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

By Arthur Gulumian
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How COVID-19 Impacted Cannabis Businesses

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

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

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

Vendors & Supplies

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

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

Investing in Your Core Business

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

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

Maintaining Urgency

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

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

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

Understanding the Shift in Purchasing Behavior

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

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

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

Expanding Sales Avenues

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

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

Delighting Your Customers

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

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

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

Scaling Operations Taking Advantage of Limited Competition in Emerging Markets

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

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

Conclusion

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

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

California Midterm Ballots To Bring Green Wave of Cannabis Tax Regulations

By Jasmine Davaloo
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As state and local jurisdictions rake in millions of dollars in tax revenue from the state’s legal cannabis industry, new states, counties and cities are piling onto the cannabis tax bandwagon. There are currently hundreds of local cannabis business taxes in place in California. On the November ballots, there are 47 new local cannabis tax measures. In fact, even some local jurisdictions that outlaw cannabis operations want a piece of the green pie and are asking voters to impose cannabis business taxes.

More cannabis tax measures being passed means more regulations and compliance responsibilities for cannabis businesses. This is especially taxing (pun intended) for multi-licensed and multi-location cannabis businesses. With hefty monetary penalties and even revocation of business licenses as consequences of noncompliance, adherence to state and local tax regulations is of paramount concern to cannabis businesses. Below is a list that Taxnexus has put together showing all of the cannabis tax measures on the November 6 ballots in California:

Taxnexus is an automated transaction-to-treasury cannabis tax compliance solution for the entire cannabis supply chain that provides point-of-sale state and local cannabis sales and use tax calculation, tax data management as the authority of record, and timely filing of returns with all applicable taxing authorities.

