April 19, 2022

Cannabis Licensing Process in Massachusetts to Ensure Social Equity

Boston Skyline at Night
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Massachusetts adult use sales data for March 2022 was recently posted on the state’s Open Data Platform. March 2022 adult use retail sales, at $120 million, were up 9.4% from a downwardly revised $110 million (previously $117.9 million) in February 2022 and up 12.8% from March 2021.

Average daily sales in March 2022 were a bit under $3.9 million versus a downwardly revised $3.9 million plus in February 2022 (from $4.2 million).

Massachusetts Retail Cannabis Sales

Massachusetts Cannabis Control Commission (CCC) also provides information on the number of licensed and operating cannabis businesses in the state. As of the end of March 2022, there were 83 cultivators, up four from February 2022’s count; six couriers, unchanged from February; 12 testing laboratories, up four from February; six microbusinesses, unchanged from February; 62 product manufacturers, up one from February; 213 retailers, up 15 from February; and four third-party transporters, up one from February.

The Open Data platform provides monthly average retail flower prices for the adult use market. March 2022’s average retail flower price fell 3.2% to $339.01 per ounce and is down 5.4% this year.

Massachusetts spot prices have fallen 23.6% this year. The move lower has been attributed to bulk deals struck at lower than prevailing prices at the time of the deals. Prices are unlikely to recover to the mid-$3,000s with New York, New Jersey, and Connecticut slated to open adult use sales, which should take away some demand from residents of those states who have patronized Massachusetts retailers to this point.

The CCC recently issued guidance that conveyed a sophisticated understanding of corporate finance not typically found in such documents. The guidance was issued and opened for public response due to “the industry’s maturation and evolution,” necessitating further clarity on ownership and control of cannabis businesses in Massachusetts. “Delivery Courier and Delivery Operator” licensees were addressed specifically.

The release is an effort to reiterate legislatively mandated limits on adult use license ownership. The CCC document offers clarity on the legislative intent of rules governing this area “as a way to ensure that bigger businesses do not crowd out smaller competitors.”  The matter is open for public comment between April 11, 2022, and May 2, 2022 at 5 pm. For further details and how to submit comments, see the full document here.

While the ownership guidance was clear, it seemed to be addressing corporate finance schemes perhaps created to take advantage of social equity applicants who lack access to affordable banking and who are possibly less knowledgeable about financing that might affect their ownership stake in their own businesses. In reading the guidance, questions arose regarding social equity applicants’ potential vulnerability to sophisticated lending agreements that might convey ownership to the lender at some point, as well as whether the state itself might consider financing social equity applicants so they will not fall prey to such lenders.

In an interview with Cannabis Benchmarks, the Chairman of the CCC, Steven Hoffman, acknowledged the thrust of the guidance was meant to “protect cannabis businesses and social equity applicants” undergoing “financing challenges.” When asked if multi-state operators (MSOs) were engaging in such behavior, Hoffman was clear, “the MSOs are adhering to state mandated ownership limits” and are not involved in predatory schemes. According to Hoffman, it seems “private equity are proposing predatory” lending schemes to “social equity businesses,” some of which might “trigger effective control” of such businesses. Hoffman noted the CCC has been working on issues of predatory lending and the sources and structures of such deals for some time now. Hoffman has expertise in the private equity world, which has clearly been deployed in his role as chairman. His understanding of finance and private equity is now being utilized to support and protect social equity applicants from such schemes.

When asked about the likelihood of Massachusetts starting a state bank to finance small and social equity businesses, Hoffman cited two reasons the notion of a state bank was “quickly shot down:” “the state does not want to be in the banking business” and “there was no government support for cannabis,” but rather a voter initiative that ushered in adult use legalization in Massachusetts. Hoffman said he “thinks a state bank is a good idea” and proposed it to state leaders to no avail. However, he did point to a bipartisan senate bill – S. 2801 – An Act Relative to Equity in the Cannabis Industry. The bill will create a new fund to support equity in the cannabis industry and improvements to the local licensing process.

