A political “knife fight” in the beach cities

THE BIG IDEA

Hi all,

This newsletter’s coming in a bit late. Circumstances informed against me after a whirlwind trip to Vegas. I hope you still find it valuable.

In today’s issue:

  • The gloves come off in the beach cities

Read up,

Alex

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BEACH CITIES BRAWL CAPTURES CANNABIZ FRUSTRATIONS

beach cities
A mailer supporting Measure E in Redondo Beach

Bitterly contested ballot initiatives on whether to allow dispensaries in three SoCal beach cities could have far reaching implications for retailers trying to access consumers, an ongoing concern for California’s beleaguered cannabiz. The measures have attracted fierce criticism from local officials as well as some in the industry who say more similar initiatives could further hinder the state market.

The initiatives are funded by Catalyst Cannabis and Tradecraft Farms, two retailers eager to open in the affluent and heavily touristed markets of Manhattan Beach, Redondo Beach and Hermosa Beach (Los Angeles Co., 3x). In response, town officials have condemned the initiatives as a foreign invasion. Manhattan Beach Mayor Steve Napolitano and all three city council members signed a statement calling the vote “an abuse of the initiative process,” backed by out of town business interests.

Elliot Lewis, CEO of 13-shop chain Catalyst calls it grassroots democracy. Lewis has gained some renown for social media jeremiads where he describes himself as a fighter delivering #weedforthepeople in the face of “Chads” and MSOs “that ain’t ready for real competition.”

Lewis’ opponents accuse him of trying to secure for himself the kinds of anti-competitive carve outs he claims to oppose, and that…

Read the story…

 

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Eaze CEO Rogelio Choy departs

THE BIG IDEA

Hi all,

Lots to cover so let’s get to it:

  • SHO Products sues Puffco for patent infringement
  • CEO Rogelio Choy departs Eaze

PLUS: So much more.

I’ll be at MJUnpacked in Vegas next week. Will you? 

Alex

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SCOOP: SHO Products strikes back, sues Puffco for patent infringement

SHO Products, maker of the Focus V Carta e-rig, sued Puffco for patent infringement this week, escalating its legal battle with the rival dabbing device maker.

First released in 2018, Puffco’s Peak rig, sometimes called the iPhone of bongs, helped destigmatize dabbing and make concentrates one of the hottest product categories in cannabis. Puffco and SHO are now fighting over the multi-billion market for sleek, portable e-rigs which Puffco expanded. 

The SHO lawsuit comes months after Puffco sued SHO for infringement on a separate patent also commercialized in Puffco’s Peak device line. Puffco alleged infringement of a patent for for “a portable vaporizing device with an atomizer and mouthpiece that are each independently removably attachable to the base.”

SHO’s new lawsuit alleges infringement of its patent for a “removable cup atomizer.” 

  • Both suits were filed in federal court in the Central District of California, which includes Los Angeles.

Patent litigation is technical, expensive and unpredictable, and the vast majority of cases settle before trial.

SHO’s response to the initial Puffco lawsuit focused on a procedural issue known as “prior art” which gives inventors one year to file a patent after publicly displaying their innovation. SHO claims  that Puffco’s pre-launch marketing for the Peak in early January 2018 came more than a year before it filed the patent application on January 14, 2019.

  • SHO argues that Puffco’s intellectual property had been publicized,  among other places, in a January 8, 2018 review of the device in Engadget, in since deleted Instagram posts and at the Consumer Electronics Show (CES) in Las Vegas.
  • In addition to the new lawsuit, SHO has filed a motion to dismiss Puffco’s case. It’s set to be argued on Monday.

Jeffrey Smyth, a Silicon Valley-based partner at IP law firm Finnegan, said SHO’s motion to dismiss, paired with its new law suit shows it’s taking a “pretty aggressive stance,” in the litigation. (Smyth is not involved in the case.)

A spokesperson for Puffco declined to comment.       

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Eaze CEO Rogelio Choy departs

Rogelio Choy, who led delivery service Eaze for four tumultuous years, has stepped down. He’s been replaced by executive Cory Azzalino.

“With a hyper focus on expanding retail and profitability, the company needs greater clarity and strategic vision in areas outside of my expertise,” Choy wrote in a parting email, the text of which was obtained by WeedWeek.

  • The note says the company, which operates in California, Colorado, Florida and Michigan, has $200M in revenue.
  • As of several months ago, Eaze accounted for one-third of the deliveries in California, but was struggling to reach profitability in the state’s hypercompetitive market.
  • In July, the company received a $15M credit facility to focus on growth in Colorado and Florida 

One of the industry’s original darlings, Bay Area-based Eaze launched in 2014 and has raised more than $250M from high profile investors including Silicon Valley technologist Jim Clark.

  • Described as the “Uber of weed,” the company initially operated a tech platform that enabled customers to buy cannabis online and facilitated delivery without touching the plant. In 2020 it pivoted to become a plant-touching company.

Choy joined Eaze in 2018 from the tech world and was promoted to CEO the next year. As Choy led the pivot, he cooperated with federal prosecutors as two former Eaze consultants faced trial, and were convicted, of conspiracy to commit bank fraud for a scheme that tricked credit card companies into processing transactions on Eaze’s non-plant touching platform. 

  • Former Eaze CEO Jim Patterson pleaded guilty to one count of bank fraud conspiracy and testified against the consultants.
  • Under Choy, Eaze was not accused of wrongdoing.

Eaze’s acquisition of Green Dragon, a profitable, family-owned operator, which closed early this year, initially looked like a comeback story. 

  • Green Dragon operated in Colorado and Florida.
  • However, in an April meeting, a recording of which was obtained by WeedWeek, Green Dragon executive Alex Levine said the deal did more to improve Eaze’s “entire situation.” “I don’t know where this company would be if this did not happen.”

In that meeting, Levine’s father Alex Levine described Eaze’s engineering team as its key asset and the smartest people at the company.

“We live or die by [the engineering] team,” Choy said.

  • The company has since reportedly laid off members of its engineering team. It also brought in a new CTO, Mervyn Lally, who previously worked for Experian.
  • Trey Handley, who previously worked for Green Dragon, remains the company’s CFO.
  • At the April meeting, a member of the engineering team who is no longer with the company said she believed it was the Green Dragon team, not Choy, running the company.
  • At the time, WeedWeek reported that Alex Levine and his stepmother Lisa Leder held two of the company’s eight board seats.

The April meeting took place against a backdrop of tense relations with Eaze’s workforce.

Before the Green Dragon acquisition, Eaze had relatively warm relations with California unions. But in April, the company faced picket lines at a Colorado grow house where the United Food and Commercial Workers (UFCW) Local 7 accused it of hard-edged anti-union tactics. At the same time, delivery drivers in San Francisco who had voted to unionize sought to negotiate a contract.  

Jim Araby, an organizer with UFCW Local 5 in the Bay Area said the San Francisco workers and Eaze had reached an agreement due to be ratified today. It is similar to a contract negotiated by Eaze drivers in Oakland but without a $1 payment for each completed delivery, he said.

“It’s the best we could get given the difficulties of the cannabis market,” Araby said.

  • Araby said the union is now working to organize Eaze workers at an Element 7 location in South San Francisco, which would give the union four of the six NorCal depots owned or operated by Eaze.

Eaze declined to comment for this article or make its new CEO Azzalino available for an interview.  

  • UFCW’s Araby said he believes the Levines and Lisa Leder, formerly of Green Dragon, still call the shots at the company.

Eaze CEO Rogelio Choy departs

Rogelio Choy, who led delivery service Eaze for four tumultuous years, has stepped down. He’s been replaced by executive Cory Azzalino.

“With a hyper focus on expanding retail and profitability, the company needs greater clarity and strategic vision in areas outside of my expertise,” Choy wrote in a parting email, the text of which was obtained by WeedWeek.

  • The note says the company, which operates in California, Colorado, Florida and Michigan, has $200M in revenue.
  • As of several months ago, Eaze accounted for one-third of the deliveries in California, but was struggling to reach profitability in the state’s hypercompetitive market.
  • In July, the company received a $15M credit facility to focus on growth in Colorado and Florida 

One of the industry’s original darlings, Bay Area-based Eaze launched in 2014 and has raised more than $250M from high profile investors including Silicon Valley technologist Jim Clark.

  • Described as the “Uber of weed,” the company initially operated a tech platform that enabled customers to buy cannabis online and facilitated delivery without touching the plant. In 2020 it pivoted to become a plant-touching company.

Choy joined Eaze in 2018 from the tech world and was promoted to CEO the next year. As Choy led the pivot, he cooperated with federal prosecutors as two former Eaze consultants faced trial, and were convicted, of conspiracy to commit bank fraud for a scheme that tricked credit card companies into processing transactions on Eaze’s non-plant touching platform. 

  • Former Eaze CEO Jim Patterson pleaded guilty to one count of bank fraud conspiracy and testified against the consultants.
  • Under Choy, Eaze was not accused of wrongdoing.

Eaze’s acquisition of Green Dragon, a profitable, family-owned operator, which closed early this year, initially looked like a comeback story. 

  • Green Dragon operated in Colorado and Florida.
  • However, in an April meeting, a recording of which was obtained by WeedWeek, Green Dragon executive Alex Levine said the deal did more to improve Eaze’s “entire situation.” “I don’t know where this company would be if this did not happen.”

In that meeting, Levine’s father Alex Levine described Eaze’s engineering team as its key asset and the smartest people at the company.

“We live or die by [the engineering] team,” Choy said.

  • The company has since reportedly laid off members of its engineering team. It also brought in a new CTO, Mervyn Lally, who previously worked for Experian.
  • Trey Handley, who previously worked for Green Dragon, remains the company’s CFO.
  • At the April meeting, a member of the engineering team who is no longer with the company said she believed it was the Green Dragon team, not Choy, running the company.
  • At the time, WeedWeek reported that Alex Levine and his stepmother Lisa Leder held two of the company’s eight board seats.

The April meeting took place against a backdrop of tense relations with Eaze’s workforce.

Before the Green Dragon acquisition, Eaze had relatively warm relations with California unions. But in April, the company faced picket lines at a Colorado grow house where the United Food and Commercial Workers (UFCW) Local 7 accused it of hard-edged anti-union tactics. At the same time, delivery drivers in San Francisco who had voted to unionize sought to negotiate a contract.  

