Tag Archives: California

August 11, 2022

M&A in Cannabis: A Guide for Buyers and Sellers

By Abraham Finberg, Rachel Wright

Mergers and acquisition activity in the cannabis space tripled from 2020 to 2021, and that pace is on track to continue in 2022. With big players entering the global cannabis market, we’re fielding more questions about mergers and acquisitions of cannabis businesses.

In this guide, we look at the evolution of the U.S. cannabis industry and some best practices and considerations for M&A deals in this environment.

The New Reality of Cannabis M&A Activity

The industry has evolved since adult use cannabis was first legalized in some U.S. states in 2012. More cannabis companies have a professional infrastructure—legal, financial and operational—with executive teams and board members ensuring the organization establishes proper governance procedures. Investors and private equity firms are showing more interest, and some cannabis companies have celebrated their first IPOs on the Canadian Securities Exchange (CSE).

At the same time, we are seeing a kind of “market grab” by multistate operators (MSOs) looking to acquire various licenses and expand their market share. MSOs tend to understand the current state of the market. For example, in California and some other states, there is a surplus of cannabis on the market for various reasons, partially due to so-called “burner distribution”—rogue distributors using licenses to buy vast amounts of legally grown cannabis at wholesale prices and selling the product on the black market, thereby undercutting retailers and other legal cannabis businesses. Another reason for the surplus is simply the entrance of many legal cultivators into the market over the past year.

Due to these trends, MSOs are interested in acquiring the outlets to be able to sell the surplus cannabis within California and other new markets.

Transferring Cannabis License Rights

One of the biggest challenges to M&A activity in the cannabis sector is the difficulty of transferring or selling a cannabis license.

Different types of cannabis licenses in California

Cannabis licenses are not expressly transferable or assignable under California law and many other states. However, the parties involved aren’t without options. For example, a business that is sold to a new owner may be able to retain its existing cannabis license while the new owner’s license application is pending, as long as at least one existing owner is staying on board. At the state license level, a change of up to 20% financial interest does not constitute a change in ownership, although the Bureau of Cannabis Control (BCC) must be notified and approve the change.

This process can take a while—often a year or more—since licensing involves overcoming hurdles at the local level as well as the state level with the BCC. It’s crucial to talk with legal counsel about the particulars of the license and location early in the process to best structure the terms of the agreement while complying with state and local requirements.

Seeking a Tax-Free Reorganization in the Cannabis Space

In many cannabis mergers and acquisitions, the goal is to accomplish a tax-free reorganization, where the parties involved acquire or dispose of the assets of a business without generating the income tax consequences that would result from a straight sale or purchase of those assets.

IRC Section 368(a) defines various types of tax-free reorganizations, including:

Stock-for-stock exchanges (IRC Section 368(a)(1)(B)

In a stock-for-stock reorganization, all of the target company’s stock is traded for a portion of the stock of the acquiring parent corporation, and target company shareholders become minority shareholders of the acquiring company.

Often, it’s tough to meet the requirements to qualify for this type of tax-free reorganization because at least 80% of the target stock must be paid for in voting stock of the acquirer.

Additionally, companies may be saddled with too much debt. If the acquirer assumes that debt, it may be classified as consideration paid to the seller and therefore disqualify the transaction as a tax-free reorganization.

In other M&A deals, the acquiring corporation may be unwilling to assume the debt of the target corporation—perhaps because showing these items on its balance sheet would impact its debt-to-equity and other financial ratios.

Stock-for-asset exchanges (IRC Section 368(a)(1)(C)

Rather than acquiring the target company’s stock, the acquirer may purchase its assets. In a stock-for assets exchange, the buyer must purchase “substantially all” of the target’s assets in exchange for voting stock of the acquiring corporation.

A stock-for-assets format offers the buyer the benefit of not having to assume the unknown or contingent liabilities of the target. However, it’s only feasible if the acquirer purchases at least 80% of the fair market value of the target’s assets AND all or virtually all of the deal consideration will be stock of the acquirer.

Tax Consequences Arising from Sale of Assets

If the sale price doesn’t consist primarily of the buyer’s stock, the transaction may be a standard asset sale. This leads to very different tax results.

If the seller is a C corporation, it will typically face double taxation—paying tax once on the sale of assets within the corporation and again when those profits are distributed to shareholders. If the target company has net operating losses (NOLs), it can use those NOLs to offset the tax hit.

If the seller is an S corporation, it won’t have to pay corporate tax on the transaction at the federal level. Instead, shareholders will pay tax on the gain on their individual returns.

For the buyer, the benefit of an asset sale is that the assets acquired get a “step-up basis” to their purchase price. This is beneficial from a tax perspective, as the buyer can depreciate the assets and may be able to claim accelerated or bonus depreciation to help offset acquisition costs.

Reverse Triangular Merger

Often, in practice, we come across what is termed as a reverse triangular reorganization. In this type of merger,

The acquiring company creates a subsidiary,
The subsidiary merges into the target company before liquidating,
The target company then becomes a subsidiary of the acquirer, and
The target company’s shareholders receive cash.

Structuring the deal this way may work to overcome the hurdle of transferring the license but may not qualify as a tax-free reorganization.

Bottom Line

The circumstances and motivations for mergers and acquisitions in the cannabis industry are diverse. As a result, there is no one-size-fits-all approach to structuring the transaction. In any event, it’s crucial to start the process early and seek advice from legal counsel and tax advisors to minimize the tax burden and ensure that both parties to the transaction get the best deal possible. If you need assistance, contact your 420CPA strategic financial advisor.

July 28, 2022

Transportation & Supply Issues in Cannabis Staffing: How to Get Unstuck

By Melita Balestieri

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Anyone in cannabis will tell you that complex transportation and supply issues are stalling industry growth and impacting employers’ ability to hire teams for the critical roles that keep product moving on schedule.

Since the onset of COVID-19 in March 2020, global and domestic supply chains have suffered bottlenecks caused by ever-changing public health policies and ongoing materials and labor shortages. While the status of transportation as an essential business kept other essential sectors, such as cannabis and grocery, chugging along, the current situation is still challenging.

Transportation remains the biggest supply-side problem, with the American Trucking Association reporting a shortage of an estimated 80,000 truckers in October 2021. The Bureau of Labor Statistics also continues to report high numbers of job openings across supply-chain jobs such as warehousing and transportation.

Cannabis businesses, from multistate operators to distributors to delivery service startups, are hardly immune to these issues. In fact, they face the additional hurdle of restrictive federal regulations, including the illegality of transporting cannabis across state borders. For example, this stipulation means that the over-saturation of flower in California cannot be addressed in a naturally symbiotic manner by shipping to states whose markets demand more flower, such as Arizona and New Mexico.

In the aggregate, these challenges impact employers’ operational and logistics goals and diminish candidates’ interest to work in a highly scrutinized industry. Many trucking companies have found it a challenge to attract drivers. Low pay, grueling schedules, and zero-tolerance cannabis testing for drivers despite legalization have led to an exodus of truckers in the U.S. and Canada.

Despite these obstacles, cannabis employers can still embrace smart strategies to attract quality employees and create much-needed stability to thrive in the rapidly changing marketplace.

Cannabis, COVID & the Great Resignation

In recent months, when it seemed America was finally emerging from COVID’s long shadow, the Great Resignation dampened business optimism. Employee turnover hit cannabis hard—especially in California, where other challenges like a thriving illicit market, high taxes and wholesale price compression have impacted companies’ ability to operate smoothly. Transportation and supply issues compound the problems.

