Currently, cannabis is still a Schedule I Drug under the Controlled Substances Act, a classification that means cannabis has no medicinal value and an extremely high potential for abuse. At the same time, the U.S. Government owns the infamous Patent #6630507, entitled “Cannabinoids as antioxidants and neuroprotectants.”

The patent claims exclusive rights on the use of cannabinoids for treating neurological diseases, such as Alzheimer’s and Parkinson’s, and diseases caused by oxidative stress, such as heart attack and Crohn’s disease.

And now, on the eve of the DEA’s decision on whether or not to reschedule cannabis to a Schedule II drug (said to be done by mid-year, but at press time no decision had been announced), one must weigh the possibilities of whether or not rescheduling the plant to a Schedule II classification would be a positive move for the cannabis industry.

The Good Possibilities

“Reclassifying marijuana would make it easier for researchers to work with the plant, which is currently subject to strict limitations and officially can be acquired only from a single government garden,” reported USA Today.

So that’s a positive, right? Scientists will, for the first time, have a much easier time conducting (and getting funding for) significant research with the plant to document its said medicinal qualities.

Another positive would be that physicians would be permitted to give prescriptions for cannabis to their patients instead of “recommendations.” Currently, doctors can only recommend the drug, since cannabis is still a Schedule 1 and considered federally illegal.

A few more pluses for the industry: Rescheduling marijuana could lift the restrictions of state boundaries, open up the industry to import-export and help increase the potential for a nationwide, regulated market, which we desperately need. Rescheduling could welcome marijuana into the mainstream economy.

The Bad Possibilities

“Contrary to popular belief, rescheduling doesn’t automatically ease federal criminal penalties, nor would it make the manufacture, possession or distribution of marijuana legal,” wrote Leafly’s Jeremy Kossen in a recent article.

There’s still the possibility of arrest. Laws still have to get on the books that change this. (Descheduling cannabis would do that.)

illustration: © wildpixel

Nor does it solve the conflict between the states and federal government. “Descheduling would be ideal, but ultimately what we need is overall reform of the [antiquated], non-scientific scheduling system,” said Bill Piper, senior director of national affairs at the Drug Policy Alliance, in the Leafly article.

Then there’s Big Pharma.

Big Pharma has a long history of charging exorbitant prices for life-saving medicines. Just look at hated 32-year-old CEO of Turing Pharmaceuticals, Martin Shkreli, who, overnight, jacked the price of a life-saving AIDS drug called Daraprim from $13.50 a pill to $750, as CNN Money reported.

Then there are “government-granted monopolies” — defined on Wikipedia as “a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service.”

The government does this to help speed up research and development of new drugs, or as Wikipedia cites, “Advocates for government-granted monopolies often claim that they ensure a degree of public control over essential industries, without having those industries actually run by the state.” But it turns into a financial windfall for the company that gets the monopoly if the patented drug is successful.

If said company completely controls a life-saving drug (U.S. Cannabinoid Patent #6630507, say, for example), then they can charge whatever they want for it, and there is little anyone can do about it.

Then there are FDA regulations. “If the federal government determines that medical marijuana must be subjected to FDA approval, companies would have to enter a process that can take years to complete and cost more than $1 billion per product,” reported Rolling Stone. “Few, if any, cannabis companies in the U.S. have the resources for that, which might open the door for Big Pharma to muscle in and take over the business.”

A lot of money is on the line, and when that happens, the people who hold the patents will have a lot of leverage. What happens to the marketplace when companies with tons of resources start throwing their weight around?

The fear that rescheduling would essentially wipe out the existing medical marijuana marketplace that has been established by various states is unfounded, however. As the Brookings Institution explained in a recent article, the plant’s schedule or reschedule is set by the Controlled Substances Act, which is a federal law. The medical programs in existence are legal under state laws.

So does the good outweigh the bad? Reclassification could get us closer to that dream of the mainstream market and new opportunities for sales and growth.