California City and County Cannabis Tax Measures November 6, 2018 Ballots

City County Measure Name Proposal
Adelanto San Bernardino S Adelanto Marijuana Tax To authorize the city to impose a tax on marijuana businesses of up to $5.00 per square foot on nurseries and up to 5% on other businesses.
Atascadero San Luis Obispo E-18 Atascadero Cannabis Business Tax To impose a tax on cannabis businesses at annual rates not to exceed $10.00 per canopy square foot for cultivation, 10% of gross receipts for retail cannabis businesses, 2.5% for testing laboratories, 3% for distribution businesses, and 6% of gross receipts for all other cannabis businesses.
Atwater Merced A Atwater Marijuana Tax To authorize the city to impose a 15% tax on marijuana businesses.
Benicia Solano E Benicia Marijuana Business Tax To authorize the city to impose a tax of up to $10 per square foot for marijuana nurseries and 6% of gross receipts for other marijuana businesses.
Capitola Santa Cruz I Capitola Marijuana Business Tax To authorize the city to tax marijuana businesses at a rate of up to 7% with no expiration date to fund general city purposes.
Chula Vista San Diego Q Chula Vista Marijuana Business Tax To authorize the city to tax marijuana businesses at the following rates: 5% to 15% of gross receipts or $5 to $25 per square foot for cultivation.
Colfax Placer C City of Colfax Cannabis Business Tax To tax cannabis businesses at annual rates not to exceed $10.00 per canopy square foot for cultivation (adjustable for inflation), 6% of gross receipts for retail cannabis businesses, and 4% for all other cannabis businesses.
Colton San Bernardino U Colton Marijuana Tax To authorize the city to impose a tax on marijuana businesses of up to $25.00 per square foot on nurseries and up to 10% on other businesses.
Emeryville Alameda S Emeryville Marijuana Business Tax To enact a marijuana business tax at a rate of up to 6% of gross receipts to fund general city purposes.
Fresno Fresno A Fresno Marijuana Business Tax To tax marijuana businesses at rates of up to $12 per canopy square foot and up to 10% of gross receipts for medical dispensaries and other marijuana businesses, with revenue dedicated to the city’s general fund an a community benefit fund.
Goleta Santa Barbara Z2018 Goleta Marijuana Business Tax To authorize the city to tax marijuana businesses at the following initial rates with a cap at 10% of sales: 5% for retailers; 4% for cultivators; 2% for manufacturers; and 1% for distributors/nurseries.
Hanford Kings C Hanford Cannabis Business Tax To tax cannabis businesses at an annual maximum rate of $7 per square foot of canopy for cultivation businesses using artificial lighting only, $4 per square foot of canopy for cultivation businesses using a combination of artificial and natural lighting, $2 per square foot of canopy for cultivation businesses using natural lighting only, and $1 per square foot of canopy for nurseries, 1% of gross receipts of laboratories, 4% of gross receipts of retail sales, 2% of gross receipts of distribution and 2.5% of gross receipts of all other types of cannabis businesses.
Hesperia San Bernardino T Hesperia Marijuana Tax To authorize the city to impose a tax on marijuana businesses of up to $15.00 per square foot on nurseries and up to 6% on other businesses.
La Mesa San Diego V La Mesa Marijuana Business Tax To authorize the city to tax marijuana businesses at rates of up to 6% gross receipts and up to $10 per square foot of cultivation.
Lassen Lassen M Lassen County Commercial Marijuana Business Tax To authorize the county to enact a tax on commercial marijuana at rates of between $0.50 to $3.00 per square foot for cultivation and 2.5% to 8% on gross receipts for other businesses, such as retail, distribution, manufacturing, processing, and testing.
Lompoc Santa Barbara D2018 Lompoc Marijuana Business Tax To authorize the city tax marijuana businesses at the following rates: $0.06 per $1 of non-medical retail sales proceeds; $0.01 per $1 of cultivation proceeds; $15,000 for net income less than $2 million of manufacturing/distribution proceeds; $30,000 for net income $2 Million or more of manufacturing/distribution proceeds; a total aggregate tax of $0.06 per $1.00 of microbusinesses proceeds; and no tax on testing.
Malibu Los Angeles G Malibu Marijuana Business Authorization and Tax To authorize the sale of recreational marijuana in the city and imposing a general tax at the rate of 2.5% of gross receipts on the sale of recreational marijuana.
Marina Monterey V Marina Marijuana Business Tax To authorize marijuana businesses to operate in the city and authorizing the city to tax marijuana businesses at rates of up to 5% of gross receipts, with revenue funding general city purposes.
Maywood Los Angeles CT Maywood Marijuana Business Tax To authorize the city to tax marijuana businesses at a maximum rate of 10% of gross receipts to fund general city purposes.
Moreno Valley Riverside M City of Moreno Valley Commercial Cannabis Activity Tax To enact a tax on cannabis sales and cultivation, not exceeding 8% of gross receipts and $15 per square foot of cultivation.
Morgan Hill Santa Clara I Morgan Hill Marijuana Business Tax To authorize the city to tax marijuana businesses at annual rates up to $15.00 per canopy square foot for cultivation and up to 10% of gross receipts for all other marijuana businesses.
Mountain View Santa Clara Q Mountain View Marijuana Business Tax To enact a tax on marijuana businesses of up to 9% of gross receipts to fund general city purposes.