Jim Araby, an organizer with UFCW Local 5 in the Bay Area said the San Francisco workers and Eaze had reached an agreement due to be ratified today. It is similar to a contract negotiated by Eaze drivers in Oakland but without a $1 payment for each completed delivery, he said.

“It’s the best we could get given the difficulties of the cannabis market,” Araby said.

  • Araby said the union is now working to organize Eaze workers at an Element 7 location in South San Francisco, which would give the union four of the six NorCal depots owned or operated by Eaze.

Eaze declined to comment for this article or make its new CEO Azzalino available for an interview.  

  • UFCW’s Araby said he believes the Levines and Lisa Leder, formerly of Green Dragon, still call the shots at the company.

DOGWALKER

Another legislative win

Among the dozen or so weed bills recently signed by Governor Gavin Newsom (D), AB 2210 has gotten relatively little attention. Sponsored by Assemblyman Bill Quirk (D-Bay Area), it allows temporary dispensary licenses to operate on premises that also have an alcohol permit. (The cannabis permit must operate in a distinct area without alcohol allowed.)  A smart source told me it will “open up 100s of venues to do cannabis retail,” and could be a game changer for improving access to licensed product.

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SCOOP: CEO Jon Avidor departs Shryne

THE BIG IDEA

Hi all,

It was great to see many of you in Chicago this week. Forgot how much I dig that city.

Let’s get to it:

  • Why Wana Brands Left California
  • What’s working here
  • CEO Jon Avidor departs Shryne

Enjoy,

Alex

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Why Wana Brands left California

Wana Brands CEO Nancy Whiteman knows the state markets as well as anyone in weed. She has grown the company to 15 markets including Canada since launching 12 years ago in Colorado. The company is profitable in every one she said.

Last year Wana landed a $300M payment from Canada’s Canopy Growth to be acquired once it’s federally permissible. But not even Wana, best known for its gummies, could make it work in California. The company recently said it was leaving the state after not turning a profit.

Wana arrived in California in 2019, just as price compression was kicking in Whiteman said when we spoke at Benzinga Chicago this week. “It came down to a pricing issue,” she said, calling California probably the most price-pressured market. On top of that retailers expect brands to pay slotting fees and offer BOGOs and other promotions.

  • “If we had done that it wouldn’t have been a money making market for us,” Whiteman said.
  • She said she is aware of situations where slotting fees exceed sales revenue. “I believe there will probably be a shakeout.”
  • Of course Wana wasn’t immune to high taxes, the limited number of dispensaries, the rampant illegal market and other headwinds.
  • “In general we try not to join the race to the bottom,” she said.

Looking more broadly Whiteman pointed to several factors for soft sales in several key markets:

  • Consumers have less money and more places to go than they did during the pandemic.
  • At the same time, Wana can benefit from falling THC prices since the cannabinoid is the most expensive input in their cost structure.

Wana uses the “asset light” model which involves finding manufacturing partners in each market. Rather than compete against dozens or more gummies in California, Whiteman likes venturing into newer, smaller markets like Montana and Arkansas where there’s less competition, and it’s often local.

  • Since the Canopy deal, Whiteman also endowed The Wana Brands Foundation which partners with local charities on food security, domestic violence prevention, voter registration and other causes.

Why Wana Brands left California

Wana Brands CEO Nancy Whiteman knows the state markets as well as anyone in weed. She has grown the company to 15 markets including Canada since launching 12 years ago in Colorado. The company is profitable in every one she said.

Last year Wana landed a $300M payment from Canada’s Canopy Growth to be acquired once it’s federally permissible. But not even Wana, best known for its gummies, could make it work in California. The company recently said it was leaving the state after not turning a profit.

Wana arrived in California in 2019, just as price compression was kicking in Whiteman said when we spoke at Benzinga Chicago this week. “It came down to a pricing issue,” she said, calling California probably the most price-pressured market. On top of that retailers expect brands to pay slotting fees and offer BOGOs and other promotions.

  • “If we had done that it wouldn’t have been a money making market for us,” Whiteman said.
  • She said she is aware of situations where slotting fees exceed sales revenue. “I believe there will probably be a shakeout.”
  • Of course Wana wasn’t immune to high taxes, the limited number of dispensaries, the rampant illegal market and other headwinds.
  • “In general we try not to join the race to the bottom,” she said.

Looking more broadly Whiteman pointed to several factors for soft sales in several key markets:

  • Consumers have less money and more places to go than they did during the pandemic.
  • At the same time, Wana can benefit from falling THC prices since the cannabinoid is the most expensive input in their cost structure.

Wana uses the “asset light” model which involves finding manufacturing partners in each market. Rather than compete against dozens or more gummies in California, Whiteman likes venturing into newer, smaller markets like Montana and Arkansas where there’s less competition, and it’s often local.

  • Since the Canopy deal, Whiteman also endowed The Wana Brands Foundation which partners with local charities on food security, domestic violence prevention, voter registration and other causes.

HOW TO WIN IN CALIFORNIA: TWO VIEWS

Not all is doom and gloom here according to two plugged in execs:

Rob Sechrist, president of mortgage REIT Pelorus Equity Group, said the California market is “more nuanced than the soundbites that you hear.” While many outdoor producers can’t find buyers, he sees “indoor user/owners who grow for themselves” in a much stronger position.   

  • In this year of oversupply, he says its smart to prepare for a shortage.
  • However, he warned about dashing into interstate trade agreements:  “California should figure out its own economics before they make it more complicated.”

Brady Cobb, chairman of OnePlant, which has nine California shops, also sees upside in going vertical. The company plans to buy a high end indoor grow which “gives you the opportunity to distinguish yourself amid an endless supply of mids.”

Cobb is also CEO of Sunburn Cannabis, which recently stole bought MedMen’s vertical license in Florida, including 14 dispensaries, for $63M.

  • Cobb is especially bullish on where MedMen placed its shops. “We can fix the grow, we can’t replicate its store locations,” he said.
  • Though Sunburn has fewer stores than Trulieve and other MSOs, Cobb sees an inflated store count as a detriment. With federal legalization, he expects dispensary’s to lose their monopoly on selling legal weed.

DOGWALKER

SCOOP: CEO Avidor departs Shryne

Jon Avidor has departed his role as CEO of Stiiizy parent company Shryne Group to return to lawyering, someone familiar with the situation confirmed to WeedWeek. Avidor, who had been chairman and president, took over the CEO role last September after former CEO Brian Mitchell was indicted for fraud in relation to his work at a previous company. (Mitchell has pleaded not guilty.)

The company needs operational expertise and Avidor did not see himself in that role, the source said. Co-founder James Kim now serves as CEO; COO Mark Unterbach is adding chairman to his portfolio.

QUICK HITS

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Statewide:

Business:

Local:

  • The Santa Barbara Coalition for Responsible Cannabis filed a complaint alleging widespread illegal water usage by growers along the Santa Ynez River in Santa Barbara County. For more see the Santa Barbara Independent.
    Santa Ynez Valley News
  • An Alameda County judge upheld an order calling for two Oakland grows to stop using diesel generators.
    SF Chronicle
  • California City News counts more than 20 cities which could vote to allow retail this fall. Plus, LA, San Diego and Sacramento County residentd will vote on shops in unincorporated areas.
  • Some in Ukiah (Mendocino Co.) think Cookies’ brand is too attractive to kids.
    Ukiah Daily Journal
  • Urbn Leaf, now part of Statehouse, continues to push for a shop in San Diego neighborhood Rancho Bernardo.
    San Diego Union-Tribune
  • Green Market Report checks out the ballot measure fights in LA County’s beach cities.

Nevada:

  • A Nevada judge ruled the state’s classification of cannabis as a schedule I (banned) drug is unconstitutional.
    Las Vegas Review-Journal

Equity:

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We tested top prerolls for potency inflation

THE BIG IDEA

Happy fall and greetings from WeedWeek’s new HQ in Long Beach.

Let’s get to it:

  • Exclusive: We tested top prerolls for potency inflation

Plus lots more.

Also, I’ll be at the Benzinga conference in Chicago next week. Say hello!

Alex 

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EXCLUSIVE: WE TESTED TOP PREROLLS FOR POTENCY INFLATION

El Blunto
El Blunto Cigarillos, Pic via Flower Company

A WeedWeek test of seven California preroll brands suggests potency inflation is close to ubiquitous in the product category. 

  • The seven brands we tested include some of the top selling brands in California: El Blunto (Albert Einstone’s), Field (Glass House), Jeeter (DreamFields), KingRoll (StateHouse), Lowell, Pacific Stone and Raw Garden.

Of the seven brands (and nine total products) included, all of them tested below the THC levels on their label. The implied potency inflation on various products ranged from  14% to more than 500%.

How’d your favorite brand do?

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In the news

DOGWALKER

GETTY IMAGES

The year’s legislative session ended with Gov. Gavin Newsom signing a flood of new and amended plant-touching laws. Together they go a long way towards normalizing the plant and industry but of course they only apply to California at the moment. 

Of these the most closely watched is one that could lay the groundwork for interstate trade. It allows the Government to make trade agreements with other states, subject to testing, labeling and other requirements.  Though interstate trade is likely a few years off, CCIA executive director Lindsay Robinson called it a “strong foundation.”

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Cannabiz defeats label bill, for now

THE BIG IDEA

Hi all,

Happy end of summer!

The newsletter will be off next week as I move, work on a longer story or two and try to relax a little. See you all back after Labor Day. 

In today’s newsletter:

  • Industry beats back label bill
  • SCOOP: Three more women sue Jungle Boys

Enjoy,

Alex

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Calif. cannabiz defeats label bill, for now

The cannabiz scored a big win in Sacramento this week with the defeat of legislation that would have added bright yellow warning labels and “graphic” language to weed packaging. Supporters of the Right to Know Act shelved their bill after accusing the industry of diluting it. 

While trying to address the industry’s many ongoing challenges, the California Cannabis Industry Association (CCIA) made blocking the Right to Know Act a priority this year. CCIA argued that it would add onerous and expensive regulations that would drive up prices and push consumers to more dangerous illegal market products.

As initially filed, the bill would have required bright yellow warning labels on packaging, roughly like Canada’s, with text such as:

  • “Cannabis use may contribute to mental health problems, including psychotic disorders such as schizophrenia. Risk is greatest for frequent users and when using products with high THC levels.”
  • “Do not use if pregnant or breastfeeding. Substances in cannabis are transferred from the mother to the child and may harm your baby’s health, including causing low birth weight.