But if cannabis does get rescheduled, I’m going to be looking for who’s holding those patents. Whoever it is will have a huge chance to shape the future of a drug, or multiple drugs, that could save lives.

Where will you source the marijuana cultivars you intend to grow? Given that there are thousands of cultivars available today, with many more to come, do you know where they have come from and how you will utilize them? Many fail to recognize the importance of genetic diversity. However, genetic diversity is why not all seeds are created equal. Therefore, the clones, seeds and tissue cultures produced from different cultivars will vary.

So, where do the cultivars (genetics) of today come from?

Landraces: A landrace is defined as a traditional plant variety that has been selected by local farmers. Landraces were the basic foundations of the cultivars we know today. Today's growers utilize hybrids. Only a few grow Old World landraces because they typically require a longer maturation time and are less potent than hybrids; but there are some incredible growers, such as The Highest Grade, who are now growing and investigating the properties of these Old World gems. I expect to see a resurgence of boutique landrace production in the near future.

Hybrids: Hybrids result from crossing two different landraces, breeder's varieties or cultivars. Today, most hybrid cultivars are considered to be in the public domain. (More on that later.) Hybrids are what are predominantly grown today, along with landrace variants and pure-lineage Afghan cultivars.

Thus began the selection and breeding that produced the hybrid cannabis cultivars we know today, and that continue to be bred to produce the cultivars of tomorrow. Seed companies began breeding specialized seeds and offering them for public sale from Holland in the early 1980s. Thousands of cultivars have been bred since.

With the change in state cannabis laws, some seed companies have begun breeding and selling seeds here, as well. Today’s breeders have spent tens of thousands of dollars marketing their companies and genetics lines; hundreds of thousands more have been spent developing their breeding programs and producing the seeds they sell. But after being sold and in the hands of the public for 365 days, the hybrids are classified as “public domain,” meaning that just like the landraces, these seeds are considered public property that cannot be patented or protected. There has been no exclusivity.

But what does this really mean? It means a company can do anything it wants with public domain genetics. The cannabis world essentially can be a free-for-all with no acknowledgment nor financial reward given to the breeder.

Cultivars that are not in the public domain, are exclusive to the breeder and have unique characteristics are patentable from now on.

Without patent protections, it is not legally necessary to compensate breeders, so growers are left with a choice: do the right thing and form a licensing agreement with the breeder to produce his cultivar; or, use the breeder’s work without permission (and put the onus on the breeder to decide whether to try sue for compensation), in which case, you might as well steal anything you desire, rename it after your mom and call it your own.

The decisions a company makes from the start ultimately will earn or lose the consumer’s respect. By making ethical decisions, you ultimately will be recognized and respected.

© Olivier Le Moal

A Patent That Could Change the Future

Recently, however, something happened that could significantly change the landscape for breeders. Vice magazine revealed that on Aug. 4, 2015, U.S. patent number 9095554 was granted for a cannabis cultivar that contains significant amounts of THC — the very first of its kind ever granted. Vice reported. "A spokesperson for the U.S. Patent and Trade Office confirmed that officials are now accepting and processing patent applications for individual varieties of cannabis, along with innovative medical uses for the plant and other associated inventions."

I spoke with a representative of the firm (Cooley LLC) that filed the patent, and it is as legitimate as any other plant patent.

The implications of this granted patent are many.

What is patentable and what is not? Cultivars that are not in the public domain, are exclusive to the breeder and have unique characteristics are patentable from now on, based on the precedent set by U.S. Patent 9095554. All existing genetics, be they landrace, hybrid or anything else available to the public, are not.

So how will all this be sussed out and enforced? No one really knows. The only thing certain is it will be a huge legal battle, many times over. A lot of money will be spent on lawyers, for both enforcement and defense.

How will it be proven that a given cultivar existed in the public domain? Recently formed groups are dealing with this issue and many other genetics-related subjects, such as the Agricultural Genomics Foundation of Colorado, which is working on mapping DNA and marker identification. The Open Cannabis Project (OCP) is collecting cannabis DNA samples to publish in a massive database to determine if a given cultivar was available to the public before or after it was patented. In conjunction with Phylos Bioscience, OCP is offering an incredible, 3-D, interactive online guide that visually portrays the genetic relationships of almost 1,000 cannabis samples using genetic data (Galaxy.Phylosbioscience.com).

