Cannabis risks have always outpaced the availability of insurance, in large part because of its status as a federally illegal substance and the dangers in extraction and production. But it now shares many of the same risks as other industries — catastrophic crop damage, cyber risk and a shortage of skilled workers.
With legalization becoming more common, the industry is positioned for enormous growth despite these challenges. However, enterprises that will benefit the most are those best positioned to manage risk.
Here are four obstacles to growth in the industry in 2022 and how enterprises can combat them:
Cybercrime will be the top manufacturing risk
Both cybercrime and cannabis have experienced major booms since the start of the COVID-19 pandemic. Cannabis companies watched as healthcare and pharmaceutical organizations were hit hard by cybercriminals in 2020, and now the threat could be headed their way.
For retailers, the vulnerability often lies in their POS tech
For cannabis retailers, the vulnerability lies in their dependence on point-of-sale tech, while the threat for cultivators exists within their strong use of intelligent automation to manage the grow environment. Across the industry, the lack of sophisticated IT security systems is like a beacon for bad actors.
Nearly 60% of cannabis businesses say they haven’t taken the necessary steps to prevent cyberattack, but the winds are changing. Due to these concerns and the growing attention on cybercrime in the industry, cyber coverage is expected to rise 30% or more in 2022, which puts the onus on risk management practices that will help prevent cyberattacks and ensure coverage from insurers concerned about risk.
Barriers to business growth may result in more M&A
As of summer 2021, 18 U.S. states have legalized adult use and 37 states have legalized medical cannabis.
While this is opening opportunities for many cannabis businesses, the U.S. remains a complicated market. Federal regulations continue to hinder even more cannabis industry growth by restricting lending to the industry from traditional banking and financial institutions. While it’s not illegal to do service with the cannabis industry, many institutions stay away due to its high risk.
Smaller cannabis companies are impacted most heavily by this barrier and await passage of the Secure and Fair Enforcement (SAFE) Banking and Clarifying Law Around Insurance of Marijuana (CLAIM) Acts to allow easier access to capital. Together, these two acts of legislation will provide guidelines on how to work lawfully with legal cannabis businesses and prohibit penalizing or discouraging institutions from working with them.
In the meantime, M&A activity is expected to increase in 2022 as large cannabis businesses have the means to access capital and acquire these small companies. This includes Canadian cannabis companies, unburdened by federal restrictions, who are expected to increase their cross-border mergers and acquisitions.
Severe weather isn’t easing up
Extreme natural catastrophes are no longer rare, and they have only added greater uncertainty to the industry which has always had difficulties securing crop insurance.
NASA’s Aqua satellite took this picture of the smoke over California in 2017 Photo: NASA
For example, policies that transfer wind and hurricane damage risk in Florida or wildfire and smoke taint in California are virtually non-existent for cannabis — and for outdoor growers, a single weather event can wipe out an entire crop with no recourse.
One possible solution for cannabis companies that cannot secure traditional crop insurance is parametric insurance, which pays out in full when a weather element reaches a threshold, regardless of the actual damage.
Growers with indoor operations, or those considering moving that way, must cope with energy conservation initiatives. Measures like the one in California that would require indoor growers to use LED lighting by 2023 could cost the industry millions and present a direct threat to small operations’ viability. This makes it important for cannabis producers to institute conservation measures and undertake risk mitigation measures like improved safety measures at indoor growth facilities ahead of 2022 renewals.
As a continually emerging market, cannabis risks are great. Adding to these pressures is the growing impacts of climate change and cybercrime raising the bar even further. Growth for the cannabis industry in 2022 will depend upon strong risk management solutions and the ability for cannabis companies to implement them.
Social consumption lounges are becoming increasingly popular in legal cannabis markets. Just what are social consumption lounges? They’re a safe, enclosed space where cannabis consumers of legal age can come together and enjoy cannabis products, much like a bar environment for consuming alcoholic beverages.
Social consumption lounges are particularly attractive for their potential to bring in cannabis tourists. Although adult use cannabis can help promote tourism, tourists typically can’t smoke in most places indoors (including their hotel accommodations) nor consume on the street or in public, due to strict public consumption rules set by state regulations. This leaves the perfect set-up for consumption lounges, which provide the appropriate and legal environment for tourists to consume cannabis.
What do social consumption lounges look like in practice? What are the rules and regulations that social consumption lounges must adhere to? How and where are social consumption lounges currently legal in the United States? Here’s what you need to know.
What are social consumption lounges?
Social consumption lounges—also known as consumption lounges, cannabis lounges, cannabis consumption area and cannabis consumption lounges—are retail lounges that permit on-site cannabis consumption, such as smoking and vaping cannabis flower as well as ingesting cannabis infused products like edibles and tinctures. Similar to a bar that serves alcoholic beverages, all consumers in a cannabis lounge must be at least 21 years of age. While smoking typically isn’t permitted in retail businesses, smoking is permitted in lounges.
Mellow Yellow in Amsterdam
While state-specific regulatory bodies are responsible for developing, implementing and enforcing the rules surrounding U.S. social consumption lounges, Dutch “coffee shops” may have served as the inspiration and model for U.S. industry. Contrary to the name “coffee shops”, patrons don’t go to Dutch coffee shops for coffee. Rather, they go because the sale and consumption (including smoking) of cannabis is permitted and socially accepted. According to travel resource Amsterdam.info, Dutch coffee shop culture emerged in the 1970s when the federal government made a clear legal distinction between “hard” and “soft” drugs. Soon after in 1972, the first coffee shop named Mellow Yellow opened. Although cannabis wasn’t clearly legal or illegal, Dutch law enforcement tolerated the growing number of cannabis coffee shops, focusing instead on prosecuting heroin and lethal illicit substances. Today, the Amsterdam City Council permits coffee shops to operate after they obtain a non-transferable license, which must be displayed in shop windows, thanks to an agreement with the coffee shop union Bond van Cannabis Detaillisten (BCD).
Unlike Dutch coffee shops, U.S. social consumption lounges must adhere to numerous rules and regulations specific to their state and municipality. One major difference is who is permitted to own and operate a lounge. In some U.S. states, consumption lounges are operated by existing cannabis businesses, such as adult use and medical dispensaries. In these cases, the lounge may be required to be on the cannabis business’s existing premises. In New Jersey, this must be an “indoor structurally enclosed area of the cannabis retailer or medical cannabis dispensary that is separate from the retail sales or medical dispensary area” or “an exterior structure on the same premises as the cannabis retailer or medical dispensary, either separate from or connected to the cannabis retailer or medical dispensary,” according to the National Law Review. In many places within the U.S., “stand alone” lounges that aren’t attached to an existing cannabis business aren’t permitted.
