Tag Archives: Microbusiness

Learning from the First Wave Part 2: California’s Cannabis Supply Chain and Vertical Integration, with a Grain of Salt

By Todd Feldman
No Comments

Part One of this series took a look at how the regulated cannabis market can only be understood in relation to the previous medical market as well as the ongoing “traditional” market. Part Two of the series describes how regulation defines vertical integration in California cannabis, and conversely, how vertical integration can address some of the problems that the regulations create. But first:

A Grain of Salt

Take the conventional wisdom about vertical integration with a grain of salt. Expected benefits may not materialize under the current circumstances:

  • Overall, the business environment is highly challenging due to extensive regulation, over taxation, insufficient retail capacity and competition from the “traditional” market. As a result, integrating businesses upstream or downstream may mean capturing losses, not profits.
  • The three major types of cannabis activity span three major industrial sectors: raw materials (i.e., cultivation), manufacturing and service (distribution, testing and retail). As a result, a vertically integrated company needs to carry out very different types of activity, which require very different types of core competencies, equipment and facilities.
    • Developing core competencies is especially challenging because each of the major cannabis sectors is still evolving.
    • Realizing the benefits of vertical integration requires an additional core competency in cross-sector operations.

 Regulations Define the Supply Chain

California’s regulations define the cannabis supply chain by defining both the individual links (licensees) and the relationships between those links. Therefore, an understanding of vertical integration must be grounded in an understanding of the underlying regulatory definitions.

The regulatory definition of each link is extensive. For example, each licensee is tied to a specific facility, and must have its own procedures for production, inventory control, security, etc. When the links are strung together, this definition tends to preserve operational redundancies, and impede operational integration.

Overall, the relationships between the links are primarily defined in terms of preserving the chain of cannabis custody. On top of that, regulations define very specific (and very consequential) links between certain licenses, as discussed below.

A Taxonomy of Links

There are currently 26 types of cannabis license in California, 25 of which can be vertically integrated:

  • Cultivation – 14 licenses, including 4 sizes each for Indoor (up to 22,0000 sf), Mixed Light (up to 22,000 sf) and Outdoor (up to 1 acre), as well as Nursery and Processor (drying, trimming and packaging/labeling). Note that cultivation licenses are the only licenses that restrict the scale of activities.
  • Manufacturing – 5 licenses, including volatile extraction, non-volatile extraction, everything but extraction (i.e., infusion) and packaging/labeling.
  • Testing (Type 8), for testing cannabis according to state standards prior to sale. The owner of a testing license cannot own any other type of license.
  • Distribution (Type 11), acts as the gateway between cultivation and manufacturing on the one hand, and retail on the other. The distributor’s gateway status is entirely an artifact of regulation – cannabis must be officially tested before it is sold to a consumer, and only a distributor can order the official test. All products must stay in a “quarantine” area at the distributor until they pass testing. Products that fail testing must be destroyed if they cannot be remediated.
  • Transport (Type 13), which can move cannabis between licensees (with a narrow exception). This license does not allow for official testing.
  • Storefront Retail (Type 9), which is the best license to have, and the hardest one to get.
  • Delivery Retail (Type 10), for delivery services that are subject to the vagaries of software platforms and the intransigence of local authorities.
  • Microbusiness (Type 12), which allows the licensee to carry out cultivation (up to 10,000 square feet), non-volatile manufacturing, distribution and retail.
  • Event Organizer

Self-Distribution – A Case of Useful Integration

You may gather from the previous section that shoving a gratuitous and mandatory distributor into the middle of the supply chain creates problems for cultivators and manufacturers. Savvy operators solve this problem by getting a distribution license. This allows the cultivator or manufacturer to:

  • Pick the time and place for the testing of its cannabis products.
  • Avoid paying someone else for the storage of cannabis products as they await test results or purchase.
  • Reduce transport costs (particularly if the distributor is near the other operations).
  • Sell directly to retailers.

