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Did Strip Clubs Open the Door for Cannabis Businesses to Receive PPP Loans?

By Steve Levine, Megan Herr
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In our previous posts, we discussed why state-legal medical and recreational cannabis businesses are likely not eligible to receive federal financial assistance under the Paycheck Protection Program due to the fact that these businesses are inherently engaged in federally illegal activities.

While our view has not necessarily changed, this post is intended to highlight the implications of a recent temporary restraining order prohibiting the U.S. Small Business Administration (SBA) from excluding strip clubs from receiving financial relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act or the “Act”).

The Case for Strip Clubs to Receive SBA Assistance

The Facts

Last month, DV Diamond Club of Flint LLC (dba Little Darlings) sued the SBA in the U.S. District Court for the Eastern District of Michigan claiming, among other things, that the agency exceeded its authority under the CARES Act by excluding otherwise eligible strip clubs from receiving Paycheck Protection Program (PPP) loans.

Little Darlings Night Club in Flint, Michigan

On April 6, 2020, Little Darlings, an adult entertainment establishment licensed in Flint, Michigan, applied for a PPP loan to mitigate its business losses as a result of the COVID-19 pandemic.

Due to rapidly diminishing PPP funds and the rejection of applications submitted by other seemingly eligible adult entertainment establishments, Little Darlings filed a claim against the SBA alleging that the agency’s April 15, 2020 “Business Loan Program Temporary Changes; Paycheck Protection Program “ Rule (the Interim Rule) exceeded the SBA and Department of Treasury’s regulatory authority under the CARES Act.

The Interim Rule, in part, provided that:

“Businesses that are not eligible for PPP loans are identified in 13 CFR 120.110 and described further in SBA’s Standard Operating Procedure (SOP) 50 10, Subpart B, Chapter 2, except that nonprofit organizations authorized under the Act are eligible.” 1

The Interim Rule effectively clarified that those businesses that “are identified” in 13 C.F.R. § 120.110 (the Ineligibility Rule) and “described further” in Standard Operating Procedure 50 10 5(K) are “not eligible for PPP loans.”

The Ineligibility Rule – 13 C.F.R. §120.110

In 1996, the SBA declared that certain types of businesses are not eligible to participate in SBA lending programs. Under the Ineligibility Rule (codified at 13 CFR § 120.110), certain sexually oriented businesses2 and “businesses engaged in any illegal activity,”3 in addition to other enumerated businesses, were barred from receiving SBA financial assistance.

The SOP

In 2019, the SBA issued “Standard Operating Procedure for Lender and Development Company Loan Programs 50 10 5(K)” (the SOP) providing guidance to lenders regarding how to administer the Ineligibility Rule. The SOP explained that certain business types such as “Businesses Providing Prurient Sexual Material”i and “Businesses Engaged in any Illegal Activity,ii” among others, may be “ineligible” to participate in SBA programs.4

The Argument

In addition to arguing that the SBA’s regulations violated Little Darlings’ Constitutional rights under the First and Fifth Amendments, Little Darlings alleged that the SBA lacked authority to promulgate regulations clarifying what businesses were eligible for PPP loans, as Congress intended to “increase eligibility” for PPP loans under the CARES Act by establishing only two criteria for PPP eligibility. Moreover, Little Darlings relied on the fact that Congress explicitly provided that “any business concern . . .  shall be eligible” for a PPP loan if it met the criteria identified in 15 U.S.C. § 636(a)(36)(D)(i) of the CARES Act.

As a result, Little Darlings sought a Temporary Restraining Order (TRO), Preliminary and Permanent Injunction enjoining the SBA from enforcing or utilizing the Ineligibility Rule or SOP to exclude otherwise eligible PPP loan applicants. As part of the orders, the SBA would be required to immediately notify all SBA lending banks to immediately discontinue utilizing 13 CFR § 120.110 or the SOP as criteria for determining PPP eligibility and to process all PPP loan applications without reference to such regulations and procedures.

On May 11, 2020, U.S. District Judge Matthew Leitman granted Little Darlings’ TRO blocking the SBA from enforcing the Ineligibility Rule and SOP finding that Congress intended to provide temporary paycheck support to “all Americans employed by all small businesses that satisfied the two eligibility requirements – even businesses that may have been disfavored during normal times.”5

Notably, the Sixth Circuit refused to overturn the TRO reasoning that withholding loans from previously “ineligible” businesses, such as strip clubs, conflicts with the broad interpretation of the CARES Act.

Similar cases have also been brought in Illinois and Wisconsin on behalf of adult entertainment businesses that have been denied PPP relief. Notably, on April 23, 2020, the U.S. District Court for the Eastern District of Wisconsin issued a comparable injunction blocking the SBA from denying federal financial assistance to multiple Wisconsin gentlemen clubs.

Implications for Cannabis Businesses

As we previously discussed, one of the largest hurdles for cannabis businesses to receive federal financial assistance from the SBA is that applicants must make a good faith certification that they are not engaged in any federally illegal activity.6

The SBA has historically relied on both the Ineligibility Rule and SOP to uphold its position that “illegal activities” include both Direct Marijuana Businessesiii and Indirect Marijuana Businessesiv that “make, sell, service, or distribute products or services used in connection with illegal activity.”7

However, should Judge Leitman’s interpretation hold true and continue to prohibit the SBA from utilizing the Ineligibility Rule or the SOP as criteria for determining PPP eligibility, cannabis businesses (namely Indirect Marijuana Businesses8) may be eligible to receive PPP loans so long as they satisfy the eligibility requirements identified in the CARES Act.

Although it would ordinarily be absurd to conclude that Congress intended to provide financial assistance to businesses operating in clear violation of federal law (such as Direct Marijuana Businesses), the U.S. District Court for the Eastern District of Michigan and the Sixth Circuit have concluded that the expansive definition of “any business concern” in the CARES Act is not subject to SBA limitations.

