california Archives - Green Market Report

Sean HockingSean HockingJuly 6, 2020
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12min1310

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

The Santa Barbara County Grand Jury issued its 2019-2020 Final Report on June 30, 2020. The last section of this report is devoted to the County’s actions relating to the cannabis industry. This last section of the Report is a scathing indictment of the manner in which greed for money and power influenced the governance of Santa Barbara County in its adoption of ordinances relating to cannabis.

The following is an introductory summary of the Report.

“The action taken by the Santa Barbara County Board of Supervisors to certify the development of a robust cannabis industry as the primary objective of the cannabis ordinances has altered the quality of life in Santa Barbara County, perhaps forever.

 “The fulfillment of that objective dictated the actions taken by the Board from the excessive allowance of licenses and acreage, creation of an unverified affidavit system, ignoring widespread odor complaints, not acknowledging the conflict between cannabis cultivation and traditional agriculture, to rejecting the environmentally superior alternatives of limited cannabis development.

 “Instead of a balanced approach carefully evaluating how the cannabis industry would be compatible, both as to amount of acreage and location, the Board simply opened the floodgates. These ordinances must be amended.”

This is the report of a civil grand jury. It is clear, however, that some of the matters discussed in this 26-page Report could well be the subject matter of a criminal grand jury investigation if these same matters were viewed a little differently. In fact, some of the matters described in this Report may well be under consideration by a criminal grand jury.

We are not writing about this Report because we have any particular interest in Santa Barbara County, or because some of the activities described in the Report may be criminal. We are writing about this Report because this Report should be mandatory reading for every member of every Board of Supervisors, City Council, Planning Commission, and Administrative Office that is involved in the considerations of that member’s governed community relating to the involvement of the community with the cannabis industry. This Report should also be mandatory reading for every California legislator and for every executive-level Administrator in any Administrative Department or Agency that has significant involvement with the cannabis industry.

California legalized medical cannabis in 1996 in Proposition 215. California legalized adult-use cannabis almost 20 years later in Proposition 64 – an initiative amendment to the California Constitution. Proposition 64 was ill-conceived and poorly drafted. See Keeping Proposition 215’s Promise. The California Legislature compounded the problems created by Proposition 64 with its attempt to impose regulation and taxation on a well-established industry by force of will. See, See Implementing Proposition 64. The most grievous error of the Legislature, however, is likely its creation of an administrative agency structure filled with intelligent and skilled administrators who were wholly lacking in an understanding of the existing industry as well as in the vision required to guide the conversion of the existing underground industry into a regulated industry. See Background California Cannabis Regulation.

The foundation for the chaos created by the people of California in Proposition 64 and the Legislature was passed on to the Cities and Counties of California much like a dangerous virus. Every City and County received some measure of encouragement, or pressure, from advocates, promoters, advisers, consultants, experts, and voters as well as a host of opportunists. Each had an opinion. Each had an agenda.

None of these individuals had a comprehensive and workable plan for how a particular locality could best fit into California’s regulated cannabis industry. The Legislature failed to design a comprehensive and workable plan for California’s regulated cannabis industry let alone explain how the well-established underground cannabis industry would transition into a regulated industry. As a consequence, most California Cities and Counties have some local version of the chaos that prevails throughout California in its cannabis industry.

Santa Barbara County is different from all other Counties. No other County is likely to have made the same errors as Santa Barbara. Most Cities and Counties, however, have succumbed to a greater or lesser degree to the encouragement, or pressure, that led Santa Barbara County to error so grievously. We recommend those individuals we describe above at least consider those paragraphs of the closing of the Report that follows and how the thoughts of the Santa Barbara County Grand Jury may apply in the locality with which they are involved.

“A more sobering realization for the Jury was that the governance in this matter took the form of some Supervisors aggressively pushing through their own agendas while other Supervisors meekly followed or resigned themselves to the inevitable.

 “Some senior staff in the office of the Santa Barbara County Chief Executive Office and the Santa Barbara County Planning and Development Department became cannabis advocates, losing their objectivity to the point of interfering in the responsibilities of independent agencies and elected officials.”

  “The Board of Supervisors rushed through the cannabis ordinances, ignoring the Santa Barbara County Planning Commission and staff recommendations on verification of applicants claiming eligibility to grow cannabis, to buffer distances for odor, and to not establishing cannabis as a compatible use that would allow for an analysis of compatibility with traditional agriculture. The actions of the Board resulted in the picking of winners and losers.

 “The Board of Supervisors used the mechanism of an Ad Hoc Sub Committee to craft the cannabis ordinances out of public view. These ordinances are now the cautionary tale for other counties in the State of California on what not to do.

 “The Ralph M. Brown Act codified as California Government Code 54950 et seq., declares as follows: 

‘In enacting this chapter, the Legislature finds and declares that the public commissions, boards, and councils and the other public agencies in this State exist to aid in the conduct of the people’s business. It is the intent of the law that their actions be taken openly and that their deliberations be conducted openly.’

The people of this state do not yield their sovereignty to the agencies which serve them. The people in delegating authority, do not give their public servants the right to decide what is good for the people to know and what is not good for them to know. The people insist on remaining informed so that they may retain control over the instruments they have created.’

“The Jury believes the Board of Supervisors, in their hubris, failed the people of Santa Barbara County. Now they must amend the cannabis ordinances to regain the people’s trust.” [Bold added.]

All of the tools exist under the existing laws of the State of California to create a legal cannabis industry that encompasses both medical and adult-use cannabis in which all businesses are in complete compliance with all applicable tax and regulatory responsibilities. The State of California, working with the purported leaders of the cannabis industry, has forcefully demonstrated that it does not know how to produce such a result. This result, if it is to be achieved, will be produced by the thoughtful efforts of the governance of California’s Cities and Counties.

