Growing a business 600% over two financial quarters is normally highly improbable — but in the most disrupted economy since the Great Depression, that’s exactly where Talaria, a medical marijuana transportation and logistics company, finds itself.
“(The growth has) been a godsend, for our employees and our customers,” says Ari Raptis, Talaria’s founder and CEO.
In terms of cannabis supply chain logistics, Talaria does it all: Its vans run cannabis products from farms and warehouses to dispensaries and test labs. They transfer cash to banks and to deposit directly in the Federal Reserve. “We’re those gears, the invisible infrastructure of the supply chain,” Raptis says.
The Philadelphia-based company, which recently opened facilities in Scranton, Pittsburgh, and Columbus, Ohio, also offers an ATM service and a software suite for home deliveries in states that allow it.
Talaria handles product delivery from cultivators to over 220 dispensaries in 16 Northeast and Mid-Atlantic states, including newly opened Maryland. Talaria moves $80 million a month in cannabis cash and expects its cash processing business to surpass $900 million in deposits by the end of 2020.
The employee count is up to 150, which is astounding considering that Raptis started the company with a single employee to make the company’s first delivery on “4/20” — April 20, 2018.
Nonetheless, that hockey stick trajectory is not without strains. Hiring two to five new employees a week, “We can’t hire them fast enough,” Raptis says. “We’re holding onto the reins of this crazy horse; it’s taken us for a ride.”
Talaria’s fleet of 37 Mercedes Sprinter and Metris vans is putting 70,000 miles a year running two eight- to 10-hour shifts a day. The company had been buying four units a month, it’s jumped to six a month recently.
De-fleeting hasn’t been part of the conversation yet. “We’ll need to retire some of those vehicles soon, but we’re not yet sure how,” he says.
The cannabis industry has been on a bumpy ride during the last five years of legal expansion across 12 states. While some vendors are managing explosive growth, the same operational challenges remain — or have been exacerbated — since Business Fleet’s article on cannabis transportation and logistics published in January 2019.
With federal legality nowhere in sight, cannabis can’t be transported across state lines. Cannabis companies face a patchwork of state-by-state regulations, making it difficult for multi-state operators to achieve economies of scale.
Transporters must manage distinct state ecosystems, with separate mandated compliance software, tracking methodologies, security requirements, transportation regulations, and cash processing models.
As the mainstream banking industry continues to shun cannabis, it’s still a cash business, which increases liability and drives insurance premiums sky high.
In California, the country’s largest market, taxes have increased yet again. As of Jan. 1, 2020, cannabis consumers saw their taxes jump about 30%, keeping marijuana’s black market alive and well.
“We've seen a lot of distributors go out of business,” says Todd Kleperis, founder of Hardcar, a secured logistics and transportation provider for the cannabis industry in California.
Kleperis, who was interviewed for the previous Business Fleet article, faults the overabundance of investors driven from the problematic Canadian market coupled with companies that overspent and tried to grow fast without the customer base to support them.
“There are a lot of people who thought they could just jump into the space and burn through investor money,” he says.
Frustrated with the limitation on liquidity from mainstream banks, Kleperis recently created PayZel, a banking solutions platform that connects cannabis businesses with consenting banks educated on the intricacies of the industry. “The tagline (of PayZel) is ‘Forged out of Frustration,’” he says.
PayZel’s first transaction was $67 million. The second was close to $100 million, the largest in the industry's history.
Despite the challenges, Hardcar has been able to grow its distribution network in California from two products to 16. In terms of out-of-state growth, Kleperis is looking into partnering with companies to license Hardcar’s operational model — an easier task than starting from scratch in states with different rules.
For cannabis transportation companies, insurance is their biggest expense, which is seemingly and frustratingly disconnected from actual loss runs. In the previous Business Fleet article, transporters said the lack of carriers and data on loss claims kept premiums high. With another year and a half of data and stable claims histories, premiums haven’t come down.
Hardcar pays $20,000 to $26,000 per year per vehicle for cargo insurance and liability. In Talaria’s case, insurance takes 30% away from profits.