For example, even transporting federally legal hemp in California and elsewhere has its headaches. Our company’s trimmer certification course uses hemp for training purposes. We ship the hemp directly to students’ homes so they can participate in virtual training sessions. Although our company has certified that the course packet contains only hemp, the U.S. Postal Service (USPS) will not ship it, regardless of whether the delivery location is in or out of state. We therefore must rely on a private carrier to transport the course packets to class participants, which is more time consuming and costly

Staffing Strategies for Transportation & Supply Jobs

Cannabis employers have several traditional and non-traditional tools at their disposal to address transportation and supply-related staffing.

While standard ecommerce jobs are synonymous with turnover, here lies an opportunity for cannabis operators to differentiate themselves. This is the cannabis industry, after all, and plenty of individuals who might not normally be interested in the transportation or supply aspect of ecommerce, might be far more open to those types of roles if they know the jobs involve cannabis.

What can employers do to attract these more receptive candidates to their organizations? Hone in on workers who have a passion for the plant. In job descriptions, position cannabis messaging front and center and conduct outreach through LinkedIn groups and other social media platforms to groups and individuals that have a cannabis focus.

Salary and Benefits

These days, a competitive salary simply is not enough to entice the right employees. A solid benefits package goes a long way to establishing trust between employers and employees and provides employees with a level of comfort and reassurance that they are supported during these tumultuous times. For example, companies must prioritize healthcare benefits and consider including coverage for part-time workers on the supply side of the cannabis industry.

Bonuses

Bonuses are another great way to catch the eye of potential employees, but bonuses must be developed within a framework designed for retention. Cannabis employers who establish performance bonuses and loyalty bonuses also increase that ever-important aspect of trust within their companies.

Safety

A transparent and robust HR plan that addresses safety concerns—COVID and beyond—can affect employees’ comfort for certain supply or transport positions that may involve increased public exposure or enhanced personal safety risks. Be clear with employees about the system that’s in place to support them in the event of unforeseen emergencies or injuries.

Procedures

Cannabis employers should also be aware of the importance of having compliance-focused internal transportation standard operating procedures and protections for employees. These policies can be a key factor in attracting both drivers and additional transport and supply experts from other regulated transport industries such as food, agriculture and pharmaceuticals. Candidates without a cannabis background will be more drawn to companies that provide a well-developed and safe infrastructure.

Smart Cannabis Staffing Solutions: The Time is Now

Federal cannabis legalization is coming, and with that nationwide sea change other issues in cannabis supply and transport will emerge. How will cannabis transport consolidate? Will the nation’s top carriers simply take over?

Regardless of what those answers might be, the need to embrace smart staffing solutions now is imperative. Providing a solid base wage with health benefits, and making it clear to current employees and job candidates that there’s an internal infrastructure of support—from HR to loyalty bonuses—is the best way to tackle the transportation and supply issues to position your company for future success.

July 28, 2022

The Inflated THC Crisis Plaguing California Cannabis

By Erik Paulson, Josh Swider, Zachary Eisenberg

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Fraud

The THC content you see on a label when you walk into a dispensary? There is a very good chance the number is false.

In every state with regulated cannabis, there is a requirement to label the potency of products so consumers can make informed purchasing and medicating decisions. The regulations usually state that the THC/cannabinoid content on the label must be within a particular relative percent difference of the actual tested results for the product to be salable. In California, that threshold is +/- 10%.

The problem is, with all the focus on THC percentage in flower and concentrate products, enormous pressure has been placed on cultivators and manufacturers to push their numbers up. Higher numbers = higher prices. But unfortunately, improving their growing, extraction and formulation processes only gets companies so far. So, they proceed to ‘lab shop’: giving their business to whichever lab provides them the highest potency.

There are roughly 50 Department of Cannabis Control (DCC) licensed labs in the state, and competition is fierce to maintain market share in a maturing and plateauing industry. Whereas competition used to be healthy and revolved around quality, turnaround time and customer service, now it’s essentially become a numbers game. As a result, many labs have sacrificed their scientific integrity to chase what the clients want: higher THC potency results without contaminant failures. The practice has become so prevalent that labs openly advertise their higher potency values to gain customers without fear of recourse. Here are two examples:

Over a year ago, a few labs fed up with what was happening got together to determine the extent of the potency inflation issue. We proactively purchased and tested over 150 randomly chosen flower samples off dispensary shelves. The results were staggering. Eighty-seven percent of the samples failed their label claims (i.e., were >10% deviant of their labeled values), with over half of the samples >20% deviant of their labeled THC values (i.e., over 2x the legal permitted variance). Additionally, our labs found multiple cases of unreported category 1 pesticides in some of the analyzed samples at multiple times the legal limit – a significant public health concern. The deceit was not limited to small cultivators trying to get by but also some of the industry’s biggest brands.

The same issues and economic conditions are in play for concentrates. Manufacturers of these products also hunt for the highest D9 THC values because wholesale prices for distillate are determined by THC content: <86% for the lowest value, 86-88%, 88-90% and >90%, with a new price point for over 94%. As a result, consumers can walk into a dispensary and find concentrates like the one shown below that report>99% total cannabinoids (>990mg/g) and contains almost 10% additional terpenes. You don’t have to be an analytical chemist to realize those numbers add up to well over 100%, which is physically impossible.

Blame

Everyone can agree that the system is broken, but who is at fault? Should the blame be placed on dispensaries, many of whom use THC % as their only purchasing or marketing metric? Or on cultivators, manufacturers and distributors, who seek the highest results possible rather than the most accurate ones? Or on the labs themselves, who are knowingly reporting inflated results?

Ultimately, the individual businesses are acting in their own self-interest, and many are participating in this practice simply to stay afloat. Dispensaries can’t reasonably be expected to know which results are inflated and which are not. Cultivators and manufacturers feel obligated to use labs that provide them with the highest results; otherwise, they’re putting themselves at a disadvantage relative to their competitors. Likewise, labs that aren’t willing to inflate their numbers have to be ready to watch customers walk out the door to maintain their principles – an existential dilemma for many.

The primary reason why potency inflation has become so prevalent is that there have been no negative repercussions for those that are cheating.

The axiom is true – don’t hate the player, hate the game. Unlike most businesses, testing labs operating with integrity want meaningful regulations and oversight to assure a level playing field. Without them, the economics force a race to the bottom where labs either have to inflate more and more or go out of business. Since 2016, the DCC (formerly BCC) has taken zero meaningful actions to discourage or crackdown on potency inflation— not a single recall of an inflated product or license suspension of an inflating lab— so predictably, the problem has gotten progressively worse over time.

So, to answer the question above – who is at fault for our broken system? The answer is simple: the DCC.

Inaction

In the Fall of 2021, we began engaging with the DCC to address the industry’s potency inflation concerns. The DCC requested we provide them with direct evidence of our accusations, so we collected and shared the flower data mentioned above. The Department tested the same batches off the shelf and confirmed our results. Somehow not a single recall was issued – even for the batches containing category 1 pesticides.

We pushed for more accountability, and DCC Director Nicole Elliott assured us steps were being taken: “The Department is in the process of establishing a number of mechanisms to strengthen compliance with and accountability around the testing methods required of labs and will be sharing more about that in the near future.”

Instead, we got a standardized cannabinoid potency method (mandated by SB 544) that all labs will be required to use. On the surface, a standardized methodology sounds like a good thing to level the playing field by forcing suspect labs into accepting generally accepted best practices. In reality, however, most labs already use the same basic methodology for flower and concentrate cannabinoid profiling and inflate their results using a variety of other mechanisms: selective sampling, using advantageous reference materials, manipulating data, etc. Furthermore, the method mandated is outdated and will flatly not work for various complex matrices such as gummies, topicals, beverages, fruit chews and more. If adopted without changes, it would be a disaster for manufacturers of these products and the labs that test them. Nevertheless, the press release issued by the DCC reads as though they’ve earned a pat on the back and delivered the silver bullet to the potency inflation issue.

