Tag Archives: analytics

February 23, 2021

Flower-Side Chats Part 2: A Q&A with Bill Conkling, Founder and CEO of Maggie’s Farm

By Aaron Green

Flower continues to be the dominant product category in US cannabis sales. In this “Flower-Side Chats” series of articles, Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.

Maggie’s Farm is an integrated cannabis company based in Southern Colorado. Maggie’s Farm has seven adult-use and medical dispensaries and cultivates the vast majority of their flower on outdoor farms. All Maggie’s Farm products are sun-grown from seed in soil that is 100% custom-mixed onsite as well as spring-watered, slow-cured and hand-trimmed. Maggie’s Farm does not use any synthetic pesticides or growth hormones in its cultivation. In addition, for the past eight years, Maggie’s Farm has recently obtained Clean Green Certified®, a designation certifying organic standards and testing that mirrors the USDA organic certification. Maggie’s Farm was the first cultivator in Colorado to earn the Clean Green certification.

We spoke with Bill Conkling, Founder and CEO of Maggie’s Farm to learn more about the benefits of outdoor growing, localism and their Clean Green certification. Bill started Maggie’s Farm in 2010 after growing up on cattle ranches and farms in Colorado.

Aaron Green: Bill, thanks for taking the time today. Tell me a bit about how you got involved in the cannabis industry.

Bill Conkling: I am a native of southern Colorado. I was a medical caregiver back in the early days of legalization, and I saw an opportunity to vertically align after my first legal crop in 2010. I opened up the store in 2011. I’ve been a lifelong proponent of medical, recreational and adult use of marijuana.

I come from a background of farmers and I had worked on cattle ranches and farms throughout childhood. As soon as I graduated from college, I went back to work on a large cattle ranch in the four corners area [of southern Colorado]. That’s where I started to incorporate my indoor cultivation experience and skills with outdoor.

Aaron: What trends are you following in the cannabis industry?

Bill: I was one of the first medical operators to support legalization, so I have certainly followed legalization trends. I’ve looked at some other states in our region in terms of growth and legalization.

Bill Conkling, Founder and CEO of Maggie’s Farm

We’re trying to stay a regional supplier and producer so that we are locally grown. We believe the southwest of Colorado is optimal for outdoor cannabis cultivation.

At Maggie’s Farm, we have followed an organic trend from the beginning and I think that’s becoming more of a trend now. We recently received Clean Green certification to that effect. Our goal is to try to provide the healthiest product at a good value to the market.

I believe that all of the products that are made in the cannabis world come from the flower. Downstream products are only as good as their ingredients. It all starts with the flower. So, we focus on producing a clean, top-shelf quality flower that is produced outdoors.

Aaron: How do you define local?

Bill: Local is staying in the climate that is optimal with the least amount of carbon footprint to the earth. That also means trying to operate so that we’re not moving a lot of product across long distances.

We’re trying to set up farms that are in optimal climates. There is a two or three-state region that I believe is the optimal climate for outdoor marijuana cultivation in our country.

Aaron: What states are those specifically?

Bill: I think Colorado and New Mexico, primarily.

Aaron: What geographies is Maggie’s farm currently in?

Bill: We’re in southern Colorado. We don’t go into the plains of Colorado.

Aaron: So Colorado state only right now?

Bill: Yes. The wet mountain range is one of the mountain ranges that we are in. I’ve also cultivated in the La Plata mountain range.

Aaron: What specifically is it about that region that makes it conducive to cannabis growing?

Bill: I think if you get the right elevation and the right microclimates within those elevations, and you have the number of sunny days that Colorado offers in those areas – the intensity of the sunlight, and the cool nights – all those things are factors that coincide in these areas that we like to cultivate in.

Aaron: We’ve been talking about outdoor growth. Does Maggie’s do any indoor?

Bill: No. We’re essentially an outdoor farm. We do a little bit of breeding and we’ve got starter houses, greenhouses and hoop houses for that purpose. We’ve got one greenhouse that we use for some wholesale, but we are primarily outdoors.

Aaron: How do you go about selecting the genetics or evolving the genetics to meet your local environment, given that you’re growing outdoors?

Bill: A lot of it is honestly through testing and experimentation, historically. You just cultivate and harvest and see how the genetics performed, you know? You test, you take test inputs, you take customer reviews, and blind test results from the team and from the customers and you consider all those facts.

Aaron: Do you produce and use your own seeds or are you purchasing those?

Bill: We have done both. I think I’ve probably created somewhere north of 800 different strains at this point. So, we’ve got a huge seed bank. We do also buy from vendors and experiment with some of those genetics as well.

Aaron: Do you market your seeds in Colorado?“I don’t think that you can get anywhere near the terpene value indoors that you can outdoors.”

Bill: We do not.

Aaron: How did you settle on outdoor-only as the strategy for Maggie’s?

Bill: I believe outdoor is a premium flower. I think it has less impact on the earth. I think that there is a lot less pest mitigation than there is indoors, which makes it a healthier, cleaner product. You don’t have to mitigate the concentration of pests that you get in temperate climates of stagnant corners of greenhouses and buildings that you cultivate indoors. Therefore, you never get into the situations as often or as intensely, where you might have to really work hard at mitigating your pests. You can use the natural predator insects you can introduce and oftentimes they survive and they create their own climates and it’s a more natural, healthier product.

I don’t think that you can get anywhere near the terpene value indoors that you can outdoors. You just don’t have the value of the sun, which nothing compares to. You can hold up as many high wattage bulbs as you want and you don’t even pale to the sun and the effect that the sun has on the flower.

Aaron: What are some of the challenges of growing outdoors that you see frequently?

Bill: You have to be nimble. You can’t rely completely on a schedule. You’ve got to be able to shift around in your planting days and your harvest dates.

You’ve obviously got to be on your toes all the time for weather changes. Higher humidity years can tend to bring more insects or pests. Some years you’ve got higher winds than other years. This year, we had a snowstorm on September 9, which left nine inches of heavy wet snow on one of our farms. So, you’ve got to be nimble, very proactive and ready for those kinds of weather events that happen in very short notice.

Aaron: We mentioned Clean Green Certified® briefly. Can you explain more about the Clean Green certification and why that’s an important thing for you at Maggie’s?

Bill: The choice to become Clean Green Certified® was really an effort to validate the organic process that we have. We vetted out what we believe was and still is the premier, organic criteria certification endorsement in the market for cannabis. To this day, they really do an ethical, vetting-out process whereby if you fail the parts of any of the soils that are sent to federal-licensed labs, you do not get your endorsement. The owner of Clean Green also had a mother company that was an endorser of other agricultural products such as coffee, wheat and dairy.

Aaron: How would you compare Clean Green Certified® to USDA Organic?

Bill: Identical. When the federal government legalizes, we are poised to automatically convert to a USDA Organic certification and endorsement. The processes the founder and owner of Clean Green uses to test cannabis is the same process used to test other agricultural industries. For plants, he takes random samples of soils throughout a cultivation field and sends them to a federal-licensed lab where they test for impurities.