Before you source your genetics you need to consider a few more things.

• Will you start from propagated clones?
• Where will you obtain them?
• Will they be the most desirable representation of a given cultivar?
• Are they free of pests and diseases?

Or will you start from seeds? If so:

• Where will you obtain them?
• How many seeds must you germinate, cultivate, mature and bring to flower to get the most desirable representation of that cultivar, which includes the labor and time-intensive process of eliminating male plants? (It is now possible to determine sex by genetic analysis.)

All of this takes a lot of time and funding, especially if you intend on cultivating many different cultivars. And once again, you are faced with those crucial questions:

• From whom will you source?
• To whom will you pay royalties or licensing fees?
• Will you just jump into that aforementioned free-for-all?

Seed breeders from this point on will need to retain some form of exclusivity for the genetics they develop, meaning patenting and licensing, which, in turn, means a cultivator and a retailer can legally associate their branded products with the appropriate breeder. It's all about to get very complicated.

But legalization will bring advancements, too, such as tissue culture, and cellular division and replication (not genetic modification), which will allow for the production of millions of like specimens that are all-female, sterile in that there are no bugs or disease infestations, and are perfect examples of a given cultivar. These plants will be patented, branded and will come with exclusive licensing agreements and contracts for royalties, which again leads to exclusivity.

Photo: http://galaxy.phylosbioscience.com

There will always be public domain genetics and those that breeders choose to keep public in the future. In the end, however, either the cannabis industry protects itself and the intellectual property (IP) it has pioneered and created, or the newly emerging corporate entities will do so.

The cultivars you grow are also to some degree dictated by available space, the intended growth method, and the environment you choose. Indoor or greenhouse production can each accommodate various growth methods. Will you grow small, medium or large plants? Will you train/spread out (aka screen-of-green) the plants? Use large containers? Small containers? Grow in the ground?

Many of the landraces mentioned earlier are referred to as sativas — narrow-leaflet cultivars. These typically take longer to mature and require a longer flowering period. They can be a challenge to cultivate indoors en masse due to their size. They also have a higher cost of production because of these traits. But traditional pre-Afghan cultivars are now being re-investigated — greenhouses are perfect for cultivating them, as are market conditions and many growers’ desire to provide more diverse offerings. And growers will explore further what beneficial properties these cultivars have and which can be utilized in future breeding programs, ultimately resulting in thousands of new cultivars in the future.

© Dersankt | Dreamstime.com

To some extent, genetic diversity and varying maturation times also will dictate what method and environment you choose, in that it is labor-intensive to grow cultivars that mature and finish at very different rates. Whenever possible, try to grow plants that mature and finish at approximately the same time.

The Ever-Present Fear

Many in the cannabis industry fear corporate takeover of cannabis genetics. They fear monopolization and the legal avenues available to biotech corporations and others, such as tobacco companies. Again to quote the Vice article, “When contacted, Monsanto claims it has no interest in cannabis production or cannabis seed production. A tobacco representative stated that they also have no interest. But that does not mean they won't be if federal restrictions are ever lifted.”

I recently had a conversation with someone (who prefers to remain anonymous) who was asked to attend meetings with representatives and/or ex-employees of global agribusiness Syngenta Corp. (He was unclear on who all the attendees were.) The impression this person was left with was that Syngenta was definitely investigating the genetics of the cannabis plant.

And pharmaceutical interests are already being put to action.

Hortapharm B.V. was founded in 1990 in the Netherlands by David Watson, and together with David Pate and Rob Clarke, they obtained the first license issued by the Dutch government to open a cannabis research facility. Hortapharm pioneered the concept of breeding plants to produce single compounds and licensed varieties to GW Pharmaceuticals for the manufacture of pharmaceuticals. Hortapharm created cultivars that produce virtually single cannabinoids, approximately 98-percent THC or CBD relative to the total of other cannabinoids present.