Supporters of the bill argued that the state’s current warning labels are “nearly invisible,” and too mildly worded.

  • The bill would also have required dispensaries and delivery services to make available brochures with similar information.

“We didn’t feel the language needed to be that prescriptive” or specific, Amy Jenkins, an industry lobbyist with Precision Advocacy told WeedWeek. She said the bill’s warnings weren’t based on “mutually agreed-upon scientific consensus.”

Instead wrote amendments to the bill which proposed language about: “The potential for THC to exacerbate certain mental health conditions,” and “Implications and risks associated with cannabis use by pregnant and breastfeeding women.”

  • The more specific labels risked pushing consumers to the illegal market, she said.
  • Her amendments’ also proposed that the labeling requirements could be met “via an insert or label.”

Dr. Lynn Silver, a pediatrician and director of the Public Health Institute’s Getting It [legalization] Right from the Start program said in a video promoting the bill that the labels addressed issues where there is “substantial evidence of harm.”

  • She also cited some public health benefits of legalization such as fewer people going to prison and several of the plant’s therapeutic properties.
  • The bill was sponsored by Sen. Dr. Richard Pan (D-Sacramento.), a pediatrician, and had support from Kaiser Permanente, the American College of Obstetricians and Gynecologists and the American College of Emergency Physicians among other health organizations.

“We won today but can’t rest on our laurels,” Jenkins said. She expects the bill to be filed again next year.

“We were very disappointed that the industry’s lobbying to continue to hide this information from consumers was effective,” Silver said. “We’re not stopping.”

SCOOP: Three more women sue Jungle Boys for discrimination

Three women who previously worked for Jungle Boys have sued the storied SoCal operator alleging sex discrimination, underpayment and other labor violations.

The case follows a similar pending suit filed in April by two women. The five plaintiffs seek to consolidate the cases into a class action representing similarly situated Jungle Boys workers over the past four years.

The defendants are Los Angeles County-based Toluca Lake Collective and other entities associated with the Jungle Boys brand. A lawyer for Jungle Boys did not immediately respond to a request for comment.  

The plaintiffs worked as budtenders (allegedly called “Jungle Girls”) and other jobs allege they were denied equal pay, promotions and assignments “because they are women.” It further alleges unpaid overtime, withheld tips and other labor violations affected male and female workers. 

Defendant Lindsay Wooten alleges she was repeatedly denied opportunities to be a cultivator, despite holding a degree in horticulture.

Wooten, who was married, claims she saw several employees fired after reporting their pregnancies and felt she would be fired if she got pregnant. She alleges her manager “held a meeting and expressly told female employees they were not allowed to become pregnant.”

  • The suit further alleges the company routinely demoted, reduced hours or fired women who were married or said they were getting married.

A second defendant, Lily Barragan alleges her hours were cut more than 50% after she became pregnant. She claims she was fired after using sick leave on account of her morning sickness.  

The suit further alleges Jungle Boys:

  • Gave women inferior plants for trimming, which meant more work for less pay  
  • Communicated a policy that women couldn’t work as cultivators and otherwise limited women’s attempts to advance their careers

The case was filed yesterday in California state court. Read the complaint.

SCOOP: Three more women sue Jungle Boys for discrimination

Three women who previously worked for Jungle Boys have sued the storied SoCal operator alleging sex discrimination, underpayment and other labor violations.

The case follows a similar pending suit filed in April by two women. The five plaintiffs seek to consolidate the cases into a class action representing similarly situated Jungle Boys workers over the past four years.

The defendants are Los Angeles County-based Toluca Lake Collective and other entities associated with the Jungle Boys brand. A lawyer for Jungle Boys did not immediately respond to a request for comment.  

The plaintiffs worked as budtenders (allegedly called “Jungle Girls”) and other jobs allege they were denied equal pay, promotions and assignments “because they are women.” It further alleges unpaid overtime, withheld tips and other labor violations affected male and female workers. 

Defendant Lindsay Wooten alleges she was repeatedly denied opportunities to be a cultivator, despite holding a degree in horticulture.

Wooten, who was married, claims she saw several employees fired after reporting their pregnancies and felt she would be fired if she got pregnant. She alleges her manager “held a meeting and expressly told female employees they were not allowed to become pregnant.”

  • The suit further alleges the company routinely demoted, reduced hours or fired women who were married or said they were getting married.

A second defendant, Lily Barragan alleges her hours were cut more than 50% after she became pregnant. She claims she was fired after using sick leave on account of her morning sickness.  

The suit further alleges Jungle Boys:

  • Gave women inferior plants for trimming, which meant more work for less pay  
  • Communicated a policy that women couldn’t work as cultivators and otherwise limited women’s attempts to advance their careers

The case was filed yesterday in California state court. Read the complaint.

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Two economists’ dismal view of legalization

THE BIG IDEA

Hi all,

You might want to sit down before reading today’s newsletter. I review Can Legal Weed Win, the new book by UC Davis economists Robin Goldstein and Daniel Sumner.

Economics is called the dismal science, and the book doesn’t disappoint on that score:

  • Can legal weed win?, the WeedWeek review

Cheer up, it’s Friday,

Alex

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Two economists’ dismal view of legalization

Until its heartstopping seventh chapter — “Legal Weed in 2050” — many cannabis executives will find themselves nodding along with “Can Legal Weed Win: The blunt realities of cannabis economics,” by UC Davis economists Robin Goldstein and Daniel Sumner.

Then, as if cresting the peak of a roller coaster, readers may find themselves holding their stomachs and questioning their life choices. I certainly did.

The cannabiz is tough, but what keeps everyone going is faith in the massive growth to come. Last year, state legal sales came in at $25B. Many prognosticators say it will triple or better by the end of the decade. Goldstein and Sumner, by contrast expect industry revenues to shrink. They don’t dispute that national legalization is coming, or that the number of consumers will grow. They argue that market forces will crush prices by 85% or more.

economics

Until its soul-shaking turn, much of the book is devoted to how the industry got this way. Goldstein and Sumner are affable guides, largely sympathetic to the legalization movement without indulging its taste for conspiracy and myth. And the conclusions they reach, largely resemble the California industry’s belief that its fortunes would improve in a lower-tax, laxer-regulation climate.

They hold up Oklahoma, where it’s said to be as easy to open a dispensary as a taco stand, as a relative success story, and devote a chapter and more to how California’s high-tax, high-regulation climate has created an unworkable mess for so many companies. The economists also endorse the industry mantra that taxes and anything else that pushes up prices sends consumers to the illegal market. They run the numbers and confirm what most industry insiders believe in their guts. 

A very important caveat

The authors recognize the unique difficulties of running a cannabis business, but then they add a very important caveat: Operating in this market keeps cannabis prices at absurd levels compared to every other agricultural commodity. Today in California, a pound of weed, in eighths, might wholesale for $2,500. A pound of Napa Valley Cabernet Sauvignon grapes wholesales for about $5.

Of course no one knows exactly what it will look like as the market normalizes and interstate trade arrives. But Goldstein and Sumner predict that as with all other agricultural markets, cultivation will move to places like Oklahoma where low taxes and regulations become a competitive advantage. 

Glass House Brands which is in the process of opening a massive 5.5M square foot greenhouse in Ventura County, says the cost of its first crop, harvested in June, was $189/pound. It wants to get that to $100 per pound by next year, with an eye on interstate trade. But in the economists’ view, interstate trade would likely shift production to someplace like Oklahoma where they can build greenhouses too, and production costs will fall even lower.

  • The bottom line: Californians bought $5B in legal weed last year. While that number hasn’t necessarily peaked yet, by 2050, Goldstein and Sumner think it could crash to $750M.

And their views have begun to catch on. In 2019, Grand View Research predicted a $146B global market by 2025. It has since revised that down several times. This week it predicted a $40B U.S. market by 2030.

Why they may be wrong

One possible way the authors underestimate the future market is through an omission. As the industry matures, they see price compression from all directions. They don’t discuss the ingenuity of companies and brands to push prices up.

Today California consumers are voting for the illegal market with their wallets, because the main difference they see between legal and illegal products is that the illegal ones cost way less. Many in the business agree and aspire to build brands with truly differentiated products. So far, no one has. But that doesn’t mean they won’t.

Differentiation can come from many different directions. It could be infusing products with a new little known cannabinoid with extraordinary properties or something much less innovative. Starbucks perfected selling $6 cups of coffee by giving people a place to sit. Differentiation should also get a boost as the industry gains access to marquee advertising and marketing channels.  

But weed can’t go on selling for $5,000/pound retail. This helps explain why the industry is so excited about drinks, which can cost 15x as much as a gummy per milligram of THC. (Drink sales haven’t yet lived up to hopes.) 

Sumner and Goldstein don’t expect to be right about everything, but they are extremely smart economists. Operators ignore them at their peril.

Two economists’ dismal view of legalization

Until its heartstopping seventh chapter — “Legal Weed in 2050” — many cannabis executives will find themselves nodding along with “Can Legal Weed Win: The blunt realities of cannabis economics,” by UC Davis economists Robin Goldstein and Daniel Sumner.

Then, as if cresting the peak of a roller coaster, readers may find themselves holding their stomachs and questioning their life choices. I certainly did.

The cannabiz is tough, but what keeps everyone going is faith in the massive growth to come. Last year, state legal sales came in at $25B. Many prognosticators say it will triple or better by the end of the decade. Goldstein and Sumner, by contrast expect industry revenues to shrink. They don’t dispute that national legalization is coming, or that the number of consumers will grow. They argue that market forces will crush prices by 85% or more.

economics

Until its soul-shaking turn, much of the book is devoted to how the industry got this way. Goldstein and Sumner are affable guides, largely sympathetic to the legalization movement without indulging its taste for conspiracy and myth. And the conclusions they reach, largely resemble the California industry’s belief that its fortunes would improve in a lower-tax, laxer-regulation climate.

They hold up Oklahoma, where it’s said to be as easy to open a dispensary as a taco stand, as a relative success story, and devote a chapter and more to how California’s high-tax, high-regulation climate has created an unworkable mess for so many companies. The economists also endorse the industry mantra that taxes and anything else that pushes up prices sends consumers to the illegal market. They run the numbers and confirm what most industry insiders believe in their guts. 

