June 30, 2022
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Cannabiz Media Director of Regulatory Research, Jason Kikel, joins Ed Keating on the Cannacurio podcast to talk about microbusiness licenses in the cannabis industry today and what we can expect to see in the future.
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Ed Keating:
Welcome to the Cannacurio Podcast part by Cannabiz Media. I'm your host, Ed Keating, and on today's show, we're joined by my colleague, Jason Kikel, Director of Regulatory Research. Jason, welcome to the show.
Jason Kikel:
Hi, Ed. Thanks for having me.
Ed Keating:
Absolutely. So a little bit of background, everybody. Jason and I have been working together for over five years. He was actually the first researcher that we ever brought on and over these last five plus years, his knowledge is incredibly deep, and that's why we have him as our director of regulatory research.
He's my go-to guy when I have questions about, why is this state doing this or are they contemplating this? So since we meet all the time and we get into these deep discussions, we thought, "Well, why not record it and turn it into one of our podcast episodes?"
And we dug around for some topics. And the first one we want to explore today is the concept of microbusinesses, because as more states are issuing licenses, we're seeing a lot more of this activity coming from the regulators.
So, Jason, let's start at the beginning. From what you see, what are microbusiness licenses? Help everybody understand that.
Jason Kikel:
So as the name would suggest, they are typically smaller licenses. These are not widely available everywhere, but they're typically available to smaller operators. Usually, what defines small includes the canopy size, right? Either a limited plant count range or a limited canopy maximum defined by square footage. Additionally, there's an expectation of vertical integration. Frequently, but not always.
There may be limitations on the amount of manufactured product throughput. Sometimes limits on the gross weight per year, coming through the license holder. And then in limited cases, there are also limits on the number of employees that might be working at the facility and also corporate hierarchy relationships where if you own a microbusiness in a given state, you may be prohibited from owning other cultivation licenses, other cannabis licenses in general, or maybe you might be prohibited from owning licenses in other states as well.
Ed Keating:
Interesting, interesting. So they come with what sounds to be some limitations to really manage their size and scope so that they don't turn into the next MSO in a state or a giant single state operator.
Jason Kikel:
Certainly, yes.
Ed Keating:
Got it. So with that in mind and given those constraints, who typically applies for them? Does it appeal to a certain type of people who only have so much capital to invest or who's going to line up for these?
Jason Kikel:
Yeah. Limited capital is certainly a challenge opportunity for some of these applicants. These are most frequently mom-and-pop type operators. Using mom-and-pop kind of broadly could be a small group of friends, maybe a former cooperative or caregiver group, depending on the legacy and the history of the state, particularly if it was in medical cannabis in the past.
But again, based on those corporate limitations, it's typically somebody who's interested in having one location vertically integrated. Almost the farm to table of cannabis.
Ed Keating:
Got it.
Jason Kikel:
But no vans, no driving around, no bringing product from the farm to downtown, a dispensary on main street in a separate facility.
Ed Keating:
Got it.
Jason Kikel:
None of that.
Ed Keating:
Got it. Okay. So they're not in every state. I mean, we're tracking licenses in about 39 states now for both medical and adult use. Where are you seeing them?
Jason Kikel:
So far, we're still fewer than five states where microbusiness licenses are not only in the legislation but being actively issued. The longest to date has been California. It's also the state with the most microbusinesses. Those started rolling out in late 2017. It advanced the 2018 kind of combo of the med in adult use launch, but also the legitimization of a long-time gray market.
Later on, Massachusetts began accepting applications for microbusinesses. They've awarded some. Michigan has come on later. I think in 2021. And of course in 2022, New Mexico became the newest state to issue adult use microbusiness licenses with their April 1st sales and launch for their new adult use program.
Ed Keating:
So did these programs ever run into the same kind of like legal challenges that other ones do? Like in Illinois, we've seen a lot of lawsuits coming out and I know early on in Maryland, there was not really any social equity because it was an early-ish program and a lot of people threw lawsuits and dumbed up the works. Is that happening with microbusiness license programs, Jason?
Jason Kikel:
Typically no. It could be an indicator of these programs having larger success beyond that specific activity. But for the most part, California is of course complicated market. These states don't really have license caps. So Michigan, Massachusetts, more recently, New Mexico, they're rolling forward issuing these licenses as these applicants are clearing the hurdles and working through the application process.
California is a little bit different. There haven't really been lawsuits, but the constraints that limit growth for other licenses, notably retail and to an extent delivery, have led to a huge chunk of the state, various municipalities, and counties really being offline and those opportunities not being available for operators to get into key markets to reach consumers directly. So lawsuits, not so much, but other hang-ups and administrative and political challenges, certainly on the way.