Oakland Alameda V Oakland Marijuana Business Tax Amendments To amend the marijuana business tax law to: allow marijuana business to deduct the cost of raw materials from their gross receipts and to pay taxes on a quarterly basis; and allow the city council to amend the law in any manner that does not increase the tax rate.
Oroville Butte T Oroville Marijuana Tax To authorize an annual gross receipts tax on cannabis businesses at rate not to exceed 1%, with initial rates of 5% on retailers and manufacturers; 4% on cultivators; 3% on distributors; 2% on nurseries; 0% on testing laboratories; and 7% on microbusiness to generate approximately $300,000 to $600,000 in annual revenue.
Paso Robles San Luis Obispo I-18 Paso Robles Cannabis Business Tax To impose a maximum tax rate on every person or entity operating or conducting a cannabis business within the City a cultivation tax of up to$20.00 per square foot of space utilized in connection with the cultivation and processing of cannabis; a gross receipts tax of up to 10% for all cannabis transportation; a gross receipts tax of up to 15% for all cannabis manufacturing, testing, and distribution; and a gross receipts tax of up to 10% for dispensaries.
Pomona Los Angeles PC Pomona Marijuana Business Tax To authorize the city to tax marijuana businesses at rates of $10.00 per canopy square foot for cultivation and up to 6% of gross receipts for all other marijuana businesses to fund general city purposes.
Riverbank Stanislaus B City of Riverbank Cannabis Business License Tax To authorize the City Council of the City to impose a business license tax at a rate of up to 10% of gross receipts on cannabis businesses and dispensaries, to help fund general municipal services.
San Bernardino San Bernardino W San Bernardino Marijuana Tax To authorize the city to impose a tax on marijuana businesses of up to $10.00 per square foot on nurseries and up to 6% on other businesses.
San Diego San Diego AA City Council Marijuana Business Tax Measure To authorize the city to tax marijuana businesses at the following rates: $14 per square foot; up to 8% on manufacturing and distribution; up to 10% on medicinal retail; up to 12% on adult-use retail; and up to 3.5% on testing.
San Francisco San Francisco D San Francisco Marijuana Business Tax Increase To tax marijuana businesses with gross receipts over $500,000 at a rate between 1% and 5%, exempting retail sales of medical marijuana, and expanding the marijuana business tax to businesses not physically located in San Francisco.
Santa Ana Orange Y Santa Ana Recreational Marijuana Business Tax To authorize the city to tax marijuana businesses at rates of $0.25 to $35.00 for gross square footage and up to 10 percent for cultivating, manufacturing, distributing, selling, or testing.
Santa Clara Santa Clara M Santa Clara Marijuana Business Tax To authorize the city to tax commercial marijuana businesses up to 10% of gross receipts and up to $25 per square foot for cultivation.
Simi Valley Ventura Q Cannabis Business Tax To enact a maximum tax on gross receipts of cannabis businesses in the City after January 1, 2019, as follows: for testing, 2.5%; for retail sales, retail delivery, or microbusiness retail, 6%; for distribution not to consumers, 3%; for manufacturing, processing or nonretail microbusiness, and any other type of business not otherwise specified, 4%; and for cultivation, a tax per square foot of canopy ranging from $2.00 per square foot of canopy to $10.00 per square foot of canopy, depending on the type of lighting (artificial or natural) used.
Solvang Santa Barbara F2018 Solvang Marijuana Business Tax To authorize the city to tax marijuana businesses at an initial rate of 5 percent of gross receipts with a cap of 10 percent and a maximum annual increase of 1 percent.
Sonora Tuolumne N City of Sonora Cannabis Business License Tax To enact a business license tax at a rate of up to 15% of gross receipts on cannabis businesses, to help fund general municipal services; and increasing the City’s appropriations limit for the Fiscal Years 2019-2023 by the amount of tax proceeds received.
Suisun Solano C Suisun Marijuana Business Tax To authorize the city to impose a tax of up to $25 per square foot and 15% gross receipts for marijuana businesses.
Union City Alameda DD Union City Marijuana Business Tax To authorize the city to tax marijuana businesses at rates of $12.00 per square foot for cultivation and 6 percent of gross receipts for other businesses to fund general municipal services.
Vista San Diego Z Vista Retail Medical Marijuana Sales and Tax Initiative (November 2018) To authorize commercial retails sales of medicinal marijuana for up to 11 retailers and enacting a 7% tax on the business’ gross receipts.
Contra Costa R Contra Costa County Marijuana Business Tax To authorize Contra Costa County to tax commercial marijuana businesses in the unincorporated area in the amount of up to $7.00 per canopy square foot for cultivation and up to 4 percent gross receipts for all other cannabis businesses to fund general County expenses.
El Dorado N, P, Q, R, S Commercial Cannabis Tax Measures To impose a general tax on any independently authorized commercial cannabis activity in the unincorporated areas of El Dorado County at rates up to: $30 per square foot or 15% for cultivation; 10% for distribution, manufacturing, and retail; and 5% for testing laboratories, effective until amended or repealed, with estimated annual revenue of $1,900,000 to $52,800,000.