Here are a few more meaningful actions the DCC could take that would help combat potency inflation:

Perform routine surveillance sampling and testing of products off of store shelves either at the DCC’s internal lab or by leveraging DCC licensed private labs.
Recall products found to be guilty of extreme levels of potency inflation.
Conduct in-person, unannounced audits of all labs, perhaps focusing on those reporting statistically higher THC results.
Conduct routine round-robin studies where every lab tests the same sample and outliers are identified.
Shutdown labs that are unable or unwilling to remediate their potency inflation issues.

For some less disciplinary suggestions:

Remove incentives for potency inflation, like putting a tax on THC percentage
Set up routine training sessions for labs to address areas of concern and improve communication with the DCC

Fight

Someone might retort – who cares if the number is slightly higher than it should be? No one will notice a little less THC in their product. A few counterpoints:

Consumers are being lied to and paying more for less THC.
Medical cannabis users depend on specific dosages for intended therapeutic effects.
Ethical people who put their entire lives into cultivating quality cannabis, manufacturing quality products and accurately testing cannot compete with those willing to cheat. If things get worse, only the unethical actors will be left.
Labs that inflate potency are more likely to ignore the presence of contaminants, like the category 1 pesticides we found in our surveillance testing.
This single compound, delta-9 THC, is the entire reason why this industry is so highly regulated. If we are not measuring it accurately, why regulate it at all?

We will continue to fight for a future where quality and ethics in the cannabis industry are rewarded rather than penalized. And consumers can have confidence in the quality and safety of the products they purchase. Our labs are willing to generate additional surveillance data, provide further suggestions for improvement in regulations/enforcement, and bring further attention to this problem. But there is a limit to what we can do. In the end, the health and future of our industry are entirely in the hands of the DCC. We hope you will join us in calling on them to enact meaningful and necessary changes that address this problem.

July 28, 2022

An Interview with Würk CEO & Chairman, Scott Kenyon

By Aaron Green

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The cannabis industry operates in a legal gray area between federal restrictions and state legalization in a constantly changing regulatory environment. Maintaining payroll and HR compliance is a burden cannabis companies face that grows exponentially with geographic expansion of the workforce.

Würk allows cannabis companies to manage payroll, human resources, timekeeping, scheduling and tax compliance, minimizing compliance risks in the ever-changing cannabis regulatory environment. The company uses its expertise and trusted partnerships to provide guidance on 280E tax law, accounting and banking. Its platform is designed to scale nationally with the growth of the industry while incorporating the local laws and regulations unique to individual states. Their clients include Cresco Labs, Canndescent and NUG.

We caught up with Scott Kenyon to ask about Würk’s approach to human capital management, challenges facing cannabis businesses and industry trends. Scott sat on the Board of Würk before becoming its CEO and chairman. Prior to Würk, Scott held leadership roles at Dell and Phunware.

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

Scott Kenyon: My wife and I were early investors in a few companies in Colorado and Nevada. From early on (this was back in 2015) we learned the hard way of cannabis and how difficult it is to run these businesses, especially in those early days. We’ve progressed a ton over the years, but it’s still very difficult to run cannabis businesses.

I joined Würk about five years ago as a board member. I came on as CEO at the beginning of 2021 after our founder and previous CEO Keegan Peterson, who was an early trailblazer in the industry, passed away. So, I’ve been CEO at Würk for about 18 months.

Green: Tell me about Würk and the main problems you’re trying to solve.

Kenyon: Early on we were focused on establishing getting out of the cash business for these cannabis companies. Allowing them to pay payroll, taxes and be tax compliant electronically was a huge early advantage for us as a company. Now, fast forward seven years later and a lot of different banks (credit unions) are in the industry and that is allowing people to move money. So, that’s not as big of an advantage for us anymore, but early on that was huge.

Our advantage now is the scars on our back, for lack of a better phrase, from what we’ve gone through over the last seven years. We anticipate. We prevent. And most importantly we’ve seen all those problems for our customers. Last year, a big thing of mine was being “Smokey the Bear.” We want everybody to be Smokey the Bear: prevent fires and prevent issues for our customers. When I came in, we were the world’s best firefighters. I didn’t want that title. I wanted to prevent issues for our customers. That takes you from being a vendor to a partner.

If you look at it, on our platform we have 80% of the enterprise cannabis market, about 60% of the mid-market and then low single digits in the small business space. We have that market share because we provide invaluable experience and guidance to our customers. The biggest MSOs have different challenges from a “Joseph and Scott” dispensary, or a “Mary and Jane” grow facility. We’re able to adapt to all those different segments.

At the core of our product, we offer payroll services and what we call HCM – human capital management. That’s everything from scheduling, applicant tracking systems processing and paying your payroll taxes. So, we have the full gamut of product offerings that any type of HCM or HRIS software system does, whether you’re outside of cannabis or inside of cannabis, we’re offering the same thing.

Green: How does Würk differ from say a Professional Employer Organization (PEO)?

Kenyon: We aren’t a PEO. We don’t manage employees. At a high-level, a PEO is basically managing HR for these companies. Our platform enables HR professionals to go out there and do that. PEOs are more popular down in the small business space, because people are not at the scale to hire an HR team. We’re similar in that we’re processing payroll and have all the software that these companies need, but we’re different in that we’re not running their HR for them.

Green: How do you work benefits into the mix?

Kenyon: We leave it to the client, and we integrate their benefits provider into our platform so it’s an easy one-stop shop. We have single sign-on for a lot of our integrations. For the HR organizations, we want them to log into our platform and everything they need will be there.

Green: How is SAFE banking going to affect the HR industry in cannabis?

Kenyon: It’s going to be great for the industry, obviously. For HR specifically, it’s going to bring in more providers of payroll and more competitors for us for sure. But also it’s going to bring in more providers of services that can come in and offer that right now because of the federal illegalization.

Green: How does 280E affect your business and your customers?

Kenyon: We don’t guide people around 280E because that’s a tax specific matter. We refer them to their tax experts. We process payroll tax, which is different than what 280E affects. I think 280E was a big challenge, it’s still a big challenge, but that’s mostly because people didn’t really understand it. I think 280E was a problem five to seven years ago. In the last two years most companies are very familiar with it. That doesn’t mean 280E is the right thing. I think 280E is an awful thing. And while I think I hope SAFE banking is the first thing to fall legislatively, I think 280E has a good chance of getting across first.

On any given day my opinion on which will go first changes. I just want something to get across the line.

Green: What are some unemployment and payroll challenges your customers face?

Kenyon: We really watch unemployment changes and changes in job descriptions or job codes. For example, if an unemployment rate changed, and that unemployed person moved to a different place, which happened a lot during COVID, that company needed to report that and they needed to collect the appropriate charges or taxes there.

Green: What geographies are you in right now?

Kenyon: As of January 1, we had people on our platform in 46 states and just under 600 different jurisdictions. So, even though cannabis isn’t legal in all those states, big companies have employees across the United States.

Green: How do you help your users manage compliance across multiple jurisdictions? That must be a complex undertaking.

Kenyon: Our platform automatically plugs into the states that have electronic notifications around laws, which most states do. In our tax department, we have certain group members that are experts, let’s say, in the west coast. So, we assign people to certain regions to ensure that they have the best knowledge.

From our support piece, where a lot of our customers come in, somebody might say, “Hey, I have a unique question for Utah” and we’ll say we have a person that is specialized in Utah, but we don’t force them there, we just give them the option. But in our tax queue, we actually direct the customer like, “Hey, here’s a Massachusetts Question, so that goes to a particular person because they are our Massachusetts expert.”

Green: How do you deal with timekeeping issues like overtime?