The lesson all local leaders must take from Santa Barbara County is that the decisions each locality makes relating to cannabis must be based on a comprehensive understanding of the interests of the entire community with respect to California’s cannabis industry. Every resident of California is impacted to some degree by California’s cannabis industry. As a consequence, every resident has some interest in California’s cannabis industry. Responsible governance of each locality demands informed and thoughtful compromises relating to the best interests of the entire community in all things, including cannabis.

Cannabis is just another agricultural commodity. As California agricultural commodities go, it is not particularly important from a financial standpoint. As a consequence of greed, this agricultural commodity has received far more attention in recent years than can be justified. For political reasons, this agricultural commodity has long caused injuries to far more California residents than were justified. The legalization of adult-use cannabis in California has raised the financial stakes and imposed a far greater burden on knowledgeable and thoughtful local governance.

The story told in the Report illustrates how difficult it is for local governance to rise to the occasion in view lack of adequate support and guidance from the State. In this regard, some may see a parallel with the States and national leadership in connection with the COVID-19 crisis.

 


Sean HockingSean HockingJune 24, 2020
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14min5642

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

Why is California’s cannabis industry in a state of chaos 2+ years after adult-use sales of cannabis were legalized?  Why did California fail so badly in transforming a stable, lightly-regulated medical cannabis industry into a heavily regulated medical and adult-use cannabis industry?  Why is California’s underground cannabis industry booming while its legal cannabis industry is struggling?  Why do so many self-anointed cannabis experts distribute so much advice of so little value?  Why have the Equity Programs that were expressly created to assist and subsidize economically disadvantaged individuals with start-up cannabis businesses had so little success?

There are hundreds of smart advisors in California’s cannabis industry who can, and will, provide a variety of good answers to each of the preceding questions.  In some instances, many advisors are likely to agree on the best answer to each of these questions.  With respect to some of the preceding questions, we suspect California’s recognized cannabis advisors will have a variety of answers.  Most of these answers, but certainly not all, will be somewhat accurate answers.  Many of these answers will be useful, or helpful.  All will be wrong!

Before we explain why the answers California’s cannabis advisors to our introductory questions will almost universally be wrong, we must address a tangential issue.

This article will solely focus on California’s cannabis industry.  The comments in this article, however, are to some significant degree applicable in every State that has legalized cannabis in some form.  Our comments relating to California’s cannabis industry apply in other States for the same reason the answers of California’s cannabis advisors to our introductory questions will almost always be wrong.

 

California’s cannabis industry, as an industry that moves an agricultural commodity from grower to consumer, is unique.  The cannabis industry in every other state that has legalized cannabis is unique in the same sense.  In any state that has legalized cannabis, there is no other industry in that State that moves an agricultural commodity from farmer to consumer that is close to being comparable to the cannabis industry of that State.  The cannabis industry of every State that has legalized cannabis is also different in some significant respects from the cannabis industry in every other State.

 

Please consider how many times have you heard an advisor with respect to some aspect of the conduct of business in the cannabis industry preface an opinion relating to a business issue involving cannabis with a statement, “The opinion that follows must be adjusted for the laws and regulations of the State in which you are operating.”  We submit that such a disclaimer is not made with sufficient frequency if at all.

 

 

Federal laws impact the cannabis industry in every State.  Federal law may preempt state law, but in most instances, federal law will not preempt State law.  Every state that legalizes cannabis in some form establishes a body of law specifically applicable to the State’s cannabis industry.  A State’s cannabis businesses will also be subject to the general business laws of the particular State.  The general business laws may be preempted by those laws enacted specifically for the State’s cannabis industry, but in most instances, there will be no preemption.

 

California’s cannabis industry is not unique because cannabis remains federally illegal as a commodity.  California’s cannabis industry is not unique because trafficking in cannabis is subject to the tax penalty of the Internal Revenue Code (“IRC”) §280E.  Both of these issues are frequently discussed as making the cannabis industry in California unique.  These aspects of the conduct of business in the cannabis industry apply in every state that has legalized cannabis.

 

 

California’s cannabis industry moves an agricultural commodity from a cultivator to a consumer.  This industry is at the same time both the simplest form of this type of industry and the most complex form of this type of industry.  In its simplest form, a farmer grows this commodity and sell part of the cannabis crop to her next-door neighbor.  Compare growing cannabis to growing tomatoes.  In the simplest of circumstances, there is no substantive difference between the movement of tomatoes as a commodity from grower to consumer and the movement of cannabis.

 

 

Now consider the complexity of a commercial tomato industry that moves millions of tons of tomatoes each year from farmers to consumers.  The conduct of business in California’s cannabis industry is subject to all of the complexities that apply to the conduct of business in California’s tomato industry.  However, California added laws and regulations to most aspects of the conduct of business in the cannabis industry that do not apply to tomatoes or any other commodity-based industry.  Every aspect of the movement of cannabis as a commodity from cultivator to consumer in California is subject to cannabis-specific laws and regulations in addition to those laws and regulations that apply to the movement of all commodities from growers to consumers.

 

 

The cannabis industry in every other state that has legalized cannabis is unique in that State from every other commodity-based industry for the same reason that  California’s cannabis industry is unique as a commodity-based industry.  In every state that has legalized cannabis, the movement of cannabis as a commodity from cultivator to consumer will be subject to cannabis-specific laws in addition to those laws that apply to the movement of all commodities.  It is the cannabis-specific laws and regulations that make a State’s cannabis industry unique as a commodity-based industry in the State.

 

Not only does every State that has legalized cannabis have a unique commodity-based industry, but the cannabis industry of every State will also differ to some extent from the cannabis industry in every other State.  Even if one State adopts a legal cannabis regime that is identical to another State, the cannabis industries in these two States will be different to some degree.  Invariably, there will be some differences in the general laws of each State when you take into account all of the general bodies of law that apply to the conduct of business in a commodity-based industry in a State.  Those bodies of general law applicable to the conduct of business that come immediately to mind include tax law; commercial law; real estate law; securities law; corporate law; transportation law; insurance law government law; and administrative law.