Ed Keating:
Excellent. So luckily, there aren't lawsuits everywhere and these programs are successful. But what about the tariff to get in? How are the fees different? Because I know here in Connecticut, which is rolling out their programs, they have a rather complex web of fees. And I'm curious what you've seen in your research, Jason, in terms of how these established states have done it.
Jason Kikel:
Sure. These fees typically vary. Some of these states have a range of fees for different activities. One thing that's important to keep in mind is if you're going to apply for a microbusiness that has a range of activities included, or you're working with a regulator to say, "Hey, I plan on undertaking the following," you're going to be seeing a fee reduction or a lowering any amount you're going to pay due to the consolidation of activities on one license.
So for example, California. Your initial fee is around a thousand dollars. California, of course your renewal fee and your taxes do fit into this, it's based on a percentage of sales. So when I did my research for California, your renewal could range between 5,000 per year and 300,000 per year. For anybody who talks California, that number is not very shocking. Certainly, if you were a higher class sole cultivator license, you could be paying a similar amount or much more than that based on what you're selling.
Ed Keating:
Wow.
Jason Kikel:
Elsewhere, Massachusetts, it's only $300 to get in. And Michigan, it's 8,000, but again, those annual renewal fees vary. And those are kind of scaled down compared to, if you were to pay for vertically integrating, but at a higher scale. So the other thing is you could be paying much more in Michigan for 10 or 15 class C licenses based on the plant counts. There are other fees, of course, other expenses and risks involved. So these kind of operate separately from the reality of the fee schedule in some of these states.
Ed Keating:
Well, and I think the other part, and this is something that we've been talking about every week for the last five plus years is every state is their own sovereign nation. They'll come up with their own rules and regulations. And the thing that I think we want to point out is that we know that there are few people who are going down the microbusiness route and trying to pick a state to go in.
Most people are doing it in a state they live in. Nobody is deciding, geez, "Should I do it in Michigan or California?" Either way, it's still interesting to see how variable these fees are to begin these businesses. And it does impact entrepreneurs in a very direct way.
Jason Kikel:
Totally.
Ed Keating:
So very good. So let's take a look at some of these programs. We've got the Cannabiz Media Database. We've been capturing these licenses for a while. I think we're somewhere close to 450 across the country give or take with probably more on the way. What does the leaderboard look like from where you sit?
Jason Kikel:
Sure. Jumping in, looking at each of these states and comparing and contrasting, California, it's really blazing the path forward with over 340 of these. Looking back to their transition from an unregulated gray market from medical jumping over to regulating both medical and an adult use rollout on the same day, and they're still figuring out what's happening in their wake nearly five years in, that's an interesting market and that's why I think we've seen so many in California.
There were a lot of caregivers and compassionate cooperative groups going back nearly 25 years with the [inaudible 00:10:26] Prop 215. These turned into businesses. Some of them expanded, kind of turned the harbor side and some other major players that are now expanding in California or they've expanded into other states and are on the trajectory to being MSOs.
Some of those folks obviously did not become microbusinesses. But there were other legacy operators that pivoted to say, "Hey, I want to apply for one license, tack up one PDF from the Bureau of Cannabis Control on my wall, print out one license, but they're limited notably with their square footage for their canopy.
So continuing into California, the canopy size limited 10,000 square feet. You're also limited certain kinds of manufacturing. You can't be using butane or other volatile substances that might be a little more risky. So that's something that would be happening at a larger facility. Maybe manufacturing only, or offsite somewhere else, not near retail sales. Not near the sales floor.
I did a quick analysis of the 340 from California and the most popular activity, I was surprised, it's not cultivation. The most popular activity that appears at these 340 is distribution. That includes D2B, distribution that would be handling some of the tax and testing requirements from the bureau or from the Department of Cannabis Control, but also just B2B transportation.
So some of these microbusinesses are receiving... They may be receiving product from other entities, not only their own product and shipping it out the door.
Ed Keating:
So, Jason, do you think some of this... Because I remember when I also analyzed the microbusiness licenses a couple years ago for a blog post, I found the same thing. Distribution was number one like 40, 60%. I can't remember.
Jason Kikel:
Sure.
Ed Keating:
But I wonder if that's because in other states using the Jason term distribution is implied. California, it's not. It's explicit. So they had to check that box where they wanted to or not because the rule is of the seven permitted activities, six, seven, you have to choose at least three and maybe distributions kind of a guinea. I mean, not everybody's doing it, but a lot are. Do you think that comes into play?
