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Welcome to our podcast, TechExchange! Sysazzle’s TechExchange brings together a wide array of technology topics from technology leaders across all industries. Meet technology leaders from across the country and hear their thoughts on where technology is going, current technology trends, specific technologies and more. Let’s welcome our first guest, Steve Stevens, formerly VP of IT / now Chief Technology Officer – Sysazzle, as we explore how information technology enables the Cannabis Industry.

Transcript:

00:00:00 – 00:05:17

Hello and welcome to the TechExchange Podcast! I’m your host, Phil Hopkins. I’m the Chief Solutions Officer for Sysazzle. The Sysazzle TechExchange Podcast was created to bring you highly relevant topics from some amazing technology leaders. Today will be exploring how information technology enables what may be the fastest growing consumer product category in the United States. The industry we’re talking about today is also a major employer providing jobs for a quarter of a million American workers according to market research from New Frontier data. I know you’ve heard about it. This type of business got started in California but really took off in Colorado and Washington in 2012. In fact you may already be customer. Well what could it be? Some aspect of the gig economy like ride sharing? Well, I’ll give you a big hint. Before, I said it was growing. Right, now you’ve got it. We’re talking about technology behind the cannabis or if you prefer the medical and recreational marijuana business. Joining me to discuss the technology side of the legal cannabis industry is Steve Stevens. He was a veteran IT executive and recently lead systems implementations for Harvest Health and Recreation, the leading cannabis manufacturer and retailer headquartered in Arizona. Hi Steve, welcome aboard. Hey Phil, how are you. I’m doing great, thanks. Steve, I know that The cannabis industry especially the legal cannabis Industry is very different than any other industries. It’s kind of like parts of the agricultural industry. It’s like parts of the alcoholic beverage industry. How’s it different from a supply chain perspective from other regulated industry. It’s very challenged from a supply chain perspective. Cannabis is illegal at the federal level but has been regal at the state level and more than two dozen states for a while now and every election adds a few more states. However, the supply chain is not allowed to cross state lines and is complicated by the fact that the federal government still considers it an illegal substance. Over the swiping across state lines what type of modifications to the supply chain technology have to be in place? Does it have to remain separate state by state or how does that work? Well to start out with the regulatory environment for that supply chain it gets very complicated because we have state after state implementing its own regulations without any kind of federal oversight homogenizing those regulations. So every state treats it differently. Some for recreational use and others for strictly medical use but it gets even further complicated because of the way it’s licensed. In states like California you have separate licenses for those who grow for those who refined the product, process it, for those who distribute and so forth. In other states, it’s illegal to have any interoperation between companies so you have one vertical license from growing to selling it in your dispensary and you’re not allowed to sell at the wholesale level to other companies. So state by state the rules change and trying to support that from technology standpoint is very complicated. Wow sounds like it. And also I think there’s a lot of compliance and oversight requirements that many states put on the industry as well and that also impacts the technology, am I right about that? Yes so the regulatory environment for each state is somewhat different. Each state has typically set up a department with oversight for the industry. They’ll issue licenses and with different rules on how things are to be processed and sold. It’s further complicated by state and local government by local governments such as counties and cities so for example it might be legal in one town to deliver but illegal in another town to deliver so keeping track of all of these different regulations depending on your zip code is a very important task for anybody that is entering that business. Well, let’s talk about the specifics of maybe one example. Then i know there’s a system using California called Metric which stands for Marijuana Enforcement Tracking Reporting and Compliance. And i think that’s being used by a number of states for the recreational marijuana industry. That’s partly a physical tracking system, I believe, with RFID tags and also there’s a cloud based component to that too isn’t there? It is a state that tracking system that’s used by the state it’s commercial software and a number of states have picked that particular system to regulate the industry in their state many of the states wanted to set up traceability to protect consumer especially a state like California which feels very strongly about pesticides and other things getting into things that humans eat and smoke so that particular system will monitor plants from the moment that they are brought into existence and every bit of harvest that comes from that plant and down through the supply chain is tracked to the end customer walking into the dispensary and purchasing product.

