Businesses often require outside capital to finance operating activities and to enable scaling and growth. Financing in the cannabis industry is notoriously challenging with regulatory obstacles at the local, state and federal levels. Recent market dynamics pose additional challenges for both financiers and cannabis operators.
We sat down with Matt Hawkins, Founder and Managing Partner of Entourage Effect Capital (EEC) to learn more about EEC and to get his perspective on recent market trends.
Aaron Green: In a nutshell, what is your investment/lending philosophy?
Matt Hawkins, Founder & Managing Partner at Entourage Effect Capital
Matt Hawkins: Entourage Effect Capital’s long history and experienced leadership allow us to access and construct high potential later-stage growth investments with sought-after industry leaders. We want to get ahead of what is happening on the regulatory and federal level to build scale with our investments.
Green: What types of companies are you primarily financing? What qualities do you look for in a cannabis industry operator or operating group?
Hawkins: Essentially, we are focused on investing in companies that will benefit the most when legalization occurs. We are currently working on multiple such deals, and separately, we are excited by how our newly minted, early-stage focused Arcview Ventures Seed Fund will provide a pipeline to the next generation of leading growth opportunities. When evaluating opportunities, we always look for the potential for scale and a strong management team.
Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business?
Hawkins: As an industry, we all want companies to be valued for what they are worth, and right now, there are a lot of companies where that’s not the case due to the downturn in valuation. For us, it works the other way, because we are now able to invest at lower valuations with the hope of more upside when valuations reset.
Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?
Hawkins: Debt is at its highest in industry. Operators don’t want to take equity capital at this point because valuations have come way down. However, we are lucky to have been in this business for a long time so that we can create our own deals. Our reputation precedes us — as a result, combined with the strength of our portfolio, people want us in their capital stack.
Green: How does the lack of institutional investor participation in the cannabis industry affect your business?
Hawkins: The lack of institutional capital in the industry makes it difficult for a large chunk of companies to grow and scale. For the industry to grow, there needs to be a different type of investor, investors who are not scared to go through the peaks and valleys we go through as an industry, whereas retail investors take their losses and move on. Everybody’s competing for the same small pool of money; managing cash is the most important factor for operators, whether private or public, big or small.
Green: What would you like to see in either state or federal legalization?
Hawkins: The illicit market still has a strong presence, and until we get regulatory reform, it’s going to continue. Reducing the tax burden on legalized markets would bring more revenue to both operators and the government because they’d reduce the market share of the illicit market, with the price offset trickling down to the retail customer.
Passing the SAFE Banking Act would create consequential changes for the cannabis industry. There is also a small chance that the New York Stock Exchange and the Nasdaq could start listing legal plant-touching businesses. If that happens, more institutional capital would enter the market and flush the industry with cash, with market caps going way up. There is a lot of unease and uncertainty with retail investors that prop up the stocks in the space, and it will continue until there is regulatory movement, even on the private side.
Green: What trends are you following closely as we head towards the end of 2022?
Hawkins: I don’t see anything happening unless the SAFE Banking Act passes. Otherwise, things are status quo, especially with public companies. For private companies, we’re going to see a lot more consolidation, especially in California.
Businesses often require outside capital to finance operating activities and to enable scaling and growth. Financing in the cannabis industry is notoriously challenging with regulatory obstacles at the local, state and federal levels. Recent market dynamics pose additional challenges for both financiers and cannabis operators.
We sat down with Travis Goad, Managing Partner of Pelorus Equity Group to learn more about Pelorus and to get his perspective on recent market trends.
Aaron Green: In a nutshell, what is your investment/lending philosophy?
Travis Goad: Our investment and lending philosophy is focused on being honest, upfront and doing what we say we’re going to do for both our borrowers and our investors. At Pelorus, we lend against cannabis-use real estate assets.
Every lender in this space is a hybrid between real estate and corporate lending. However, if you think about it as a political spectrum, with one side being pure real estate lending and the other pure corporate lending, Pelorus is as close as you can be to pure real estate lending in this sector while also being properly collateralized. What sets us apart from our recently launched lending peers is that we lend against the real estate asset value only, even though we’re collateralized by the real estate and license.
We lend between 60% to 75% of the value of the real estate, which means sponsors need to raise equity for the 25% to 40% remainder of the project cost. This allows us to be covenant-lite for our borrowers while giving them the flexibility to grow their business as they see fit.
Travis Goad, Managing Partner at Pelorus Equity Group
The other lending options in the space are much different. While our lending peers may call themselves mortgage REITs, they really are based on a business development company (BDC) lending model. While they may lend borrowers as much as 150% to 180% of the real estate value, they will require significant financial covenants, require control of major decisions and most often want a board seat. We’ve seen this model severely hamstring growth of companies.
The third option available to sponsors is a sale-leaseback. In this structure, lenders will buy your real estate for 100% of the value, but require you to enter into a 15-to-20-year lease that increases 3% each year. There is a temporary benefit to this model from a federal tax perspective, but that will go away when 280E is addressed, either by descheduling cannabis or amending the tax code.
While this structure means you don’t have to raise equity, it gives up the most valuable asset cannabis companies have in the early stages of the industry. Once you sell this asset, it hampers optionality for sponsors – and in a fast-growing industry like cannabis – optionality is the most critical thing a company has. Pelorus’ structure allows maximum optionality, as well as the ability to lower your cost of capital as the industry matures.
From an investor standpoint, they should know that the BDC and sale-leaseback models are a lot riskier than our model. While we’ve seen those models work well in mature industries, we think the cannabis industry is too early-stage and too volatile to go that far out on the risk spectrum. We have the longest history in the space of deploying capital successfully and seeing it returned. Prior to making any loans, we spend a lot of time underwriting the company we’re working with, the real estate and the projections. We look for strong sponsors, great projects and attractive markets.
Before we entered the cannabis lending space, our team at Pelorus had more than 5,000 transactions under our belt, worth $5B, and we leveraged our decades of underwriting experience when starting the Pelorus Fund. As the first dedicated lender in the cannabis space, we have more data and experience than anyone in terms of transactional volume – we’ve looked at more than 2,000 deals and have made 71 deals, worth $468M. We know the intricacies of every market, the particular ordinances, what the costs should be, and utilize the data to help our borrowers succeed. Through our deals and sustained success, we’ve made a name for ourselves as the most trusted and efficient lender in the cannabis space.
Green: What types of companies are you primarily financing?
Goad: We finance construction and stabilized loans for a range of clients including MSOs, SSOs and ancillary companies. We don’t lend on outdoor cultivation, but are open to working with any cannabis-related business that has commercial real estate, strong financials and experience in the cannabis space. Today, our sweet spot is closing loans in the $10M to $30M per transaction range, but we can fund loans $100M+ and as low as $5M. Since 2016, we’ve financed 4.2M feet of cannabis-use properties for a total of $468M in loans – roughly 15% to 20% of the entire US market.
Green: What qualities do you look for in a cannabis industry operator or operating group?
Goad: We are meticulous in our underwriting process and underwrite the company, the real estate and the market. We’re one of the few lenders today that has capital to deploy, which has given us the opportunity to continue to take market share while also increasing the quality of our borrowers. Whether you’re an MSO, smaller state operator or ancillary business, we recognize quality across the sector. Brand affinity and shelf space are critical in this market, and we like working with companies that have a competitive edge in getting their branded product to customers. We try to target companies that offer a unique product, or have a unique position within the state they are located.
To qualify for our lending program, borrowers need to own their real estate. If the sponsors own the real estate or intend to own the real estate, we offer two main lending products: we provide construction loans that range between 60% to 75% of the project that are typically 18-month terms; and more recently implemented, we also lend on fully stabilized assets that are cash flowing and operational up to 75% of the value and up to a 5-year term.
By the time a borrower comes to us, they should already have a license (or be acquiring a license at closing), have their required equity raised to completely fund the project and have all local approvals to begin construction.
Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business?
Goad: As far as how market dynamics have impacted our fund, we’ve been pretty insulated because we are a privately held company. From our inception, we’ve worked hard to create an innovative model, and have had many firsts. We were: the first dedicated lender in the cannabis sector; the first lender to become a private mortgage REIT; the first to be issued an FDIC warehouse line of credit; the first to get an investment grade rating; the first to issue an unsecured bond with institutional investors; the first to update our fund to a billion dollars. Amid all these firsts, we made a conscious decision not to go public. This has been one of the best decisions we’ve made and has shielded us from much of the market volatility we are seeing.
As for the broader market, we’ve seen our sponsors that are publicly traded impacted pretty significantly by the recent market dynamics. We’ve also seen flow-on effects for non-publicly traded firms. Our loan book is performing excellently, but we’re in a very challenging market for marijuana-related businesses to raise equity, making debt even more attractive. For most of our competitors, who chose to go public, they’ve been unable to raise much capital to deploy, whereas our market share is increasing and we continue to grow in this tough environment. We remain bullish on the sector in the medium/long term and are finding excellent opportunities to lend in this challenging environment.
Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?
Goad: Increased access to debt capital markets is a sign of a maturing market. The U.S. cannabis sector has a great tailwind with growth of new markets, but it’s facing some significant headwinds tied to tax inefficiencies and inadequate state-level enforcement. All of these issues can be solved with political action, but so far that hasn’t happened and it’s causing pain in the industry. These industry dynamics are set against a broader macro backdrop of risk-asset repricing and increased volatility, which leads to outsized volatility in cannabis due to limited liquidity. That increased volatility has made it very challenging to raise equity in this market.
