The cannabis industry is on a new high with legal sales expected to reach $30 billion in the United States by 2025.
This assessment is part of “The U.S. Cannabis Report: 2019 Industry Outlook,” published by New Frontier Data that refers to “the strong demand for concentrates and edibles” as reasons for continued growth.
An article last year in Forbes spoke of larger cannabis farms being built. “In Arizona, Colorado, California, and Oregon, cannabis is being cultivated in greenhouses in excess of 250,000 square feet that are capable of yielding more than 50,000 pounds of flower,” the article reported.
The gradual loosening of the social stigma and new methods of consumption other than smoking have helped the industry to become “a positive, taxpaying presence in shopping districts around the country,” Tom Adamswrote in the introduction to a recent report on U.S. legal cannabis, published by ARCVIEW Market Research and BDS Analytics.
“The legal cannabis industry in the United States will contribute nearly $40 billion in total economic output and create a total employment effect of almost 414,000 full-time equivalent workers by 2021,” the report states; in Colorado, total economic output in 2021 is estimated to be more than $3.75 billion.
Product innovations in medical and recreational uses of cannabis also are fueling the new “green rush.”
But the growing industry’s power consumption is not so green.
Need for sustainable cultivation
Legal cannabis cultivation in the United States consumed 1.1 million megawatt hours of electricity in 2017 (enough to power 92,500 homes for a year,) generating 472,000 tons carbon dioxide, according to a 2018 New Frontier Data report. It forecasts electricity consumption will increase 162% from 2017 to 2022 as the legal markets expands.
In Boulder County, the average electricity consumption of a 5,000-square-foot indoor marijuana facility is about 41,808 kilowatt-hours monthly, according to county data. As most of the power used comes from coal burning power plants, a typical 5,000-square-foot indoor grow facility contributes approximately 43,731 pounds of carbon dioxide per month to the atmosphere, the data states.
Boulder-based Surna, which designs, engineers and manufactures application-specific environmental control and air sanitation systems for commercial, state- and provincial-regulated indoor cannabis cultivation facilities in the U.S. and Canada, is helping cannabis growers become sustainable and efficient in their operations, said Tony McDonald, Surna’s president and CEO.
Energy costs are the biggest expenditure for indoor cultivators, he said. Indoor cannabis operations, like data centers, are drawing the attention of the public and policy makers, for their use of high-power light sources and cooling systems.
Surna’s technologies address the energy- and resource-intensive nature of indoor cultivation, he said. Surna’s proprietary energy-efficient climate control systems help reduce energy consumption and allow growers to get better yields, McDonald said.
A successful cannabis cultivation operation requires precise temperature, humidity and light controls. “The more precise control means less energy consumption and that affects the bottom line,” said McDonald, author of “Cleantech Sell: The Essential Guide to Selling Resource Efficient Products in the B2B Market.”
Since 2006, Surna has been involved in consulting, equipment sales and/or full-scale design for over 800 grow facilities. “It’s a sophisticated mechanical engineering challenge,” McDonald said.
Surna recently posted a record $4.2 million in revenue for the quarter ending June 30. This represented an increase of 110% compared to the same quarter last year and an increase of 138% compared to the first quarter in 2019. With a net income of $140,000 in second quarter 2019, Surna achieved positive net income in a quarter for the first time.
It achieved a gross profit margin of 34.4% in the second quarter of 2019, its highest gross profit margin since 2016, and an improvement of 6.7 percentage points over the first quarter gross profit margin of 27.7%.
McDonald plans to get the company listed on the Nasdaq exchange by the fourth quarter of 2020.
“Surna was one of first manufacturer members to understand the need to know how to be more efficient,” said Derek Smith, executive director and co-founder of Portland, Ore.-based Resource Innovation Institute, a nonprofit working to promote and quantify energy, carbon and water conservation in the cannabis industry. “We need to credit Surna as a leader in understanding that information is needed in the market place.”
As the cannabis industry continues to grow, there is a greater need to learn about improving agriculture in controlled environments, Smith said. It has created opportunities for companies like Surna in the indoor cultivation manufacturing and design space. Controlled environments also are needed for the processing of cannabis crops.
Cultivators are increasingly installing efficient technology for their lighting and HVAC needs, but they don’t know how to optimize, Smith said, adding, “We need regional data at climate zone levels. We need to know what processes (cultivators) are using for temperature settings and watering rates for different types of grow media (whether soil, water, air, coco fiber/rock wool or any other medium) to measure efficiency.”
Better data will help reduce energy consumption and lower production cost for cultivators, he said.