00:05:17 – 00:10:00

Wow that sounds like a lot more complicated than the typical agricultural supply chain product or even a alcoholic beverage product where I don’t think if you’re making vodka you have to track every single potato that goes into the vodka but it sounds like you do for the marijuana industries. Is that correct? This is true so in a typical industry you will have things brought together into a lot. So you’ll have a batch of potatoes and so forth that will go through processing. And that is what’s very typical. But in the cannabis industry the states have chosen to get very granular and they track it all the way back to the specific plant. Wow it is virtually impossible to do manually and be profitable. So it’s very important to have good software support that inter operates with the state system. Let’s talk about that some more because I would imagine that since the legal cannabis industry even for medicinal purposes and recreational is a relatively new industry. I mean it’s not that many years old. Are most cannabis start ups prepared implement these processes and systems bring them into compliance with the state’s help? In other words, how prepared are the company’s supposed handle the regulatory burden and to meet your business goals? Good question. Let’s just say that I call it an immature industry. What that means is that it’s new. Even the states are trying to figure out how to better regulate it. So in a new state that went legal, the inspectors are still trying to understand the rules and how they should be implemented. The owners of those licenses have to learn all of those regulations regardless and then on top of that they have some complications with raising capital and doing regular banking and payroll that other businesses find is commonplace. They’re challenged because of the federal rules around cannabis. What are some of the banking issues and finance issues? I understand that it’s largely in some states an all cash business. So how does that impact the systems and the tracking the point of sale the financial management systems, all that technology behind what would normally be tracked through normal banking systems? That has matured along with the industry to a certain extent because the federal government still considers it an illegal substance. There are laws, banking laws, about money laundering and money associated with illegal drug trafficking and so forth. So on the one hand you have the state saying it’s legal, here’s a license go forth and do business and at the federal level you have all of these rules because it’s classified as an illegal substance that prevent the national bank from working with you. What does that mean. That means that you cannot go down to one of the big banks, Bank of America or Chase or any of the others, and open up a business account for a cannabis business. Further, you cannot accept credit cards because the credit card processors will not touch the cannabis business because they don’t want to be shut down or accused of money laundering. This all raises the cost of doing business for cannabis. They have to deal with cash, cash is very expensive. It’s a physical medium. It has to be physically protected and just trying to do payroll can be a challenge. Wow, so in terms of the system support that that are there additional security systems necessary to support a business that has basically a cash business? Oh yes. In comes the wild wild west where they had banks and physical cash before things were electronic. You’re gonna have to have cash picked up by armored services if you can find one to work with you or you’ll have to have your own service and stand that up from scratch. Most of the businesses have dispensaries and locked boxes and go through a large amount of effort to be able to deliver product to other businesses where it’s legal and then collect cash and bring that back. Just think of the security concerns around a moving vehicle that has a large amount of cannabis and a large amount of cash. Right, interesting. So are there specific things that are done to support that that you’re aware of in the industry, for instance, vehicle tracking or tracking of the payments and so forth…

00:10:00 – 00:15:13

…that would be some sort of IT system to support that? Oh yes, many of the states want know that specific route and how things were being delivered. And so as a result you mentioned metric as an example, metric wants to know the route through taking to deliver those substances so you need tracking systems in the vehicles to make sure they stay on those routes. You want have panic buttons in case something happens. In order to reduce business you need to be able to track all of the routes and that into systems although the state governments for some reason or sometimes not willing to accept those in electronic form so you’ll also have to be able to print them out and present them in paper. They’re a little behind in their technology. That really does sound like the wild west doesn’t it! It is, and every state is choosing to do it differently and you know this is where the federal government in the past why they were given the right to regulate interstate commerce. It was to fix all of those problems and because this is an intrastate business where you’re not crossing state borders, you run into all of these problems. Interesting. So from a technology standpoint and technology management standpoint, you’re trying to run an enterprise that has for instance an enterprise resource planning system but there are so many differences in each state the way it’s implemented in that state. That might be very difficult. So are there, for instance, ERP systems that are designed for the cannabis industry that incorporate all these various regulations, tracking, compliance and other mechanisms, or is it each one a one off every time? So, there are. There are ERP systems that are out there that have been modified to be cannabis compliant however most of them do not interact with the state systems. There are some pieces of software out there that are meant to interact with the state systems and being compliant in that fashion. But they’re not a full-fledged ERP interfacing well you know with all of the accounting and cost modeling that you would typically find it in the ERP. So it often requires a lot of integration between multiple systems and the more states you have the more complicated it gets. But it is workable. There are platforms out there that can be extended to talk with the software that meets compliance requirements and so the best of breed typically is a combination of two or three systems. Interesting, and also I imagine there are certain companies that do everything in terms of the industry from growing to retailing and then there’s other companies that just do some aspect for instance they just grow or they just manufacture or they just do retail. Am I right about that? This is true. Yeah, so it depends on how the licenses in the states are handed out. There in California as an example, each section of the supply chain is given a separate license and even if that company has multiple addresses, let’s say they have two addresses, each address would get separate license. And maybe that’s just for cultivation by the number of acres that they have. A retail store dispensary would have a separate license and you would have to sell between one and the other and the state will collect tax in between. In other states, I’ll choose California’s neighbor Arizona, they were handing out vertical licenses so one license would cover everything from the grow through manufacturing and processing, distribution, all the way down to a dispensary. Interesting, so and then if you are working with let’s say you were somewhere in the middle where you are creating a, I think there’s a lot of products that are not only smokable products but there is also edible products and vape products and all that, if you are creating something in the middle and somebody else was selling it then you have to take the source material from a grower, do something with their license, do the production manufacturing process to it, and then potentially hand it off to another company to do retail. So that sounds like there’s a lot of chain of custody of control here that might be imposed. Am I right on that? This is true and this is part of the reason why they have these traceability systems like metric for California because they chose to break up the supply chain and handout different licenses for everyone along that supply chain and because they tax as it moves across that supply chain. They want to be able to track it all. And you might have a third party that might wanna make an edible, say a cookie, and they would get a license to do that and they would buy raw ingredients from other people…