U.S. District Judge Matthew Leitman

As Judge Leitman elaborated in his May 11, 2020 order:

“Congress’s decision to expand funding to previously ineligible businesses is not an endorsement or approval of those businesses. Instead, it is a recognition that in the midst of this crisis, the workers at those businesses have no viable alternative options for employment in other, favored lines of work and desperately need help. It is not absurd to conclude that in order to support these workers, Congress temporarily permitted previously excluded businesses to obtain SBA financial assistance.”

Therefore, although we believe it to be highly unlikely that cannabis businesses will actually receive PPP loans due to their continued violation of the Controlled Substances Act (CSA) and need to make a good faith certification that they are not engaged in any federally illegal activity, the door has been opened for certain types of cannabis businesses to potentially receive PPP loans should the SBA remain prohibited from relying on the Ineligibility Rule or SOP to disqualify otherwise eligible applicants.

References

  1. See Interim Rule, p. 2812
  2. 12 C.F.R. § 120.110(p) Businesses which: (1) Present live performances of a prurient sexual nature; or (2) Derive directly or indirectly more than de minimis gross revenue though the sale of products or services, or the presentation of any depictions or displays, of a prurient sexual nature
  3. 12 C.F.R. § 120.110(h) Businesses engaged in any illegal activity.
  4. See the 2019 SOP, ECF No. 12-11, PageID.570
  5. Specifically, U.S. District Judge Matthew F. Leitman reasoned that: “While Congress may have once been willing to permit the SBA to exclude these businesses from its … lending programs, that willingness evaporated when the COVID-19 pandemic destroyed the economy and threw tens of millions of Americans out of work…” In response to the SBA’s argument that such an interpretation would lead to “absurd results,” Judge Leitman stated: “[T]hese are no ordinary times, and the PPP is no ordinary legislation. The COVID-19 pandemic has decimated the country’s economy, and the PPP is an unprecedented effort to undo that financial ruin.”
  6. See Borrower Application Form, page 2; see also COVID-19 Economic Injury Disaster Loan Application
  7. See SOP 50 105(K) at Ch. 2(III)(A)(8).
  8. It is our position that Indirect Marijuana Businesses (or non plant-touching businesses that service state licensed marijuana establishments) will have an easier time alleging that they are not operating in violation of federal law than those businesses whose existence is inherently premised on cultivating and distributing marijuana in violation of the Controlled Substances Act

i Businesses Providing Prurient Sexual Material (13 CFR § 120.110(p))

  1. A business is not eligible for SBA assistance if:
  2. It presents live or recorded performances of a prurient sexual nature; or
  3. It derives more than 5% of its gross revenue, directly or indirectly, through the sale  of  products,  services  or  the presentation  of  any  depictions  or  displays  of  a  prurient sexual nature.
  4. SBA has  determined  that  financing  lawful  activities  of  a prurient sexual nature is not in the public interest. The Lender must  consider  whether  the  nature  and  extent  of  the  sexual component causes the business activity to be prurient.

ii Businesses Engaged in any Illegal Activity (13 CFR § 120.110(h))

  1. SBA must not approve loans to Applicants that are engaged in illegal activity under federal, state, or local law. This includes Applicants that make, sell, service, or distribute products or services used in connection with illegal activity, unless such use can be shown to be completely outside of the Applicant’s intended market.
  2. Marijuana-Related Businesses:
  3. Because federal law prohibits the distribution and sale of marijuana, financial transactions involving a marijuana-related business would generally involve funds derived from illegal activity. Therefore, businesses that derive revenue from marijuana-related activities or that support the end-use of marijuana may be ineligible for SBA financial assistance.

iii “Direct Marijuana Business” mean “a business that grows, produces, processes, distributes, or sells marijuana or marijuana products, edibles, or derivatives, regardless of the amount of such activity. This applies to recreational use and medical use even if the business is legal under local or state law where the applicant business is or will be located.”

iv “Indirect Marijuana Business” means “a business that derived any of its gross revenue for the previous year (or, if a start-up, projects to derive any of its gross revenue for the next year) from sales to Direct Marijuana Businesses of products or services that could reasonably be determined to aid in the use, growth, enhancement or other development of marijuana. Examples of Indirect Marijuana Businesses include businesses that provide testing services, or sell or install grow lights, hydroponic or other specialized equipment, to one or more Direct Marijuana Businesses; and businesses that advise or counsel Direct Marijuana Businesses on the specific legal, financial/ accounting, policy, regulatory or other issues associated with establishing, promoting, or operating a Direct Marijuana Business. However … [the] SBA does not consider a plumber who fixes a sink for a Direct Marijuana Business or a tech support company that repairs a laptop for such a business to be aiding in the use, growth, enhancement or other development of marijuana. Indirect Marijuana Businesses also include businesses that sell smoking devices, pipes, bongs, inhalants, or other products if the products are primarily intended or designed for marijuana use or if the business markets the products for such use.”

Priorities During the Pandemic: How to Run a Lab Under COVID-19

By Dr. Peter Krause, Udo Lampe
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During the COVID-19 pandemic, most testing laboratories have been classified as relevant for the system or as carrying out essential activities for national governments. Therefore, it is crucial to maintain activities and optimally assess the changes that are occurring, framed within the spread of the SARS-CoV-2 virus. Analytica Alimentaria GmbH, a testing laboratory with its headquarters in Berlin, Germany and a branch office in Almeria, Spain, decided to focus its management on the analysis of events and the options available, at the legal and employment level, to ensure continuity of activities and reducing, as much as possible, the damage for the parties involved: employees and company. Accredited by the International Accreditation Service (IAS) to ISO/IEC 17025:2017, Analytica Alimentaria GmbH is required to implement risk-based thinking to identify, assess and treat risks and opportunities for the laboratory. Since March 12, 2020 a crisis committee was established, formed by the six members of the company’s management, covering general management, human resources, direction of production, finance and IT. The committee meets every day and it intends to:

  • Minimize the risks of contagion
  • Be able to continue providing the service required by our clients
  • ensure that the company as a whole will survive the economic impact of the crisis
  • Take measures that are within the legality of both countries where the laboratory operates (Spain and Germany),
  • Manage internal and external communication related to the crisis

To achieve correct decision making, daily meetings of the committee were established, to review the situations that were presented day after day and the actions that should be carried out. Each decision was analysed in a prioritized, objective, collaborative and global way.

