a successful acquisition.
Several of these issues merit special attention:
Nonstandard accounting and financial reporting practices. As is often the case in relatively young, still-maturing businesses, acquisition targets in the cannabis industry might not have yet developed highly sophisticated accounting operations. It is not uncommon to encounter inadequate accounting department staffing along with financial reporting procedures that do not align with either generally accepted accounting principles or other standard practices. In many instances, company management is still preparing its own financial statements with minimal outside guidance or involvement by objective, third-party professionals. Significant turnover in the management team – and particularly in the chief financial officer position –is also common, as is a general view that accounting is a cost center rather than a value-enhancing part of the management structure.
Such conditions are not unusual in young businesses that are still largely entrepreneurial in spirit and practice. In the cannabis industry, however, this situation is also a reflection of many professional and business services firms’ longstanding reluctance to engage with cannabis operators – a hesitancy that still affects some organizations.
When customary business practices are not applied or are applied inconsistently, acquiring companies or investors should be prepared to devote more time and attention – not less – to conventional financial due diligence. The expertise of professional advisers with direct experience in the industry can be of immense benefit to all parties in this effort.
Restructuring events or nonrecurring items in financial statements. Restructuring events and nonrecurring items are relatively common in many new or fast-growing businesses, and they are especially prevalent among cannabis operations. In many instances, such companies have engaged in multiple restructuring events over a short period of time, often consolidating operations, taking on new debt, and incurring various one-time costs that are not directly related to the ongoing operations of the business.
The inclusion of various nonrecurring items within the historical financial statements can make it much more difficult for a buyer or investor to accurately identify and assess proforma operating results, especially in businesses that have not yet generated consistent profits. Here again, applying previous experience in clearing up the noise in the financial statements can help improve both the accuracy and timeliness of the due diligence effort.
Run-rate results inconsistent with historical earnings or losses. A company’s run rate – an extraction of current financial information as a predictor of future performance – is a widely used tool for creating performance estimates for companies that have been operating for short periods of time or that have only recently become profitable. In cannabis businesses, however, run-rate estimates sometimes can be unreliable or misleading.
Because it is based only on the most current data, the run rate often does not reflect significant past events that could skew projections or recent changes in the company’s fundamental business operations. Because such occurrences are relatively common in the industry, the results of run-rate calculations can be inconsistent with the target company’s historical record of earnings or losses.
Historical tax and structuring risks new owners must assume. Like many other new businesses, cannabis operations often face cash flow and financing challenges, which owners can address through alternative strategies such as debt financing, stock warrants, or preferred equity conversions. Such approaches can give rise to complex tax and financial reporting issues as tax authorities exercise their judgment in interpreting whether these items should be reported as liabilities or equity derivatives. The situation is often complicated further by various nonstandard business practices and the absence of sophisticated accounting capabilities, as noted earlier.
As a consequence, financial statements for many cannabis companies – including a number of publicly listed companies – often contain complex capital structures with numerous types of debt warrants, conversion factors and share ownership options. Although an acquisition would, in theory, clean up these complications, buyers nevertheless must factor in the risk of previous noncompliance that might still be hidden within the organization – a risk that can be identified and quantified only through competent and thorough due diligence.
Not as simple as it seems
On the surface, the fundamentals of the cannabis industry are relatively straightforward, which is one reason it appeals to both operators and investors. For example, participants at every stage of the cannabis business cycle – growing and harvesting, processing and packaging, shipping and distribution, and ultimately marketing and retailing – can readily apply well-established practices from their counterparts in more conventional product lines.
The major exception to this rule, of course, is the area of regulatory compliance, which is still shifting and likely will continue to do so for the foreseeable future. Outside of this obvious and significant exception, however, most other aspects of the industry are relatively predictable and manageable.
When viewed in this light and in light of the continued growth of the industry, it is easy to see why cannabis-related acquisitions are so appealing to existing business operators and outside investors alike. It is also easy to understand why buyers might feel pressure to move quickly to take advantage of promising opportunities in a fast-changing industry.