Aaron: Did you decide to get your Clean Green certification due to pulling from the market, or is this more something you decided to do internally as Maggie’s Farm?

Bill: I decided to do this internally. I wanted to be recognized for all of our organic efforts and I wanted to let people know that we have a safe product that doesn’t have synthetics in it. Even to this day, a lot of people in Colorado unlike the coastal states like maybe California are still pretty unaware of a Clean Green certification or even the fact that there is an organic process for cannabis or marijuana. So, it’s really just to let our customers know that there is value in a safe, healthy choice for them.

Aaron: What kind of products do you create at Maggie’s farm?

Bill: We grow flower. We are also a big producer of a very high-quality pre-roll. We are developing promoted products as well.

Aaron: Do you do fresh frozen?

Bill: We do some, yes.

Aaron: Are you selling direct to the dispensary or to manufacturers?

Bill: We finally had produced some excess. So, we started wholesaling flower this year and lots of high-quality shake for concentrates to concentrate makers. Our customer is typically a little more of a mature customer. I don’t want to say necessarily older, but I think we probably do hit a little bit of a higher, more experienced, health-conscious, connoisseur customer.

Aaron: Can you give me an idea of some of the regulatory challenges in Colorado that you’ve faced in the past or are facing today?

Bill: The perpetual change of regulation has been a challenge. Being a competent operator in cannabis means getting used to the change and having the resources to be nimble with compliance. We haven’t had common problems such as metals, mold or mildew issues. However, we have had some hardware issues, which required us to change cameras along with other technical intricacies.

Aaron: How many acres do you have?

Bill: We have about 30 acres of secured premise cultivation.

Aaron: Is that all managed in-house or sublet?

Bill: It’s all managed and operated exclusively by Maggie’s Farm.

Aaron: What’s next for Maggie’s Farm? What are you excited about?

Bill: We want to continue to put a higher scale of a very healthy, quality, value flower out there and to be able to offer that to more states initially states that are within our region and eventually states across the US. Also, we will continue to do our best to meet the growing demand for healthier choices in general.

Aaron: Lastly, what are you personally interested in learning more about?

Bill: How we can continue to be as earth-conscious as we can be? How we can continue to look for ways to give back to our communities? How we can continue to operate as a view of made in the USA and to try to just support local regional and national products and vendors? Just how to be more aware and always look for opportunities for self-improvement.

Aaron: That concludes the interview, thank you Bill!

February 23, 2021

Learning from The First Wave Part 3: Seven Basic Questions About Local Cannabis Ordinances & Real Estate

By Todd Feldman

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Part One of this series took a look at how the regulated cannabis market can only be understood in relation to the previous medical market as well as the ongoing “traditional” market. Part Two of the series describes how regulation defines vertical integration in California cannabis.

If you are considering getting involved in California cannabis, imagine the following sentence in ten-foot-tall letters made out of recently ignited $20 bills:

Before you put any money down on property, carefully examine the local cannabis ordinance and tax rates.

This article is written in the form of advice to a newbie cannabis entrepreneur in California, but it will discuss issues that are also of significance to investors, as well as (to various degrees) cannabis entrepreneurs in other states.

Here are seven basic questions that you need to ask about local regulations (in order, except for Number 7).

1. What’s Your Jurisdiction?

If you’re in city limits, it’s the city. If you’re outside city limits, it’s the county.

2. Does the Jurisdiction Allow Cannabis Activities?

If the answer is yes, go to the next question. If the answer is no, pick another jurisdiction.

3. Where Does the Jurisdiction Allow Cannabis Activities?

A zoning ordinance will limit where you can set up shop. The limitation will probably vary by license type.

4. How Does the Local Ordinance Affect Facility Costs?

The short answer is: in many ways. Your local ordinance is a Pandora’s box of legal requirements, especially facility-related requirements.¹ Read your local cannabis ordinance very carefully.

Generally speaking, the cannabis ordinance will set out two types of requirements – those that are specific to cannabis and those that apply generally to any business.

Looks great but . . . where are the sprinklers? Does it need a seismic upgrade? How about floor drains?
Photo by Wilhelm Gunkel on Unsplash

Cannabis-specific requirements:

Typically incorporate state cannabis laws by reference.
Have significant overlaps with state cannabis laws. For example, the state requires commercial-grade locks and security cameras everywhere cannabis may be found on a given premises. Local ordinances generally include similar requirements – keep in mind that you will need to comply with a combined standard that satisfies both state and local requirements.²
Vary greatly according to type of activity. For example, manufacturers will need to comply with Health & Safety Code requirements that can have a major impact on construction costs.
Vary greatly by jurisdiction when it comes to equity programs.

General requirements:

Include by reference building and fire codes, which can require very expensive improvements. Note that this means your facility will be inspected by the building department and the fire department.
Can include anything from Americans with Disabilities Act (ADA) requirements to city-specific requirements, such as Design Guidelines.
Will be zealously enforced because you’re a cannabis business.

5. What is the Enforcement Policy?

It may be that your local jurisdiction will give you temporary local authorization after meeting some, but not all, of the requirements. For example, you may be able to begin operations once you’ve provided your city or county with your cannabis permit application, a zoning clearance and a business permit. In this jurisdiction, you would be able to bring your building up to code sometime after you begin operations.

On the other hand, your local jurisdiction may require you to meet every requirement – from cannabis-specific security requirements to general building code and ADA requirements – before you can begin operations. Depending on the type of cannabis business (and facility condition), this might be inconsequential. Or it might mean that you will have to pay more than a year’s worth of rent (or mortgage) before you can start making money.

6. Can You Choose a Facility That Saves You Time and Money?

Of course, you won’t have to spend much time or money bringing your facility up to code if it’s already up to code. How likely it is that you will find such a facility varies wildly according to the type of cannabis activity in question. In general:

Service-side activities (delivery retail, storefront retail, distribution) are in many respects similar to their non-cannabis counterparts. From a facilities standpoint, the major differences come from security requirements. So, it may be possible to save time and money by choosing a facility that is already up to code for a similar use.
Manufacturing activities are trickier, since you will need food-grade facilities and equipment. You may be able to save money by setting up shop in a commercial kitchen.
Extraction with volatile solvents is a special (and particularly expensive) case, since it is inherently dangerous and requires special facilities.
Outdoor cultivation may be relatively unproblematic if it has an appropriate water source.
Indoor cultivation is expensive because of climate-control and lighting requirements. Buildings potentially suitable for large-scale indoor grows frequently come with significant problems. Former warehouses will typically require major power upgrades, while former factories may have inconvenient architecture and/or hidden toxic waste. In all cases, internal reconstruction is likely to be necessary, and will trigger all sorts of building and fire code requirements.