Kenyon: Well, our system does that automatically. Let’s say they’re working overtime in a state that’s difficult to keep time for like California. In the state of California, if they’re working overtime on a Saturday or Sunday or a holiday, that’s a whole different calculation than working longer on a Thursday night. So, our platform is made to automatically calculate that for our customers. There’s no manual adjustments or coaching happening there. We just follow the state law based on where the employees are.

Green: Are you seeing any unionization of employees within the cannabis industry?

Kenyon: There’s unionization in many of our states, I don’t know the exact number, but California being the biggest, there’s a lot of union representation. Illinois is probably the second biggest union state on our platform. I’m assuming New York will be once it becomes adult use.

Green: How does Würk approach cybersecurity?

“Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen.”Kenyon: Well, we approach it very seriously and I recommend everybody take cybersecurity seriously. We test our internal systems regularly. We test our employees through phishing scams. And we’re always just trying to educate our team on the risk that we have.

I can’t share specifically the prevention steps that we’re taking, but I can tell you we partner with some of the biggest experts and make sure that we’re following everything that they’re recommending. More importantly, we’re testing for human failures, because where most failures happen is with people.

Green: What trends are you following in the industry right now?

Kenyon: Any type of activity in Congress is going to be huge for this industry. So that’s something I always keep abreast of. The next thing that comes down the line which is tied to that is interstate commerce: How is interstate commerce going to really come into play? And how does that change this industry?

Within the industry, the big question is how do we combat the illicit market? Over the last five years, I’ve heard all kinds of different ideas. But in the end, I think we have to out-innovate the illicit market, and that’s what I’m most excited about.

There are new product categories, beverage being one that is starting to gain traction. How are these new products and new variations of the cannabis plant able to treat and help people in ways that we’ve never thought of? That’s part of out-innovation. I was reading an article today about new terpenes that were discovered and how 100 products could come from each one of those new terpenes. I think we’re just still at the tip of the iceberg of product innovation.

How do we fight the illicit market? I think that is just through coming up with new products that treat different illnesses and ailments, that allow customers to get away from pharmaceuticals. Cannabis customers don’t want to buy on the illicit market. They want to buy from a trusted source. It just takes time to make that happen. They’re not going to do it when there’s a huge price difference, but they will do it when there’s a huge product difference. And right now, our products are very similar to what you can find on the illicit market. You can find vapes, you can find gummies, you can find all that in the illicit market. We’ve got to out-innovate the illicit market.

Green: What in your personal life are you most interested in learning about?

Kenyon: I am the father of two teenagers right now and I really like to learn how to be a better parent to them because it’s really frickin’ tough!

Green: Great, that concludes the interview!

Kenyon: Thanks, Aaron.

July 20, 2022

Cannabis Receiverships: A Viable Alternative to Bankruptcy

By Oren Bitan

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Doing business in California’s legal cannabis industry remains a risky endeavor. The majority of the industry is still unlicensed, tax rates at the state and local levels are high (notwithstanding a recent reprieve from California’s cultivation tax) and there are not enough licenses to meet geographic demand throughout the state. Outside financing remains difficult to secure for equipment, tenant improvements, account receivables and working capital because, under the federal Controlled Substances Act (CSA), cannabis remains a Schedule I narcotic. Therefore, entrepreneurs, investors and lenders who have stakes in state-sanctioned cannabis enterprises expect to see returns that justify the higher level of risk, which places additional financial pressure on cannabis businesses. In addition to the industry specific challenges, the United States economy is on the verge of a recession that may further hamper the industry notwithstanding the industry’s resiliency during the pandemic when it was deemed to be an “essential” industry that benefited from consumer spending of stimulus monies.

These outside pressures increasingly lead to ownership disputes and creditor defaults that result in litigation and the need for restructuring. In some instances, business partners cannot agree about control and finances of the licensed businesses and in other instances unpaid creditors file suit to enforce their interest in a company’s assets. And sometimes a local municipality discovers wrongdoing by an operator and initiates a health and safety lawsuit to cease the illegal condition.

Bankruptcy reorganization is an option typically utilized by struggling businesses to shed or restructure debt. Cannabis businesses, however, cannot take advantage of bankruptcy remedies because bankruptcy is a product of federal law and federal law still prohibits the sale of cannabis.

As a result, stakeholders in legal California cannabis enterprises must consider alternatives to bankruptcy to collect what they can on their loans and investments in the event the enterprise becomes insolvent or requires restructuring. A well-established alternative to bankruptcy is a state court remedy – the appointment of a receiver over the assets of a business or over the entire business operations. Through the receivership process, stakeholders may obtain many of the same protections available to them through bankruptcy

A. Federal Illegality Bars Access to Bankruptcy Protection

Over the past ten years, bankruptcy courts have routinely prohibited licensed cannabis businesses from seeking bankruptcy protection because cannabis remains illegal at the federal level under the Controlled Substances Act (CSA). Bankruptcy trustees are typically charged with managing and operating property in the same manner that the owner would be bound to do if in possession thereof. Because cannabis remains illegal at the federal level, trustees are not able to manage and operate licensed cannabis businesses.

B. Receivership as an Alternative to Bankruptcy

Under California law, a receiver is a neutral agent of the court appointed to preserve, control, manage and ultimately dispose of property that is subject to the litigation before the court.¹ The receiver, therefore, holds property for the court, not the parties to the litigation.

Appointment of a receiver is a statutory provisional remedy. Other than corporate dissolutions under Code of Civil Procedure section 565, the law does not have a specific cause of action to appoint a receiver. Thus, the proponent of a receiver must have a valid cause of action in an underlying lawsuit.

1. The Appointment of a Receiver

The appointment of a receiver rests within the trial court’s discretion. Code of Civil Procedure section 564 contains the broadest statutory authority to appoint a receiver. Subdivision (b), details twelve possible situations in which a receiver may be appointed, most of which are beyond the scope of this article. The most common of these is a lender’s request to appoint a receiver when a borrower defaults on a loan and the lender seeks the appointment of a receiver over its collateral. The statute, however, clarifies that the situations listed in the statute are not exclusive: a court may appoint a receiver “[i]n all other cases where necessary to preserve the property or rights of any party.”

The receiver’s powers are limited by the statute under which the court appointed the receiver and those conferred by the court. The appointment order should, therefore, detail the duties the receiver owes to the court, and actions that the court authorizes the receiver to take to perform those tasks. The order should also specify the property that will be part of the receivership estate.

2. The Receiver’s Powers

The receiver has general statutory powers.² The statutory powers include (i) commencing or defending litigation; (ii) taking and possessing property of the receivership estate, (iii) receiving rent, collecting debts, and making transfers, and (iv) acting in accordance with the court’s instruction with respect to the property.³ But the court’s authorization is necessary to sue the receiver and for the receiver to commence litigation.⁴ In the foregoing scenarios, the receiver is immunized personally from tort liability, but not in his or her official capacity as receiver.⁵

In addition to taking possession of property, the receiver may dispose of receivership property with the court’s approval.⁶ If the receiver is an equity receiver, the receiver may take possession and satisfy creditors from all the debtor’s assets.⁷

The court may further authorize the receiver to issue “certificates of indebtedness” to raise money to administer the receivership estate.⁸ This device permits the receiver to provide liquidity to the estate and gives the certificate holder an interest-bearing priority claim against the receivership estate.

3. Liquidating Cannabis Assets Through a Court Appointed Receiver

After the court appoints the receiver, the receiver should have sufficient powers to, among other things: (i) take over the management of the company; (ii) open bank accounts; (iii) borrow money by issuing receivership certificates; (iv) manage all of the company’s property; (v) hire counsel and other professionals; and (vi) sell the receivership estate’s assets for the benefit of the creditors. To maximize repayment to the creditors, the receiver may hold an auction to sell the assets and assist in facilitating the cancellation of company’s state license while the buyer of the assets secures its state license after the local license is transferred.