To authorize outdoor and mixed-light (greenhouse) commercial cannabis cultivation for medicinal use on parcels of at least 10 acres zoned Rural Lands, Planned Agricultural, Limited Agricultural, and Agricultural Grazing that are restricted in canopy size, required to pay a County commercial cannabis tax, and subject to a site-specific review and discretionary permitting process with notification to surrounding property owners and environmental regulation.

To authorize outdoor and mixed-light (greenhouse) commercial cannabis cultivation for recreational adult use on parcels of at least 10 acres zoned Rural Lands, Planned Agricultural, Limited Agricultural, and Agricultural Grazing that are restricted in canopy size, required to pay a County commercial cannabis tax, and subject to a site-specific review and discretionary permitting process with notification to surrounding property owners and environmental regulation.

To authorize the retail sale, delivery, distribution, and indoor cultivation of commercial cannabis for medicinal use on parcels zoned Community Commercial, Regional Commercial, General Commercial, Industrial High, and Industrial Low that are restricted in number and concentration, required to pay a County commercial cannabis tax, and subject to a site-specific review and discretionary permitting process with notification to surrounding property owners and environmental regulation.

To authorize the retail sale, delivery, distribution, and indoor cultivation of commercial cannabis for recreational adult use on parcels zoned Community Commercial, Regional Commercial, General Commercial, Industrial High, and Industrial Low that are restricted in number and concentration, required to pay a County commercial cannabis tax, and subject to a site-specific review and discretionary permitting process with notification to surrounding property owners and environmental regulation.

Lake K Lake County Marijuana Business Tax To authorize the county to enact a marijuana business tax at the rates of $1.00 per square foot for nurseries and cultivators and between 2.5% and 4% for other businesses.
San Joaquin B Unincorporated County of San Joaquin Cannabis Business Tax To impose a special tax on commercial cannabis businesses in unincorporated San Joaquin County at a rate of 3.5% to 8% of gross receipts, with an additional cultivation tax of $2.00 per square foot of cultivation space.
Tuolumne M Tuolumne County Commercial Cannabis Business Tax The County to impose a 0%-15% gross receipts tax on commercial cannabis businesses (but no less than $0-$15 per square foot for cultivation businesses as annually increased by a consumer price index) in the unincorporated area of Tuolumne County, and to authorize the Board of Supervisors to implement and adjust the tax at its discretion, with funds staying local for unrestricted general revenue purposes, including but not limited to public safety, health,environmental protection and addressing industry impacts, unless repealed or amended by voters.

Hoban Law Group Expands Internationally

By Aaron G. Biros
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Last week, Hoban Law Group announced a major international expansion, with new offices in Latin America and the European Union. The Denver-based law firm said they will have four new offices across the EU by late fall and two new offices in Latin America by spring of 2018.

BobHobanAttorney
Bob Hoban, managing partner

Bob Hoban, managing partner and co-founder of Hoban Law Group, says they have already been working internationally for years. “HLG steps in to global markets quickly as our direct work with government officials on policy and regulation has kept us in this important global curve,” says Hoban. “We have accepted the challenge of being global cannabis industry leaders & experts and will work with strategic industry-leading partners, such as New Frontier Data, to move the industry forward across six countries.”

The press release says the law firm has been advising governments around the world on cannabis policy for several years, as well as working on a handful of international business transactions in the past. These new offices will work mainly with structured finance, mergers and acquisitions, worldwide trade, regulatory law and equity placement in the cannabis (including industrial hemp) industry. “Combining the firm’s corporate practice, with our intellectual property and tax practice groups will position our firm’s client’s to succeed at the highest levels in this international marketplace,” says Hoban.

