Profits are a rarity: California’s new regulated marijuana market six months in

Half a year into California’s newly regulated marijuana market, it’s worth asking: How are licensed companies in the state doing financially?

The short answer: Many are struggling.

Chelsey Miles, a Sacramento-based accountant and consultant who works with licensed manufacturers, retailers and distributors, said most companies are “breaking even, but I don’t think they might be hitting their budget.”

And while some companies are doing well, many are having a hard time financially while the market stabilizes, according to multiple industry sources.

The harsh financial reality of 2018 has been a combination of:

  • Compliance with new regulations.
  • High state and local taxes.
  • Lost revenues to the  illicit market.
  • Supply chain uncertainties.

“(Operators’) eyes are more wide open as to what the actual industry is doing, as opposed to the green rush,” Miles said.

“The rose-colored glasses are off, and now it’s, ‘We’re looking at the bottom line, and we’re making decisions based on the bottom line.'”

Where’s the money going?

The current situation has forced many businesses to either freeze hiring or begin downsizing.

“It’s kind of the good, the bad and the ugly at this point. We’re seeing members that are at various ends of the spectrum,” said Lindsay Robinson, executive director of the California Cannabis Industry Association (CCIA).

“I can’t imagine there are a lot of companies that are expanding rapidly. If they are, it’s probably cautious steps. We’re hearing mostly holding pattern or downsizing.”

Others are offering an even less positive picture of the industry’s financial health.

“I think the entire supply chain is in shatters,” observed Melanie Nash, director of operations at Dark Heart Industries, an Oakland-based nursery that specializes in marijuana clones.

“At every level, people are barely scraping by. And people are just looking for … investment to kind of get through this year.”

For instance, newly mandated childproof packaging for edibles makers and concentrate producers has caused costs to shoot up, said Tuan Le, director of business development for Oakland-based Brite Labs, a vape cartridge manufacturer.

“We were working something at 7 cents per unit, and now it’s 55 cents per unit” for child-resistant packaging, Le said.

The packaging requirement kicked in July 1, and because of that market disruption, a lot of Le’s competitors don’t currently have products on cannabis retail shelves, he said.

Many if not all of those brands will return, Le said, but when that might happen is an open question. Another one is how much that interruption in product availability will cost those businesses.

Le added that testing costs are going to triple for Brite Labs, in part because of a new standard practice for many suppliers – including both manufacturers and growers.

That is, product must be tested before it’s delivered to distributors. It serves as an insurance policy so that when product is then tested by distributors, it won’t have to be relabeled.

Several sources said testing costs for individual manufacturers and growers can easily run into the tens of thousands of dollars monthly.

And build-out costs for companies that are trying to get their facilities into compliance with state regulations can cost hundreds of thousands, CCIA’s Robinson said.

Asked if Brite Labs is operating in the black or the red, Le said, “We’re right there at even-steven.”

Dark Heart’s Nash reported: “Right now, we’re taking it week to week. We’re covered. We’re still in the black, but kind of barely.”

Demand is booming

At the other end of the spectrum – at least for the month of July – many Northern California growers are experiencing a rush of demand for product that is passing the mandated testing standards that just went into effect.

“We can’t get weed in jars fast enough. … As soon as it gets in jars, it’s gone,” said Hezekiah Allen, executive director of the California Growers Association. “We need more weed, and we need more workers.”

But whether that short-term rush is going to translate into longer-term sustainability is still up in the air.

That’s partly because many of those NorCal growers also have had to pay out large sums to comply with state regulations in the first half of 2018 – while keeping their fingers crossed they’d experience the exact rush of demand they’re now seeing.

“We should know in 30 days if they’re really doing well,” Allen said.

Nash said Dark Heart wasn’t profitable in January or February because the vast majority of its previous customer base opted to either not get new California MJ business licenses or at least hold off.

That meant Dark Heart basically had to start from scratch in building a new customer base for its marijuana clones.

The company turned profits in March, April and May, Nash said, then saw another big sales drop in June in the run-up to the July 1 transition.