State cannabis licenses may not be sold or transferred.⁹ Yet, to maximize recovery for the creditors, the receiver may need to participate in the regulatory process to maintain a license during the pendency of the receivership and to assist in the amendment of a license while a prospective buyer seeks to obtain its own license. To do so, the receiver will first need to qualify as a licensee under state law to join as a licensee on the license and further the licensee as a going concern. Next, the principals of the prospective buyer will themselves need to qualify as licensees under the license. Then, once the sale of the company’s assets (including any interest in the license) to the buyer closes, the receiver and the company’s original owners will terminate their capacities as licensees of the license, leaving only the new owners as licensees. Thus, the proposed order should be written with attention to ensure the receiver has powers to further the foregoing and not diminish the value of the receivership estate.

After the conclusion of the sale of all assets, the receiver will need to obtain a discharge from the court of his or her duties as receiver. The receiver may do so by the parties’ stipulation or by motion. Together with the request for a discharge, the receiver should seek approval to pay: (i) any lenders to the receivership estate; (ii) professionals that the receiver hired; and (iii) him or herself for his or her services. Upon the court’s approval, the receivership will be terminated.

The conflict between federal and California law regarding cannabis continues to be an impediment for stakeholders in California’s cannabis market. Because of this conflict, stakeholders in California’s legal cannabis market lack access to vital traditional institutions, such as bankruptcy remedies. As a result, stakeholders must be prepared to consider alternatives such as a court appointed receiver, which can be a useful alternative to both secured creditors and unsecured creditors. Stakeholders who pursue a court appointed receiver will benefit from a long-established body of law and experienced professionals.

References

Cal. Rules of Ct., r. 3.1179(a).
Cal. Civ. Proc. Code §§ 568-570.
Free Gold Mining Co. v. Spiers, 136 Cal. 484, 486 (1902); Steinberg v. Goldstein, 129 Cal. App. 2d 682, 685 (1954).
Vitug v. Griffin, 214 Cal. App. 3d 488, 493 (1989).
Chiesur v. Superior Court, 76 Cal. App. 2d 198, 201 (1946).
Helvey v. U.S. Bldg. & Loan Ass’n, 81 Cal. App. 2d 647, 650 (1947).
Turner v. Superior Court, 72 Cal. App. 3d 804, 812 (1977).
Cal. Civ. Proc. Code § 568.
See e.g., Cal. Code Regs. tit. 16, § 5023(c).

July 11, 2022

The Man Behind MXXN: An Interview with CEO and Founder Darnell Smith

By Aaron Green

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Hangovers are one of the aftereffects often experienced with spirits. Who doesn’t love a good martini or a refreshing margarita? One company is on a mission bring the flavor profile and buzz of spirited drinks without the negative consequences.

Like this article and want to see more? Subscribe to our free newsletter hereMXXN is a California-based cannabis infused beverage manufacturer specializing in 1:1 non-alcoholic replacements for everyone’s favorite spirits, enhanced with a touch of cannabis. By combining new technology in cannabis oil nano emulsions and alt-alcohol, MXXN is able to create flavor matching spirits sold by the 750 mL bottle. MXXN recently launched with three product SKUs including London Dry (gin), Jalisco Agave (tequila) and Kentucky Oak (bourbon) with a rum replacement due to launch soon.

We caught up with Darnell Smith, founder & CEO of MXXN, to ask about the technology going into infused non-alcoholic spirits, regulatory challenges and more. Prior to MXXN, Darnell was a spirits industry veteran, having worked with companies including Diageo, Pernod-Ricard and Bacardi.

Aaron Green: Darnell, nice to meet you. How did you get involved in the cannabis industry?

Darnell Smith: For me, it wasn’t something that was premeditated, in a sense. I had always been a cannabis user in my adult life. I played Division I sports. Cannabis replaced a lot of painkillers and medications that I probably would have had to take just to cope with athletic injuries. That’s how I got introduced to cannabis. And there is the recreational use of it as well.

To get to the origin story of MXXN, I spent a large part of my career working in spirits, namely, on the innovation and commercialization side of bringing new products to market under very well-known trademarks for large multinational companies. A few years into it, my liver was kind of at a point where it was like, “It’s gonna be you or me here, buddy.” So, I made the decision to start making – this is 15 years ago, in New York – a tincture where I would just heat up flower and decarb it and soak it in a high proof spirit. I would cover it for 30 days then strain it and have my tincture.

I’d be the guy in the bar, that would say “Hey, can I get a tonic and lime?” and I would put three drops of my tincture in there, and I would session cocktails along with everyone else. Next day at work, I’m the guy that’s bright-eyed and bushy-tailed and everyone else is kind of feeling a little bit weathered by that alcohol.

Innovation is usually born out of a personal need and that’s the same way here. So, fast forward 15 years and the technology has finally caught up. The rise of non-alcoholic spirits, the rise of cannabis and water-soluble emulsification, those two things combined really made the light bulb go off and say now is the time to offer this product. I feel like MXXN has a very specific place in our consumption of beverages and can fill a unique need that I think is rising.

Green: I’m interested in learning about the technology and the product. We can start with the technology that went into the product development process. I’ll go on to product next.

Smith: From a technical standpoint, up until a few years ago, the way that edibles were made was basically like raw extraction. There was very little ability to be precise about dosage. It was like trying to throw softballs through a chain-link fence. Non-uniformity made it very hard to say, “Here’s how this is going to affect you.” Fast forward and companies like Vertosa and Source have perfected this kind of nano-emulsion technology, which is basically water-suspended cannabis that can uniformly be used in food, beverage and cosmetic applications. And it’s akin to trying to throw sand through a chain-link fence. It’s just much smaller. It can remain more uniform, and thereby be more predictable in terms of dosage and effect.

So, that technology made it possible for us to then combine it with another wave that’s happening, which in the spirits industry is called alt-alcohol. What we do is distill all the flavor essences of well-known spirits and skip the alcohol. We then add the emulsified cannabis in place of the alcohol. And so with that, we offer a new kind of experience which is basically all the buzz but none of the booze. That’s really where technology-wise things have evolved. The rise of the non-alcoholic spirits and then the rise of being able to do water-soluble compatible cannabinoid emulsions.

Green: Are you selling this then as packaged goods or are you selling it as bladders similar to Coca-Cola in a bar setting?

Smith: This is a CPG packaged product and it really is analogous to a 750 ML spirits bottle similar to Tito’s or Grey Goose. The form factor is the same as spirits bottles, same 750 ML bottle. It doses just like a spirit would. Standard spirit pour is an ounce and a half. For us, an ounce and a half shot has six milligrams of THC.

For the average consumer, you can session cocktails and we give you the option to dose between two and six milligrams between a half ounce and an ounce and a half pour. So, it’s very analogous to what people are experienced in when it comes to spirits from the bottle to the dosage and to the actual recipes. We pride ourselves on being able to demystify something that has been a little bit complex in terms of making cannabis-infused cocktails. We are sticking close to what people are familiar with. People have a lot of experience with tequila or gin or bourbon and so we wanted to stay very familiar but also give people a chance to make the same recipes but sans alcohol.

Green: What kind of flavor profiles are you launching with?

Smith: We’re launching with three SKUs. Our first is London Dry, which is our take on a gin and that one has cucumber, juniper, coriander, and a nice peppery finish. We have Jalisco Agave, which is our take on a tequila or Mezcal. You have notes of agave, flint, salt, oak, and vanilla. And then the last one is Kentucky Oak, which is our version of a bourbon or whiskey. There you have charred oak, vanilla, and other flavor components that make up what bourbon is.