Keeping in mind that research officially began in 1990, 26 years ago, it amazes me how fast everything cannabis-related is about to accelerate globally. Therefore, when cannabis is rescheduled and if federal restrictions are ever lifted, the legal realm of cannabis will quickly become very murky and very profitable for attorneys. And it will become very expensive to protect your IP.

Workers at R. Greenleaf Organics in Albuquerque, N.M., have to be committed to maintaining a clean, contaminant-free growing environment. Jacob White, chief of cultivation, makes sure nobody cuts corners when it comes to cleanliness.

“I have always believed the two most important things in medical cannabis production is No. 1, cleanliness, and No. 2, your environment,” White says. “You can have the best strains in the world, but if you don’t have a good environment you’re limited in what you can do.”

That’s why White knew he needed to make a change in late 2015. The presence of powdery mildew in 13 of R. Greenleaf Organics’ 14 cannabis grow rooms indicated something was wrong with the environment. Powdery mildew is a fungal disease that thrives in high-humidity conditions. The disease reduced overall yields by at least 25 percent. In one room, 70 percent of the plants were lost, says White.

White attributes at least some of the losses to a lack of automated controls. R. Greenleaf Organics had moved to a 14,000-square-foot warehouse in January 2015. Due to budget constraints, the company relied on rudimentary controls, such as non-programmable thermostats. This January, White installed controllers for each room that automatically adjust CO₂ levels, humidity, temperature and lighting based on set parameters.

© Reynold Greenleaf and Associates

Most importantly, R. Greenleaf Organics has not experienced a recurrence of powdery mildew since implementing the automation system, White says.

Automation may include controllers that regulate environmental conditions, such as humidity, temperature, CO₂ levels and light or mechanical systems, such as irrigation systems, seeders or potters.

More than two-thirds (68 percent) of cultivators say they’re using technology to automate temperature control, according to Cannabis Business Times’ 2016 “State of the Industry Report.” More than half of the growers who participated in the research say they use humidity-control technology.

A Maturing Market

The trend will continue to grow as the industry matures, says Michael Mayes, CEO of Quantum 9 Inc., an international cannabis consulting firm based in Chicago. As the industry moves from craft producers to larger-scale enterprises, growers, especially those in newer markets, are incorporating automation into their plans, Mayes says.

Growers in older, more-established markets, such as California, may not have facility designs that were optimized for sophisticated automation systems because of tight cultivation limits, Mayes says. But growers constructing new facilities are beginning to incorporate automation into their building designs.

“Or, they are retrofitting a building that was used for heavy manufacturing, and before any plants go into the facility, they have the ability to build it to spec and run automatic fertigation lines throughout the entire facility,” Mayes says.

In some respects, cannabis facilities are more advanced than traditional horticulture operations because of the younger workforce involved and the unique environment that’s required for cannabis, says Patricia Dean, CEO of Wadsworth Control Systems. “We’ve been in business for 50 years, and these cannabis operations have more equipment than a lot of facilities,” Dean says. “They’re a bit more automated, high-tech than a lot of other horticulture markets.”

Photo: Keenan Brown | GroQuip

Perhaps because many are younger, cannabis growers tend be more familiar with technology, Dean says. Also, because they’re producing high-value crops, they often work under tighter parameters and are more concerned about optimal humidity levels and CO₂ than traditional markets, such as floriculture, she adds.

Some material-handling systems can involve larger capital investments, but present great opportunities to the cannabis industry, says Bill Bissell, senior process design specialist for AgriNomix LLC, an Oberlin, Ohio-based supplier of automated production equipment for growers, from soil mixing, cloning lines and potting machines to fully automated bench movement systems. “We often see smaller grows benefit the most from a piece of automation. They are the most labor-limited folks, so bringing [in] an automation tool ... can be a life-changer,” Bissell says. Such automation is commonplace in other horticultural facilities and can easily be applied to cannabis, he adds.