In the Netherlands, coffee shops operate in a legal grey area with their products being supplied by an entirely underground cultivation market. Cannabis being consumed in coffee shops isn’t regulated or checked. Per regulations in the U.S. states that allow them, however, only legal cannabis may be consumed in these lounges. While consumers might be able to bring their own cannabis or cannabis products, consuming any cannabis or cannabis products obtained through the underground market is strictly prohibited.
Where are social consumption lounges legal?
The Barbary Coast lounge in San Francisco
Not all U.S. states with legal recreational, adult-, or personal-use cannabis programs permit social consumption lounges. Although it’s been a decade since Colorado and Washington voted in favor of legalization, consumption lounges are a fairly recent trend, likely because states without legal consumption spaces found out the hard way that they couldn’t accommodate tourists or anyone who wished to consume cannabis outside of their home. Here’s where social consumption lounges are legal in the U.S.:
Nevada: After the Governor signed a bill in June 2021, a new cannabis law permitting social consumption lounges went into effect in October 2021 and lounges are anticipated to open in early 2022, according to Nevada public radio station KNPR. Additionally, efforts are being made to prioritize minority-owned business owners of consumption lounges, reports local news station Fox5 KVVU-TV.
New Jersey: Although consumption lounges weren’t initially permitted in the recent regulatory framework, individual municipalities now decide whether or not to permit lounges within their communities. Atlantic City and Jersey City have approved social consumption lounges, reports Hudson County View.
New York: The state’s recently passed adult use cannabis law allows social consumption lounges, but the recreational market isn’t expected to take off until mid-2023, according to Business Insider. Lawmakers still need to adopt a regulatory framework to how lounges (along with other cannabis businesses) will operate.
Illinois: Currently, two social consumption lounges have opened, and two others are planned to open across the state,” says the Chicago Tribune.
Colorado: Similar to New Jersey, individual municipalities decide whether to permit lounges in their communities. Denver and Aurora have approved consumption lounges.
California: Given the state’s rich history of an underground market, informal social consumption lounges aren’t particularly new. However, a recently approved law officially allows social consumption lounges, reports Marijuana Moment.
The number of states considering and/or permitting social consumption lounges is growing. Which states will likely legalize them next? As noted below, it looks like Michigan, Massachusetts and Maine will be next.
Michigan: The state doesn’t allow for them now, but they could come in the future, reports WZZM13.
Massachusetts: The state is considering them, reports Boston.com.
Maine: The state delayed them until 2023, according to MJ Biz Daily.
Why are social consumption lounges becoming increasingly popular?
Consumption lounges are becoming increasingly popular for many reasons. First and foremost, they’re a win for the cannabis industry because they provide consumers with a physical place to consume safely and legally.
The Original Cannabis Cafe by Lowell Farms in West Hollywood
Second, the tourism sector benefits from social consumption lounges. “The problem is people can buy marijuana products in states that have legalized adult-use cannabis, but they have limited options when they want to consume the cannabis that they purchase legally,” explains Cannabiz Media. For instance, Las Vegas has promoted itself as a cannabis travel destination since 2017, despite lack of adequate space for visitors to consume. Meanwhile, those who don’t consume cannabis have criticized the city for its growing public consumption, complaining especially about the odor of smoked cannabis. Social consumption lounges can potentially help fix these growing pains in the state’s cannabis market.
Additionally, lounges are a win for harm reduction. Lounges provide beginner cannabis consumers the opportunity to consume alongside experts, to be shown the ropes with professionals present. Being in a community with experienced consumers provides opportunities for novices to understand how to smoke, dose and overall consume properly and safely.
Lastly, MG Magazine emphasizes other benefits including de-stigmatization, social connection, industry partnerships and product innovation.
Regulation and compliance differences between states
Without federal cannabis legalization, states are tasked with regulating their own cannabis markets. Likewise, state regulatory agencies are responsible for drafting regulations for social consumption lounges.
California and Colorado have fewer limitations, likely because both states have more experience and overall comfort with the plant. In states with more lenient regulations, 420-friendly cafes, hotels, bus tours, paint nights and other businesses are tolerated.
New Jersey has notably strict regulations for social consumption lounges. For example, the current state law doesn’t permit any stand-alone consumption spaces independent of existing permitted cannabis businesses. Therefore, a cannabis cafe or bud and breakfast isn’t permitted.
There is, however, one legal loophole in New Jersey for stand-alone consumption space. The microbusiness license model allows for temporary licenses, permitting a temporary social consumption lounge, such as for an event at a private venue. New Jersey permits them in Newark, Hoboken, Highland Park, Jersey City,Elizabeth, Long Branch Atlantic City and Trenton.
In closing, it is likely that social consumption lounges will become increasingly common especially in major U.S. cities with legal adult-use cannabis programs. While Dutch coffee shops may have inspired the emerging U.S. social consumption lounge model, their U.S. counterparts must comply with much stricter rules and regulations. Since regulations vary from state to state, it’s important to be on top of your state’s policies in order to stay compliant.
Tracy Szerszen, President & Operations Manager, PJLA
Mohan Sabaratnam, Vice President, IAS
Kathy Nucifora, COO, COLA
Chris Gunning, General Manager for Accreditation Services, A2LA
Aaron Biros, Editor, CannabisIndustryJournal.com
In this session, the panel answers attendee questions related to ISO 17025:2017 accreditation for cannabis testing labs. Learn some of the common challenges labs face when seeking accreditation and learn about sampling protocols, security issues, statements of conformance, calibration and much more.
TechTalk: ANAB
Melanie Ross, Technical Products Developer, ANSI National Accreditation Board
R & D Lab Testing: Ensuring Success with Results
Mark Carter, president of MC Squared Enterprises
Learn how R&D lab testing can help you, prepare for compliance batches, successfully launch new products and amp up your quality control.
TechTalk: MilliporeSigma
USDA’s Hemp Testing Rules Have Changed: Accelerate Your Lab’s Preparedness
Arun Apte, CEO, CloudLIMS
This presentation takes a deep dive into understanding the requirements for USDA hemp testing, the operational changes hemp testing laboratories need to make to comply with the new hemp testing rules and the regulatory compliance framework and quality standards the testing labs need to meet.