Now we have a rum in development that’s nearing the end of a robust R&D pipeline. We have some other options like ready-to-drink cocktails made with MXXN to more high-dose products for what we consider the “legacy consumer” who is maybe more medically inclined in the hopes of being able to give people more options when it comes to consumption of flavored spirits.

Green: On the cannabis side, with the infusions that you’re doing, is it pure THC or are you doing full spectrum?

Smith: Yes, full-spectrum cannabinoid. You’ll notice some beverage brands have what we consider a hybrid, some THC and some CBD. For us, and for the effects that we wanted to have the product to have we stuck with a THC-forward blend. There is a trace of CBD in there, but we don’t even claim it. It’s not something that we go forward with. Our emulsion is THC-based.

Green: Where are you at today in terms of the launch and presence?

Smith: We just finished a pilot test here in California. We started late-January, early-February and we’ve been selling direct-to-consumer. Just order and you can have it at your door in 24 hours for about 85% of the state. We’ve blown through our entire pilot run. Now we are entering into what we consider our launch phase which will be available in select retailers late-July. We are gearing up for our next big production run here in mid-July. We are basically all systems go.

At the same time, we’re exploring multi-state expansion. We have a lot of interest in states like Colorado, Nevada, Arizona and we’re having constant conversations with partners in those states to help bring the product to market.

Green: Have you looked at lounges?

Smith: Lounges have been our biggest traction as we start the retail rollout. We literally just started the dispensary piece of what we’re doing last month. And this is by design. First, we wanted to go direct-to-consumers for proof of concept to make sure we weren’t, you know, saying the story to ourselves. I think just by the performance of the pilot run and direct-to-consumer sales, we proved okay, this is a viable concept.

So as we go out, our number one targets are obviously establishments that also are connected to or have connections with a consumption lounge. There aren’t a ton at this point. They’re still kind of proliferating. But I will tell you the moment we walk into one of these accounts is like a no-brainer because it allows this account to offer a whole new experience. When it comes to consumption lounges in terms of great cocktails you already know: gin and tonics, margaritas, paloma, with no real education required on the part of who’s ever going to be serving. We basically take 20 retailers a month in chunks and so far of the 15-20 that we’ve done, four or five of them have consumption lounges and you’ll see it in those very soon.

Green: Are there any challenges there with dosing in a lounge where the onus is on the operator to dose? How do the regulations work there?

Smith: It’s similar to alcohol, right? As an establishment, you have a responsibility to kind of pay attention to what’s happening as the consumer is consuming. Typically, most of the legislation that was written is for an inhaled consumption lounge. Ingestibles weren’t necessarily considered heavily when it came to legislation. What we tell folks is you have the same responsibilities you would if you were a bartender. Our recommended pour in consumption lounges is a lighter dose. This way, the customer has a chance to start low and go slow, and really recognize how it’s going to affect them.

Legally, there is no firm guidance on what overconsumption looks like for the typical consumer. So, we tell folks you have to kind of get a feel for who the consumer is. If they’re curious person who doesn’t have a lot of experience with cannabis, we typically recommend not to exceed a five-milligram serve per sitting until you figure out how it’s going to affect them. However, if you have very high dose legacy consumers, who buy and drink these 100-milligram single-serve bottles it’s a different story. You kind of need to gauge that from consumer to consumer, and what their tolerance level is. A lot of onus is on the consumption lounge. And I think that’s why they’ve kind of been slow to really roll out how they deal with beverages, because it’s just a different beast. It’s absorbed differently by the body from inhalable products

Green: What trends are you looking at in the industry?

Smith: I love seeing more food-based options. Edibles to this point have been mostly candies and gummies and I see the trend going to more high-end, curated food selections. I think that’s super interesting. The condiments that go into cooking is a category that I’m keeping an eye on. I came across a THC and CBD-infused Siracha sauce the other day and I was like, “wow, this is fantastic!”

MXXN logo

In the beverage space, there continues to be innovation, which we are on the forefront of. There’s a point of saturation that’s going to come for how many seltzers can exist in the market at the same time. And I think we’re kind of reaching that point. So, it’s going to be incumbent upon the beverage space to continue to innovate.

I’m also watching where things go with hemp-derived THC, the Delta-8s and those things and how is that going to be dealt with when it comes to the legal market. I think you see varying ways that it’s being dealt with across states. That’s a trend I’m certainly keeping an eye on as things continue to roll out across the country.

Green: What, in your personal life or in cannabis are you most interested in learning about?

Smith: Given where the world is today, I feel like we all live in this “OR” mindset. It’s either you OR me, it’s either this OR that. And I think you can see with some of the more recent political things that have happened, it’s this ideology of like, trying to force your beliefs on someone else. For me, it’s more about like, how can we learn to live more in the “AND” right? You can have this AND this and they can coexist, and they don’t have to be in competition. In my personal life, that’s where a lot of my energy is going. How do I spread that thought of getting out of this living in OR. We must move to this kind of mindset of AND. How can we be accommodating for a bunch of different beliefs, a bunch of different approaches? It causes so much friction when we try to impose beliefs on others that may not share the same beliefs.

I am thinking about how I can apply that to the cannabis industry as well. In terms of federal legalization versus state, where can we find that the happy ground? If we think about going across state lines, that’s effectively building a whole other business in the state, and in virtually no other industry does that exist. I can tell you economically this country could use infusion of cannabis to be more freely available. So those are the types of things that keep me moving these days. I’ve had a lot of success in my past and so for me, it’s less about financial achievements, and it’s more about how we can help move folks to this is AND mentality and not everything has to be OR.

Green: Great. That concludes the interview.

July 6, 2022

New Insurance Risks as Cannabis Lounges Open Across the US

By Jason Scheurle

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In a growing number of communities around the U.S., new cannabis lounges are offering a social setting where guests can openly use cannabis products. Colorado and New Mexico both saw their first cannabis lounges open in April, Michigan’s first cannabis lounge is set to open this summer, and officials in Nevada are currently discussing how the recently approved class of businesses should be regulated. In West Hollywood, California, where the state’s first cannabis lounge opened in 2019, multiple new lounges are now in the works after two years of slowdown due to the pandemic.

The bar-like establishments add a new dimension of potential revenue — and risk — to an industry that is expected to add almost $100 billion to the U.S. economy this year. This new and emerging segment within cannabis isn’t happening in every legal state, but more are starting to enact regulations to provide for some type of on-site consumption.

These new ventures need insurance policies tailored to address the risks of serving cannabis products, which could be looked at similarly to liquor liability for bars and restaurants.

Whether it’s alcohol or cannabis, these products impair people’s judgment, meaning everyone reacts differently to them. But how do you know when to cut someone off?

Cannabis lounges could be held liable & run risk of being sued for overserving

If a cannabis lounge faced a lawsuit alleging that it overserved a patron, leading to a third-party bodily injury, the business’ Commercial General Liability (CGL) Insurance and Products Liability Insurance could potentially cover costs such as legal defense, medical expenses and settlement amounts. Until such a case occurs, it is not yet known how exactly these lawsuits would be covered by insurance.

Because of the short history of cannabis lounges in the U.S., something like this is largely untested, making it hard to speak to exactly how a scenario would play out. Many of the existing cannabis insurance policies are highly exclusionary, meaning it could exclude a loss that is deemed to have arisen out of the use of cannabis.

Recent liquor liability lawsuits have shown the potential for a significant loss is clear. In early April 2022, a $20 million lawsuit was filed against a nightclub in Houston, Texas, alleging it overserved customers and allowed underage drinking, contributing to a drunk driving crash that killed a teenager.

In December 2021, a jury in Texas awarded the family of two drunk driving victims over $301 billion after a lawsuit alleged the driver was overserved at a bar before the accident; though largely symbolic, the settlement marked the largest personal injury award in U.S. history.