As the industry matures, price competition heats up and efficiencies must be taken even further to lower production costs, including labor and related processes, industry analysts and another vendor CBT spoke with say these technologies will become more commonplace in cannabis as well.

In fact, according to Zev Ilovitz, president of Envirotech Greenhouse Solutions, many growers are already making the shift to automating production processes to reduce labor costs. “There is strong interest in mobile bench systems. The efficiency of the cultivation system is greatly increased by moving plants to people rather than people to plants. While mobile bench systems have higher infrastructure costs, customers are realizing that the difference compared to a stationary or rolling bench system is paid back rapidly with the labor savings that the mobile system provides,” he says.

“Mobile bench systems are very flexible; they can be operated manually, or motorized, in a single or multi-level system,” he adds. “The design and function of a system will often depend on the scale, style and sophistication level of the cultivation facility.”

Less Work, Greater Yields

Perhaps one of the reasons some cannabis cultivators hesitate to completely automate is their belief that technology should complement human interaction with plants rather than replace it. That’s the approach Denver-based Good Meds — which has a 90,000-square-foot cultivation facility and two dispensaries — typically takes with its cultivation operations, says Good Meds founder John Knapp. But in at least one area, automation won out over a hands-on approach.

Good Meds opened its current cultivation facility about three years ago. Initially, the company relied on hand-watering and manual fertilization. The process left too much room for error, says Knapp. Employees would get formulations wrong or forget what nutrients they already mixed into the fertilizer tanks.

In early 2015, Knapp implemented Dosatron fertigation systems for each room. Fertigation involves the injection of nutrients directly into an irrigation system. Total system and installation costs were $80,000, and total installation time was about three months, according to Knapp. The cost includes a complete replacement of the facility’s irrigation system to accommodate the Dosatron units.

A series of Dosatron pumps, connected to irrigation pipes, suction nutrients from a tube placed inside fertilizer jugs. The pumps then inject the fertilizer into the water lines based on a dial setting. The mixture flows to drippers located at each plant. The system ensures the precise amount of nutrients are being dispersed at a set gallon-per-minute rate, Knapp says.

Good Meds has realized a 20-percent to 40-percent increase in yields and recouped its investment in the Dosatron systems in less than one harvest, he notes, adding that “even a couple percentage points increase in yields would have paid for that within six months.”

The system also reduces the amount of time employees must spend watering so they can focus on other important tasks. “At the end of the day, watering plants is important, but you also have to prune them, you have to train them, you have to make sure the environment is right, so it gives the guys way more time to work on optimizing everything else,” Knapp says.

Preventive Maintenance

Likewise, for R. Greenleaf Organics, the investment in automation paid for itself quickly and has helped employees focus on other critical activities. “We can put all our energies into growing cannabis and less time worrying about environmental conditions,” White says.

The company, one of three nonprofit businesses operating under R. Greenleaf & Associates, has implemented fully integrated environmental controls in three flowering rooms, and upgraded the thermostats and controllers in the remaining 11 rooms to digital, programmable units.

The automated systems also have data-logging capabilities, which helps White identify issues before they become a major problem. Recently, one of the rooms experienced temperatures that were well above the set limit. By observing data patterns, White could see the issue was happening during the evening and that it was a problem related to the air conditioner. Without the data log, White says he would have likely checked the controller first.

White and the company’s director of operations installed the system at a cost of about $250 per room. But White says he wants to eventually have a single environmental controller for all of the flowering rooms.

“To get a system installed to meet all of our needs, the cost has been quoted as anywhere from $1,500 to $3,500 per room,” White says. “While this is an expense to be planned for, it will easily be evened out by prevention of further infestations.”

Looking Ahead

Implementing an automation system brought some challenges for White. “A lesson learned was to trust, but verify what hired contractors are selling you. We thought we had purchased one thing, and were given another, simply by completely trusting the contractors at face value,” he says.

