On the weekend the State of New York put into Senate their legalization legislation for cannabis. It still has to be approved, but it sounds like all parties are on side.

The legislation looks like a three tier alcohol system much like we have suggested in our recent thesis.

I think the system NY has tabled is pretty fair, in that it allowed existing players basically the rules they enjoy today and added adult use opportunities.  Where it was not as beneficial is that the existing players will have to pick one of the three tiers for future growth beyond the three adult use stores they can open.

MSO’s have thrived on verticality. It generates more sales, margins and cash flow than a segmented approach.  But the incremental opportunity is in a specific tier and not through verticality, which takes considerable wind out of the forward opportunity. 

The three tiers;

1. Manufacturing and/or processing
2. Distribution
3. Retail (max three licenses/stores)

And they added a Consumption Lounge license (max 3 per holder) which will be especially important for beverage categories.

It gives the ten Registered Organizations (RO’s) that presently have licenses for cultivation and up to four dispensaries the ability to open up three more facilities for a total of seven (+3). I believe they have ability to open up 1-2 more but they must be in an underserved area and subject to fees.

RO’s have verticality grandfathered via exceptions, but the usefulness of it is going to be limited by practicality as the market develops. 

• RO can only sell their product in their medical stores and in their adult stores they can sell their product in store and source from a registered distributor the balance.

• The RO’s have the ability to self-distribute their products to their own stores and other adult dispensaries but they can only distribute their own product.  No other products are allowed on the truck.  I really do not think the economics of self-distribution to 7-8 stores would tip in-favour, as the RO still has to hire a distributor to a) sell their product to the other adult rec stores, AND b) they have to fill the remaining adult rec shelves in their stores with other brands and products.  Maybe if it was like Florida and they had +50 stores self-distribution would make sense. But eight stores likely leads to a 3^rd party distributor handling the entire delivery.

With licenses capped at three adult retail no major chain will likely develop until that cap is raised.  This is social justice and with ownership restrictions: independent retail (just like the federal alcohol model).

State caps on number of licenses per category are not yet finalized.

The state can grant more RO’s if they need to bulk up medical supply and stores.  But most new entrants will likely be limited to one of the three lanes of the three tiers.

RO’s got the benefit of first mover but realistically are not going to be able to grow adult retail beyond three stores until caps are revisited.  With the addition of the distribution tier, which a cultivator/processor or retailer cannot also hold, RO’s are going to see that segment of the supply chain fall into someone else’s hands.    RO’s are going to likely become cultivation/processor dominant.

Sales, margins and cash flow going forward has been divided into three versus consolidated.

First sale of a gram of adult use is not expected until late 2022. 

Some pertinent sections:

Section 39

§ 39. Registered organizations and adult-use cannabis. The board shall have the authority to grant some or all of the registered organizations registered with the department of health and currently registered and in good standing with the office, the ability to obtain adult-use cannabis licenses pursuant to article four of this chapter subject to any fees, rules or conditions prescribed by the board in regulation.

§ 68-a. Registered organization adult-use cultivator processor distributor retail dispensary license.

1. A registered organization cultivator processor distributor retail dispensary license shall have the same authorization and conditions as adult-use cultivator, adult-use processor, adult-use distributor and adult-use retail dispensary licenses issued pursuant to this article provided, however that the location of its adult-use dispensaries shall be limited to only three of the organization’s medical dispensaries’ premises and facilities authorized pursuant to article three of this chapter, and that it may only distribute its own products. Provided further that such registered organization shall maintain its medical cannabis license and continue offering medical cannabis to a degree established by regulation of the board. Such license does not qualify such organization for any other adult-use license.

• A person holding a registered organization adult-use cultivator processor distributor retail dispensary license may not also hold another retail dispensary license pursuant to this article and no registered organization adult-use cultivator processor distributor retail dispensary shall have a direct or indirect interest, including by stock ownership, interlocking directors, mortgage or lien, personal or real property, management agreement, share parent companies or affiliated organizations, or any other means, in any premises licensed as an adult-use cannabis retail dispensary or in any business licensed as an adult-use cannabis retail dispensary.

§ 68-b. Registered organization adult-use cultivator, processor and distributor license. A registered organization cultivator, processor and distributor license shall have the same authorization and conditions as an adult-use cultivator, processor, and distributor license, provided, however, that such license does not qualify such organization for any other adult-use license and may only authorize the distribution of the licensee’s own products.

Section 80 § 80. Adult-use cultivators, processors or distributors not to be interested in retail dispensaries. 1. It shall be unlawful for a cultivator, processor, cooperative or distributor licensed under this article to:…

Section 84 is distributors. Mark ups by distributor can be capped by the control board.

We are working on an Ask Me Anything on our subReddit with a NY cannabis lawyer and +two decade alcohol distributor turned cannabis distributor. Keep an eye out for it.  It will be your chance to ask questions of how New York might play out and how federal regulation might impact company valuations.