As attractive as such opportunities might be, however, buyers should take care to avoid shortcuts and resist the urge to sidestep established due diligence procedures that can reveal potential accounting and financial statement complications and the related compliance risks they create. The unique nature of the cannabis industry does not make these practices irrelevant or unnecessary. If anything, it makes professional financial, tax, and legal due diligence more important than ever.
Crowe Disclaimer: Qualified organizations only. Independence and regulatory restrictions may apply. Some firm services may not be available to all clients. Given the continued evolution and inconsistency of various state and federal cannabis-related laws, any company should seek competent legal advice relating to its involvement in the cannabis industry, including when considering a potential public offering as a cannabis-related company.
Regulators in New York are continuing their push forward in launching the adult use cannabis market. They have approved 58 conditional licenses for hemp growers to begin cultivating cannabis for the adult use market. In just the past few months, the state has already awarded 146 conditional licenses for cultivation.
The Office of Cannabis Management (OCM) in New York also announced their “Get Ready, Get Set” virtual workshop series, designed to help social equity applicants prepare for license applications and better understand the conditional licensing program.
Earlier this year, following an amendment to state law, the OCM launched the conditional licensing program to ensure that hemp farmers in the state with a desire to grow adult use cannabis could get started in the 2022 season.
Applications can be filed with the OCM for conditional licenses through June 30, 2022, with a $2,000 non-refundable application and licensing fee. The licenses are only for farms that have already grown hemp in New York State.
“New York is building the most inclusive cannabis industry in the country and including small farmers with an expertise is an essential component in accomplishing that goal,” says Chris Alexander, executive director at the OCM. “The growing season isn’t waiting for anyone and I’m grateful for the hard work of the CCB and my colleagues at OCM to ensure these licenses are being reviewed as quickly as possible so New York’s farmers can take full advantage of the growing season and cultivate the products that our equity entrepreneurs will be the first to sell when they open their dispensaries this year.”
The Boston Beer Company, Inc., known for brands like Sam Adams, Truly, Twisted Tea and Dogfish Head, has announced their entry into the cannabis market. According to the press release, the craft beer company is launching TeaPot, a new brand of cannabis infused-iced teas. Your cousin from Boston is getting into the cannabis game.
The line of canned, THC-infused beverages will hit stores in Canada this July. The cannabis beverages will be produced at Peak Processing Solutions in Windsor, Ontario and distributed by Entourage Health based in Toronto, Ontario.
The Good Day Iced Tea beverage
The first product of the brand is called Good Day Iced Tea and is strain-specific. It will be formulated with lemon black tea and infused with “Pedro’s Sweet Sativa,” a strain grown by Entourage Health in Ontario. More products will be announced in the next few months, the company says.
The press release emphasizes the size and growth of the cannabis beverage market, citing Headset retail data showing the Canadian beverage market is about double the size of its American counterpart and growing at an astounding 850% in the past two years. It’s no secret that the cannabis beverage sector is a rapidly growing market for cannabis brands. Canopy Growth has been targeting this portion of the market for years and Molson Coors launched a joint venture last year. A lot of other companies have been slowly getting more and more involved as of late.
The U.S. cannabis beverage market is certainly lagging behind our neighbors to the North, mostly stymied by slow state-by-state legalization, patchwork regulations and restrictive federal policies. Of the beverage giants and companies that have entered the space, most are doing so cautiously.
Dave Burwick, CEO of the Boston Beer Company, hinted at their desire to enter the U.S. market, but says they’ll focus on Canada in the meantime. “As we await further progress on U.S. regulations, we’ll continue to develop an exciting product pipeline in the federally regulated market of Canada,” says Burwick. “While beer is our middle name, we’ve also introduced successful hard teas, hard ciders, hard seltzers, and canned cocktails. We’re encouraged by the continued growth of the cannabis beverage category and we believe it’s one of the next innovation frontiers.”