For companies that have strong assets on their balance sheet, they’re still able to access capital via the debt markets. This is creating clear winners and losers, as companies that choose to sell their real estate have significantly fewer capital raising options than those that choose to keep real estate assets on their balance sheets. Overall, this increased debt trend has been great for our business – our pipeline has increased rapidly and we’re able to lend to strong operators with solid assets at attractive rates for investors. Our fund continues to have inflows, and since we’re one of the few lenders with capital to deploy, we’re still open for business and deploying capital in this challenging environment.
Green: How does the lack of institutional investor participation in the cannabis industry affect your business?
Goad: The current regulatory environment impacts the type of investor that comes into this space. Rather than being dominated by institutions, this sector has largely been funded by retail investors and family offices. This has created challenges in aggregating large amounts of capital, both on the operator and the debt-fund side of the business. It can lead to delays in loan closings, as it takes borrowers a longer amount of time to raise the required equity to close their transaction. As we’re seeing with our publicly traded peer group, it can also lead to lenders having trouble raising capital to deploy. As for Pelorus, we’ve been very fortunate that our length of time in the industry and track record of successfully making loans and having them repaid has set us apart in fundraising. Our decision to stay private has been a critical factor in our fundraising success as well. Overall, the lack of institutional investor participation is a double-edged sword: the lack of liquidity has caused challenges broadly, but since we’ve had significant capital to deploy, it’s created great opportunities for us to make loans with attractive risk/returns in this challenging market.
Green: What would you like to see in either state or federal legalization?
Goad: Given the stalemate in the Senate and the sharp bipartisan divide, I don’t think federal legalization will happen during this administration. That said, there are incremental actions that the government should take to strengthen the cannabis sector. First of all, the Cole Memo needs to be reinstated to add additional protections for cannabis and cannabis-related businesses. As 280E has clearly been detrimental to the overall health of the cannabis industry, we also believe the tax code should be amended, or better yet, we should address the conflict between state and federal policy. We also need to get SAFE Banking approved in order to open up the cannabis sector to credit cards and potentially open up banking to the sector in a more material way. Unfortunately, there’s a choke point in the Senate to get SAFE Banking approved, since there needs to be 60 votes to be filibuster proof. And while there is some talk of SAFE Banking passing during the lame duck session, we are not holding our breath.
Green: What trends are you following closely as we head towards the end of 2022?
Goad: The biggest trends we’re following are on the legislative front (both federally and at state level), which heavily impact revenue and net cash flow growth for the industry. We’re following emerging state markets, such as Alabama and Mississippi, as well as current medical markets poised to transition to adult use in the near term, such as Missouri. The more addressable the population, the faster the industry can grow.
We’d also like to see current legal states address the often-heavy tax burdens that have led to additional challenges for legal businesses and kept illicit markets thriving. No state got everything right at the beginning, but we’re starting to see states address some of the inequities and harmful policies now. California has made some progress in this area, however there are many issues that still need to be addressed.
Federally, 280E is the other major headwind that needs to be addressed as extremely high tax rates are one of the biggest problems for the industry. We’d really like to see that addressed, as cannabis is the only new industry, I’m aware of in the U.S. that has had such disadvantages out of the gate.
Business often require outside capital to finance operating activities and to enable scaling and growth. Financing in the cannabis industry is notoriously challenging with regulatory obstacles at the local, state and federal levels. Recent market dynamics pose additional challenges for both financiers and cannabis operators.
We sat down with Len Tannenbaum, CEO & Partner of Advanced Flower Capital Gamma (AFC Gamma, NASDAQ: AFCG) to learn more about AFC Gamma and to get his perspective on recent market trends.
Aaron Green: In a nutshell, what is your investment/lending philosophy?
Len Tannenbaum: AFC Gamma is one of the largest providers of institutional loans to cannabis companies nationwide in all aspects of production: cultivation, processing, and distribution. Cannabis companies, no matter the size, traditionally lack the lending opportunities that other enterprises have available, and that’s where AFC Gamma comes in. As an institutional lender, we provide financial solutions to the cannabis industry.
AFC Gamma is a commercial mortgage REIT that provides loans to companies secured by three pillars: cash flows, licenses, and real estate. We provide term loans, draw facilities, and construction loans. Each loan is unique and tailored specifically to meet the needs of our borrowers. This unique partnership approach with our clients allows us to find solutions to help them expand and grow alongside them.
Since starting AFC Gamma, we have completed almost $500 million of transactions. We provide capital to an industry that others do not and, in turn, allow these operators to build cultivation facilities, production facilities, and dispensaries.
Green: What types of companies are you primarily financing?
Len Tannenbaum, CEO & Partner of Advanced Flower Capital Gamma
Tannenbaum: AFC Gamma seeks to work with operators, ideally in limited license states. We make loans to companies secured by three pillars: cash flows, licenses, and real estate. We tend to lend to operators in regulatory-friendly states, such as: Ohio, Pennsylvania, New York, New Jersey, Maryland, Massachusetts, Arizona, New Mexico, Missouri, Illinois, Michigan, and Nevada. Traditionally, we shy away from states like California, Washington and Oregon given our approach to lending. We have 16 borrowers in 17 states, and what we look for are companies that we can grow with over the long term.
Green: What qualities do you look for in a cannabis industry operator or operating group?
Tannenbaum: We tend to work with three different buckets of operators. You have the large publicly traded multi-state operators (MSOs) we have lent to, such as Verano. Then you have the tier right below the top tier MSOs, where you have some public enterprises like Acreage, who is one of our borrowers, and then some private companies such as Nature’s Medicine and Justice Grown. The third tier are smaller operators. They’re single or two-state operators, and we’re typically coming in to help them build out licenses that they want or help them expand within that state. That’s why state-by-state dynamics are so important to us and why we typically only lend to limited license states.
We look at portfolio diversity on a step-by-step basis rather than a borrower-by-borrower basis. We tend to focus on deals in limited license states and also deals that have real estate as collateral. We have found that REIT loans give our clients the most flexibility, and we are able to finance more companies this way.
Green: Capital market dynamics have led to significant public cannabis company revaluations in 2022. How has this affected your business?
Tannenbaum: Although capital market dynamics have made an impact on a significant number of public cannabis companies’ revaluations this year, our overall business hasn’t been affected too much and that’s because the other lending options available right now are not ideal choices for most borrowers. One of the ways a lender can achieve credit enhancements or securities is by raising capital in the public markets. When the markets are more challenging, those companies have a harder time accessing capital when they may need it most. In turn, this could cause slow growth overall, more cash conservation and it removes one of the benefits to lenders. We’d like everyone to have more robust equity from that standpoint, but the flip side is, if equity gets too high in price, those borrowers won’t come to us lenders and they’ll raise capital in the equity markets since the equity is cheap. We’re definitely conducting a lot of business because the equity market is not available to cannabis companies. If that were to change, while our loans would be theoretically safer, they would choose equity instead of debt.
Green: Debt on cannabis companies balance sheets have increased significantly in recent years. What is your perspective on that?
Tannenbaum: When equity markets were free and the valuations were high, cannabis companies raised money in the equity markets rather than take on debt. Now that the equity markets have been somewhat closed and valuations are much lower, we see their debt has increased over the past two years.
Green: How does the lack of institutional investor participation in the cannabis industry affect your business?
Tannenbaum: Right now, we are one of the biggest lenders in cannabis. Looking to the future, though, if the SAFE Banking Act passes, we could see an influx of institutional capital that would increase competition amongst cannabis-specific and mainstream lenders. From the outset, most of the competition will come from hedge funds, not big banks. This competition will drive down interest rates and attract borrowers like MSOs.
Green: What would you like to see in either state or federal legalization?
Tannenbaum: The Senate passing the SAFE Banking Act. Should this happen, lenders, including AFC Gamma, will be able to borrow cheaper, which will, in turn, allow lenders to lend cheaper. It will be a net positive for all operators. It could also be positive for lenders assuming they have the infrastructure and capabilities to scale and decrease the cost of capital once the money starts flowing and more deals are being made.
Green: What trends are you following closely as we head towards the end of 2022?
Tannenbaum: The most important trend we’re following is state by state trends. We’re excited to see new states getting their act together like New York. We’re excited about Georgia. We’re also looking forward to Missouri going rec. On the flip side, we’re also watching Virginia issue more than 400 licenses, diluting down the limited license states into basically an unlimited license state, which personally doesn’t make sense.
The other trend we’re watching across the country is cannabis prices. There is definitely a gray and legacy market that goes across border that should be enforced. That flow of cannabis product is depressing prices, especially in the unlimited license states. I believe there is a chance that trend starts reversing as many grows are now inefficient. The low end of inefficient grows are going to start closing, which may increase prices going into next year.
The cannabis beverage market is expected to reach $2 Billion by 2026 and is growing at a rapid pace. In Canada, the market share of infused beverages grew nearly 850% since 2020, according to a recent Headset report, the trend is expected to follow in the States. Some traditional beverage companies are hesitant to jump in due to the niche branding and supply chain models needed to capture significant market share. Other adult beverage companies such as Vita Coco and Pabst are dipping their toes into the cannabis beverage market to capture early market opportunities.