Ranging a bit further afield, Hoffman said he was aware of the sell-off in wholesale prices and the seeming disconnect with retail prices as indicated in CCC’s monthly data. He noted that “wholesale prices are a leading indicator of retail prices” suggesting retail prices will eventually reflect the price drop on the wholesale level. When asked about last fall’s outdoor harvest, Hoffman said part of the legislative mandate was to “incentivize outdoor cultivation” through “reduced fees” for outdoor growers and such applicants “go to the front of the line.” He also noted Massachusetts will license co-ops to help support cannabis businesses. Overall, Hoffman believes the state is “undersupplied in cultivation capacity” although the state has an uncapped licensing scheme. He indicated the uncapped scheme is closely watched over and praised other legal states for advice provided to Massachusetts as they set up their adult use market, noting there is no interstate competition at this point.

Hoffman is well-studied in legacy state cannabis markets and corporate finance. He seems determined to steer Massachusetts around issues that have arisen in other states, especially in consideration of his state’s social equity mandates. Last week’s “Guidance and Control on Ownership” document makes clear that predatory financing schemes are well-understood at the CCC, and any “deals” struck with social equity applicants will be thoroughly vetted to keep social equity participants safe from those who would take advantage of them.

April 12, 2022

Recreational Marijuana Sales in New Mexico Off to Strong Start

Lining up to enter store
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New Mexico adult use sales are off to a fast start, with $5.2 million in combined adult use and medical sales in the first three days of the new recreational market being open. Adult use sales topped $3.52 million on opening weekend with the adult use share of total sales at 67.5%. Total weekend transactions were 87,773, with 57,890, or 66%, occurring in the adult use market.

New Mexico has 265 active adult use licenses as of this weekend and an uncapped licensing scheme that gives localities the say over where, but not if, retail shops can be located.

The table below breaks out adult use and medical sales, market share, and totals for the state’s first weekend of adult use sales.

New Mexico Spot price for cannabis flower rose as the Cannabis Control Division of the state’s Regulation and Licensing Department set the opening date for adult use sales last fall. From October 2021 though last week, per pound prices have risen about $360 on demand from new adult use stores and medical dispensaries expanding into adult use sales.

An on-the-ground assessment of retail cannabis sales and supply issues was provided by Steve Farmer, a retailer with plans to “go vertical” in the near term. Farmer contracted for flower supply well ahead of the adult use market’s opening weekend, but, in a post weekend analysis, said “the shortage of flower is real” and characterized his contracted supply as only “somewhat stable.” He noted that “ancillary product lines – concentrates and edibles – are scarce,” but “suppliers are catching up already.”

Farmer’s retail business is 90 miles from the Texas border and over the weekend he saw a “significant flow of Texans,” saying their “per visit spending numbers were even better than expected so far.” He praised New Mexico’s choice of BioTrack for its required plant and inventory tracking system, saying it has “wonderful data capture” that enables him “to track specific revenue streams.” Farmer’s first weekend sales exceeded his business plan projections, but he said, “let’s be real, it’s only day five.” Regardless, the first weekend of retail sales, especially the influx of customers from Texas, was encouraging.

Farmer analyzed New Mexico’s projections when making his business plan and found he “had two issues with the state’s numbers.” First, he thought they were “too low at the top level,” meaning he sees the state’s projected year one sales of $300 million as too conservative. For his location, the state projected eastern New Mexico would garner just 21% – or $63 million – of the state’s first year total projection, with Tucumcari in Quay County along the I-40 corridor accounting for 75% of the $63 million, or $47.3 million.

Secondly, Farmer, himself a Texan, thought projected revenue out of Texas was too low, saying “I know they’re low at the Texas percentage level” after spending nine months with the data and setting up his business plan. If the opening weekend is any indication, Farmer is likely correct in his revenue assessment for his specific area.

April 5, 2022

Changes on the Horizon for Oklahoma Cannabis Licensees

legislature
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The Oklahoma legislature is considering no less than 31 bills directly affecting the medical cannabis market in the state. Cannabis businesses may be in for higher expenses if some of the slate of proposed bills are passed by the legislature.