00:15:13 – 00:20:01

…in the market, other cannabis licensed people in the market, and then they would make their product and then sell that through distributors if they didn’t have their own distributorship. There’s other aspects besides edibles such as vape and so forth but it can get very complicated very quickly like any normal product. The only difference here is that you’re not dealing with the national market. It’s a state market. And if you drive across the border into the next state, that industry changes dramatically. The basic ingredient, cannabis, can be sold as an end product or it can be processed into all sorts of things and all of them need to be tracked and registered and regulated by the state. Just depends on how sophisticated the state is in its regulations. It sounds to me like, I mean it’s an industry calling out for computerization and the technology behind it to make it work just because the complexity of even if they all had the same ground rules from kind of stem to sale or seed to sale, it will still be complicated but then making all the various states with their own compliance rules. It just sounds like a nightmare. Do you find the business is driven by data or do you think it’s driven by the market and by regulation more than it is by IT? And I think it’s pretty obvious there’s a lot of regulation. Is the business being driven by that? To a large extent the business is structured by the regulation. The business is driven by demand for the products. However, because this is a growing business in the states that have had it legal for a while, the consumers are more educated. And they’re not shy about telling the businessman exactly what they would like to see in product. And those businessmen then take that input and try to provide it. Some of those businesses in the oldest serving states are starting to become data driven. The states that are just coming online and have a less mature market we have regulators that are trying to figure it out, you have consumers that are trying to get educated, you have business people that are trying to get educated, so most of the choices are seat of the pants or looking at other states. Unfortunately, the markets and other states are different because the consumers are more or less educated and the rules are different. So there is a lot of guessing that goes on at first and eventually the consumer, the regulators, and the businessman all start to mature and a start to become more numbers driven, data driven at least if they want to be a successful and grow their business and open up additional locations. Right, Oh it makes perfect sense. I was just looking at some statistics the other day from one of the trade magazines called Marijuana Business Daily and right now at least in terms of the end of 2019 the recreational and medical cannabis market is somewhere in the range of between ten and thirteen billion dollars across the US as an aggregate, but the growth potential of it if indeed it does meet projections is somewhere like around thirty billion dollars in a few years and that’s even bigger than the five away perspective, the whole craft beer industry in the United States is only twenty nine billion dollars so it would be bigger than that it within four or five years if the projections hold out. Do you think that that is possible to achieve for the industry without some sort of federal relaxing of the federal restrictions? Or do you think it could achieve that even so? I do think it’s possible for the industry to do that without federal involvement, federal relaxation. However, it will be more expensive for the businesses and that costs will be passed on to the consumer so consumers will be paying a lot more than they should be for those products. The federal relaxation of rules will probably come in stages. So for example, in one of the things that will likely happen first will be for cannabis banking to be decriminalized. Now what do I mean by that? It doesn’t legalize cannabis at the federal level, it simply tells the banks in the credit card processors that it’s okay to process and handle normal banking functions for a state licensed cannabis business. Oh why would they want to do that? Well you know states have been under a lot of stress these last eight months with COVID and by allowing this to happen, they will have greater transparency,…

00:20:01 – 00:22:45

…they’ll see everything that’s going on in the market, and they’ll be able to collect taxes. The businessmen will be able to do regular business accept credit cards. Their cost of business will go lower. They won’t have to deal with as much cash and security. So it’s a win win for both the industry and for government if they do that. If it does go in that direction do you then see a more normalization state to state in terms of the regulations? Or do you still see them to be fairly divergent going forward? I don’t think you’re gonna see the state regulations being any easier until the federal government decriminalizes cannabis itself. It doesn’t mean at it’s legal, it just means that it’s not illegal, right, and so what do I mean by that? It means that the states will still strongly control the regulation around cannabis, but at that point it might be able to move across state lines. And if that’s the case then you start to get larger players coming into the market in a consolidation of places where you’re growing it and where you’re processing it. I think that’s a little ways off. I think banking will probably be decriminalized in the first half of next year and as far as regulation and transportation in inter/intrastate commerce with cannabis, I think that’s a little ways off yet. I think it has to happen because there’s only fifteen states that are still outlawing marijuana in any form, all the rest are either allowing it for medicinal purposes or for recreational so it is a trend and is obviously moving forward and the numbers are gigantic in terms of the billions of dollars that this industry generates. Steve, this has just been really fascinating information, an amazing discussion. I really want to thank you for your time today and joining us and appreciate all this insight. This is something that most people don’t realize about the industry and I think from an IT perspective it shows the complexity of when a new business comes in and especially when has a variety of state laws help with conflicting federal laws. So thank you for your time today. Thank you Phil, it was a pleasure. And I actually consider it quite enjoyable to be facing these kinds of challenges an solving them for people. Said like a true veteran IT man, thank you. Thanks, Steve. Please subscribe right here for additional Sysazzle TechExchange podcasts and please visit us online at www.sysazzle.com. That’s S-Y-S-A-Z-Z-L-E dot com. This is Phil Hopkins for Sysazzle, so long.