The cannabis market is beginning to segment as entrepreneurs find more commodity usage for cannabis as oils and edibles. They are expanding outdoor cannabis cultivation. But small indoor production facilities will continue as boutique production centers, he said.
Growing cannabis indoors
Indoor cultivation has its advantages, said Alex Park, CEO of Vera, which owns a 22,000-square-foot hybrid greenhouse to grow cannabis in an unincorporated part of Boulder County. (Vera does not use Surna equipment.) Vera’s custom-designed facility uses closed-loop recirculating-deep-water-culture systems to grow cannabis indoors while leveraging sunlight.
“A controlled environment is needed to get a high quality product,” he said.
It’s crucial to have environmental stability, which translates to precise temperature and humidity control, he said. But defining the precise balance between temperature and humidity may differ from grower to grower, and from place to place, Park said. The amount of light, fertigation, watering and cooling also depends on the type of grow and techniques used.
The Vera facility also relies on high-pressure sodium bulbs for supplemental light and uses chilled water systems for cooling and dehumidification, instead of a traditional refrigerant-based air conditioning system.
Minimizing the necessary inputs for production and maximizing yields is key to a successful operation, he said. Cultivators need to be vigilant to notice any potential signs of pestilence, insects, mold or mildew, he said. It needs to be checked on a daily basis. It’s important, even with automation, to constantly verify sensor readings are accurate.
“Human scrutiny is applied to both plants and equipment,” Park said.
Alan Bonsett is one of Surna’s major customers.The founder of NOBO Inc. in Boulder provides “turnkey solutions” for cannabis cultivation. NOBO’s mission is to create a portfolio of cannabis industry assets.
“We use Surna equipment in our build-out,” said Bonsett, who also is CEO of GrowRay, a company that provides industrial-grade adaptive LED lighting systems designed specifically for cannabis.
“Surna has efficiencies on the HVAC side. We have it with our LED lights,” he said.
Energy use offsets
For growers, the challenge is to building the facilities properly to get the efficiencies they need for a lower production cost, Bonsett said.
High energy needs of the marijuana industry for light sources and cooling systems in indoor cultivation potentially can have a substantial impact on climate change, which is why growers pay a mandated 2.16 cent charge per kilowatt-hour into the Boulder County Energy Impact Offset Fund.
The county requires growers to offset their electricity use with local renewable energy or pay the fee, which is used to develop best practices for marijuana cultivation.
The goal is to have energy efficient cultivation, said Kristen Huber, licensing program manager for Boulder County Marijuana & Liquor Licensing.
Like Boulder County, Boulder requires its marijuana cultivation facilities to offset their electricity use with on-site solar, a solar garden subscription or payment into the city’s Energy Impact Offset Fund, said Carolyn Elam, energy manager in the city’s Climate Initiatives Department. The city’s fee is 2.07 cents per kWh of electricity use, which is slightly lower than the county’s fee. “The city adjusted its fee amount since our businesses also have to pay the city’s Climate Action Plan tax,” she said.
The city began implementing the fee in 2018 and as of the end of August, had collected just over $550,000 in the fund. It plans to offer marijuana growers energy assessments to help them identify efficiency opportunities, Elam said.
“The city is also offering businesses credits towards future (Energy Impact Offset Fund) fees for investments that they make in efficiency and solar for their businesses. To create offsets for the remaining electricity use by the cultivation businesses, the city will also be using funds to provide solar to low-income residents within the community,” she said.
Boulder County has a steering committee (comprising growers, county staff and other community members) that helps make informed decisions related to the management and disbursement of the Marijuana Energy Impact Offset Fund, said Zac Swank, business sustainability coordinator for Partners for a Clean Environment, which works to promote business sustainability in Boulder County.
The funds are used for energy efficiency assessments and audits, and to provide carbon conscious certification (to efficient and sustainable growers) that can used for marketing, he said. The committee is exploring other uses of the fund, he said.
NOBO’s Bonsett also is in the business of growing cannabis in Colorado and Michigan.
“We are trying to get licenses in Pennsylvania and Illinois. We are a diversified holding company in the cannabis space,” he said.
Surna, too, sees the value of the cannabis space. The company’s long-term plan is to grow revenues to $20 million to $40 million annually. The company is focused on growing organically and through acquisitions, CEO McDonald said. Its goal is to provide hardware (equipment, sensors and controls) and software to indoor cannabis growers. Surna executives are sharing their vision with potential investors.
The company sewed up sales contracts with a total value of $10.3 million in the first half of 2019, and in June delivered its first custom-designed “ducted air handling system.”