A very important caveat

The authors recognize the unique difficulties of running a cannabis business, but then they add a very important caveat: Operating in this market keeps cannabis prices at absurd levels compared to every other agricultural commodity. Today in California, a pound of weed, in eighths, might wholesale for $2,500. A pound of Napa Valley Cabernet Sauvignon grapes wholesales for about $5.

Of course no one knows exactly what it will look like as the market normalizes and interstate trade arrives. But Goldstein and Sumner predict that as with all other agricultural markets, cultivation will move to places like Oklahoma where low taxes and regulations become a competitive advantage. 

Glass House Brands which is in the process of opening a massive 5.5M square foot greenhouse in Ventura County, says the cost of its first crop, harvested in June, was $189/pound. It wants to get that to $100 per pound by next year, with an eye on interstate trade. But in the economists’ view, interstate trade would likely shift production to someplace like Oklahoma where they can build greenhouses too, and production costs will fall even lower.

  • The bottom line: Californians bought $5B in legal weed last year. While that number hasn’t necessarily peaked yet, by 2050, Goldstein and Sumner think it could crash to $750M.

And their views have begun to catch on. In 2019, Grand View Research predicted a $146B global market by 2025. It has since revised that down several times. This week it predicted a $40B U.S. market by 2030.

Why they may be wrong

One possible way the authors underestimate the future market is through an omission. As the industry matures, they see price compression from all directions. They don’t discuss the ingenuity of companies and brands to push prices up.

Today California consumers are voting for the illegal market with their wallets, because the main difference they see between legal and illegal products is that the illegal ones cost way less. Many in the business agree and aspire to build brands with truly differentiated products. So far, no one has. But that doesn’t mean they won’t.

Differentiation can come from many different directions. It could be infusing products with a new little known cannabinoid with extraordinary properties or something much less innovative. Starbucks perfected selling $6 cups of coffee by giving people a place to sit. Differentiation should also get a boost as the industry gains access to marquee advertising and marketing channels.  

But weed can’t go on selling for $5,000/pound retail. This helps explain why the industry is so excited about drinks, which can cost 15x as much as a gummy per milligram of THC. (Drink sales haven’t yet lived up to hopes.) 

Sumner and Goldstein don’t expect to be right about everything, but they are extremely smart economists. Operators ignore them at their peril.

DOGWALKER

Since we’re talking interstate trade…

In a Maine lawsuit, a federal appeals court found 2-1 that cannabis markets are legal enough to be governed by the Constitution’s  commerce clause. The case struck down a Maine law which allowed only Mainers to sell MED. While this isn’t close to a green light for interstate trade, it’s a nod in that general direction. A new paper by several academics and at least one journalist offers recommendations for how interstate trade can support a fair and competitive industry.

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Does Stiiizy have a diiiversiiion problem?

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Let’s get to it: 

  • Exclusive: Does Stiiizy have a diiiversiiion problem?

Enjoy,

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Exclusive: Does Stiiizy have a diiiversiiion problem?

This story has been updated with a screen shot of Empire Cannabis Club’s Stiiizy offerings.

The labels of four Stiiizy-branded vape products purchased in New York City suggest that there is an illegal pipeline of products originating at the company’s licensed Los Angeles factory and reaching out of state markets.

There are essentially two ways cannabis products legally manufactured in California can reach other states, both illegal. They can 1) Be diverted from a company’s supply chain; or 2) Sent out of state after a consumer legally purchases them.

Stiiizy’s parent company, Shryne Group, declined to comment on the vapes purchased in New York, but provided the following statement:

STIIIZY products are currently only legally sold in California, Arizona, Nevada, and Michigan. While we cannot comment on possible counterfeit sales, which STIIIZY combats with constantly updated packaging with verification QR codes, or unethical third-party distribution practices outside of these legal markets, we can affirm that STIIIZY’s mission is to bring high quality and safe access to cannabis in 100% compliance in jurisdictions where sales are legal.

  • (More on the counterfeit question below.)

California’s unicorn

LA-based Shryne doesn’t disclose its numbers, but it’s frequently cited as a unicorn thriving despite California’s punishing market. In June, Shryne received a loan of up to $170M co-led by Silver Spike Capital, which took Weedmaps public through a SPAC deal this year. (Silver Spike did not respond to requests for comment.)

Best known for its Stiiizy vape pods, Shryne is vertically integrated with factories in Lompoc (Santa Barbara Co.), LA and Oakland, according to its web site. It has more than 20 dispensaries under the Stiiizy and Authentic brands. According to data shop BDSA, Stiiizy was California’s top cannabis brand in any category last year, and third nationwide, with roughly $250M in sales (through November) across California, Michigan, Nevada and Arizona. There’s no legal way to transport cannabis across state lines, even between legal states. 

In California, it’s widely acknowledged that many struggling licensed companies stay afloat by maintaining a back door to the illegal market. As companies grow larger and more successful, the incentive structure promotes legal behavior: The rewards of staying aboveboard increase, and there’s more to lose if a company gets caught breaking the law. If products are leaking from Stiiizy’s supply chain, it could indicate that the California market is even tougher than everyone says. 

The vapes in question

Recently, after receiving a tip, I asked two people to visit smoke shops in New York City and pick up Stiiizy vapes. New York’s state REC market hasn’t yet opened, but city Mayor Eric Adams has welcomed the grey market. Unlicensed dispensaries operate openly and THC products can now be purchased at smoke shops and even several grey market consumption lounges.

The New Yorkers sent pictures of three products they’d bought, one in Midtown, one on the Lower East Side and one from Brooklyn’s Cobble Hill.

Here are the labels of the Manhattan vapes:


Purchased in Manhattan July 2022

stiiizy
Photo by Brad Racino

Here’s the one from Brooklyn:


Purchased in Brooklyn July 2022

Stiiizy has been combatting counterfeits of its popular vapes for years, but declined to comment on whether it believes these specimens are authentic.

If the labels are counterfeit, they are thorough. Each label:

  1. Says that it was manufactured legally by Ironworks Collective Inc. Ironworks is a SoCal company with cultivation, manufacturing, distribution and retail licenses in Los Angeles County. The names listed on Ironworks licenses include Shryne Group execs Jon Avidor, Takayuki Sato and CEO James Kim.
  2. Includes a phone number for a working Stiiizy support line.
  3. Has a QR code that produces the label’s UID number. (Try them.)
  4. Has a packaging date

The California Department of Cannabis Control said it could not determine if the above photos were of authentic Stiiizy products. Asked if it was aware of counterfeit Stiiizy labels that include a factory name, the agency declined to comment.

After receiving these pictures, I asked one of the New Yorkers to purchase a fourth Stiiizy vape, this one from the Empire Cannabis Club. Empire is is a “non-charitable, not for profit” dispensary, a new kind of legal entity designed to operate in New York before licensed pot shops can. To shop there, my friend had to buy a $15 day pass.

Empire, which has about 100 employees, operates storefronts and delivery services out of Chelsea, the Lower East Side and Williamsburg. As of today, its Chelsea branch stocked several recognizable California brands including Kanha, Jeeter, and Kiva as well as eight Stiiizy vape products.

Here’s what she bought:

Purchased at Empire Cannabis ClubsPurchased at Empire Cannabis Clubs, Chelsea, August 2022

Empire’s lawyer, Steve Zissou, said he has no idea how California products reach Empire, but he guaranteed that whatever it stocks is authentic (non-counterfeit). Stiiizy declined to comment on whether the above product is counterfeit.

  • Jonathan Elfand, the longtime cannabis activist who runs Empire, recently told Forbes that “Every single company has a back door.” His lawyer, Zissou, claimed not to know what Elfand was talking about.

An August 11 screenshot of some of Empire Cannabis Club’s Stiiizy offerings. Empirecannabisclubs.com

 

Stiiizy vapes are available in four states. Since there’s no legal cannabis business that crosses state borders, compliance requires those pods to be manufactured at at least one site in each state. If New York’s City’s appetite for Stiiizy vapes can be met in a haphazard way by a combination of counterfeits and whatever licensed products wash in from legal states, it’s unlikely that all four products bought at random in the city would come from the same LA factory.

  • (If the odds were calculated for a controlled casino-like environment, which this is not, and there were four total Stiiizy vape factories, the chance that all four vapes purchased at random in New York came from the same factory would be about 1%.)

It seems more probable that there’s an organized operation diverting products manufactured by Ironworks into the illegal market. The key question is whether they are diverted before or after a legal sale to a customer.

There’s data that could probably help determine the answer, but I wasn’t able to obtain it. California and more than a dozen other states contract with software company Metrc to track cannabis products from seed to sale, but neither state regulators (citing statute) nor Metrc would provide it.

Shryne may also possess relevant data. According to Metrc, “businesses and their designated employees will only have visibility in Metrc on current and historical inventory that has lived within their specific Metrc business license.” Shryne declined to provide any data.

 

Exclusive: Does Stiiizy have a diiiversiiion problem?

This story has been updated with a screen shot of Empire Cannabis Club’s Stiiizy offerings.

The labels of four Stiiizy-branded vape products purchased in New York City suggest that there is an illegal pipeline of products originating at the company’s licensed Los Angeles factory and reaching out of state markets.

There are essentially two ways cannabis products legally manufactured in California can reach other states, both illegal. They can 1) Be diverted from a company’s supply chain; or 2) Sent out of state after a consumer legally purchases them.

Stiiizy’s parent company, Shryne Group, declined to comment on the vapes purchased in New York, but provided the following statement:

STIIIZY products are currently only legally sold in California, Arizona, Nevada, and Michigan. While we cannot comment on possible counterfeit sales, which STIIIZY combats with constantly updated packaging with verification QR codes, or unethical third-party distribution practices outside of these legal markets, we can affirm that STIIIZY’s mission is to bring high quality and safe access to cannabis in 100% compliance in jurisdictions where sales are legal.

  • (More on the counterfeit question below.)

California’s unicorn

LA-based Shryne doesn’t disclose its numbers, but it’s frequently cited as a unicorn thriving despite California’s punishing market. In June, Shryne received a loan of up to $170M co-led by Silver Spike Capital, which took Weedmaps public through a SPAC deal this year. (Silver Spike did not respond to requests for comment.)