7. What Are the Local Cannabis Taxes?

Cannabis tax rates may be determinative. For example, Oakland imposes a 6.5% gross receipts tax on manufacturers that have gross receipts of less than $5M, and 9.5% on manufacturers that have gross receipts over $5M. In comparison, Santa Rosa only imposes a 1% gross receipts tax on manufacturers.

Local cannabis ordinances and taxes can make or break your business, so you need to understand them before you commit to a location. The seven basic questions listed above are designed to get you started.

This article is the opinion of the author and is not intended to be legal or other advice.

References

For example, see Part II of the City of Oakland’s Administrative Regulations and Performance Standards, and The City of Los Angeles’s Rules and Regulations for Cannabis Procedures No. 3 (A)(14).
For example, compare 16 CCR § 5044 (“Video Surveillance System”) with The City of Los Angeles’s Rules and Regulations for Cannabis Procedures No. 10 (A)(7).

February 17, 2021

Cannalytics Becomes First Accredited Cannabis Lab in Puerto Rico

By Cannabis Industry Journal Staff

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In a press release sent out this week, A2LA announced they have accredited Cannalytics to ISO 17025:2017. With the finalized accreditation in December 2020, Cannalytics is the first cannabis testing laboratory in Puerto Rico to get accredited to the standard.

Jorge Diaz, owner and director of Cannalytics, says their two main objectives are business excellence and quality. “Being the first ISO/IEC 17025 accredited cannabis laboratory in Puerto Rico affirms our mission to provide continuous quality science to our clients while safeguarding the health of Puerto Rico’s medical cannabis patients,” says Diaz.

Cannalytics is a medical cannabis and hemp testing lab based in San Juan, Puerto Rico. They offer compliance and R&D analysis in their suite of testing services.

“We are glad to see the continued growth of our cannabis program in a new territory, which further promotes the value that accreditation adds in ensuring quality in this emerging industry,” says Anna Williams, A2LA Accreditation Supervisor.

February 17, 2021

FAQs: How Cannabis Businesses Can Avoid TCPA Liability

By Artin Betpera

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As the cannabis industry continues to experience growth in markets across the country, cannabis businesses are becoming an ever-increasing target of plaintiff’s lawyers in Telephone Consumer Protection Act (TCPA) lawsuits. Text messaging provides a potent channel of customer engagement, but at the same time is subject to strict regulations under the TCPA, with violators subject to steep statutory penalties of $500-$1,500 per message. While one-off cases won’t typically break the bank, that’s far from the case when many thousands of texts are bundled together in a class action. And this potential for big paydays means plaintiff’s lawyers have a financial incentive to file cases as class actions whenever they can.

Some well-known names in cannabis have been the target of TCPA class action. Cannabis delivery service Eaze has battled some fairly well-publicized TCPA class actions in the past couple of years. There has also been an assortment of dispensaries across several western states that have been the targets of similar lawsuits. Notably, these lawsuits share a common thread: they are based on marketing or promotional text messages sent to consumers.

In this landscape, firing off texts without the proper compliance safeguards is a game of roulette. At some point in time, one or more messages will invariably land in the wrong hands, sparking an expensive, high-stakes class action. In this competitive space, there are far more productive things any cannabis business can be doing than spending the time and resources on this type of lawsuit.

So how can your business avoid being caught in a TCPA trap? The following Q&A will walk you through some of the questions you should be asking if you are currently texting, or planning to text your customer base for marketing purposes. One quick note before starting: the TCPA has different rules for different types of messages (such as informational versus marketing messages). This Q&A will cover the distinction between these types of messages, but focuses on the rules around marketing messages since these are rules cannabis businesses get tripped up in most frequently when sued for TCPA violations.

Question: How do I know if the TCPA applies to me?

Answer: Are you texting your customers? If so, are you using some kind of platform that lets you send multiple texts at once? If you answered yes to both, then the TCPA most likely applies to you.

In short, the TCPA prohibits calling or sending texts to cell phones using an Automatic Telephone Dialing System (ATDS). Without getting into the many nuances of how courts have interpreted the legal definition of that term (and risk boring you to death), you can assume that unless you’re hitting send on each and every single text that goes to your customers, that you’re using an ATDS, and your texts are subject to the TCPA.

Q: So it looks like the TCPA applies to me. What now?

A: If you don’t have a compliance plan in place, now’s the time to implement one. To start, take stock of (a) how you’re sending texts; (b) who you’re texting; (c) where you obtained their phone number; and (d) whether you have their prior express written consent. That last part is key: under the TCPA, if you’re sending any text messages to your customers for “telemarketing” purposes, you’ll need what the TCPA calls “prior express written consent”.

Q: But I’m a cannabis business, not a telemarketer. Why should I worry about the TCPA again?

A: The TCPA’s rules requiring prior express written consent apply when the text is sent for “telemarketing” purposes, defined as “the initiation of a telephone call or message for the purpose of encouraging the purchase or rental of, or investment in, property, goods, or services, which is transmitted to any person.” Put simply, if you are sending texts to market or promote something you sell, then it’s likely the message will be considered “telemarketing” under the law. In contrast, if you’re sending a text for purely information purposes, such as sending a receipt for a transaction, or advising on the status of a delivery, then those message are still regulated by the TCPA, but subject to a more relaxed consent standard (a topic for another article).

Q: What do I need to do to get prior express written consent from my customers?

A: It’s important to know that prior express written consent is a technical, legally defined term that requires the caller be provided a written disclosure containing certain information and disclosures, which they “sign.” There are three key components to prior express written consent:

First, the consent agreement has to be in a signed writing. The law affords some flexibility here, allowing callers to obtain consent digitally through a number of mediums including web-based and electronic forms. If structured properly, consent may even be obtained through a text message flow.

Second, the consent agreement has to say certain things. It must authorize the caller to deliver advertisements or marketing messages using an ATDS, it must specify the phone number to which messages are being authorized, and it must say that the consumer doesn’t have to provide their consent as a condition to receiving goods or services.

Third, the disclosures must be “clear and conspicuous”. There’s no real rocket science here, but this is a very important part of the rule. It’s challenging to enforce an agreement that’s hard for a consumer to find or see, meaning the consent disclosures can’t be hidden away, in imperceptible font, or baked into another legal document (such as terms and conditions).

Q: I have a great customer contact database, but I don’t think I check all the boxes for prior express written consent. Can I still text them with specials and promotions?

A: No. At least not with your usual automated or mass-texting platform. But with some legwork, you can leverage your existing database and obtain consent. It’s not ideal, but it’s better than taking the risk of texting in this situation.

Let’s start with the fact that people like to get deals and specials on cannabis products, so there will likely be interest across your customer base for signing up. And with the flexibility afforded by the E-SIGN Act, businesses can try multiple avenues in obtaining prior express written consent from existing customers. This could include a call-to-action campaign, where consumers can initiate a text message consent flow by texting a keyword to a short code. The TCPA does not regulate e-mails, so businesses can consider an e-mail campaign that encourages their customers to follow a link that takes them to a web-based consent form. For businesses with storefronts, customers can be encouraged to sign up for texts on-site by filling out and submitting a form on a tablet device. Bottom line, there’s room for some creativity in designing campaigns to enrich your existing customer database with the necessary consent to send marketing texts.