Without clear direction from the FDA, states are filling the void by developing their own quality standards and testing requirements for hemp derived CBD products. Unlike their THC based counterparts, hemp derived CBD products are being sold across state lines raising the demand for a single testing panel that will be compliant in every state. Attendees will learn:
The current state of regulations nationally
The issues that hemp product manufacturers need to be educated on to ensure compliance,
The challenges labs face in offering customers a truly comprehensive panel.
Last week, Steep Hill announced their expansion into Illinois with a new cannabis testing lab partner licensed in Ottawa, IL. Illinois became the eleventh state to legalize adult use cannabis back in 2019. It’s also the eleventh market that Steep Hill has opened a laboratory in.
Co-founders Nick Etten, John Tinsley and Matt Grabowski will lead the new Steep Hill venture. Etten will lead the team as SVP of external affairs, who comes from Acreage holdings and the Veterans Cannabis Project. Tinsley comes from a consulting background at EY-Parthenon and Grabowski comes from a background in finance.
According to the press release, the new Steep Hill location in Ottawa is “within a 90-minute drive of the largest MSOs in Illinois.” The lab will provide full regulatory compliance testing panels in addition to R&D testing, according to Tinsley. “We are currently building out the lab,” says Tinsley. “We will also provide research and development testing services for cultivators and processors; supporting our partners in the development of new products and supporting their growth.”
Steep Hill is often touted as the first cannabis testing lab in the United States, with its headquarters in Berkeley, California. The company has been testing cannabis for thirteen years now.
The cannabis industry is an unprecedented industry and one under constant review and control. Following the November 2020 elections, fifteen states and Washington DC have legalized adult use cannabis, a number that will continue to grow as legalization slowly becomes more widely adopted in other states. Beyond that, a continuously growing number of states allow residents to purchase legal medicinal cannabis, and many have also decriminalized adult use. However, it still remains a Schedule I substance under the Controlled Substances Act and is therefore illegal on all accounts at the U.S. federal level, which creates a number of issues for businesses in the cannabis industry duly operating in states where it has been legalized.
Not only is it difficult for cannabis companies to avail themselves of alternative banking solutions, but there are also obstacles in place preventing these companies from taking advantage of notable tax deductions. The primary obstacle being Internal Revenue Code (IRC) Section 280E.
What is Section 280E?
Section 280E is a relatively short code section, only 77 words to be exact, but it carries significant weight and can have a debilitating effect on the taxable income of marijuana [sic] related businesses (MRB). Section 280E of the IRC prohibits taxpayers who are engaged in the business of trafficking certain controlled substances, including cannabis, from deducting typical business expenses associated those activities. Section 280E, which was enacted in 1982 during the “War on Drugs” era, has become increasingly relevant for cannabis businesses. The cannabis industry has grown substantially in recent years with annual market values expected to reach $30 billion by 2025.
However, while Section 280E greatly restricts the tax deductions of state-legal cannabis businesses, there is some reprieve. Current IRC provisions permit state-legal cannabis businesses, including growers, producers, wholesalers or retailers, to deduct the Cost of Goods Sold (COGS) in computing their US federal income tax liability, despite the application of Section 280E.
Impact of Section 280E on Businesses
What does Section 280E mean for cannabis businesses today? It is intended to prevent dealers from claiming tax deductions for their business expenses, interpreted to include state-legal cannabis businesses, reduced deductions that result in increased taxable income and MRBs will face higher federal tax rates.
The IRC disallows any deductions or credits paid or incurred during a tax year if those deductions or credits relate to trafficking controlled substances. The courts have taken the position that the term “trafficking” in this case means “engaging in a commercial activity – that is, to buy and sell regularly.” Simply, the law denies cannabis businesses any U.S. federal income tax deduction for ordinary and necessary business expenses, despite being duly licensed as a legal business in their state of operation.
Typically, the ability to deduct ordinary business expenses means that a business is subject to federal tax on its net income (i.e., gross receipts minus expenses). However, the definition of Section 280E and the classification of cannabis as a Schedule I substance severely hinders legal cannabis companies from taking advantage of tax deductions for actual economic expenses incurred in the ordinary course of business, which results in a significantly higher effective tax rate as compared to other businesses.
Legal Actions and Challenges to Section 280E
There have been court challenges and concessions made to Section 280E. Specifically, the 2007 court case Californians Helping to Alleviate Medical Problems, Inc., v. Commissioner. This court case reinforced the precedence that Section 280E does not apply to cost of goods sold. The Internal Revenue Service (IRS) defines cost of goods sold to be “expenditures necessary to acquire, construct or extract a physical product which is to be sold.” Generally, for a retail MRB, this means that the direct cost of acquiring cannabis products for resale. Deductions for rent, utilities, wages, insurance and other operating costs common to ordinary businesses are generally disallowed. New York State has specifically indicated that it intends to follow Section 280E for its own income tax calculations, disallowing these same deductions against New York taxable income
Tax Court and Section 280E
The Tax Court has also been aggressive in tamping down efforts by MRBs to separate cannabis related and non-cannabis related activities. The courts argue that these separate activities constitute a single trade or business when they share a close and inseparable organizational and economic relationship. In addition, the risk of cannabis related activities tainting a taxpayer’s other business concerns exists if services or employees are shared between an MRB and a non-MRB. Allocation of expenditures to cost of goods sold, as well as any allocations of costs between MRB and non-MRB entities, need to be well thought out and supported by defensible tax and accounting positions.
The Future of MRBs and Section 280E
All indications point to an increased frequency of IRS audits of MRBs compared to audits of non-cannabis related businesses. Therefore, documenting the methodology behind the calculation of costs of goods sold is even more important for MRBs. It is vital to consult with a tax advisor to ensure you are maximizing your cost of goods sold deductions and preparing the best documentation possible to support your 280E tax positions.
Disclaimer: The information presented in this article should not be considered legal advice or counsel and does not create an attorney-client relationship between the author and the reader. If the reader of this has legal or accounting questions, it is recommended they consult with their attorney or accountant.
Cannabis and hemp derived concentrates are a rapidly growing product category. Formed by extracting cannabis using a variety of methods including ethanol, butane hash oil and CO2, concentrates find their way into consumer packaged goods as ingredients for infused products or as stand-alone products such as resins, rosins, distillates and hash.
