March 1, 2022

Finding a Path to Profitability with Cannabis

Indoor Cannabis: The Path to Profitability in 2022

 As the cannabis industry matures, license holders in 2022 are looking at how to increase profitability and assure license security. Achieving a positive cash flow while orchestrating a full facility buildout isn’t always easy, which is why more companies are seeking out innovative solutions from experienced consultants and engineering firms.

For an emerging entity in the competitive cannabis space, what are the keys to finding business success? Is it possible for multi-state operators (MSOs) and new licensees to achieve positive cash flow while building out full facilities?

Absolutely, says Chuck Miller, CEO of NgenX Energy and Director of Energy Services for KMB Design Group.

In a recent webinar — Your Path to Profitability with Cannabis — Miller addressed the most common questions he’s asked by large MSOs and newly-licensed operators. During his 7+ years in the cannabis industry, Miller says he’s seen most licensees facing the same few challenges time and time again. One of the key elements to business success in the cannabis industry is to have a solid plan with a vision for the future. Cheap and fast today could mean slow and expensive later, Miller says.

Cannabis growth projects are technically intense, so having a partner with experience in renewable energy and engineering is necessary to be successful. Taking a modular approach to production, while continuing to eye expansion to maximize canopy, takes a unique viewpoint. It also requires seamless execution and dedication to addressing all of the elements necessary for success in the cannabis growth space.

Cannabis Growth: The Critical Nexus

Multi-state operators (MSOs) with established success in the cannabis growth market focus on addressing the nexus of three key elements:

  • Time to Market
  • Quality
  • Cost of Goods Sold

Startups, new licensees, and other firms entering the cannabis space would be wise to consider Time to Market, Quality, and Cost of Goods Sold as these elements are integral to successful crop production and facility design.

Combined Heat & Power (CHP)

One of the best ways to address these key elements simultaneously is through a technology called Combined Heat and Power, or CHP.

How can we use CHP technology to address one of the biggest pain points for licensed cannabis operators?

CHP is a technology mechanism that enables MSOs to recover energy from power generation and deploy it for heating or cooling. By doing so, cannabis license holders can reduce the Cost of Goods Sold.

Looking at energy as it relates to environmental control, growers can reach levels of 50% reduction or more in electric energy consumption by utilizing energy reclaimed from on-site power generation. Being able to use CHP is a critical approach for every major player in the cannabis growth space.

Deploying Modular Solutions

With the modular approach, it’s possible to provide rapidly-deployable modular solutions to MSOs, while still bringing the element of third-party financing into the mix. High-end CEA systems are often developed and managed using a modular approach, which reduces business costs and accelerates the time to market.

NgenX has flipped the script with modular environments to produce high-quality facilities. Based on watering rates, operators can back down or ramp up to scale their facilities in a fast start approach. The fast start approach involves knowing how much energy goes into a room at certain watering nutrient rates versus trying to back fit an energy plant to room size and watering rate. If a grower has a higher nutrient rate than they expect, they need more energy to remove it or fewer pods consuming energy. With a lower rate, the grower could add more pods.  Balancing all of these elements, it is extremely clear that the relationship between quality, cost, and energy intensity are closely interrelated.

First Costs Vs. Lifecycle Costs

First-cost decisions can prevent MSOs from achieving the goals they are looking for. That’s one of the reasons why Miller says new licensees should think through their business decisions and financial strategies early in the process.

Some systems may not be capable of addressing all of a licensee’s future needs if the goal is to produce the highest quality and highest yield product. For example, more water and more light mean more energy and ultimately more product. But some first-cost decisions that a licensee might make early on could make it difficult to achieve the water and light requirements necessary to meet expected future production goals.

An example of an expense with a low initial cost but a higher lifecycle cost would be a dehumidification unit. While great at removing moisture, these units require an immense amount of energy to regenerate the medium to be able to remove that moisture. If a licensee is looking at the wrong solution, they are going to end up spending more resources on energy or worse limit their capabilities to grow at all by consuming all of their available electricity. Within the complete lifecycle of the facility, that can be very penalizing if not altogether lethal.

Being quick to the market gets a market share, but having a higher quality product is what’s going to keep an MSO on top. Understanding the business plan and how it intersects with technology is critical. If a licensee is building to flip their business, then they can afford to do lower first-cost approaches and make quality and yield somebody else’s problem down the road. However, if a licensee is building to last, or they are building to get acquired by an MSO or a pharmaceutical company in the future, then they need to make the right decisions upfront. Cheaply retrofitting facilities at a later date is simply not an option in the competitive cannabis growth space.

Reaching Sustained Growth in the Cannabis Market

How do top licensees and MSOs get to where they want to go faster? How do they accelerate the deliverables?

One way is by understanding where time is spent. More time spent on the front end of a project yields a greater return, however, these decisions must be made quickly. The best thing a licensee can do to reach sustained growth in the cannabis market is to make a decision, go forward, and then address that decision as they go on. KMB recently launched a technology decision support tool that will help clients visualize the implications of their decisions early on in the process ideally minimizing the issues that many (if not most) operators have with power availability.

Understanding the market and how cultivation fits into it is important, as well. MSOs that want to grow high-quality products need to have high-quality environments with very tight controls. If a licensee is trying to grow high-quality flowers, they need a high-quality environment. If what they are producing is targeted at edibles, gummies, or extracts, then they may be able to get away with having a less on-the-quality perspective.

To learn more about how to increase your production values and maximize growth potential or to get a technology evaluation model of your facility, contact KMB today.