 

As a consequence of saturation, we have ceased to be offended by articles and webinars that purport to provide solutions to cannabis business issues that are applicable in every State that has legalized cannabis.  While these presentations may provide useful guidance, the answer to any question relating to the conduct of business in a State’s cannabis industry will always involve some State-specific gloss.  In some instances, the gloss will be relatively minor.  In other instances, the best answer to a question relating to the conduct of a cannabis business in one State will be completely different from the answer to the same question with respect to a cannabis business in another State.

 

 

The conduct of business in California’s cannabis industry is a circumstance where having only a little information will very likely prove fatal for a cannabis business.  The licensing of cannabis businesses in California provides an illustration.  Hundreds of advisors have assisted thousands of individuals in California in securing cannabis business licenses – frequently at significant cost.  Many individuals successfully secured licenses.  Many did not.  Of the thousands of individuals who secured cannabis business licenses, almost none will establish a successful cannabis business.  Securing a local license for the conduct of a cannabis business is a necessary first step, but it is solely one small step among many on the path to a successful business.

 

Long-term success in any business function in California’s cannabis industry requires a comprehensive general understanding of the industry as well as a comprehensive understanding of the business niche the particular business fills in this industry.  Such an understanding cannot be achieved without also understanding how that same business function would be conducted in any other commodity-based industry.  Cannabis-specific laws and regulations add a gloss to the general laws and regulations that apply to the conduct of the same business function in other commodity-based industries.

 

California’s cannabis industry is in a state of chaos at the present time.  This state of chaos exists because so many leaders in the industry, both in the private sector and in the public sector, lack a comprehensive general understanding of this commodity-based industry.  Unfortunately, substantial amounts of money will be lost, and the hopes of many will be dashed, because so many smart people so freely opine without fully understanding the extent to which the unique aspects of California’s cannabis industry make their opinions erroneous to a greater or lesser degree.

 

The preceding is particularly true in connection with the management of taxes which is our area of expertise.  We have not yet examined a California cannabis business that we considered to be properly managing its tax responsibilities.  Most California cannabis businesses are throwing away money through the failure to properly manage taxes except for those California cannabis businesses that are succeeding with tax management through tax evasion.


Kaitlin DomangueKaitlin DomangueJune 8, 2020
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3min7180

Leading cannabis manufacturer in California, Procan Labs, announced its victory in a monumental lawsuit against the state of California. 

The Los Angeles Times reported on February 14th, 2020 that Santa Barbara County law enforcement confiscated over $2.6 million in cannabis oil as well as over $620,000 in cash from Barry Brand, a well-known local businessman, and cannabis operator. Brand is a longtime Gerbera daisy grower and shifted to cannabis. Brand is a prominent advocate in the cannabis community dedicated to helping develop marijuana policy, even hiring lawyers, lobbyists, and communication firms to support his efforts. Brand maintained his position that he was operating legally, but the District Attorney highlighted technical noncompliance problems that ignited the belief that Brand was acting criminally. 

The litigation lasted for three months, and Judge T. Anderele ruled in the state of California that criminal laws such as the state Controlled Substances Act do not apply to licensed commercial cannabis activities, such as Brand’s operation. It was also confirmed that there were no illegal cannabis oils of any kind. All substances and products found on the premises were correctly identified with METRC RFID tags and in the system prior to shipment and seizure. 

John Armstrong representing Horwitz+ Armstrong law firm was lead counsel for Eagle Bay Enterprises (d.b.a. Procan Labs). He said, “With millions of dollars at stake, licensed cannabis operators should not be at risk of losing their business because police mistake lawful cannabis operations for illegal black market activities. California established the Bureau of Cannabis Control (BCC) and empowered it to support and regulate legal cannabis activities, to the exclusion of heavy-handed law enforcement regulating such activities. This decision shows that our courts will side with the cannabis industry when provided evidence of good faith efforts to comply with state regulations. We would like to thank CREC Compliance for its assistance in verifying legal compliance by Procan. CREC’s help was invaluable in securing the eventual positive result.”

Many cannabis brands came to the defense of Procan, namely longtime distribution leader, HARDCAR. “Mark Unterbach, CEO of Procan Labs, remarked, “HARDCAR’s assistance was instrumental in assisting us maneuver through the legal roadblocks that had been placed in the way of our efforts to simply secure the return of our inventory.”

This is a big win for cannabis businesses not only in California but nationwide. 


Kaitlin DomangueKaitlin DomangueJune 4, 2020
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7min5020

Businesses across the nation are suffering at the hands of protesters attempting to send a message about the brutal killing of George Floyd. Many protests have been peaceful, but there are many that lead to looting and damaging buildings, and cannabis dispensaries are included. Despite being considered an essential business throughout the pandemic, many cannabis retail stores found themselves in the crosshairs of these looters. 

The protestors describe these acts of violence and damage to their cities as years of pent up rage and unheard voices, stemming from what they believe is a racially biased system against black Americans. The civil unrest has incited the President to release the National Guard across various states. There have been many deaths, arrests, and injuries during this tense time in history. 

According to social media videos, MedMen in Los Angeles had two locations broken into and robbed. The man filming the video can be heard saying, “They are cleaning MedMen out” as protestors o just plain looters leave the store with red shopping bags, filled with the things they stole. 

