PROCEED WITH CAUTION: NAVIGATING CALIFORNIA’S HIGHLY REGULATED CANNABIS SUPPLY CHAIN – PART 5Jared Younker
BY: DAVE MINER: LinkedIn
Part 5: The Plant-touching Supply Chain
Below is a high-level depiction of the Plant-touching Cannabis Supply Chain. Each of these business types, or “nodes” in the supply chain, actually touches cannabis plants or cannabis products and therefore is therefore subject to licensing and regulations as described in Parts 1 – 4 of this series.
These plant-touching businesses are among the most highly regulated businesses in the State of California. In this report and the subsequent “deep dives”, I will provide an overview and dig into the details of the Plant-touching Cannabis Supply Chain, including physical considerations such as inventory management and transportation to-and-from upstream and downstream trading partners, as well as transactional considerations like paperwork and systems data entry to ensure inventory harmonization between actual physical inventories and inventories recorded digitally in Metrc and/or other computer systems. This will be key moving forward for financial reporting, tax obligations, and potential audits by State or Local authorities, and, of course, running your actual plant-touching business.
Each licensed node of the Plant-touching Cannabis Supply Chain (e.g., Cultivators, Manufacturers, Distributors, Labs, and Retailers) have the privilege of conducting commercial transactions directly with cannabis or cannabis products. These transactions are conducted with their “upstream” or “downstream” trading partners. For instance, a licensed Cultivator may sell dried flower to their downstream trading partner, a licensed Distributor. The Distributor is one step downstream from the Cultivator. Furthermore, a licensed Distributor may sell cannabis or cannabis products to their downstream trading partner, a licensed Dispensary. The Dispensary is one step downstream from the Distributor.
Remember, a Cultivator cannot sell directly to a Retail Dispensary or Delivery Company, they are obligated to sell ONLY to the state imposed intermediary, the Distributor. The Distributor is also the plant-touching node where all of the compliance testing is conducted. R&D Testing may be conducted onsite at the Cultivator or Manufacturer, but this type of testing differs from Compliance Testing in that it the results may only be used internally. R&D or in process tests — are intended for use by manufacturers and cultivators to improve their processes and products. (SC Labs, 2018)
Once a Cultivator has prepared and sold a batch of flower, for example, to a Distributor, their licensed “downstream partner”, a few things have to happen to make the movement of the cannabis legal in the eyes of the State of California. These include recording all batch and transactional details in Metrc and other computer systems, Compliance Testing, Commercial Transaction Record Keeping for pickup and delivery, and Transportation. A similar laundry list of activity must occur for ALL commercial transactions that occur between any two nodes of the plant-touching supply chain.
Compliance testing requirements increase as the level of processing increases with Cannabis Products. For instance, a typical Cultivator to Distributor transaction of dried flower would require TWO (2) sets of compliance testing; one for the Cultivator where a batch would be moved to a Distributor and quarantined so as to be able to legally undergo compliance testing. Results would be used by the Cultivator on packaging and to advertise THC levels, for example, to prospective customers, downstream, licensed Distributors. Next, once purchased and prior to sale a Retailer (Dispensary or Delivery Company), the Distributor would have Compliance Testing conducted. For Cannabis Oil, there would be THREE (3) tests prior to sale to a Retailer; Cultivator stage, Manufacturer stage (as oil), and Distributor stage. Edibles, topicals, and the like would have FOUR (4) sets of Compliance Testing prior to sale to a Retailer; Cultivator stage, Manufacturer stage (as oil), a 2nd Manufacturer stage (as an edible, topical, or the like), and finally a Distributor stage. That’s a lot of testing!
As you can see the CA Regulations require significant testing and records keeping to track all commercial transactions and movements of cannabis and cannabis products. So much so, that it would be overwhelming to cover everything here in one blog post. Over the next few weeks, I will endeavor to “zoom in” on each of the plant-touching nodes and explain in relative detail what is required from a regulatory compliance standpoint for that business type to sell product to its legally authorized downstream partner.
Take care and, as always, Proceed with Caution!
Stay tuned for Part 6 of our series: Deep-Dive on Dispensaries!