Precision Extraction Solutions (Precision) was founded in 2014 to provide equipment and services to cannabis and hemp processors. In October 2021, Agrify (NASDAQ: AGFY) purchased Precision in a $50M cash and stock deal. The move positions Agrify to offer end-to-end infrastructure solutions for cannabis cultivators and processors.
We interviewed Nick Tennant, SVP of Innovation at Precision, now a division of Agrify. Nick founded Precision after seeing a need for quality equipment in concentrate processing. Prior to Precision, Nick was involved in a vertically integrated cannabis business in Michigan where he gained experience in cultivation, extraction and retail.
Aaron Green: How did you get involved in the cannabis industry?
Nick Tennant: I’ve been in cannabis about 17 years now. I had family in Colorado and California who I started to interface with around 2006. Around 2008, Michigan passed their cannabis law, and we were one of the first businesses to get licensed. The subsequent five years from that law getting passed, up to 2013, I did pretty much everything in terms of commercial cannabis – cultivation, retail, edible manufacturing, you name it. Concentrates didn’t really exist in a meaningful way; the products definitely were there, but the technology wasn’t. I looked at technology at the time and it was very primitive, so we made a shift to focusing on concentrates. We launched Precision in 2014 and we basically shot out of a cannon, doing a million dollars in sales in our first 90 days. Since then, we grew the company up to 60 employees and substantial amounts of revenue. We sold Precision to Agrify in October of this year.
Green: Tell me about that transition from a cannabis products company to an equipment manufacturer.
Nick Tennant, SVP of Innovation at Precision Extraction Solutions
Tennant: It was a gradual transition. As I started to see the extraction niche expand, I really started to put more time and resources into it. When we launched Precision and were met with such success in just the first 90 days, I knew that I had to abandon everything else I was doing to focus on this. My former partners took over the businesses, like the grows. We worked out individual circumstances regarding how I was going to leave those businesses and focus full time at Precision.
Green: So, big news recently with the acquisition, congratulations on that! Tell me about Agrify and why a deal with Agrify made sense to you.
Tennant: The strategic rationale is that we are providing an end-to-end infrastructure solution. They have the horticultural aspect, an excellent public vehicle, and plenty of cash on the balance sheet to continue to scale the business and acquire additional constituents within the cannabis infrastructure. Getting to the point where you can exit the businesses, it’s a long road, and our business is very niche. We were seeking to partner with t a bigger player in the industry with more resources that would help us to scale what we were trying to do, and Agrify was the perfect fit.
Green: You’ve got several areas of focus at Precision ranging from ethanol extraction, distillation, and butane hash oil (BHO) extraction. Where are you focusing the business going forward?
Tennant: Going forward we want to provide that end-to-end one-stop shop infrastructural solution for any cannabis products company. We want Agrify to become the dominant and fastest growing player in the cannabis industry for infrastructural solutions, whether that’s horticulture or extraction. We’re continuing to expand our product portfolio into other niches so that if you’re building a cannabis facility, you only need to come to one company and the process is as simple as possible.
Green: What kinds of products are you seeing the consumer gravitate towards?
Tennant: I think that cannabis will remain to be very artisanal because of the uniqueness of the plant. If you look at similar industries, I could compare it to craft beer or winemaking. I think that hydrocarbon and water hashes will continue to play a substantial role. I also think that ethanol and distillate-based products will hold market share just like the Budweiser and Kendall Jacksons of the world.
People love the native sort of essence of the plant, that this is a plant sort of bestowed upon us by the universe with all these unique healing and restorative properties. I think that trying to capture those properties and that native essence of what’s going on within the genome of the plant and translate that into a product is going to be the theme that continues to dominate, and I think that for several reasons. For the same reason somebody will go to Whole Foods, and they’ll buy the local organic grown fruit or vegetables, people are going to gravitate towards artisanal cannabis products. People that consume cannabis, generally speaking, are more naturalistic or homeopathic than most.
Green: Precision has technology for a range of extraction methods where the focus has been on cannabis. Are you seeing any new markets outside of cannabis?
Tennant: Yes. We’ve dealt with varieties of different botanical extraction companies over the years, but they’re a very small segment of our business. We’re a cannabis business. Non-cannabis extraction may make up less than 1% of our business so it’s very small.
Green: What trends are you following in the cannabis industry?
Tennant: Consolidation, I would say, is a big one. MSOs are consolidating and buying up the small players. The second major trend is regulation, and what’s going on in DC. Beyond that, you obviously have new states coming online, shifting consumer trends, things like that. I would say these last two are less impactful from a macro standpoint, but nonetheless, still things that we follow.
Green: Following up on consolidation, do you see a demand for larger systems now?
Tennant: I’d say 95% of what we do is under 2000 pounds a day, which we consider artisanal. You’re not going to see large scale production consolidation because you have fragmentation by state. It would be most efficient for a cannabis manufacturer to manufacture everything in one location but it’s just not possible with the state laws. It’s very fragmented. Somebody like a Trulieve might have 20 different manufacturing operations, all running similar processes. Perhaps we will see more upon national legalization and the opening of state borders.
Green: What in your personal life or in the cannabis industry are you most interested in learning about?
Tennant: I am constantly learning. That’s just how my brain is, and the type of person that I am. I’m interested in a variety of topics, but I think I’m most interested in how capital markets are going to materialize and substantiate around the federal legalization because we’re in this weird space of cannabis. It’s weird, because you have a boom industry that’s generating massive amounts of revenue and massive amounts of tax dollars, but you must remind yourself that there is no real liquidity in this market, meaning you can’t finance things. A typical cannabis company that wants to go out and get capital is getting rates between 16 to 18%. There’s just a capital restriction since cannabis is a Schedule I substance, and these large lenders don’t want to play into that.
The question in my head and the big catalyst for the entire industry is: what happens when we get a descheduling, decriminalization and/or legalization on a federal level? How does that affect the large funds sentiment to deploy this zero-interest rate capital that we’re seeing in the rest of the world? We’re seeing it in mortgages. We’re seeing it in every aspect of the world. There’s free money printing, but it’s not flowing into cannabis because those federal laws are prohibiting it as such. Ultimately, as more infrastructure comes online, these companies are not going to have to scrape by to build a $3 million lab. They can finance it at a reasonable interest rate, and the infrastructure can come online.