Increasing competition, consolidation
Bonsett said he is not concerned the increasing number of grow operations across the United States eventually will bring down cannabis prices. Cannabis, like oil and gas, is a commodity with price swings, he said.
“It’s all about how you monetize cannabis. It’s about integrating the process. Brands haven’t crossed the state lines very well. We are in the third inning, we still have a long way to go,” he said.
A consolidation in marijuana space is driving down prices, said Andrew Comer, an associate at Fortis Law Partners in Denver, who helps with “biomass” buying and selling contracts. (Marijuana refers to varieties of cannabis that contain more than 0.3% THC, or the psychoactive constituent that provides the high, and hemp refers to varieties of cannabis that contain 0.3% or less THC.)
“According to data from Viridian Capital Advisors, merger and acquisition activity during the first two months of 2019 significantly outpaced the same time last year (66 deals in 2019 compared to 44 deals in 2018). Of the mergers and acquisitions that have closed so far this year, 30 of them have involved cultivators and retailers,” Cannabiz Media reported in March.
It also reported cannabis cultivation facilities are growing larger.
“Companies like Harvest Health, MedMen Enterprises, Tilray, Inc., Aurora Cannabis Inc., and Canopy Growth Corp. have all made strategic moves to expand their cannabis cultivation facilities through M&A or by building their own, larger facilities,” according the Cannabiz Media article.
At the start of retail legalization in 2014, there was a requirement that only existing medical businesses could hold the first retail licenses, she said. The vertical integration requirement (and the mandatory dual-license requirement for retail and medical) expired on Sept. 30, 2014.
Cultivation in state, county
As of Oct. 1, the number of licensed medical marijuana growers in Colorado was 481 and the number of growers of marijuana for retail or adult use was 689, according to the information on the Department of Revenue Marijuana Enforcement Division website.
The website is updated at the beginning of each month, Gray said.
In Boulder, marijuana cultivation is allowed indoors in greenhouses, said Mishawn Cook, Boulder’s licensing manager. The grows are differentiated as “medical or recreational.” Boulder has 14 medical grows and 30 recreational grows, she said.
Both medical and recreational marijuana business licenses are transferable in Boulder, she said.
Boulder County has issued 21 marijuana cultivation licenses, which includes 20 licenses for indoor/greenhouse cultivation and one license for outdoor cultivation, Boulder County’s Huber said. Some facilities have multiple licenses, she said.
Longmont prohibits commercial cultivation, production and testing of both medical and recreational marijuana, said Michelle Sebestyen, city’s licensing coordinator. Home growing of marijuana for personal use is subject to the city’s municipal code.
In 2017, Longmont approved retail sales of marijuana, and later approved four businesses (selected from 13 applicants) to open in city limits. The city offers recreational marijuana licenses and dual recreational/medical licenses for retail sales. Stores that sell only medical marijuana are not allowed, according to the information on the city website.
Louisville has two locations for retail marijuana sales, said Meredyth Muth, city clerk. The city can have up to six locations, she said.
The city will have two marijuana-related questions on November ballot, she said. It is asking voters whether to have an excise tax on “first sale or transfer from a retail marijuana cultivation facility to a retail marijuana store or retail marijuana product manufacturing facility,” and whether retail marijuana cultivation facilities should be allowed with in the industrial zones of the city.
Cultivation facilities will be allowed only if voters also approve the excise tax on them, she said.
Erie prohibits marijuana cultivation facilities; marijuana product manufacturing facilities; marijuana testing facilities and retail marijuana stores. Only those who are registered as patients with the state cancultivate, produce or process medical marijuana plants in Erie, according to information on the town website.
The town has no locations for retail or medical marijuana sales, said Jessica Koenig, town clerk.
Lafayette has three medical and retail dispensaries in city limits, and six cultivation operations as of Oct. 1, according to the Department of Revenue Marijuana Enforcement Division.
Surna sewed up sales contracts with a total value of $10.3 million in the first half of 2019, and in June delivered its first custom-designed “ducted air handling system.”
Surna will continue to focus on cannabis.
“That’s our core expertise,” said CEO McDonald, who reduced payroll, got cash flow under control and emphasized selling Surna’s products and services to put the company on path to profitability.
“Production and delivery cycles can take up to a year,” he said.
The company’s long-term plan is to grow revenues to $20 million to $40 million annually. The company is focused on growing organically and through acquisitions, McDonald said. Its goal is to provide hardware (equipment, sensors and controls) and software to indoor cannabis growers. Surna executives are sharing their vision with potential investors.
Growth is the only alternative, McDonald said.