Best known for its Stiiizy vape pods, Shryne is vertically integrated with factories in Lompoc (Santa Barbara Co.), LA and Oakland, according to its web site. It has more than 20 dispensaries under the Stiiizy and Authentic brands. According to data shop BDSA, Stiiizy was California’s top cannabis brand in any category last year, and third nationwide, with roughly $250M in sales (through November) across California, Michigan, Nevada and Arizona. There’s no legal way to transport cannabis across state lines, even between legal states. 

In California, it’s widely acknowledged that many struggling licensed companies stay afloat by maintaining a back door to the illegal market. As companies grow larger and more successful, the incentive structure promotes legal behavior: The rewards of staying aboveboard increase, and there’s more to lose if a company gets caught breaking the law. If products are leaking from Stiiizy’s supply chain, it could indicate that the California market is even tougher than everyone says. 

The vapes in question

Recently, after receiving a tip, I asked two people to visit smoke shops in New York City and pick up Stiiizy vapes. New York’s state REC market hasn’t yet opened, but city Mayor Eric Adams has welcomed the grey market. Unlicensed dispensaries operate openly and THC products can now be purchased at smoke shops and even several grey market consumption lounges.

The New Yorkers sent pictures of three products they’d bought, one in Midtown, one on the Lower East Side and one from Brooklyn’s Cobble Hill.

Here are the labels of the Manhattan vapes:


Purchased in Manhattan July 2022

stiiizy
Photo by Brad Racino

Here’s the one from Brooklyn:


Purchased in Brooklyn July 2022

Stiiizy has been combatting counterfeits of its popular vapes for years, but declined to comment on whether it believes these specimens are authentic.

If the labels are counterfeit, they are thorough. Each label:

  1. Says that it was manufactured legally by Ironworks Collective Inc. Ironworks is a SoCal company with cultivation, manufacturing, distribution and retail licenses in Los Angeles County. The names listed on Ironworks licenses include Shryne Group execs Jon Avidor, Takayuki Sato and CEO James Kim.
  2. Includes a phone number for a working Stiiizy support line.
  3. Has a QR code that produces the label’s UID number. (Try them.)
  4. Has a packaging date

The California Department of Cannabis Control said it could not determine if the above photos were of authentic Stiiizy products. Asked if it was aware of counterfeit Stiiizy labels that include a factory name, the agency declined to comment.

After receiving these pictures, I asked one of the New Yorkers to purchase a fourth Stiiizy vape, this one from the Empire Cannabis Club. Empire is is a “non-charitable, not for profit” dispensary, a new kind of legal entity designed to operate in New York before licensed pot shops can. To shop there, my friend had to buy a $15 day pass.

Empire, which has about 100 employees, operates storefronts and delivery services out of Chelsea, the Lower East Side and Williamsburg. As of today, its Chelsea branch stocked several recognizable California brands including Kanha, Jeeter, and Kiva as well as eight Stiiizy vape products.

Here’s what she bought:

Purchased at Empire Cannabis ClubsPurchased at Empire Cannabis Clubs, Chelsea, August 2022

Empire’s lawyer, Steve Zissou, said he has no idea how California products reach Empire, but he guaranteed that whatever it stocks is authentic (non-counterfeit). Stiiizy declined to comment on whether the above product is counterfeit.

  • Jonathan Elfand, the longtime cannabis activist who runs Empire, recently told Forbes that “Every single company has a back door.” His lawyer, Zissou, claimed not to know what Elfand was talking about.

An August 11 screenshot of some of Empire Cannabis Club’s Stiiizy offerings. Empirecannabisclubs.com

 

Stiiizy vapes are available in four states. Since there’s no legal cannabis business that crosses state borders, compliance requires those pods to be manufactured at at least one site in each state. If New York’s City’s appetite for Stiiizy vapes can be met in a haphazard way by a combination of counterfeits and whatever licensed products wash in from legal states, it’s unlikely that all four products bought at random in the city would come from the same LA factory.

  • (If the odds were calculated for a controlled casino-like environment, which this is not, and there were four total Stiiizy vape factories, the chance that all four vapes purchased at random in New York came from the same factory would be about 1%.)

It seems more probable that there’s an organized operation diverting products manufactured by Ironworks into the illegal market. The key question is whether they are diverted before or after a legal sale to a customer.

There’s data that could probably help determine the answer, but I wasn’t able to obtain it. California and more than a dozen other states contract with software company Metrc to track cannabis products from seed to sale, but neither state regulators (citing statute) nor Metrc would provide it.

Shryne may also possess relevant data. According to Metrc, “businesses and their designated employees will only have visibility in Metrc on current and historical inventory that has lived within their specific Metrc business license.” Shryne declined to provide any data.

 

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Lab execs allege rampant potency fraud

THE BIG IDEA

Hi all,

We’ve got a story today on lab testing and it’s made me want to dig in to this subject further. Got any ideas, thoughts or tips? Reach out any time: alex@weedweek.com

  • Lab execs allege rampant potency fraud

Enjoy,

Alex

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Correction: Last week I misspelled the name of LA dispensary Gorilla RX.

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Calif. lab execs allege rampant potency fraud

California cannabis retailers say only two things move product: high potency and low prices.

With prices finding new lows and the state market in crisis, retailers are hungry for products with ever higher THC levels. This dynamic has led to a “plague” of brands “shopping” for a desired potency level and unscrupulous labs happy to oblige, according to a group of self-identified honest operators.

Feeling ignored by regulators, last week executives from Infinite Chemical Analysis Labs and Anresco Laboratories aired their complaints in a article published in Cannabis Industry Journal. Potency inflation, they say, threatens their business, overcharges consumers — “higher numbers = higher prices” — and risks allowing more unsafe products on the market. The authors blame state regulator the Department of Cannabis Control (DCC), which they say has taken insufficient and wrongheaded steps to curb the problem.

“Three years ago you had to be 20% —- 25%,” co-author Josh Swider, Infinite’s co-founder and CEO, told WeedWeek. “Now it’s up to 30%. Dispensaries won’t buy it if it’s under 30%.” Every day, he said, companies reach out offering their business on condition of hitting potency targets. “There’s no point in naming names,” he said. Big companies do it and smaller companies are worse. 

  • In a random test, I took a look at the flower listed today at Flower Company. About two-thirds tested above 30%.
  • Infinite Lab Director Erik Paulson, who co-wrote the CIJ article, said the article arose out of confusion. He watched potency numbers soar in stores without seeing a corresponding climb in Infinite’s data, even as the lab continually re-evaluated its methods.

An experiment

More than a year ago, the CIJ article says a group of irate labs, including the authors’, bought 150 flower samples of shelves and found that 87.4% contained at least 10% less THC than stated on the label. Almost 30% of the samples came in more than 25% below the label. “The primary reason why potency inflation has become so prevalent is that there have been no negative repercussions for those that are cheating,” the article states.

  • The authors say they provided DCC with data on the 150 samples which showed rampant potency inflation and it didn’t result in a single recall. They say the DCC did not even recall those products shown to contain category 1 pesticides, which the state bans in any concentration on cannabis.
  • While few cannabis professionals consider potency inflation itself to be a safety hazard, the authors say the data shows labs willing to bump THC levels are more likely to overlook restricted or banned chemicals.

While potency inflation may be especially common here, it’s not just a California problem:

A brand’s view

A scientist at a company with several brands, who does not have permission to speak to reporters, acknowledged the practice is widespread as well. He said he’d been asked, “How high do you want it?”

“It creates a false sense of what is actually in the packaging and what’s achievable,” he said. “Is 40% THC [flower] possible? Yeah it’s probably possible but that creates demand for every brand to be 35% and that’s not the way it works.”

  • “Everyone is getting so THC focused removes a lot of the variety and specialness, because everyone is just trying to get these fake THC numbers,” he said.

DCC Response

The DCC is aware of the problem. In July it fulfilled a statutory obligation by proposing standardized testing procedures. The fed up lab execs say it won’t help. (UPDATE 8/8/22: Statement from DCC director Nicole Elliott added below.

In an eight page response to the request for public comments and published here for the first time, Scott Willard, CEO of Monterrey-based Coverton Labs wrote that the proposal “fails to sufficiently account for purposeful manipulation of data and use of improper deviations.”

  • The cheating, Willard and his allies say, owes not to the lack of standardized testing methods but willfullly fraudulent activity such as being very selective about the sample that gets tested and what bits within it (i.e. kief instead of stem) get tested.
  • DCC said additional unnamed projects are underway that build on its efforts to combat potency inflation.

The Cannabis Industry Journal article’s recommendations include:

  • Routine surveillance sampling and testing of products bought in stores.
  • Recalls for “extreme” potency inflation.
  • In-person, unannounced audits of labs, perhaps focusing on those reporting statistically higher THC results.
  • The article even raises the idea of potency taxes.

Cindy Orser, Chief Science Officer at San Diego-based CLIP Labs suggested more consumer education could also help. Consumers are “really getting ripped off,” Orser said. Even when there is excessive THC, it’s “just going up in smoke. It’s not benefitting you.”

Statement from DCC director Nicole Elliott:

This practice of purposely altering lab results is the result of unscrupulous labs that are intentionally undermining the regulatory space, scamming consumers and threatening public health. There is no reasonable excuse for this type of behavior, for seeking to justify it or for financially supporting it in California’s legal market.  

The DCC has moved quickly in its first year of existence to undertake enormous regulatory responsibilities previously housed across three distinct state departments. We are proud of the strides we have made to help support the cannabis industry and continue to work on the many unique and complex issues within our control. One thing we know – significant changes can take time and require collaboration. We work in earnest every day to make progress towards these changes and improvements that will better support our legal market and drive accountability amongst our licenses.  

One example of this work is reflected in the Department’s proposed SB 544 regulations. The intent of SB 544 is to tackle the issue of potency inflation and inaccurate testing of contaminants by establish testing standards where none existed. The proposed standardized cannabinoid – potency – test method creates a standard for laboratories to follow that will reduce variation of results from laboratories using alternate methods. 

This is one example, and there will be more we will share, as there is work underway to build on these efforts. In the meantime, we encourage stakeholders to focus their energy on productive collaboration as we continue our work to expand compliance with our overall regulatory framework.

Calif. lab execs allege rampant potency fraud

California cannabis retailers say only two things move product: high potency and low prices.

With prices finding new lows and the state market in crisis, retailers are hungry for products with ever higher THC levels. This dynamic has led to a “plague” of brands “shopping” for a desired potency level and unscrupulous labs happy to oblige, according to a group of self-identified honest operators.

