Cannabusiness: The Riskiest Legal Supply Chain in the World?

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Most of us are aware that an overall culture of and around cannabis exists.

If you have a pulse, you’ve most likely seen the figures that have emerged from and represented (for better or worse) the cannabis-culture mainstream over the years: Bob Marley, Cheech and Chong, Snoop Dogg and even the fictional Nancy Botwin, played by Mary Louise Parker in the show ‘Weeds.’

Source/Artist: KlimPaPaRaZzI

My personal favorites happen to be Abbi and Ilana of the show “Broad City,” but all play a role in the plant’s place in American society.

However, as marijuana is becoming legalized in more states, and as Cannabis Culture slowly sheds broad stereotypes, another C-word is just as vital to pair with cannabis and the industry that surrounds it: compliance.

“The one lesson that every cannabis business must understand is the same lesson that every business in every regulated industry already understands — compliance is a part of how you run your business, day in and day out,” said Rick Matsumoto, COO of Simplifya, a compliance platform designed specifically for cannabusinesses. “It's not something you pay attention to once a year during an audit; it's not something you delegate to a compliance officer and then forget about. Compliance, when done right, is part of the company culture.”

As we noted in Part 1 of this series, the Marijuana Business Daily projects the total economic impact of legal marijuana sales to rise to between $48 billion and $68 billion by 2021, according to Eli McVey, the principal author of MBD’s 2017 report on the industry. The potential supply chain implications of this growth on a national level are hard to overstate.

However, because marijuana is classified as a Schedule I drug by the U.S. Drug Enforcement Administration, it’s still federally illegal. And for that reason, states that have legalized cannabis for medical — and especially recreational — consumption have had to implement considerable systems of regulatory compliance for businesses to follow.

The Regulatory Landscape Overview for Cannabusiness 

Although it is a relatively young industry, the legal-marijuana supply chain has certain prototypes.

“I think there are some obvious comparisons,” said Matsumoto. “Cultivations learn from the agricultural industry, dispensaries learn from the alcohol industry, infused-product manufacturers learn from the consumer goods industry.”

However, the industry most closely aligned with cannabis may be pharmaceuticals.

“I would say pharmaceutical manufacturing is probably the most stringent overall manufacturing process there is,” said Gregg Brandyberry, former vice president of procurement at GlaxoSmithKline.

As a highly regulated and validated process, pharma is subject to a host of good manufacturing practices (GMPs), good laboratory practices (GLPs), QC and employee training in SOP. Various tests guaranteeing purity of product, secure and tamper-proof transportation, anti-counterfeiting assurances and highly regulated processing are all hallmarks of the pharmaceutical process, according to Brandyberry.

It hasn’t been all that much different for pot.

The medical side of the cannabis industry has already been in play to some degree in nearly 30 states (and in both NAFTA-partner countries, as Mexico joined Canada in legalizing medical marijuana, aka MMJ, just a few days ago). The regulatory bodies in those U.S. states have had more time to get their regulatory infrastructure in place, including implementing licensing systems, rigorous lab testing standards, safety and security procedures, among others.

However, legalized recreational-use cannabis is a relative newcomer in the U.S., and although it has many of the same regulatory checklists as medical, there are a few extras.

Product tracking, for example, is a big one. If a business seeks to obtain a license to produce or sell recreational marijuana in any of the current states that have legalized it, it must comply with more stringent tracking and tracing of pot plants and products than for MMJ.

Where Compliance Technology Comes In

Metrc, a regulatory compliance solution platform created by Franwell, uses RFID technology for plant and product inventory tracking from seed to store. Colorado’s Marijuana Enforcement Division (MED) is one of several state regulatory bodies that employ Metrc, which Franwell customizes to each state’s needs, to help businesses remain compliant within in the overall ecosystem.

Yet issues inevitably crop up. According to this article, Ron Sigman, an ex-law enforcement officer and criminal investigator for the MED, is quoted as saying, “[When it comes to Metrc], it’s very common to find violations.”

The most common issues, according to the original Sigman interview referenced in the article, are:

  • Cannabis industry businesses fail to attain current licensing and properly train staff members.
  • Cannabis industry businesses often fail to assess their inventory properly, or they perform inaccurate accounting. Having too many plants or too much inventory are both violations.
  • Some businesses face security issues and don’t have the proper camera coverage.
  • Businesses also neglected to have proper documentation and paperwork on site during MED audits.

A big part of the problem is that compliance ins and outs vary depending on whether you’re a grower, dispensary, product manufacturer and so on.