Jason Kikel:
Yeah. I think that more entities have checked off distribution that are probably making the drive from LA to Palm Springs every day. Something like that between other entities and other licenses. Beyond distribution, around 200 are operating cultivation. And again, that's limited to 10,000 square feet. So depending on the size you plan on growing, the scale you plan on producing per season or throughout the year, the microbusiness, isn't going to be the best option for you, but cultivation fits in.
It's around two thirds of these facilities. Another 200 operated, either retail or delivery, or maybe both. So it seems like the production end is murky, but a lot of manufacturing going on that was actually 300. Lot of manufacturing going on and product going from edibles or extraction facility, either directly to the other end of the building, into customer's hands or into a car where it's being delivered around town. [inaudible 00:13:54]
Ed Keating:
The retail one is interesting because I know early on when they first came out and we did the analysis of what percentage were retail, partly driven by our customers who wanted every retailer and they'd mistakenly assumed that, well, every microbusiness is retail, right? It used to be a very small percentage, but now it's actually jumped up a lot more, I think, to your point.
So it'll be interesting to see how that plays out and if more and more are going to go down that pathway because the state is screaming for a need for more retail distribution.
Jason Kikel:
Absolutely. If I were one of our customers targeting those microbusinesses, knowing that roughly two thirds of microbusinesses in California have retail, those are valid leads. I think those are... Certainly, if they're doing delivery or they're doing retail, they are worth making that contact and that connection. Certainly, that's an activity to not overlook when you're setting your facets and your searches in the database.
Ed Keating:
Yeah. Makes sense. So let's pivot over to the Midwest. Tell us about Michigan which is by some expert's views, perhaps the second largest market in the US or at least the potential second largest market in the US. What's going on there?
Jason Kikel:
Sure. I think given that market potential in Michigan, but a very different legacy compared to 20 years of Prop 215 in California, there are only 11 microbusinesses that have an active license. The rules and regs are a little different. The legislature certainly turned the screws on microbusiness applicants, and it probably made it a little less appealing than some of these other states. You're fully self-contained, you're fully integrated, but you're also really handcuffed at the same time.
You're a license holder. You can't go to an outside producer from a different business and bring product in that includes for manufacturing. So you were limited to your own 200 plants. If you have a crop failure, you have a testing issue, you have some kind of contamination, that can set you back or put you out of business altogether.
So those 11 are carrying a lot more risk than a lot of the other facilities that we're seeing in Michigan, or they're carrying risk in different ways. And it's like every day is make or break if you're a microbusiness in Michigan.
Ed Keating:
Yeah.
Jason Kikel:
It's very different. But also kind of beyond that, you can't interact with other firms. So your competition appears in different ways. Are you competing with the other microbusinesses or with other retailers or other producers, or are you competing with everybody at the same time? That's something to consider. You were thinking about becoming a microbusiness applicant in Michigan.
Ed Keating:
Yeah, and it's a fascinating case study of how regulators try and regulate a market. We'll figure this out. We won't let these people interact at all because why? I mean that doesn't seem to be a great way to build up an industry. As you point out from a competitive standpoint, it can be just very hard to figure out who you're actually competing against. So I wonder what happened in that licensing discussion meeting in terms of how they decided that was a way to go.
Jason Kikel:
I don't see this number reaching very high in Michigan in the coming quarters and years.
Ed Keating:
Yeah. We'll see, because your point about the risk they take is quite good. And once again, as we said, looking across states, different risk profiles like in California by being able to choose those activities that perhaps you're good at, may increase your chances of success hopefully. So we'll have to see. So let's keep heading east getting to one of the other M states, Massachusetts. Another one of the kind of volatile states that we follow where there's a lot of activity and a lot of licenses too. So what is your take on microbusinesses?
Jason Kikel:
Massachusetts is in a rather unique spot. Again, someone in Michigan, the regulator made an effort to define the market. Massachusetts had many years with a medical program. And micro-businesses, didn't appear on day one the same way they did in California. And we'll get to New Mexico and talk about those in a minute. But the collocation here is a tier one cultivation, which is limited to 5,000 square feet.
So as far as the square footage limits, that's the lowest state. At the same time, you can also be a product manufacturer. And you're also limited to 2,000 pounds of product produce per year. If you're producing very productively with a 5,000 square feet you've got, this might not be the best fit for you with this license. And you are also prohibited from having a retail store which very different than these other states.