Q: What happens when a consumer opts out of receiving texts?

A: You should stop all texts to their phone number unless and until they opt back in to receiving texts. Under the TCPA, a consumer has the right to revoke their consent, and any text message sent after an opt-out will violate the TCPA. This means it’s important to have clear opt-out instructions in every message you send (i.e. text stop to stop), and to ensure you have the proper systems in place to automatically suppress any further texts to the consumer’s phone number following an opt out.

Q: If I don’t follow these rules, what are the odds of getting sued for a violation?

A: Pretty high in my opinion. As mentioned, the TCPA is a very lucrative statute for Plaintiff’s lawyers. There are several thousand TCPA cases filed in federal courts each year, and lately cannabis businesses are becoming an increasing share of the defendants named in those suits. Additionally, the TCPA has a four-year statute of limitations, meaning exposure for non-compliant practices has a really long tail. It’s far easier to develop and execute a compliance plan up front, than to take on the risk that comes without one.

Q: Is there anything else I can be doing to protect my business?

Absolutely. Your TCPA compliance policy should be one layer of a holistic approach to legal compliance. Businesses have other tools at their disposal, such as arbitration provisions and class action waivers, that they can build into their consent-gathering process to further protect themselves in the event of a legal dispute.

Q: Any other tips to help keep my business out of the TCPA fracas?

A: Yes. Lots. More than I could fit into just this one article. But my goal here was to get you to think in the right direction when it comes to the TCPA, if you aren’t already. While I tried to make the basics of this as straightforward as possible, there are plenty of grey areas and nuance when it comes to compliance (especially when you inject the real world into the situation). This is where having lawyer experienced in this arena can come in really handy to vet your disclosures, review your compliance processes, and help you implement other risk mitigation strategies.

TCPA claims have become the cost of doing business when contacting consumers on their cell phones. But by being proactive, businesses have ample opportunity to mitigate their risk, and protect themselves in the event the legality of their text message campaigns is challenged.

February 16, 2021

Flower-Side Chats Part 1: A Q&A with Sam Ghods, CEO of Connected

By Aaron Green

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Flower continues to be the dominant product category in US cannabis sales. In this “Flower-Side Chats” series of articles Green interviews integrated cannabis companies and flower brands that are bringing unique business models to the industry. Particular attention is focused on how these businesses navigate a rapidly changing landscape of regulatory, supply chain and consumer demand.

Connected is a vertically-integrated cannabis company based out of Sacramento, CA and one of the most sought-after brands in California and Arizona. Having formed as a legacy operation in 2009, Connected has created a cult-like following over more than a decade in business. According to BDS Analytics, Connected Cannabis and their acquired brand Alien Labs now boasts the highest wholesale flower price in any major legal market – their average indoor flower wholesale price is 2x the CA average – yet also has the highest flower retail revenue.

We spoke with Sam Ghods, CEO of Connected to learn more about his transition from tech to cannabis, how Connected thinks about product and his vision for future growth. Sam joined Connected in 2018 after getting to know the founders. Prior to Connected, Sam was a co-founder at Box where he stayed on for 3 years after their successful IPO.

Aaron Green: How did you get involved in the cannabis industry?

Sam Ghods: I originally came from the tech industry. I co-founded Box, a cloud sharing and storage company, in the mid 2000s with three other friends. We grew that from the four of us to eventually a multi-billion-dollar public offering in 2015. I stayed on a few more years after that until I took some time off trying to decide what I wanted to do next. I looked at a number of different industries and companies, but personally I always had a real passion for artisan and craft consumer goods. It’s a really big hobby of mine. Whether it’s going to Napa or learning about different kinds of premium consumer goods, I really had a deep love and never knew cannabis could be like that.

When I first met Caleb, the co-founder of Connected, he instantly got my attention by telling me that they had been selling out of their product in the volume of millions of dollars a year at more than two times what everybody else was selling for. That really piqued my interest because creating a product that has that level of consumer passion and demand is maybe the single hardest thing about building a consumer goods business. For them to have been so successful in what was a very difficult and gray market to operate in at the time – this was mid 2018 that I was speaking with him and he had been building this company since 2009 – is a really big challenge, and really impressive.

Sam Ghods, CEO of Connected

So, I started spending time with Caleb and the Connected team and learned a lot about the business. Everything I learned got me more interested and more excited. The way that they thought about the product, the way they treated it was with a reverence and level of sophistication I had no idea was possible.

I was so excited to just learn about the space. I mean, honestly, it feels like the internet in the 90’s- The sheer possibility and excitement. The only difference here is that the market already has existed for 100 years plus: the gray and underground markets for this product are actually phenomenally mature. And now we’re lifting up billions of dollars in commerce that’s already occurring and attempting to legalize all of it in one fell swoop, which creates such an interesting set of challenges.

I first got involved as an advisor on fundraising and strategy. And then a few months later, they were looking for a CEO and I joined full time as CEO in September 2018.

Aaron: What trends in the industry are you focused on?

Sam: It may seem basic, but I think product quality in the broader cannabis markets nationally and internationally is really underrated. Because of the extreme weight of the regulatory frameworks in so many different markets, it’s resulting in a lot of product being grown and sold just because it can be by the operators that are doing it. In many markets, they count the number of producers by the handful, instead of being measured in hundreds or thousands like in California or Oregon. And in that kind of environment, you’re not really having competition, and you’re not really able to see the quality that has existed in this category for years and years and years.

That’s one of the things that really sets us apart – the quality is first above all else, as well as the innovation and time that has gone into it, and not many existing brands in the legal market can say that. With some of the “premium” brands on the market, it would be comparable to just jumping into the wine industry one day and thinking that you can become a premium brand, without having any knowledge of the history of the product or the industry itself. At Connected, we have a team that’s been doing this for over a decade. We did a back of the envelope calculation: there’s over one thousand lifetime harvests between our team. We’ve also brought in specialists from Big Ag and other industries to complement that experience.

Cannabis is a very, very difficult plant to grow at a very high level. It’s much more like high-end wine or spirits than other fruit or produce. I think in the cannabis community, that’s extremely acknowledged, and appreciation for that is the reason we get by with the highest prices in the legal market. I think in the broader investor and financial community, this point hasn’t really hit home, because the limited license markets aren’t mature enough, and there isn’t enough competition in many of them.

Our focus is continuing to make the best product we can, which has fed and developed our brands [Connected and Alien Labs] into what they are today. That is our number one focus, and we think it’s pretty unique to the space of not just cultivating a great quality product, but also as far as breeding, pushing the bar higher and higher on what can be done with the genetics of the plant.

