Going from black market to legal business can brings a special set of challenges. Good thing technology is stepping in to help.
“Data is critical in every industry and especially cannabis,” said Nick Kovacevich of Kush Bottles, in an interview last week. Not only do growers need to be taught how to use different software products for each part of the “seed to sale” cycle, but they also need to learn what he calls “white collar” business practices. “Now is the right time for early players to gather data. Down the road, they will figure out how to monetize it.”
Currently, seventy-five percent of the suppliers to legal cannabis retailers come from the black market. They understand growing, seed and crop rotation, profit margins, and delivery, but are deficient in keeping an auditable paper trail for business supplies. Tax records? Balance sheets? Purchase orders? We don’t need no stinkin’ purchase orders!
Except that with legalization, they do. This move to more official supply chains brings a new set of problems to the 75 percent of growers who have come in from the shadows. This formality is new to a lot of these business people, who are used to being able to pop down to the local market to pick up more baggies when supplies run low. But now one now has to package the flowers in medical-grade packaging. So if they run out in the middle of packing product on a Saturday night and run out of approved supplies, production stops.
Several companies have stepped forward to develop software to manage the business from “seed to sale.” To add to the complication is the increasing demand for alternative methods of consumption as the medical cannabis market matures. Many medical users are adverse to smoking, and the industry is seeing huge growth in consumables, edibles, vaporized oils, tinctures and sublingual strips.
The problem, said Kovacevich, is that the industry is extremely complex. In the U.S. marijuana is illegal at the federal level, but a growing number of states is approving its usage for medical and even recreational purposes. For example, in Colorado, the growers are also retailers, but in Washington, if you grow marijuana, you are not allowed to sell it, and vice versa. This is not expected to change until marijuana becomes legal on a federal level and national standards are set.
Software companies entering the cannabis market are finding niches, meaning that businesses must utilize a more than one product to be fully automated. Greenbits has a POS tailored to the cannabis industry, and MJ Freeway, Metrc, and BioTrack all provide traceability and compliance software, or as cloud services.
Getting the growers used to the necessity for supply chain management and transparency in accounting is sometimes a tough sell. There are a couple of reasons for this. One is that after flying under the radar for so long, it is uncomfortable for many growers to expose their business to the world.
On a more practical level, tax laws regarding cannabis are complicated and not business friendly because of Congress’ refusal to remove the Schedule 1 drug classification. This means that marijuana is alongside heroin and LSD as among the “most dangerous drugs” and has “no currently accepted medical use and a high potential for abuse.”
From a business perspective, this means that now growers are operating in a “gray” market, according to Kovacevich, where they have to pay taxes on their profits, but are not able to deduct any business expenses, making going legit rather expensive. Also, as long as marijuana is classified as a Schedule 1 drug, banks are unwilling to advance capital for normal business ventures like expansion, as they run the risk of being named as complicit in money laundering on a federal level, even if the business is legal in the state. So they’re caught coming and going.
Kovacevich is a self-proclaimed middle man in this transition. Kush Bottles is a five-year-old B2B supply company. He calls his business “product agnostic” which means that he doesn’t sell cannabis itself, but all the other supplies needed to run a dispensary — medical grade containers and packaging for flowers, concentrates and consumables, including glass bottles, bags, labels, and a variety of smoking and vaping accessories.
He stands, he said, at the intersection of his customer’s needs and the software companies looking for customers. His company serves as a consultant to both these constituents, helping pair the right software to the business needs of his customers. This is ultimately is good for his business as well. Kush Bottling is fully automated, but with so many of the growers not used to “white collar” business practices, figuring out what to stock is a guessing game.
The future is both uncertain and really exciting. Until marijuana is legal on a federal level, there will be too much risk for banks to get involved. Larger tech companies are also shying away, but are becoming more interested as more and more states legalize marijuana, said Kovacevich. This means that the current software companies targeting the cannabis industry are ripe for takeover when they are ready to step in. Making data in the cannabis industry a budding industry.