MedMen did not want to comment on the situation. However one employee of MedMen posted on LinkedIn, “It is not hard for me to empathize with, and I am sensitive to those who view MedMen as a symbol of the inequality that led to the anger expressed last night.” He further emphasized his support for those who feel outraged by the killing of George Floyd, and he himself feels “angry that a group of police officers sat idly by while one of their own murdered George Floyd by standing on his neck for nearly 10 minutes.” MedMen reported Monday that all of their stores will be closed until further notice. They have operations across six US states. 

“Effective immediately, we are temporarily closing all stores and the corporate office to protect the safety of our employees. The safety of everyone in the MedMen family is the most important thing right now, and we are grateful to report that while our stores were damaged, our employees and security guards were unharmed.” The company said in an internal memo, first reported by Marijuana Moment

Jushi Closes Temporarily

Jushi Holdings (OTC:JUSHF) Chairman and Chief Executive Officer Jim Cacioppo said in a statement:

We fully support an individual’s right to freedom of speech and the touching peaceful demonstrations that we have seen around the country. We are heartbroken by the murder of George Floyd and the pain it is causing communities across the country that we not only work in, but live and love.

Unfortunately, certain opportunistic bad actors have at times manifested unacceptable behaviors. This past weekend, our Center City and Northern Liberties locations in Philadelphia were broken into, making it impossible for us to safely operate. In addition to these two temporary store closures, we have limited our hours at certain locations in Pennsylvania and Illinois. Please check www.beyond-hello.com for the latest details. It is our hope to begin safely servicing our customers soon from the impacted store locations and apologize for any inconvenience this may cause our patients and customers.

As committed members of the cannabis movement, we will also continue to fight for equality and work to overturn racially biased laws that ruin lives and unequally target disenfranchised communities and people of color. 

Rappers Berner and B Real both reported robberies at their stores, too. B Real Tweeted on May 30th, “Today as a country we hit a low point.  Rioting, looting  and burning down business all during a pandemic isn’t going to make the change needed. It will only set us back. Protest peacefully and remove the instigators that aren’t there in the name of George Floyd.” 

The Chicago Tribune reported that all of their dispensaries would be closed indefinitely either to prevent looting or to clean up from the damage that has already been done. Kris Krane, president and co-founder of 4Front Ventures, who owns the robbed dispensary Mission South Shore, told The Chicago Tribune, “The store’s been pretty much ransacked. Nothing was going to hold that many people back.” Krane watched 30 to 40 people break into the dispensary on security cameras. 

Most of the cannabis industry seems optimistic that they will rebuild from this, and a lot of them say they understand why this happened. “We can replace windows, we can grow more pot, we can have empathy.” said the MedMen employee. 


Sean HockingSean HockingMay 6, 2020
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17min6850

 

If you wish to re-publish this story please do so with the following accreditation
AUTHOR:  aBIZinaBOX Inc. CPAs – Jordan S. Zoot, CPA
PUBLISHER:  CANNABIS LAW REPORT

 

This is the first of four articles we have been writing while sheltering-in-place.

This first article summarizes our views on the impact of the COVID-19 crisis on the cannabis industry with respect to financial record-keeping and tax reporting issues. More accurately stated, we will address the impact of the economic depression triggered by the COVID-19 crisis on the financial future for the cannabis industry.

As our followers are aware, we have regularly addressed financial record-keeping and tax reporting issues relating to the cannabis industry as well as the impact of tax management on success in this industry. It appears this lesson has not yet been learned by many in the cannabis industry.

See, The Growth of the Marijuana Industry Warrants Increased Tax Compliance Efforts and Additional Guidance]

The importance of tax compliance will eventually be learned by everyone involved in the cannabis industry.

On February 28, 2019, we published [Dispensaries Need Accurate Receipts] to describe the financial records a dispensary must prepare and maintain, and the receipts it must issue, in order to establish it complied with its tax responsibilities.

We published [Which Set of Books?] to provide every California dispensary with a guide for the preparation and maintenance of the financial records a dispensary needs to have in order to be prepared for the inevitable tax audit.

Learning the importance of tax compliance will be expensive for some. For a number of players in California this lesson may prove particularly costly. The fall-out from the Grand Jury investigation that is the basis for the Weedmaps subpoena may take-down a number of California cannabis businesses even if all of the targets of this investigation avoid criminal prosecution.

The information secured by the U.S. Attorney through the Weedmaps subpoena will eventually find its way to other governmental agencies for use in civil proceedings, both federal and state. Further, the California Attorney General is very likely already involved in this investigation. Cannabis businesses evade far more in California taxes than in federal taxes.

The cannabis industry was turning downward before the COVID-19 crisis. California’s cannabis industry was facing a dramatic downturn coming into 2020. The depression precipitated by the COVID-19 crisis converted what would have been a substantial market-place adjustment into a chaotic collapse. California’s cannabis boom was the biggest. California’s bust is of comparable dimension.

Our primary interest in cannabis involves California’s industry. Our insights relating to tax management for California’s cannabis industry can be readily adapted by qualified professionals for other jurisdictions. Challenges similar to those that confront California’s cannabis businesses are commonly encountered in other jurisdictions.

Our second article describes “Better Mousetraps” for the ownership and operation of cannabis dispensaries.

Our second article also discusses the difficulties cannabis dispensaries will encounter in adjusting to the post-COVID-19 new normal.

Our third article describes the approaches that will maximize profitability in moving cannabis from cultivator to consumer. Profits for all businesses are maximized through the selection of operating entities, careful financial analysis, and the management of taxes and other financial obligations. Our third article describes those techniques that will maximize profitability for this segment of the cannabis industry post-COVID-19.

Our fourth article addresses the impact of the COVID-19 crisis on “Social Equity” programs in the cannabis industry. Our fourth article will be primarily of interest to individuals involved in California’s cannabis industry. California has been a leader in the effort to utilize Equity Programs to remedy some of the social inequities created by failed governmental policies relating to cannabis.