The basis of the lab’s action plan was a well-developed risk assessment. In addition to the risk of getting a droplet or smear/contact infection with the coronavirus SARS-CoV-2 (risk I) by contact with other people, psychological stress caused by changing working conditions (home office), contact options and information channels were also identified (risk II).

As a result of the risk assessment, the conclusion was that a mix of various measures is the best form of prevention:

  • Keep distance
  • Avoid “super spreader” events
  • Personal hygiene
  • Regular communication between managers and personnel about the current situation and possible scenarios

The risk assessment took both areas into account. The following assessment was developed together with an external specialist and focused on risk I:

Risk I Assessment Protective measures / hygiene plan
Organisation
Working hours and break arrangements High Limit the gathering of people and ensure a minimum distance:

  • Relocated work, break and mealtimes
  • Create fixed groups of shift-working staff
  • Time gap of 20 min. between the shifts
  • Enable home office wherever it is possible
Third party access Moderate Few but “well-known” visitors:

  • Reduce the number of visits and keep internal contacts to a minimum
  • Ensure the contact chain
  • Inform visitors about the internal rules and obtain written consent
Dealing with

suspected cases

 High Isolation and immediate leave of the company:

  • Contactless fever measurement (in case of typical symptoms)
  • Leave the company or stay at home
  • If the infection is confirmed, find contact persons (including customers or visitors) and inform them about a possible risk of infection
Contact with other persons
Traffic route from home to work Moderate Avoid public transportation:

  • Take a car, bicycle or go by foot
  • Enable mobile work and teleworking
At work High Always keep a sufficient distance of 2.0 m from people:

  • If minimum distances cannot be maintained, wear protective masks or install physical barriers (acrylic glass)
  • Organize traffic routes so that minimum distances can be maintained (one-way routes, floor markings indicating a distance of 2 m)
  • Use digital meetings instead of physical ones
Sanitary facilities Moderate Remove virus-loaded droplet as often as possible:

  • Provide skin-friendly liquid soaps and towel dispensers
  • Shorten or intensify cleaning intervals
  • Hang out instructions for washing hands at the sink
  • Include instructions for proper hand-disinfection
Canteens, tea kitchens and break rooms High One person per 10 m² = minimum:

  • Reduce the number of chairs per table
  • Informative signs in every room, indicating the maximum number of permitted persons
Ventilation High Diluting or removing bioaerosols (1 µm virus-droplets):

  • Leave as many doors open as possible
  • Regular and documented shock ventilation every 30 minutes or more frequently, depending on the size of window
  • Operate ventilation and air-conditioning systems, since the transmission risk is classified as low here
Use of work equipment Moderate Use tools and work equipment for personal use:

  • Regular cleaning with changing use (PC, hand tools, coffee machine, …)
  • If possible, use gloves when using equipment for a larger number of users
Protective masks Moderate
  • Use of protective masks as an additional measure, indicating that this does not replace keeping distance
  • Recommend wearing masks in commonly used areas and explain that they do not protect yourself, but help to protect others
  • Give clear instructions (written and oral) on how to use a mask correctly and explain the use and purpose of different mask-types
  • Distribute masks freely

A number of guidelines and concrete measures addressing the risks related to health issues are already in place. Those health issues in risk group II are more closely related to the psychological effects of the crisis, however, are also more complex to mitigate. The key strategy is communication and, in particular, actively listening to all employees of the company.

Analytica’s robust company culture, based on values established in coordination with the whole staff, has been of significant help during the crisis. The some 150 staff members are organized by over 22 team coordinators. During the crisis, active communication has been intensified significantly. The crisis management team set up regular alignment meetings with all the coordinators and with individual persons with particular situations. This way, not only was it possible to explain the development of the crisis and the subsequent measures, the conversations with coordinators were also the most important source of information enabling the appropriate decisions. The coordinators, closely aligned and in sync with management, were then able to communicate with their team members with a high degree of confidence. One outcome of the communication was a measure that proved very effective in fortifying trust within the company: all measures and evaluations, as well as a chronological review, are published in a dynamic internal report and are made available, with full transparency, to all staff members. Besides the many individual and group alignment meetings (usually held by video conference), this has been a key measure to establish confidence and security within the company.

On the other hand, the company made a great effort to balance the effect of the general closure of kindergartens and schools in Spain and Germany. Each case where staff members were required to care for children at home was studied individually and agreements were established, adapting shifts and making use of time accounts, to allow childcare at home without significant loss of income.

The success of the measures is shown by the continuous work of both laboratories during the crisis. Besides the personal tragedy of a possible infection, the identified risk to the company has the consequence of a (partial) quarantine due to an infected person in contact with the staff and the consequent loss of work-power which might lead, in extreme cases, to a closure of the laboratory. According to the governmental regulation in Germany, if an infection occurs (confirmed by the health department), contact persons cat. 1 (more than 15 min. contact face to face) are identified and sent to quarantine. Other contact persons, e.g. contact persons cat. 2 (same room without face to face) must be identified quickly with the collaboration of the infected person and notified and, if necessary, sent in quarantine. In this case, there is a confirmed emergency plan that maintains the laboratory’s ability to work, defining replacements and alternative work-flow strategies.

It has been part of our strategy to validate all our measures with the relevant guidance documents made available by the official competent institutions. The German Federal Office for Public Safety and Civil Protection (Bundesamt für Bevölkerungsschutz und Katastrophenhilfe) has published a guide, “Crisis Management in Companies, 9-point Checklist” especially for critical infrastructure companies in the CoVid-19 crisis.

Having been classified as a core business enterprise (Spain) and “relevant to the system” (Germany), we consider it important to use them as a reference to confirm our level of alignment with your proposal for crisis management.

An important effect, relevant to any leader in times of crisis, is that the confirmation of all points of such a checklist provides certain peace of mind regarding the question: Have we done everything we could?

7 Factors to Consider When Choosing Cannabis Software

By Ella Alpina
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These days, there are countless choices for cannabis operators when it comes to software. There are general tools like Trello, Airtable, Hubspot and Mailchimp. And then there is industry-specific software built just for cannabis operators.

