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Illicit to essential: Cannabis in a post-COVID-19 world 

As the legality of cannabis changes, CPAs should be aware of this up-and-coming industry and what makes a successful cannabis market.
December 2, 2020

By Ryan Cram, CVA, and Ron Seigneur, CPA/ABV, CVA 

The way we do business and conduct our lives generally will forever change in a post-COVID-19 era. Innovation and adaptation will drive new models and modes of successful operations in many sectors. Ten of the 11 states that currently allow access to legal, regulated recreational cannabis , and as many as 20 of the 28 states that allow for medical access to cannabis, have deemed it an essential service since March of this year.

Moving the image of legal cannabis from illicit to essential has been huge and brought about changes that would not have happened nearly as quickly as they have since coronavirus hit. Arizona and New Jersey have November ballot measures for voters to decide on recreational/adult use of regulated cannabis, and several states, including Nebraska, Mississippi and South Dakota, will be voting on medical access. Ballot measures are front and center for increased access at the municipal and county level in many states, including consumption in designated facilities pursuant to local regulations and zoning.

The changing cannabis landscape

The legal, regulated side of the cannabis industry is a great example of how COVID-19 will bring radical and lasting change to how business is generally conducted. Online ordering and curbside delivery protocols are part of a tidal wave of change allowing many cannabis retailers to be experiencing year-to-date sales well in excess of 2019 sales — with trends for another record-setting year.

For example, Colorado just reported its first month of regulated sales in excess of $200 million for July 2020. It’s on its way to becoming a $2 billion industry in 2020 just in that state. This figure represents the legal regulated medical and recreational sales in Colorado and does not consider the state’s illicit market — estimated to be about the same in terms of dollars spent on cannabis products. That illicit market demonstrates the state’s capacity for more growth as more consumers migrate to regulated channels.

Some vendors report they cannot keep product on the shelf. Speaking of shelf space, the pandemic has launched a whole new delivery channel, with home delivery now in vogue and an intriguing sales option in many jurisdictions. Planet 13 in Las Vegas is reported to have 30 vehicles and more than 100 drivers delivering product 24/7 throughout the Clark County jurisdiction. Their pre-pandemic investment in valet parking, turnstiles at the dispensary entry point, stations for up to 50 bud tenders, and curbside delivery, has been a salvation to their business.

Oregon based software company Dutchie, which connects dispensaries and consumers with an online delivery platform, has seen sales skyrocket 700% since the pandemic started. It just completed a $35 million series B funding round, which included investment from Starbucks founder Howard Schultz. 

Jurisdictions like Los Angeles are in the process of awarding licenses for as many as 100 new dispensaries that will be non-store, front-delivery-only operations. These dispensaries will have no retail presence other than delivery of product as ordered online by customers. 

Access and licensing

Awarding new licenses for dispensaries and cultivation of cannabis has also taken a huge turn, with many jurisdictions implementing new frameworks to assess how best to award these license rights using new expanded criteria that emphasizes social equity components. Illinois, for example, uses a 250 point scoring system that evaluates and awards points for having sufficient capitalization and management competence, but also awards points for locating operations in disadvantaged neighborhoods and even provides points for having certain lower level prior marijuana convictions on the applicant’s record. 

Access to legal cannabis, be it recreational or medical, is highly dependent on local and municipal rules and regulations. Many of the states that have legislated legal access or had it approved by voters still have significant limitations on access due to a lack of municipal approval. Metropolitan Denver is an excellent example. While the state of Colorado has almost 600 operating licensed recreational dispensaries, with roughly 350 of those in the city and county of Denver, surrounding suburbs have been a study in contrast in terms of municipal approval.

Smaller municipalities like Edgewater and Lakeside have embraced cannabis dispensaries and have flourished from a municipal budget standpoint due to the significant boost in cannabis-related license fees and excise tax revenues. Others, like Golden, Arvada and Littleton, have continued to advocate a “not in my back yard” position. Lakewood, which has allowed limited medical access, added recreational access to the November 2020 ballot (at press time, it looked likely to pass). The small municipality of Glendale, wedged between goliaths Denver and Aurora, has been a hotbed of cannabis dispensing partly due to municipal rules allowing dispensaries to stay open until midnight; while Denver and Aurora, the two largest cities in the state, must close by 10 p.m. Some stores in Glendale report that more than 50% of their daily sales happen between 10 p.m. and midnight. 