The COVID-19 induced depression will prove a death knell for those Equity Program businesses that do not adjust. Equity Program businesses that quickly adapt to the new normal will be able to accomplish far more than they would have been able to accomplish in the absence of this crisis. For those Equity Program cannabis businesses that quickly adjust, the financial collapse of the past four months creates opportunities for success that would not have existed in the absence of this collapse.

We have read at least fifty articles in recent weeks offering advice to cannabis businesses relating to the impact of the COVID-19 crisis. Most of these articles accurately address some issues. Most provide some worthwhile thoughts.

However, any article that does not assume the cannabis industry will be dramatically transformed by the COVID-19 induced depression is flawed.

 

The cannabis industry began a downward adjustment in a number of jurisdictions in 2019. California’s cannabis industry in particular was poised for a substantial market-driven adjustment by the end of 2018. The inevitable downturn in California’s cannabis industry was obvious to any astute observer. California growers have produced far more cannabis than Californians consumed since the ‘70s. The combination of an ill-conceived and poorly-drafted amendment to the California Constitution to legalize adult-use cannabis, incompetent implementation of California’s regulation of cannabis, and excessive expansion of this industry, made a precipitous downturn inevitable.

 

The COVID-19 crisis has condensed what would have been a tumultuous restructuring of California’s cannabis industry driven by market forces into a precipitous collapse.

 

The preceding statement should surprise no one. Everyone involved in California’s cannabis industry could see it was in difficulty in 2019. Now the entire United States economy has gone from steady growth to severe depression in a period of weeks. The cannabis bubble in California was the biggest cannabis bubble, and it has popped.

The U.S. economy will recover. California’s economy will recover. Full recovery for both will take years. Of greatest significance for purposes of planning, the new normal will be different. Some industries will be little changed by this depression. For other industries the change will be dramatic and permanent. California’s cannabis industry will rapidly recover. The foundation for a successful cannabis industry in California remains. Long-term success in California’s cannabis industry, however, will require dramatic changes for most businesses.

The days of easy money in California’s cannabis industry will soon disappear. Recovery from this crisis for California’s legal cannabis industry will necessarily take place in a severely depressed economy. Long-term success in California’s legal cannabis industry will require that such businesses become financially competitive with the underground distribution of cannabis. Price-competition and smaller margins will eliminate all cannabis businesses that are not financially efficient.

We are writing this article, and the three that will follow, to describe how climbing out of this depression has created an opportunity for success for some California cannabis businesses.

All commodities that move from cultivators to consumers:grapes, tomatoes, corn, etc, are different.

Cannabis is an agricultural commodity. It is a precious commodity, but it is not the most precious commodity. Saffron is far more precious than cannabis.

We have always preferred to compare cannabis as a commodity to tomatoes. Both of these commodities are easily grown. Both lend themselves readily to backyard cultivation. Cannabis is readily grown in small, valuable quantities on a small scale.

There will always be an underground cannabis market because cannabis is so easily grown in a backyard. Both tomatoes and cannabis also lend themselves to mass production, processing and retail consumption in a wide variety of forms.

Tomatoes are most efficiently grown on large farms where the tomatoes are picked by machines and trucked in massive gondolas to factories for processing into consumer products.

Cannabis on the other hand is most efficiently grown in relatively small quantities by knowledgeable growers. For many years the Emerald Triangle produced a substantial portion of the high-quality cannabis consumed throughout the United States. This phenomenon was the consequence of the many expert growers who settled in California’s Emerald Triangle.

 

 

The “new normal” for California’s cannabis industry will not be the industry most visualized six months ago. While we cannot wholly describe the contours of this new normal, we can describe the business practices that will maximize financial efficiency for the operation of cannabis businesses in this new normal. Those cannabis businesses that are most financially efficient will be far more likely to survive in the long-term than the less financially efficient.

Many features of the new normal can be extrapolated from an examination of the forces that drove the growth of California’s cannabis industry. The lure of financial success was very likely the strongest driver of the bubble that just burst. The real and supposed medical benefits of cannabis use was a significant driving force for some. The increased recognition of the social injustice caused by federal and state prohibitions of cannabis was another significant force. A new source of tax revenue was a critical motivator for many who would otherwise have been inclined toward continued prohibition. The opportunities for success opened by a big new legal industry demanded exploitation by brokers, developers, manufacturers, trade show promoters, and experts of all shapes and sizes. Those who saw profit in building this new industry was a substantial driving force in California and elsewhere.

No doubt there are forces we failed to mention. We may not have accurately interpreted the significance of some forces. Any errors in this regard are of little import.   An understanding how various forces drove the growth of the cannabis bubble in California merely provides a foundation for selecting the courses of action that are most likely to assure success for California cannabis businesses in the new normal. The new normal will require success in a severely depressed economy in a highly competitive, regulated industry with too many participants. It will not be easy.

One of the more interesting aspects of business planning for the cannabis industry is the fact the industry is so heavily impacted by state laws even though cannabis is an easily-grown agricultural commodity. Another interesting aspect of business planning for the cannabis industry is that local jurisdictions, cities and counties, invariably impose local taxes and regulations on the cultivation and sale of this commodity.

 

 

One additional item must be noted as it is likely to have a greater impact on the future of California’s cannabis industry than the COVID-19 induced depression. Governor Newsom’s proposed budget for California for the 2020-2021 fiscal year makes a significant change in the collection of cannabis taxes. If this change in law is adopted, it will dramatically alter the flow of money through California’s cannabis industry.

 

See Governor’s Cannabis-Related Proposals published February 14, 2020.] We will discuss the impact of Governor Newsom’s proposal in the next three articles. [California Gov. Gavin Newsom’s administration on Friday announced plans to simplify the state’s cannabis regulatory and tax systems, which have been blamed for enabling an illicit market to continue to thrive.]