House Bill 2179 would increase licensing fees for growers based on canopy square footage and type of grow facility. Every grower would pay an initial $2,500, in addition to $1.50 per square foot on facilities over 1,667 square feet for indoor grows, greenhouse grows, and light deprivation operations. Outdoor grows over 83,334 square feet (1.9 acres) would pay an additional $0.03 per square foot.

House Bill 3734 would require marijuana businesses to buy temporary conditional licenses before being issued an annual license.

Senate Bill 1697 would require cultivators to post a $25,000 minimum bond to cover land reclamation costs. It would also allow the Oklahoma Medical Marijuana Authority (OMMA) to increase the size of the bond at will if the agency feels land reclamation, after the grower leaves, would be more expensive.

Senate Bill 1693 would have commercial growers and processors obtain permits from the Oklahoma Water Resources Board, as well as obtaining an official statement allowing groundwater usage.

Senate Bill 1704 would raise the fines for cannabis businesses and employees for selling or sharing cannabis with unauthorized persons (those under 21 without a medical card). The first violation of the new law would increase the fine by 500%, to $5,000, the second violation increases the fine by 300%, to $15,000, and may include license revocation.

A list of cannabis bills under consideration by the Oklahoma Legislature can be found on NPR’s Oklahoma website. The full text of marijana bills and their legislative progress can be found at Legiscan.com/OK.

With all the cannabis bills pressing in the legislature, Cannabis Benchmarks spoke with Kelsey Pagonis, OMMA Communications Director, about the implementation of the likely new rules and sought clarity on the number of cannabis licenses. Pagonis noted “there are about 395,000 OMMA licensees, however, the vast majority of those license holders fall into the patient/caregiver categories.”

Regarding House Bill 4055, a bill contemplating the monitoring of licensee utilities, Pagonis said it would “require public utilities to report to OMMA on a monthly basis and provide names, addresses, and amount of commodities supplied to licensed medical marijuana growers. The bill requires that we develop rules to monitor groundwater usage.”

Regarding bills under consideration that may raise costs to cannabis businesses – HB 2179, HB 3734, SB 1697, and SB 1704, Pagonis noted that even if OMMA becomes an independent agency, they will still need legislative approval for increasing or decreasing fees.

March 29, 2022

California Legislation Pushing for Cannabis to Cross State Lines

Interstate Traffic
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California has recently proposed a set of bills to address issues arising from federal cannabis prohibition, with one measure appearing to be an explicit challenge to the U.S. government’s current stance of simultaneous toleration for state-legal cannabis regimes and refusal to legalize nationally. Two of the bills under consideration are: AB 2568, which would provide that it is not a crime for individuals and firms to provide insurance and related services to persons licensed to engage in commercial cannabis activity; while SB 1293 would allow a credit to cannabis licensees in the amount equal to the amount of business expenses the licensees could not deduct or claim credit for on federal taxes.

The most direct challenge to the U.S. government’s current stance on cannabis, however, is SB 1326, which would authorize the Governor to enter into interstate agreements authorizing medical and / or adult use commercial cannabis activity between entities licensed under the laws of other states. California’s Medical and Adult Use Cannabis Regulation and Safety Act (MAUCRSA), the enabling legislation providing the framework for legal commercial cannabis activity in the state, “specifies that its provisions shall not be construed to authorize or permit a licensee to transport or distribute … cannabis or cannabis products outside the state, unless authorized by federal law.” The bill would strike the phrase “federal law” and replace it with “state law” in the original MAUCRSA, thus opening the door for interstate trade.