Last week, the U.S. Food & Drug Administration (FDA) published a consumer warning regarding food products containing THC and the risk of children accidentally eating them. Between January of last year through April 24, 2022, the FDA says they have received more than 100 adverse event reports involving people (both adults and children) accidentally consuming THC-containing products.
According to the published advisory, the main concern seems to be copycat products that are packaged and labeled to resemble popular junk foods. The copycat, THC-containing products are mimicking Cap’n Crunch, Cocoa Pebbles, Cocoa Puffs, Froot Loops, Fruity Pebbles, Nerds Ropes, Starbursts, Sour Patch Kids, Trix and others.
Examples of the THC products the FDA included in its warning.
In years past, usually around Halloween, local police, municipalities and state officials would often issue similar warnings over the same issue. Folks in the cannabis industry are usually quick to dismiss those warnings as dramatized and misleading, citing extremely low numbers of actual instances where edibles were given to children during Halloween. However, these warnings might be more warranted now, given the number of copycat products on the market today and the increased number of adverse events the FDA has reported.
Historically, most of the companies producing these copycat products that contain THC, like Sour Patch Kids or Nerds Rope candies, come from the illicit market. Most licensed edibles producers know not to steal branding and packaging from a large food company. Still though, it is worth taking a good, hard look at cannabis edibles packaging and making sure they wouldn’t be mistaken for a food product that doesn’t contain THC.
The hiring process is evolving: major U.S. employers are reconsidering the significance of higher learning. An employer’s undue emphasis on university education while hiring is called “degree inflation.” As the hiring manager for NisonCo, a cannabis public relations, marketing and SEO agency, I have learned a college degree is not the best predictor of employee success.
NisonCo was established during the dawning of the modern cannabis legalization movement. At the time, our small staff included individuals with and without college degrees. I evaluated both groups of employees and learned they gave equal contributions to the team. Limiting our pool of potential candidates to university graduates would have hindered the growth of our company.
Accordingly, at NisonCo a college degree is not required to work. We believe degree inflation impedes hiring, increases payroll, encourages turnover and perpetuates social injustice. For these reasons, NisonCo encourages your cannabis company to emphasize a candidate’s skills and drive during the hiring process rather than their education.
Degree Inflation Increased in the Aftermath of The Great Recession
The Great Recession in 2008 caused a massive downturn in the U.S. economy. By 2010, the workforce had lost nearly 9 million jobs. The unemployed entered a tight labor market, and employers had the luxury of limiting potential candidates to college graduates. After the economic downturn, the number of employers requiring a college degree increased by 10%.
Employers added degree requirements to positions previously staffed by high school graduates. In 2015, 67% of job postings for production supervisors required a degree, while only 16% of current production supervisors possessed degrees. The Great Recession pushed Americans without a college degree out of the labor market.
Technological Advancements and Social Movements Confront Degree Inflation
The importance of technical skills began declining when automation entered the workforce in the 1980s. Employers suddenly required soft skills like relationship management to serve customers and resolve conflicts with partners successfully. A technologically advanced economy requires problem-solving and people skills. These skills are not usually acquired while attaining a college degree.
Most employers confirmed degree inflation prevents them from hiring equipped employees.
During the Covid-19 pandemic, companies laid off millions of employees. Many unemployed people reconsidered their relationship with work and decided to leave unfulfilling jobs. Employers are now in dire need of staff, and they no longer have the privilege of requiring a college degree during the hiring process. This degree inflation prevents recovery from the economic downturn caused by the pandemic.
The Black Lives Matter movement highlighted the need to deliver social justice to historically marginalized communities. Americans are learning these communities need economic opportunities to achieve social justice. For this reason, employers are reexamining hiring practices and identifying barriers to equity. Employers like NisonCo have recognized since company inception that degree requirements impede social justice.