But more recently you are able to jump into delivery. They had the first opportunity within the state and with the social equity rollout. So again, that's a risk and that's a challenge. If you were a prospective microbusiness owner or applicant and you're envisioning a concept for your facility, again, I'll use the phrase farm to table. Maybe we need to hear that more on cannabis. I don't know.
You're missing out on that table. You're missing out on that sales in the store. Part of the experience, "Come visit us at our farm, come visit us at our facility." Instead, it's, "While we're here, we're doing this and we'll meet you at your porch," which I don't know. Maybe if it was rolled out sooner, it would've thrived in 2020 with some of the health orders to stay at home.
Ed Keating:
Yeah. And in terms of some of the opportunities that may occur, I think you pointed out in Massachusetts there may be ways for these license holders to partner with consumption establishments? Is that something that's happening yet or is it going to happen someday?
Jason Kikel:
Consumption is probably another six to eight months out. I know the commission has been discussing it. But the way the rules are set up, microbusiness owners, similar to Michigan, you're not able to own any other license, but you can be a backer and be involved with social equity-oriented consumption lounges. I know the rules are not completely finalized on that front yet for Mass. We'll be doing a future podcast on consumption lounges. So we'll maybe have an answer by then. But they're more limiting opportunities in Massachusetts with the ownership restrictions similar to Michigan.
Ed Keating:
Got it. Well, let's bounce to New Mexico, which I think is the most recent program launching just earlier in the spring.
Jason Kikel:
Yeah. So they've only been at it for a few months and some of these facilities may not be completely up and running as we've noticed. An active license doesn't necessarily equate to an operational business. That's a tricky one to count sometimes. But recently at the beginning of the month, New Mexico crossed the 100th business license issued so that they jump from not being on the map to being in second place in very short time.
And New Mexico's licenses actually include two subsets with a 200 plant cap. So far, the only subset that has been issued is the cannabis producer microbusiness. So that really is just a smaller cultivation license akin to the state's larger producer license. That's a little bit more widely available. What's coming down the road, we haven't seen any yet is the integrated cannabis microbusiness.
Again, 200 plants, but that also enables the license holder to manufacture cannabis products, can involve in distribution and operate one retail establishment. And that retail establishment doesn't have to be collocated. So that could be down the street prior to the same facility perhaps. But beyond that, similar to California, the courier permission is included. So they can be selling cannabis not only to adult use customers, but also medical patients, perhaps under 21 and their caregivers and they can be delivering to their door. So that's a pretty liberal take.
Ed Keating:
Yeah. Sounds like a powerful scheme compared to the others in terms of lacking limitations. I mean, none have been issued yet, but when they are, it seems very entrepreneur-friendly.
Jason Kikel:
Absolutely. Yeah, definitely a provision to promote small business. And New Mexico's legacy, medical cannabis program kind of took something similar except it's about scale and scope where the former vertically integrated firms were able to pivot to integrated adult use licenses, which would include delivery, which they call courier, but also production and everything tied back to one license. So it's a scale issue.
Ed Keating:
And also talking about how unique New Mexico is, you've also pointed out that the state has actually taken a role in financing some of these businesses. Is that right?
Jason Kikel:
Absolutely. I believe this to be the first in the country. There have been some other social equity programs where cities and municipalities do make grant money or micro loans available. But New Mexico, through a state finance agency, is being a little bit more generous making available loans ranging from 50 to 150,000. And they're actually authorized by law to go up to 250,000.
So if you're a prospective entrepreneur who really wants to get in New Mexico, that's a great opportunity to get a little bit of help from the state. And that is tied to some of the other social equity provisions that were discussed at length in last year's special legislative session to get this done.
Ed Keating:
So looking at the points of differentiation in terms of how these license came to be, why they exist, why do states embark on these schemes? It appears that there were different drivers in different states.
I mean, a lot of what Cannabiz Media does when we work with our clients is they're often after the big three of the value chain: the growers, the manufacturers, the stores. And here, we've got these more nuanced kind of messy, choose your own adventure kind of license schemes.
So as you've looked across the handful of states that are doing it, what were the drivers and how did they come to be in terms of becoming a type of license that an entrepreneur would have the choice to go after?
Jason Kikel:
Sure. I think that the more recent history kind of post-2016 for the industry that already feels like an eon or two for those of us who are in the industry and looking at the data daily. There was so many lessons learned from that first generation of states that pivoted to adult use early. Thinking back, Colorado, Alaska, Oregon, to an extent Washington, there were a handful of states where it was relatively easy and relatively inexpensive to get a license.