To help clarify whether California is attempting to throw down a gauntlet that would force a reckoning over the contradiction of state legality and federal illegality, Cannabis Benchmarks spoke with California cannabis lawyer Dale Schafer. Schafer’s view of cannabis law is formed from his decades of work as an attorney in the industry and the work of his organization, Weed for Warriors, which seeks to ease veterans’ access to medical cannabis through the Veterans Administration. While Schafer acknowledged the inertia of the now-rescinded Cole Memo – which stated generally that the U.S. Department of Justice would not enforce federal cannabis prohibition against compliant state-licensed businesses – he cautioned “the federal government is lurking out there,” suggesting the current situation is a shaky foundation on which to build interstate trade.

Schafer said the package of bills seemingly in defiance of federal law are “a big stick for states to wield” and may “effectuate policy change,” though the multiple and varied interests in keeping the cannabis industry in legal limbo may well keep the bills from passing. He could envision other states – Washington, Oregon, Nevada, and Hawaii – joining in a class action suit against the federal government to force a resolution when and if California finds itself in the federal crosshairs, particularly on passage of SB 1326, the interstate trade bill.

Schafer’s 10,000 foot view of the California cannabis industry sees key players in government financed sectors, law enforcement especially, as blocking any attempt to put a federal imprimatur on the cannabis industry, as it would affect law enforcement funding. The federal prohibition / state legal dichotomy has forced the industry to “live under precedents” – like the Cole Memo – based on “foundations that can be blown up any day.” He thinks the interstate commerce bill, SB 1326, is especially likely “to start a battle with the federal government.” He notes 2021 remarks from Supreme Court Justice Clarence Thomas – “a prohibition on intrastate use or cultivation of marijuana may no longer be necessary or proper to support the Federal Government’s piecemeal approach” – were “a greenlight to attack” the federal government’s positions on most cannabis restrictions.

Schafer believes if the dissonance between state and federal law is presented in such a way as to support state law with “objective reasonableness,” the federal government will lose. He also noted that “California is the only state big enough to take on the federal government,” citing its place as the fifth-largest economy in the world. He continued that California may, if these strategic bills are passed, “have a position the federal government can’t ignore.”

As for the current state of the cannabis industry in California, Schafer sees licensed businesses “circling the drain” due to the cost of compliance with the state’s environmental laws, expensive licensing fees that lock out experienced cannabis farmers, and prohibitively high cultivation taxes. As well, Schafer sees the pervasive power of illicit cannabis underlying many of the issues in the legal market.

Regarding proposed bills to get rid of the cultivation tax or place a five year moratorium on the same, Schafer does not believe they will pass. He cited the influence of law enforcement in politics and says the bills aimed at the cultivation tax are also likely to be opposed by California labor unions whose leadership tend to be “conservative.” His clear sense is that unless law enforcement is directed and funded away from drug enforcement, they will continue to oppose efforts to fully support the state’s cannabis industry and oppose moves to reconcile state and federal cannabis law.

Schafer sees the road to full federal legalization as a series of incremental efforts to inch the country along the path, while changing the public’s perception of cannabis. He hopes the bill to eliminate the cultivation tax will pass and supports another bill that would fine landlords of illicit cannabis retailers $30,000 per day to help eradicate illegal storefronts. That said, he acknowledges stamping out illicit cannabis businesses is “a game of whack-a-mole” and believes the entire California cannabis industry is underpinned by the illicit market.

Schafer says California’s proposed bills could well be a strategic bid to force the federal government to reconcile its contradictory stance on legal cannabis. However, questions remain: First, as to whether the bills, particularly the interstate trade measure will pass. Subsequently, if SB 1326 is signed into law in California, will it garner a legal challenge from the U.S. government, or will the state be the first in the nation to sidestep federal regulation with state law?

March 22, 2022

What are Lawmakers in Oregon Doing to Aid the Cannabis Industry?

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Oregon perhaps exemplifies the cannabis price crash better than other states, in that policymakers have stepped in on multiple occasions in what was understood to be efforts to “fix” the oversupply problem with two license moratoriums. The second moratorium was instituted this month and will stay most new licenses for growers and retailers until March 31, 2024. Given Oregon spot prices tanked during the last moratorium there is some question about the purpose and effect of the new moratorium.