Degree Inflation is Bad for your Cannabis Business
The Harvard Business School polled business leaders on their perception of the performance of employees with and without degrees. The polling revealed the hidden costs of degree inflation: pending positions, payroll premiums, poor productivity and high turnover. Undoubtedly, degree inflation is not suitable for your cannabis business.
Most employers confirmed degree inflation prevents them from hiring equipped employees. They admit that candidates without degrees may possess the skills needed to thrive in most positions. Often, degree inflation prevents the discovery of competent candidates without degrees.
Most respondents revealed that degree inflation places a premium on wages for college graduates. Many respondents also confirmed those with and without degrees provide equal contributions to their teams. Degree inflation adds unnecessary payroll and training costs to a company’s budget.
Many employers believe staff members with university degrees demand higher salaries and benefits than staff without degrees. Additionally, most respondents admitted employees with degrees demonstrate low productivity and experience high job dissatisfaction. As a result, employers witness increased turnover among college graduates. In my experience, degree inflation can prevent employers from finding productive, satisfied, and loyal employees.
5 Ways Your Cannabis Company Can Oppose Degree Inflation
Review Your Company’s Job Descriptions and Assess Contributions to Degree Inflation
I recommend reviewing your company’s positions and determining if they are prone to degree inflation. Evaluate job descriptions written by leaders in the cannabis industry to understand if your degree requirements contribute to degree inflation and consider dropping degree requirements for positions that are common contributors to degree inflation.
Identify the Technical and Soft Skills Needed for Positions in Your Company
I advocate for analyzing the technical and soft skills needed for positions in your cannabis company. Review your job descriptions to determine if they require soft skills a candidate without a degree could possess. Delete degree requirements from job descriptions that do not need technical education provided by universities. Additionally, review the vetting process for candidates and remove onerous education requirements for positions requiring additional soft skills.
Analyze the Costs of Your Company’s Contribution to Degree Inflation
Understanding your cannabis company’s contribution to degree inflation lowers the costs of sustaining it. Developing metrics for evaluating contributions to degree inflation helps assess the charges to your company. Realizing your company’s potential cost savings helps maintain a commitment to combating degree inflation.
Develop Your Company’s Pipeline of Non-Degree Employees
Your cannabis company should develop alternative talent pipelines to attract non-degree employees. Investments in training create talent pipelines that give your company access to new pools of competent and productive candidates. Investments in training attract employees without college degrees and confront degree inflation.
Expand Your Company’s Territory for Recruiting New Employees
I recommend expanding your company’s geographic footprint while recruiting. Establishing relationships with partners in new territories provides access to new pools of non-degree talent. Expansion of your recruiting territory withstands degree inflation.
The Cannabis Industry Should Commit to Combatting Degree Inflation
Legalizing cannabis began as a social justice movement to benefit historically marginalized communities, and the maturation of our industry can deliver social justice to these communities. The cannabis industry has a prime opportunity to be an excellent example for other sectors confronting degree inflation. Our industry must demonstrate how different sectors can resist the urge to support it.
In a press release published this week, AOAC International announced it has partnered with Signature Science, LLC as the test material provider for the new AOAC Cannabis/Hemp Proficiency Testing program. What makes this proficiency testing (PT) program so unique is that AOAC will be the only PT provider to offer actual cannabis flower as the matrix.
This month, the pilot round with twenty cannabis testing labs begins with hemp-only samples being shipped in early May. The first live round of the PT program is scheduled for November of this year and will offer participating labs the choice of cannabis flower samples or hemp samples.
The program will include one sample for cannabinoid and terpene profiles, moisture and heavy metals, as well as a second sample for pesticide residue testing. According to the press release, mycotoxins will be added to the mix soon.
The new PT program was developed by stakeholders involved with the AOAC Cannabis Analytical Science Program (CASP), including state regulatory labs, industry labs, state and federal agencies and accreditation bodies. Shane Flynn, senior director of AOAC’s PT program, says the program is a result of scientists coming to them with concerns about testing in the cannabis space. “AOAC has a long history of bringing scientists together to address emerging topics, so when stakeholders came to AOAC with their concerns and need for quality proficiency testing in the cannabis industry, AOAC acted,” says Flynn. “Stakeholders noted the analytical differences in testing cannabis versus hemp and had specific concerns around it and asked for a program that would provide actual cannabis samples in addition to hemp. This is truly a program that was created by the stakeholders, for the stakeholders.”