The bottom line is that vertical integration in California cannabis is useful as a means to an end, as opposed to an end in itself. Therefore, cannabis operators should carefully consider how vertical integration will benefit their core business before incurring the risks and expenses associated with an additional license.

This article is an opinion only and is not intended to be legal advice.

Massachusetts Prepares for Adult-Use

By Aaron G. Biros
No Comments

Last month, the Cannabis Control Commission, the regulatory body overseeing Massachusetts’ newest industry, finalized their regulations for the market. At the beginning of this month, the state began accepting applications for business licenses. Now with the full implementation of adult-use sales on the horizon, businesses, regulators, consumers and local governments are preparing themselves for the legalization of adult-use cannabis. Sales are expected to begin June 1st.

On March 29th, the Cannabis Control Commission announced their finalized rules were filed, published and took effect. Leading up to the filing, the Commission reports they held 10 listening sessions, received roughly 500 public comments and conducted 7 hearings for roughly 150 policy decisions. The license categories that businesses can apply for include cultivator, craft marijuana cooperative, microbusiness, product manufacturer, independent testing laboratory, storefront retailer, third-party transporter, existing licensee transporter, and research facility, according to the press release.

What separates Massachusetts’ rules from other states’ rules are a few of the license categories as well as environmental regulations, as Kris Kane highlights in this Forbes article. Experimental policies, like the microbusiness and craft marijuana co-op licenses, Kane says, are some tactics the Commission hopes may help those affected by the drug war and those who don’t have the capital and funding required for the larger license types.This is a groundbreaking reform previously unseen in states that have legalized cannabis. 

The Commission will also establish a Social Equity Program, as outlined in the final rules (section 17 of 500.105). That program is designed to help those who have been arrested of a cannabis-related crime previously or lived in a neighborhood adversely affected by the drug war. “The committee makes specific recommendations as to the use of community reinvestment funds in the areas of programming, restorative justice, jail diversion, workforce development, industry-specific technical assistance, and mentoring services, in areas of disproportionate impact,” reads one excerpt from the rules (section 500.002) identifying the need for a Citizen Review Committee, which advises on the implementation of that Social Equity Program.

This is a groundbreaking reform previously unseen in states that have legalized cannabis. Massachusetts may very well be the first state to actively help victims of the prohibition of cannabis.Some municipalities are hesitant and skeptical, while others are fully embracing the new industry with open arms.

For environmental rules, Kane notes the Commission is taking unprecedented steps to address energy usage in the cultivation process, pushing the industry to think about environmental sustainability in their bottom line and as part of their routine regulatory compliance. He says the Commission mandates a 36 watts-per-square-foot maximum for indoor cannabis cultivators.

On Monday, April 2nd the state began accepting applications for businesses seeking licensure. Within a few days, nearly 200 businesses have applied. That number is expected to grow significantly over the next few weeks.

While businesses continue applying for licenses, local governments are preparing in their own way. Some municipalities are hesitant and skeptical, while others are fully embracing the new industry with open arms.

A couple weeks ago, the City Council of Springfield, Massachusetts passed a six-month moratorium on cannabis sales, citing the need for more time to draft local regulations for businesses first. “I believe the moratorium is in place to make sure that we get it right the first time,” Councilor Adam Gomez, chairman of the council’s Economic Development Committee told MassLive. “We don’t have a chance to get it right the second time. The residents of Springfield supported this.” There are also talks of a potential temporary ban in Truro, MA.

Meanwhile in the city of Attleboro, ABC6 News reports Mayor Paul Heroux is “working to make his city marijuana friendly as city councilors work to draft regulation ordinances.” In Peabody, two businesses just received approval to begin operating as medical dispensaries.

California Releases Proposed Emergency Regulations

By Aaron G. Biros
No Comments

Last week, the California Bureau of Cannabis Control released their proposed emergency regulations for the industry. The Bureau, the government agency tasked with regulating California’s cannabis industry, announced the proposed emergency regulations ahead of the highly anticipated January 2018 start date.