[The proposed changes, which will be in Newsom’s state budget proposal, come in the wake of recommendations by an independent agency that the state overhaul its cannabis tax regime.]

What will be the new normal for California’s cannabis industry? Cannabis trade shows are history. They will not return. Too much production equipment has been sold into the industry to support continued increases in the sales of such equipment. Real estate promoters have created more cannabis investment opportunities than this industry can support.

The lure of financial success in cannabis continues to exist, but easy access to investment capital has ended. The regulatory agencies California established for this industry will not disappear. Administrative agencies are more difficult to eradicate than crabgrass. California continues to expect to collect substantial tax revenue from its cannabis industry. California will figure out how to collect this tax revenue. California will make certain its cannabis industry survives. More than ever before California needs the tax revenue a regulated and taxed industry will generate.

The new normal in California will consist of regulated, tax-paying cannabis businesses that can compete commercially with an underground market. The three succeeding articles will describe how regulated, tax-paying cannabis businesses can survive and prosper in this new normal.

 

 


Kaitlin DomangueKaitlin DomangueFebruary 13, 2020
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4min6390

Its time for your Daily Hit of cannabis financial news for February 13th, 2020. 

On the Site

Meet the Weedy Award Finalists 

The founder and Editor of WeedWeek, Alex Halperin, has created the Weedy Awards, with winners being announced on February 28th in Hollywood. Awards will be presented in categories like best grow, the most socially responsible company, the best delivery company, the best edibles, and the people’s choice cannabis celebrity. 

Aurora Cannabis Stock Slides as Revenue Falls

Canadian-based Aurora Cannabis Inc. (NYSE: ACB) saw its shares falling in early trading after the company said that revenues fell in the second quarter of fiscal 2020 ending December 31, 2019. Aurora reported that its total net revenue reported in Canadian dollars fell 26% sequentially to $56 million in the second quarter from $75 million in the first quarter of 2020. It was higher than the 2018’s second quarter, which delivered net revenue of $54 million.

Neptune Wellness Delivers Solid Quarter as Sales Increase

Neptune Wellness Solutions Inc.  (NASDAQ: NEPT) (TSX: NEPT) announced its financial results for its fiscal third-quarter ending December 31, 2019. Total revenues for Neptune were $9.1 million, a sequential increase of $2.6 million or 41% over the second quarter ended September 30, 2019. This was also an increase of $2.6 million or 40% compared to $6,538 for the three-month period ended December 31, 2018. 

In Other News

SLANG Worldwide Partners with Cali Cannabis Cookie Company 

SLANG Worldwide Inc. (CNSX: SLNG), leading cannabis consumer packaged goods company, has partnered with Cookies, a leading California-based cannabis brand. 

Pursuant to the deal, SLANG will bring Cookies’ products to the Oregon market. 

Cresco Labs Expands C-suite

Cresco Labs will name marketer Greg Butler as its first-ever Chief Commercial Officer. Butler has past supported the brand in a CMO capacity, developing the commercial growth strategy for the brand. He has strong plans to develop Cresco’s market in 2020, as well as promoting diversity and social equity in the cannabis space. 


Kaitlin DomangueKaitlin DomangueFebruary 12, 2020
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5min15390

Amid layoffs appearing as a constant, The Supreme Cannabis Company is the latest in the industry to let a percentage of its staff go. Last night after the market’s close, the company announced a 15% layoff, releasing a third of corporate positions and 13% of its operational ones. This report comes after the announcements of companies like Tilray and Aurora also slashing jobs. 

All hope is not lost though in the ganja workforce. Leafly found 243,700 full-time-equivalent (FTE) jobs in the United States that are supported by legal cannabis as of January 2020. That is a 15% annual increase. 

This data was reported in Leafly’s fourth annual Cannabis Jobs Report. Even more encouraging, the report shows that the industry created 33,700 new jobs nationwide in 2019, effectively making it the fastest-growing job arena in the United States. 

According to the report, Massachusetts, Oklahoma, and Illinois are leading the fight in terms of employment expansion. Massachusetts recently celebrated the one year anniversary of legalizing cannabis for adult-use in the state and added 10,226 jobs to boot. Oklahoma saw a 221% growth in 2019, supporting 9,412 full-time jobs. Illinois adult-use market rolled out on the first of the year, and early 2020 data shows this is already a $470 million annual market supporting 9,176 jobs.

An interesting tidbit of information, Massachusetts has more cannabis industry workers than hairstylists and cosmetologists, and Illinois has twice the number of cannabis industry workers than they do meat packers. When compared to other industries, it is truly amazing to see the creation of jobs in the United States by the industry, as well as the cannabis industry’s growth in general. 

Though the previously mentioned states take the prize for the fastest job growth, California is still America’s largest cannabis employer. However, Colorado may be the nation’s biggest per-capita cannabis job market. With California offering one job per 980 residents, Colorado supplies one job per 165 residents. 

Colorado is also passing Washington state in terms of jobs. Though both states legalized cannabis for adult-use in 2012, Colorado supplies nearly 10,000 more jobs than Washington state, despite Washington’s population containing nearly 2 million more residents. 

Despite cannabis job expansion’s rapid growth in most of the country, California and Michigan suffered technical job losses. 

Leafly’s experts estimate that their job markets fell due to changes in laws and regulations. In California, an estimated 8,000 jobs moved from legal to non-legal status, but as mentioned before it is still America’s largest cannabis job provider. Michigan’s new regulatory processes pushed hundreds of legally operating dispensaries into illicit status. 

Leafly started their annual job counts four years ago, upon the discovery that federal and state labor economists do not account for state-legal cannabis jobs in their employment reports. The reason? Federal prohibition. The NAICS (North American Industry Classification System) codes classify cannabis retail stores in the same category as art supply stores, hot tub stores, and auction houses. While cannabis cultivators have the same job code as hay farmers and agave growers. 