The cannabis industry is fast-paced and highly regulated. So, there are certainly additional factors to consider in the search for software.

Because no two systems are exactly alike, it’s important to set up a decision-making framework in order to do a clean side by side comparison. Consider the following factors when evaluating software. Specifically, think about each one’s importance to the team and its ultimate goals.

1. Functionality

Functionality is the most important factor in the evaluation process. But, before the demos begin, take the time to identify the problems this new software should solve for the company.

Will it help you automate or optimize your processes or just offer basic features that won’t make a meaningful impact on the bottom line? (The whole point!)

2. Customer Support

For some, the level of customer support is an afterthought. The team that will use the software needs prompt, attentive support both during onboarding and after.

How does one evaluate the level of customer service a software company offers?

Questions like these will gather the info needed to make a decision:

  • How many support specialists are there vs how many total customers?
  • What’s the turnaround time for a support ticket?
  • Can I schedule one-on-one calls after the onboarding period?
  • Describe your onboarding process – how many sessions or hours do we get with your team?

Ideally, the software company takes support very seriously. Because if they don’t, here’s what happens: the team won’t use it or worse, costly mistakes will be made.

Another aspect seldom considered is the company’s industry expertise. Software vendors that stay up to date on changing regulations can provide much more value than those who don’t. Test their knowledge and see whether they would make a solid resource for you.

Software built for the cannabis industry is likely to provide this kind of support. Some industry-specific vendors, that provide cannabis cultivation software for instance, are able to answer their customers’ ongoing Metrc questions. They can become your right hand in solving compliance and, oftentimes, operational challenges.

3. Ease of Use

Always keep in mind who the end user will be. Is it someone who’s tech-driven or not at all?

The trick is to balance complexity with ease of use. If complexity is feared, there’s a risk for selecting software too simple. In this case, the value of automation and cost savings isn’t gained.

At the same time, it’s important to stay mindful of how complicated or difficult it will be for the team to adopt and use.

What does a typical day look like for employees and will the software be an approachable, useful tool for them?

4. Credibility

In a new, growing industry, there are many software vendors. How long have they been in business? Some have been around for years while others only months.

The last thing you want is for the software company to disappear off the face of the earth just when your team is on-boarded and trained. Also, beware of huge corporations that have turned their attention to the Green Rush and created a separate business unit just for cannabis. A lack of industry knowledge can be felt in the software application. If it’s being repurposed for our industry, chances are it won’t seamlessly work for our workflows.

Finally, ask what companies are currently using the software. Bonus points for recognizing any of them! It shows that established companies trust this vendor. In making the decision for which software to go with, this validation holds weight for many.  Before signing a contract and implementing the new software, make sure to read the fine print!

5. Cost vs Value

At the top of everyone’s mind is price. In these tumultuous times, we’re all worried about the bottom line.

That said, review a software company for the value it can bring to your cannabis business. How much labor time will the software save due to its automation and streamlining? Is it quantifiable?

Budgeting for a more expensive software might actually make sense if the value is there. Crunch the ROI, to the best of your abilities, to see the impact its set of features can make.

6. Enhancements

How quickly and how often does the software provider innovate its product? Ask the company for examples of how they’ve listened and addressed requests for changes or additions to their software.

Also ask what their road map looks like for the year. What new features and changes will they be making?

Without updates, software can quickly become outdated and irrelevant. A perfect solution today is not a perfect solution two years from now. Select a vendor who’s committed to regular improvements.

7. Exit Strategy

Before signing a contract and implementing the new software, make sure to read the fine print!

Some companies will try to lock in a multi-year contract. Beware of contracts that will charge for early termination if you change your mind down the road.

Get the fine print and ask for clear terms of the commitment. In a fast-paced industry like ours, priorities and needs change often. Contract lock-up is not optimal.

How to Grow a New Cannabis Business Amid a Pandemic

By Hannah Deacon
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The COVID-19 crisis is plunging the global economy into recession, changing consumer behavior and the world of business. Cannabis businesses are no stranger to operating in a challenging landscape. The constantly evolving legal status, regulatory hurdles and social stigma has forced founders in this space to be nimble and more financially wise with their capital.

While the market has experienced a seismic shift that has already attracted investors to inject capital into the cannabis industry and seen neighboring industries, including tobacco, alcohol and pharma, come into the fray, COVID-19 will change key industry structures and operations. To succeed and cultivate value, cannabis companies must adapt to the new realities of the marketplace to be well positioned for continued growth after the pandemic subsides.

With social distancing guidelines suddenly forcing brick-and-mortar retailers to move their businesses and customer experiences online and disruptions to the supply chain due to international travel and business directions, some businesses will struggle to stay afloat.

As consumer behaviour and online shopping patterns adjust to a new way of living (affecting B2B sales, online ordering, deliveries and manufacturing), leadership and strategic thinking will be paramount.

By understanding where the challenges and opportunities lie, cannabis businesses can thrive. Here are some focus areas and tactics to consider:

  1. Targeted consumer segmentation through social media

When starting a cannabis business, it is key to understand who your core consumers are and what they want from their products. This has become even more acute because of the pandemic with consumers flocking to all sorts of health-focused products including CBD.

With everybody spending more time online, social media use is on the rise. Executing a social media plan to include influencer outreach can increase brand visibility, build a solid consumer base and create brand advocates.

Instagram is essential to a cannabis business building an online presence but it’s important that it doesn’t become a “hard sell, please buy me” channel. Plan and make Insta-worthy content that educates and entertains followers to increase engagement, click-through rates and leads. Brands may want to pair with an influencer on either a gifting or paid-for basis which will mean the brand appears in a potential customer’s feed as they interact with their favourite accounts.

PlugPlay, a California cannabis brand, stays relevant with creative posts like these.

The art is finding key influencers whose audience is one that you would like to interact with. This type of positioning will allow cannabis businesses to reach a new audience or group of people.

  1. Marketing and PR

In times like these, many companies choose to pull back on communication activities and expenditures for fear of spending too much for what they perceive as little return, however, marketing and PR, when executed well, can be the lifeline of any business.