Tracking the Chain
Each state requires vendors to connect to systems that record the inventory and movement of cannabis through the commercial cannabis supply chain.
In January 2019, the California Bureau of Cannabis Control (BCC) mandated the Metrc track-and-trace system, which is used in 11 other states as well. The system not only tracks shipments by customer, it also tracks specific products within those shipments.
While Metrc has generated complaints, it has forced the industry into a new level of transparency and helped with safety, Kleperis says. In addition to tying into Metrc, Hardcar also runs a separate logistics software that provides another backstop in the chain of custody.
In addition to supply chain tracking, GPS tracking is mandated as well, though rules differ by state. Some states require video surveillance of fleet vehicles, others require video surveillance and archiving 90 days of footage.
Video telematics is a growing trend for cannabis fleets. Each of Talaria’s 37 fleet vehicles has live video surveillance of the driver and cargo area, as well as the road ahead and behind. The company has an in-house video surveillance team that continuously monitors the vehicles.
Licensing varies greatly from state to state too. Some states mandate separate licenses for cultivation, distribution, and sales, while others only require a single license for both cultivation and distribution.
As cannabis regulators are often greener to cannabis operations than the vendors they regulate, they look to industry veterans for guidance in crafting the laws. For four years, Kleperis has been working closely with BCC, which has some of the strictest cannabis transportation guidelines in the country. Kleperis expects new transportation guidelines to be issued this year.
In less than two years, Talaria has also become an important information source for regulators on transportation security measures within the states it operates.
In the Northeast, many consider Pennsylvania the “gold standard” for cannabis regulations, which is why Talaria first started in that market, Raptis says. Talaria transports 80% of the product in Pennsylvania and 95% of the cash.
Since the 2019 article, Hardcar has started expediting larger shipments, which led to fleeting box trucks in addition to large commercial vans. While Kleperis is satisfied his company is properly addressing the security of these larger loads, he worries about the overall industry’s ability to react.
A 55-gallon drum of distillate cannabis oil is worth about $7 million. “When somebody starts to move a box truck or bigger with product in it, you start to get into transporting millions of dollars of cannabis,” he says. “If you can now put three of those drums on a truck, well, that's a lot of money.”
In the 2019 article, Kleperis pointed to a “Susie and her minivan” mentality, referencing a carefree attitude to safety of some smaller operations. “That's gotten a little better because they started to see some thefts of product and cash,” he says. “They started to understand they’re a target.’”
Recently legal Mid-Atlantic and Northeast states haven’t encountered the same mentality, Raptis says, as those states aren’t burdened with California’s 20-year evolution of dispensaries, sales, and regulations. With fewer dispensaries coming online so quickly, those states were able to exert more oversight over operators, he says.
The industry is also seeing a trend toward climate control during transport, which matches the evolution of cannabis products, particularly oils.
Cannabis oil decomposes in warmer temperatures and changes opacity. The clearer the liquid, the greater price it can be sold. For preservation, growers are freezing cannabis directly after harvesting and loading shipments into refrigerated vehicles for processing.
Both Talaria and Hardcar run both temp-regulated and refrigerated vans to transport cannabis. Kleperis has also recently added air purifiers to his fleet vehicles to combat potential bacteria.
California treats cannabis as produce for the purposes of regulating temperature during transport and requires fleets to keep documentation. “Maintaining the cold chain was one of the harder things to accomplish because the state of California is just so big,” says Kleperis.
Creating the CannaCage
Todd La Pant, owner and COO of Nor-Cal Vans, a Chico, Calif.-based van upfitter that specializes in cannabis-compliant conversions, says 90% of the units the company builds have either cargo air conditioning or refrigeration.
La Pant went further to engineer another popular option, a completely insulated cage in the cargo area. “It almost looks like an ice box,” says La Pant.
When interviewed for the January 2019 Business Fleet article, Nor-Cal was upfitting the Ford Transit Connect for secure cannabis transport. The company has since moved into larger van models such as Ford Transit, Ram ProMaster, and Mercedes Sprinter, and now offers a greater selection of lock options for vans used for cash in transit.