As he tries to move toward a single control system, he has received contractor proposals that vary widely. “My expertise is in growing, and not HVAC,” White says.

For many cannabis growers, their ability to scale up will depend on their knowledge of business systems and practices that might, at the outset, be unfamiliar.

White says he has had to ask more questions of suppliers, regarding the different aspects of each system, to be able to gain a better understanding of the systems he is considering and the differences between each.

Cultivators also shouldn’t hesitate to consult with the agriculture industry for advice on technology, Knapp says.

“This industry has come out of the black market. So the knowledge and the people that do this kind of stuff don’t necessarily have the typical agriculture background,” he says. “It’s interesting to watch how the industry came up, and the type of techniques and tools employed in the beginning and how it’s evolving. There’s a lot more influence from the agriculture industry [taking] hold.”

New states continue to come online with medical cannabis programs. As a by-product, teams of potential and current cannabis entrepreneurs flock to each location to secure licenses. Is the new state-by-state cannabis licensing game a true gold rush? Is it even profitable?

Currently Washington, Colorado and California receive much of the attention pertaining to the cannabis market. This article, however, will focus attention on many of the new states with medical cannabis programs that are either in their infancies or still in licensing phases. Looking at the challenges and potential benefits of being in these emerging, but more restrictive markets, should provide a more realistic view of the business landscape and provide guidance on how to avoid some of the pitfalls to which many fall prey.

A Basic Overview of Business Challenges

Cannabis businesses are unique and challenging. Any new cannabis cultivation enterprise is going to be particularly unique due to the nature of the product being produced (unless, of course, you have been cultivating indoor cannabis on an industrial scale for the last X decades … but few fall in that category). But beyond that, these businesses also are challenged with a variety of hurdles that “normal” businesses simply do not have to accommodate for: limited banking/no financing, few insurance providers, obscene tax implications, no interstate commerce, evolving controls, prohibitive legislative changes and vendors hesitant to engage the industry.

New (Restrictive) Markets

New states with legal cannabis programs present their own unique challenges as the various regulatory bodies (both state and county) implement their own legislation and ever-evolving regulatory controls. Many states build untenable barriers to entry and/or executing business in any type of profitable manner, or implement barriers to patients’ ability to qualify and register to legally purchase the products.

States intent on implementing successful programs frequently limit the number of licenses available and utilize a competitive application process through public posting of a Request for Application (RFA). Applicants have a limited time to document their ability to meet or exceed the controls defined by the state in the RFA.

The application process frequently costs the applicants tens of thousands in cash outlay (usually nonrefundable) to the state simply to submit the application, and third-party expertise to consult and prepare the necessary documentation can easily double and quadruple those costs.

Before chasing after a license in a newly legislated cannabis program, consider some of the unique requirements of the programs being implemented. Every new state’s cannabis program borrows from a previous state’s controls and regulations, while adding its own unique circumstances or culture. Therefore, controls and requirements vary widely from state to state. The list below gives an overview of some of the unique mosaic of state controls:

• Cannabinoid Restrictions While many states have full spectrum (THC, CBD, flowers, concentrates, etc.) medical cannabis programs in place, others restrict all products to specific non-psychotropic cannabinoids — primarily CBD. Some states, like Virginia, also theoretically allow THCA (tetrahydrocannabinolic acid); you can’t purchase it, cultivate or produce it, but you won’t go to jail if caught with it — provided you have intractable epilepsy.

  Restrictions within these limited-cannabinoid programs require producers (if production is allowed) to keep THC concentrations below certain thresholds — in some cases as low as what is recognized federally as ‘hemp’ — while also requiring costly environmental and security controls similar to those used for cultivating THC-rich cannabis. At best, this scenario makes the costs of good sold (COGS) equal to that of a high-THC product, while having less revenue potential. That is, if the business can survive at all in such a climate.

• Production and Manufacturing Requirements Between restrictions on locations, a myriad of environmental controls are relevant for any new operation. State legislators expect advanced security controls to be in place and, as such, most allow indoor cultivation only, which has a significantly higher build-out cost associated with it, as well as significantly higher ongoing costs (as compared to greenhouse or outdoor cultivation).