With so much noise in the market about the “next best thing in cannabis”, effective marketing and PR can distinguish brands that are credible and offer a strong value proposition to those that are all smoke and mirrors.

The current needs of businesses and consumers are much different than they were just a few short months ago, so it’s important to understand these needs and spending habits while combatting negative perceptions of cannabis.

As cannabis companies are not able to advertise like mainstream companies, a strong public relations and marketing strategy will enable firms to communicate their identity, build trust, shift perceptions through media coverage, enhance reputations and reach customers, partners and investors.

  1. Cost cutting

Businesses in every sector are cutting costs to keep their businesses afloat. This needs to be done strategically and requires senior leadership teams to explore cost reduction strategies and streamline non-essential costs.

This may mean further consolidation of cannabis companies and supply chains to manage cash flow and maximise resources. Companies may even look to create strategic partnerships with complementary businesses in the industry or push some firms towards mergers and acquisitions.

Business models will evolve as cannabis companies identify inefficiencies and reconfigure their operations and messaging. This could range from assessing their R&D capabilities, agricultural assets, manufacturing chains or route to market.

  1. E-commerce capabilities
Pivoting to e-commerce is nothing new, but getting creative with product offerings and marketing initiatives will set you apart from the typical CBD retailer

The postponement of countless CBD Expos, trade shows and cannabis conferences are creating new demand and opportunities for businesses. To reach prospective wholesale clients, investors and connect to their customer base, firms are entering the digital marketplace. Digital events, Zoom investor pitch panels and email marketing and sampling is on the rise and expected to grow over the coming months.

CBD brands should work in parallel with their retail partners to influence product samples in digital offers and create a touchless transaction. Buying products online is going to become a permanently entrenched habit, even when restrictions are fully lifted so it’s worth looking at how technology can support and enhance sales while offering a smooth customer experience.

  1. Industry Relationships

Everyone in the cannabis industry will be affected by COVID-19 so maintaining positive relationships is vital in these tough times. Calling investors or partners to tell them what is going on with your business or checking in on others in your ecosystem means information can be shared to iron out any issues and help generate ideas to future proof the business. “A problem shared is a problem halved!”

COVID-19 is creating incredible business challenges. As we navigate the new normal, it’s important to adapt and grow. As more products come to market and brands/services develop distinguished offerings, expectations will change so cannabis businesses need to be ready for greener pastures.

The Brand Marketing Byte

Business Development Impact: Chalice Farms

By Cannabis Industry Journal Staff
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The Brand Marketing Byte showcases highlights from Pioneer Intelligence’s Cannabis Brand Marketing Snapshots, featuring data-led case studies covering marketing and business development activities of U.S. licensed cannabis companies.

Here is a data-led, shallow dive on Chalice Farms:

Chalice Farms – Business Development Impact

Based in Oregon, this company is a retail and edibles brand in the Golden Leaf Holdings portfolio. Chalice Farms has a number of locations in the Portland area, capitalizing on an effective regional strategy.

However, 2019 was a tough year for Oregon cannabis companies. Increased competition and heavy market saturation led to plummeting prices, forcing Chalice Farms to implement layoffs last Spring. 2020 appears to show Chalice Farms doing much better than the previous year.

In addition to tightening operations, the company engaged in several new business development initiatives recently. They’ve expanded distribution of their signature fruit chews into California and Nevada. They also implemented a sales initiative called “an extended 420 celebration,” covering the month of April. All six of the company’s branded retail locations have pivoted to curbside pickup and home delivery during the coronavirus pandemic.

All of those initiatives led to a boom in earned media for Chalice Farms. They were mentioned on CNN and in Forbes, among other national news outlets. The company also improved their web activities considerably, adding keywords, backlinks and a notable increase in web traffic.

Chalice Farms ended the month of April on a high note, moving to the 11th hottest web property, according to data from Pioneer Intelligence. This continued into May; Chalice Farms claimed the #26 position on the Pioneer Index, the highest it has been to date.

Managing Supply Chain Challenges During a Crisis

By Daniel Erickson
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Discussion of supply chain disruption has permeated media reports almost daily since the advent of the current COVID-19 crisis – from shortages of toilet paper to cleaning products and meat. Cannabis businesses have not been immune to impacts on their supplies, and for an industry that faces unique challenges during normal times, a disrupted supply chain has emerged as one of the biggest issues to business due to the coronavirus. Deemed essential in many states, cannabis has weathered the storm relating to government-imposed restrictions only to face logistics problems or a scarcity of supplies necessary for manufacturing and/or distributing products to consumers. For many companies, cannabis ERP software has provided a necessary and supportive structure to efficiently manage and mitigate supply chain challenges during this unprecedented time – facilitating continuity and trust in the supply chain for their customers.

What is COVID-19’s impact on the cannabis supply chain?

During this pandemic, the global supply chain has been disrupted due to factory closures, worker illness, slowed production, closed ports and altered transportation routes – leading to shipping delays and fewer supplies available, from cultivating essentials and vaping accessories, to baking ingredients for edible manufacturers and packaging materials. A quarantined workforce, as well as a shortage of healthy crop care and production workers necessary to grow and harvest crops, has also had an effect. Similar to other current supply issues, there has been significant inventory depletion as consumers prepared to stock up on cannabis products for “stay at home” orders in anticipation of spending extended periods of time at their residence. Uniquely pertinent to the cannabis industry, due to the lack of federal legalization, regulation occurs at the state level and therefore each state governs its cannabis inventory available for sale. These factors have all led to the two biggest problems facing today’s cannabis industry – companies lacking visibility into their inventory and the fact that many do not have alternate vendors for their supplies to meet current consumer demands.