Feeling ignored by regulators, last week executives from Infinite Chemical Analysis Labs and Anresco Laboratories aired their complaints in a article published in Cannabis Industry Journal. Potency inflation, they say, threatens their business, overcharges consumers — “higher numbers = higher prices” — and risks allowing more unsafe products on the market. The authors blame state regulator the Department of Cannabis Control (DCC), which they say has taken insufficient and wrongheaded steps to curb the problem.

“Three years ago you had to be 20% —- 25%,” co-author Josh Swider, Infinite’s co-founder and CEO, told WeedWeek. “Now it’s up to 30%. Dispensaries won’t buy it if it’s under 30%.” Every day, he said, companies reach out offering their business on condition of hitting potency targets. “There’s no point in naming names,” he said. Big companies do it and smaller companies are worse. 

  • In a random test, I took a look at the flower listed today at Flower Company. About two-thirds tested above 30%.
  • Infinite Lab Director Erik Paulson, who co-wrote the CIJ article, said the article arose out of confusion. He watched potency numbers soar in stores without seeing a corresponding climb in Infinite’s data, even as the lab continually re-evaluated its methods.

An experiment

More than a year ago, the CIJ article says a group of irate labs, including the authors’, bought 150 flower samples of shelves and found that 87.4% contained at least 10% less THC than stated on the label. Almost 30% of the samples came in more than 25% below the label. “The primary reason why potency inflation has become so prevalent is that there have been no negative repercussions for those that are cheating,” the article states.

  • The authors say they provided DCC with data on the 150 samples which showed rampant potency inflation and it didn’t result in a single recall. They say the DCC did not even recall those products shown to contain category 1 pesticides, which the state bans in any concentration on cannabis.
  • While few cannabis professionals consider potency inflation itself to be a safety hazard, the authors say the data shows labs willing to bump THC levels are more likely to overlook restricted or banned chemicals.

While potency inflation may be especially common here, it’s not just a California problem:

A brand’s view

A scientist at a company with several brands, who does not have permission to speak to reporters, acknowledged the practice is widespread as well. He said he’d been asked, “How high do you want it?”

“It creates a false sense of what is actually in the packaging and what’s achievable,” he said. “Is 40% THC [flower] possible? Yeah it’s probably possible but that creates demand for every brand to be 35% and that’s not the way it works.”

  • “Everyone is getting so THC focused removes a lot of the variety and specialness, because everyone is just trying to get these fake THC numbers,” he said.

DCC Response

The DCC is aware of the problem. In July it fulfilled a statutory obligation by proposing standardized testing procedures. The fed up lab execs say it won’t help. (UPDATE 8/8/22: Statement from DCC director Nicole Elliott added below.

In an eight page response to the request for public comments and published here for the first time, Scott Willard, CEO of Monterrey-based Coverton Labs wrote that the proposal “fails to sufficiently account for purposeful manipulation of data and use of improper deviations.”

  • The cheating, Willard and his allies say, owes not to the lack of standardized testing methods but willfullly fraudulent activity such as being very selective about the sample that gets tested and what bits within it (i.e. kief instead of stem) get tested.
  • DCC said additional unnamed projects are underway that build on its efforts to combat potency inflation.

The Cannabis Industry Journal article’s recommendations include:

  • Routine surveillance sampling and testing of products bought in stores.
  • Recalls for “extreme” potency inflation.
  • In-person, unannounced audits of labs, perhaps focusing on those reporting statistically higher THC results.
  • The article even raises the idea of potency taxes.

Cindy Orser, Chief Science Officer at San Diego-based CLIP Labs suggested more consumer education could also help. Consumers are “really getting ripped off,” Orser said. Even when there is excessive THC, it’s “just going up in smoke. It’s not benefitting you.”

Statement from DCC director Nicole Elliott:

This practice of purposely altering lab results is the result of unscrupulous labs that are intentionally undermining the regulatory space, scamming consumers and threatening public health. There is no reasonable excuse for this type of behavior, for seeking to justify it or for financially supporting it in California’s legal market.  

The DCC has moved quickly in its first year of existence to undertake enormous regulatory responsibilities previously housed across three distinct state departments. We are proud of the strides we have made to help support the cannabis industry and continue to work on the many unique and complex issues within our control. One thing we know – significant changes can take time and require collaboration. We work in earnest every day to make progress towards these changes and improvements that will better support our legal market and drive accountability amongst our licenses.  

One example of this work is reflected in the Department’s proposed SB 544 regulations. The intent of SB 544 is to tackle the issue of potency inflation and inaccurate testing of contaminants by establish testing standards where none existed. The proposed standardized cannabinoid – potency – test method creates a standard for laboratories to follow that will reduce variation of results from laboratories using alternate methods. 

This is one example, and there will be more we will share, as there is work underway to build on these efforts. In the meantime, we encourage stakeholders to focus their energy on productive collaboration as we continue our work to expand compliance with our overall regulatory framework.

DOGWALKERS

Berner makes the cover of Forbes

Cookies’ mogul Berner looks badass as the first cannabiz exec to appear on the cover of Forbes. The story, by my friend Will Yakowicz, focuses less on Cookies than the market’s struggles, mostly in California.

A few juicy tidbits:

  • According to Jonathan Rubin, CEO of New Leaf Data Services, 95% of California growers operated at a loss last year.
  • “Every single company has a back door,” says Jonathan Elfand who runs Empire Cannabis Club in New York City.
  • Industry pioneer Steve DeAngelo says legalization failed in California.
  • “This whole thing is a fucking scam,” says Jason Gellman of hallowed Ridgeline Farms in Humboldt.
  • Glass House Farms co-founder Graham Farrar called the company’s enormous greenhouse a “call option” on federal legalization.

Separately, MJBiz announced Berner would headline their flagship Las Vegas conference in November.

Read the whole thing

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MedMen hit with discrimination suit

An Asian American woman who worked at MedMen‘s Desert Hot Springs (Riverside) facility has sued the MSO alleging discrimination, retaliation, and other labor violations. Amanda Tran alleges the company harassed her on the basis of race, national origin, ancestry, sex and gender. In a response, MedMen denied all the allegations.

Last month WeedWeek was also first to report that MedMen was sued for nearly $1M in back rent at a Chicago location. (Legal research facilitated by UniCourt.)

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Company milestones:

Job Moves:

  • Antonio Frazier has joined testing company Sonoma Lab Works as president. He was previously with CannaSafe which shut its California operations on account of rampant “lab shopping.” North Bay Business Journal

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Black-owned businesses feel the squeeze

THE BIG IDEA

Hi all,

Sorry for today’s delay, but I hope you’ll find it a valuable weekend read.

  • Black-owned businesses feel the squeeze

Alex

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Black-owned businesses feel the squeeze

In June, the chair of Oakland’s Cannabis Regulatory Commission sounded the alarm: California’s social equity businesses couldn’t survive in the current business climate. Amid heavy taxes and competition with the illegal market, Chaney Turner told lawmakers in Sacramento, “Only large operators with expendable capital can afford to operate ‘in the red’ long enough for many of their competitors to fail.”

“Why are Black & Brown cannabis equity retailers being ignored?” Turner asked. As Turner noted, two recent relief efforts had overlooked the urban dispensaries and delivery services which comprise most minority-owned cannabis businesses.

  • The cannabis tax cut signed this month by Governor Newsom zeroed out the hated cultivation tax of more than $161/pound. But while there’s hope of benefits rippling across the supply chain, the immediate benefit goes to growers.
  • Additionally, late last year the state Department of Cannabis Control (DCC) announced a license fee waiver program for equity businesses. But data obtained by WeedWeek and published here for the first time show that more than 70% of the 629 waivers awarded so far have gone to businesses in overwhelmingly rural counties. (More than 400 went to the Emerald Triangle.)

“There are no known errors, however, this information is outdated,” a spokesperson for the Department wrote.

  • As defined in legislation “The Department has issued a significant number of licenses in rural areas, and rural areas have not been immune from impacts associated with the War on Drugs,” a department spokesperson wrote in an email. (Eligibility requirements for equity fee waivers can also be found on the DCC website..)

“Zero benefit to us”

There’s been “zero benefit to us,” said Rashaan Everett, president of Good Tree, a SoCal-based delivery service that’s the biggest equity business I’m aware of anywhere.

The problem of cannabis equity tends to focus on getting fledgling businesses off the ground, but has little to offer businesses that already have traction.

  • Good Tree has more than $10M in annual revenue, which Everett expects to go up by about 50% this year, and about 150 employees, including drivers.
  • It operates out of Montebello (Los Angeles County), Oakland and Sacramento.

With the state market in crisis, and equity funding at a standstill, Everett says Good Tree has to borrow money at far higher rates than larger companies, while being subject to far more nickel and diming on various costs.

While Good Tree can’t enjoy the benefits of scale, it’s too big to qualify for the DCC’s equity fee waiver, which is restricted to companies below $5M in revenue. This isn’t the only equity policy, in California or elsewhere, that seems to punish or inhibit growth.

  • Meanwhile, everyone else in the industry sees scale as essential to survival.

Equity companies “Continue to go out of business,” said Amber Senter, Oakland entrepreneur and executive director of non-profit Supernova Women which advocates for people of color in the industry. “People are really fed up, they feel like there’s no hope.”

Gorilla RX
Gorilla RX dispensary in Crenshaw (Courtesy: Gorilla RX)

Strength in numbers

Kika Keith, who owns equity dispensary Gorilla RX in LA’s Crenshaw neighborhood said that as the neighborhood’s first Black-woman owned dispensary the store has benefitted from its high profile and community outreach — it’s building a career training center. But she’s still paying 52% in taxes. For most of her peers who have won or applied for licenses, she says equity programs “have done nothing but sold hope and delivered dismay.”

This week in her role as President of the Social Equity Owners & Workers Association (SEOWA) Keith sent a letter to the City Council with two asks:

  1. Assist 150 LA social equity dispensary applicants looking for compliant locations;
  2. Allow equity applicants “to aggregate their ownership shares” to hold the majority of a licensed business. SEOWA believes this would promote “cooperative economics…giving applicants an option to pool resources within the community and not just rely on large corporate and/or predatory investors.” 

(SEOWA previously successfully sued the city of Los Angeles to create 100 more equity licenses. The process for awarding them is underway.)