Sales and marketing agencies like Petalfast, with a core team stemming from the natural foods and beverage industries, have already started cracking the code for cannabis brands by implementing systems straight out of those industry’s playbooks. This includes disrupting the CA market by becoming the first to implement a traditional three-tier distribution model.
We caught up with Jason Vegotsky, CEO of Petalfast to learn more about the cannabis beverage distribution market. Prior to Petalfast, Jason was Chief Revenue Officer at KushCo Holdings (now Greenlane Holdings), a role he took on after selling his butane supply company to KushCo.
Aaron Green: How did you get involved in the cannabis industry?
Jason Vegotsky, CEO of Petalfast
Jason Vegotsky: I began my career in wine and spirits distribution, but I always knew I wanted to work for myself. My first foray into launching a business, raising capital and brand building was through my beef jerky company, Lawless Jerky, which I built and sold after five years. Drawing on my food and beverage experience, I quickly entered and understood the cannabis market. I launched a company called Summit Innovations that sold butane to producers making oil. I eventually sold Summit to KushCo Holdings, Inc. (now known as Greenlane Holdings, Inc.) and became their President and Chief Revenue Officer. Through that experience, I began to notice gaps in the cannabis distribution model. Petalfast was built to fill that gap, providing clients with exceptional go-to-market strategies, leading to increased revenue and customer loyalty.
Green: How does experience in natural foods and traditional beverages translate to the cannabis industry?
Vegotsky: The route-to-market strategy is similar to that of cannabis, and the industry can benefit from the knowledge and experiences of those who work in natural foods and beverages. The extensive regulatory history and long-standing distribution models of these industries can provide a framework that those in the cannabis industry can capitalize on.
Green: What is the current distribution model for the majority of cannabis beverage companies today?
Vegotsky: Cannabis beverage companies face significant regulatory hurdles regarding distribution. Transportation restrictions, state-by-state differences in THC serving sizes and packaging requirements, retail display and storage limitations, and consumer adoption are just a few examples of what cannabis beverage brands run into when looking to enter, compete or scale in a given market.
At Petalfast, we offer a tiered distribution model, and our clients get phenomenal distribution through our logistics partner, Nabis. Products are circulated to all of California’s dispensaries and delivery services, allowing brands to focus on what matters most: creating the highest quality cannabis products on the market.
Green: What is a three-tier distribution model? Why do you think the cannabis beverage market is ripe for this model?
Vegotsky: The three-tier distribution model is commonly deployed by alcohol and other traditional food and beverage companies as it provides each tier to scale their operations and focus on their specific services. The three tiers include the brand, the wholesaler (sales + distribution), and the retailer in this distribution model. Because cash flow is such a significant challenge in the cannabis industry, adding an extra tier by separating your distribution and sales is advantageous to brands as it decreases overhead and allows brands to have the ability to scale.
Green: What are the opportunities for smaller brands looking to carve out a niche?
Vegotsky: One of the benefits of working in an emerging market is the opportunity to get in on the ground floor, learn as much as possible about the industry and find where gaps exist. Brand building in this space requires a deep understanding of the consumer and the overall culture — something that most brands are still trying to crack. If a smaller brand can effectively target a base within a distinct product category, it can be very effective in scaling within its niche.
Green: With big players from adult beverages dipping their toes in the cannabis beverage space, is consolidation inevitable?
Vegotsky: At a certain level, yes. Well-established companies will seek out acquisitions of smaller, successful companies, especially ones that are capital constrained, but buyers need to be aware that capital alone will not be enough. The culture of cannabis is very different from alcohol or other adjacent beverage categories, so the success of these big players in adult beverages will be linked to their ability to locate and understand the consumer and implement branding strategies accordingly. Adult beverage companies entering the cannabis market must also realize that the flow of product to retailers is not the same as in alcohol, so they will need to adjust accordingly. The cannabis-infused beverage market is expected to reach $2 billion by 2026, so alcohol companies looking to join this movement should start exploring their options now.
Green: What trends are you following in cannabis beverages? What does the future of cannabis beverages look like?
Vegotsky: Canna-tourism has grown to a $17 billion industry. With the rise in cannabis-infused beverages, we’re seeing an increase in creative consumption offerings, from tastings and food and beverage pairings to dispensary tours and bud-and-breakfasts.
Cannabis beverages are attractive to newcomers as they allow for easier control of the effects. Businesses that provide an experience similar to that of a wine or brewery tour can capitalize on new consumers looking to explore the benefits of cannabis in a controlled environment.
The modern consumer is also more health conscious, and with the increased availability of legal cannabis, many are replacing alcoholic beverages with the plant. There has been a reported decrease in alcohol consumption since the 1980s, and many now believe cannabis is safer than alcohol. This belief is especially prevalent among younger generations, leading to more users incorporating cannabis-infused beverages into their daily lives. How we socialize or unwind at the end of the day will start to look different, and brands will become market leaders by speaking to the varied needs of consumers.
Green: How does the industry get there?
Vegotsky: For one, federal decriminalization and removing cannabis as a Schedule I drug on the controlled substances list would help. Cannabis companies don’t have access to the traditional marketing playbook to promote their brands due to TV advertising and social media restrictions. To build brand awareness, businesses should focus efforts on the retail level. Engaging with consumers in-store allows brands to grab their attention and drive faster sales until other avenues open up. At Petalfast, we decided to invest in field and trade marketing to bring brands to life at the retail level. We do this better than anybody else, and we do it at scale.
California is the fastest-growing cannabis beverage market, according to a recent Headset report. The count of beverage product offerings in California has grown quickly, nearly doubling from 2020 to 2021. As of December 2021, there were approximately 530 distinct cannabis beverage offerings.
Mocktails have been a growing product category within the cannabis beverage segment. Klaus, headed up by Warren Bobrow, the “Cocktail Whisperer,” recently entered the California market with their ready-to-drink THC cocktail, Mezzrole, a unique terpene-forward beverage with three simple culinary-grade ingredients.
We caught up with Warren to learn more about his path to the cannabis industry and his inspiration for Mezzrole. Warren is a multi-published author of six books including “Cannabis Cocktails, Mocktails, and Tonics” and has contributed to publications such as Forbes and Skunk Magazine. After the loss of his fresh pasta business in Hurricane Hugo, he worked in banking for 20 years before reinventing himself and following his passions—becoming a bar back to bartender and master mixologist and penning his six cocktail-focused books. Warren crafted Klaus with knowledge gained from years of experience in the mixology and culinary worlds and with his strong enthusiasm for cannabis.
Aaron Green: How did you get involved in the cannabis industry?
Warren Bobrow: It was a happenstance, and it was something that I never considered before. I was working in the traditional liquor industry, and because liquor is inherently a poisonous substance, I was slowly poisoning myself and my mind with the alcohol. I made a conscious decision back in July of 2018 – I was down to Tales of the Cocktail in New Orleans – and I said, “this is my last drink.” I was halfway through a Hemingway, which is absolutely my favorite cocktail to have and that’s what I was known for. That’s the drink that paved the way to a wonderful career on-premises and off-premises doing brand ambassadorship and being a named person within the liquor industry. As with all great careers, this one had to come to an end, or I was going to die because liquor was poisoning me. I was probably about 75 pounds heavier than I am right now. I just didn’t feel myself and I was going to be sick.
So, I decided to take my knowledge of cannabis, which was something that I’ve enjoyed since I was 12 years old – I am 61 now – and put it to use for me in this book, Cannabis Cocktails, Mocktails and Tonics. My first book, Apothecary Cocktails, really did pave the way. I wanted to include cannabis in my early books, but my publisher wouldn’t let me. It just wasn’t time until 2015 when I wrote Cannabis Cocktails, which is all based on the early apothecary. The inspiration for writing the book certainly was from being down in New Orleans and going to the Pharmacy Museum. They had an exhibition of cannabis in the early apothecary, and I knew immediately what I was going to do with the rest of my life. There you have it!
Green: It seems like it was a sharp cut off with the alcohol industry
Bobrow: Yes, like one day to the next, literally. It was absolute. I made the decision; I came back to New Jersey, and I never drank again. I drink a little beer and wine, but I haven’t had a distilled drink in years.
Green: How did the concept for Klaus come about? Was it something that you always had in the back of your mind?
Bobrow: The idea for creating a cannabis infused beverage came from being incarcerated in New York City for smoking cannabis in the street and being taken out of commission for 48 hours, I knew that if I was drinking a cannabis infused beverage like Klaus, which is the one that I created in California, no one would know my business. Of course, when this happened, it was in the early 2000s, so the technology and the pretense just weren’t available yet. But it did put something in my mind. If I was to create a cannabis-infused beverage using my knowledge and experience as a master mixologist, the fear of consuming cannabis would be diminished.
If you look at the book, Cannabis Cocktails, and you see the recipes, they’re not for the meek. They’re really meant for a medical community – someone who needs to really eliminate pain, if you will. Cocktails in the book started at about 250 milligrams of THC, whereas with Klaus they’re 10 milligrams, Two different stories completely!
Warren Bobrow, CEO & Co-Founder of Klaus
My inspiration for creating Klaus certainly was from the gnome [Warren displays Klaus, The Gnome]. He’s a star and he’s been all over the world with me. I don’t know why I first started traveling with him. Maybe it’s because he was sitting up there up on my mantle and he told me that he wanted to go out on the road with me. I was traveling all over the world as a rum judge for the Ministry of Rum and for Rum XP. We just show up at food events. I’m a trained chef, I love going to the Fancy Food Show in New York City, and I’d meet people and they invite me out to see their places. Then I started writing for Forbes and I don’t know, my career has been up and down. I’ve tried to follow my dreams ever since I left the corporate world in May of 2009.