How a cannabis ERP software solution can help

During a disruption to the supply chain such as the COVID-19 outbreak, natural disasters, or other unexpected events, here are three ways an industry-specific ERP system supports effective supply chain management for the cannabis industry:

1) Continuous management and monitoring of inventory and effective material planning – With a real-time tracking system that monitors the movement and storage of inventory by managing and automating transactions and providing lot tracking and traceability, cannabis companies have up-to-the-minute access to crucial inventory data. Accurate analysis of future requirements, as well as procurement guidelines that include minimum order quantities and safety stock levels, ensure the proper planning and reordering of materials – avoiding lags in production due to inventory shortages. Using the information recorded in an ERP solution’s centralized database, such as vendor lead times, shelf life and production timelines, buyers and planners are able to effectively utilize materials requirements planning (MRP) functionality to factor supply, demand and forecasted requirements to plan production and purchasing. Customer purchasing fluctuations throughout the year for holidays and seasonal consumer trends are also tracked in the system, and its analytics software provides growers, cultivators and manufacturers with the visibility to mitigate supply shock and analyze previous periods of hardship to provide actionable insight.

An integral part of inventory control includes testing protocols and quality processes that are automated in an ERP solution. These workflows and approval processes ensure that specific quality standards are met and non-compliant raw materials are quarantined, removed from production and issues are rectified – keeping undeclared substances, harmful chemicals and impure ingredients from infiltrating the supply chain or ending up in finished goods. During these critical and trying times, assurances that materials and ingredients are safely managed and monitored is imperative.

2) Maintenance of supplier information and rankings – A cannabis ERP solution provides features for managing supplier and item specific details to monitor and control which materials can and should be purchased from each vendor. A strong relationship with each supplier is critical in gathering this information, as this helps assign and manage a risk level with each supplier. Current and accurate information (either provided by the vendor or acquired from on-site visits) regarding sanitation programs in place, security measures, physical distancing policies and other details ensures that a cannabis company starts with a foundation of quality raw materials for their products. An ERP solution maintains a list of these approved suppliers to provide already vetted and documented alternatives should a primary supplier’s materials be unavailable. Once vendors are recorded they can be ranked in order of preference and/or risk level so that if a supplier becomes unavailable, another can be quickly identified and used in its place. An ERP’s maintenance of approved supplier lists is an industry best practice that provides supply chain visibility to enhance the assurance of safety.

3) Establishment of supplier transparency through audit rights and communication – An ERP’s ability to manage and monitor all supplier transactions and communications helps facilitate audit rights to evaluate the financial viability of vendor partners. Data is collected regarding vendor price points, historical transactions, average lead times and quality control results in order to identify vendor trends and build a risk assessment with a scorecard rating system for each supplier. Potential supply chain issues can be identified in real-time – such as price increases or delivery delays – prompting communication with suppliers to address problems or triggering the change to an alternate source for materials. Transparency and open communication are key to vendor analysis by researching all suppliers. An ERP solution’s maintenance of current, accurate information is essential to keeping a consistent inventory.

A centralized ERP system facilitates the maintenance and management of the supply chain when a crisis of the magnitude of COVID-19 hinders supplies from arriving or the safety of vendor materials comes into question. Inventory management best practices within the solution help to avoid production lags due to inventory shortages, materials planning provides insight into scheduling and production, and quality assurance procedures prevent harmful products from being sold to consumers. By utilizing features such as the approved supplier and alternative supplier processes within the system should a primary suppliers’ materials be unavailable, there is no need to scramble to find replacement vendors, as they are already vetted and documented within the solution. The system also provides transparency of supplier information to make key decisions regarding vendor rankings and risk level. While the cannabis supply chain is relatively new and untested, proactive companies have the technological tools available in an ERP solution at their disposal to weather the current crisis and face future industry challenges head-on.

Solutions & Alternatives to Bankruptcy for Cannabis Businesses

By Richard Ormond
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A Cannabis Related Business (or CRB), whether a plant-touching operation or a provider of goods and services to plant-touching operations cannot seek protection from the bankruptcy court as it is a federal court and cannabis remains illegal at the federal level. As such, a CRB does not have the benefit of a court approved restructuring as provided by Chapter 11 of the Bankruptcy Code and does not receive the benefit of an orderly liquidation as provided by Chapter 7 of the Bankruptcy Code. However, alternatives to bankruptcy do exist and are available to a CRB.

Historical Considerations

Before the emergence of the Bankruptcy Code, businesses and their creditors had very few options available to undertake a court-supervised restructuring or liquidation other than seeking the appointment of a court neutral, typically called a receiver or special master. That “neutral” would take the business or its assets into “legal custody” or custodia legis and begin the process of dissolving the entities, selling the assets or otherwise sell the business as a going-concern. In the 1880s and 1890s with the Gilded Age coming to an abrupt halt, this process was successfully used to restructure and recapitalize the failing network of over-extended railways and rail lines, leading to the consolidation in the market that remains to this day.

Cannabis businesses can be legal and now an “essential” business but, still cannot receive the benefits of bankruptcy court.During the Great Depression, the federal judiciary established “reference” courts to deal specifically with bankrupt businesses and individuals laying the foundations for the modern bankruptcy code which is still in effect today. Many of those first precedents used to establish the bankruptcy code and rules were drawn directly from the receivership case law and receivership statutes ever-present in the historical record of common law cases and common law countries, reaching all the way back to the Courts of Chancery in Britain established soon after the Norman invasion of the British Isles in 1066.

In the United States, the equitable power of courts to initiate receiverships or other insolvency proceedings and crafting orders and decrees based on equity, as opposed as based on law or statute, is codified clearly in Article III of the United States Constitution. Today, receiverships and special masters are still utilized by state and federal courts to remedy unique circumstances where a simple bankruptcy cannot address the inequities presented in that case.

State Court Powers & Financing of Receivership Estates

State courts in particular, and California especially, have a wide body of case law supporting the equitable powers of the court, the quasi-judicial immunity of the receiver and the many equitable tools available to receivers. These powers include the negotiation and transfer of liens, with liens attaching to proceeds of sales of assets, the dissolution of a business and the establishment of a claims process akin to a bankruptcy or assignment for benefit of creditors.

One of the many overlooked powers of a receiver is their ability to bring in outside financing or capital to fund the receivership estate to maintain a business as an ongoing concern or to provide short term leverage so that assets can be properly maintained, “dusted off” and sold.