That’s going to be better for the consumer. There will be more infrastructure, more products, more research and development, more retail locations. Everything gets better, more convenient, and more robust. I would think that finance interest rates are the largest lever within the industry right now, and because of that, you’ll likely see cannabis capital markets go pretty crazy when legalization comes around.
The National Cannabis Industry Association (NCIA) presents the 7th Annual Cannabis Business Summit & Expo, December 15 – 17, 2021 at the Moscone Center in San Francisco, California. As one of the industry’s most influential national trade shows, it is the only event to combine a lineup of business-building education, exhibitors representing the entire cannabis ecosystem and exclusive experiences, all under one roof.
NCIA’s Cannabis Business Summit & Expo is known throughout the industry for its unmatched education opportunities and high-profile speakers. The upcoming event in San Francisco is no exception. Highlighting next month’s conference agenda is groundbreaking keynote speaker Troy Datcher, CEO of The Parent Company.
NCIA will welcome 2021 Cannabis Business Summit Keynote Speaker for Thursday, December 16, Troy Datcher, CEO of The Parent Company. Leading a new generation of c-suite innovators, Chief Executive Officer Troy Datcher, together with Chief Visionary Officer Shawn “JAY-Z” Carter, helms a cannabis business for the post-prohibition era at The Parent Company. Combining best-in-class operations with leading voices in popular culture and social impact, The Parent Company focuses on building brands that will pave a new path forward for a legacy rooted in equity, access, and justice.
Datcher joined The Parent Company from The Clorox Company, where he deployed global sales plans for over $6.7 billion in cross-portfolio annual revenue throughout a 20-year tenure as Senior Vice President and Chief Customer Officer. In an intimate “fireside chat” setting, moderated by Adrian Farquharson, journalist and founder of MARY Magazine, Datcher will share personal stories and detail the impact he is working to make in the cannabis space.
Food-focused controlled environment agriculture (CEA) is a multidisciplinary production technique whereby plants and products are grown inside greenhouses, vertical farms and growth chambers where every aspect of the environment can be monitored and controlled. Using CEA, cultivators can produce high-value and traditional food crops with the goal of maximizing plant productivity in an efficient and environmentally friendly way.
As the industry’s first integrated building and cultivation systems design firm, urban-gro is ushering in a new era in the design of efficient indoor agriculture facilities, providing productivity and efficiency benefits to CEA operators when designing and operating facilities.
We interviewed Sam Andras, executive vice president of Professional Services at urban-gro, and principal of MJ12 Design Studio. Sam joined urban-gro after his company MJ12 Design Studio was acquired in July 2020. Prior to that, he was principal in charge of 2WR+ Partners, a 20-year Georgia-based architecture and interior design firm.
Aaron Green: Sam, tell me, how did you get started in the cannabis industry?
A facility that Andras designed in Massachusetts
Sam Andras: I started my architecture firm in 2001 in Georgia and later moved to Colorado in 2012. In 2013, I had the opportunity to do three cannabis facilities and really saw it as an emerging market that I thought would be really cool to dig into and pursue. Due to the marijuana stigma at the time, our company, 2WR, decided to create a cannabis-specific entity and developed MJ12 Design Studio. We built a website and it took off. Since 2013, I’ve personally designed about 130 cultivation facilities and vertically integrated facilities, from Hawaii all the way to New Zealand.
Green: When you say vertically integrated, what does that include?
Andras: The full building design of cultivation, product manufacturing, extraction, infusion and dispensaries.
Green: Is that something urban-gro currently does as well?
Andras: Now? Yes, with MJ12 under the facility design umbrella. After urban-gro acquired us in July, they were able to start offering full turnkey services. Everything from architecture, mechanical and plumbing engineering, electrical engineering, integrated cultivation, design of fertigation, benching, lighting, water treatment, environmental controls and other plant focused services– all of that is under our umbrella.
Green: Can you explain what controlled environment agriculture (CEA) is?
Andras: Absolutely. To me, CEA is crop agnostic, it can be anything from leafy greens to cannabis. Though we’re mainly focused on the cannabis industry and controlling that environment, we do also serve some leafy green companies. Environmental control includes things like temperature and humidity levels in the various stages of growth which is key to the economic success of organizations.
A California dispensary he designed
I’m a firm believer in legalization on the federal level down the road, which means that everything’s going to be under FDA for human consumption. If you look at the European models, when you look at the medicinal product development, it’s focused on consistency of the crop, from one crop to the next. And the way you achieve consistency is with CEA.
Green: From a resource perspective, can you describe how CEA differs from indoor to outdoor and greenhouse?
Andras: When you look at the market and the sale value of cannabis flower grown indoors versus outdoors or even greenhouse, greenhouse growing has huge variations by region. I believe greenhouses function better in more of a dry, arid climate. Indoor grows give you the ability to design and control your entire environment including temperatures, humidity levels, plant sizes, watering rates and other considerations. Growing indoors, in a controlled environment, gives you more flexibility to explore different alternatives in your cultivation.
A California cultivation facility he designed
Green: Final question: what in cannabis or in your personal life are you most interested in learning about?
Andras: That’s a great question. I’m a hands-on kind of guy. I would love to spend a couple of weeks working in extraction, as that’s the piece of the puzzle, as an architect, I know the least about. We’ve designed pretty much every type of cultivation from drip irrigation aeroponics to aquaponics, ebb & flow. You name it, we’ve done it, but the whole extraction process and the different equipment, and why companies choose ethanol, butane, hydrocarbon, CO2 and how to design for those extraction processes is something that as an architect, I’d love to learn more about.
Green: Okay, Great. That concludes the interview. Thanks Sam!
The supply chain for consumer cannabis products is complex, involving cultivation, extraction, manufacturing and packaging. While global best practices exist for Good Agricultural Practices (GAPs) and Good Manufacturing Practices (GMPs), the certifications are not tailored to the cannabis industry.
CSQ has developed tailored standards for the cannabis industry to assist cannabis companies in improving their quality. As a division of ASI, a woman-owned business that’s provided safety solutions to the food industry since the 1940s, the CSQ standards were built in 2020 to meet ISO requirements, GFSI requirements and regulatory cannabis requirements from seed-to-sale. CSQ is the first cannabis certification program to meet the GFSI Benchmarking Requirements with plans to be benchmarked in 2022.