Green: Let’s talk about the product.
Bobrow: I just have one SKU right now, which is the Mezzrole named for Mezz Mezzrow, Louis Armstrong’s weed dealer. You can’t make this stuff up. It’s all real.
Green: First, how did you land on the flavor profile?
Bobrow: For someone who’s a rum head like myself, we used to drink rum for breakfast. That’s how you become a rum head. The Mezzrole is based on a Ti’ Punch, which is the national drink of Martinique. Ti’ Punch is usually made in Martinique with rum Agricole, which is a sugar cane-based rum rather than a molasses-based rum. It’s the freshly pressed sugar cane rum before it ferments so it has a lovely floral quality and it’s 100 proof. There’s nothing weak about it!
A Ti’ Punch is freshly squeezed lime quarters, the 100 proof Agricole – one or two ounces – and cane sugar syrup stirred usually with your finger like my old friend Gaz Regan, who’s no longer with us, used to do it. He was known for his finger stirred negronis. I would do it preferably in a clean glass and there’s no ice involved because if you’re on a sailboat, you probably don’t have ice anyway. So, it’s potent. It’s a very potent drink. That’s the basis of the Mezzrole.
The Mezzrole contains a single strain of cannabis. We used a craft, land-raised strain called Hippie Crasher. It’s an indica leaning hybrid that is terpene forward. The Mezzrole utilizes the terpene aromatics of the cannabis strain. So, we have this gorgeous French lime puree that I get made from limes that are sourced down in Martinique. They have a certain oily quality to them and they’re very pungent. They’re very citrus forward and very flavorful.
Then, I’m using a ginger syrup that’s made in what I would say is a Great Britain or Jamaican style called Picketts. It’s from Denver, Colorado. My old friend Matt Pickett, and his late brother Jim created it. Jim was the bartender for Malcolm Forbes on his yacht, the Highlander, when they had it in the waters between me and Palm Beach, or wherever they happened to be on the island. Jim crafted this incredible ginger syrup, which is really authentic. And in later years, it became the Pickett’s ginger syrup that I would use in this beverage because I’m paying homage to Matt’s brother by using his extra hot and spicy ginger syrup in here along with the French lime purée.
The final element – there are only three flavor elements [besides the cannabis] – is rice vinegar. Rice vinegar in this case is something called mirin. There are two different types of mirin. There’s the sweet mirin and then there’s the dry mirin, and Mezzrole utilizes the dry mirin. I didn’t want to add any sugar. Mezzrole is six tenths of a gram of sugar for the entire can, which is eight ounces, 16 calories.
So, to recap, each can of Mezzrole is eight fluid ounces, six tenths of a gram of sugar, ginger, lime and rice vinegar with THC infusion. And it’s not a seltzer!
Green: What was special to you about the Ti’ Punch?
Bobrow: My family had a yacht, and we would go places in the Caribbean. One of the places we would go in the Caribbean was Down Island and they would have drinks like the Ti’ Punch. I remember that it was emblazoned in my brain. It was a drink that got me drunk. It was what sailors did; they got drunk. And you would get drunk on drinks that go back to the days of the pirates, because they probably didn’t have ice on the sailing vessels. So, why should a couple million-dollar yacht make any difference? We had icemakers, but you drink the drink without ice. You drink it like it was drunk in the age of sailing.
I wanted to reinterpret the Ti’ Punch and bring credence and life to that drink by bringing it to life in the Mezzrole. But the Mezzrole has another story behind it entirely. That’s because Mezz Mezzrow, who was a jazz head during the jazz era, brought between two and 4,000 pounds of cannabis up from Mexico, and sold it in Detroit, Chicago and Harlem during the early days of jazz. He made quite a name for himself. At the time, cannabis was not illegal on a national level yet. If you were to ask for a joint or reefer, you might become detained by the police, especially if you were Black. Not only were the police at that time incredibly anti-jazz and anti-Black and anti-cannabis, but they were just anti people having fun! So there had to be code names and a well-rolled cannabis cigarette was known as a “Mezzrole” and that’s what I named the cocktail after.
I’m paying homage to Louis, and I’m friendly with Louis’ daughter, Sharon. She’s the daughter that no one ever knew about. It’s a very interesting story. We’re hopefully going to do something together. I find great inspiration in jazz, and we wanted to pay homage to the role of characters in jazz by creating a beverage that hopefully wouldn’t get us arrested.
Green: Can you walk me through your choice of strain for the beverage?
Bobrow: I work with a company named Vertosa. They are the magicians in the world of nanotechnology emulsions. They’re scientists like yourself, who are upper intellects who dream in color. And the colors that they’ve chosen are the colors of the plant. So, they’ve enlivened the plant chemically through their process. I’m not privy to that process, but I’ll tell you it works. Their emulsion is gorgeous stuff. I just chose the emulsion for my next two SKUs and it’s exactly what I was looking for. It’s slightly bitter, it has depth and character, and we haven’t even added the terpenes in yet. So, it’s well balanced, and it will work exceptionally well with the craft ingredients that I’m working with. I don’t use industrialized ingredients, these are all bartending ingredients, if you will. We do 5,000 can production runs with bartending ingredients. It’s incredible food science. I love it.
Green: What was behind your decision in adding the terpene flavors?
Bobrow: What makes that interesting is no one else is doing it. So, we’re the first again! Not only did I write the first book on cannabis, and cocktails, and tonics, and all that stuff, but I created the first beverage that actually smells like cannabis. So, when you’re drinking one of my beverages, and you drink down maybe a quarter inch, and you put your nose right over the top and smell it, it smells just like the plant along with that ginger and the lime and that tangy quality of the mirin. And it’s spicy. It has an herbaceous quality to it. It’s really uncanny.
Green: Were there any challenges in working with terpenes in a beverage?
Bobrow: Yes, there’s always challenges. First off, I’m here in New Jersey, and the company that I’m working with is in California, so they can’t send me anything. So, I work very closely with a food scientist named Chris Anderson who did my scalability, and he’s absolutely brilliant. His palate mimics my own. I don’t want a sweet beverage. I want a tangy beverage. I want something that has balanced quality and fun and it makes you want to dance. I’m not looking for something to put me to sleep. That’s not my goal in life. Life is very short, and you want to have a beverage that is talkative and doesn’t get you totally destroyed. There are beverages out on the market that have 500 milligrams of THC called syrups. They’re absolutely delicious, but they’re so destructive because they want you to put them in a sugary beverage and drink the whole thing down.
I’m not a kid anymore and I don’t drink like a kid. I drink with sophisticated flavors and make beverages that are memorable. People come to me – and have since the early part of 2009 – and they say things like, “That’s the best cocktail I’ve ever had in my life. How do you do that?” My aim in life is to ruin people for their bartender because I expose all the things that our bartenders are doing to rip them off.
I started as a bar back and I worked my way up. I went to this guy named Chris James, who was working at The Ryland Inn running their beverage program. I needed a job, and he hired me as this bar back for a year and they kicked my butt. After that I could write about this stuff with knowledge and not just with something I read in a book. There’s a lot to be said for education and going to bartending school. There’s also a lot to be said for cutting your own ice and squeezing your own juice and taking out the trash.
Green: What are some of the challenges you are facing at Klaus?
Bobrow: We’re hoping to do a Series A round of financing. I wonder who would be interested in lending to us or giving us money or investing in us. I always wonder why anyone would be interested in any of this! But I have a talent and a passion, and I know that it will take me to the next step in life. I’ve waited and been very patient. I have massive shoes to fill, and I’m so committed to being ambitious.
I was an executive assistant in a Trust Bank for 20 years. I put my life on hold for others because they wanted to make an example out of me. I never became the person that my parents wanted me to become. They wanted me to become a lawyer and I didn’t have the aptitude for that. I had the aptitude for being a creative soul and a creative mind. It just took me 20 years longer to be able to achieve that.
I consider myself the luckiest man in the world because I did work for the C-suite and for the top of the house and I sold wine to them when I worked on the nights and weekends in a wine store. My customers were the presidents and “kingmakers of the world.” Here in Northern New Jersey, if nothing else, it’s pretty affluent. So, I’ve long been accustomed to coming from that environment. I know what that environment means and the importance of that environment. I had to figure out how to make it myself because I was, in polite parley, “disowned.” So, I am self-made, and I have a great product that I’ve created out of nowhere. It’s hopefully going to allow me to figure out what the next step will be in my life. I want to make this a national name.
Green: What trends are you following in the cannabis beverage space?
Bobrow: I’ve had some good ones. I’ve had some okay ones. And I’ve had some that are just, I don’t know. I’m a cook. I’m a saucier. I love flavors. I’m trained in France. I cook. It’s a lifelong thing. I started as a dishwasher, and I worked my way up. I’ve traveled the world eating.
I’ll tell you, if you don’t know flavors, you can’t put anything together. And if you don’t know what goes into making a beverage that’s different than what anyone else is doing in the world, then you don’t deserve to be in this business because it’s highly competitive and people play for keeps. If I only get one chance to capture people’s imagination, it comes with this beverage right here [Warren holds up a can of Mezzrole].
