The six month report card on California’s first steps into regulated cannabis came in with a sobering grade: “Needs Improvement.” With its heavy emphasis on local (county and municipal) controls, administratively intense applications and compounded State and local tax rates exceeding 45% for each cannabis dollar earned, most legacy California cannabis operators and indeed consumers, have simply elected not to participate.
Of the ~2,500 cannabis dispensaries operating before regulation, less than 500 have thus far become state-licensed shops. (The remaining 2,000 or so shops are electing instead to make as much money as they can until their Prop 215 rights sunset on January 1, 2019.) Because regulated operators cannot sell to legacy Prop 215 shops, the entire regulated marketplace has suffered massive constriction, forcing layoffs, reduced SKUs, and intense financial restructuring.
“Pioneers get the arrows, settlers get the land,” goes the saying. With regulation came a great reckoning that leveled the playing field and reset the marketplace, but with a much smaller footprint than anticipated. Some contraction was expected, but governments are scrambling to reset a healthier course. For example, our own County of Monterey was the first in the state to reduce cannabis tax rates, and it did so by almost 75%! In the meantime, most operators in California who chose the regulated path are reeling to down-scale to a constrained market. Those who did not, the Prop 215 operators, have less than six months of existence left and time will only tell how many will migrate to the regulated environment.
As the hangover excitement of regulation fades, a new market emerges – even if slowly. Ours is a challenging landscape and Grupo Flor will surely earn its fair share of arrows. However, unlike others, Grupo Flor was specifically designed to weather these transitional years. From our blend of cannabis and ancillary business units, to our aggressive acquisition of permits to the very architecture of our supply chain, we are specifically built to weather this transitional. Successful scaling will require more than a strong foundation, capital and guts; it also demands a mature adjustment of perspective with balanced expectations.
New Faces Join the Grupo Team
This spring, Grupo Flor hired two key players who bring a new level of expertise to cultivation and greenhouse operations — meet Sam Burgner and Mikey Towey.
Sam Burgner, Harkins Farm Indoor Lead Grower, is a recent Master of Science graduate from Purdue University — one of the nation’s top horticulture programs. Sam also worked alongside NASA Kennedy Space Center on how to efficiently grow plants in zero gravity on the International Space Station and conducted research on ways to cultivate food crops under the harsh conditions present aboard spacecraft.
Sam’s in-depth knowledge of plant and environmental physiology is being put to good use on the vertically-tiered production project at Harkins Farm, which will utilize cutting-edge fertigation, lighting, and climate control systems for 22,000 square feet of intensive production.
“Joining Grupo Flor was a natural fit. For years they have had their eyes on the future of Cannabis in California, and mine have been fixed on the future of crop production. I appreciate the innovation that they bring to the industry and the easy-going nature of the team makes the difficulties of building an industry from the ground up flow smoothly,” said Sam Burgner.
As a former whitewater raft guide, an avid outdoorsman, and devotee of fresh and local agriculture, Sam is already finding himself at home on the Monterey Peninsula with the natural beauty, great trails and hikes to explore.
Mikey Towey, Compliance Manager, who overlooks Grupo Flor’s ongoing compliance efforts, including the identification and prioritization of applicable regulations, development of internal processes and procedures, and the rollout to partners, stakeholders, and employees. Mikey’s expert knowledge in the state-mandated track and trace program is instrumental in the successful implementation and integration.
Mikey ran operations for one of the largest indoor cultivation centers in Washington State and most recently managed greenhouse operations in Monterey County. With this type of expertise, Mikey plays a major role in the design of Harkins Grow and the general A to B operation flow, as well as the procurement of genetics.
“I’m excited to be a part of such a talented team where everyone shares the same vision for excellence and innovation. This position gives me the opportunity to create infrastructure and procedures for a fast growing company in a nascent industry and that is pretty cool,” stated Mikey Towey.
When Mikey isn’t overseeing major cannabis operations, he enjoys spending time with his girlfriend, Serina, and his french bulldog, Napoleon. As a former substitute percussionist for the Seattle Symphony, he still likes to practice music and composition (when he isn’t at the gym or yoga, of course).
Federal Legislative Look
In Washington, evolution on the marijuana issue is moving forward at warp speed in political terms.
Senator, Mitch McConnell fast-tracked a Senate bill to legalize low-THC hemp. Democratic Senate Minority Leader Chuck Schumer of New York introduced a bill to remove marijuana from the Controlled Substances Act, which would deschedule marijuana entirely. Colorado Senator Cory Gardner struck a deal with President Donald Trump, who promised to not target Colorado’s legal marijuana industry in exchange for Gardner releasing his hold on Trump’s Department of Justice nominees. The Food and Drug Administration opened a comment period on the scheduling of marijuana ahead of a special session of the World Health Organization convened to re-evaluate marijuana laws, and both chambers of Congress passed “right to try” bills that might have accidentally legalized medical marijuana for terminally ill patients. Taken together they suggest that nearly 50 years of federal marijuana prohibition is about to disappear, and it’s happening in the face of an administration that has expressed its outright hostility to the notion. Bipartisan efforts are picking up steam to push for access to banking for legal marijuana businesses at the least making it so marijuana businesses don’t have to be all cash.
State Legislative Look
The new rules came from the Bureau of Cannabis Control, the Department of Food and Agriculture, and the Department of Public Health, and what is noteworthy, is that they allow companies with medical licenses to continue to do business with those holding only adult-use, recreational licenses rather than requiring a separation (which would have been a huge disruption to the industry). Of special interest to Grupo Flor, is that a provision requiring that if a product is branded as being from a specific county, 100 percent of the cannabis used in it must be from said county, and all of our cultivation is done is Monterey County.
The new regulations also outlaw what industry folks refer to as the “ice cream truck” delivery model, in which someone can load up a delivery truck with all kinds of cannabis products to have on hand as orders are placed online and a delivery driver cruises through town. Instead, delivery drivers now must receive orders and stock their vehicles at a brick-and-mortar location before making the rounds.
Bigger changes are down the road, most notably, the July 1 deadline, after which all cannabis products sold legally in California must pass stringent laboratory tests for potency, molds and pesticides, with products that fail testing, facing the possibility of being destroyed.
On May 22, 2018 the Monterey County Board of Supervisors reduced cannabis taxes! This decision was spurred by pressure from the local cannabis industry about the damaging impacts of the high taxes. This was supplemented by a report from HdL a cannabis consulting firm that analyzes rates in jurisdictions across the State. This report exemplified the challenges growers face to succeed with the cumulative state and local tax rates already at 30 percent. Listed below are the new tax rates that will be adopted in July of 2018.
- Mixed Light Cultivation (greenhouses): $5 per sq. foot
- Indoor Cultivation: $8 per sq. foot
- Nurseries: $1 per sq. foot
- Manufacturers: 2.5% of gross receipts
- Distributors: 2% of gross receipts
- Testing: 1% of gross receipts
- Retailers: 4% of gross receipts
These new tax rates are a relief for the industry, however, there is still a disconnect between the popular perceptions of the ‘Green Rush’ wealth and the harsh economic realities faced by those seeking to comply with the new law.