We interviewed Tyler Williams, CTO and founder of CSQ. Tyler founded CSQ after working at ASI – a family-owned food safety company in St. Louis.
Aaron Green: Nice to meet you, Tyler. How did you get involved in the cannabis industry?
Tyler Williams: It’s kind of a long story, but it’s a good story. My mom worked for ASI for 15+ years. That company has been around since the 1940s and is one of the oldest food safety companies in the world. The owners were ready to sell about five or six years ago, and my mom ended up using a small business loan to purchase the company. That’s how I got started in a food safety and dietary supplement space.
About three to four years ago, we started getting inquiries from cannabis companies asking about GMP audits and certification and different things. We started doing certifications to our GMP food processing standard or dietary supplements depending on what they wanted but realized that there were a lot of things that weren’t applicable to cannabis companies or there were extra things needed for cannabis companies. That’s how I started working with cannabis companies to start developing the CSQ certification program and it has just kind of grown over the years.
Tyler Williams, CTO and founder of CSQ
We currently have four standards at the CSQ level. CSQ plans on being benchmarked to GFSI which stands for Global Food Safety Initiative. We plan on going through that process to get the benchmark next year. There are four standards underneath CSQ: one for growing and cultivation; one for extraction; one for food and beverage edibles; and then cannabis dietary supplements. We’re looking to add standards for cosmetics, cannabis contact packaging materials, retail and consumption lounges.
Last year, when we were doing our pilot audits, we realized that the CSQ standard was great for medium to big sizedMSOs because they’re already doing these best practices. It’s easier for them to, you know, implement a few things, and then get certified, whereas for the smaller guys who might be coming from the illicit market, it’s a lot harder – it’s a lot bigger jump from them to go from zero to 100. Last month, we released our unaccredited cGMP, cGMP+, cGAP and cGAP+ standards. The difference between the regular and the plus is that the plus has HACCP (Hazard Analysis Critical Control Point) and then it also includes a recall module where the site must do a mock recall while the auditor is on-site.
CSQ doesn’t perform the audits. We license the use of our standard to accredited certification bodies and then they must get accredited to be able to certify companies under the CSQ name.
Green: Can you tell me a bit about the genesis of CSQ and the structure of the organization?
Williams: We’re a for-profit company. We thought about going the non-profit route but it’s a lot more intricate and a lot more people involved when you go that route. Our parent company is ASI, and we are under the ASI global standards division which is responsible for developing standards. So, CSQ is one of those standards under that brand and that’s kind of the foundation of it. We have two licensed certification bodies right now. ASI has a certification body, and they are one of our licensed CBs and then WQS, who’s based out of North Carolina and has a big presence in South America which is great because we’re starting to get inquiries from companies in South America as well.
Green: How do you go about building industry awareness and acceptance of the standard?
Williams: Building awareness really started with going out to the medium- to large-sized companies and saying, “Will you open your doors and let us come and basically do all these audits for free at your facility just so we can kind of get a baseline across the industry?” So, that started the conversation with industry. The MSOs in the medium- to large-sized companies, are more ready to go through the certification process because they know that federal legalization is around the corner. They know these things are going to have to be in place already so they’re just doing it as preparation. There isn’t much demand for retailers right now like there is in the food and or dietary supplement space. So that’s where the demand is really coming from – wanting to self-regulate in preparation for federal legalization.
Most of our outreach is education-based. We speak at a lot of conferences. We host a lot of webinars and free events and things like that, just to get the word out about CSQ. A lot of people know what GMPs are, or know that they should be following GMPs, but they don’t necessarily know how to get from point A to point B. Our job is to educate them that it’s not as hard as they think it is and it’s not as expensive as they think it is. The cost of an audit is relatively inexpensive. What I always tell people is the sooner you start preparing, the cheaper the whole process is. What happens a lot of times is a facility will not build out their facility to GMP specifications, and then they want to get GMP certified so they must move the hand washing station from the back of their facility to the front where the employee entrance is or things like that. The sooner these companies start thinking about it, the better and that’s basically what we’re trying to do is just educate the industry about that kind of preparation.
Green: cGMP and cGAP are perhaps more broadly accepted outside of the cannabis industry. Do cGMP and cGAP fall under the CSQ certification?
Williams: There are four ingredients that make up the CSQ standard. There are industry best practices, which are specific to just the cannabis industry. There are good manufacturing practices, or good agricultural practices, that are just accepted globally. Then we look at the Codex Alimentarius, which is the global food code. Every country mustwrite their federal rules on food based off this standard. We use the Codex when we’re talking about edibles and things like that. And then the last aspect of CSQ is the GFSI benchmarking requirements. So that’s kind of the basis of our program, making sure that the auditors have certain amount of audit hours, and we have training and processes in place for that. That’s where the GFSI benchmarks are coming out. So, all those four things kind of really create the CSQ standard.
Green: There are clear internal benefits to a company for holding to a quality standard. What are the downstream benefits to the companies that have CSQ? How do the end-users know about it?
Williams: I come from the food industry and if you go to the grocery store, you just assume that everything’s safe.Consumers don’t even think about the certifications that those companies must get to even be able to sell their product in retail stores. They don’t necessarily put those certifications on the packaging material, because as a consumer “SQF” means nothing to most consumers, right? It would only mean something if you’re in the industry.We’re trying to be different with CSQ and get more consumers aware of it. One of the things that we have is a database of certified facilities. Consumers will be able to say, “Okay, maybe I’m interested in this new brand. Are they certified to this program or not?” and be able to see that. We’re also trying to get companies to put the CSQ logo once they’re certified on their marketing materials.
Now, one thing that we cannot do yet is put the logo on the finished product packaging, because we don’t have a testing addendum, but we’re working on that. There’s not a lot of demand for it right now and it’s more expensive audit costs, where you’re talking about lab tests, and things like that. So, it’s something that we’re working on, but we haven’t fully developed yet.
Green: Next question is around d-8 THC and federal regulations. What’s your position on d-8 and how are you thinking about d-8 trends in the future?
Williams: d-8 THC itself as a product, I think it’s fine. I think if it’s made safely, we know all the components I think it’s fine from that aspect. The problem that we have right now is it’s not regulated. That’s where I think we need to have these states that have legalized THC or hemp to then implement rules and regulations and bring d-8 THC into those rules and regulations. And so maybe then it’s only those licensed facilities that are inspected by the state that are producing those products and not just some guy out of his garage. I think a lot of people right now are just wanting to ban it completely and I don’t think that’s the best approach. There’s nothing wrong with the product itself, it’s just how it’s being produced right now in the gray area where no one’s regulated.