AOAC says they plan on introducing microbiology to the PT program, with microbial contamination tests in both cannabis and hemp samples. They are also considering adding additional matrices, like chocolate and gummies.
Signature Science is an ISO 17043 accredited proficiency test provider that also has a DEA-licensed controlled substances lab, making them an ideal candidate to partner with AOAC for the PT Program. They entered into a 3-year MoU with AOAC for the program. Their team developed and validated methods used to create the samples for the PT program at their DEA-licensed lab in Austin, Texas.
Steep Hill, the company that started the first cannabis testing laboratory in the United States, today announced their expansion into Vermont. Their licensee, Steep Hill Vermont, is the first lab in the state to receive pre-approval from the state, according to a press release.
The leadership team is made up of CEO Kos Parulekar, Dr. Mark Scialdone, chief scientist and Callie Chapman, who will be the lab director. Parulekar previously held management roles at General Electric and The World Bank.
Dr. Scialdone will be speaking at the Cannabis Quality Conference & Expo. Click here to learn more. Dr. Scialdone worked at DuPont for eighteen years before joining the cannabis industry and becoming an expert in plant oil extraction, analysis and natural product chemistry. Dr. Scialdone is a member of the ASTM D37 cannabis committee, the NCIA testing policy working group and is a founding member of the cannabis chemistry subdivision at ACS. “We chose to partner with Steep Hill because of their breadth of experience from opening multiple cannabis testing labs across the country that are considered the gold standard for quality results, rapid turnaround time, and impeccable customer service,” says Dr. Scialdone. “Vermont has long had the status of the Humboldt County of the East having a long tradition in cannabis, so opening a testing lab here makes sense on many levels.”
Chapman is a chemical engineer who previously worked for Autumn Harp as their head of cannabis product development. “Working with the State of Vermont, our laboratory plans to expand cannabis testing services, while offering quick turnaround times and educational resources for cultivators, manufacturers, and other industry participants,” says Chapman. “Our goal is to be a key partner in the success of the Green Mountain State’s adult use market and continue to grow our industry.”
In an unprecedented move, the U.S. Food & Drug Administration (FDA) has issued warning letters today to companies selling products containing delta-8 THC. In total, the FDA sent out five warning letters to companies for violating the Federal Food, Drug, and Cosmetic Act (FD&C Act).
Image from the FDA’s consumer update on Delta-8 THC
The violations include illegal marketing of unapproved delta-8 THC products as treatment for medical conditions, misbranding and adding delta-8 THC to food products. Back in September of last year, the FDA published a consumer update on their website, seeking to educate the public and offer a public health warning on delta-8 tetrahydrocannabinol, otherwise known as delta-8 THC.
Delta-8 THC is a cannabinoid that can be synthesized from cannabidiol (CBD) derived from hemp. It is an isomer of delta-9 THC, the more commonly known psychoactive cannabinoid found in cannabis. Delta-8 THC does produce psychoactive effects, though not quite as much as its better-known cousin, delta-9 THC. Many regulators and industry stakeholders are increasingly concerned about the rise in popularity of delta-8 products, namely because of the processing involved to produce it. Delta-8 THC is often synthesized using potentially harmful chemicals.
The FDA has a history of sending a lot of warning letters to companies marketing CBD products inaccurately and making drug claims. Earlier this year, they sent a number of letters to companies claiming that CBD can cure or prevent Covid-19.
