Compliance, Cash And Cannabis’ Complicated California Future

New Year’s Day 2018 was met by biting cold temperatures across most of the U.S., a Mariah Carey comeback in Times Square and the state of California opening its doors for the sale of marijuana for recreational purposes. On that day, 400 shops had the appropriate licenses to open their storefronts, with thousands expected to come over the following weeks and months.

The experts predict a sea change in the American cannabis industry, and, given the numbers at play, it’s hard to dispute their predictions. California holds the distinction of having the nation’s largest economy; were it a standalone nation, it would be the sixth-largest economy on the planet.

When voters took to the polls last year to vote on what is now law, only four states had done so before: Colorado, Washington, Oregon and Alaska (Massachusetts, Nevada and the District of Columbia voted recreational legality on election day 2016). Those four states are home to 17 million people; their cumulative economic output is around $1 trillion annually.

California is home to 39 million people. Its annual output more than doubles those four states — to the tune of $2.5 trillion a year.

Analysts are predicting California’s market for marijuana to be massive: GreenWave Advisors (a cannabis financial analyst) estimates that California’s industry could be worth $5.1 billion in 2018, nearly doubling the industry’s entire value last year. One report out of investment bank Cowen estimates that legalization in California alone would triple the size of the nation’s legal pot industry within a decade.

But what are the expectations on the ground?

To get a better idea, PYMNTS has been talking with all kinds of emerging cannabis companies as the California marketplace was being created. First up: Mikel Alvarez, director of Retail Operations for Terra Tech, the largest publicly traded cannabis company in the U.S. with medical and recreational dispensaries in Nevada — and starting this past Monday morning in California as well.

“Yesterday in our Santa Ana location, we had the local city council members in our store seeing how everything was organized and how everyone was so happy. It really went perfectly” — which, Alvarez noted, was good news considering what a complicated race to the finish line legalization has turned out to be in California for those who wish to make a business selling marijuana.

Known Unknowns

For all the predictions and reporting, Alvarez told us that opening day in California was something of a question mark. The state, he admitted, has been surprisingly slow to fully allow recreational use, considering how early an adopter it was of cannabis’ medical use.

Early adoption of its medical use, he said, is the source of a lot of uncertainty in California, because the reality is that “medical” is a loosely defined term in the state: It’s possible for almost anyone to get a legal ID without too much investment of time or money.

“If you compare [California] to Nevada, where it was an expensive and difficult process to get a recommendation from a doctor, that dissuaded customers; and then the state would … take that recommendation for another fee and evaluate whether you could have a card. So, people were looking at $300 in charges just to be able to purchase cannabis as medicine legally. That meant a change in the recreational market, where anyone over 21 could purchase [it], was very significant. We saw a huge influx of customers [from] Nevada in July, when recreational went online — with people lining up around the building at 8:00 A.M.”

In California, a doctor’s note was good enough for a medical card, which was given out for a wide range of conditions, including things like “headaches” and “back pain.” With cards easily accessible, Alvarez said they weren’t expecting a massive influx of buyers on New Year’s Day. However, it was surprisingly a very busy sales day, “but it wasn’t record breaking.”

Alvarez said that doesn’t mean the predicted upswing isn’t coming. Terra Tech saw it in their sales in Las Vegas and expect to see it throughout the year, particularly as tourists (and those who could not get medical cards before, and thus couldn’t buy marijuana from California dispensaries) visit recently open retail cannabis enterprises. California tourism is already a $126 billion a year industry; Los Angeles County alone attracts 48 million visitors a year. Given the results, Terra Tech believes visitor spend will be very significant.

And complicated — particularly since cannabis as an industry remains dominated by the “two Cs”:

Compliance and Cash

As a large and publicly traded firm working in a legally grey area like cannabis, Alvarez said most of what Terra Tech does is dominated by compliance with local and state regulations within federal banking guidelines. Their business operations have to be completely and totally above board.

“We’re publicly traded, so we have a higher level of compliance we need to follow because we have stockholders that we are accountable to. We have to be 100 percent in compliance with state guidelines,” said Alvarez. “The number one thing I tell everyone in this business is that it’s not fun. It’s compliance, compliance, compliance. I say it in triplicate, because if we cross the line, we lose our licenses and we lose our business.”

Even when the rules seem bizarre — like having to destroy a good deal of their cannibals inventory on Dec. 31.

Between Dec. 31 and Jan. 1, California’s rules on edibles changed. Now, dispensaries can no longer sell edibles with more than 10 milligrams of cannabis per serving for medical or recreational purposes.  Unfortunately, Alvarez said, most of what is on the market contains more than 10 milligrams per serving, which meant a lot of moon pies were discounted and then destroyed if they didn’t sell by the deadline.

“You may be asking — can’t a customer just buy two? Yes, yes they can,” Alvarez said on how easy the rule was to skirt.

Easy to skirt or not, rules are rules. Although following those rules is expensive, not following them is even more so.

They bring a similar “rules will be rules” attitude to their relationship with cash, which, Alvarez said, at this point is a case of unwilling monogamy on their part. Marijuana remains a Schedule 1 narcotic at the federal level, which means that Terra Tech has to be very careful when making or receiving payments of any kind. The pubically traded firm has a banking relationship and is unwilling to say much more about it because the situation is rather tenuous and discussing it on the record could have consequences.

But when the company is making its largest payments — the ones to their distributors for the products they sell — other than the occasional paper check, those payments are almost entirely done in large piles of cash.

“The majority of our payments we do pay in cash. It is easier for us to pay in cash because we have so much of it get rid of. We might write a check on occasion, but we try to pay as much stuff in cash as possible because we have that excess of cash. I wouldn’t say it’s stressful exactly, but it requires an extraordinary amount of internal control and checks and balances. And a lot of security,” Alvarez said.

What’s Next

Alvarez thinks the future is green for California’s cannabis business in more ways than one — though he was cautious about all the predictions out there, mostly because so much remains unknown.

“This was an entirely locally regulated system that has now moved up a level to the state,” he explained, saying that the adjustment is going to provide a lot of information on the future of the industry both in California and nationwide.

Terra Tech’s dispensaries in various smaller California towns and cities were up and running on Jan. 1, care of Bureau of Cannabis Control employees who worked the holiday weekend to put a license into the company’s hands by Sunday.

“We are always looking at acquisitions we can take on so we can increase our footprint in California. We have three dispensaries now and are waiting to hear back from the state on a few more licenses. We are serious about expansion and increasing our locations because this is an industry in which we believe we can play a pivotal role by building a strong retail foundation,” Alavarez concluded.