It is important to note that this report does not include jobs created by CBD since it’s recent change in legal status. Because the regulations for CBD differ from state-legal cannabis, there is no data to build from yet.


Debra BorchardtDebra BorchardtOctober 27, 2019
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5min36921

On the October 27 episode CBS news program exposed the California cannabis illegal grow problem. The show highlighted that more supply is grown than is sold within the state and that most of the surplus is being shipped east to states where marijuana is still illegal and can be sold at a higher price.

The program interviewed one farmer, who was trying to grow his cannabis legally, but because of onerous taxes and numerous fees, he can’t make a profit. Mikey Steinmetz, Co-founder of Flow Kana walked the CBS reporter through the company’s clean, shiny and very expensive factory to show what a legal operation looks like. He, too, bemoaned the state’s inability to control the illicit market.

Todd Kleparis, the CEO of cannabis security and distribution company Hardcar wrote, “Last month, it was announced that there had been a significant license contraction for cultivators, manufacturers, and retailers in the state. There was a 48% drop in active cultivation permits and a 29% drop in licensed manufacturers, according to statistics offered by Marijuana Business Daily. This loss in licenses for cannabis was because those who had been approved for temporary licenses for cannabis-related operations (that expired earlier this year) couldn’t meet the regulatory requirements for obtaining provisional and annual permits.”

He went on to add, “More importantly, there is a significant barrier to entry, both financially, and in terms of compliance, to the legal cannabis market in the state that once held such promise for cannabis. Those who once had a hope of moving from grey to legal are left to consider going back into the shadows, rigorously pursuing the investors needed to build capital for licensing, or give up altogether.”

Jordan Zoot pointed this out in a previous piece on Green Market Report saying, “California’s underground economy generates between $60 to $140 billion in unreported revenue annually, according to a University of California at Los Angeles Labor Center report, depriving the state of $8.5 billion in corporate, personal, and sales and use taxes each year.

A pilot program has allowed a team of agencies in Sacramento and Los Angeles to work together to investigate and prosecute the most outrageous felony-level multijurisdictional underground economic crimes in California. AB 1296 builds on the success of a state pilot program by permanently establishing law enforcement teams in Sacramento and Los Angeles and authorizing additional teams in the three other major metropolitan regions of the state: San Diego, the Bay Area, and Fresno.

Investigative teams have identified $482 million in unreported gross receipts and $60 million in an associated tax loss to the state. Additionally, through its criminal enforcement actions, the pilot program has recovered over $25 million in lost tax revenue, victim restitution, and investigation costs.

The legislation strengthens the program by ensuring multi-agency collaboration between several governmental entities, including the Department of Justice, the Department of Tax and Fee Administration, the Franchise Tax Board, and the Employment Development Department. Together these agencies combat wage theft, tax evasion and other crimes in the underground economy.

Zoot also determined that “The taxes that California should be collecting are approximately 31% of the gross receipts of cannabis businesses, or $960K for each “black market” cannabis entity, and $1.1MM per legal cannabis entity. The annual total for cannabis taxes for the “black market” and legal business should be $3.66B. It is our recollection CDTFA recently announced the cannabis taxes collected for the second quarter of 2019 were $144.2MM[3] vs. $915MM California should be collecting.”

 


StaffStaffOctober 18, 2019
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9min9200

Guest opinion piece by Todd Kleperis, CEO of Hardcar. 

Protecting What’s Left of the California Cannabis Industry

Many people within the cannabis industry operate on the assumption that it’s safe to move cannabis products and cash within states; after all, peace and love are all that the plant is about, right? 

As an established cannabis security professional who has been operating in California since before legalization with my cannabis security company, HARDCAR, I can confidently confirm that when it comes to participating in the legal market, many are willing to trade in the peace and love of the plant for criminal activity and potentially life-threatening situations. 

I hate to say it, but the California cannabis industry is slowly killing itself and has the potential to literally endanger lives as a result of this loss of a promised regulated system that intended to keep cannabis clean of criminal activities. 

Pushing Cannabis Back into the Shadows

With a recent contraction of hundreds of cannabis licenses, California could be getting itself into is a situation that threatens the security and safety of those moving cannabis, and cannabis cash, across the state. 

Last month, it was announced that there had been a significant license contraction for cultivators, manufacturers, and retailers in the state. There was a 48% drop in active cultivation permits and a 29% drop in licensed manufacturers, according to statistics offered by Marijuana Business Daily. This loss in licenses for cannabis was because those who had been approved for temporary licenses for cannabis-related operations (that expired earlier this year) couldn’t meet the regulatory requirements for obtaining provisional and annual permits. 

More importantly, there is a significant barrier to entry, both financially, and in terms of compliance, to the legal cannabis market in the state that once held such promise for cannabis. Those who once had a hope of moving from grey to legal are left to consider going back into the shadows, rigorously pursuing the investors needed to build capital for licensing, or give up altogether. 

The Bureau of Cannabis Control has done what it can to regulate a ferociously growing market, yet the job just proved to be too tremendous to regulate cannabis on such a large scale. No matter who is at fault for where we’re finding ourselves now, the State of California has deprived good human beings of the ability to provide reliable and convenient products to their established clients with these barriers for entry that make participating in the legal market a no-go. 

Is Cannabis in California Safe at All?

Those who operate in the grey market of cannabis are forced to do business within the shadows, but unfortunately many aren’t taking the necessary precautions to protect their safety while moving cannabis and cannabis cash. We’ve heard of, and even seen, cars with cannabis leaves peaking out of the trunk in an effort to transport the crop. People are transporting thousands of dollars of cannabis cash across cities, even the state, with no protection or precautions to protect the employee against being robbed. 