Green: What’s next for Klaus?
Bobrow: I hope to be doing Klaus Nein. It’s a terpene forward, non-cannabis infused craft beverage. It doesn’t have any THC, so I can sell it everywhere. I caught the travel bug years ago, when I was traveling all over the world for the rum business. And I got it back again. I hate that the world became such a small place during COVID. Because it really is a big place. And it’s a place that I need to explore more of. Stay tuned!
Green: What are you most interested in learning about?
Bobrow: You know, it’s funny. I think everyone that I come across I can learn something from. My teachers at Emerson and later at MIT, where I spent a fitful year, taught me that I wasn’t the smartest person in the room, but I certainly was the most inquisitive. So, I want to be known as someone who has pretty good listening skills. I also have great skills in the way of trying to draw out answers from people. So, I have a lot to learn and I’m excited about the opportunity of learning. If I can share a little bit of my knowledge with other people within the industry and they respect me for what I’ve achieved, then I’ll be a much happier person. I’m already happy. I’m very lucky. I am the luckiest guy in the room.
Green: Thank you Warren. That concludes the interview!
The cannabis industry operates in a legal gray area between federal restrictions and state legalization in a constantly changing regulatory environment. Maintaining payroll and HR compliance is a burden cannabis companies face that grows exponentially with geographic expansion of the workforce.
Würk allows cannabis companies to manage payroll, human resources, timekeeping, scheduling and tax compliance, minimizing compliance risks in the ever-changing cannabis regulatory environment. The company uses its expertise and trusted partnerships to provide guidance on 280E tax law, accounting and banking. Its platform is designed to scale nationally with the growth of the industry while incorporating the local laws and regulations unique to individual states. Their clients include Cresco Labs, Canndescent and NUG.
We caught up with Scott Kenyon to ask about Würk’s approach to human capital management, challenges facing cannabis businesses and industry trends. Scott sat on the Board of Würk before becoming its CEO and chairman. Prior to Würk, Scott held leadership roles at Dell and Phunware.
Aaron Green: How did you get involved in the cannabis industry?
Scott Kenyon, CEO and Chairman of Würk
Scott Kenyon: My wife and I were early investors in a few companies in Colorado and Nevada. From early on (this was back in 2015) we learned the hard way of cannabis and how difficult it is to run these businesses, especially in those early days. We’ve progressed a ton over the years, but it’s still very difficult to run cannabis businesses.
I joined Würk about five years ago as a board member. I came on as CEO at the beginning of 2021 after our founder and previous CEO Keegan Peterson, who was an early trailblazer in the industry, passed away. So, I’ve been CEO at Würk for about 18 months.
Green: Tell me about Würk and the main problems you’re trying to solve.
Kenyon: Early on we were focused on establishing getting out of the cash business for these cannabis companies. Allowing them to pay payroll, taxes and be tax compliant electronically was a huge early advantage for us as a company. Now, fast forward seven years later and a lot of different banks (credit unions) are in the industry and that is allowing people to move money. So, that’s not as big of an advantage for us anymore, but early on that was huge.
Our advantage now is the scars on our back, for lack of a better phrase, from what we’ve gone through over the last seven years. We anticipate. We prevent. And most importantly we’ve seen all those problems for our customers. Last year, a big thing of mine was being “Smokey the Bear.” We want everybody to be Smokey the Bear: prevent fires and prevent issues for our customers. When I came in, we were the world’s best firefighters. I didn’t want that title. I wanted to prevent issues for our customers. That takes you from being a vendor to a partner.
If you look at it, on our platform we have 80% of the enterprise cannabis market, about 60% of the mid-market and then low single digits in the small business space. We have that market share because we provide invaluable experience and guidance to our customers. The biggest MSOs have different challenges from a “Joseph and Scott” dispensary, or a “Mary and Jane” grow facility. We’re able to adapt to all those different segments.
At the core of our product, we offer payroll services and what we call HCM – human capital management. That’s everything from scheduling, applicant tracking systems processing and paying your payroll taxes. So, we have the full gamut of product offerings that any type of HCM or HRIS software system does, whether you’re outside of cannabis or inside of cannabis, we’re offering the same thing.
Green: How does Würk differ from say a Professional Employer Organization (PEO)?
Kenyon: We aren’t a PEO. We don’t manage employees. At a high-level, a PEO is basically managing HR for these companies. Our platform enables HR professionals to go out there and do that. PEOs are more popular down in the small business space, because people are not at the scale to hire an HR team. We’re similar in that we’re processing payroll and have all the software that these companies need, but we’re different in that we’re not running their HR for them.
Green: How do you work benefits into the mix?
Kenyon: We leave it to the client, and we integrate their benefits provider into our platform so it’s an easy one-stop shop. We have single sign-on for a lot of our integrations. For the HR organizations, we want them to log into our platform and everything they need will be there.
Green: How is SAFE banking going to affect the HR industry in cannabis?
Kenyon: It’s going to be great for the industry, obviously. For HR specifically, it’s going to bring in more providers of payroll and more competitors for us for sure. But also it’s going to bring in more providers of services that can come in and offer that right now because of the federal illegalization.
Green: How does 280E affect your business and your customers?
Kenyon: We don’t guide people around 280E because that’s a tax specific matter. We refer them to their tax experts. We process payroll tax, which is different than what 280E affects. I think 280E was a big challenge, it’s still a big challenge, but that’s mostly because people didn’t really understand it. I think 280E was a problem five to seven years ago. In the last two years most companies are very familiar with it. That doesn’t mean 280E is the right thing. I think 280E is an awful thing. And while I think I hope SAFE banking is the first thing to fall legislatively, I think 280E has a good chance of getting across first.
On any given day my opinion on which will go first changes. I just want something to get across the line.
Green: What are some unemployment and payroll challenges your customers face?
Kenyon: We really watch unemployment changes and changes in job descriptions or job codes. For example, if an unemployment rate changed, and that unemployed person moved to a different place, which happened a lot during COVID, that company needed to report that and they needed to collect the appropriate charges or taxes there.
Green: What geographies are you in right now?
Kenyon: As of January 1, we had people on our platform in 46 states and just under 600 different jurisdictions. So, even though cannabis isn’t legal in all those states, big companies have employees across the United States.
Green: How do you help your users manage compliance across multiple jurisdictions? That must be a complex undertaking.
Kenyon: Our platform automatically plugs into the states that have electronic notifications around laws, which most states do. In our tax department, we have certain group members that are experts, let’s say, in the west coast. So, we assign people to certain regions to ensure that they have the best knowledge.
From our support piece, where a lot of our customers come in, somebody might say, “Hey, I have a unique question for Utah” and we’ll say we have a person that is specialized in Utah, but we don’t force them there, we just give them the option. But in our tax queue, we actually direct the customer like, “Hey, here’s a Massachusetts Question, so that goes to a particular person because they are our Massachusetts expert.”
Green: How do you deal with timekeeping issues like overtime?
Kenyon: Well, our system does that automatically. Let’s say they’re working overtime in a state that’s difficult to keep time for like California. In the state of California, if they’re working overtime on a Saturday or Sunday or a holiday, that’s a whole different calculation than working longer on a Thursday night. So, our platform is made to automatically calculate that for our customers. There’s no manual adjustments or coaching happening there. We just follow the state law based on where the employees are.
Green: Are you seeing any unionization of employees within the cannabis industry?
Kenyon: There’s unionization in many of our states, I don’t know the exact number, but California being the biggest, there’s a lot of union representation. Illinois is probably the second biggest union state on our platform. I’m assuming New York will be once it becomes adult use.
Green: How does Würk approach cybersecurity?
“Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen.”Kenyon: Well, we approach it very seriously and I recommend everybody take cybersecurity seriously. We test our internal systems regularly. We test our employees through phishing scams. And we’re always just trying to educate our team on the risk that we have.
I can’t share specifically the prevention steps that we’re taking, but I can tell you we partner with some of the biggest experts and make sure that we’re following everything that they’re recommending. More importantly, we’re testing for human failures, because where most failures happen is with people.
Green: What trends are you following in the industry right now?
Kenyon: Any type of activity in Congress is going to be huge for this industry. So that’s something I always keep abreast of. The next thing that comes down the line which is tied to that is interstate commerce: How is interstate commerce going to really come into play? And how does that change this industry?
Within the industry, the big question is how do we combat the illicit market? Over the last five years, I’ve heard all kinds of different ideas. But in the end, I think we have to out-innovate the illicit market, and that’s what I’m most excited about.
There are new product categories, beverage being one that is starting to gain traction. How are these new products and new variations of the cannabis plant able to treat and help people in ways that we’ve never thought of? That’s part of out-innovation. I was reading an article today about new terpenes that were discovered and how 100 products could come from each one of those new terpenes. I think we’re just still at the tip of the iceberg of product innovation.
How do we fight the illicit market? I think that is just through coming up with new products that treat different illnesses and ailments, that allow customers to get away from pharmaceuticals. Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen. They’re not going to do it when there’s a huge price difference, but they will do it when there’s a huge product difference. And right now, our products are very similar to what you can find on the illicit market. You can find vapes, you can find gummies, you can find all that in the illicit market. We’ve got to out-innovate the illicit market.
Green: What in your personal life are you most interested in learning about?
Kenyon: I am the father of two teenagers right now and I really like to learn how to be a better parent to them because it’s really frickin’ tough!