The press release also announced they have added Andrew Telsey, an experienced securities attorney, to their firm. He has helped take more cannabis businesses public in the U.S. than any other attorney.

Hoban Law Group, founded in 2009, is the nation’s largest cannabis business law firm. They have attorneys in every state that has legalized cannabis in the United States.

Harborside, CanPay Announce Partnership, Launching Debit Payment System

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

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

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

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

Dustin Eide, CEO of CanPay

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

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

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

Cannabis M&A: Practice Pointers and Pitfalls When Buying or Selling a Cannabis Business

By Soren Lindstrom
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The Stage is Set

According to the Marijuana Policy Group, the U.S. cannabis industry is expected to reach more than $13 billion in sales by 2020 and create more jobs than the U.S. manufacturing industry. According to Viridian Capital’s Cannabis Deal Tracker, there were close to 100 M&A transactions in the U.S. cannabis industry in 2016 and approximately $1.2 billion was raised in equity and debt. As the cannabis industry has grown more mature and businesses begin to have more capital available, the M&A activity within the industry is poised to grow significantly over the next years to assist businesses gain necessary scale and take advantage of synergies and diversification.

The Obvious Wrinkle

U.S federal law has prohibited the manufacture and distribution of cannabis since 1935. The U.S. regulates drugs through the Controlled Substances Act, which classifies cannabis as a Schedule I drug (i.e., drugs determined to have a high potential for abuse with no currently accepted medical use and a lack of accepted safety regarding their use). Yet, more than 25 states have by now legalized cannabis for medical and/or recreational purposes and, as a result, there is a clear conflict between such state laws and existing federal law. To possibly help bridge that conflict, the U.S. Attorney General’s office in 2013 issued guidance directing the federal government not to intervene with state cannabis laws except in specific, limited circumstances, but, contrarily, the DEA has shown no desire to re-classify cannabis. To add to the confusion, President Trump and the new U.S. Attorney General have provided mixed statements and signals about their positions.

All of this means that it continues to be risky to acquire cannabis businesses. The requirements to legally grow, distribute, prescribe, and use cannabis for either medical or recreational purposes vary widely by country, state, and local jurisdiction, making it tricky to determine whether such businesses can be legally combined, in particular, across state lines.

Pick the Right Team of Advisors

When preparing to sell or buy a cannabis business, it is important to pick the right team of advisors. Your regular legal counsel, accounting firm or CPA may not be the right advisors for a cannabis M&A transaction. Choose a legal counsel that not only has experience with cannabis laws and regulations, but also has cannabis M&A experience and can offer expert advice on areas like IP, employment, tax matters, etc. Similarly, verify that your accounting firm or CPA has real experience with financial and quality of earnings analysis and due diligence.

Conduct Gating Due Diligence Up Front

In any contemplated M&A transaction, it is wise to prioritize your due diligence investigations. There will always be some more prominent risks and business objectives in a particular industry or with respect to a specific target business. It will be more cost and time effective if those specific risks and business objectives are prioritized early in the due diligence process. These can dictate whether you even want to pursue the target further before you dig into a deeper and broader due diligence investigation. Conducting gating due diligence up front is even more important in an industry like cannabis that contain complex and thorny regulatory hurdles.

So, before you spend money and time on a broader legal, business and financial due diligence investigation, have your legal counsel analyze and confirm that the potential transaction is feasible from a regulatory perspective. This will include whether it is possible to obtain or transfer necessary local and/or state licenses and whether a combination or sale can occur across state lines if necessary. Early on in the process, It is also advisable to request that the target business complete a legal compliance questionnaire or discuss with the target its regulatory compliance program, policies and training. Such up front due diligence will either clear a path to negotiations and broader confirmatory due diligence or flush out “red flags” that may kill a possible deal or require the buyer to investigate further before proceeding.