  Many states also restrict the product types that can be produced and sold — such as, in New York, the lack of botanical inflorescence and largely restricting the market to concentrated cannabis extracts, or, in Maryland, the restriction against all edibles. Obtaining a license is just the starting line.

• Approved Medical Conditions The medical conditions the state approves is one of the most important factors for new businesses in an immature medical cannabis market. Those conditions and a patient’s ability to become registered to purchase the product dictate the number of potential customers for a new business entity. In states with very restrictive conditions, the market potential is very limited. Following potentially several million dollars in start-up expenses, many organizations find that the limited patient base is inadequate to support their bottom line.
• Vertical Integration States such as Colorado have wavered back and forth between requiring separate manufacturing and distribution models and vertical integration to a point where the current market is a blend of both. Most Eastern states have leveraged a distributed model in which producers are separate entities from retailers, and the number of producers/manufacturers is significantly limited; for example: four in Connecticut, five in New York, 22 in Illinois, five in Florida, 15 planned for Maryland.
• Limited Marketing While regulations may vary by state or locale, marketing is controlled tightly in nearly all markets. Once/if state or regional challenges are overcome, outside of a handful of print publications and social media, there are few national advertising or marketing options available to any cannabis enterprise.
• Limited Expansion Frequently, very restrictive controls exist with regards to canopy size and product scope. Once facilities are identified and secured, licenses are obtained, and the business is in production and the market matures, if you want to expand or move, a variety of unforeseen challenges both from the regulators and local communities (for example, new licenses required, zoning regulations, and limits, again, on size) can develop.
• Buy-In and Production Costs While not all states are relevant for these issues, in many states (e.g., Connecticut, Illinois, Florida, Maryland) potential applicants must have several million dollars in liquid assets to even participate in the qualification process. Additionally, components such as build-out costs, personnel, security, power and ongoing compliance increase COGS exponentially. When you consider competition from not only other licensed businesses, but also the black market, you can quickly see that exceedingly high COGS can cause a serious issue for a return on investment and profitability.
• Nonprofit vs. For-Profit Several states (e.g., California, New Mexico, etc.) also have a requirement that any licensed cannabis entity be a non-profit.

Despite the many challenges associated with these competitive licensing processes, each state’s application-submission process is deluged with thousands of applicants — by both local entities, as well as out-of-state interests (where permitted). These teams rush to engage consulting services from a variety of experts (such as attorneys, compliance resources and architects) and would-be experts (everyone and his brother suddenly is an expert offering consulting advice to those who know even less), and frequently acquire properties well in advance of the RFA release.

Easy Money

A persistent mentality around the industry is that cannabis equals easy money. There is, however, no replacement for comprehensive business planning and efficient operations. If your current business plan resembles: “get license -> grow lots of weed -> make lots of money,” then perhaps the drawing board should be revisited.

The thought that you can take a mediocre business model and make it thrive in a new market simply because a competitive license was obtained is a fallacy.

© David Bonvillain

I have witnessed organizations that are B and C players in a mature and relatively free(er) market environment clamor for licenses in a new state as if it is the best business idea they have ever had. It is important to remember that even if mediocrity can shine temporarily in a restrictive and monopolized environment, it is a big fish in a small pond scenario, artificially created by the regulatory controls in place. Mediocrity is simply mediocre and will not survive in a competitive environment.

The longer-term business climates in which many restrictive regulatory controls are eased and the competitive state landscapes become more robust will see premium quality, comprehensive product sets, competitive pricing and efficient operations win the day.

While there is no doubt that the product in question benefits (currently) from artificially high market prices, that is largely due to the prohibition implemented by the government vs. an appropriately profitable model (e.g., earnings vs. cost of goods sold).

If a new organization isn’t planning for the longer term and treating the environment like an operational challenge focused on an indoor-cultivated agricultural commodity, there will soon be (unfortunate) surprises around every corner.