According to Janet Woodcock, M.D., principal deputy commissioner at the FDA, they are getting more and more concerned about the popularity of delta-8 THC products sold online. “These products often include claims that they treat or alleviate the side effects related to a wide variety of diseases or medical disorders, such as cancer, multiple sclerosis, chronic pain, nausea and anxiety,” says Woodcock. “It is extremely troubling that some of the food products are packaged and labeled in ways that may appeal to children. We will continue to safeguard Americans’ health and safety by monitoring the marketplace and taking action when companies illegally sell products that pose a risk to public health.”
The FDA sent warning letters to the following companies selling delta-8 THC products:
The cannabis retail market is very unique. What began as compassion clubs and wellness centers in the early days of legal cannabis, eventually morphed into dispensaries, quickly becoming the retail model that regulators around the country adopted and businesses implemented.
For most states with legal cannabis markets, the dispensary has been the only way for consumers to buy cannabis and cannabis products. Before the pandemic began, we started seeing a handful of states warm up to allowing delivery services. During the height of the pandemic, more states adopted curbside pickup, e-commerce in some shape or form and delivery services that finally expanded cannabis retail beyond the dispensary. Still though, regulations hamper commercial growth in the retail space and the dispensary remains, by far, the place where most people buy their cannabis.
When Jack Roosevelt, co-founder of LucidaClub
When Jack Roosevelt, co-founder of LucidaClub, entered a dispensary back in 2019 in Massachusetts, he shared an experience all too common in the cannabis industry: An overwhelming number of options, jargon like sativa, indica and strain names that make no sense to the uninitiated, confusing product types and an all-around unpleasant shopping experience. Jack saw all those barriers to entry for the canna-curious or novice consumer and thought that there must be a better way to shop for cannabis.
So he started LucidaClub, a membership-based platform that is designed to guide and educate consumers with the advice of experts who can help people understand cannabis products and make the right purchase decision without all of the frustration and trial and error that is so common.
The name, Lucida, comes from a Latin phrase meaning the brightest star in a constellation. Jack and his co-founder, Lucinda, want their company to be the guiding star on your cannabis journey. LucidaClub isn’t just for the cannabis newbie; their in-house curator and team of experts can help any cannabis consumer find products to better fit their needs for sleep, wellness, relaxation, stress or just to have a good time. We sat down with Jack to chat about the cannabis retail market, what his company is all about and what the future of cannabis retail might look like.Jack Roosevelt will be speaking on the cannabis retail experience at the Cannabis Quality Conference & Expo. Click here to learn more.
Cannabis Industry Journal: Tell us about your background and how you came to the cannabis space.
Jack Roosevelt: I began my career in finance, working for JP Morgan and Barclays. I left Barclays and joined a renewable energy start up before eventually joining the cannabis space.
My move into the cannabis space was due to an event in the summer of 2019. Adult use cannabis had been legal in Massachusetts since November of 2018. Now, I smoked some weed in high school and college, but hadn’t touched it in at least 20 years. However, cannabis was now legal, so I said maybe there’s an opportunity to find something that would help me unwind at the end of the day, help with sleep and manage some of my stress.
Knowing that I smoked in high school and college, I figured that buying weed was buying weed. How difficult could this be? That took me to going to a dispensary for the first time. Walking through those doors made me realize that buying cannabis today is nothing like buying weed back when I was in college. It’s a fundamentally different experience.
I stood there looking at the menu of strains, with names that meant nothing to me, jargon like terpenes, and even the idea of sativa versus indica at that time was foreign to me. Twenty years ago, we didn’t pay attention to the strain name or anything like that. We’d walk into someone’s dorm room and your option would be ‘this is twenty bucks an eighth, forty bucks an eighth and sixty bucks an eighth.’ You weren’t paying attention to the strain or the name of anything like that.