Hangovers are one of the aftereffects often experienced with spirits. Who doesn’t love a good martini or a refreshing margarita? One company is on a mission bring the flavor profile and buzz of spirited drinks without the negative consequences.
Like this article and want to see more? Subscribe to our free newsletter hereMXXN is a California-based cannabis infused beverage manufacturer specializing in 1:1 non-alcoholic replacements for everyone’s favorite spirits, enhanced with a touch of cannabis. By combining new technology in cannabis oil nano emulsions and alt-alcohol, MXXN is able to create flavor matching spirits sold by the 750 mL bottle. MXXN recently launched with three product SKUs including London Dry (gin), Jalisco Agave (tequila) and Kentucky Oak (bourbon) with a rum replacement due to launch soon.
We caught up with Darnell Smith, founder & CEO of MXXN, to ask about the technology going into infused non-alcoholic spirits, regulatory challenges and more. Prior to MXXN, Darnell was a spirits industry veteran, having worked with companies including Diageo, Pernod-Ricard and Bacardi.
Aaron Green: Darnell, nice to meet you. How did you get involved in the cannabis industry?
Darnell Smith: For me, it wasn’t something that was premeditated, in a sense. I had always been a cannabis user in my adult life. I played Division I sports. Cannabis replaced a lot of painkillers and medications that I probably would have had to take just to cope with athletic injuries. That’s how I got introduced to cannabis. And there is the recreational use of it as well.
Darnell Smith, Founder & CEO of MXXN
To get to the origin story of MXXN, I spent a large part of my career working in spirits, namely, on the innovation and commercialization side of bringing new products to market under very well-known trademarks for large multinational companies. A few years into it, my liver was kind of at a point where it was like, “It’s gonna be you or me here, buddy.” So, I made the decision to start making – this is 15 years ago, in New York – a tincture where I would just heat up flower and decarb it and soak it in a high proof spirit. I would cover it for 30 days then strain it and have my tincture.
I’d be the guy in the bar, that would say “Hey, can I get a tonic and lime?” and I would put three drops of my tincture in there, and I would session cocktails along with everyone else. Next day at work, I’m the guy that’s bright-eyed and bushy-tailed and everyone else is kind of feeling a little bit weathered by that alcohol.
Innovation is usually born out of a personal need and that’s the same way here. So, fast forward 15 years and the technology has finally caught up. The rise of non-alcoholic spirits, the rise of cannabis and water-soluble emulsification, those two things combined really made the light bulb go off and say now is the time to offer this product. I feel like MXXN has a very specific place in our consumption of beverages and can fill a unique need that I think is rising.
Green: I’m interested in learning about the technology and the product. We can start with the technology that went into the product development process. I’ll go on to product next.
Smith: From a technical standpoint, up until a few years ago, the way that edibles were made was basically like raw extraction. There was very little ability to be precise about dosage. It was like trying to throw softballs through a chain-link fence. Non-uniformity made it very hard to say, “Here’s how this is going to affect you.” Fast forward and companies like Vertosa and Source have perfected this kind of nano-emulsion technology, which is basically water-suspended cannabis that can uniformly be used in food, beverage and cosmetic applications. And it’s akin to trying to throw sand through a chain-link fence. It’s just much smaller. It can remain more uniform, and thereby be more predictable in terms of dosage and effect.
The MXXN London Dry
So, that technology made it possible for us to then combine it with another wave that’s happening, which in the spirits industry is called alt-alcohol. What we do is distill all the flavor essences of well-known spirits and skip the alcohol. We then add the emulsified cannabis in place of the alcohol. And so with that, we offer a new kind of experience which is basically all the buzz but none of the booze. That’s really where technology-wise things have evolved. The rise of the non-alcoholic spirits and then the rise of being able to do water-soluble compatible cannabinoid emulsions.
Green: Are you selling this then as packaged goods or are you selling it as bladders similar to Coca-Cola in a bar setting?
Smith: This is a CPG packaged product and it really is analogous to a 750 ML spirits bottle similar to Tito’s or Grey Goose. The form factor is the same as spirits bottles, same 750 ML bottle. It doses just like a spirit would. Standard spirit pour is an ounce and a half. For us, an ounce and a half shot has six milligrams of THC.
For the average consumer, you can session cocktails and we give you the option to dose between two and six milligrams between a half ounce and an ounce and a half pour. So, it’s very analogous to what people are experienced in when it comes to spirits from the bottle to the dosage and to the actual recipes. We pride ourselves on being able to demystify something that has been a little bit complex in terms of making cannabis-infused cocktails. We are sticking close to what people are familiar with. People have a lot of experience with tequila or gin or bourbon and so we wanted to stay very familiar but also give people a chance to make the same recipes but sans alcohol.
Green: What kind of flavor profiles are you launching with?
Smith: We’re launching with three SKUs. Our first is London Dry, which is our take on a gin and that one has cucumber, juniper, coriander, and a nice peppery finish. We have Jalisco Agave, which is our take on a tequila or Mezcal. You have notes of agave, flint, salt, oak, and vanilla. And then the last one is Kentucky Oak, which is our version of a bourbon or whiskey. There you have charred oak, vanilla, and other flavor components that make up what bourbon is.
The MXXN Kentucky Oak
Now we have a rum in development that’s nearing the end of a robust R&D pipeline. We have some other options like ready-to-drink cocktails made with MXXN to more high-dose products for what we consider the “legacy consumer” who is maybe more medically inclined in the hopes of being able to give people more options when it comes to consumption of flavored spirits.
Green: On the cannabis side, with the infusions that you’re doing, is it pure THC or are you doing full spectrum?
Smith: Yes, full-spectrum cannabinoid. You’ll notice some beverage brands have what we consider a hybrid, some THC and some CBD. For us, and for the effects that we wanted to have the product to have we stuck with a THC-forward blend. There is a trace of CBD in there, but we don’t even claim it. It’s not something that we go forward with. Our emulsion is THC-based.
Green: Where are you at today in terms of the launch and presence?
Smith: We just finished a pilot test here in California. We started late-January, early-February and we’ve been selling direct-to-consumer. Just order and you can have it at your door in 24 hours for about 85% of the state. We’ve blown through our entire pilot run. Now we are entering into what we consider our launch phase which will be available in select retailers late-July. We are gearing up for our next big production run here in mid-July. We are basically all systems go.
At the same time, we’re exploring multi-state expansion. We have a lot of interest in states like Colorado, Nevada, Arizona and we’re having constant conversations with partners in those states to help bring the product to market.
Green: Have you looked at lounges?
Smith: Lounges have been our biggest traction as we start the retail rollout. We literally just started the dispensary piece of what we’re doing last month. And this is by design. First, we wanted to go direct-to-consumers for proof of concept to make sure we weren’t, you know, saying the story to ourselves. I think just by the performance of the pilot run and direct-to-consumer sales, we proved okay, this is a viable concept.
MXXN’s Jalisco Agave
So as we go out, our number one targets are obviously establishments that also are connected to or have connections with a consumption lounge. There aren’t a ton at this point. They’re still kind of proliferating. But I will tell you the moment we walk into one of these accounts is like a no-brainer because it allows this account to offer a whole new experience. When it comes to consumption lounges in terms of great cocktails you already know: gin and tonics, margaritas, paloma, with no real education required on the part of who’s ever going to be serving. We basically take 20 retailers a month in chunks and so far of the 15-20 that we’ve done, four or five of them have consumption lounges and you’ll see it in those very soon.
Green: Are there any challenges there with dosing in a lounge where the onus is on the operator to dose? How do the regulations work there?
Smith: It’s similar to alcohol, right? As an establishment, you have a responsibility to kind of pay attention to what’s happening as the consumer is consuming. Typically, most of the legislation that was written is for an inhaled consumption lounge. Ingestibles weren’t necessarily considered heavily when it came to legislation. What we tell folks is you have the same responsibilities you would if you were a bartender. Our recommended pour in consumption lounges is a lighter dose. This way, the customer has a chance to start low and go slow, and really recognize how it’s going to affect them.
Legally, there is no firm guidance on what overconsumption looks like for the typical consumer. So, we tell folks you have to kind of get a feel for who the consumer is. If they’re curious person who doesn’t have a lot of experience with cannabis, we typically recommend not to exceed a five-milligram serve per sitting until you figure out how it’s going to affect them. However, if you have very high dose legacy consumers, who buy and drink these 100-milligram single-serve bottles it’s a different story. You kind of need to gauge that from consumer to consumer, and what their tolerance level is. A lot of onus is on the consumption lounge. And I think that’s why they’ve kind of been slow to really roll out how they deal with beverages, because it’s just a different beast. It’s absorbed differently by the body from inhalable products
Green: What trends are you looking at in the industry?
Smith: I love seeing more food-based options. Edibles to this point have been mostly candies and gummies and I see the trend going to more high-end, curated food selections. I think that’s super interesting. The condiments that go into cooking is a category that I’m keeping an eye on. I came across a THC and CBD-infused Siracha sauce the other day and I was like, “wow, this is fantastic!”
MXXN logo
In the beverage space, there continues to be innovation, which we are on the forefront of. There’s a point of saturation that’s going to come for how many seltzers can exist in the market at the same time. And I think we’re kind of reaching that point. So, it’s going to be incumbent upon the beverage space to continue to innovate.