With these cannabis lounge establishments more or less encouraging intoxication of patrons on their premises, it’s very similar to a liquor liability type situation. If someone overindulges at a lounge, leaves and causes a crash resulting in injury or death, that could come back to the establishment.

While it remains to be seen how cannabis overserving lawsuits could play out in American courts, it’s worth noting Canada forbids on-site consumption of cannabis products and any loss or damage will not be covered by their insurance policies – despite it being legal country-wide.

Lawsuits possible over product issues, budtender advice

Even cannabis operations that do not allow on-site consumption can face liability related to the products they sell, making Products Liability Insurance and Product Recall Insurance necessary for growers and retailers. They should also consider Employment Practices Liability (EPL) Insurance to cover staffing-related allegations such as discrimination and ask their insurance broker whether budtender liability is included in their CGL Insurance policy.

Budtenders must walk a fine line between giving advice versus general information on products.

Budtenders, or individuals who work at cannabis retailers, are not allowed to offer medical advice to consumers. They must walk a fine line between giving advice versus general information on products. Although we are not aware of lawsuits that have been filed over a budtender’s advice, it would ultimately be up to the courts and lawyers as to how those proceedings would play out.

Budtender liability is not very different from professional liability insurance, and it’s more like an incidental coverage based off the budtender’s informal advice. There are, indeed, insurance carrier partners today that offer that service.

CGL Insurance can also cover in-store slip-and-falls and other third-party injuries and property damage. Because most cannabis retail stores are fairly small, these incidents have been rare, but GCL cannot be overlooked. Businesses must be prepared for anything to happen – and need to know that no risk is too small.

Theft, vandalism among top threats to cannabis businesses

Whether or not a cannabis business includes a lounge for cannabis use, any business in this industry may be more vulnerable to certain risks, including theft and vandalism.

In the U.S., where many cannabis companies operate on a cash-only basis because of banking difficulties tied to recreational products being federally illegal, a recent surge in cannabis shop robberies has led to calls for a new banking bill. Some of these incidents have even turned deadly, including an April 30 dispensary robbery in Los Angeles, California, during which one man was reportedly shot and killed.

Many insurance carriers require retailers to install alarm systems, video monitoring equipment or safes

Large amounts of cash are on-hand daily at these premises, and workers might have to make multiple bank runs throughout the day, leaving a heightened exposure and risk for robberies.

From robberies and vandalism to fires and flooding, Commercial Property Insurance is a key protection for cannabis retailers. Equipment Breakdown Insurance may also be needed, particularly when the stores contain expensive refrigeration equipment. The potential loss is large in this industry, especially at growing facilities, and there’s a lot at stake with such high-value equipment.

Security systems, employee training can help reduce risks

Many insurance carriers require business owners to install alarm systems, video monitoring equipment or safes to help reduce potential property losses, and employees should be trained to use the alarm systems consistently. Policyholders and business owners should also know there is a lot they can do to curb some of the risks, such as businesses doing background checks on every hire and taking steps to ensure they are hiring individuals they can trust.

Installing bars on glass windows and doors is another loss prevention measure that is strongly encouraged because it adds an additional layer of security to get through – it won’t be an easy or quick process to break-in and will trigger the alarm system.

The importance of working with an insurance broker

Working with an insurance broker who is specialized in the cannabis industry can help business owners better explore available coverage options. With cannabis or any type of risk, you should always work with someone who has knowledge and expertise in that area. When you work with someone who knows the ins-and-outs of the regulations, you can have more peace of mind.

You might have a risk warranty that always requires two drivers in that vehicle, or GPS monitoring on the vehicle.

Understanding your policy in its entirety is also essential, as these policies have any number of different limitations and exclusionary forms that could preclude you from collecting if you had not understood and followed the language of the policy.

In a transportation situation, for example, you might have a risk warranty that always requires two drivers in that vehicle, or GPS monitoring on the vehicle. In the event of a claim, if the investigation determines the business did not have those items present at the time of loss, that claim will not be covered.

In a rapidly growing and changing industry, business owners should not underestimate the value of working with a team of insurance experts who keep a close pulse on the quickly evolving industry. Brokers are aware of the different legal environments in each state or even each city or county. Cities and counties can add different levels of compliance matters, so as a buyer, you can be confident that you have the most recent information and are in compliance with state law and any insurance requirements that may be present. Being able to explain the differences between the markets and the coverage options is beneficial to any business owner in this ever-changing industry.

July 5, 2022

SC Labs Continues National Expansion

By Cannabis Industry Journal Staff

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According to a press release published last week, SC Labs is in the midst of a multi-state expansion under new leadership. The company hired Jeff Journey as their new CEO, coming from a VP position at Thermo Fisher Scientific.

Last year, in what seemed like an initial move to establish the lab on a coast-to-coast level, SC Labs developed a hemp testing panel that covers a number of contaminants on a national regulatory level. The hemp testing panel they developed purportedly meets testing standards in states that require contaminant levels below a certain action limit.

Then in February of this year, the company announced a partnership with Colorado-based Agricor and Botanacor Laboratories, with the goal of establishing a national testing network, offering comprehensive cannabis and hemp lab testing. All three of those organizations are certified by the Colorado Department of Public Health and Environment (CDPHE) for compliance testing required for hemp products.

In the press release that was published last week, they hinted at another announcement coming soon: a new partnership with Michigan-based Can-Lab. This, coupled with hints at further expansion and their current presence in California, Colorado and Oregon, means Journey will have his hands full and his sights set on nationwide cannabis testing.

“We’re looking forward to partnering with cannabis and hemp brands at every stage of the supply chain to share our innovative and forward-thinking scientific expertise so they can deliver safe products to the marketplace,” says Journey. “As cannabis legalization expands across the country, the testing industry is rapidly shifting and scaling to meet both market and regulatory demands.”

The leadership team will still have a few familiar faces, such as Jeff Gray as chief innovation officer and Josh Wurzer as chief operating officer. “The most important assets we can offer as a multi-state operator are scientific expertise, financial stability, and unquestionable integrity, the principles on which SC Labs has long stood for and will continue to provide to our valued customers,” says Journey.

June 2, 2022

A Q&A with Everett Smith, Co-Founder & CEO of Presidential

By Aaron Green

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Infused flower and infused pre-rolls are two segments of the cannabis flower market sought after by consumers for their high THC content. Moon rocks are a type of infused flower product made by infusing flower with sticky concentrate and then rolling the sticky flower in kief. THC content of moon rocks often exceeds 50%.

Presidential is one of the largest infused flower cannabis companies and the third largest pre-roll brand in California, with products available in over 400+ retail stores such as MedMen, Gorilla RX, Sherbinskis, La Brea Collective and Royal Greens. Presidential’s success and growth has primarily been organic through word of mouth. Presidential recently launched the Presidential Suite in WeHo, a speakeasy-style lounge with entrance through a subway car inside a NY-style pizzeria, Esco’s . The suite offers events including exclusive cannabis industry nights as well as “pizza parties” held jointly with Esco’s.

We interviewed Everett Smith, co-founder and CEO of Presidential. Everett co-founded Presidential in 2012 following a professional basketball career in Europe. He has a background in marketing and brand development.

Aaron Green: Everett, how did you get involved in the cannabis industry?

Everett Smith: It was really just by chance. I was in Vegas after I was done playing ball overseas. I was working 9 to 5 at the convention center for a company called Freeman. I was out waiting for some clients and I met this guy who started talking to me about cannabis, about this company he was starting and how his friend was manufacturing the product for him. I didn’t love my job. I was looking for something exciting to do. So, I got their information, and I took him up on it and I called them every day for almost three months. Then it finally got together and long story short, we started.

Everett Smith, co-founder and CEO of Presidential

Green: What year was that?