Aaron: How do you think about choosing testing labs?

Sam: So, the number one criterion is responsibility and compliance. We must be completely confident that they’re testing accurately, safely and exactly to the specifications of the state. Then from there, it is really cultivating about a partnership. There’s a lot of nuance in the relationship with a testing lab. We note things like: Are they responsive? Are they sensitive to our needs in terms of either timelines or requirements we have? It does come down to timelines and costs to a certain extent, like who’s able to deliver the best service for the best cost, but it really is a partnership where you’re working together to deliver a great product. Reliability and consistency are big pieces as well.

Aaron: Industry estimates for illicit market activities are something like 60% of the California market. From your perspective, how do we fix that?

Sam: I think it probably comes down to funding for the efforts to discontinue those activities and opening up the barrier to entry, incentivizing “illegal” operators to make the investment in the cross-over. I think the most successful attempts to tamp it down was when there were initiatives that were well-orchestrated and well-funded, allowing for legacy growers to actually cross over to the “legal” industry. You can’t launch an industry with such an extreme amount of regulation, set a miles-high barrier to entry, and then penalize legacy growers for continuing their business as-is. If the illicit market continues to be fueled by rejection, you’re not going to achieve the tax revenue that you’re expecting to see, that we all want to see. There needs to be an attitude that every dollar put into transitioning illicit markets into regulated markets is returned many times over in tax revenue to the state’s citizens.

Aaron: So, I understand you sell wholesale. Do you sell direct to consumer?“Once they hit the shelves, we blow people away again, beyond their expectations of what they had before.”

Sam: We own and operate three retail stores, so we do sell direct to our consumers, but at this point the majority of our product is sold through third party dispensaries.

Aaron: Do you make fresh frozen?

Sam: We do. On the cultivation side we have indoor, mixed light and outdoor. We fresh freeze a portion of our outdoor harvest every year, and then we use that fresh frozen for our live resin products, for example, our recent live resin cartridge. It creates a vape experience really unlike any other because we are using our regular market-ready flower, but instead we’re taking that flower and actually extracting, not just using the distillate and mixing a batch of terpenes with it. We extract the entire plant’s content across the board, from cannabinoids to terpenoids and everything in between, and then you have our live resin cartridges.

Aaron: How do you think about brand identity and leveraging the brand to command higher prices?

Sam: The cycle we’ve effectively created is that every time we do a release of a new strain or a new batch or harvest, the quality is generally going up. That quality is released under our brands, and then the customer is able to associate that increase in quality and reputation with those brands. Then for our next launch, we have an even bigger platform to talk about the products and to ship and distribute and sell the products. Once they hit the shelves, we blow people away again, beyond their expectations of what they had before. That continuous cycle keeps fortifying the brand and fortifying the product. From our perspective the brand is built 100% on the quality of the product. The product will always be our highest priority and the brand will come downstream from that.

Aaron: Tell me about Alien Labs.

Sam: Alien Labs was an acquisition. It was a company that had built their brand really successfully in the gray market through 2017 and Prop 215 in California and had an incredible level of quality, a really loyal and dedicated fan base, not to mention a tremendous Instagram presence and following, which is where 98% of cannabis marketing happens today. We really loved the spirit of what the founders were bringing to the table. In 2018, we decided basically to join forces with them and bring them on board, creating a partnership where they leverage our infrastructure and the systems and processes we’ve built, but still keep their way of cultivation and their product vision. To this day, Ted Lidie, one of the founders, continues as the lead brand director for Alien Labs.

Aaron: In what geographies do you currently operate?

Sam: Our primary offices and facilities are based out of Sacramento, California, but we have facilities throughout the state. Last year, for the first time we launched operations in a new state, Arizona. As you may know, you’re not allowed to take cannabis products across state lines at all, so if you want consistent product in multiple markets you really have no choice but to rebuild your entire infrastructure in each state you want to open up.

There are many brands that are expanding and launching in more markets more quickly, but they’re doing so by taking product that’s already existing and putting their brand name on it. That is something we’ve decided strategically that we will not do. We’ve spent years building a high level of trust with our customers, so we’re only going to put our brand name on products that are our genetics, our cultivation, our style, our quality of product. When we launched in Arizona, we did it with a facility that we leased and took over and now operate with our staff. We’re replicating the same exact product that you can get in California in Arizona, which is really exciting.

We launched just this past November, which has been incredibly successful. Our dispensary partner Harvest saw lines of dozens of people out the door.“We consider ourselves a flower company first and foremost, so for us, that was a very calculated strategic move.”

Aaron: Any new geographies on the horizon that you can talk about?

Sam: We’re constantly evaluating new opportunities. I don’t have anything particularly specific to announce right now, but I will say we look for states where we believe there’s a competitive environment where the product quality is going to really stand out and be appreciated.

Aaron: Do you notice any differences in consumer trends between California and Arizona that stand out?

Sam: Not too many yet. We don’t have a retail location in Arizona, so we don’t have as much direct contact. However, we have heard consistently that the Connected customer demographics – as you would imagine most interested in our product – are those looking for something special, unique, different and have a really superior quality to everything else out there. We ended up launching in Arizona with the highest price point for flower in the state, and we say that’s just the beginning. The market is still so young and immature, both nationally and internationally, that this category is going to develop into one that’s really taste-driven.

Aaron: What’s next in California?

Sam: Continued growth and product development. We want to keep blowing away our customers with more and more incredible products, different product types and categories. For example, the cartridges were a really big launch for us because we don’t really consider ourselves a vape company. We consider ourselves a flower company first and foremost, so for us, that was a very calculated strategic move. We were only going to launch the product if we could fully replicate what the consumer gets from the flower experience. We are very unlikely to ever release a distillate pen, for example.

Aaron: What are you personally interested in learning more about?

Sam: We, as a society, really don’t know very much about the cannabis plant. Pretty much all meaningful research around cannabis stopped in the early 1900’s with prohibition. In the meantime, we’ve performed millions of dollars of studies and research on almost every other plant that we grow commercially. We understand these plants extraordinarily well. Cannabis science is stuck back in agriculture of early 1900s. The most interesting conversations I have are around how the plant works, how it doesn’t work and the ways in which it is so different from all other plants with which we are familiar. Our head of cultivation comes from Driscolls, the largest berry company in the world, and even he is frequently surprised by the way the cannabis plant reacts to things that are commonly understood in other plants. So, the way the actual plant responds to different environments is truly fascinating and something I think we’ll be learning about for decades and decades to come.

Aaron: Okay, great. That concludes the interview. Thank you, Sam!

February 16, 2021

Soapbox

How Rare Cannabinoids Will Impact Investing

By Maxim Mikheev, Dennis O’Neill

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There is a significant increase in demand for all cannabinoid products across the board—including CBD, THC, CBG and THCV—from recreational users, consumer packaged goods and pharmaceutical companies. And the next great race is on for the hottest arrival to scientific cannabis therapeutics: rare cannabinoids.