Coming into the dispensary that day, I thought I’d walk out of there with an eighth of flower and something to help me unwind at the end of the day. I walked out of there with a tincture and it really wasn’t because they upsold me to a better product, it was because it was the least worst option I could see on the menu. It was something I felt that I could understand from a dosing standpoint and it was something that didn’t require knowing the strains or names that mean nothing to me. I was quite frankly looking for the easiest way to purchase something and get out of there as quickly as possible
Sitting in the car afterwards, I was mulling over that experience, the feeling of intimidation, how awkward it was, how frustrating it was. I am 6’8” and 300 pounds I am not a small guy, and I’m not a wallflower. I don’t intimidate easily, so if this was my experience, what was this going to be like for everyone else?
That made me reexamine and take a stronger look at the retail market and the potential growth. How do you engage the consumer like me, for whom there are lots of barriers to entry, most of which are perception-driven. Some of the barriers are regulatory and geographic, but most are perception based. Here in Massachusetts, a lot of the dispensaries are in inconvenient locations. Not all towns allow for rec sales, and not all of those towns that do will allow a dispensary to open on the High Street, so consumers often times have to drive out of their way to get to a dispensary.
So, for me understanding what this new consumer base would look like and how they would come into the market was key. Obviously there would be a natural growth progression for the cannabis market. However, if we could build something to help guide people, answer their questions and make them feel comfortable with what they were buying and how to consume, really hold their hand in the initial stage of a consumer coming back into the market or coming in for the first time, then we could help grow the market quicker and put that natural progression of growth on a faster track.
That experience made me start to do some market research, look at the market size, and what that potential market could look like. Our research shows that, depending on the maturity of the market in question, there are between 1.5 and 4 times the number of Cannacurious sitting on the sidelines than there are active consumers in a market. Here in MA, conservatively there are at least 1.5MM Cannacurious sitting on the sidelines, waiting to come into the market. Because our research showed such a large opportunity he in MA and the Northeast, where we live, we decided to focus our efforts here.. Because we are Cannacurious consumers ourselves, we have a natural understanding and empathy for the consumer. I was definitely not and still am not an expert on cannabis. But if we can find the right experts that can answer the questions that we have then we can do the same for the Cannacurious. For 70+ years, we’ve been told that cannabis is bad, smoking weed is bad and everything associated with it is bad. So, we want to break that negative perception, that stigma that is still lingering and open it up to a more mainstream consumer.
CIJ: What gave you the idea to start Lucida Club?
Jack: What I just told you sums it up pretty well. It was basically built out of personal frustration. I thought that if I had this problem, those feelings of intimidation, awkwardness and frustration, then undoubtedly a lot of other people would too. Therefore, we’re looking at how we can create a platform that would make the buying process as simple and convenient as possible, while educating the consumers at the same time.
CIJ: How does Lucida Club work?
Jack: It’s a concept of simplicity and convenience. There are two sides to this: The E-commerce side, when you sign up and become a member and you want to make a purchase, all you have to do is answer three questions: What experience do you want? Do you want to smoke something or not? And how much money what do you want to spend? We put together three experience packages with three key price points, around $100, around $150 and around $250.
It is based on available inventory, which products and price points match up with different packages. We have fully integrated with Flowhub and are doing the same thing with some other POS systems as well. We see the inventory for our retail partners on a live basis. When one of our members makes a purchase, if they choose the sleep, nonsmoking, $100 package and put that option in their cart, by the time it populates in their cart, our platform has already gone to the dispensary inventory, we’ve allocated their inventory by experience and by order preference. So it will put those top two or three or four items in the cart automatically. The consumer doesn’t have to worry about what brands are available.
We’ve done all the work for them. They just need to pay attention to what experience and price point they want and we take care of the rest.
The other side of our business involves our head curator who combs through all the inventories and manages the product selection. But he also works with with our members as a concierge. When you sign up for our service, you automatically get a free consultation with our head curator, which we encourage all of our members to do before they make their first purchase. That way, we can answer all your questions and make sure the package is really tailored towards you individually. You also get a follow up consultation, which helps to guide additional advice and make sure you get the experience you’re looking for. On top of that, we’re also trying to advance consumer education through a lot of content, answering common questions and help to guide consumers on their journey with cannabis and the role it can play in their lives.