I’m also watching where things go with hemp-derived THC, the Delta-8s and those things and how is that going to be dealt with when it comes to the legal market. I think you see varying ways that it’s being dealt with across states. That’s a trend I’m certainly keeping an eye on as things continue to roll out across the country.
Green: What, in your personal life or in cannabis are you most interested in learning about?
Smith: Given where the world is today, I feel like we all live in this “OR” mindset. It’s either you OR me, it’s either this OR that. And I think you can see with some of the more recent political things that have happened, it’s this ideology of like, trying to force your beliefs on someone else. For me, it’s more about like, how can we learn to live more in the “AND” right? You can have this AND this and they can coexist, and they don’t have to be in competition. In my personal life, that’s where a lot of my energy is going. How do I spread that thought of getting out of this living in OR. We must move to this kind of mindset of AND. How can we be accommodating for a bunch of different beliefs, a bunch of different approaches? It causes so much friction when we try to impose beliefs on others that may not share the same beliefs.
I am thinking about how I can apply that to the cannabis industry as well. In terms of federal legalization versus state, where can we find that the happy ground? If we think about going across state lines, that’s effectively building a whole other business in the state, and in virtually no other industry does that exist. I can tell you economically this country could use infusion of cannabis to be more freely available. So those are the types of things that keep me moving these days. I’ve had a lot of success in my past and so for me, it’s less about financial achievements, and it’s more about how we can help move folks to this is AND mentality and not everything has to be OR.
Metrc combines a software platform with radio frequency identification technology to track plants and cannabis products from seed to sale. The track-and-trace model quickly became adopted by dozens of states to regulate their cannabis markets over the years, becoming an important standard in the industry.
With government contracts in nineteen states and counting, Metrc has become an omnipresent fixture in the United States cannabis market. States work with Metrc to provide their market’s traceability software for the entire supply chain, which helps prevent diversion to the black market, offers security and safety, aids in recalls and regulatory compliance tools.
We sat down with Michael Johnson, CEO of Metrc, to discuss retail challenges, regulations, cybersecurity, compliance and more.
Aaron Green: What are the major compliance challenges retailers face?
Michael Johnson: Major compliance challenges that retailers face will vary from state to state, however, we do see common themes across state lines. Financial services, for instance, has been a historical industry hurdle, as most big banks and credit card companies deny access to their network, making it difficult for retailers across the board – from bank account setup to limited customer and patient payment options to security issues when managing a cash-only retail business. The tides are starting to change with more credit unions and state-chartered banks opening their doors to the industry, along with new payment technologies for consumers to use instead of cash.
Michael Johnson, CEO of Metrc
We also see common operational challenges, including inventory management issues due to human error, lack of consistent quality assurance, and product theft. Retailers regularly face strict packaging, labeling, and product safety laws along with requirements for public health, storage and sanitation procedures and additional layers of security and surveillance.
Finally, access to compliant and retail-friendly technology systems is important as it can have a major operational impact. If a retailer can choose, selecting the right platform will manage all their operational needs – from ID-scanning at check-in to inventory management to banking – while properly integrating with their state’s track-and-trace technology. That’s a major benefit and one that Flowhub brings to the industry, alongside Metrc.
Aaron: How does compliance for retailers differ from cultivators and manufacturers?
Michael: It is important to note that proactive compliance sits at the center of cannabis regulation. Not only does it ensure the maintenance of license(s) and overall businesses, it helps expand and enhance the industry as a whole. As a highly regulated sector, transparent and consistent compliance initiatives provide the necessary foundation for a safe and secure environment, strengthening all levels of the supply chain and the industry at large.
All industry players must adhere to specific licensing and documentation requirements – an expired or illegal license may lead to serious fines and carries the potential of losing the business. In a handful of states, employees may need a license as well. Real estate also comes into play for all license holders, with special cannabis zoning restrictions, such as requiring distance limits between select institutions.
Since retailers are customer- and/or patient-facing, they may experience unique operational requirements compared to cultivators and manufacturers, including ID-checking policies, customer or patient delivery laws, additional packaging and labeling rules, strict dispensation regulations, in-store and on-shelf product placement, retail signage, and product promotion rules, and more.
Just like retail, cultivation and manufacturing compliance will also vary across states, but with a host of additional compliance requirements to keep in mind – for example, biological, chemical, and physical hazards are something that play a larger role at facility operations, which are subject to Occupational Safety and Health Administration (OSHA) rules. Other compliance issues to highlight on the cultivation and manufacturing side include state requirements on inventory reporting, security patrols, waste removal, and meticulous logging.
Aaron: What is your process for evaluating vendor integrations?
Michael: At Metrc, we maintain an efficient and consistent process for evaluating vendor integrations – an example of our commitment to ensuring the safety and security of legal cannabis markets.
First, integrators petition access into specific instance(s) by filling out a form with their basic information (business name, software name, contact info, etc.), along with any state-required agreements that must be signed. The integrator is then given a set of steps to perform in each instance requested. The steps provided are then evaluated by our API Support team. When all steps are performed accurately, the integrator is added into production and an API key is generated for their use. Licensees must also issue the TPI a User API key to gain access to the API. Overall, the process is a combination of meeting state, Metrc, and licensee requirements.
Aaron: Can you address the cybersecurity landscape METRC faces? What is METRC’s process for dealing with cybersecurity threats?
Michael: Cybersecurity threats are shared across industries and although not unique to Metrc or the cannabis sector, cybersecurity threats and the value of data continues to change. Maintaining strict safeguards around data privacy and the security is a top priority at Metrc and we keep a constant pulse on changes in the cybersecurity landscape, to maintain this safeguard for our customers, industry users, and Metrc as a whole.
Aaron: What trends in cannabis regulation are you following?
Michael: Cannabis rules and regulations are ever evolving, which is why it is vitally important for anyone in the industry to stay up to date. Examples of some we are following closely at Metrc include the SAFE Banking Act, Marijuana Opportunity Reinvestment and Expungement (MORE) Act, and Cannabis Administration Opportunity Act (CAOA); and more generally federal legalization, public health protection, and environmental regulations.
Aaron: What’s next for METRC?
Michael: We continue to expand our customer and user feedback loop to ensure our roadmap meets the unique needs of markets and an overall evolving industry/regulatory landscape. Examples include continued performance improvements, more robust analytics capabilities, user-driven functionality updates, and exploring the design of a more sustainable RFID tag.
At its core, Flowhub is a point-of-sale and compliance software company, but they offer much more than that. After becoming the first company to integrate with Metrc in 2015, the platform quickly became a leading software company in the space.
The system helps dispensaries manage inventory, report sales data to regulators, manage payment processing, manage workflows and simplify compliance. Following a few stints at Dixie Elixirs, Weedmaps, and Neos Vape Pens where he saw the day-to-day inefficiencies of cannabis compliance, Kyle Sherman launched Flowhub about eight years ago.
As Founder & CEO, Sherman and his team have taken Flowhub to the next level, with over 1,000 dispensary partners processing $3 billion in annual sales. We caught up with Sherman to ask about compliance challenges facing the industry, 4/20 sales data, integration technology and more.
Aaron Green: What are the major inventory and point-of-sale challenges that retailers face?
Flowhub Founder & CEO Kyle Sherman
Kyle Sherman: Cannabis has yet to be federally legalized and the industry remains a highly regulated environment that’s subject to a patchwork of state and local regulations. Dispensaries face an influx of challenges compared to traditional retailers due to strict compliance requirements. Cannabis retailers are required to report all sales activities and inventory movements to their state regulators, sometimes in real time. If physical inventory does not match what has been reported to regulators, their license is at risk for suspension. Maintaining accurate inventory records across systems (including point of sale, Metrc, and ecommerce menus) is one of the biggest struggles we hear from retailers.
In addition to compliance, lack of financial services and support from large banks and credit card companies is a big challenge for the cannabis industry. This means most transactions in the industry are limited to cash. Managing such large quantities isn’t easy and it puts dispensaries at risk of theft, both internally and externally. While cash alternatives like ACH are becoming increasingly accessible, some retailers are choosing partners with predatory financial terms or those that don’t operate in compliance.
Flowhub’s point of sale software enables a dispensary to provide best-in-class customer experiences without worrying about compliance. The software is purposefully built for the cannabis industry, focused on making the jobs of dispensary owners and staff members as streamlined as possible. Flowhub also helps dispensaries hide the complexities of a cash-intensive industry by allowing customers to use alternative forms of payments at checkout, like ACH and Point of Banking. Cannabis businesses should be able to transact as easily as if they were selling coffee and doughnuts.
Aaron: We’re about a month past 4/20, how was 2022 different and how can retailers prepare for next year?
Kyle: 420 2022 was the highest cannabis sales day in history! Dispensaries brought in twice the revenue compared to an average Saturday which is typically the busiest day of the week.
While ecommerce has become a major trend for dispensaries since the pandemic, traditional retail shopping is still by far the preferred mode of purchasing for consumers. With loosening COVID restrictions, 420 2022 saw a return to in-store shopping and in-person events. We also saw that while flower still stands as the most popular product category, customer product preferences are beginning to shift toward alternative options like edibles, beverages, vapes and concentrates.
To prepare for next year, retailers should analyze their 420 data to understand customer preferences. Dig into customer demographics to find out who was shopping, at what times, and for which products. This information can be used to curate a strategic marketing and execution plan in 2023. With many dispensaries offering similar products, it’s more important than ever to have a distinct experience that differentiates from the competition. Consider forming unique partnerships, ways to give back to your local community and how you can facilitate a shopping experience others cannot replicate.