Lastly, at least from the Colorado landscape, the little town of Trinidad in Los Animas County (the largest landmass county in the state), has more than 25 licensed and operating recreational dispensaries. What makes this unusual is that there are only 15,000 people in Los Animas County — 9,000 of whom are in Trinidad. Trinidad is located 11 miles north of the New Mexico state line on I-25, the major interstate running from Albuquerque and Santa Fe to the south, to Pueblo, Colorado Springs, Denver and Cheyenne, Wyo., to the north. It is estimated that more than 90% of the business conducted in the 25 Trinidad dispensaries comes from traffic originating south of the Colorado state line and from jurisdictions that do not offer legal access to recreational cannabis. 

What makes a successful cannabis market?

A recent article by Beau Kilmer  identified 14 considerations, all beginning with the letter P, that highlight what needs to be evaluated to establish a successful and sustainable cannabis market. 

The 14 Ps are: production, profit motive, power to regulate, promotion, prevention and treatment, policing and enforcement, penalties, prior criminal records, product types, potency, purity, price, preferences for licenses, and permanency.

All of these factors are in play in nearly every jurisdiction that allows legal, regulated access to cannabis. The cost of producing cannabis will plummet with legalization. The eventual lifting of federal prohibition based on the Controlled Substances Act of 1970  (CSA) will mean many producers no longer need to hide in the forest or in the basement of a rented home. In a post-CSA landscape, costs will further decline as state and local governments allow producers to compete and grow on industrial-sized outdoor farms and, more importantly, to engage in interstate commerce.

We have seen price declines occur in Colorado. The average price for a pound of high-potency cannabis in the licensed wholesale market declined more than 60% from January 2015 to October 2018, from roughly $2,000 to $750 for the same quality and potency of product. Other mature cannabis markets like Oregon have experienced even more severe drops in wholesale prices over the last several years. It’s important to note that both of these markets have seen a partial rebound in pricing as market forces shake out weaker operators, oversupply finds its way into the black market, and some pivot to hemp production, but these pricing dynamics provide a glimpse into the implications of national legalization and the shape of things to come if lifting CSA creates a more efficient market place.

At the same time, the inherent dangers of cannabis are receiving greater scrutiny due to greatly increased THC content (the main active ingredient in cannabis) in today’s most popular strains, together with the potency of concentrates and oils derived from incredible advances in extraction and related technologies. 

The cannabis landscape is rapidly evolving and adapting to the new norms based on both the increased acceptance within our society and due to changing routines and habits in relation to the COVID-19 pandemic.

We see no reason why this industry will not continue to be dynamic and challenging as we roll into 2021. 

Ryan Cram, CVA, is a senior financial analyst and Ron Seigneur, CPA/ABV, CVA, ASA, is managing partner of Seigneur Gustafson LLP (SG), in Lakewood, Co. SG is nationally recognized for its expertise in the cannabis and hemp sectors with respect to business and intellectual property appraisal, economic damages and lost profits assessments and related consulting and tax planning and compliance. Visit cpavalue.com.


Cannabis in Virginia

Cannabis is illegal in Virginia, but because of the changing regulatory landscape across the country, many Virginia-based CPAs may have clients involved in the cannabis industry in other states. Legislation signed by Gov. Terry McAuliffe in 2015 allows for the use of medical marijuana oil to treat epilepsy. 

Most recently, simple marijuana possession (less than 1 ounce) was decriminalized as of July 1, 2020, by Gov. Ralph Northam. Cannabis regulation bills were not voted upon during the fall special session of the Virginia General Assembly and were deferred to the 2021 session.

In November 2020, while the November/December Disclosures issue in which this article appears was at the printer, Gov. Northam announced his support of marijuana legalization in Virginia. Additionally, the Virginia Joint Legislative Audit & Review Commission (JLARC) issued a report and recommendations on key considerations for marijuana legislation in the Commonwealth.

The VSCPA continues to watch the issue closely. We will report any movement on the issue, which could greatly affect the accounting profession in Virginia.


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