“All businesses in the cannabis supply chain face the same challenge — it's the need to have every employee in every part of the business aware of their role in compliance,” said Matsumoto, of Simplifya. “You can't simply task a compliance officer with compliance when it only takes one employee or a single incident to run afoul of a regulation.”

Simplifya’s goal is to help organizations and their employees simplify (it’s right there in the company name) their compliance process via self-auditing; the platform’s in-house legal team updates the ever-changing database of rules, regulations and legislation. From the sound of it, they’re constantly busy.

“The Colorado MED just announced several sales and excise tax changes for retail marijuana businesses, effective next month,” Matsumoto said. Another regulatory gray area: the ambiguity in Colorado around tracking inventory transfers, such as the 70/30 rule for transfers between medical marijuana centers (which basically states that a center must grow 70% of the product it sells).

“This rule needs to be clarified or drastically simplified,” he said. “My understanding is that this will be partially addressed with Senate Bill 17-111, potentially as soon as later this summer.”

Ultimately, the constantly shifting regulatory atmosphere keeps the solution providers on their toes just as much as the practitioners.

The regulatory changes “can dramatically impact our product roadmap,” said Matsumoto. “For other software companies, I would suggest they do their homework to understand the compliance challenge and provide features or integrations that make compliance easier for their clients. It's no small task.”

Can Blockchain Soothe the Pain?

There is one newer technology realm that could help: the use of blockchain to address regulatory compliance, strain verification, IP protection and, last but not least, financial transactions.

Dispensaries and other businesses have a tough time with access to capital. Also, still-pervasive cash-only environments are dicey. “We’ve been kicked out of more banks than I can remember,” Medicine Man Founder and CEO Andy Williams told Benzinga. “And, paying people with cash, whether it’s an employee or a contractor or even taxes, is a real burden and a public safety issue.”

In many ways, blockchain and the cannabis industry could be a match made in heaven, given the complexities of the cannabis supply chain and the capabilities of the blockchain technology. The timing is also perfect for the young couple.

According to Andrew Karpie, research director, services and labor procurement at Spend Matters, blockchain startups have already begun to appear in the industry. For example, Tokken (yes, Tokken) is a financial transaction system that, among other things, gives state regulators auditing and law enforcement access to transaction record to strengthen compliance. Tokken also provides a solution for the problem of protecting growers' IP rights to the strains they develop.

Other blockchain startups targeting the cannabis industry include Cannabis Hemp Exchange (CHEX), Medicinal Genomics (MCG), Metal, Dopecoin, and Potcoin.

The Medical/Recreational Split

Some regulatory consolidation of sorts may be ahead.

It appears clear that the morass of MMJ patient registrations, doctors’ recommendations, licensing and other fee-based barriers to entry for patients is beginning to get more streamlined, as states new to selling recreational marijuana are getting their markets online to join Colorado, Washington and Oregon.

In many cases, rec-use marijuana is either already or soon to be regulated like alcohol and tobacco in certain states, which would get the industry closer to the supply-chain model Ryan Smith of LeafLink and others foresee.

For example, according to High Times, “Oregon lawmakers are steering oversight of the [MMJ] program from the Oregon Health Authority to the Liquor Control Commission, which regulates recreational cannabis. Marijuana producers must decide whether they want to ‘remain medical’ or acquire a license under the recreational system, which has strict rules around product tracking not currently applied to medical.”

“‘In general,’ Will Patterson wrote [in the Portland Mercury], ‘it appears that the legislature ultimately intends to...get out of the cannabis-as-medicine business entirely,’” according to High Times.

Regardless, as the new states’ legal pot markets get going, one thing is certain: regulatory costs — and governments’ revenues — are set to rise.

The Biggest Risk and Associated Costs

The elephant in the room is, of course, what exactly will happen on the federal level, and when.

“The U.S. Department of Justice issued some guidelines in recent years that helped the marijuana industry gain traction,” according to MBD’s 2017 Factbook, “but these are not legally binding and could theoretically be nullified at any time.”

According to that report, the threat of federal intervention ranked as the third-most prevalent challenge facing marijuana business owners in MDB’s 2016 survey of cannabis professionals — in 2017, it’s No. 1.

But barring any cumulative state-by-state regulatory compliance disasters, would the feds want to pull the plug...rather than make some money?

“If the federal government moves to oversee all of it, it’s going to be very expensive for the people wanting to get into [canna]business,” said Gregg Brandyberry, the former VP of procurement at GSK. As precedent, “pharma companies are spending hundreds of millions of dollars to develop a product, and hundreds of millions for clinical trials. So if you get the federal government involved [in regulating legal marijuana], who knows what they might put in place.

“It’ll be super-expensive, and ultimately be passed on to the consumer,” he said.

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