At Flowhub, you can track your dispensary analytics from your smartphone with our mobile View app. Retailers can see real time performance metrics including sales data (track your sales, before and after-tax, by product category, average basket size, and total number of transactions), employee data (see top selling budtenders for the most recent day, week, month or quarter), and inventory data (view total identified inventory discrepancies by room, or see your most popular vendor and products at a glance). With data at your fingertips, you can stay on the pulse of your business and more adequately prepare for key dates and specific times of year, like 420.
Aaron: Flowhub was the first to integrate Metrc. What synergies were unlocked with this integration?
Kyle: Flowhub has always been involved in federal legalization advocacy. In 2014, I lobbied the CO Department of Revenue to build an open API to Metrc. Integrating with Metrc opened the door for cannabis operators to accelerate workflows, increase accuracy and simplify compliance. Prior to the API, tracking and reporting cannabis sales was painful. We were all handcuffed to manual pen and paper processes. Flowhub paved the way for other software companies to integrate to the Metrc API which is now the standard for track and trace systems in most legal cannabis markets.
Aaron: What’s next for Flowhub?
Kyle: Flowhub is strategically growing alongside the cannabis industry. We’re looking forward to supporting newly legal markets like New Jersey, where AU is now legal. We also recently integrated with Aeropay to offer dispensaries compliant ACH payments. Later this year we’ll have some major product developments coming out that I can’t disclose just yet but they’re very exciting! Stay tuned.
Infused flower and infused pre-rolls are two segments of the cannabis flower market sought after by consumers for their high THC content. Moon rocks are a type of infused flower product made by infusing flower with sticky concentrate and then rolling the sticky flower in kief. THC content of moon rocks often exceeds 50%.
Presidential is one of the largest infused flower cannabis companies and the third largest pre-roll brand in California, with products available in over 400+ retail stores such as MedMen, Gorilla RX, Sherbinskis, La Brea Collective and Royal Greens. Presidential’s success and growth has primarily been organic through word of mouth. Presidential recently launched the Presidential Suite in WeHo, a speakeasy-style lounge with entrance through a subway car inside a NY-style pizzeria, Esco’s. The suite offers events including exclusive cannabis industry nights as well as “pizza parties” held jointly with Esco’s.
We interviewed Everett Smith, co-founder and CEO of Presidential. Everett co-founded Presidential in 2012 following a professional basketball career in Europe. He has a background in marketing and brand development.
Aaron Green: Everett, how did you get involved in the cannabis industry?
Everett Smith: It was really just by chance. I was in Vegas after I was done playing ball overseas. I was working 9 to 5 at the convention center for a company called Freeman. I was out waiting for some clients and I met this guy who started talking to me about cannabis, about this company he was starting and how his friend was manufacturing the product for him. I didn’t love my job. I was looking for something exciting to do. So, I got their information, and I took him up on it and I called them every day for almost three months. Then it finally got together and long story short, we started.
Everett Smith, co-founder and CEO of Presidential
Green: What year was that?
Smith: That was in 2012.
Green: So, you met this person in 2012 and then three months later had it up and going?
Smith: Long story short, yes. After three months, we finally got together and got all the parameters figured out and then we started to create the brand, get the packaging, get the product, and put it out to the street. That all probably took six to eight months.
Green: Presidential is known for moon rocks and infused pre-rolls. How did you hit upon the concept of infused flower? Why did you make that your focus?
Smith: The gentleman I was talking about before – he’s no longer our partner – was manufacturing for his friend and that’s what he did, so that’s what we got introduced to and then as soon as we started selling it, I just found ways that it could be improved. I listened to the customers we were selling to. My old partner wasn’t willing to do that due to the manufacturing time, so we took it into our own hands and got an investor, my partner now, John Zapp, and we figured out how to manufacture it ourselves. We had zero idea what we were doing and we figured it out. I have to give credit to John, he is the one who figured out the formula we are using right now. There was a lot of bumping our heads, a lot of trial and error, a lot of figuring it out. And luckily, we did.
Green: You mentioned you felt like other companies weren’t doing it right. What was the difference that Presidential brought to the table?
Smith: Quality. These other companies were focused on profit margin. They weren’t using quality products. They were using the same product twice in different things, which is the ultimate no-no. I just found that if you started with high-quality raw goods, and put them together, you are going to have an even better product.
Growing up my mom was kind of a hippy. We just like stuff from the earth. Good organic stuff. So, we were taking flower that I knew was being grown organically at the time and then infusing it and it created a better product. We packaged it better than anybody else’s packaging at the time. I have a background in marketing so at that time, I was just trying to create a product and a brand that my friends and I would like. I thought we were our target user at the time. I was working in my late 20s.
Green: Where were you located at the time?
Smith: We were in Los Angeles.
Green: What were some of the challenges of launching a brand in Los Angeles back in 2012?
Smith: Some of the challenges included: education of the consumer; getting clients in the door and making them feel safe to come into a dispensary and purchase medicine at the time; and the legalities – maneuvering all the different propositions that were coming down and being able to do it legally and safely. The legal issues were probably our biggest hurdle. Then there was the challenge of introducing people to Moon Rocks. Infused flower was a brand-new concept, so we had to find as many people as we could to introduce the product to.
Green: I’m just imagining back to 2012, I think Moon Rocks would have been completely new to me. How did you get customers over the hump of trying something new?
Smith: I would get big jars of Moon Rocks. They look crazy. We saw people walk by and just watched the reactions. It was like, “Whoa, what’s that? What in the world is that?” Then we use the tagline: “World’s Strongest”. We’re starting with nice, tasty flower. We’re putting 90% THC distillate on it and then when we’re taking kief in the mid 40s 50s (% THC), and we’re covering it. So we’re putting THC on top of THC of on top of THC.
Putting “The World’s Strongest” on there and just putting big jars out in front of as many people, at as many conventions, and at as many dispensaries that would let us set up a patient appreciation day. That’s how we did it.
Green: You are in retailers across California. What were the keys to your success in building out your distribution network?
Smith: Sales. Knocking on doors. My partner comes from the car business. He was a fixer-upper helping dealerships all over the country become more profitable. So, just having that mentality of going out every day and knocking on doors trying to get every single possible client. I want to say it was like being a car salesman and Hollywood, or something similar. At first it was me and John every day knocking on doors. Then the business built on itself.
We have the same process now. Knock on the doors and send our brand ambassadors in there to do customer appreciation. They get our product in front of people and it’s worked for us. The marketing money we do spend we spend in the stores, because we see a direct correlation there. At the end, it really goes back to the knocking on doors.
Green: Do you notice anything different between 2012 sales and prospecting versus today now that your brand awareness has changed?
Smith: Absolutely. Everything is very corporate now. Before 2014, you could knock on the door and the person that you needed to see was sitting right there. The owner was the buyer. Now, you have to get through layers of people to get to the actual decision-maker because they’ve become so corporate. So that’s the biggest difference I see, but I wouldn’t say it’s a negative. I would say that our industry has become more positive. We can guarantee regular pay. We can guarantee that the products are going to be on the shelves and we can cut or markup the pricing. Those are the changes I see and they’re not always easy, but I think they’re for the better.
Green: What does the future look like for Presidential? More broadly, what does the future look like for the industry in terms of infused flower and pre-rolls?
Smith: Right now, the infused flower market is one of the fastest-growing markets. I see that becoming the norm, and the same for pre-rolls. We’re looking at expansion and trying to become one of the national players in this game. We’re swinging for the fences.
Green: What geographies are you looking at?
Smith: Right now we’re in California. We are in negotiations to launch in Nevada in July. We were getting ready to launch in Oklahoma, but had a deal fall through so now we are kind of switching gears. I would say by end of year we’ll be in Oklahoma, and my partner John is trying to close a deal for Michigan. So, those are the markets we have on the table right now. We’re looking to close those all before the end of the year.
Green: What trends are you following in the industry?
Smith: We have the number one selling blunt in California, but in terms of pre-rolls we are number four in terms of sales. The three companies ahead of us all sell minis and packs of minis, whereas we sell single 1 gram and 1.5 gram pre-rolls. So, in July, we’re launching three-packs of minis, so three 0.7 gram blunts and three 0.5 gram pre-rolls.
You can infuse the flower with pretty much any kind of concentrate the way that we do it. I’d like to come out with some diamond products, that’s hot right now. We’re following the wave and trends of the concentrates.
Green: What in your personal life or in cannabis are you most interested in learning about?
Smith: In my personal life, I’m interested in financial craftiness. You know, make your money and make your money work for you. I personally, in the business, would like to learn more about the smokeless form factors of cannabis. Things like beverages and capsules. I think that’s where the industry will end up going. So, I’m interested in learning more about the manufacturing of beverages and capsules and what it entails.
Green: Thanks Everett, that concludes the interview.
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookies
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
We use tracking pixels that set your arrival time at our website, this is used as part of our anti-spam and security measures. Disabling this tracking pixel would disable some of our security measures, and is therefore considered necessary for the safe operation of the website. This tracking pixel is cleared from your system when you delete files in your history.
We also use cookies to store your preferences regarding the setting of 3rd Party Cookies.
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.
Green: How does the lack of institutional investor participation in the cannabis industry affect your business?