Getting clarity on regulations has been an issue for Nor-Cal. Two years ago, La Pant thought he’d engineered a solution that met California’s regulations for a secure container area, or lockbox.
The solution secured a Ford Transit Connect’s entire rear compartment by installing a bulkhead and disabling the side door locks. La Pant sent certified letters to the California Bureau of Cannabis Control as well as the Highway Patrol, spending months on the effort. “We could not get anybody ever to respond,” he says.
When new regulations were introduced, La Pant found out that no part of the vehicle body can constitute the lockbox. It was back to the drawing board.
Ironically, the regulation does not specify the material type, quality, or thickness of the lockbox. “That literally could be a cardboard box that you put a padlock on,” he says, “which does not meet the intent of the law.
Business is booming. What started with less than $250,000 in revenues from secure transport conversions in 2018 is projected to reach $750,000 in 2020. Yet La Pant believes much of Nor-Cal’s business is yet to come.
While the California market is close to saturation, La Pant has received “hundreds of requests from callers outside of California for secure transport conversions.” La Pant has engineered versions of an install kit called the CannaCage, which is California-regulations complaint and shipped across the country for fleets to install in their vans.
So far, the CannaCage seems to be passing regulatory muster. “We've not had anybody who has had a problem with it yet,” he says.
Talaria puts lockboxes in all its vehicles, though some states don’t require it. “We take the California market mindset from a security standpoint in all our states,” Raptis says. “No state is going to turn back security, they're only going to increase it down the line.”
Today, 11 states and the District of Columbia have legalized recreational marijuana and 33 states permit some form of medical use. In the holdout states, Nebraska and South Dakota will vote on allowing forms of cannabis use in November.
As a result of the coronavirus pandemic, legal cannabis businesses were deemed essential in nearly every state, yet federal prohibition prevented those companies from taking advantage of federal relief efforts. This paradox raises the issue in more pressing terms: How and when will cannabis be addressed federally?
There are various forms of federal legislation moving through Congress right now.
The SAFE Act would allow cannabis businesses to work freely with banks. The bill passed the House of Representatives in 2019 and its language was part of the $3 trillion coronavirus relief bill passed in May. However, the bill has stalled in the Senate banking committee, as members look for broader marijuana policy reform that is unlikely to garner bipartisan support.
Later in September (after this issue’s publication) the House will make a historic vote on marijuana for the first time at the federal level. The MORE Act would remove marijuana from the federal list of controlled substances, expunge some marijuana-related criminal records, and impose a federal 5% tax on sales.
With a presidential election looming, however, the Republican-led Senate does not seem to have the appetite to advance any cannabis reforms. It’s highly unlikely the Senate will take up the bill this year.
When legislation finally does pass, the intent would allow cannabis transport across state lines, pave the way for traditional banking, and facilitate credit card processing, which would greatly mitigate the need for cash-in-transit services and thus lower insurance risk.
Yet those benefits aren’t guaranteed, nor would they be granted immediately. Both Raptis and Kleperis say it’ll take time — perhaps years — before banks and merchant services gain the comfort levels to work with cannabis on a large scale.
Canada’s nationwide rollout in 2018 didn’t serve as a shining example for the U.S. to follow. Rushed and poorly written laws have led to supply imbalances, an inferior legal product, and a thriving black market. “They did it overnight and it just spiraled out of control,” Raptis says. “Everyone's walking backwards in Canada to operate.”
Raptis believes the industry is a full 10 to 12 years away to when cannabis is legal recreationally on a federal level and ingrained in business processes like alcohol.
Talaria is gearing its systems and processes for that day, though the more immediate frontier is passage of state legislation for home delivery of medicinal cannabis. Talaria’s software would enable an “Uber Eats model” of connecting drivers with patients and dispensaries.
Raptis believes the federal government will ease restrictions on medical marijuana first, which still might take five to six years. “If I had good medicine in North Carolina that would help someone in Pennsylvania, why hold that medicine back from a patient if it’s legal in both states?” he asks. “It's all about patients.”
“(Medical legalization) is providing a test run for the recreational side,” he says. “And that's what I recommend — keep it in a controlled environment, then open it up to the masses.”