Important Terms and Pitfalls in the M&A Agreement

Generally, a sale or purchase agreement for a cannabis business does not appear to vary much from a similar agreement in any other industry. However, the complex environment and the premature nature of the industry impacts certain deal terms and processes in different ways from most other developed industries.

Here are few examples to keep in mind when preparing and negotiating a sale or purchase agreement:

  • Third Party and Governmental Consents: Buyer’s legal due diligence must focus on the consents that may be required from seller’s suppliers, customers, landlords, licensors or other third parties under relevant contracts. Additionally, the due diligence should focus on consents and approvals required by local and state regulators as a result of the sale. The M&A agreement should contain solid seller representations and warranties about all such consents and approvals and any such material consents and approvals should, from a buyer’s perspective, be a condition precedent to closing of the transaction.
  • Legal Compliance: A buyer should not agree to a boilerplate seller representation about the target’s compliance with laws. Be specific and tailor seller’s legal compliance representation to relevant state and local cannabis laws, regulations and ordinances. From a seller perspective, be careful and thoughtful about any appropriate exceptions (including the federal prohibition) to be disclosed to buyer in the disclosure schedules underlying the sale or purchase agreement.
  • Financial statements: The cannabis industry is very fragmented and consists of many small businesses. Many of these small businesses do not have financial statements prepared in accordance with GAAP and may consist of only management prepared financials. In that scenario, a buyer should have its financial advisor do an analysis of the financials available and ask seller to provide a representation and warranty about the accuracy and good faith preparation of the provided financials.
  • Escrow: Typically, a buyer will request some part of the purchase price be placed with an independent financial institution for a period of time post-closing as a source of recovery for losses as a result of breaches by seller of any of the representations and warranties in the definitive sale or purchase agreement. Due to the federal cannabis and banking regulations, many of the larger commercial banks will not provide financial services to cannabis businesses, in particular if the business touches the plant. The parties must therefore consider alternatives, including local financial institutions with more relaxed compliance requirements or perhaps place the escrow in a trust account of a law firm or other independent party.
  • Working Capital Dispute Procedures: Similar to the escrow, larger accounting firms generally do not provide services to cannabis businesses. Due to the rapid evolution of cannabis related regulations, if the terms of the transaction include provisions for a post-closing working capital/purchase price adjustment and related dispute procedures, it is advisable to not name an arbiter in the agreement. Instead, parties should agree to mutually select the arbiter if and when a dispute should arise.
  • Indemnification: Because of the tricky legal environment of the cannabis industry, it may be prudent for a buyer to request, at the very least, that certain parts of seller’s legal compliance representation and warranty not be subject to the “regular” caps, deductibles and other indemnification limitations. Also, if a buyer has unearthed a significant issue in its due diligence investigation, it should consider asking seller for a special indemnity for such issue that would be indemnifiable regardless of buyer’s knowledge of the issue and not be subject to the general indemnification limitations.
  • R&W Insurance: If there’s a lot of competition for the purchase of a target, particularly in a bidding process, it is now common for buyer to offer to purchase a representation and warranty insurance policy (“R&W Insurance”) to possibly gain an advantage by limiting the seller’s post-closing indemnification exposure. The good news is that many of the R&W Insurance carriers do offer such insurance in connection with the sale and purchase of cannabis businesses. However, typically, R&W Insurance cannot be obtained for insured amounts of less than $5 million. Experienced M&A counsel can advise of the advantages and disadvantages of R&W Insurance and assist in the negotiation of the related terms.

The above are just some examples of what to expect in a cannabis M&A transaction. Every M&A transaction will have its unique issues that will need to be appropriately reflected in the sale or purchase agreements and good M&A practices will continue to evolve with the industry. If you are an owner of a successful cannabis business, buckle your seat belt and be prepared for an exciting ride as the industry gets closer to significant consolidation.