Green: What in your personal life or in cannabis are you most interested in learning about?
Williams: I love what I do. I’m always looking at and reading regulations and then trying to learn something new. I’ve been going through organic certification training right now. At some point, CSQ will probably go down the route of having some sort of organic certification. So that’s been kind of what I’ve been working on and learning right now. But I’m a sponge and I like to absorb new information about the industry.
Green: Thanks Tyler, that concludes the interview!
Vaping is a multi-billion dollar cannabis product category representing more than 20% category share in the US, according to a recent Headset.io report. The 2019 vaping crisis, whereby lung injury and several deaths were caused by the adulteration of vapor pen cartridges with vitamin E acetate, highlighted the importance of safety and emissions testing for vapor pen products. In addition to volatile organic compounds, metals and ceramics contained in the heating elements of cartridges are also a concern. While the FDA has a robust program for emissions testing in nicotine products, they do not currently regulate cannabis. Cannabis vaping is currently regulated at the state level in the United States.
Cannabis vaping is popular among minors owing to its discrete nature. In a recent study published in the Journal of the American Medical Association (JAMA), 14.7% of teens reported vaping cannabis in 2018. In a separate research study, University of Michigan researchers found that teens vaping cannabis were two times more likely to experience respiratory issues than teens who smoked e-cigarettes.
We spoke with Corey Mangold, CEO and founder of PurTec Delivery Systems, to learn more about cannabis vaping safety and their PurGuard technology. Prior to entering the cannabis space, Corey founded a software company in 1998. He also founded the advertising agency Gigasavvy in 2008, which he recently exited from in March 2021.
Aaron Green: How did you get started in the cannabis industry?
Corey Mangold: I got started in the cannabis industry in 2016. My daughter was away at college in San Luis Obispo and got pregnant and was going to have a baby, which obviously I was excited about. I decided to have her come down to Southern California and start a company together, as I’ve done multiple times in my career successfully. I wanted to show her the ropes, and teach her everything from finance to HR, to business development, marketing – everything it takes to be successful – and give her the tools that she would need to be successful for her life.
Green: What kind of things were you into before 2016?
Mangold: I founded my first company in 1998 in the software industry and had that company up until 2005. In 2008 I started another company called Gigasavvy, a nationally recognized advertising agency out of Irvine, California, which I successfully exited in March of 2021.
Corey Mangold, CEO and founder of PurTec Delivery Systems
When deciding to start a company with my daughter, we were interested in the cannabis industry – I think everybody was back in 2016. In 2016, I had started using cannabis again after probably about a 16- or 17-year hiatus. I was using a vape because I had children in the house. I went to literally anywhere I could and bought every type of cartridge on the market. What I found was that their user experience was not like what it was on the nicotine side of vaping. I reached out to associates of mine who had been manufacturing vapes since 2011, starting with the blue e-cigarette, and we engineered a unique device that was proprietary and completely unlike anything on the market. It was incredible, and still to this day, I think it’s probably the best 510 thread cart on the market. We launched that under the Orchid Essentials (CNSX: ORCD, OTC:ORVRF) brand in California and Oregon.
Green: Is that cart something that you sell to other brands as well, or is it purely for the Orchid brand?
Mangold: Yes, purely for the Orchid brand, but it’s what inspired me to start PurTec Delivery Systems. After a few years of struggling in this industry because we didn’t have the access to capital needed – Orchid is a US company traded on the Canadian Stock Exchange (CSE:ORCD, OTC:ORVRF) – and dealing in a substance that’s federally illegal, there was no access to any traditional financing, be it factoring or inventory financing. We were literally creating as much product as we could every month and then selling out almost instantly, and then waiting till the next month to get money in from all our accounts to make more. We had to slug it out. We did get into a little over 500 stores in California and Oregon, but it was just a battle, and I didn’t really want to be touching cannabis.
In 2020, I had a breakthrough in my strategy. I was watching the TV show Gold Rush and I watched one of the guys go and have to buy a new wash plant. He pulls up to this dealer’s yard that sells wash plants and tractors. I saw this dealer had a lot of inventory and clearly a lot of money, and I realized the place to make money was selling the shovels, not really digging for gold. I said to myself if I have the best shovel out there, why am I digging? I should just be innovating new shovels and selling shovels. Hence, I started PurTec Delivery Systems and now for the last year and a half have been 100% focused on developing advanced vaporizer technologies.
Green: Tell me more about PurTec.
Mangold: I founded PurTec with the sole intention of creating safe vaporizers for consumers. We conducted an 18-month safety study in Switzerland with our partners, on vaping devices in the market. I learned a lot of things that I already knew but wanted to see it proven by independent laboratories and by PhDs and MDs, and really see what was so concerning to me. For the last year and a half, we have sought to develop a safe line of vaporizers. I’m very cognizant about what’s going on in my body and want to know what’s going on internally with these products. I don’t think anyone would be using them if they knew what was really going into their lungs.
Green: What are some of the things that consumers should be thinking about when it comes to vape safety?
Mangold: Consumers should be thinking about all the different aspects from inhaling vaporized heavy metals to ceramics. Ceramic particle inhalation is one of my biggest concerns. I think it’s been ignored. I think all the manufacturers know about it and I think it’s been swept under the rug. I think it’s one of the threats that we have. There should be regulatory bodies that are out there protecting consumers like the FDA, hence why I believe federal legalization is so important, because if the FDA was involved not even one of these products would be on the market because the first thing the FDA would do would be very extensive emissions testing to find out what compounds and potential toxins are entering into your body.
Green: There’s clearly a need for safety and regulation in the space, but from where you’re sitting, is there a demand? When consumers go into a store, one of their main focuses is: what’s the THC content? How do you see consumer demand for safety and how do you think about building that awareness?
Mangold: I don’t think there is consumer demand yet. The consumer demand right now is for getting medicated and having fun or getting whatever relief or primary reason you use cannabis. I can point to a direct correlation with the opioid epidemic. No one knew they were as horrible as they are, and doctors were prescribing them left and right, and everyone thought it was okay. People think these cannabis products are okay because they’re on the shelf in every licensed dispensary, and the California Department of Health and the Department of Health in every other state and country has been involved to some degree. So, consumers think that they’re safe. The problem is they’re likely not just like we weren’t with opioids.