This process of bringing in new capital is typically done by the issuance of receivership certificates. These certificates are approved, ahead of time, by the court and courts can authorize that such certificates prime all other claims (including sometimes administrative claims) and that these certificates can be reduced to a security interest recorded against real or personal property.

The Mechanics of a Receivership

However, because cannabis is approved at the state level, state courts retain their equitable powers and the power to appoint a receiver over a business in need of restructuring or liquidation. There are many avenues to get to court for this benefit, but the primary path to a receivership is either through a creditor (or group of creditors) filing a lawsuit and seeking the appointment of a receiver. This scenario can be done through cooperation and stipulation but can be hostile as well. The receiver option is available and open to address the needs of insolvency for this rapidly expanding industry.Or, a legal entity, can seek dissolution protection from the state court and seek a neutral dissolution officer (a receiver) to manage that process which may include the infusion of new capital through receivership certificates, the sale of assets to third parties, the negotiation and payment of liens and claims through a claims process and the final restructure of dissolution of the legal entity in a manner similar to a bankruptcy or assignment for benefit of creditors. This voluntary petition is permitted by statute and case law and is a mechanism available to a business that is unable to file for bankruptcy protection but is in dire need of court supervision and authority to work through its insolvency problems. Further, by court order, a receiver is able to establish banking relations where a CRB may be unable.

Typically, it is recommended that any receivership filing whether by creditors, claimants or the business itself, be guided by a well-written, explicit order that outlines the parameters of the receivership, the funding requirements and limits, the rights of claimants and some sort of stay of claims against the receivership estate to give the receiver the time needed to work through all of the issues in that receivership estate. Further, outside funding can be pre-approved by the court and the priority of that funding can be established through the open process that the court provides, much akin to a debtor in possession (DIP) financing motion in bankruptcy court.

Because of the unique circumstance that CRBs find themselves in here in California, where they are a legal and now an “essential” business but still cannot receive the benefits of bankruptcy court, the receiver option is available and open to address the needs of insolvency for this rapidly expanding industry.

The British Isles Sees Cannabis as an Economic Development Pathway

By Marguerite Arnold
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Cannabis as a tool of local or even regional economic development has rapidly gained traction in many jurisdictions within the United States and Canada. It has also caught on particularly in the poorer states of the EU (see Greece) and those countries hoping to enter the Union (North Macedonia).

These days, the concept is also spreading even to the UK, where reform has lagged significantly behind other countries both in North America and Europe. Indeed, two island communities are now investing heavily in the idea that cannabis is not only here to stay, but may invigorate communities and the economic health of islands looking for a new path, post-Brexit.

Cannabis so far, certainly in the United States and Canada, has proved to be a job creator just about everywhere for the past five years. Indeed, despite a few large corporate restructurings (see Aurora and Canopy Growth) of late, the industry itself has not slowed down, even with bumps in the road in terms of full and final legalization and the new challenges of a global pandemic.

House Of Green, Guernsey
This project is moving along, with its first harvest set for later in the year. The ₤2 million facility plans to be able to process up to 800 pounds every eight-hour day. Raw product is being grown at vineyards on the island itself by independent farmers and partners from other islands. Indeed, it is a unique facility on the European side of the Atlantic.

The company plans to process cannabis into tinctures, balms and salves as well as alkaline waters.

The idea is to create the base ingredients from which other products – bound both for the medical and recreational market – can be made.

Vecticanna, Isle of Wight
Just off the southern coast of the UK, Vecticanna is also embarking on an ambitious project – a fully solar-powered facility which plans to eventually employ 60 people. Their mission? To “unlock the therapeutic potential of cannabis” for the treatment of Fibromyalgia and related conditions.

Vecticanna has partnered with several large institutions, including the University of Southampton, and CAR Laboratories in Cambridge, and plans to produce its products in an R&D and research setting with the ambitious hope of furthering the potential of cannabinoid-based healthcare.

Where Goes UK and European Reform?

Reform across Europe has indeed been frustratingly slow. This includes the many hiccups in the German cultivation bid, which was first launched in 2017, and will only see the first nationally produced cannabis in the country sometime this fall. That amount is far too little for the patients who have already obtained prescriptions, and certainly will not be enough to serve the expected million plus patients in market here in just a few short years. Indeed, medical cannabis distributors in Germany are scouring the planet right now for properly certified product that comes from other European countries as well as South Africa, Australia, and even Latin America.

In the meantime, a new generic producer of dronabinol (synthetic THC) has just gained access to the German market.

In the UK, reform so far has also been torturously tortoise-like, with the National Health Service (NHS) favouring local producer GW Pharmaceuticals and forcing all other patients and their families to import pricey product from the Netherlands or Canada. While, it should also be added, excluding chronic pain patients.

Why Are The UK’s Island Cannabis Projects So Intriguing?

With a few exceptions (see Greece and Malta), European cannabis development remains mired in complications that include everything from a lack of reform and high prices to fights over basic regulations, including whether cannabis is a “novel” substance or not. This has slowed down the ability of growers to obtain the right certifications, find financing and actually go into business.

With two new producers on islands close to Europe and the UK however, there appear to be projects on the horizon which have jumped the regulatory queue, and are lining up for an intriguing future, supported from the ground up, by local policies that are looking at two simple things: the efficacy of the plant itself, and the economic well-being of their neighbors.

Moving Towards Greater Competency in Cannabis Testing

By Ravi Kanipayor
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While legalization of recreational cannabis remains in a fluid state in the United States, the medical application of cannabis is gaining popularity. As such, the  diversification of  pharmaceutical and edible cannabis products will inevitably lead to increased third party testing, in accordance with Food and Drug Administration (FDA) mandates. Laboratories entering into cannabis testing, in addition to knowing the respective state mandates for testing procedures, should be aligned with Federal regulations in the food and pharmaceutical industries.

In 2010, the American Herbal Products Association (AHPA)1 established a cannabis committee with the primary objective of addressing issues related to the practices and safe use of legally-marketed cannabis and cannabis-related products. The committee issued a set of recommendations, outlining best practices for the cultivation, processing, testing and distribution of cannabis and cannabis products. The recommendations for laboratory operations sets some basic principles for those performing analysis of cannabis products. These principles, complementary to existing good laboratory practices and international standards, focus on the personnel, security, sample handling/disposal, data management and test reporting unique to laboratories analyzing cannabis samples.