In the meantime companies are stretched:

  • Chris Ball, CEO of Ball Family Farms, a SoCal indoor flower brand said he had to cut his team from about 27 to 17.
  • Raeven Duckett-Robinson co-founder at Community Gardens, a state-licensed manufacturing, distribution and delivery company in Oakland said they have had to cut back to only offer scheduled rather than on-demand delivery and says they’re barely keeping afloat despite Oakland’s loan and grant program and a partnership with edibles company Kiva that pays their rent and offers other benefits. “It’s really pretty grim now,” she said “But we’re so deep in this it’s really not time to walk away. It’s tough.”

A push for scale

Everett says Good Tree in interested in pursuing the same strategy as the rest of the industry: consolidation. “Is there any way to do a roll up of the smaller equity businesses?” he asked. “Can we be stronger together?”

A merger between equity companies might involve fewer dollars than a deal between MSOs, but it comes with its own difficulties. “There are historical challenges to get people from our community to accept reduced roles,” he said. The cannabis equity movement has also been deeply rooted in business ownership, and remains so, even as the programs designed to support it have few success stories to show for their work.

For now Everett is focused on raising up to $5M through a crowdfunding campaign, with a $200 minimum  buy in. “We’re trying to position ourself as an equity success story,” he said. “Woe is me’ hasn’t moved the needle.”

Correction: This article previously misspelled Gorilla RX.

Black-owned businesses feel the squeeze

In June, the chair of Oakland’s Cannabis Regulatory Commission sounded the alarm: California’s social equity businesses couldn’t survive in the current business climate. Amid heavy taxes and competition with the illegal market, Chaney Turner told lawmakers in Sacramento, “Only large operators with expendable capital can afford to operate ‘in the red’ long enough for many of their competitors to fail.”

“Why are Black & Brown cannabis equity retailers being ignored?” Turner asked. As Turner noted, two recent relief efforts had overlooked the urban dispensaries and delivery services which comprise most minority-owned cannabis businesses.

  • The cannabis tax cut signed this month by Governor Newsom zeroed out the hated cultivation tax of more than $161/pound. But while there’s hope of benefits rippling across the supply chain, the immediate benefit goes to growers.
  • Additionally, late last year the state Department of Cannabis Control (DCC) announced a license fee waiver program for equity businesses. But data obtained by WeedWeek and published here for the first time show that more than 70% of the 629 waivers awarded so far have gone to businesses in overwhelmingly rural counties. (More than 400 went to the Emerald Triangle.)

“There are no known errors, however, this information is outdated,” a spokesperson for the Department wrote.

  • As defined in legislation “The Department has issued a significant number of licenses in rural areas, and rural areas have not been immune from impacts associated with the War on Drugs,” a department spokesperson wrote in an email. (Eligibility requirements for equity fee waivers can also be found on the DCC website..)

“Zero benefit to us”

There’s been “zero benefit to us,” said Rashaan Everett, president of Good Tree, a SoCal-based delivery service that’s the biggest equity business I’m aware of anywhere.

The problem of cannabis equity tends to focus on getting fledgling businesses off the ground, but has little to offer businesses that already have traction.

  • Good Tree has more than $10M in annual revenue, which Everett expects to go up by about 50% this year, and about 150 employees, including drivers.
  • It operates out of Montebello (Los Angeles County), Oakland and Sacramento.

With the state market in crisis, and equity funding at a standstill, Everett says Good Tree has to borrow money at far higher rates than larger companies, while being subject to far more nickel and diming on various costs.

While Good Tree can’t enjoy the benefits of scale, it’s too big to qualify for the DCC’s equity fee waiver, which is restricted to companies below $5M in revenue. This isn’t the only equity policy, in California or elsewhere, that seems to punish or inhibit growth.

  • Meanwhile, everyone else in the industry sees scale as essential to survival.

Equity companies “Continue to go out of business,” said Amber Senter, Oakland entrepreneur and executive director of non-profit Supernova Women which advocates for people of color in the industry. “People are really fed up, they feel like there’s no hope.”

Gorilla RX
Gorilla RX dispensary in Crenshaw (Courtesy: Gorilla RX)

Strength in numbers

Kika Keith, who owns equity dispensary Gorilla RX in LA’s Crenshaw neighborhood said that as the neighborhood’s first Black-woman owned dispensary the store has benefitted from its high profile and community outreach — it’s building a career training center. But she’s still paying 52% in taxes. For most of her peers who have won or applied for licenses, she says equity programs “have done nothing but sold hope and delivered dismay.”

This week in her role as President of the Social Equity Owners & Workers Association (SEOWA) Keith sent a letter to the City Council with two asks:

  1. Assist 150 LA social equity dispensary applicants looking for compliant locations;
  2. Allow equity applicants “to aggregate their ownership shares” to hold the majority of a licensed business. SEOWA believes this would promote “cooperative economics…giving applicants an option to pool resources within the community and not just rely on large corporate and/or predatory investors.” 

(SEOWA previously successfully sued the city of Los Angeles to create 100 more equity licenses. The process for awarding them is underway.)

In the meantime companies are stretched:

  • Chris Ball, CEO of Ball Family Farms, a SoCal indoor flower brand said he had to cut his team from about 27 to 17.
  • Raeven Duckett-Robinson co-founder at Community Gardens, a state-licensed manufacturing, distribution and delivery company in Oakland said they have had to cut back to only offer scheduled rather than on-demand delivery and says they’re barely keeping afloat despite Oakland’s loan and grant program and a partnership with edibles company Kiva that pays their rent and offers other benefits. “It’s really pretty grim now,” she said “But we’re so deep in this it’s really not time to walk away. It’s tough.”

A push for scale

Everett says Good Tree in interested in pursuing the same strategy as the rest of the industry: consolidation. “Is there any way to do a roll up of the smaller equity businesses?” he asked. “Can we be stronger together?”

A merger between equity companies might involve fewer dollars than a deal between MSOs, but it comes with its own difficulties. “There are historical challenges to get people from our community to accept reduced roles,” he said. The cannabis equity movement has also been deeply rooted in business ownership, and remains so, even as the programs designed to support it have few success stories to show for their work.

For now Everett is focused on raising up to $5M through a crowdfunding campaign, with a $200 minimum  buy in. “We’re trying to position ourself as an equity success story,” he said. “Woe is me’ hasn’t moved the needle.”

Correction: This article previously misspelled Gorilla RX.

DOGWALKER

The Parent Co and others fold SacTown delivery services

The Parent Company-owned Caliva and at least four of the nearly 60 other delivery services in Sacramento are ceasing operations in the capitol amid fierce competition and shrinking demand. Caliva was advertising up to 70% off last week in the area. To enter the market, it had bought a delivery service for $475,000 last August. Last month Unrivaled Brands shut down Sacramento delivery service Silver Streak Solutions which it bought for $6M in October. More Sacramento companies are expected to follow. The Parent Company declined to comment to the Sacramento Bee. Parent and Unrivaled stock trade for 67 cents and eight cents respectively.

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  • Pacific Stone has partnered with Weed + Grub on the Pacific Stone Comedy Tour, an invite only event for budtenders. It kicked off last night in LA and is coming to Santa Barbara and NorCal in October. BTW, that press release refers to PacStone as #1 flower brand by units sold. 
  • The Burning Treez Festival is set for August 27 in Adelanto (San Bernardino Co.)

Prizes:

Dutchie’s payments play faces hurdles

THE BIG IDEA

Hi all,

Hope you’re staying cool. Lots of local news in today’s newsletter, and two stories about big companies:

  • Dutchie’s payments play isn’t a slam dunk
  • Curaleaf goes small

Enjoy,

Alex

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Dutchie’s payments play faces headwinds

Correction: This story originally misstated Lipson’s title and the nature of Dutchie’s e-commerce offering.

Cannatech unicorn Dutchie has a new payments offering designed to secure its place at the center of dispensary tech stacks, and help it reach profitability. For that to happen, Dutchie will have to overcome hurdles on several fronts, from operations to marketing.

After raising $550M in 2021, Dutchie announced that it had landed a $3.75B valuation, making it the most valuable cannatech company. Like many tech companies, Dutchie prioritized market share over profitability, and now says it’s in 5,000 shops across North America. But this year’s tech stock collapse has punished that strategy.

  • Dutchie investors are reportedly getting skittish. In June, the company laid off around 65 employees, roughly 10% of its workforce.
  • New York magazine named one of Dutchie’s main investors, Tiger Global the “poster child” of the recent tech meltdown.

The “Third Puzzle Piece”

Dutchie provides dispensaries with e-commerce and point of sale software. Co-founder and CPO Zach Lipson describes payments as the “third puzzle piece.” Competing payment providers typically plug-in to dispensaries’ software, including Dutchie. Dutchie Pay is fully integrated with its current offering.

There’s a significant opportunity here. While various payment solutions abound, a 2020 report estimated 90% of dispensary transactions were still in cash.

Dutchie Pay uses ACH (Automated Clearing House), a popular mainstream payment mechanism which handles trillions in transactions every year.

How it works

To begin, consumers connect their bank account to Dutchie Pay through a quick registration. When they’re ready to make a purchase, Dutchie enables a “one tap” payment that initiates the deduction from their account.

Dutchie Pay is available for U.S. online payments immediately, with brick and mortar rolling out in the fall.

  • ACH transactions require an originating bank but since they do not traverse Visa, Mastercard or another network that bans cannabis payments, they are considered compliant.
  • This varies from another common dispensary option, “cashless ATMs,” where customers pay with a credit or debit card and the dispensary receives the cash. Visa has warned about the practice.

In addition to creating a new revenue stream for Dutchie, operating on ACH holds out the promise of a partnership with mainstream delivery services. (DoorDash started delivering weed in Canada earlier this year.)

  • Dutchie Pay could also give the company an edge once credit card payments become possible.

Based on seven months of alpha and beta testing this year, Dutchie touts several benefits of its new platform for shops: Bigger order sizes, fewer abandoned carts and more repeat purchases.

  • Of course it also carries all the safety and convenience benefits of not doing most transactions in cash.

An array of challenges

Despite Dutchie’s reach into thousands of U.S. dispensaries, observers say Dutchie Pay will face an array of challenges. Notably, it doesn’t yet have a track record of running an ACH payment network.

  • One operational challenge is that ACH payments aren’t instantaneous: Customers can sometimes make a cannabis purchase, then drain their account on another debit purchase before the first one gets deducted.