Smith: That was in 2012.

Green: So, you met this person in 2012 and then three months later had it up and going?

Smith: Long story short, yes. After three months, we finally got together and got all the parameters figured out and then we started to create the brand, get the packaging, get the product, and put it out to the street. That all probably took six to eight months.

Green: Presidential is known for moon rocks and infused pre-rolls. How did you hit upon the concept of infused flower? Why did you make that your focus?

Smith: The gentleman I was talking about before – he’s no longer our partner – was manufacturing for his friend and that’s what he did, so that’s what we got introduced to and then as soon as we started selling it, I just found ways that it could be improved. I listened to the customers we were selling to. My old partner wasn’t willing to do that due to the manufacturing time, so we took it into our own hands and got an investor, my partner now, John Zapp, and we figured out how to manufacture it ourselves. We had zero idea what we were doing and we figured it out. I have to give credit to John, he is the one who figured out the formula we are using right now. There was a lot of bumping our heads, a lot of trial and error, a lot of figuring it out. And luckily, we did.

Green: You mentioned you felt like other companies weren’t doing it right. What was the difference that Presidential brought to the table?

Smith: Quality. These other companies were focused on profit margin. They weren’t using quality products. They were using the same product twice in different things, which is the ultimate no-no. I just found that if you started with high-quality raw goods, and put them together, you are going to have an even better product.

Growing up my mom was kind of a hippy. We just like stuff from the earth. Good organic stuff. So, we were taking flower that I knew was being grown organically at the time and then infusing it and it created a better product. We packaged it better than anybody else’s packaging at the time. I have a background in marketing so at that time, I was just trying to create a product and a brand that my friends and I would like. I thought we were our target user at the time. I was working in my late 20s.

Green: Where were you located at the time?

Smith: We were in Los Angeles.

Green: What were some of the challenges of launching a brand in Los Angeles back in 2012?

Smith: Some of the challenges included: education of the consumer; getting clients in the door and making them feel safe to come into a dispensary and purchase medicine at the time; and the legalities – maneuvering all the different propositions that were coming down and being able to do it legally and safely. The legal issues were probably our biggest hurdle. Then there was the challenge of introducing people to Moon Rocks. Infused flower was a brand-new concept, so we had to find as many people as we could to introduce the product to.

Green: I’m just imagining back to 2012, I think Moon Rocks would have been completely new to me. How did you get customers over the hump of trying something new?

Smith: I would get big jars of Moon Rocks. They look crazy. We saw people walk by and just watched the reactions. It was like, “Whoa, what’s that? What in the world is that?” Then we use the tagline: “World’s Strongest”. We’re starting with nice, tasty flower. We’re putting 90% THC distillate on it and then when we’re taking kief in the mid 40s 50s (% THC), and we’re covering it. So we’re putting THC on top of THC of on top of THC.

Putting “The World’s Strongest” on there and just putting big jars out in front of as many people, at as many conventions, and at as many dispensaries that would let us set up a patient appreciation day. That’s how we did it.

Green: You are in retailers across California. What were the keys to your success in building out your distribution network?

Smith: Sales. Knocking on doors. My partner comes from the car business. He was a fixer-upper helping dealerships all over the country become more profitable. So, just having that mentality of going out every day and knocking on doors trying to get every single possible client. I want to say it was like being a car salesman and Hollywood, or something similar. At first it was me and John every day knocking on doors. Then the business built on itself.

We have the same process now. Knock on the doors and send our brand ambassadors in there to do customer appreciation. They get our product in front of people and it’s worked for us. The marketing money we do spend we spend in the stores, because we see a direct correlation there. At the end, it really goes back to the knocking on doors.

Green: Do you notice anything different between 2012 sales and prospecting versus today now that your brand awareness has changed?

Smith: Absolutely. Everything is very corporate now. Before 2014, you could knock on the door and the person that you needed to see was sitting right there. The owner was the buyer. Now, you have to get through layers of people to get to the actual decision-maker because they’ve become so corporate. So that’s the biggest difference I see, but I wouldn’t say it’s a negative. I would say that our industry has become more positive. We can guarantee regular pay. We can guarantee that the products are going to be on the shelves and we can cut or markup the pricing. Those are the changes I see and they’re not always easy, but I think they’re for the better.

Green: What does the future look like for Presidential? More broadly, what does the future look like for the industry in terms of infused flower and pre-rolls?

Smith: Right now, the infused flower market is one of the fastest-growing markets. I see that becoming the norm, and the same for pre-rolls. We’re looking at expansion and trying to become one of the national players in this game. We’re swinging for the fences.

Green: What geographies are you looking at?

Smith: Right now we’re in California. We are in negotiations to launch in Nevada in July. We were getting ready to launch in Oklahoma, but had a deal fall through so now we are kind of switching gears. I would say by end of year we’ll be in Oklahoma, and my partner John is trying to close a deal for Michigan. So, those are the markets we have on the table right now. We’re looking to close those all before the end of the year.

Green: What trends are you following in the industry?

Smith: We have the number one selling blunt in California, but in terms of pre-rolls we are number four in terms of sales. The three companies ahead of us all sell minis and packs of minis, whereas we sell single 1 gram and 1.5 gram pre-rolls. So, in July, we’re launching three-packs of minis, so three 0.7 gram blunts and three 0.5 gram pre-rolls.

You can infuse the flower with pretty much any kind of concentrate the way that we do it. I’d like to come out with some diamond products, that’s hot right now. We’re following the wave and trends of the concentrates.

Green: What in your personal life or in cannabis are you most interested in learning about?

Smith: In my personal life, I’m interested in financial craftiness. You know, make your money and make your money work for you. I personally, in the business, would like to learn more about the smokeless form factors of cannabis. Things like beverages and capsules. I think that’s where the industry will end up going. So, I’m interested in learning more about the manufacturing of beverages and capsules and what it entails.

Green: Thanks Everett, that concludes the interview.

Smith: Thanks, Aaron.

May 19, 2022

Canopy Growth Acquires Jetty Extracts

By Cannabis Industry Journal Staff

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Canopy Growth Corporation, one of the largest cannabis companies in the world, announced the acquisition of Jetty Extracts this week for $69 million. Jetty Extracts was founded in 2013 and is now a leading cannabis brand in California and a top 5 brand in the vape category. The two companies plan to expand Jetty’s offerings in California, Colorado, New York and across the broder to Canada, according to a press release.

Canadian-based Canopy Growth is a massive international company that has been expanding its presence well beyond Canadian borders. For years now. Their medical arm, Spectrum Therapeutics, is a leading brand in Canada and Germany.

Some of the Jetty Extracts product offerings

Back in 2018, Canopy solidified a partnership and took considerable investment from Constellation Brands on a long-term play to enter the cannabis beverage market. Then in 2019, they began their aggressive expansion into the U.S. through the multi-billion-dollar deal with Acreage Holdings who, at the time, was the largest U.S. cannabis company. In April of last year, they inked a deal with Southern Glazer’s Wine & Spirits following the launch of their first CBD-infused beverage line sold in the United States, Quatreau.

Late last year Canopy Growth announced a deal to acquire Wana Brands, the number one cannabis edibles brand based on market share in North America. The latest acquisition of Jetty Extracts this week follows the same pattern of increasing their North American footprint in the cannabis market considerably.

David Klein, CEO of Canopy Growth, says the cross-border potential excites them. “”Canopy Growth is building a house of premium cannabis brands with a focus on the core growth categories that will power the market’s path forward, now including Jetty – a pioneer of solventless vapes,” says Klein. “There are significant opportunities for Jetty to scale at the state-level across the U.S. by leveraging Canopy’s U.S. ecosystem, and we’re actively working on plans to bring the brand to the Canadian recreational market.”