As local and federal regulations continue to dictate medical and recreational cannabis use, many will venture into the business of laboratory testing to meet the demands of this industry. Thus, it is not surprising that cannabis producers, distributors and dispensaries will need competent testing facilities to provide reliable and accurate results. In addition, our understanding of cannabis from an analytical science perspective will derive from test reports received from these laboratories. Incorrect or falsified results can be costly to their business and can even lead to lawsuits when dealing with consumer products. Examples of fines and/or suspensions related to incorrect/false reporting of results have already gained coverage in news media. This sets up the need for the cannabis industry to establish standardized protocols for laboratory competency.

The international standard, ISO 17025 – ‘General requirements for the competence of testing and calibration laboratories’ – plays an important role in providing standard protocols to distinguish labs with proven quality, reliability and competency. The industry needs to rely not only on the initial accreditation received, but also on the ongoing assessment of the labs to ensure continuous competency.

Receiving accreditation involves an assessment by an International Laboratory Accreditation Cooperation (ILAC) recognized accrediting body, which ensures that laboratories have the competency, resources, personnel and have successfully implemented a sound quality management system that complies with the international standard ISO/IEC 17025:2017. This ISO standard is voluntary, but recognized and adopted globally by many industries for lab services. Cannabis companies can ensure that the test services they receive from accredited laboratories will meet the requirements of the industry, as well as the state and federal regulatory agencies. The International Organization for Standardization (ISO) is an independent, non-governmental organization with over 160 memberships of national standards bodies, and all with a unified focus on developing world-class standards for services, systems, products, testing to ensure quality, safety, efficiency and economic benefits.

ILAC is a non-profit organization made up of accreditation bodies (ABs) from various global economies. The member bodies that are signatories to the ILAC Mutual Recognition Arrangement (ILAC MRA) have been peer evaluated to demonstrate their competence. The ILAC MRA signatories, in turn, assess testing labs against the international standard, ISO/IEC 17025 and award accreditation. Accreditation is the independent evaluation of conformity assessment in accordance with the standard and related government regulations to ensure the lab carry out specific activities (called the ‘Scope’) impartially and competently. Through this process, cannabis industry stakeholders and end users can have confidence in the test results they receive from the labs.

Understanding the principles of accreditation and conformity to ISO standards is the beginning of the ISO 17025 accreditation process. Similar to other areas of testing, accreditation gives cannabis testing labs global recognition such that their practices meet the highest standards in providing continuous consistency, reliability and accuracy.

Many government agencies (state and federal) in the US and around the world are mandating cannabis testing laboratories to seek accreditation to ISO/IEC 17025:2017, in an effort to standardize their practice and provide the industry with needed assurance. Conformance with the standard enables labs to demonstrate their competency in generating reliable results, thereby providing assurance to those who hire their services.

Testing of cannabis can be very demanding and challenging given that state and federal regulations require that the performance and quality of the testing activities must provide consistent, reliable and accurate results. Hence, labs deciding to set up cannabis testing will have to take extra care in setting up a laboratory facility, acquiring all necessary and appropriate testing equipment, hiring qualified and experience staff and developing and implementing test methods to ensure the process, sample throughput, data integrity and generated output are continuously reliable, accurate and meet the need of the clients and requirements of the regulatory bodies. This demands the lab to establish and implement very sound quality assurance program, good laboratory practices and a quality management system (QMS).

Some expected challenges are:

  1. Standardization of test methods and protocols
    1. Since there is no federal guidance in standardization of test methods and protocols for cannabis testing in US, it is challenging for laboratories to research and validate other similar, established methods and gain approval from the local and state authorities.
  2. Facility
    1. Cannabis testing activities must be physically isolated from other testing activities for those labs conducting business in other areas of testing such as environment, food, mining, etc.
    2. Microbiological testing requires additional physical isolation within the testing facility, maintaining sterility of the environment, test area and test equipment.
  3. Equipment
    1. The test equipment such as Chromatographs (GC/LC), Spectrometers (ICP-MS, ICP-OES, UV-Vis), and other essential analytical instruments must meet the specifications required to detect and quantify and statistically justify the test parameters at the stipulated concentration levels. That means the limit of detection and limit of quantitation of each parameter must be well below the regulatory limits and the results are statistically sound.
    2. Calibration, maintenance and operation of analytical equipment must be appropriate to produce results traceable to international standards such as International System of Units and National Institute of Standards and Technology (SI and NIST).
  4. Staff
    1. The qualification and experience of the staff should ensure standard test methods are implemented and verified to meet the specifications.
    2. They should have a sound understanding of the QA/QC protocols and effective implementation of a quality management system which conforms to ISO/IEC 17025:2017 standard.
    3. Staff should be properly trained in all standard operating procedures (SOPs) and receiving schedule re-training as needed. Training should be accurately documented.
  5. QMS
    1. The QMS should not only meet the requirements of ISO 17025, but also be appropriate to the scope of the laboratory activities. Such a system must be planned, implemented, verified and continuously improved to ensure effectiveness.

Finally, stakeholders should seek expert advice in establishing a cannabis testing lab prior to initiating the accreditation. This can be achieved through a cyclic PLAN-DO-CHECK-ACT process. Labs that are properly established can attain the accreditation process in as little as 3-5 months. An initial ‘Gap Analysis’ can be extremely helpful in this matter.

IAS, an ILAC MRA signatory and international accrediting body based in California is one such organization that provides training programs for those interested in attaining accreditation to ISO/IEC 17025:2017. It is a nonprofit, public-benefit corporation that has been providing accreditation services since 1975. IAS accredits a wide range of companies and organizations including governmental entities, commercial businesses, and professional associations worldwide. IAS accreditation programs are based on recognized national and international standards that ensure domestic and/or global acceptance of its accreditations.2

References

  1. American Herbal Products Association , 8630 Fenton Street, Suite 918 , Silver Spring, MD 20910 , ahpa.org.
  2. International Accreditation Services, iasonline.org.