Research shows rare cannabinoids are poised to be the future of cannabis investing, providing better health benefits in addition to impacting the pharmaceutical, CPG, nutraceuticals, cosmetics and pet care markets significantly. According to recent reports, the biosynthesis of rare cannabinoids will be a $25 billion market by 2025 and $40 billion by 2040.

The companies that will revolutionize this market are ones with the highest quality and lowest prices, which means that biosynthetic cannabinoid companies will be the leaders in investment and capturing market share. We will also see a major consolidation in this market amongst the grow, harvest and extraction companies, increasing efficiencies and driving down costs.

What are rare cannabinoids and why should we care?

Rare cannabinoids such as CBG, CBN, THCV, THCA and others have significantly better and more specific health benefits than just CBD on its own. Biotech companies like ours, Biomedican, which has a patent-pending biosynthesis platform, can produce pharmaceutical grade, non-GMO, bioidentical, synthetic cannabinoids with 0.0% THC at 70-90% less cost. Producing 0.0% THC means that rare cannabinoids can be added into nutraceuticals, CPG and cosmetics/lotions with zero changes in current cannabis regulations. Also, we produce the same exact product every time (not possible through plants), which is extremely important for pharmaceutical companies conducting clinical trials.

Why are rare cannabinoids important?

The human body contains different cannabinoid receptors that help regulate critical processes, including learning, memory, neuronal development, appetite, digestion, inflammation, overall mood, sleep, metabolism and pain perception. This considerable involvement of cannabinoid receptors, critical to many physiological systems, underscores their potential as pharmaceutical targets.

Pharmacological research has uncovered several medical uses for cannabinoids, which bind to cannabinoid receptors. They’ve been shown to help with pathological conditions such as pediatric epilepsies, glaucoma, neuropathic pain, schizophrenia and have anti-tumor effects as well as promote the suppression of chemotherapy-induced nausea. This ongoing research is becoming more prevalent and has the potential to uncover therapeutic uses for an array of cannabinoids.

In addition to the medical field, other prominent sectors have adopted the use of cannabinoids. There is an increasing demand for cannabinoids in inhalables, the food industry and in hygienic and cosmetic products. Veterinary uses for cannabinoids are also coming to light. The use of naturally occurring cannabinoids reduces the need for synthetic alternatives that may produce harmful off-target effects.

So how does this affect the investing market?

Where there is demand, significant and growth investments follow. All the major players from nutraceuticals, CPG, cosmetics and pet care companies are driving the demand for rare cannabinoids. We are seeing a major investment shift from commodity-based prices for cannabis and CBD to the new biosynthesis technology which offers significantly better health benefits and higher profit margins. Those unique qualities of rare cannabinoids open an enormous opportunity to create new drugs and food supplements for treating various medical conditions and improving the quality of life. This creates a massive global opportunity for all companies in these categories differentiating their products from competitors.

There will be big winners and losers in these markets, but at the end of the day, the highest quality and lowest cost producers will capture most of these markets. Biomedican has the highest quality, highest yields and lowest cost of production in the industry. Which we believe will make us the clear leader in the biosynthesis rare cannabinoid markets.

Which rare cannabinoid to invest in first?

Early reports indicate THCV (not to be confused with THC) could contain a variety of health benefits: it may help with appetite suppression/weight loss, possibly treat diabetes as well the potential to reduce tremors and seizures caused by conditions like multiple sclerosis, Parkinson’s disease and ALS.

There has been an explosion of interest in THCV due to its potential health benefits. We are seeing major players in the nutraceutical, health food and pharmaceutical industries clamoring to add THCV to their product lines. Companies can now produce THCV through biosynthesis, creating a pharmaceutical-grade, organic, bioidentical compound at 70-90% less than wholesale prices. This is exactly what the largest players in the market want: a pharmaceutical-grade, consistent product at significantly less cost. The current prices and quality have limited THCV production, but new breakthroughs in biosynthesis have solved those issues, so we expect a tsunami of orders for THCV in 2021.

February 16, 2021

THC Remediation of Hemp Extracts

By Darwin Millard

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Remediation of delta-9 tetrahydrocannabinol (d9-THC) has become a hot button issue in the United States ever since the Drug Enforcement Agency (DEA) released their changes to the definitions of marijuana, marijuana extract, and tetrahydrocannabinols exempting extracts and tetrahydrocannabinols of a cannabis plant containing 0.3% or less d9-THC on a dry weight basis from the Controlled Substances Act. That is because, as a direct consequence, all extracts and tetrahydrocannabinols of a cannabis plant containing more than 0.3% d9-THC became explicitly under the purview of the DEA, including work-in-progress “hemp extracts” that because of the extraction process are above the 0.3% d9-THC limit immediately upon creation.

The legal ramifications of these changes to the definitions on the “hemp extracts” marketplace will not be addressed. Instead, this article focuses on the amount of d9-THC that is available in the plant material prior to extraction and tracks a “hemp extract” from the point it falls out of compliance to the point it becomes compliant again and stresses the importance of accurate track-n-trace protocols at the processing facility. The model developed to support this article was intended to be academic and was designed to follow the d9-THC portion of a “hemp extract” through the lifecycle of a typical CO2-based extract from initial extraction to THC remediation. A loss to the equipment of 2% was used for each step.

Initial Extraction

For this exercise, a common processing scenario of 1000 kg of plant material at 10% cannabidiol (CBD) and 0.3% d9-THC by weight was modeled. This amount, depending on scale of operations, can be a facility’s total capacity for the day or the capacity for a single run. 1000 kg of plant material at 0.3% d9-THC has 3 kg of d9-THC that could be extracted, purified, and diverted into the marketplace. CO2 has a nominal extraction efficiency of 95%, meaning some cannabinoids are left behind in the plant material. The same can be said about the recovery of the extract from the equipment. Traces of extract will remain in the equipment and this little bit of material, if unaccounted for, can potentially open an operator up to legal consequences. Data for the initial extraction is shown in Image 1.

Image 1: Summary Data Table for Typical CO2-based Extraction of Phytocannabinoids

As soon as the initial extract is produced it is out of compliance with the 0.3% d9-THC limit to be classified as a “hemp extract”, and of the 3 kg of d9-THC available, the extract contains approx. 2.8 kg, because some of the d9-THC remains in the plant material and some is lost to the equipment.

Dewaxing via Winterization and Solvent Removal

Dewaxing a typical CO2 extract via winterization is a common process step. For this exercise, a wax content of 30% by weight was used. A process efficiency of 98% was attributed to the wax removal process and it was assumed that 100% of the loss can be accounted for in the residue recovered from the equipment rather than in the removed waxes. Data for the winterization and solvent recovery are shown in Image 2 and 3.