It was pretty terrible, pretty complicated at the time. But in retrospect, when you're comparing to California, I guess a lot of other places are much easier. But I think there were a lot of lessons learned, a lot of the stakeholders that were involved in helping make that public policy hop from medical to adult use. And they were looking at the taxes, the fees, the application, what people were doing at one location. And they realized we need to make this vertical integration at a small scale available.
Again, think about mom-and-pop, smaller family operators. Some of these folks in California are outdoors. They might be on a farm with other crops, not just cannabis. So some of the lessons learned as they were implementing voter-approved measures where the legislators and the people, they had their input before the ballot. Some of these other states either through rule-making, additional legislation, or legalization legislation to get the job done.
They had an interest in a lot of public input demanding we want to support small businesses and leave the door open to smaller operators. Now, we'll see how that plays out in coming months and years with some of these states as these counts grow and even out. But it was about letting the multi-state operators and the big guys really dominate even more. So it's going to be a balancing kind of a counterweight to big cannabis.
Ed Keating:
Excellent. Oh, I think that's a good assessment and it will be interesting to see how it plays out as new states come on board. I know looking down south in places like Georgia and I think Alabama, Mississippi, they are opting for the tried and true oligopoly. We're going to pick six winners. We're going to let them run the stores. And a handful of people are going to get really rich as I think how they're running it.
So obviously, every state is its own nation and they're going to come up with the cannabis rules that they think make sense, I suppose.
Jason Kikel:
Absolutely.
Ed Keating:
So let's look forward. We've taken a look at the 450 or so licenses and the states that have them. As we always like to do in the podcast, it's always fun to look forward and prognosticate and then be proved wrong a year from now. So what do you think the future holds? Where should we be looking? Where is the next set of licenses going to emerge from?
Jason Kikel:
Sure. I think looking forward six months to a year, maybe beyond that, New York is going to be a state where the microbusiness license is already on the books. In the short term, their cannabis commission is working through the early start adult use cultivators, which actually an interesting turn of events went to have licenses, over 150 got those. So some of those hemp folks might decide, "We want to be a microbusiness." That remains to be seen. We'll hold out for those in the coming year or so.
But beyond those early adult use start licenses, there is a pretty decent opportunity for a lot of smaller, again, mom-and-pop operators in New York. Beyond that, I think there is a decent chance for microbusiness licenses to act as a counterweight against some of the larger MSO dominated states.
So looking at states like Florida, possibly Georgia in the future. When they get medical done, maybe they need some time to about moving to adult use. But through the lens of bringing smaller operators in and the national conversation and politics around social equity are really going to guide this.
They might have an opportunity to allow for either high number or an unlimited number of microbusinesses to enter into markets that are already largely dominated by big players. But I think they could find a way to make that work in some of these states, and they might surprise us.
Ed Keating:
So the analogy is often made with these types of licenses that they’re a lot like craft breweries in the beer industry. I know here in Connecticut, there's seems to be a brewery in every couple towns and we have 169 towns in the state. Is that an app analogy? I know you're a beer aficionado. Did you think that's a fair thing, because I think some of these businesses do quite well and it is a little bit of perhaps that farm to table barrel to table or whatnot. But they make a business out of it. So is that a good analogy? As people evaluate these microbusiness licenses and cannabis with something that maybe they're more familiar with - beer?
Jason Kikel:
Sure. I think that the... Well, I'll step aside from the largely quantitative analysis because that's... We'll leave that for some other folks in the industry. But on the qualitative side, when all these smaller breweries or even micro distilleries open up, what really helps them is human relationships. If you're able to go in and talk to the brewer on a busy Saturday night, you get some larger beer producers. Most of them probably.
So if you're able to go into a dispensary and interact with the grower, because mom and pops split the duties and one of them is at the register and one of them working in the extraction facility or something, that's going to do a lot of help for an industry that's still clouded by some maybe older folks saying, "Oh, this isn't the cannabis from the '70s." Well, you can go and get educated by the grower who's also directly selling it to you. Or some of the other misconceptions around consumption methods, different products that are available.
So being able to have that human relationship with the producer goes a long way. And I think that that will help a parallel emerge between breweries and certain cannabis operators, definitely.
Ed Keating:
Excellent. Well, Jason, thanks for joining me today. This was a great discussion.
Jason Kikel:
Thank you.
Ed Keating:
We're already looking ahead to our next one where we're going to talk about consumption lounges in the coming weeks. So we hope you'll tune back in for that. So once again, thanks, Jason.
Jason Kikel:
Thank you. Well, see you, Ed.
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