Dutchie also has to convert buyers to its new system. The experience of ACH player CanPay suggests this is a long game. Over six years of accepting payments, CanPay CEO Dustin Eide said the company has grown into the largest ACH network for dispensaries, serving nearly 900 shops across 30 states.

  • Over that time it has handled a total of $600M+ in transactions, a tiny amount compared to the industry’s billions in annual sales.
  • CanPay charges dispensaries less than 2% per transaction. Dutchie doesn’t disclose its rates.

Based on numbers from about two months ago, a former Dutchie employee told WeedWeek that Dutchie Pay “underperformed” in alpha and beta.

  • “Fewer people have used it than expected and overall revenue has been way lower than estimates,” the employee wrote. At one point the program had signed up 30 to 40 dispensaries, below the projection of 125. The former employee said revenue was roughly 90% below expectations.
  • The former employee blamed “operational and sales issues, then lack of consumer trust…[consumers] have no idea what Dutchie is.”

“We have huge demand for the product and a long waiting list of customers eager to adopt Dutchie Pay,” a company spokesperson wrote. “Dutchie Pay exceeded our expectations during alpha and beta with consumers, our customers, and the industry at large.”

  • The company declined to disclose how much money has moved through the system.

A balancing act

The former employee described payments as essential to Dutchie’s plan to reach profitability in about two years. To make that happen, Dutchie’s network needs to execute in the complex world of payments, while also supporting its existing customers.

A few weeks ago on LinkedIn, Benjamin Ballinger, COO of Michigan operator Left Coast Holdings, publicly broke up with Dutchie’s LeafLogix point of sale system.

  • In a message to WeedWeek, Ballinger said it seemed like the company was disorganized and that leadership is more concerned with building market share than “making a solid offering for existing customers.”

“Our customers are our number one focus,” a Dutchie spokesperson wrote. “We’re in communication with this customer and working closely with them to ensure they are set up for success when using our products.”

Asked Thursday if he planned to stick with Dutchie, Ballinger said he didn’t plan on it.

Dutchie’s payments play faces headwinds

Correction: This story originally misstated Lipson’s title and the nature of Dutchie’s e-commerce offering.

Cannatech unicorn Dutchie has a new payments offering designed to secure its place at the center of dispensary tech stacks, and help it reach profitability. For that to happen, Dutchie will have to overcome hurdles on several fronts, from operations to marketing.

After raising $550M in 2021, Dutchie announced that it had landed a $3.75B valuation, making it the most valuable cannatech company. Like many tech companies, Dutchie prioritized market share over profitability, and now says it’s in 5,000 shops across North America. But this year’s tech stock collapse has punished that strategy.

  • Dutchie investors are reportedly getting skittish. In June, the company laid off around 65 employees, roughly 10% of its workforce.
  • New York magazine named one of Dutchie’s main investors, Tiger Global the “poster child” of the recent tech meltdown.

The “Third Puzzle Piece”

Dutchie provides dispensaries with e-commerce and point of sale software. Co-founder and CPO Zach Lipson describes payments as the “third puzzle piece.” Competing payment providers typically plug-in to dispensaries’ software, including Dutchie. Dutchie Pay is fully integrated with its current offering.

There’s a significant opportunity here. While various payment solutions abound, a 2020 report estimated 90% of dispensary transactions were still in cash.

Dutchie Pay uses ACH (Automated Clearing House), a popular mainstream payment mechanism which handles trillions in transactions every year.

How it works

To begin, consumers connect their bank account to Dutchie Pay through a quick registration. When they’re ready to make a purchase, Dutchie enables a “one tap” payment that initiates the deduction from their account.

Dutchie Pay is available for U.S. online payments immediately, with brick and mortar rolling out in the fall.

  • ACH transactions require an originating bank but since they do not traverse Visa, Mastercard or another network that bans cannabis payments, they are considered compliant.
  • This varies from another common dispensary option, “cashless ATMs,” where customers pay with a credit or debit card and the dispensary receives the cash. Visa has warned about the practice.

In addition to creating a new revenue stream for Dutchie, operating on ACH holds out the promise of a partnership with mainstream delivery services. (DoorDash started delivering weed in Canada earlier this year.)

  • Dutchie Pay could also give the company an edge once credit card payments become possible.

Based on seven months of alpha and beta testing this year, Dutchie touts several benefits of its new platform for shops: Bigger order sizes, fewer abandoned carts and more repeat purchases.

  • Of course it also carries all the safety and convenience benefits of not doing most transactions in cash.

An array of challenges

Despite Dutchie’s reach into thousands of U.S. dispensaries, observers say Dutchie Pay will face an array of challenges. Notably, it doesn’t yet have a track record of running an ACH payment network.

  • One operational challenge is that ACH payments aren’t instantaneous: Customers can sometimes make a cannabis purchase, then drain their account on another debit purchase before the first one gets deducted.

Dutchie also has to convert buyers to its new system. The experience of ACH player CanPay suggests this is a long game. Over six years of accepting payments, CanPay CEO Dustin Eide said the company has grown into the largest ACH network for dispensaries, serving nearly 900 shops across 30 states.

  • Over that time it has handled a total of $600M+ in transactions, a tiny amount compared to the industry’s billions in annual sales.
  • CanPay charges dispensaries less than 2% per transaction. Dutchie doesn’t disclose its rates.

Based on numbers from about two months ago, a former Dutchie employee told WeedWeek that Dutchie Pay “underperformed” in alpha and beta.

  • “Fewer people have used it than expected and overall revenue has been way lower than estimates,” the employee wrote. At one point the program had signed up 30 to 40 dispensaries, below the projection of 125. The former employee said revenue was roughly 90% below expectations.
  • The former employee blamed “operational and sales issues, then lack of consumer trust…[consumers] have no idea what Dutchie is.”

“We have huge demand for the product and a long waiting list of customers eager to adopt Dutchie Pay,” a company spokesperson wrote. “Dutchie Pay exceeded our expectations during alpha and beta with consumers, our customers, and the industry at large.”

  • The company declined to disclose how much money has moved through the system.

A balancing act

The former employee described payments as essential to Dutchie’s plan to reach profitability in about two years. To make that happen, Dutchie’s network needs to execute in the complex world of payments, while also supporting its existing customers.

A few weeks ago on LinkedIn, Benjamin Ballinger, COO of Michigan operator Left Coast Holdings, publicly broke up with Dutchie’s LeafLogix point of sale system.

  • In a message to WeedWeek, Ballinger said it seemed like the company was disorganized and that leadership is more concerned with building market share than “making a solid offering for existing customers.”

“Our customers are our number one focus,” a Dutchie spokesperson wrote. “We’re in communication with this customer and working closely with them to ensure they are set up for success when using our products.”

Asked Thursday if he planned to stick with Dutchie, Ballinger said he didn’t plan on it.

CURALEAF GOES SMALL WITH FARMER’S SELECT

The Farmer’s Select (Courtesy of Curaleaf)

MSO Curaleaf, parent of brand Select, has launched a Farmer’s Select Program, a series of limited collaborations with legacy farmers and other unique California operators. (Disclosure: Curaleaf is a client of WeedWeek advertiser Mattio.)

CuraLeaf’s new CEO Matt Darin, and Josh Pritchard, founder and CEO of Delighted Farms, responded to emailed questions about their collaboration. Here are their responses, edited for length and content.

WeedWeek: How are these partnerships structured? 

Matt Darin: They typically begin with our team reaching out to and meeting with licensed legacy farmers. Once a relationship is formed, we purchase a sample from the farm for analysis by a certified third-party lab. Following approval of the sample, our team works with the farmers to harvest and flash-freeze the whole flower. It is then processed into live resin and formulated to match the terpene profile from cultivar to concentrate. 

WW: What does Curaleaf do for their partners?

MD: Our Farmer’s Select partners are provided with as much assistance as they need, whether that be on the cultivation and processing side or promotionally through marketing and PR. We understand that small farms have varying levels of marketing and sales teams, so we aim to bridge the gap by providing them with as much exposure and support as possible.

WW: How is the program going so far?

MD: Fantastically! The Farmer’s Select program shows what we can do when our industry values community and collaboration over competition. Select’s first collaboration with Sonoma Hills Farm sold out in under two weeks. 

How does Curaleaf envision expanding this program?

MD: Our long-term goal is to launch one Farmer’s Select collaboration per month. In fact, we encourage other farmers who are interested to reach out to our CA Ops team led by Jayne Fiscus!

Does Curaleaf ever see this program contributing meaningfully to the top line and how?

MD: Our primary focus with Farmer’s Select is to reaffirm our commitment to creating an equitable cannabis industry where everyone can participate. That said, we do see the program contributing to the top line as both Farmer’s Select collaborations have sold out much faster than anticipated.

Josh Pritchard:

WeedWeek: Who’s the leadership of your company and how many employees do you have?

  • Josh Pritchard, Founder/CEO. Started growing cannabis in 2008, also worked in tech, most recently running data analytics at Slack.
  • Kevin Crouch, Director of Cultivation, Biologist. Started growing cannabis in 2002, breeding and phenohunting since 2007.
  • Approximately 30 full time employees, including trimming staff.

Describe your business: what do you do aside from the partnership with Curaleaf/Select? How’s it going?

Josh Pritchard: We are a large indoor farm with a significant focus on developing new and unique flavors through constant R&D. We grow flower for our own brand (DELIGHTED) and also white label for other brands. The market has been tough overall, but our R&D is going very well and we’re looking forward to opening a new facility later this year, which will include a nursery.

Why did you choose to partner with Curaleaf/Select?

JP: Knowing the lab crew in Sacramento for years, we’ve been waiting for a chance to work together. After years of operating exclusively as a white label provider, we’ve just launched our flower brand, DELIGHTED, and were very excited to be given the chance to partner with Curaleaf and Select to highlight the new and unique flavors we’re bringing to market. 

What does success for this partnership look like?

JP: For us it’s all about getting more people to learn about and experience the new flavors from our flower menu: Napali Sunrise, Frozen Gushers, and Gas Pie. We have a lot more in the pipeline and look forward to working with Curaleaf and Select to bring in Live Resin carts as well.

DOGWALKER

Kings Garden default raises questions about IIP

Stock in San Diego-based REIT Innovative Industrial Properties, which hasn’t had a good year, fell again after it revealed key California tenant Kings Garden had defaulted on $2.2M in rent and insurance payments for July.

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