The Bureau also published helpful fact sheets and overview documents, providing a good snapshot of the major requirements for different types of licenses. Here are some of the key takeaways:

Temporary licenses will allow businesses to operate for 120 days while their annual license application is being processed. Not surprisingly, local jurisdictions have considerable autonomy. Getting a license seems to be contingent on first getting local approval to operate. According to Josh Drayton, communications and outreach director at the California Cannabis Industry Association (CCIA), working with local governments will be crucial to making progress. “Now that the Brown Administration has created the framework for medical and adult use cannabis, the main challenge we face as an industry is getting local municipalities to move forward with regulations,” says Drayton. “California has a dual licensing process which means that cannabis operators must receive a local permit/license/authorization before being able to apply for a state license. A majority of California cities and counties have yet to finalize their regulations which will delay state licensing.”

The initial reactions to these proposed regulations seem positive, given that this is a culmination of efforts over several years. “The California Cannabis Industry Association welcomes the release of the emergency regulations,” says Drayton. “These regulations represent years of hard work and collaboration between the administration, the regulating departments, and the cannabis industry.”

License Distinctions

A-type licenses are for businesses in the adult-use market, while M-type licenses are for the medical market. Laboratory licenses don’t have this distinction, as they can test both medical and adult-use products.

The record keeping and security requirements seem relatively straightforward, requiring normal surveillance measures like 24-hour video, commercial-grade locks and alarm systems. The rules also lay out guidelines for disposing of waste, including securing it on the premises and not selling it.

Distributors

Distributor licenses appear to have a number of compliance documentation requirements, such as arranging for all product testing, quality assurance and packaging and label accuracy. “Cannabis and cannabis products must pass through a distributor prior to being sold to customers at a retail establishment,” reads the overview the Bureau published. There is also a transport-only distributor license option. Those regulations appear to be more comprehensive than others, with a number of regulations pertaining to appropriate transportation and security measures.

Everything has to be packaged before it gets to retail; Retailers are not allowed to package or label cannabis products on premises. Microbusiness licenses will be available, which should be an exciting new development to follow as the market matures.

Labs

The state will require ISO 17025 accreditation for testing labs. A provisional license is required for a lab to operate in the short term, expiring after 12 months. Laboratory personnel are required to go in the field and do the sampling. Documentation requirements, sample sizes, sampling procedures and storage and transportation rules are also laid out.

Testing labs are required to test for cannabinoids, foreign material, heavy metals, microbial impurities, mycotoxins, moisture content and water activity, residual pesticides, residual solvents and processing chemicals and terpenoids (terpenes). Infused and edible products are required to be tested for homogeneity in THC and CBD concentrations as well. Drayton and the CCIA welcome these new testing regulations, hoping it might improve overall public safety. “We believe that these regulations will address public health issues by mandating the testing of all cannabis products,” says Drayton. “The evolution of the cannabis industry will continue, and we will continue to advocate for good policy that creates solutions for the problems that arise. I believe that we will be visiting and revisiting cannabis regulations for many years to come.”

Certificates of analysis (COA) will be required, showing whether a batch passes or fails testing requirements. Harvest batches that fail testing can be processed for remediation. “Testing laboratories are required to develop and implement a quality assurance program that is sufficient to ensure the reliability and validity of the analytical data produced by the laboratory,” reads the statement on QA and QC.

The Bureau, at the end of their regulatory overview document, lays out some possible enforcement actions, disciplinary actions and citations that could come from noncompliance. “These emergency regulations create a framework for both medical and adult use consumers,” says Drayton.  “January 1, 2018 will be the first date that adults 21 years and older will be able to purchase cannabis without a medical card.”

In the coming weeks, we’ll be breaking down and analyzing the other proposed emergency regulations that the state released. Stay tuned for a breakdown of the California Department of Food & Agriculture (CDFA) regulations on cannabis cultivation, as well as The California Department of Public Health (CDPH) cannabis manufacturing regulations.