I don’t think the consumer demand will be there for quite some time until we start seeing a lot of long-term health impacts where we start seeing people getting lung disease, we start seeing people getting iron lung, different potential brain issues from inhaling adhesives and heavy metals. I think once the health impacts are seen clinically – just like we saw with the opioid crisis – once that was really in the forefront, everybody saw with their own eyes, and then they were aware that there was a problem. So, I think that it’s important to become aware of the potential health impacts, but I think it will take quite some time before that happens.
Green: It sounds to me like you want to get ahead of the industry on this because if it does go federally legal, there will be more stringent requirements. How do you think about that from a product design and development perspective to get ahead of a problem that exists but isn’t reflected in current regulations?
Mangold: The best thing we can do right now in the cannabis vape industry is to look at what the nicotine vape industry is doing. It is controlled by the FDA and there are standards for vaporizers in other parts of the world that are very stringent, like the AFNOR standards, which are in the European Union regulations for vaporizer safety.
What we do is we find the most stringent standards in the world, and we test our products to those standards. If the standards get stricter, we can develop our products and re-engineer them to meet those new requirements. Right now, all our products are emissions tested at AFNOR standards and over-engineered even for those standards. We also are constantly working on reduction of potentially hazardous materials: reductions of heavy metals; only using proven safe and effective materials and FDA approved materials like SAE 316L surgical stainless steel; and using improved ceramics that are not as brittle as the ceramics being used by almost every single manufacturer out there. There’s a lot of things that can be done. It takes supply chain management, understanding the technology and having strong solid teams of scientists and doctors that know this stuff much better than anyone else in the industry does, and leveraging their expertise.
Green: You recently launched a safety feature for minors. Can you tell me more about that?
Mangold: Yes. Two weeks ago, we launched a new software application called PurGuard. PurGuard is a massive innovation and is the first of its kind that we’re aware of. It’s a piece of software that pairs with any device, whether it’s a disposable pod system or a 510 cartridge. You then pair it to your phone and take a picture of your government ID. Then the camera looks at your face, runs quick facial recognition and runs an age check through the largest age-checking platform API in the world. Then based on location and legal age of the user’s location – some states are 18 and different countries have different rules – it validates your ability in your market to be consuming that product. This technology works in 180 different countries.
Once that occurs and the device is ready for you to use, we have another feature that we’ve developed. There is an auto-lock feature that we have where if you’re a parent, like me, and you have kids in the house, you can turn your device to auto-lock right from your phone. When you walk away from your phone and are 10 feet away, your Bluetooth connection will break, and it will automatically lock the device and so your child can’t walk into your bedroom and take your device.
This technology is important to us. Consuming cannabis is horrible for the health of minors. There are serious mental effects on brain growth that occur from using cannabis at a young age because the brain is still developing up until about the age of 23 to 25. So, it’s not safe for them to be using. Of course, I’m sure we all smoked when we were in high school, but the ease of use of vape and the discretion, I think allows minors to use significantly more cannabis than previous generations did 20, 30, 40 years ago. It’s a massive problem right now and I think it’s just a matter of time before the FDA requires such protections. This industry can only survive if we protect minors. So, we’re getting ahead of the curve and setting the standard.
Green: What kind of hardware does PurGuard work with?
Mangold: PurGuard works with every single type of device that we manufacture: 510 thread cartridges, disposables, and pods. If it’s a 510-thread cartridge, the battery has to be a PurTec battery, and the cartridge has to be a PurTec cartridge. They communicate to each other through certain technologies, and it can even recognize what oils are in the cartridge or the pod or the disposable. Moreover, we can tell what strain it is, when it was manufactured, what the potency levels are and more. It records all the usage statistics. We’ve also proven with our hardware, the actual milligram contents being consumed per hit, or draw based on volume, and draw duration. We can track and report to people and say, “Hey, you’re consuming 100 milligrams of THC a day, that’s too high, you need to slow down and maybe go down to 50 milligrams a day.” That will be what is required as it is being required in the nicotine industry under the FDA pre-market tobacco applications (PMTA). When the FDA comes into cannabis, they’re going to want to see the same thing. They’re going to want to know that cannabis products are not promoting people to use more, and they are trying to get people to use less. It doesn’t mean stop using it, but use it in moderation, like everything in life. You shouldn’t be drinking a bottle of whiskey a day. You probably shouldn’t be smoking a pound of weed a day either. Everything in life is moderation and this application not only protects minors but also teaches us about our consumption habits.
Green: A theme here is “skating where the puck is going to be.” What kind of trends are you looking at right now in the industry?
Mangold: The biggest trend I see right now in the industry is disposables. We’ve seen that the trends in cannabis consumption trail behind the nicotine industry by 2-4 years. We see a lot of our customers and potential customers shifting into disposables and are now seeing a very large spike in sales of disposables. I think that’s a big trend, but with that comes another major issue: we now have lithium-ion batteries being thrown away at astonishing rates and going into landfills. PurTec has an answer for that that we’ll be launching here in the next four to six months That will be I think the biggest innovation in regards to eco-friendliness within the vape industry. That’s where I see things going right now.
Green: What are you most interested in learning about?
Mangold: The thing that interests me most, and what I’m most interested in learning about is regulations. Not the regulations themselves, but how regulations are drafted. I’ve sat in several meetings with rules committees for different regulatory bodies throughout the United States and it is laughable. I was recently in a state I’m not going to mention. I asked them what scientists and what doctors they have consulted with and they said none. I just found that dumbfounding. The state regulatory bodies are making decisions without doing due diligence and without bringing in subject matter experts in some cases.
I’m very interested in learning about how we can change our regulatory bodies. Taxpayers pay these salaries and their job at the end of the day is to protect consumers. I think that these cannabis regulatory bodies need to be way more involved with their state’s Department of Health, as well as with the FDA, and National Institute of Health and looking at this as a holistic approach. How do we protect consumers? This is a drug. It’s like anything else out there. If you’re selling tomatoes that were sprayed with a certain pesticide, you must do the research and you have to know what’s in that product before you start putting it in people’s hands. Otherwise, you may have people dying left and right. So, I’m very interested in learning more about regulatory bodies and how they need to evolve and hopefully I can help push them into evolving sooner rather than later.
Green: Great, that concludes the interview, Corey.
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