Lack of capital, ‘authenticity’

Nevada cannabis consumers and patients experience a market unlike those in nearby states because of its “ecosystem,” which has fewer options for consumers, industry leaders say.

In an industry that remains illegal at the federal level, but regulated in certain states, Nevada is experiencing some challenges also seen nationwide, such as slower investment and heavy regulation, but others that are confined to its borders. The broad challenges that face businesses that have been legal for just a few years were among the topics of discussion at the 2023 MJBizCon Dare to Grow conference that wrapped earlier this month in Las Vegas.

MJBizCon brought 30,000 cannabis executives and entrepreneurs to Las Vegas to showcase equipment for facilities, connect people in the business and inform attendees through panels about global trends in the commercial cannabis industry.

Panelists forecasted what could soon happen and spoke about limited capital investments, a lack of safe banking because of federal prohibitions on cannabis, a need to increase female-focused products to expand the market and unreliable business partners.

When asked what the greatest challenges are during a panel about the next 18 months in the business, cannabis advocate and marketing executive Willie Mack said, “raising capital and finding good partners that you can trust.”

“In this industry we vet, and we vet 16 more times,” said Mack, of creative branding firm Frank White.

Six years after the state legalized adult-use marijuana, cannabis lobbyist Scot Rutledge pointed to limited licenses, products grown in a dry climate, an accumulation of vertically integrated companies that can drive down the diversity of offerings in stores and a lack of brand partnerships as major factors that limit the Nevada market.

“If you've got six retail stores and most of the flower (are products) you're growing — you're not carrying flower from some of the other cultivators, right?” he said in an interview with The Nevada Independent.

Shaky investments

Cannabis companies are federally illegal so they have limited access to banking and pay an effective tax rate of as much as 74 percent, compared with alcohol businesses, which pay 21 percent or less — making the business model risky to investors.

During the “State of the Industry” panel that took on a global perspective, Chris Roberts, who reports at the cannabis-focused news outlet MJBiz Daily, said he predicts that federal rescheduling will pass in the U.S. in 2024, removing cannabis from the highly scrutinized category of a Schedule I controlled substance and ending federal tax prohibitions. President Joe Biden has proposed downgrading cannabis to a Schedule III substance.

Among the “bad news” highlighted: this year’s collapse of California distribution giant Herbl, which handled $700 million in products last year but left brands unpaid by tens of millions of dollars — and the prominent Cookies brand, which closed two stores this year in California and Oklahoma after being sued by its investors.

A’Esha Goins, founder of the Nevada-based Cannabis Equity and Inclusion Community, said in an interview with The Nevada Independent that someone needs to hold licensees accountable for paying their debts to each other, adding that the collapse of Herbl should be a “huge red flag” for people.

Goins, who formerly chaired the state Cannabis Advisory Committee’s Diversity, Equity and Inclusion subcommittee, said the market can be volatile, especially for local cultivators who are paid on the back end by dispensaries for products that they sell. She said cultivation companies often struggle financially and sometimes go into receivership because dispensaries owe them thousands of dollars.

Goins said dispensaries and other licensees face financial turmoil due to burdensome regulations such as the requirement that they have $200,000 in liquid assets to obtain a business license and high penalty fees that can exceed $100,000.

“People are making money, but a lot of people are losing their shirts,” Goins said.

Misinformation about remediation

During science-focused panels, speakers discussed misconceptions about techniques used to salvage contaminated cannabis, stating that some people think remediation is used to sell unclean products.

Panelists said remediation is used in many industries to ensure products are safe to consume.

“If you're making beef in a beef slaughterhouse and you end up with a positive E. coli test, you can then remediate that product … and then it becomes ground beef in your chili,” said Seth Wong, president of TEQ Analytical Laboratories, during the “Ready for Remediation” panel. “But (in cannabis) we call it a problem.”

Rutledge said the bottom line is that consumers buy what is available and last year Nevada cannabis operators capitalized on that, bringing in $848 million in sales — down from a pandemic high of $1 billion in 2021.

“So the question becomes, are consumers OK with knowing that they might not know what's in that cannabis?” he said. “But it doesn't matter. Because they're happy to have it, right? It's the same with food.”

Remediation is used by cultivators to quickly rid flower that fails microbial testing of pathogens, heavy metals, mold and bacteria — using chemicals, heat or gasses — to meet compliance standards and market demands.

Irradiation is used for the same purposes and includes using gamma rays to zap plants with a radioactive substance to kill microbes.

Hans Brand, CEO of the “pesticide-free” cultivation farm called Autumn Brands, located in Santa Barbara County, California, said his method is 100 percent remediation of all products to ensure they remain sterilized while packaged and on the shelf.

A lack of ‘conscientious brands’ 

Rutledge said that in order to expand the market and compete with unlicensed operators, commercial cannabis businesses need to better target portions of the customer base and build “conscientious brands.”

“So maybe if we could see more innovation in Nevada — where you have licensees partnering with individuals and companies that aren't currently licensed and may not want a license either … I think the marketplace in Nevada would benefit from that for sure,” Rutledge said.

Legacy brands, or products, are cannabis goods that were popularized before legalization and include “legendary strains.”

Goins said she believes that if licensed operators built partnerships with legacy brands “instead of creating brands that don't resonate with the consumers that they're trying to pursue … (the industry) would bloom and blossom.”

Rutledge said Nevada’s cannabis industry does not allow for legacy products to enter the marketplace but stated that leaders could build a program to usher in new partnerships — and focus on building an inclusive market to secure 80 percent of all cannabis sales. A similar program was discussed in New Jersey regarding its regulatory framework that involved creating amnesty clauses for legacy market brands.

Rutledge said these partnerships could address a “deficiency” in storytelling and allow customers to support Black, women or Latino-owned cannabis businesses.

“Certain people are drawn to certain products … because there is something about it. An ethos,” he said. “And for cannabis — a product that is sort of designed for storytelling — the fact that we don't have as much of that, I think, is a deficiency.”

Legacy to legal pipeline

When asked, “Can legal weed win?” — the title of a panel during the conference that gave insights on the future of illegal and legal cannabis markets — Rutledge said the market should look at ways to bring more people into the industry.

According to a 2020 illegal market report based on data from other cities, the Nevada Cannabis Association estimates that between 70 percent and 80 percent of cannabis sales in the state were from the unregulated market that year.

Lawmakers considered a bill this past session that would have increased civil penalties from a cap of $50,000 to $10 million for illegal operations and financially incentivized whistleblowers to help law enforcement go after unlicensed markets. The measure, which died before receiving a vote, was backed by prominent legal cannabis companies such as Jardin Premium Cannabis Dispensary, Planet 13 and RNBW Cannabis.

“As long as you keep people out, you're always going to have an illicit market,” Rutledge said. “And even when you do bring more people in, there are always folks who are going to want to skirt the rules, not pay the taxes and not deal with all the regulations.”

Rutledge and Goins said unlike states such as California or New York, Nevada’s medical cannabis marketplace did not flourish and was mainly underground, which they said prevented a legacy to legal pipeline. That left an empty space in which Nevada developed a heavily regulated recreational market that they say lacks authenticity.

“So when we're talking about how can the industry stabilize itself?” Goins said, “(The answer is) being able to tell brand stories by bringing those (legacy) markets in and creating business models that are sustainable, for not just the industry, but also these Black and brown businesses that have been left out.”

This story was published Dec. 10 by The Nevada Independent and is republished here with permission.