That happened in large part because of packaging uncertainty for Dark Heart’s only product: cannabis clones.

“We had a lot of questions about labeling, like, ‘Do you need to put a clone in a childproof package?’ That’s not clear in the regulations, and we were scrambling to get answers,” Nash said.

Profitability in the new California cannabis landscape can vary depending on geography, noted Ruben Honig, executive director of the United Cannabis Business Association in Los Angeles.

“If a legal retail shop is surrounded by illegal retail outlets, those law-abiding owners are watching their revenues plummet,” Honig said.

The situation overall, Honig observed, is “putting some licensed shops on the brink of insolvency.”

The outlook

The industry landscape is widely expected to smooth out in the coming months for several reasons:

  • Permanent industry regulations will be in place by the end of 2018. That will give businesses more certainty on operational logistics and costs.
  • The supply chain is expected to become more streamlined over time. That will happen as more growers and product makers find their footing and begin ramping up production and as more get licensed and figure out how to operate in compliance with the state.
  • It’s likely that more municipalities and counties will begin issuing business permits (including Los Angeles, which will start the cultivation licensing process in August). That will further help the entire supply chain stabilize.

“It’s going to be rough, and there are folks that don’t end up making it through, but I am oddly optimistic,” CCIA’s Robinson said.

John Schroyer can be reached at [email protected]

13 comments on “Profits are a rarity: California’s new regulated marijuana market six months in
  1. Pat on

    The harsh financial reality of 2018 has been a combination of:

    1 ) Compliance with new regulations.
    2 ) High state and local taxes.
    3 ) Lost revenues to the illicit market.
    4 ) Supply chain uncertainties.

    1 ) What Ca. is infamous for: Too many unnecessary and onerous and outrageously expensive regs. Why in the case of cannabis regulation in Ca? The short answer, is because they can. They can because the public has done essentially nothing to force reforms unto the legislature’s manner of conducting the state’s business. The result you get is non-evidenced based need for any given ( often made up ) regulation. Usu. led/inspired by a special interest lobbyist. Get enough of these, attach an arbitrary ( of course, the higher the better..until the state sees a false sense of equilibrium on their artificial supply/demand graph ) price, and wala,… You achieve the exact same historical black market prices that the general public was used to paying out anyway. Isn’t that interesting. An ounce of bud that sold for $350-400/oz then, is selling for the same now. That only works when you remove capitalism from the economic equation and exchange it for one of oligopoly. An oligopoly can be compared to that of a cartel. Instead of the public having access to more choices, much lower prices, arguably cleaner cannabis….you have this. The preexisting oligarchs didn’t want the competition, and the legislature was more than willing to comply. Why? See #2.

    2 ) The higher the price of anything that’s taxed, the higher the tax rate; therefore the higher the tax revenue for the gov. For instance, if bud was selling for $40/oz vs $400/oz, say the combined tax rate ( for all the taxes combined ) is 15%,,, For the $40 bud the tax rate is $6. For the $400 bud, it’s $60. Big difference. Most of all of these regs are made up, so that the state can “justify” their tax rev. The state could arguably make even more tax revenue if they allowed everyone that wanted to participate into the market, and by making their regs reasonable/realistic. But they don’t. Maybe they don’t want to piss off their oligarch friends, too soon. At least not yet. And what happens when you’ve got the previous two things going on ( over regulation/nefarious regulation and extremely high taxes )…See #3!!

    3 ) Surprise: You get a thriving black market. A black market that places a lot of people that were doing it right, up until the “law” passed that now places them in harms way. It can potentially harm their health and welfare in very significant ways. It’s a new and unnecessary stressor that the state has imposed upon the general population that was conducting themselves in good faith. And the state all the while alluding to a win/win for the small operator prior to the “laws'” passage. Then the state pulled the rug out from underneath all of them. What was the state expecting from this historically rugged individualistic lot? The state didn’t know?!? That this was going to happen? Of course they did. And, they’re going to ride this train for as long they can. In addition, when you have the gov. changing horses in the middle of the stream ( constantly ) after the “law” was passed ( just to make sure that the combination of regs/permitting fees/penalities etc.. matches up to their/and special interest desires ) just to try to keep the prices as high as they can…. A consequence of this can be…Ooops, #4!