Image 2: Summary Data Table for Typical Winterization of a CO2 Extract

Image 3: Summary Data Table for Solvent Removal from a CO2 Extract

Two things occur during winterization and solvent removal, non-target constituents are removed from the extract and there is compounded loss from multiple pieces of process equipment. These steps increase the concentration of the d9-THC portion of the extract and produce two streams of noncompliant waste.

Decarboxylation & Devolatilization

Most cannabinoids in the plant material are in their acid form. For this exercise, 90% of the cannabinoids were considered to be acid forms. Decarboxylation is known to produce a mass difference of 87.7%, i.e. the neutral forms are 12.3% lighter than the acid forms. Heat was modeled as the primary driver and a process efficiency of 95% was used for the conversion rate during decarboxylation. To simplify the model, the remaining 5% acidic cannabinoids are presumed destroyed rather than degraded into other compounds because the portion of the cannabinoids which get destroyed versus degrade into other compounds varies from process to process.

Devolatilization is the process of removing low-molecular weight constituents from an extract to stabilize it prior to distillation. Since the molecular constituents of cannabis resin extracts vary from variety to variety and process to process, the extracts were assumed to consist of 10% volatile compounds. The model combines the decarboxylation and devolatilization steps to account for complete decarboxylation of the available acidic cannabinoids and ignores their weight contribution to the volatiles collected during devolatilization. Destroyed cannabinoids result in an amount of loss that can only be accounted for through a complete mass balance analysis. Data for decarboxylation and devolatilization are shown in Image 4.

Image 4: Summary Data Table for Decarboxylation and Devolatilization of a CO2 Extract

As the extract moves along the process train, the d9-THC concentration continues to increase. Decarboxylation further complicates traceability because there is both a known mass difference associated with the process and an unknown mass difference that must be calculated and justified.

Distillation

A two-pass distillation was modeled. On each pass a portion of the extract was removed to increase the cannabinoid concentration in the recovered material. Average data for distilled “hemp extracts” was used to ensure the model did not over- or underestimate the concentration of the cannabinoids in the distillate. The variables used to meet these data constraints were derived experimentally to match the model to the scenario described and are not indicative of an actual distillation. Data for distillation is shown in Image 5.

After distillation, the d9-THC concentration is shown to have increased by 874% from the original concentration in the plant material. Roughly 2.2 kg of the available 3 kg of d9-THC remains in the extract, but 0.8 kg of d9-THC has either ended up in a waste stream or walking out the door.

Chromatography – THC Remediation Step 1

Chromatography was modeled to remove the d9-THC from the extract. Because there are several systems with variable efficiency rates at being able to selectively isolate the d9-THC peak from the eluent stream, the model used a 5% cut-off on the front-end and tail-end of the peak, i.e. 5% of the material before the d9-THC peak and 5% of the material after the d9-THC peak is assumed to be collected along with the d9-THC. Data for chromatography is shown in Image 6.

Image 6: Summary Data Table for d9-THC Removal using Chromatography

After chromatography, a minimum of three products are produced, compliant “hemp extract”, d9-THC extract, and noncompliant residue remaining in the equipment. The d9-THC extract modeled contains 2.1 kg of the available 3 kg in the plant material, and is 35% d9-THC by weight, an increase of 1335% from the distillation step and 11664% from the plant material.

CBN Creation – THC Remediation Step 2

For this exercise, the d9-THC extract was converted into cannabinol (CBN) using heat rather than cyclized into d8-THC, but a similar model could be used to account for this scenario. The conversion rate of the cannabinoids into CBN through heat degradation alone is low. Therefore, the model assumes half of the available cannabinoids in the d9-THC extract are converted to CBN. The entirety of the remaining portion of the cannabinoids are assumed to convert to some form of degradant rather than a portion getting destroyed. Data for THC destruction is shown in Image 7.

Image 7: Summary Data Table for THC Destruction through Degradation into CBN

Only after the CBN cyclization step has completed does the product that was the d9-THC extract become compliant and classifiable as a “hemp extract.”

Image 8: Summary Data Table for Reconciliation of the d9-THC Portion of the Hemp Extract

Throughout the process, from initial extraction to the final d9-THC remediation step, loss occurs. Of the 3 kg of d9-THC available in the plant material only 2.1 kg was recovered and converted to CBN. 0.9 kg was either lost to the equipment, destroyed in the process, attributable to the mass difference associated with decarboxylation, or was never extracted from the plant material in the first place. All of these potential areas of product loss should be identified, and their diversion risk fully assessed. Not every waste stream poses a risk of diversion, but some do; having a plan in place to handle waste the DEA considers a controlled substance is essential. Without a track-n-trace program following the d9-THC and identifying the potential risk of diversion would be impossible. The point of this is not to instill fear, instead the intention is to shed light on a very real issue “hemp extract” producers and state regulators need to understand to protect themselves and their marketplace from the DEA.

February 11, 2021

New Guidance on Waste Disposal for Hemp Producers

By Stephanie McGraw, Emily Sellers

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On January 15, 2021, the USDA published its final rule on US hemp production. The rule, which becomes effective on March 22, 2021, expands and formalizes previous guidance related to waste disposal of noncompliant or “hot” crops (crops with a THC concentration above .3 percent). Importantly for the industry, the new disposal rules remove unduly burdensome DEA oversight and provides for remediation options.

Producers will not be required to use a DEA reverse distributor or law enforcement to dispose of noncompliant plants. Instead, producers will be able to use common on-farm practices for disposal. Some of these disposal options include, but are not limited to, plowing under non-compliant plants, composting into “green manure” for use on the same land, tilling, disking, burial or burning. By eliminating DEA involvement from this process, the USDA rules serve to streamline disposal options for producers of this agricultural commodity.

Alternatively, the final rule permits “remediation” of noncompliant plants. Allowing producers to remove and destroy noncompliant flower material – while retaining stalk, stems, leaf material and seeds – is an important crop and cost-saving measure for producers, especially smaller producers. Remediation can also occur by shredding the entire plant to create “biomass” and then re-testing the biomass for compliance. Biomass that fails the retesting is noncompliant hemp and must be destroyed. The USDA has issued an additional guidance document on remediation. Importantly, this guidance advises that lots should be kept separate during the biomass creation process, remediated biomass must be stored and labeled apart from each other and from other compliant hemp lots and seeds removed from non-compliant hemp should not be used for propagative purposes.

The final rules have strict record keeping requirements, such rules ultimately protect producers and should be embraced. For example, producers must document the disposal of all noncompliant plants by completing the “USDA Hemp Plan Producer Disposal Form.” Producers must also maintain records on all remediated plants, including an original copy of the resample test results. Records must be kept for a minimum of three years. While USDA has not yet conducted any random audits, the department may conduct random audits of licensees.

Although this federal guidance brings some clarity to hemp producers, there still remains litigation risks associated with waste disposal. There are unknown environmental impacts from the industry and there is potential tort liability or compliance issues with federal and state regulations. For example, as mentioned above, although burning and composting disposal options for noncompliant plants, the final rule does not address the potential risk for nuisance complaints from smoke or odor associated with these methods.