Casey Houlihan, Executive Director of Oregon Retailers of Cannabis Association, told Cannabis Benchmarks the moratorium is not about cannabis prices. Indeed, Houlihan said the newly passed two-year grower and retailer moratorium had no effect on prices last week; it was not the reason Oregon’s Spot rose nearly $63. Last week’s price gain was the largest weekly rise since the third week of March 2021, when Oregon’s Spot rose $66. Houlihan put last week’s price increase down to seasonal demand and not the moratorium, which he says “is to stop the bleeding” in the industry.

“Price swings will continue until cannabis is legal everywhere” and “Oregon prices are suppressed by the illicit market,” said Houlihan. He admitted illicit cannabis, which is readily available in Oregon, competes with legal cannabis on quality, and said discerning buyers will buy high quality illicit cannabis before they buy lesser quality legal product, no matter the price. That said, he sees illicit, high quality cannabis going for $70 per ounce, which suggests illicit prices may also be suffering from oversupply. Houlihan has seen legal product at $72 for two ounces at retail, which he noted is $1.15 per gram, but he also sees “good retail marijuana for $200-300 an ounce.”

The price dichotomy in Oregon, according to Houlihan, is based on quality and prices are not neatly siloed by grow type or source. Oregon cannabis consumers are perhaps more sophisticated buyers, with years of experience in the legal and illicit cannabis markets. These buyers do not base purchases on a seller’s license designation, but on the nature of the product itself and on product consistency. There is a tacit acknowledgement that legalization has not made a dent in the thriving illicit market.

Houlihan offered a more nuanced view of the two-year license stay on growers and retailers; “it was never designed to have a major impact on price,” he said. Instead, it was intended to “encourage competition” and “prevent longer term additional instability.” He noted the moratorium is not supported by the entire cannabis community and recounted how “smaller retailers,” those with “one or two stores,” see the moratorium as impeding their ability to grow their businesses such that they cannot be easily taken over by big cannabis companies. In short, the larger the retail footprint, the less likely smaller retailers are to be taken over by “big cannabis.”

According to Houlihan, the upside of the moratorium is that smaller retailers and growers are seeing an immediate bump in the value of their businesses, owing to the fact that new entrants will have no choice but to buy an existing business under the license moratorium. Cannabis businesses that have been pressured by falling prices might now rightly expect better prices for their businesses if they want to sell or take on a partner. So while the moratorium seeks to “stop the bleeding,” it may also offer a transfusion by bringing new blood into existing businesses, resulting in a more competitive, and perhaps innovative, market.

In a rundown of prices and retail demand, Houlihan has seen “dialed in” outdoor-grown product going for as high as $500 per pound. At the other end of the spectrum, he has observed “whole outdoor plants” going for $20 per plant. He noted the cost of raising outdoor cannabis runs about “$40-$50 per plant and [that] does not count getting the plant ready for sale.” So growers avoid the cost of trimming, packing, and shipping by selling in bulk to extractors. Trimmed outdoor flower of middling quality is going for $150 to $200 per pound. Outdoor quality greenhouse product typically draws outdoor flower prices, but “with an uptick.”

Regarding retail product demand, Houlihan said he would “not be shocked if an overall increase in volume, but not spending” occurs, suggesting an expectation that lower prices are here to stay. He noted that top-shelf pre-rolls are selling very well, but also noted the presence of some “abysmal” quality pre-rolls. He said the variability in quality can sometimes be down to established farms with recognized brands occasionally experiencing missteps resulting in poor outcomes. For outdoor growers with “branded farms” he does not see a move into products other than flower. Among consumers in Oregon, Houlihan does not see growing demand for tinctures, shatter, or more esoteric products, with consumers instead choosing among high quality flower. He is a proponent of high quality sun-grown flower and is seeing steady consumer demand in this category.

At the end of the day, Houlihan sees the moratorium as a public good for Oregon’s cannabis industry, providing a reset for growers and retailers buffeted by falling prices in an overcrowded market. It is not about price, it is about new blood; a transfusion for one of the most mature markets in the country.