Licensed growers, manufacturers, distributors, and retailers are even putting themselves at risk with a lack of security on cash, product, and people. Despite the ideals that cannabis-related crime would begin to fall with the legalization of cannabis, people are still facing gun-related violence in California over cannabis. “People are getting shot over this plant,” said Ben Filippini, a deputy sheriff in Humboldt County said to The Atlantic, “All legalization did here was to create a safe haven for criminals.” In Humboldt County, the largest cannabis-producing region of the United States, 717 per 1 million people go missing each year. 

Across the state, delivery drivers, who can carry up to $10,000 in cash, are being robbed by criminals eager to take what the legal market has. To carry cannabis and cash without protection is just sheer lunacy. Shame on anyone involved in cannabis who will willingly put their people in harm’s way for a profit.  

Despite efforts to keep gangs and drug cartels out of the legal markets, it is speculated that those involved in organized crime are heading from prohibitionist states in the east to west to use California’s legal cannabis to feed illicit markets. 

While the headlines may feed us contradictory statements on the connection between cannabis and crime rates, we can’t deny that crime within cannabis still exists and persists. People want what licensed cannabis can provide and produce, and are willing to go to any lengths to get it. 

Simply put, the California cannabis industry is killing itself and endangering what’s left of it by its own lack of foresight towards its own regulations towards safety and security right after they got out of the gates.

Whether they like it or not cannabis will continue to be bought and sold in the Golden State and regulators will just lose their hold on a large portion of what could have been a tremendously large regulated market. 

Protecting What We Have Together

The regulated cannabis market in California has come too far to endanger what we’ve built. 

HARDCAR was built from the ground up to protect the cash, product, and most importantly the people of cannabis to ensure the safety of California’s legal cannabis while setting a standard for the state to strive to as far as enforced safety and security compliance. 

Our efforts have come from recognizing that cannabis can be dangerous and will continue to be if we don’t get the safety of cannabis under check now before more lives are unnecessarily lost. 

California and other states can work to develop the intelligence to recognize cannabis crime and put in the security measures to ensure it no longer persists. Just recently, we have uncovered one firm out of Colorado that carries up to half a million dollars in cash at a time, without any protection, and as expected, they have a target on their head. As a community around cannabis, we need to work together to intervene in these criminal activities before they have a chance of coming to fruition. 

Catching the cannabis industry before it becomes victim to crime starts with lessening the barriers to entry to receiving a cannabis license to allow people to operate legally, while also taking the proper security measures to ensure that cannabis product, cash, and people are safe. 

 


Debra BorchardtDebra BorchardtOctober 16, 2019
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6min12000

Green Market Report reported news last week that Trump associates who had been arrested for campaign finance violations had applied for marijuana licenses in Nevada. It also seems one of the gentlemen tried to pursue licenses in California as well.

The San Francisco Chronicle reported that Andrey Kukushkin had attempting to build a cannabis business in the Bay Area. The paper said that Kukushkin had some control in a variety of cannabis companies named Oasis Venture, Legacy Botanical Co., and Venture Rebel Inc. It was reported that Kukushin first entered the space in 2015 as his Rebel Venture Inc. company was contracted by the medical marijuana dispensary MediThrive to manage its Mission Street location.

This information came about as Kukushkin sued his partners in 2018 claiming they cost him $1 million by running the company into the ground. Venture claims it gave MediThrive a million dollars to renovate a storefront and purchase inventory. The case alleges that the inventory got diverted to another business and the investment was squandered.

It looks as if this case is continuing as the latest filing is dated 9/3/2019. Cannabis law firm Greenspoon Marder seems to be representing Kukushkin in this case and Green Market Report is in the process of confirming whether this is still the case.

More recently, his Oasis Venture company planned to turn a large ranch in Livermore into a cannabis farm. It seems the neighbors weren’t so keen on the idea. Oasis Venture originally applied for a cultivation permit in 2017 but was denied. The paper reported that a business partner by the name of Chuk Campos wrote a letter to the Alameda County saying Oasis was going to use the cannabis to advance cancer research. The article says Campos is now distancing himself from Kukushkin.

According to CannaBiz Media, Andrey Kukushkin appeared on 11 cultivation and manufacturing licenses in California relating to Trava Group LLC., which wasn’t mentioned in the Chronicle story. Trava Group is based in California. CannaBiz said that the licenses appear to have expired, yet a story in the Mojave Desert News says a license was awarded to Trava Group for delivery only.

The Sacramento Bee is reporting that the FBI is investigating whether cannabis business people have tried to bribe California politicians. The Bee is suggesting that it could be Kukushkin that is being investigated, which is a logical conclusion since the group also tried to bribe politicians in Nevada in order to get licenses approved.

The Sacramento Business Journal reported that “Kukushkin’s business dealings extend to Sacramento’s legal cannabis industry, where he is a business partner of Garib Karapetyan, the CEO of Capitol Compliance Management, which is the group behind nearly one-third of Sacramento’s cannabis dispensaries.”

The Kolas dispensary brand is owned by Capitol Compliance and is up to nine of the 30 dispensaries licensed by the city of Sacramento. “Karapetyan has permits for eight dispensaries in Sacramento, according to The Sacramento Bee, making him the single largest permit holder for dispensaries in the city.”

The Bee had this statement: “If this story is true, then our cannabis licensing process, which was designed to protect consumers and reward local law-abiding businesses, is being improperly exploited,” said the mayor’s spokeswoman, Mary Lynne Vellinga, in a statement provided to the Business Journal. “The mayor is calling for an immediate investigation and will lead an effort to add additional safeguards to licensing process.”

 

 



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The Green Market Report focuses on the financial news of the rapidly growing cannabis industry. Our target approach filters out the daily noise and does a deep dive into the financial, business and economic side of the cannabis industry. Our team is cultivating the industry’s critical news into one source and providing open source insights and data analysis


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