At the federal level, there could be compliance issues with the Resource Conservation and Recovery Act (RCRA), Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and ancillary regulations like Occupation Safety and Health Administration (OSHA). In addition to government enforcement under RCRA and CERCLA, these hazardous waste laws also permit private party suits. Although plant material from cultivation is not considered hazardous, process liquids from extraction or distillation (ethanol, acetone, etc.) are hazardous. Under RCRA, an individual can bring an “imminent and substantial endangerment” citizen suit against anyone generating or storing hazardous waste in a way the presents imminent and substantial endangerment to health or the environment. Under CERCLA, private parties who incur costs for removal or remediation may sue to recover costs from other responsible parties.

At the state level, there could be issues with state agency guidance and state laws. For example, California has multiple state agencies that oversee cannabis and hemp production and disposal. CA Prop 65 mandates warnings for products with certain chemicals, including pesticides, heavy metals and THC. The California Environmental Quality Act (CEQA) requires the evaluation of the environmental impact of runoff or pesticides prior to issuing a cultivation permit. Both environmental impact laws permit a form of private action.

Given the varied and evolving rules and regulation on hemp cultivation, it remains essential for hemp producers to seek guidance and the help of professionals when entering this highly regulated industry.

February 10, 2021

Jazz Pharmaceuticals to Acquire GW Pharma

By Cannabis Industry Journal Staff

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Last week, GW Pharmaceuticals (Nasdaq: GWPH) announced they have entered into an agreement with Jazz Pharmaceuticals (Nasdaq: JAZZ) for Jazz to acquire GW Pharma. Both boards of directors for the two companies have approved the deal and they expect the acquisition to close in the second quarter of 2021.

GW Pharma is well-known in the cannabis industry as producing the first and only FDA-approved drug containing CBD, Epidiolex. Epidiolex is approved for the treatment of seizures in rare diseases like severe forms of epilepsy. GW is also currently in phase 3 trials seeking FDA approval for a similar drug, Nabiximols, that treats spasms from conditions like multiple sclerosis and spinal cord injuries.

Jazz Pharmaceuticals is a biopharmaceutical company based in Ireland that is known for its drug Xyrem, which is approved by the FDA to treat narcolepsy.

Bruce Cozadd, chairman and CEO of Jazz, says the acquisition will bring together two companies that have a track record of developing “differentiated therapies,” adding to their portfolio of sleep medicine and their growing oncology business. “We are excited to add GW’s industry-leading cannabinoid platform, innovative pipeline and products, which will strengthen and broaden our neuroscience portfolio, further diversify our revenue and drive sustainable, long-term value creation opportunities,” says Cozadd.

Justin Gover, CEO of GW Pharma, says the two companies share a vision for developing and commercializing innovative medicines, with a focus on neuroscience. “Over the last two decades, GW has built an unparalleled global leadership position in cannabinoid science, including the successful launch of Epidiolex, a breakthrough product within the field of epilepsy, and a diverse and robust neuroscience pipeline,” says Gover. “We believe that Jazz is an ideal growth partner that is committed to supporting our commercial efforts, as well as ongoing clinical and research programs.”

February 9, 2021

Learning from the First Wave Part 2: California’s Cannabis Supply Chain and Vertical Integration, with a Grain of Salt

By Todd Feldman

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A Grain of Salt

Take the conventional wisdom about vertical integration with a grain of salt. Expected benefits may not materialize under the current circumstances:

Overall, the business environment is highly challenging due to extensive regulation, over taxation, insufficient retail capacity and competition from the “traditional” market. As a result, integrating businesses upstream or downstream may mean capturing losses, not profits.
The three major types of cannabis activity span three major industrial sectors: raw materials (i.e., cultivation), manufacturing and service (distribution, testing and retail). As a result, a vertically integrated company needs to carry out very different types of activity, which require very different types of core competencies, equipment and facilities.
- Developing core competencies is especially challenging because each of the major cannabis sectors is still evolving.
- Realizing the benefits of vertical integration requires an additional core competency in cross-sector operations.

Regulations Define the Supply Chain

California’s regulations define the cannabis supply chain by defining both the individual links (licensees) and the relationships between those links. Therefore, an understanding of vertical integration must be grounded in an understanding of the underlying regulatory definitions.

The regulatory definition of each link is extensive. For example, each licensee is tied to a specific facility, and must have its own procedures for production, inventory control, security, etc. When the links are strung together, this definition tends to preserve operational redundancies, and impede operational integration.

Overall, the relationships between the links are primarily defined in terms of preserving the chain of cannabis custody. On top of that, regulations define very specific (and very consequential) links between certain licenses, as discussed below.

A Taxonomy of Links

There are currently 26 types of cannabis license in California, 25 of which can be vertically integrated:

Cultivation – 14 licenses, including 4 sizes each for Indoor (up to 22,0000 sf), Mixed Light (up to 22,000 sf) and Outdoor (up to 1 acre), as well as Nursery and Processor (drying, trimming and packaging/labeling). Note that cultivation licenses are the only licenses that restrict the scale of activities.
Manufacturing – 5 licenses, including volatile extraction, non-volatile extraction, everything but extraction (i.e., infusion) and packaging/labeling.
Testing (Type 8), for testing cannabis according to state standards prior to sale. The owner of a testing license cannot own any other type of license.
Distribution (Type 11), acts as the gateway between cultivation and manufacturing on the one hand, and retail on the other. The distributor’s gateway status is entirely an artifact of regulation – cannabis must be officially tested before it is sold to a consumer, and only a distributor can order the official test. All products must stay in a “quarantine” area at the distributor until they pass testing. Products that fail testing must be destroyed if they cannot be remediated.
Transport (Type 13), which can move cannabis between licensees (with a narrow exception). This license does not allow for official testing.
Storefront Retail (Type 9), which is the best license to have, and the hardest one to get.
Delivery Retail (Type 10), for delivery services that are subject to the vagaries of software platforms and the intransigence of local authorities.
Microbusiness (Type 12), which allows the licensee to carry out cultivation (up to 10,000 square feet), non-volatile manufacturing, distribution and retail.
Event Organizer

Self-Distribution – A Case of Useful Integration

You may gather from the previous section that shoving a gratuitous and mandatory distributor into the middle of the supply chain creates problems for cultivators and manufacturers. Savvy operators solve this problem by getting a distribution license. This allows the cultivator or manufacturer to:

Pick the time and place for the testing of its cannabis products.
Avoid paying someone else for the storage of cannabis products as they await test results or purchase.
Reduce transport costs (particularly if the distributor is near the other operations).
Sell directly to retailers.

The bottom line is that vertical integration in California cannabis is useful as a means to an end, as opposed to an end in itself. Therefore, cannabis operators should carefully consider how vertical integration will benefit their core business before incurring the risks and expenses associated with an additional license.

This article is an opinion only and is not intended to be legal advice.