    4 ) Supply Chain Uncertainties! Well, guess who’s there to give the state a hand? You guessed it…The Blaaack Market. And, this scenario has played out in human history for thousands of years. This is just another text book example of the Ca. legislature repeating history. At the unwitting ( or more likely apathetic ) taxpayer. Either way, the legislature is supposed to be looking out for the publics’ best interest. If if they aren’t with this cannabis stuff, what else could they be possibly doing in the publics’ great disfavor? Detriment? Probably most everything else.

    Reply
    • Joe on

      These enormous costs were all planned beforehand by wealthy individuals that want to get in the game. It is so sad how people continue to just look at one political party as the problem. Politicians of ALL parties cater to those with money!!!Wealthy white conservatives have been eating up multiple licenses in California! That is a fact. Don’t you think they would move slowly knowing the taxes, regulations, packaging costs etc??? They can afford to initially make less money or even lose money if the result is that small time farmers who have been doing this for decades have to shut down. It’s business 101!!! I mean 50% of the articles written are about companies like medmen expanding and making millions. Even most people in the industry who are going broke haven’t figured this out. Wake the f up!!!

      Reply
  2. EBW on

    Every stock that I own based on all of the research I have read is now in the red, yep. someone needs to look into the bookkeeping and exactly what the owners are doing with the stockholders money. If it turns out that these creative minds are unable to grow a plant for a profit I find it unacceptable to even offer their names in advertisements or articles. You really need to look into Terra Tech I have received several emails and articles the show they will never get out of the talespin they are in. Offers are being made for Real Estate Acquisitions or market building strategies on a daily basis. And yet if you look at what their company has earned as I do at Schwab you will see they are losing money hand-over-fist.

    Reply
  3. Rick on

    July 1st law just made millions of people in California illegal marijuana black marketers.

    No longer can growers deal directly with the co-ops that they have been working with for years the California licenses are way too expensive and difficult to acquire to bother with.

    It is just a way to control the money and the people who live here by the corrupt state of California.

    Now the state has millions of people to bust and toss in the corrupt legal systems and jails.

    The whole big bubble is going to pop and it will not be pretty.

    FYI 100% clean nor cal mountain grown bud goes for $1-2 a gram wholesale =$450-900 per LB

    (verified by nor cal garden shop supply stores)

    California BAY Area neighborhood street prices $2-5 per gram

    California taxed retail $10-20+ per gram (verified Weedmaps menu prices)

    I know where I am going to shop along with 90% of Californian’s

    FYI Oregon’s legal retail prices are now down to less than $2 per gram. =$50 per OZ

    Reply
    • Mark Gray on

      I agree completely with everything in your Post. Great job. I was reading an article on the Oregon debacle earlier. It’s ugly.

      Reply
    • G on

      Where is your Black Market Bud going to be grown? Why smoke Chemicals? You have no idea what your smoking go get it tested.

      Reply
  4. Joe on

    It’s similar to coffee shops back in the days. You had 1000’s of mom and pop coffee shops where the owners would make a decent income. Eventually you had a few wealthy people who decides to create Starbucks and coffee Bean and ruin the mom and pop shops. People keep talking about taxes and regulations and politicians when they are totally missing the real reason behind the downfall. I mean c’mon people, this website has dozens of articles daily about these upcoming corporate Giants making millions and or getting millions in funding to expand their already huge cannabis business. They don’t even have to try to fool any of us since we end up doing it ourselves.