CIJ: How do you think you are innovating the cannabis retail experience?
Jack: When I was sitting in the car that fateful day back in 2019, I looked at retail the same way everyone else does: you build a store, an e-commerce platform, you have a product you’re trying to sell and focus on the product itself. What opened my eyes being the consumer that day was that cannabis unique.
We’ve been told for decades about how bad cannabis is for us and for society and these negative connotations have been drilled in to us. We need to look at the retail space from the consumer’s perspective and the barriers to entry that they feel. It’s not something that a regular retailer can do easily.
By definition, a brick-and-mortar retailer, needs to be everything to everybody, for all of their customers. They have to work with the connoisseurs, the regulars that have been consuming for a long time, who really understand what they’re looking for. At the same time, they need to engage with the canna-curious, the newbie that’s walking in the door for the first time. It’s difficult to focus on one market segment for them. If they were to focus all of their efforts on just the canna-curious, they would be missing out and losing traction and not engaging properly with their other customer bases.
We have the ability to engage with a very specific market segment, the Cannacurious, which is a very large group of people by the numbers but still niche. Our research shows that there are at least 1.5 million Cannacurious in Massachusetts alone that are either sitting on the sidelines or engaging in the market in a very small way. We’ve spoken to a lot of people that have other people make purchases for them, their sister or brother going to a dispensary that feels comfortable picking up a single package of edibles for them. That’s a form of hand holding that we want to provide. We want to make consumers feel comfortable and educate them on how they can choose products for the experience they want.
In my mind when we look at the cannabis space, it’s about how we can help people come into the marketplace, how we can help open their eyes to a litany of other opportunities for them and also how to approach things from a consumer perspective.
CIJ: What do you think the future of retail in cannabis looks like?
Jack: That’s a tough question because so much of that is driven form a regulatory standpoint. I know where I think it would go if regulators were just there to make it easy for consumers and for everyone to do business. It changes so much state to state and market to market. In retail in general, so much is moving online and on to e-commerce. Where you have a situation where people actually understand what they want and they tend to buy the same products on a regular basis, e-commerce is great and easy for them to make a purchase. Delivery opens a lot of doors as well with that. But again, it’s really difficult to look at what is going to happen because the market is so fragmented from a regulatory standpoint.
It won’t develop in one direction easily. Delivery is an option but we don’t have it on a mass scale in Massachusetts. It’s the same with e-commerce. Technically in Massachusetts, purchasing online is not an easy thing to facilitate. It still has to be done at the point of sale in-person with pickup and it hampers e-commerce. This potentially slows down how the market could develop. I definitely know where it could go, but looking into that magic eight ball will still be very cloudy if you ask it for an answer. Sorry, I have to obfuscate things a little there because it’s just so hard to figure out what the regulators will greenlight next and where they want the market to go.
We really just don’t know. There are so many ways to look at that question. If you’re a brick-and-mortar dispensary right now and you’re looking at how the market itself is growing in the state of Massachusetts, it’s tough to say. We went from about sixty licensed retailers during the height of the pandemic to well over 200 now. There’s going to be some consolidation. Whether that means that the growth of MSOs will proliferate and everything will be homogenized going forward, I don’t know what that could mean because at the moment it’s very difficult to have that full homogenization when you’re only allowed to have a handful of retail licenses. How do any of the MSOs gain real traction with three locations? If that changes, if you go somewhere like Florida where the rules are different, you see the true growth of the MSO with dozens of retail locations. Here, we still have a lot of mom-and-pop retailers along with a lot of much smaller MSOs who might have locations in one or two other states.
E-commerce will bring a lot to the market and help brands grow significantly. How we grow depends almost entirely on what the regulatory environment looks like. There are so many different things we could do with our platform, but we are so hampered by the regulations in just this one market alone. We built our platform and business model the way we did because it allows us to be flexible and adapt. As we move into a new market, we can build relationships and new markets open up. It’s all about being flexible if you can be.
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