    Reply
  5. Joe on

    Has anyone looked at all the applicants who applied in West Hollywood? Half the applicants hired PR firms, consultants, lawyers just to better their odds of getting picked. At least 3 applicants donated money to the mayor’s charities!!! I mean if this was a losing industry, why would they do that? These people wanted all these regulations and taxes in order to make it difficult for the small time cannabis businesses to survive!!! It’s a temporary burden that they can afford which will ultimately lead to a few companies making billions and restructuring the tax rates in the future. This is all so basic to understand. If people are fine with this because it’s a capitalistic country and they deserve to make billions, that’s fine… Just don’t blame it on politicians since their job is to cater to those who will make them money!!!!

    Reply
  6. Kristen on

    Pat and Rick nailed it on the head. The cannabis industry didn’t vote for Prop 64. We knew better. And any cannabis business owners that voted for Prop 64 are now eating shit from their ignorance.
    I’m finding it nearly, if not completely impossible to see any positives with MAUCRSA. My heart goes out to all of the businesses and growers suffering right now.
    I miss Prop 215.

    Reply
  7. BudMan on

    It is easier to grow cannabis than it is to profit from it in the legal market. They will have a lot of people falling off over time, any demand right now is simply due to testing shortages. Once that settles out and the supply chain is overloaded prices will drop a bit. That said under an over regulated system there are enormous fixed costs with growing. So much so that here in Colorado I can get wholesale for $600-800 a pound now. It costs me almost that much to risk growing it. At this point it looks better and better to let others hassle with a grow and just go cherry pick pounds for the shop when needed.

    The government adds so much cost. The only reason black market was so expensive before legal bud is because it was illegal, not because it is actually worth $400 an oz!

    Reply
  8. Mark Gray on

    I have been a Compliance guy in both Nevada and CA. Five years in the Compliance field/ Industry. I was a Prop 215 Recommendation clinic owner prior to this. We are currently waiting on our Local Jurisdiction to approve our Application for a CA Retail Outlet. That’s on molasses time. We’re seven months in, yes paying rent and Fees, and won’t have an answer before October. But I digress.

    I’ve been saying this for awhile. Regulation is indeed strangling the CA Industry. I’m on the CA list- serve and get emails re: changes almost weekly, if not weekly. I’m sure most of you are on that list as well. I find it interesting that it takes four state bureaus, including Dept of Transportation, to run this Program. So many fingers in one pie. Granted, it’s potentially a big pie, but the way things are going, can the over bloated state oversight allow it to rise?

    Yes. Over regulation is an understatement.

    Compliance wise, Nevada is a dream compared to this nightmare. One department, Department of Health. That’s it. My Policies and Procedures for Nevada were a total of 406 pages. It was, and is, absolutely nothing by comparison to CA. Love Nevada!!! They are currently struggling right now as well. Very low quality. In Nevada, it’s Yield over Quality with a lot of PM issues and Lab result challenges to contend with. But Compliance wise, awesome. I wish all the Nevada guys and ladies the best. Lots of great folks over there, especially the ILAC Committee and Dr. Tung!!! Great guy at G-3 Labs.

    I’ve also said CA Cultivation should have been put in place first. As we all know, that would have circumvented the Supply Chain nightmare we currently see.

    My business partner is a 25 year CA cultivator. His last grow was 25,000 ft in Nevada while juggling a 15,000ft LA project at the same time. Thank God for good help. IMHO, unless Retail Outlets have a Cultivation license with a qualified, knowledgeable grower attached hand in hand to their Retail Outlet license, as well as a Distribution license (basically a Micro License to save “Distribution” cost), it will be a tough row to hoe. God bless growers. That must be Compliance hell. I’ll be focusing on that soon enough.

    Btw, I agree with Kristan, above. I miss Prop 215 too. Those days are gone. We need to collectively stay positive and look for brighter days. For now though, it’s pretty cloudy. I’m an extremely positive guy, but people will need to adjust or go under. Everyone knows, that’s no News Flash.

    Rick (above ) is right on the money. Hundreds, if not thousands, became illegal overnight. It’s quite clear. This is why CA Law Enforcement stood behind Prop 64. That’s a whole other conversation.

    I fully agree 100% with everything posted on this topic. Thanks for all your insights.

    As the old saying goes, “Be careful what you wish for.”

    Stay positive all.

    Reply

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